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Does a Tandem of Bankers and MFOs Hamper the Country’s Economic Development?

Recently, Georgia’s microfinance market is expanding exponentially. The first two quarters data show that the sector’s profit has almost doubled.

Whether it means that  the funding of real economy has increased, new enterprises and new  jobs have been created? Microfinance institutions are funding high-risk customers, mostly those who have been declined by the banks. Banks are the allies of microfinance organizations in financing high-risk customers who are providing loans to them.

At the same time, a large part of Georgia-based microfinance institutions and pawnshops are owned by the banks or the top managers and the financial groups in close alliance with them. (Of course, legally their names do not appear anywhere, but it does not change the actual situation). Did the microfinance sector become a significant source of funding for the Georgian economy for this reason?

The scheme is simple – banks don’t like to  give out loans to the companies operating in different areas (as evidenced by statistics), but they are easily lending  intermediary financial organizations, which in turn give out cheap loans borrowed  from the banks at  an increased  interest rate. Georgian banks take cash resources at the annual rate of 5-7% in international financial markets, give out at  12-18% to micro-finance institutions, while the latter at  an annual rate of 24-36%. Such high-profit business is hardly possible in other areas. Georgian financial sector generates  solid profit each year, while the rest sectors of  the economy are constantly in survival mode due to expensive money.

This scheme is not prohibited by the legislation and is not controlled by the regulatory body. We can only talk about the moral side, but when it comes to the financial benefits, the bankers don’t remember the moral responsibility.

We offer statistics on microfinance institutions provided by the central bank

Total assets:

Two quarters  of 2015 – 1 416 125 711 GEL.

Two quarters of 2014 – 938 083 836 GEL;
Two quarters of 2013 – 808 465 654 GEL.

Net Income

Two quarters of 2015 – 70 546 418 GEL;
Two quarters of 2014 – 38 748 718 GEL;
Two quarters of 2013 – 32 261 544 GEL.

Attracted loans:
The second quarter of 2015 – 839 112 633 GEL, out of which 425 835 891 GEL from the international financial organizations, banks 197 957 251 GEL; from individuals – 176 745 869 GEL.

The structure of loans provided  by microfinance organizations  in the first two quarters of 2015:
Consumer Loans – 532 734 284 GEL;
Agriculture and Forestry – 238 461 842 GEL;

Trade and services – 222 003 897 GEL;

Tourism and Sports – GEL 8 740 506;
Construction – 7 423 587 GEL;
Processing industry – 2 426 423 GEL;
Transport – 1 751 144 GEL;
Education and Culture – 259 122 GEL;
Extractive Industry 17 796 GEL.
The National Bank’s data  on commercial banks:

According to figures of July this year, the banks  issued 776.060 million for  financial intermediation (which includes lending to banks, pawnshops, microfinance institutions, etc.) ie 72.4% of loans issued to legal entities, and only 1.7% to the country’s most important sector-   agriculture.

In the words of Archil Bakuradze , Chairman of the Board of the Microfinance Organizations Association, a fact that the population calls all financial organizations, except for  the banks,  microfinance institutions  causes misunderstanding and critical assessments. In Georgia, at least two types of organizations are operating under this name. Microfinance institutions and  consumer credit organizations (lombards).

He claims  that the l microfinance institutions are financing the real economy and a major part of the customers  are business  borrowers. Bakuradze notes that in July a loan worth GEL 111  000 was issued to agriculture and forestry that  proves that the real economy is supported by microfinance institutions.

In response to  the opinion that banks are often behind  the microfinance organizations  receive funding from them, Bakuradze states that all members of the Association is independent and none of them operates on behalf of the banks or receives funding from them. According to him, the banks’ share in the financing of entire microfinance sector totals 23 percent.

“Banking and Finance” editor Zurab  Kukuladze  says that large collateral providing  security to the lender is the basic principle for microfinance institutions. But if we consider the fact that their customers are people who are declined by banks, they face the danger of losing real estate pledged as collateral. It’s a general picture and MFOs activity even further deteriorates social conditions of borrowers.