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Unfair Rules of Play in Georgian Banking Sector

The Ministry of Finance of Georgia has announced a new government initiative to create an alternative to expensive banking products.

According to Minister of Finance Mamuka Bakhtadze, this initiative is necessary to help the economy progress. “The Georgian banking system should drive economic development, not frustrate it, but, regretfully, in reality, commercial banks do not fulfil this driving function.”

“Therefore, we have found it necessary to propose the creation of an alternative source, and we have called for a reform of the startup capital instrument,” Bakhtadze said.

According to this proposal, nearly interest-free resources will be supplied to young entrepreneurs, the Minister noted. “This will be an alternative to high-interest banking products,” he said.

“Our economic growth will be inclusive, people-oriented and based on free economy principles. Entrepreneurial activity will increase considerably through a combination of 1% taxes for small entrepreneurs, an automated system for VAT return and access to capital. This signifies that small and medium companies and new entrepreneurs will hold at least a 60% ratio in GDP growth,” Bakhtadze added.

Caucasus Business Week (CBW) has inquired into whether the Georgian banking sector actually frustrates the economic development of the country.

Andria Gvidiani, an analyst for the Association of Young Financiers and Businessmen (AYFB), said that the initiative by the Finance Minister will considerably incentivize small- and medium-sized entrepreneurs.

“The initiatives announced by the Finance Minister are of crucial importance. I believe these initiatives will bring a revolutionary breakthrough for small and medium entrepreneurs. I believe the new initiative will essentially incentivize entrepreneurial spirit. As for the banking sector, today financing the real economy has been minimized. In practice high interest rates, and inadequately bubbled interest rates, frustrate crediting the economy and economic growth in general.”

“Therefore, the entrepreneurship-encouraging mechanisms offered by the Finance Minister will considerably promote entrepreneurial development. As a result, a lot of people will receive benefits and dividends as part of these reforms. Consequently, this will be an important and successful step for overcoming poverty, as citizens will have access to capital if they have a properly shaped business plan. Therefore, simplified access to capital will be combined with the preferences the Ministry of Finance has made for small and medium businesses and very liberal tax reform, and all these factors will jointly bolster small and medium business development. This is a very important step for valuable economic development,” Gvidiani said.

Gvidiani also discussed the positions expressed by Georgian banking sector representatives and noted that today the banking sector has detrimental priorities.

The Georgian banking sector is not motivated to benefit the economy, according to Gvidiani.

“As for the banking system, today commercial banks are oriented on their own profits. Crediting the economy is a secondary direction for them. The banking system profits grow year after year, however, in reality the economy is not credited. In reality, commercial banks do not share the risks of financing the business sector,” said Gvvidiani.

“Therefore, the banking sector directs unimportant resources to business crediting. The main earnings come from physical bodies, fines, conversion operations and so on. Naturally, this is unacceptable. 1.5 billion GEL out of 3.5 billion GEL turnover is received from physical bodies. And this signifies that the banking sector is not developed in the proper way, and it is not oriented to contribute to the economy,” Gvidiani said.

Economic analyst Merab Janiashvili agreed with the Finance Minister’s argument. According to Janiashvili, Georgian commercial banks frustrate economic development and essential changes are required.

“Our banking sector is ranked in the world’s top 20 banking sectors, with 24% profits. These profits mainly come from non-interest incomes and retail loans. Despite the fact that business loans hold 45% of the total crediting portfolio of the Georgian banking sector, only 20% of the banks’ revenues are accumulated from business loans. To make use of the banking sector, commercial banks should favor the economy, not imports. Today it is difficult to find a social group that is content with commercial banks. Clients are not content with the banking sector: however, the banking sector has high profits, because it issues short-term loans with high interest rates, and this banking product is very profitable,” Janiashvili said.

Only the central bank and legislative amendments can change this situation. Banks are commercial organizations and they are oriented to maximize profits, Janiashvili noted.  “And the mechanism they use for profit multiplication does not serve economic development. If we want to change something, the central bank should play a leading role,” Janiashvili pointed out.

Economic expert Shota Buchukuri said that he agrees with the Finance Minister’s statement, because small and medium businesses face serious problems attracting necessary financial resources. Commercial banks issue loans with high interest rates, and this is problem for small and medium companies, he said.

“The responsibility of issuing loans is another related issue for commercial banks. I mean physical bodies, because clients’ incomes are not examined frequently, and this factor becomes ground for unpaid loans in the future,” Buchukuri said.

“Another problem is related to noncore businesses that commercial banks own, including ones in the development, health and insurance sectors. In many cases commercial banks want their creditors to fail to pay loans, so commercial banks can expropriate their property and clear the market for their own subsidiaries,” Buchukuri said.

The situation could be improved if the National Bank of Georgia (NBG) introduced additional regulations, he said.

“We can say that today unfair rules of play dominate in the Georgian banking system,” Buchukuri concluded.