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REASONS FOR GROWTH IN MARKET OF MICROFINANCE ORGANIZATIONS

The Georgian financial market registered an appearance of microfinance organizations in 2006, when on July 18, 2006 the parliament adopted a law on microfinance organizations. Today, a total of 85 microfinance organizations with 307 service centres and branches are registered on the market. They employ 3 813 citizens as of 3Q14. The sector players have issued 406 955 loans of 761 401 439 GEL as of 3Q14. Total assets of the sector account for 1 .9 billion GEL, while total capital stands at 254 140 315 GEL. In January to September 2014 the sector’s undivided profits marked 171 million GEL.

The Sector in Figures

The microfinance sector is one of the rapidly growing fields of the Georgian economy. Even in 2008 amid the hostilities and the global financial crisis, the microfinance sector’s assets rose by 100% compared to 2007, while the undivided profits rose by 8 times.

As reported, microfinance organizations launched operation in Georgia in 2006 and today a total of 85 bodies are recorded in Georgia. They have increased their financial indicators too. Namely, total assets in the third  quarter of 2014 rose 360 times compared to 2006, total loans rose 350 times and net profits increased about 1800 times.

Other indicators have also increased in the microfinance sector. Namely, the sector employs 3 398 citizens as of the third quarter of 2014, up by 658 citizens compared to the same period of 2013, while the quantity of branches and services centres rose by 65 units to 307 ones year on year.

According to the recent statistics of the National Bank of Georgia (NBG), Georgia’s microfinance sector has totally issued 761 401 439 GEL loans, including the ratio of corporate loans is 0.6%.

Products and Rates

Microfinance organizations offer the same package of credit products as commercial banks, including mortgage loans, auto loans, agro loans, business loans, pawn loans and consumer loans. The companies will also introduce credit cards in the near future.

As to interest rates, quite high yields are registered in the sector, especially on auto loans and pawn loans. The NBG does not provide as accurate statistics on the microfinance sector as in the bank sector. Consequently, there is no official statistics on interest rates in the microfinance sector. However, the analysis of the market terms enables to calculate an averaged interest rate.

Interest rates range from 18% to 72% due to the products and this is quite high indicators. In this respect the situation in other countries is very interesting.

The NBG official report shows in European countries interest rates on micro credits are far lower than in Georgia. As of July 2013, the indicators are as follows: Bulgaria – 7.07% averaged interest rate, Finland – 1.18%, Czech Republic – 2.68%, Estonia – 2.65%, Hungary – 7%, Latvia – 2.71%, Lithuania – 3.15%, Romania – 9.02%, Poland – 4.9%, Slovenia 4.1% and so on.

Reasons for Success of

Microfinance Organizations

What drives the growth in demand for credits of microfinance organizations amid so high interest rates? As reported, there are several ways to borrow money, including commercial banks are the most famous and widespread institutions for that, but commercial banks set quite high standards and requirements to borrowers, while a major part of the society cannot meet these standards, but they need financial resources and they have to find alternative sources. Microfinance organizations are similar alternative instances, but they charge very high interest rates. Thus, a major part of clients of similar credit organizations are in economic and financial needs and they cannot apply to commercial banks (they do not have sufficient incomes or there are other reasons). This category has to take loans with very high interest rates from alternative financial institutions. This category is very major and numerous and this is the main reason for success of microfinance organizations, because citizens with stable financial conditions will not apply to the microfinance sector. Those who are able to take loans from commercial banks will not apply to microfinance organizations.