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Capital Market Challenges in Georgia

What the capital market is and why it matters for the state economy.

The capital market, that is, the securities market industry, as well as banking sector, is an integral part of the financial market. It enables physical and legal bodies to seek desirable capital, on the one hand, and invest free money resources favourably and successfully, on the other hand. Moreover, it should be also noted that the capital market and the banking sector are competitor fields. Development of one direction signifies that another segment will lose positions and inversely. The banking mechanism mobilizes investors’ funds in the form of deposits under certain interest rates and later, commercial banks issue these money resources in the form of credits for higher interest rates. In case of the capital market, money resources are immediately directed from investors to economy, in exchange for securities issued by companies or other institutions.

In this situation, if the regulator institution gives preference to one party and demonstrates disproportional approaches, development of one of the segments will result in stagnation of another segment.

The capital market has exceptional economic importance for economic development and for diversification of the financial sector.

Overview of Georgian Stock Exchange

The Georgian Stock Exchange (GSE) was founded in 1998, as part of the USAID program. Under recommendations of leading American specialists, the field regulator – Securities Market Law was developed, based on which, the key infrastructure of securities was shaped – stock exchange, central depositor, several registrars and brokerage companies.

According to the law, the securities industry must be separated from its natural competitor – banking sector so as the new mechanism of securities market could independently develop. This differentiation was expressed in a n umber of aspects: commercial banks could not immediately participate in the market (only through affiliated brokerage companies); no owner of the stock exchange was entitled to hold more than 10% of the stock exchange, while commercial banks could not hold 50% of the stock exchange;

The securities market and its participants were supervised by the independent regulator – Georgian National Commission for Securities, which was a body for collegial management and besides supervision, was to foster the industry development.

Formation of such an equal competitive environment was the ground for rapid development of the securities market and its market capitalization in relation to GDP made up 14% in 2007. However, in this period, as a result of active interreference of the banking lobby, the law was liberalised and the GSE suspended development, in practice. For example, in 2018 the stock exchange capitalization was 3% in GDP, whilst, according to the capital market state development strategy, this figure is to rise to 4% up to 2025.

Securities of 62 varieties are registered in all 3 listing groups (A, B, C). The A Group, the highest listing group, includes bonds of Black Sea Trade and Development Bank (BSTDB), European Bank for Reconstruction and Development (EBRD), the Netherlands Development Finance Company (FMO), Silknet and Bank of Georgia. The B listing group includes bonds of 6 Georgian companies both in GEL and USD. The C listing group includes GEL-denominated shares of Georgian stock companies. This is not a short list, but the main thing is the market capitalization and liquidity. Brokerage companies belong to other category, which are represented in 6 companies, including brokerage companies of commercial banks.

And now let’s see the demand for Bank of Georgia shares and its liquidity. The last 5 deals were made from November 2017 up to September 5, 2018, that is, over the past 10 months. The averaged duration of the deal is 2 months, this signifies, on average, deals are made every two months on shares of successful companies,  like Bank of Georgia shares. It is noteworthy that the Georgian Stock Exchange Index (GSX) has fallen to 140 point. The lowest point was recorded in June – 131 point. The largest deal was made in May 2018, in an off-exchange format and the deal constituted 98.5% of the total deals. This fact outlines gaps in the current legislation that took effect in 2007. Exchange index is the leading indicator of economy, not capitalization of off-exchange deals.

Noncompetitive Environment in Financial Sector

The strategic paradigm for evident and clear differentiation of exchange business from deposit, crediting and payment businesses, that is, the banking sector on legislative level is the main precondition for the financial market development.

Uncompetitive environment in Georgia’s financial sector was driven by the 2007-2008 legislative changes, under which the independent regulator was abolished and the securities supervision was assigned to the National Bank of Georgia (NBG), whilst the latter institution have always acted on behalf of the competitor banking sector . As a result, commercial banks were allowed to immediately engage in this business, restrictions on the stock exchange ownership were removed and commercial banks were allowed to fully control the infrastructure of the competitor sector. Moreover, prior to the amendments, deals on securities admitted to the GSE were to be made in competitive and transparent environment – in an exchange format. After the mentioned amendments,  this obligation was annulled. As a result, 95% of the deals moved to off-exchange format, into shadow and non-transparent environment.

All the above mentioned factors, naturally, have caused distrust among foreign investors regarding our securities market. As a result, both the market capitalization and turnover considerably declined.


For the purpose of developing the securities market, the following measures should be taken:

  • Decision on the securities market regulator;
  • Carrying out the principle of “Centrality of Trade” and ensuring the unbiased pricing mechanism;
  •  The exchange  should be allowed to adopt obligatory trading regulations for the exchange members;
  • The fixed tax should rise for off-exchange deals;
  • IPO of state-owned companies on the domestic exchange;
  • The exchange ownership should be broadened and diversified. We will get more benefits by preventing the situation when a brokerage company
  • If Georgia genuinely wants to ensure the more diversified financial system, it should ensure equal opportunities for those institutions, which are not affiliated with commercial banks. This is the principle of fair play;

Shota Gulbani

President of Association of Young Financiers and Businessmen