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Micro finance Sector’s Benefits Amid GEL Devaluation

Sector’s Profits Rose

by 12% in 1Q15

The market of microfinance organizations is one of the flourishing sectors in the Georgian economy with 71 legal entities, 300 service center, 4 344 employees and assets of over 1 billion GEL.

The history of microfinance organizations in Georgia started 10 years ago. First microfinance organizations launched operation in Georgia in 2006 after the Parliament adopted a law on microfinance organizations on July 18, 2006.

According to the law, a microfinance organization is a legal entity founded as a limited liability company or a joint stock company that is registered by the National Bank of Georgia and that carries out activities under the NBG supervision in line with the legislation.

Thus, the range of operation of microfinance organizations has been confined and they must act in line with legislation. They are entitled to issue microloans to legal and physical bodies, including, consumer loans, pawn loans, mortgage loans, unguaranteed loans, corporate loans and other loans; to make investments in state and public securities; to carry out money transfers; to act as insurance agents, to provide consultations over micro-crediting; to take loans from resident and nonresident legal and physical bodies; to hold stakes in authorized capitals of legal entities. The stake ratios must not exceed 15% of the authorized capitals of these microfinance organizations. Moreover, the legislation entitles microfinance organizations to carry out other financial services and operations, including micro-leasing, currency exchange, as well as to issue, sell and buy off  bonds and promissory notes and carry out other related operations.

The main signs and criteria by which microfinance organizations differ from commercial banks imply the rights for receiving deposits and issuing a limited amount of loans to one borrower. Under the current legislation, microfinance organizations are banned to receive deposits from either physical or legal bodies and to issue loans of over 50 000 GEL to one borrower.

Despite the current economic problems, the microfinance sector has made significant advancements. Even in 2008, despite the financial crisis and the hostilities, the sector improved all indicators.

The effect of the recent currency problems on the microfinance sector is also very interesting.

 

GEL Depreciation and

Increased Profits

The GEL exchange rate fluctuations started in the last quarter of 2014 ad the problem remains relevant even today.

The first quarter of 2015 turned out the sharpest, when the GEL volatility and public panic and uncertainty reached the peak.

Net profits of microfinance organizations in the first quarter of 2015 exceeded 40 million GEL.

In 2014 net profits of the microfinance sector marked 80 million GEL.  Consequently, the profits of the first quarter of 2015 makes up 50% of the whole net profits of 2014 and exceeds by 122% compared to the first quarter of 2014.

As opposed to the first quarter of 2014, the first quarter of 2015 has recorded:

  1. A 41% upturn in interest returns (74 million GEL).
  2. A 42% upturn in interest expenditures (22 million GEL);
  3. A 228% upturn in interest-free revenues (37 million GEL). Including: a 51% growth in revenues from commission fee; a 112% growth in revenues from sales of currency, a 3000% upturn in revenues from recalculation of currency reserves. All these revenues have exceeded 15 million GEL.
  4. A 43% growth in interest-free expenditures (over 39 million GEL);

It should be also noted a major part of the attracted funds microfinance organizations have drawn from nonresident physical and legal bodies. This factor makes the service of these funds expensive because of the GEL rate devaluation.

As to the microfinance sector’s loans portfolio, it exceeds 1 billion GEL and the credits portfolio structure is reflected in the table N1.

Thus, amid the current currency problems the microfinance sector is very successful in the short-term period, but in the long-term period the GEL devaluation will increase service burden on foreign currency liabilities.