The last years have recorded an impressive leap in the microfinance sector development. The sector has nearly doubled its profits in the first half of 2015.
Does this upturn signify a growth in the real economy financing expressed in new enterprises and new job places?
Microfinance organizations issue loans to the high-risk category clients, who fail to borrow loans from commercial banks. Consequently, the policy and terms of microfinance organizations impose a heavy credit burden on Georgian citizens.
Commercial banks issue loans to microfinance organizations. Therefore, commercial banks act as allies of microfinance organizations in financing high-risk categories.
At the same time, a major part of Georgia based microfinance organizations and pawnshops are owned by commercial banks or top managers of commercial banks and financial groups (Naturally, no legal records exist in this case).
Has this factor made the microfinance sector a significant financial source for the Georgian economy?
A simple scheme works: commercial banks show caution in issuing credits to business companies in various sectors (the below statistics proves this). Meanwhile, commercial banks easily issue credits to companies that act as mediating financial bodies. These organizations borrow cheap credits from commercial banks and issue loans with increased interest rates.
Georgia based commercial banks draw money resources from the international finance market with an annualized 5-7% interest rate and issue this money to microfinance organizations at 12-18% interest rates. Finally, the microfinance sector lends money with 24-36% interest rates. There is no other business sector in Georgia that would operate with such a high top margin. Similar simple speculative schemes inject very expensive financial resources to the business sector. The Georgian finance sector earns significant profits every year, while other business sectors remain in the survival regime because of expensive money resources.
The legislation does not ban this scheme and the regulatory body does not control this scheme either. We can only talk about moral aspects. Bankers forget moral responsibility, when they think of financial profits.
We submit the statistics of microfinance organizations (the national bank’s report):
All misunderstandings and criticism derive from the fact Georgian citizens consider all financial organizations to be microfinance organizations, excluding commercial banks, while at least two varieties of financial organizations under this appellation operate in Georgia: 1) genuine microfinance organizations and 2) consumer credit organizations (pawnshops), Archil Bakuradze, head of the association of microfinance organizations, said.
Genuine microfinance organizations finance the real economy and a major part of clients borrow business loans. Only a small part of the clients applies to microfinance organizations for consumer loans, he said.
A total of 111 000 loans were issued to the agriculture and forestry sectors, according to the July 2015 report. This fact proves microfinance organizations support the real economy, he added.
“The same opinion may be expressed regarding the trade, service and other sectors. Therefore, it is not expedient to assert microfinance organizations issue only consumer loans”, Bakuradze noted.
As to the assertions as if commercial banks act behind microfinance organizations, Bakuradze assures all members of the association are independent and no one operates in the name of a commercial bank and no one receives financial support.
When borrowers fail to pay the liabilities to commercial banks, microfinance organizations provide refinancing services, but consumer credit organizations provide the same services too, Bakuradze noted. Similar organizations do not need information about revenues of their clients. They accept real estate and property as a mortgage, he added.
“There are many cases when customers take loans from other organizations to serve bank loans, as a rule, from consumer credit organizations or online render companies and this sort of financial organizations issue loans with very high interest rates”, Bakuradze noted. The ratio of commercial banks in financing the microfinance sector is 23%, he added. A part of the experts blame the principles Bakuradze has named.
The microfinance organizations seek expensive and valuable mortgages, but their clients are people, who fail to obtain bank loans because of high risks. Therefore, this category of borrowers may lose the mortgaged property, Zurab Kukuladze, editor-in-chief for the Banks and Finances newspaper, said.
In certain cases loans taken from microfinance organizations may promote the implementation of this or that business project, but these cases are an exception and, in general, the performance of microfinance organizations deteriorates the social condition of borrowers, Kukuladze noted.