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The Value of Credits in Georgia – International Experience

Where can we find or borrow money which would be easy to return at the lowest interest rates? Are there, anywhere, similar creditors? It turns out that similar creditors do genuinely exist.

It is a widespread practice in many  countries, where central banks issue loans to commercial banks with the lowest possible interest rate, frequently with a so-called negative interest rate. International experience proves that similar practices make financial resources more attainable. For example, when a central bank issues a loan with a 0.75%. interest rate, this signifies that the authorities of the mentioned country is ready to fund commercial banks to enable them to issue cheap credits to the business sector. Like Switzerland, the negative interest rate is practiced in Denmark, too (-0.65%). The top four countries with negative interest rate include Japan (-0.1%) and Sweden (-0.5%). Interest rates range from 0% to 1% in such countries as Bulgaria (0%), Israel (0.1%), Samoa (0.14%), Great Britain (0.5%), Norway (0.5%), Fiji (0.5%),the Czech Republic (0.75%), Hungary (0.9%). Interest rates range from 1% to 2% in the following countries: Taiwan (1.75%), USA (1.5%), South Korea (1.5%), Australia (1.5%), Poland (1.5%), Bahrain (1.75%), Hong Kong (1.75%), and New Zealand (1.75%).

According to specialists, in these countries where cheap credit with low interest rates are issued thanks to strong economies, sharp competition between commercial banks and a high volume of issued capital.

What is the situation in Georgia? According to the National Bank of Georgia (NBG), in January 2019 the averaged interest rate on GEL-denominated loans made up 16.2% and 7.7% on foreign currency (USD) denominated loans.

If we compare the current average interest rates in Georgia and EU countries, the difference is essential. For example,  in Germany the average interest rate  of a loan is 1.7%, Austria and Finland – 1.9%, Netherlands – 2%. The same interest rates run at Sweden. 2.1%, 2.5%, 2.9%, 3 % and 3.2% interest rates run in France, Belgium, Denmark, Hungary and Lithuania, respectively. However, there are countries with higher interest rate loans too: Spain – 9.1%, Croatia – 7.8%, Bulgaria – 7.5%, Iceland – 7.4%, Romania – 6.2%, Greece – 6%, Slovenia – 5.5%, Poland 5.5%, Estonia – 5.1% and Latvia – 5.1%.

Financial experts name several factors that make credit expensive in Georgia. The first reason is that a comparatively lower volume of stock capital at Georgia-based commercial banks (16 banks), which makes up about 1.8 billion USD. For example, in Denmark, which is a smaller territory than Georgia and has 5.5 million citizens, there are five commercial banks, and their assets exceed 10 billion USD. Another reason: borrowers in Georgia have low and unstable incomes, and they may fail to fulfill their obligations. An unstable national currency is another, additional reason. Because of extreme volatility in the exchange rate, borrowers may fail to return loans, and commercial banks may face problems in this respect. Low competition among commercial banks is an additional factor making loans expensive, as well as an undeveloped capital market. We should also mention political and macroeconomic risks in the country, market diversification, the inflation rate and so on.

According to specialists, the high or low interest rates depend on refinancing the loan rate set by the National Bank of Georgia (NBG). The refinancing loan is a short-term loan that the NBG issues to commercial banks. Today, the refinancing loan rate is 6.75%, and this signifies that the interest rate on GEL-denominated loans cannot be less than 6.75%.

Specialists assert that clients prefer to take mortgage loans for buying apartments, cottages, land or other expensive things. According to the indicators of the Numbeo statistics portal, the top three countries with the lowest interest rate on mortgage loans is as follows: Japan – 1.21% (the maturity ranging from 1 to 35 years), Switzerland – 1.42% (the maturity ranging from 2 to 100 years) and Sweden with 1.35% and about a 35% maturity. In Georgia, the interest rate of GEL-denominated mortgage loans is about 7.5%, and USD-denominated mortgage loan yields 4.55% interest.

By Zurab Khachapuridze