The role of bank systems in various economies grows every day, but analysts assert the bank system advancement may bring dangerous outcomes.
The finance sector’s role in developed economies of the USA, Japan and other countries has considerably grown. This process includes certain hazards. In the course of time, banks and other financial institutions will become a considerable part of economies, but their contribution to economic growth falls, because after a certain stage of financial development, a positive effect on the economy shrinks, while economic and financial volatility grows.
Many specialists assert the domination of the finance sector has become an obstacle against development of other sectors. The Financial Development Index developed by the International Monetary Fund (IMF) explores various indicators of the bank sector’s financial stability and an access of various sectors of the economy to bank and other financial products. The IMF report shows the finance sectors of such economies as Ireland, Japan and the USA have already crossed the line, when the finance sector enlargement brings less effect for economic growth. It should be noted many developing countries have not reached this verge, under the report.
What about Georgia? How dominating positions does the Georgian finance sector occupy? What is its contribution to developing other sectors of the economy and how does it supply financial resources to the real sectors of the economy?
Georgia’s Bank Sector
As of December 31, 2014 the Georgian bank sector registered 21 commercial banks. The ratio of nonresidents’ participation was 87% in the sector’s assets and 84% in the sector’s stock capital. According to the National Bank of Georgia (NBG), the bank sector’s total credit portfolio exceeded 13 billion GEL. Without the exchange rate effect, the year on year growth marked 18.6%.
In 2013 and 2014 the retail loans segment recorded a major upturn, including auto loans, consumer loans, urgent installment schemes, credit cards, loans for apartment repairs and mortgage loans. The ratio of these loans in total loans portfolio is 38.6%. This signifies commercial banks issue a major part of loans to the noncommercial sector and this does not increase the economic productivity.
Besides retail products, a major ratio in the loans portfolio is recorded for the trade sector – about 13%, while only 3.2% is recorded for the energy sector, the most important field for the economic development. The agriculture sector ratio makes up 4.6%, the production sector – 1.2%, hotels and tourism – 3.5%, real estate development, management and buildings companies – 7.9%.
Unlike other sectors the Georgian bank sector’s profitability continues stable growth. According to the NBG report, the 2014 return on average assets and capital marked 2.6% and 14.8%. The bank sector’s profitability indicators are stable for the last years.
According to the NBG report, an upturn in assets and efficiency of scales have positively affected the bank systems’ profitability. Moreover, for the last years the number of assets appropriated by the bank sector grows on permanent basis.
Structure of Georgia’s
In 2013 the Georgian National Statistics Service has conducted a research for evaluation of paw-shop assets. Under the report, in 2013 total assets in pawn-shops marked 340 million GEL, including 91.5% in terms of loans and 4% in terms of cash. The remaining part of assets was preserved at commercial banks and in other types of assets. This signifies pawn-shops have issued 310 million GEL loans. Evaluation of the volume of assets at pawn-shops has outlined the volume and structure of the total financial sector. The finance sector’s total assets (according to the 2013 indicators) marked 19 billion GEL, of which commercial banks recorded 91%, microfinance sector – 4%, insurance sector – 3% and pawn-shops – about 2%.
The correlation of the finance sector assets to GDP, one of the indicators of the finance sector development, makes up 71%, including 64.4% is recorded for assets of commercial banks. In practice, the finance sector on the Georgian market has become a monopolist. Over 90% of the assets in the finance sector are registered for the bank sector. According to the European Central Bank, the ratio of commercial banks in the Eurozone finance sector’s total assets is 60%. According to the statistics of the Federal Reserve System, the same indicators in the USA makes up 23.4%, that is, commercial banks hold less than 25% in the finance sector. Moreover, even the interbank competition is very low. Small commercial banks that make up a majority in the system cannot make essential effect on the market ratio.
As to the major bank institutions, they have got huge potential. Namely, they can draw cheaper and longer-term credit resources, including from abroad. They are able to issue comparatively large credits with flexible terms, efficiently manage risks and so on. All these factors narrow market space for small commercial banks and shrink their competitive capacity. The fact is today the Georgian finance system entirely consists of the bank sector and this grows the quality of dependence of the economy on commercial banks. This also grows risk factors. If the world is afraid of domination of the finance sector, there is the worse situation in Georgia, where not only the finance system, but only one segment of commercial banks has got dominating positions on the market.
IMF experts recommend tightening regulations to minimize the existing risks. The finance sector regulation issue became relevant after the 2008 financial crisis. The world is seeking for new approaches of regulations. A major part of new economic theories backs complex regulations, because the borders between economic fields disappear every day. Complex methods will not work in Georgia because of undeveloped market. Only the finance sector has been developed in terms of commercial banks. This factor creates specific risks to the Georgian economy. The world is trying to resolve the problem with regulating deeply integrated sectors, while in Georgia the finance sector regulatory legislation promotes the development of only one sector and this is a dangerous tendency.
Because of deficiency of domestic resources for financing the transient economies, foreign capital inflow is an inevitable necessity. The domestic stock exchange performs a function of organized market to ensure this process. To ensure the normal operation of the stock exchange, it is necessary to adopt legislative amendments. Due steps were taken in 2012 in this direction after the parliament initiated the bill to separate securities regulations from the National Bank and to direct these regulations to the securities national commission. Despite the bill was developed, it had not been discussed yet. Public skepticism and public unawareness in this field are one of the reasons the securities market has not been developed in Georgia.
The government should develop a strategic plan and legislative amendments for developing the securities market. The government should promote making investments in the corporate securities to create grounds for the state economic development.
The reforms package should outline such priorities that will ensure the market transparency, stimulate a wide range of financial instruments, encourage a growth in number of brokerage companies and create municipal and project-supported securities. But today we have a dominant bank system and its healthiness largely depends on the finance and economic stability of the country and its profitability grows every year. At the same time, their credit policy implies an issuance of loans that do not promote the real sector of the Georgian economy.