In Georgia, as in the world’s most ancient civilized countries, the monetary-credit relations, the existence of different credit facilities and banks have a very long history. Different types of credit institutions, such as credit unions appeared in the VIth century BC in ancient Georgian kingdoms of Colchis and Iberia. These institutions were the precursor of today’s banking system. This process permanently continued and further accelerated, and in the 8th century, wide variety of credit organizations – banks in today’s term – already existed giving credits with or without the basis of collaterals. In the XI-XIII centuries, Georgia was involved in the world trade, after which the credit unions were more developing, however, after the second half of XIII century Georgian territory became the fighting arena, while it continuously had invaders from different countries.1 Therefore any kind of materials or historical sources on credit facilities is no longer available. After that period the financial-banking system in Georgia was gradually developing and refining. But in this paper we will mainly consider today’s banking system and its role in the country’s economy starting from the period of Georgia’s independence. After declaring its independence, the financial system of Georgia has experienced significant changes. The financial infrastructure designed the following transformation: The National Bank of Georgia (NBG) has been created; the national currency – Georgian Lari (GEL) has been issued; the commercial banks have been certified. Except banking system, the financial system includes other financial institutions. In 2010 in Georgia 19 Commercial banks operated, from which 16 are operating with the foreign capital participation. As for non-banking depository institutions, there are 49 microfinance organizations (MFO), 18 credit unions; 1,624 exchange bureaus; 24 money remittance service providers; 16 insurance companies; 6 pension funds and 1 stock exchange.0 Among these financial institutions most profitable and important for financial sector is the banking system, which is reflected with the mobilization of the finances and their formation into investment sources by means of the banking institutions. According to this, banking system plays an important role in increasing the pace of Georgian economy. The banks operate in accordance with modern market model in every respect. An active involvement of the Georgian banks helps the small and medium sized business development in the country. Georgia have done lost of success in developing its financial sector during last years after its independence, however external factors have hampered country’s development to some extent recently, which reflected on Georgia’s economy and consequently on its financial sector. Nowadays, positive changes are being implemented which gives us the possibility to presume, that the financial system will further develop and promote county’s economic development.
The transformation of Georgia’s financial system was going on the background of heavy economic and political crisis. During 1991-1994, the production capacity dropped dramatically by 70 percent, which caused a serious financial crisis, suspension of traditional foreign economic links, weak requirements for licensing and, moreover hyperinflation increased instability of banking system. Extremely low required initial capital and the absence of regulation norms from the national bank facilitated the process of the creation of new private banks. From 1989 to 1993, number of commercial banks functioning in the country increased from 20 to 228 (See Table 3 for details), but because of a weak financial base biggest part of them faced financial difficulties, consequently volume of deposits dropped to zero; they couldn’t provide high-quality services to their customers. Because of the lack of credit recourses, commercial banks began to compete in attracting money amounts from the population in return for huge interest rates. Interest rates reached 25-30 percent per month. Unfortunately, such promises were beyond reasonable. After a year, already in 1995, such promises gave deplorable results – these banks became bankrupts.3 The tendency of opening commercial banks easily and providing credits from the national bank was finally stopped by the introduction of a new regulation and strict requirements for commercial banks. As a result, in 1996, a two-tier banking system has been developed. The national bank became the upper level of the banking system. All other banks, being under private ownership, constituted the lower tier. The National Bank of Georgia was formed as a classic central bank. The central bank supported Georgian banking system to become larger and secured. In 1998, in order to improve the banks’ equity liquidity, the requirements for the charter capital were made stricter. The national bank introduced minimal charter capital with the amount of 5 million GEL. Later it increased up to 12 million GEL. This policy led to the reduction of number of commercial banks and in 2009, only 20 commercial banks were functioning out of 228 (Mosiashvili, 2009). Table 3. Number of registered commercial banks /end of the year/ 1993 2001 2002 2003 2004 2009 2010 Number of Banks Total 228 29 27 25 21 20 19 Number of Bank Branches
206 199 201 162 159 119 Nowadays, 17 of the existing commercial banks are national (private owned) and 2 are branch establishments of Turkish and Azerbaijan Banks. All in all, 16 out of the 19 commercial banks were founded under the participation of foreign financial institutions such as HSBS, Commerzbank and Societe Generale and others. From 1997, the banking system of Georgia grew significantly rapidly. The banking sector compared to other sectors was annually developing at a preceding rate. During 1997-2004, financial intermediation, as one of the types of economic activities, grew almost 8.7 – times in real terms, while the GDP only grew 1.6 – times. Despite the fact, that banking sector’s share itself is rather small, it offers its clients almost all kinds of banking services currently available in the developed countries.
As we already mentioned, nineteen commercial banks operated in 2010, from which 17 are resident banks and two as branches of a foreign bank. The total number of service centers and branches of the commercial banks in Georgia equals 632, or 26 units less compared to the previous year (probably because of the cost minimization policies). The share of commercial banks with foreign capital participation equals 89 percent in total assets and 88.3 percent in equity capital. 78.7 percent of paid-in capital represents investments, a two percentage point increase in annual terms. The Georgian banking sector received investments in the total amount of 58.14 million GEL in terms of flows between June 2009 and June 2010. The total assets of the banking system comprised 9.215 million GEL at the end of Q2 2010, which in 19.2 percent more compared to 2009. As for the rations of total banking assets and loans with respect to GDP, these parameters were subject to certain fluctuations in the accounting period. At present, the assets-to-GDP ratio equals 48.7 percent, being 6 percent more compared to previous – 2009 year. The loans-to-GDP ratio in 2010 stood at 30.3 percent, posting an insignificant change in annual terms. Commercial bank’s credits to economy Deposits Share of Households in Deposits (%) Total in national currency in foreign currency 2003 785923 618852 85863 532989 60.3 2004 964917 895940 230104 665836 50.5 2005 1730466 1174896 333611 841285 54.7 2006 2704384 1859075 565143 1293932 50.2 2007 4632048 2863060 984903 1878157 45.1 2008 6059598 3221187 778560 2442627 50.9 2009 5253905 3427324 91002 2517322 52.7 Source: NBG
The deposits in commercial banks showed a mild increase – by 6.4 percent – in 2009 compared to 2008, which can be explained by a high growth rate (16.9 percent) of deposits in national currency. Their share in total deposit volume increased significantly – by 2.3 percent – and comprised 26.5 percent compared to 2008. Hence, the deposit dollarization coefficient decreased from 75.8 percent to 73.5 percent. In 2008, an upward trend in foreign currency denominated deposits continued, although the growth rate was much lower – by 5.5 times – that of the deposits in national currency. The increase in the deposits in foreign currency was mainly achieved due to the rise in term-deposits – by 14.2 percent, while current account deposits decreased by 19.9 percent. It should be noted, that the interest rates on deposits tended to decrease: the respective interest rates on deposits in lari and foreign currency decreased from 11.4 and 10.2 percent in June 2009 to 10.7 and 9.3 percent at the end of the year, and 9.5 and 8.0 percent at the end of June 2010. Compared to 2009, the overall share of deposits increased by 45.3 percent in 2010;
The amount of loans issued by commercial banks significantly decreased in 2008 (by 13.3 percent). 95 percent of these loans accounted for term loans, according to which 3 percent and 1.4 percent accounted for overdue loans and accrued interest. In 2009, 59.8 percent of credits to the national economy issued by commercial banks both in national and foreign currencies went to different sectors of the economy, while 40.2 percent went to households. Source: NBG The structure of credit to the economy experienced significant changes in 2008: the share of industry has increased by 2.3 percent. At the same time slightly increased healthcare and transport and communications share (0.5 and 0.3 percent). In contrast, notable decrease was seen in the share of trade (1.3 percent). And last but not least, the shares of real estate transactions and construction experienced a decrease as well by 0.9 percent and 0.6 percent. In 2009, fewer amounts were channeled towards crediting of sectors of the economy as compared to a year before mainly because of the decrease in loans to trade and construction by 12.8 and 14.9 percent. In 2008, the average annual interest rate on loans of commercial banks comprised 18.6 percent; then in 2009 it increased by 0.7 percent and in 2010 decreased again by 1.4 percent and comprised 18.1 percent. The total assets of commercial banking sector showed a moderate decrease – by 6.5 percent falling to GEL 5,185 million in 2009 due mainly to a notable drop in loans to the entrepreneurial sector and households because of higher credit risks. The decrease in total liabilities, on the other hand, was caused by a sharp decline in borrowings by commercial banks. However, starting from January 2010 a permanent uptrend has been manifested showing signs of economic recovery. As for June 2010, the volume of loans equals GEL 5,737 million. In particular, the loans to legal entities grew by 10.9 percent year-on-year, while loans to individuals increased only slightly at 0.6 percent. Overall, the real growth of the credit portfolio of the banking sector equaled 3.1 percent in the accounting period. Strong growth of loans in the first half of 2010 should be noted with the real growth amounted to 8.43 percent during that period. In 2010, 42.5 percent of the interest income of the banking sector came from loans to individuals, and 55 percent – from loans to legal entities. If we compare the interest expenses, the net interest margin equaled 14.7 percent for households and 12.1 percent for legal entities.
During last ten years, Georgian economy was growing quite successfully. The major factor of economic growth was a correct macroeconomic policy which along with economic liberalization envisaged the establishment of European market regulations. In such conditions, the banking sector has achieved very good indicators, particularly in loans and consumer deposits; growth prospects are also very important. After all of the above-mentioned circumstances significantly increased financial interests of international organizations through the Georgian banking system. Today, as a result, many foreign and international financial institutions are making investments in Georgia. They are as follows: EBRD, IFC, Kreditanstalt für Wiederaufbau (KfW), JSC Procreditbank, German “Komerzbank”, German Investments and Development Company (DEG), Russian Vneshtorbank” and many more. Growth of foreign capital in Georgian banking system significantly increased the availability of new resources and new banking products, and at the same time was an important contributor of introducing modern management principles. Participation of foreign financial institutions in Georgian banking system is also reflected by allocation of credit lines, which started from 1996 and consisted three main directions: Structural strengthening of banks; Support of small and medium sized businesses (SME); Mortgage market development. In this direction leads EBRD and its capacity of credit line to Georgian banks is growing annually. Only in 2001-2005, the amount of credit line increased from GEL 32 to 50 million and was distributed to six commercial banks. Recently, on July 2010, the EBRD has approved a financing USD 50 million package for the Bank of Georgia consisting of three transactions: USD 20 million for Medium-Sized Co-Financing Facility (MCFF) with full recourse to the company; USD 20 million credit line for Small and Medium Enterprise Lending (SME) and USD 10 million credit line for Energy Efficiency.7 Bank of Georgia is the leading bank in Georgia with a market share of 33 percent of total assets on the London Stock Exchange. The second largest share of credit line has IFC, a member of the World Bank Group, which is also growing its credit lines annually. In the same period, the amount of loans for three commercial banks increased from GEL 8 million to GEL 31 million. Also should be mentioned the fact, that it declared of lending USD 20 million to Bank Republic, Societe Generale Group for financing small and medium sized enterprises. SME in Georgia represent one of the most important segments for economic growth as well as employment. It consists of lots of sectors such as small retailer shops, traders from agriculture and many more. SME business has high potential and the most interesting field to develop is manufacturing, in order to be able to produce products, to be exported and development of export is crucial for the country in order to capture inflow of foreign currency.8 It is also noteworthy to mention German DEG and KfW with their modest share. KfW is very actively involved in financing the land market development project and establishment of technical support in deposit insurance system, which will have a great importance on the future development of banking sector. As for the current situation, in 2010, after activating the processes of consolidation and concentration, the following major groups have been firmly established: Large Banks (6) with the 87 percent assets of the overall banking sector (each bank consists of more than 5 percent total assets of the banking system); Medium sized banks are represented with three commercial banks, each of them owns from 1 to 5 percent of overall banking assets (total group includes 7 percent of total assets); Small banking group includes 10 banks (each owns less than 1 and together 6 percent of the overall banking assets). The quantitative and qualitative growth rates in Georgian banks were challenged by strong financial conditions of large banks, which caused stability of the banking system. The main competition was held among these strong banks and they become the pioneers of implementing new products and services.
JSC Bank “Republic” 04.02.1992 N5 46 JSC “TaoPrivatBank” (Former JSC “kavkasioni”, JCS “Tao Bank”, JCS “First Commercial Bank” 25.02.1992 N10 40 JSC “TBC Bank” 20.01.1993 N85 35 JSC ” Bank of Georgia” 15.12.1994 N86 138 JCS “Liberty Bank” (Former People’s bank, JCS “Agro-industrial Bank”) 10.02.1993 N96 72 JCS “Basisbank” 11.04.1993 N173 18 JSC “VTB Bank – Georgia (Former JSC “United Georgian Bank) 07.05.1995 N226-a 15 JCS “Cartu Bank” 09.01.1997 N229 9 JSC “Procredit Bank” (Former JSC “Microfinance Bank of Georgia”) 13.05.1999 N233 55 JSC “BTA Bank” (Former JSC “BTA Silk Road Bank”, JSC “Silk Road”) 13.03.2001 N238 7 JSC “Investbank” 29.09.2003 N241 3 JSC “The International Bank of Azerbaijan-Georgia” 07.02.2007 N0110242 1 T.C. JSC “Ziraat Bank A.S. Tbilisi Branch” 31.03.1998 N231-1 1 Open JSC “Transcaucasus Development Bank Tbilisi Branch” 02.12.1999 N234-1 1 JSC “HSBC Bank-Georgia” 30.07.2007 N000226 1 JSC “Progress Bank” 31.12.2007 N0110244 2 JSC “KOR Standard Bank” 25.01.2008 N01100245 14 JSC “Halyk Bank Georgia” 29.01.2008 N0110246 1 JSC “Bank Constanta” 03.07.2008 Decree N130 issued by the Head of FSA 17 From these commercial banks the leading banks can be considered – Bank of Georgia, TBC Bank, Bank Republic and Procredit Bank. This is mainly due to the amount of loan portfolio, with the share of deposits, with a good service and international recognition (with respect to other banks). For example, Fitch Ratings, a global credit rating agency, has improved TBC Bank’s rating and assigned B+ category. Growth of TBC Bank’s rating is a very positive event since the difficult economic and political processes in Georgia during 2008-2009 had a negative effect on the country’s economy, including banking sector. Experts of Fitch Ratings claim that growth of TBC Bank’s rating along with the stable and dynamic development of the bank has been conditioned by a large scale investment in TBC Bank in the first half of 2009 as well as by the changes that took place in the structure of shareholders. Moody’s Investors Service has upgraded by two notches to B1 from B3 the long-term foreign currency deposit rating TBC Bank. At the same time, Moody’s has the bank’s D bank financial strength rating (BFSR), which maps to a Ba3 baseline credit assessment (SCA), and has changed its outlook to stable. Similarly, the bank’s Ba3 long-term global local currency (GLC) deposit rating was confirmed with a stable outlook. Raising USD 161 million from leading international institutions such as – EBRD, enterpreneual development bank of the Netherlands – FMO, JP Morgan and Ashmore was bank’s major achievement in 2009. TBC Bank’s performance in the SME segment is improving annually. At the same time, the Bank’s structure and approaches are being developed in order to increase the quality service. The TBC bank main financial data for 2010 can be characterized as follows: net profit of GEL 43 million was achieved; Bank evaluated another successful year from its 18 year history. According to the banks information, loan portfolio was increased by 33 percent (GEL 369 million), deposits increased by 38 percent (GEL 370 million) and total assets by 30 percent (GEL 522 million). From the beginning of 2010, taking into account country’s improvement, TBC Bank has reinforced its credit policy and softened the terms of lending. It introduced several social projects, implemented a new service as well as expanded its branch networks and so on.9 Bank’s market share in total assets is 20.8 percent; market share in loans – 21.6 percent and market share in deposits accounts for 24.9 percent.
IFC International Financial Corporation KfW Kreditanstalt für Wiederaufbau SME Small and Medium sized business BFSR Bank Financial Strength Rating GLC Global Local Currency 0 National Statistics of Georgia: www.geostat.ge 1 see www.cac-biodiversity.org for details. 2 Kartl-Kakheti Kingdom in Georgia don’t exist anymore. Instead they represent two regions of Georgia: Kartli and Kakheti. 7 See www.ebrd.com 3 According to expert estimation, total amount accumulated in these companies and banks, fluctuated between 25 million and 50 million USD, composed 20-35 percent of a state budget in 1995. 4 Mwenda (2006), pp. 31-32. 8 see www.finchannel.com 9 see www.economy.ge
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