Banking Business or More? A Survey of the Georgian Micro Credit Market

CONTENTS

Acknowledgements

Executive Summary

1. Introduction

2. Background

3. Objectives

4. Georgian Micro Credit Market
4.1. Demand: The Target Group
4.2. Supply

5. Findings and Conclusions
5.1. Findings
5.2. Conclusions for IOM

Appendix 1: Micro Finance Activities in Georgia

Appendix 2: List of Interviews

Appendix 3: References

Acknowledgements

The underlying report is the result of a survey carried out by Kristin Höltge during her internship with the International Organization for Migration (IOM) in Georgia from September until December 2002.

She would like to acknowledge the generous support of IOM Tbilisi for this survey, and also thanks the representatives of organizations, banks and state institutions for providing required information.

Executive Summary

A broad approach to micro finance in Georgia encourages various means of development, such as economic growth; conflict prevention in the sense of minimizing of poverty as one of the causes of conflicts; institution building; education, and the strengthening of civil society. Taking this into account, micro financing covers economic as well as political and social aspects.

Therefore, mere loan disbursement should be underpinned with education and, in particular, with initiatives that focus on building up a civil society.

Such comprehensive projects demand governmental cooperation as well as the insight of the donor community in the importance of awareness building rather than immediate cost covering, and highly motivated staff at the implementing counterparts.

1. Introduction

Economists and politicians as well as the major development organizations have realized the growing importance of small and medium sized enterprises (SME) for national economic development. This tendency goes hand in hand with an increasing informal sector in urban regions that has appeared as consequence of

unemployment and inappropriate social welfare systems. As commercial banks focus their activities on large-scale clients, “credit [for SME] is rationed.”¹ To promote SME’s growth, steps have to be undertaken in order to overcome the limited access to financial resources.

Therefore, micro financing was put on the agendas of the international donor community, and corresponding programs were introduced in transition and development countries. In Georgia, assessments on micro financing started about ten years ago, and the number of projects as well as of implementing NGOs have increased rapidly since then.

This paper analyses activities of micro finance institutions (MFI) in Georgia in order to summarize best practice and lessons learnt.

2. Background

Georgia with a population of 5 million inhabitants (2000) and a per capita income of 620 USD (2001)2 has, like other newly independent states (NIS), so far failed to carry out democratic and market-oriented reforms consequently. There remain serious deficits in the political and economic, and in particular in institutional means.

The following figure indicates problems from the point of view of the Georgian population:

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Source: UNDP (2002), p. 13

Institutional Weakness

As shown above, corruption as an expression of weak institutions is in ²nd place of the most pressing concerns. Taking into account that Georgian companies are paying 4 % of their revenues as bribes to state officials, the country is in the 6th place of the most corrupt states in Middle and Eastern Europe.³ Rent seeking behavior by state authorities, a lack of transparency in certain procedures, gaps in law and uncertainty about competence hinder any trust in institutions.

Political Instability

The position of president Eduard Shevardnadze within the political network is rather weak. “ … [The] political power coalesces around several ‘oligarchic’ poles that engage in political violence as a means of gaining advantage over other contenders.”⁴ The government has lost control over large parts of the country.

The relations between the political center and the regions are highly conflict loaded. Abkhazia and Adjara in West Georgia are autonomous republics, and so is South-Ossetia in the North an autonomous region. The Samtskhe-Javakheti district on the border to Armenia and Turkey, with an Armenian population of up to 95 % in Akhalkalaki, was been neglected by the Georgian government, and now depends economically in particular on the Russian military base, located in

Akhalkalaki.⁵ Furthermore, Zugdidi’s population (in Samegrelo close to the Akhazian border) lives in hardship following the influx of almost 150,000

internally displaced persons (IDPs) from Abkhazia.⁶ Finally, the still unsolved

issue over Chechen activities in the Pankisi gorge and Russia’s reproach for Georgia’s support strains Russian-Georgian relations.

Economic Development

Georgia succeeded in overcoming a massive fall in output, hyperinflation and enormous budget deficit following the breakdown of the Soviet Union in 1991. Since 1995, a positive growth rate in GDP around 5 % can be noted. There are great expectations for growth and employment as a result of the recently signed contract for the pipeline project Baku-Tbilisi-Ceyhan.

On the other hand, agriculture is still seen as the backbone of economy. It contributes 1/3 of the Georgian GDP and employs the half of the economically active population. About 80 % of agricultural output is produced by the private sector.⁷ Generally, private activities on subsistence level play a very important role for income generating.

Social Tendencies

Despite the progress mentioned above the living standard of the population remains low. The per capita income of 620 USD does not even cover basic needs. Between 8 and 13 % of the Georgian population, depending on the season, lives under the Extreme Poverty Line.⁸ The rate of unemployment reaches 26 % in the urban regions. The government has so far failed to provide

an appropriate allowance to those who are especially vulnerable. As a result of the sustained large budget deficit state spending has decreased from 8.8 % of the GDP (1997) to 7.5 % (2000).⁹ The unemployment allowance amounts to 14

GEL for the first 6 months of unemployment, and the pension level is 14 GEL, as well.

Because of the social hardship labor migration is becoming a more and more important issue. According to a research by IOM most favorable destination countries of irregular migration are Greek, the US, Russia, and Turkey.

3. Objectives

The combination of weak institutions, small scale economic activities, and a not yet developed civil society requires appropriate measures in order to reduce poverty and build up a reliable institutional framework. Therefore, the international donor community put the objectives as shown below on their agendas:

1. Conflict prevention in local development in order to minimize regional inequalities that might occur as conflict causes;
2. Establishment of long-term, cost-effective and reliable governmental and non-governmental institutions to increase the population’s trust in institutions, and to provide the required services;
3. Establishment of the rule of law as a base for good governance and transparency, and to combat corruption;
4. Promotion of SME as a catalyst for economic growth;
5. Alleviation of poverty and social hardship through employment creation and income generation;
6. Strengthening of civil society through empowerment, participation and education measures, especially with a focus on women.

Micro finance, if provided in a comprehensive sense, can contribute to almost all of the objectives above. A more detailed view on the micro credit market in Georgia allows deducing more concrete measures. Therefore, the following chapter will concentrate on the target group (demand side) on one hand and on

ongoing micro finance programs of international and local organizations as well as commercial MFIs (supply side) on the other.

4. Georgian Micro Credit Market

The micro finance market in Georgia has increased a lot during the last five years and is seen as more developed than in Armenia or Azerbaijan. To date, the main donor is USAID.

4.1. Demand: The Target Group

The number of self-employed small entrepreneurs increased enormously as a result of unemployment and insufficient social security. Their contribution to the Georgian GDP has increased from 21 % (1996) to 30 % (2001), whereas the employment in the private sector has raised by 15.6 % between 1998 and

2000¹⁰ and already represents 60 % of all those employed.¹¹ Of these, 66 % are engaged in trade, 19 % in the service sector (especially in transport,

communication and catering) and 15 % in small production.¹² Opportunities for trading have become more restricted since Russian has passed a new

visa regime, requiring visa for Georgian citizens traveling to Russia. Temporary electricity cuts remain an unsolved problem for small-scale entrepreneurs focusing on production.

As most of traders purchase their good themselves and travel to Turkey, Armenia, Azerbaijan as well as to Iran and China, they are interested in buying large quantities to minimize their transport costs and benefit from discounts. The biggest limitation is seen as their liquid capital assets. Although private money lending is traditionally rooted in the Georgian society this option is seen as rather uncertain and limited. Conversely, small entrepreneurs face high demands for collateral from commercial banks, which itself is discussed in more detail in the next chapter.

4.2. Supply Commercial Banks

The Georgian banking sector is rather small and relatively under-developed.

There are 33 commercial banks operating of which MBG, TBC Bank and Bank of Georgia are among the biggest. During the last five years some progress achieved with extension of banks’ branches as well as the variety of services on offer. ATMs have been established, and internet banking is

offered by a few banks. But the amount of savings and foreign capital remains small.

In the debating over micro finance, commercial banks focus their operations on rather large-scale clients as shown at table 1. TBC Bank for example has disbursed credits under 1,000 USD to 1.5 % of their clients only. MBG operates with a stronger focus on SME but like the other banks requires high collateral security which the majority of entrepreneurs cannot offer.

Table 1: Conditions of Commercial Bank’s Micro Credit Programs in Georgia

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Source: Interviews with representatives of the banks and bank’s homepages¹³

Micro Finance Programs of Transnational, International and Local Organizations

As indicated above, there is only rare access to credit for SME. That is one reason international donors try to close this gap. The World bank, for example, has so far provided 6.5 million USD for the establishment of credit unions and further 2.2 million USD for agricultural credits. So does the EU’s Regional Agricultural Reform Program finances credits for farmers. IOM

started a micro finance program in Samtskhe-Javakheti recently.¹⁴ A lot of

NGOs have become involved in micro finances and their activities have grown quickly and now cover many regions of Georgia.¹⁵ Of these, the largest NGOs are Oxfam GB and World Vision International (WVI) as international organizations, and Finca and Constanta are the local ones.

These NGOs are working together on a draft law concerning tax and other aspects of NGOs working on micro finance issues.

[...]

¹ Stiglitz, Joseph E. and Andrew Weiss (1981): Credit Rationing in Markets with Imperfect Information. In: The American Economic Review, Vol. 71, H. 3, p. 394

² World bank, Georgia Data Profile

³ IMF (2001), Georgia. Recent Economic Developments and Selected Issues, Country Report No. 211, Washington, p. 23 – 36; Survey by EBRD

⁴ Dr. Ghia Nodia is political scientist and board of the Caucasian Institute for Peace, Democracy and Development. See RFE/RL, Press Releases, 10 Oct 2002

⁵ More detailed, see: RFE/RL: Georgia: Javakheti Armenians’ Calls for Autonomy has Tbilisi on Guard (Part I), 26 Nov 2002, http://www.rferl.org/nca/features/2002/11/25112002183353.asp

⁶ That equals more than 50 % of the residents.

⁷ USAID (1999): Strategic Plan 2000 – 2003. Georgia, o. O., p. 13

⁸ See: UNDP, National Human Development Report (NHDR): The NHDR Extreme Poverty Line, set at approximately 45 GEL/month, captures the group of Georgians at the margin of society, a group of desperate people that are far from achieving an adequate diet and have almost no budget for health care, education, electricity and heating.

⁹ IMF (2001), Georgia. Recent Economic Developments and Selected Issues, Country Report No. 211, Washington, p. 41

¹⁰ IMF (2001), Georgia. Recent Economic Developments and Selected Issues, Country Report No. 211, Washington, p. 99

¹¹ Interview with Revaz Sakvarelidze, Head of Labor and Employment Policy Department of the Ministry of Labor, Health and Social Affairs in Georgia, 27 Nov 2002

¹² MBG (1999), Business Plan and Financial Projections. Microfinance Bank of Georgia, p. 3

¹³ See bank’s homepages: http://www.mbg.com.ge/english/services/index.htm (MBG); http://www.tbcbank.com.ge/eng/corporate1_2.html (TBC Bank); http://www.bankofgeorgia.com.ge/eng/product/microcredit.shtml?lang=eng&category=products (Bank of Georgia); http://www.tbiluniversalbank.com/english/mainservices_e.htm (Tbiluniversalbank)

¹⁴ See: IOM (2002): Economic Capacity Building Project Samtskhe-Javakheti. Mid-Term Report, Tbilisi

¹⁵ See: Appendix 1