THE NEW LAW ON MICRO BANKS AND WHAT IT WILL CHANGE IN THE FINANCIAL MARKET OF GEORGIA

Abstract

Microfinance is the provision of financial services to low-income groups. By classical definition it contributes to the improvement of the socio-economic condition as well as financial self-sufficiency of the low-income costumer and improves their living standards. Today, microfinance institutions around the world serve up to 156 million borrowers and manage a loan portfolio of USD 187 billion (Impact Finance Barometer, 2022: 3). Formation of Georgian microfinance market began in the 1990s and was developed mainly with the same scenario as in Balkans, Eastern Europe and Central Asia. During the first 10 years after adoption of the new Law on Microfinance Organizations and commercialization of the industry, a rapid growth and fast development of the sector was recorded (2006-2016), which has been then changed by a negative trend and market decline. The main reasons of the crisis are: tighter regulation, market saturation, growing competition from commercial banks, over-indebtedness, weak corporate governance, etc. In July 2022, the draft law on the activities of micro banks was registered in the Parliament of Georgia, according to which a new financial institution focused on lending to entrepreneurial and agricultural activities - a micro bank - will enter the market from 2023. The draft law was prepared based on the recommendation of the International Monetary Fund, which advised the National Bank to introduce a micro bank as a new institutional form (International Monetary Fund, 2020: 19). As a result of the law, 4 types of financial institutions will be presented in the financial market of Georgia since 2023: commercial banks, micro banks, microfinance organizations and loan issuing entities. The new regulatory framework should give microbanks the following advantages over the current status of MFIs: The maximum loan amount per borrower will be increased from GEL 100,000 to GEL 1 million, which allows microbanks to actively enter the SME lending segment, retain good borrowers, grow faster faster in the market and compete with banks. Having the right to mobilize the deposits, microbanks will be able to better diversify their funding sources, reduce the cost of local currency borrowing (based on savings in hedging) and, accordingly, reduce the interest rate on loans for thier clients, which will also increase their competitiveness with banks. By offering bank account services, microbanks will be able to provide customers with an almost full range of banking services. After legally differenciating from “consumption” and “pawnshop” type of financial institutions, microbanks will be able to attract more investments from responsible and reputable international financial institutions. At the same time, the new draft law contains certain potential risks that need to be properly assessed and analyzed: The increase of loan size limit from 100,000 to 1 million GEL is a good for portfolio growth. However, most companies lack the experience and qualification to properly manage risks of such large loans. Past experience also confirms that the worst portfolio quality and problem loans MFIs have in large loans (over GEL 10,000). Administration of the article, according to which at least 70% of the loans of a microbank must be disbursed for business purposes, seems very difficult. As of today practically no MFIs can meet this criteria. Adding the new products (deposits, account management) requires a high-quality core banking systems and automation of many processes. Consequently, microbanks will have to mobilize additional financial and human resources to build this infrastructure, which may take several years and entail significant costs. In conclusion, it can be said that the draft law is likely to have a positive impact on the financial sector. Competition in the financial sector will increase, which will lead to the provision of better quality and diverse financial services to customers.