The FINANCIAL -- According to research by KPMG, the average effective interest rate for SMEs’ investment loans in Georgia stands at 12.8 percent, whereas in the neighbouring Azerbaijan and Armenia the corresponding rates are 19.6 percent and 16.9 percent, respectively. Although there is still room for improvement, these figures confirm that Georgia is ahead of its closest peers when it comes to accessibility to lower-priced funding for SMEs, says Monika Beck, Head of the Financial Sector Development Department at KfW.
The European Fund for Southeast Europe (EFSE) started operations in the ENR in 2010, and so far it has provided 77 loans to banks, microfinance institutions and leasing companies, totalling EUR 367 million. Out of that, EUR 97 million went to Georgia, where EFSE had EUR 18.5 million investments in 2014, out of a total of 47 MEUR invested in the region this year, according to EFSE.
Bank of Georgia, Bank Republic and ProCredit Bank Georgia are long-standing partners of EFSE in Georgia. The funding that EFSE provided to these institutions has been provided to more than 12.5 thousand borrowers, Georgian micro and small businesses, farmers and households, totalling EUR 202.5 million.
EFSE, one of the largest microfinance funds in the world initiated by KfW Development Bank with the financial support of the German Federal Ministry for Economic Cooperation and Development (BMZ) and the European Commission, aims to foster economic development and prosperity in Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, the former Yugoslav Republic of Macedonia, Kosovo, Georgia, Moldova, Montenegro, Romania, Serbia, Ukraine and Turkey.
The total volume of loans disbursed in 2013 to local financial institutions for the benefit of micro and small enterprises (MSEs) in the region increased to a new all-time high of EUR 211.3 million disbursed to the EFSE’s 71 partner lending institutions (PLIs). These disbursements served to refinance 121,422 new sub-loans to micro and small enterprises as well as to low-income households for home improvement. On the funding side, new investments lifted available capital to reach EUR 962 million, 66% of which was from private investors.
The EFSE Development Facility, which goes hand-in-hand with the Fund in providing technical assistance to its partner institutions mainly for improving quality access to micro and small enterprises as well as to sector bodies, also progressed significantly with 65 projects under management totalling EUR 3.7 million in 2013 alone, according to EFSE.
Monika Beck, who is heading the financial sector development department at KfW talked to The FINANCIAL about the development of the SME and financial sector in Georgia.
Q. How limited is it for micro and small enterprises and low-income private households to have access to financial services in Georgia? Please compare the situation here to that in other countries in the target region.
A. In Georgia, the importance of the SME sector is clearly recognized by the Government, international donors and IFIs, as well as local financial institutions. There is a common saying that SMEs are “the backbone of the economy” and in Georgia this is confirmed by the fact that SMEs contribute to around 40 percent of the employment in the country. SME financing also remains a priority for international financial institutions, including EFSE. The Fund has been actively present on the market since 2010 and has extended a total of around EUR 100 million to date, specifically to promote lending to micro and small enterprises in the country.
With respect to the local banking sector, approximately 24 percent of total lending is estimated to go to SMEs. PCB Georgia, a partner to EFSE, is the country’s fourth largest bank and is entirely dedicated to serving SMEs. The two largest banks - Bank of Georgia and TBC - are also extensively focusing on the segment. For example, Bank of Georgia, another partner of EFSE, has extended more than 20 percent of its loans to SMEs. Of course other market players, as well as the microfinance sector, are also active in this field.
Despite the continuous efforts there is still a gap for SME financing, also recognized in a recent study of the European Investment Bank (EIB). The gap for SME funding in Georgia in 2012 is estimated at EUR 0.7 billion, while the largest gaps are identified for affordable long-term local currency loans, particularly for rural and agricultural clients, according to the study.
In countries such as Azerbaijan and Armenia (which are also target countries for EFSE), demand for SME financing is exceeding the availability of funding. The gap for SME funding in Azerbaijan continues with the largest gaps identified in the agricultural sector and for rural enterprises in particular. Therefore the ENR region remains very important to EFSE in fulfilling its objectives to foster economic development through the provision of sustainable development finance to MSMEs.
Q. You said that the banks in Georgia provide loans for SMEs, however the representatives of SMEs complain of high interest rates, which are hampering business development in general as they are not able to take out loans and develop their businesses. What is your view on this?
A. Both nominal and effective interest rates in Georgia are generally lower compared to its peer countries in the region as shown by recent comparative research conducted by KPMG for the National Bank of Georgia. The same trend was identified in terms of interest rates charged to SME clients. For example, according to the research, the average effective interest rate for SMEs’ investment loans in Georgia stands at 12.8 percent, whereas in the neighbouring Azerbaijan and Armenia the corresponding rates are 19.6 percent and 16.9 percent, respectively. Although there is still room for improvement, these figures confirm that Georgia is ahead of its closest peers when it comes to accessibility to lower-priced funding for SMEs.
Furthermore, interest rates in Georgia have demonstrated a clearly decreasing trend over the last year in all segments, which was due to the high competition on the market. For example, the average market interest rate on banking loans stood at 18.6 percent at end 2012, coming down to 15.6 percent at end 2013.
Finally, while in 2013-2014 Georgia went through a slowdown in economic growth and the overall banking sector credit was not expanding, EFSE’s partner lending institutions strongly expanded lending to SMEs. This further supports the argument that the cost of credit has not hindered SMEs from borrowing even at times of overall slowdown.
Q. A lack of strong SMEs in the country is still a problem for Georgia. As an expert on micro, small and medium enterprise promotion, could you please tell us what you see as the way to develop SMEs in Georgia? For example, one of the key findings of the research conducted in Armenia, Serbia and Romania was that small enterprises, in particular in the productive and agriculture sector, need financial services adapted to their specific circumstances and require more effective delivery and often more flexible conditions than currently provided.
A. The development of a strong SME sector in Georgia is dependent on a number of macroeconomic and market-related factors and the provision of long-term sustainable financing, such as EFSE is delivering, is an important component in promoting SME growth.
EFSE is actively supporting its partners in developing further their SME lending capabilities to be able to offer solutions which correspond to the needs of micro and small businesses. Through its Development Facility, the Fund is working closely with its partner lending institutions in strengthening their lending capabilities by providing targeted consultancy and trainings, such as our recent training partnership with Bank of Georgia.
In addition, the Fund is supporting innovative approaches in the agri-financing sector. We are currently working with a microfinance institution in Georgia to develop an innovative information platform for its agricultural clients. In this way, EFSE will be assisting the institution in addressing the gap for reliable information for small farmers in the rural areas of Georgia, enabling them to improve their productivity, sales and ultimately sustainability, which at the same time improves their credit risk and makes them bankable.
Q. What are the urgent reforms that Georgia and its neighbouring countries need to implement to develop the financial sector? In general, what is your view of the financial sector in Georgia?
A. The financial sector of Georgia has been developing dynamically over the past few years supported by a vibrant banking sector. Local banks have grown rapidly multiplying total assets by more than 10 times over the last 10 years, reaching USD 10 billion as of Q1 2014. In addition the banking sector has so far managed to preserve sound asset quality indicators and to weather several financial shocks including the European financial crisis and political instability. The two largest banks of Georgia have demonstrated their commitment to adhere to high standards of transparency and investor accountability by obtaining a listing on the London Stock Exchange.
The success of the sector is supported by the active involvement of the local regulator, the National Bank of Georgia, which has sought to ensure sound capitalization of the sector to serve as a sufficient buffer at all times.
Considering the highly dollarized nature of the local economy with more than 60 percent of the loans issued in foreign currency, further promoting lending in local currency remains a priority. This is well understood by both the international and local financial community, including EFSE as well as by the National Bank of Georgia, which has been actively providing short-term liquidity refinancing for the banking sector.
In addition, other important steps have been made by National Bank of Georgia towards improving responsible finance and financial education. We are proud to have contributed to these efforts, as we have worked together with the National Bank in organizing responsible finance workshops, and we have developed different educational booklets and brochures that are available to the public through our partner lending institutions.