The minister of finance says that banks are putting the brake on the development of the economy. Is this really so?
At the end of April, several Georgian politicians from different political camps criticised the Georgian banking system.
JAMnews tried to get to the bottom of the matter and find out just what the complaints of Georgian politicians against the Georgian banking sector are.
The National Bank put forward new regulations on 7 May for commercial banks.
One of them is the implementation of limitations on granting loans. This law states that banks must carefully check and analyze the solvency of their clients. Moreover, the amount of loans cannot exceed 25% of the total authorised capital of the commercial bank.
Minister of Finance Mamuka Bakhtadze says that there is one more limitation in the making for commercial banks: a so-called effective interest rate limit will be established.
“I want to clarify what ‘effective interest rate’ means,” Bakhtadze stated on Facebook during a live feed. “There are more and more cases of people taking out loans, agreeing to an interest rate and subsequently are subjected to other expenses such as commissions, various types of fines and the doubling and tripling of interest. Because of this it is necessary to set an effective interest rate so that people know in advance what the maximum for their loan might be,” Bakhtadze said.
Some experts believe that the new limitation will make receiving loans much harder.
“This is practically price control, which will bring about a deficit. In other words, those who want to take out a loan and are readier than others to pay the high price will not be able to receive one at all. Moreover, the process of taking out a loan will also become more confusing. This increases the risk of nepotism. And we can assume that some people will receive credit based on decisions which are not understood,” says economist Zviad Khorguashvili.
“Banks slow economic development”
The new attack against banks was launched by the Minister of Finance back in April. Mamuka Bakhtadze said that banks in Georgia do not function as engines for the economy because they offer loans at high prices. This makes access to start-up capital all the more difficult and creates obstacles for the development of enterprise and for the economy in general.
“Unfortunately we see that the loan rates offered by the banking system do not give people the chance to start a business. The banking system should not be a brake on the economy,” the minister said.
Bakhtadze was supported by ex-president Mikheil Saakashvili who is currently in the Netherlands. Saakashvili released two video addresses on Facebook. Well known for his right-wing views, Saakashvili said that the banks are putting families into debt and destroying the economy and that order must be restored in the banking sector. He said that it is necessary to impose a ceiling for loan rates and to forbid banks from engaging in ‘non-core’ activities. Saakashvili gave some concrete data, noting that in Europe, rates go no higher than 11% and in Armenia 7%, while in Georgian banks the rate can go as high as 25%.
Are things really that bad?
It’s not difficult to check the numbers.
Data supplied by the National Bank of Georgia for March 2018 shows that the average loan rate was 21.3% for lari-denoted loans to individuals, while companies received loans of 11.4%. In dollars, individuals could take out loans at 7.8% while companies took out loans at 8.9%.
The average interest rate is about 11.5%. This indicator is also given by the World Bank where the numbers are available for other countries as well. For 2017, the numbers for loan rates in various countries were:
Azerbaijan: 16.5%; Armenia: 14.4%; Ukraine: 16.4% and Russia: 16%.
According to the data, the numbers in Georgia are better than in a number of other countries.
In European states, the situation is different. In Hungary, the average loan rate is 2.1%, while in Estonia it is 4.2% and in Romania 6.4%.
As a whole, the loan rate is dictated by the competition, the size of the loan and supply and demand. In Europe, these numbers are higher than in Georgia.
There are 16 active banks in Georgia, with assets reaching USD 12 billion. In Denmark, which is about as large as Georgia, five banks alone have more than USD 10 billion in assets. Germany’s Deutsche Bank has more than USD one and a half trillion in assets, which is about 140 times more than the entire banking system of Georgia.
Why do politicians constantly criticise Georgian banks?
This is not the first year that there has been discussions about loan rates in the country. This issue has long been on the political agenda which has created fertile ground for populist slogans. Politicians often use this problem and offer voters tempting alternatives to solve the issue. Moreover, they don’t even have to bend or give incorrect figures to do so.
It is easy to exploit this topic because the majority of the population is not financially literate and people can easily be misguided. Attacks on the banking sector easily play on the emotions of voters – many in Georgia take out bank loans which places a large burden on borrowers. It is for this reason that Georgian politicians use vague promises about cheap loans to woo the crowds.
Some simply promise citizens that their debts will be erased. For example, when Bidzina Ivanishvili was in the opposition, he promised credit rates of two-three per cent.
“Everyone will have access to cheap, accessible and long-term loans. We will provide credit at a minimum of 10-20 years, the majority of which will not carry loan rates, or at two-three per cent. But I will repeat – the majority of loans will be without rates,” Ivanishvili said.
The leader of the Labour Party Shalva Natelashvili always promises to free voters from the yoke of the banks. Everytime he promises to set up a ceiling for loan rates at about six per cent and threatens to close microfinancing organisations that give out credit online.
“Everyone stands to win in their own Battle of Didgori, our Didgori battle will be a victory over the banking mafia.” These were the words that concluded one election campaign of the Labour Party.
Experts say that such election campaigns will continue to be an issue of political discussions until poverty will be eradicated in the country and real economic growth begins which will be felt by each and every family.
Georgian banks work well, but are politicians lost in populism?
Not quite. There are more concrete complains against the Georgian banking system and more constructive suggestions.
“There is nothing surprising about the fact that banks are not loved by people in a poor country,” said former president of the National Bank of Georgia and dean of the School of Business of Ilia State University, Giorgi Kabagidze.
Kabagidze says that political speculation about banks is common not only among politicians in Georgia but in more developed countries as well. But this does not mean that things are going entirely well in the Georgian banking sector. Kabagidze says that “you can count on your fingers the number of Georgian companies for whom the idea of social responsibility is important.”
“Successful companies do not burst with pride from their profit. Successful companies are proud of their high standards of social responsibility. Successful companies are proud of the positive changes that they bring about in the lives of their countries and for their customers. From this point of view, large Georgian businesses has a lot to work on,” Kabagidze says.
Zurab Japaridze, leader of opposition movement Girchi (pinecone) accuses the Georgian banking system of making ‘dishonest money’ with the help of the state.
“We often see alliances between large banks and the authorities, an example of which could be the appearance of the idea to change to an advanced funding pension plan system,” Japaridze says.
[Starting from 1 September 2018, a new pension system will come into play. It will include all able-bodied workers up to forty years of age. The system will demand that workers contribute two per cent of their income to the fund. Self-employed people will contribute four per cent and the government will match another two per cent of their salaries.]
“The state needs pension reforms in order to create another source of internal debt. Banks will benefit from the creation of a pension fund because they will be able to make enormous money off of it which over the course of a 30 year period – while this money is kept at the banks – they will be able to use and reuse,” says Zurab Japaridze.
According to Girchi members, the state must face up to its responsibility for creating a pension system in which specific organisations – in this case banks – will receive the ability to use the payouts of tax-payers at their own discretion.