Georgian Banks Step Up

The Georgian banking system seems one of the most, if not the only, thriving sector of business in Georgia.

The Georgian banking system, comprised of 21 banks – 19 Georgian and two foreign – appears to derive its positive reputation as a result of its updated management skills and service qualities. The cumulative capital in assets for the entire banking system reached USD 2.11 billion in September 2005 and this figure may creep to USD 2.3 billion by the end of the year, Georgian experts forecast.

Having overcome the crisis in the mid 90s, when banks went bankrupt after one another while simultaneously cheating their clientele, banks have shown sustainable growth in deposits since 2000-2001. The total number of deposits during the first half of 2005 alone was benchmarked by a 22% increase. 

Experts explain this progress by an overall economic growth of the country, lessened commercial risk, coupled with improved management and service systems that are aligned with western standards.

“Creation of the stratum of solvent businessmen who need additional financial sources and are able to cover credits over time has lessened the risk factor, which tangibly reduced the number of overdue and repudiated debts in the working assets portfolio. Without this factor we couldn’t offer such a large variety of credit products,” Levan Kulijanishvili, director of the internal audit department of the Bank of Georgia told Civil Georgia.

Although bank officials assure that the risk factors have relatively decreased over recent years, they nonetheless remain high. Banks appeal to these high risk factors when justifying the high interest rates they generally offer – averaging 11%-12%; these figures have been denounced by various international financial institutions, including the IFC.

Davit Tchkadua, an independent expert from the Economic Policy Research Center (EPRC), suggests that risk factors are overvalued and inadequate interest rates may theoretically cause a crisis in prospects in this sector, as the economic growth of the country accounts for 8% according to official statistics.

“Interest rates and economic growth should be adequate. When a client pays 15%-16% on a mortgage, for example, and the economic growth of the country amounts 8%, it means that the  money spent on interest rates by customers won’t be reimbursed by their income, as their income doesn’t increase by the same amount as interests rates do,” Tchkadua told Civil Georgia, adding that this is “the only concern” he has about the banking sector from the macroeconomic point of view.
 
But bank officials tend to downplay this concern and, instead, appear optimistic, owing to the success the sector has enjoyed as of late.

“This development of the banking sector is an increasing tendency and banks can not develop seperately from the whole economy, as they are an integrated part of it. If banks develop, commensurately, the economy develops as well,” Kulijanishvili said.

2005 was marked by an upsurge of investments in the country’s banking sector. The Bank Australia Creditanstalt purchased 9.9% of the Bank of Georgia in September, though the amount of this deal was not reported.

The Russian VneshTorgBank purchased controlling shares of the United Georgian Bank in spring 2005 and the London Investment Bank Limited (LIB Ltd) purchased 25% of the shares in Georgian Investbank.  Additionally, in August, the East Capital Bering Ukraine Fund bought 5.5% of Bank of Georgia for USD 2.6 million.

In August, the Kazakh bank TuranAlem (BTA) opened a branch office in Tbilisi after purchasing a controlling package at local Silk Road Group’s bank for USD 5 million.

The European bank of Reconstruction and Development (EBRD) and International Finance Corporation (IFC) are the biggest shareholders in the BTA bank.

Zurab Gvasalia, Chairperson of the Association of Commercial Banks of Georgia (ACBG), says that this tendency will continue, as large western companies generally prefer to invest in the country’s banking sector  because they find it “safer, more acceptable and convenient.”

The sharpened competition on the local bank market has also begot a number of new, flexible banking services and products, as well as improvement of old ones.

The quality of electronic payment in the country has improved. An institute of private banking was introduced and call-centers established for transactions. Plastic credit card systems in the country have developed to such an extent that pensions and state allowances are now often paid through plastic bank cards throughout the country.

Also, the practice of partnerships forming between construction and insurance companies with banks continues to develop in Georgia.
 
After deals were finalized by the Bank of Georgia and TBC Bank with leading Georgian construction companies, long-term mortgages, averaging 13% and 15% respectively, are now available to consumers. 20-year long-term mortgages instead of ten year ones were introduced by TBC Bank in May as well.

Partnership between banks and insurance companies has also developed recently. This synergy covers financial products that are focused on an amalgamated client market and create more flexible, cheaper banking and insurance services through the employment of one-stop windows. 

Bank Republic became one of the major shareholders in Aldagi, the leading insurance company in Georgia, through purchasing 50% of the company’s stocks in September 2005.  Aldagi, for its part, purchased 100% of the shares in the Salbi Insurance Company, founded by the Bank Republic.

“Administrative barriers are likely to be revoked; also clients have no need to search for collateral, thanks to the insurance service. They will have a chance to get both credit and insurance through one-stop windows,” Lasha Papashvili, Chairman of the Supervisory Board of Bank Republic, told Civil Georgia.

Also the sluggish local stock exchange was refreshed thanks to first-ever corporate bonds, amounting to GEL 2 million, issued by the Bank of Georgia, with two-year maturity period and a GEL 100 face value. The first private bond emission appears as an alternative to bank deposits and an additional financial instrument in an exchange market wherein only so called “treasury liabilities” circulated in the past.