Georgian Banking Sector Overrview

Commercial Banks

The development of the financial sector was largely determined by the country’s sustainable macroeconomic development, foreign debt stability and strong financial performance and In 2007 three new banks were opened in Georgia and in the last three quarters of the same year the foreign direct investment in the banking sector amounted to USD 119 million.

Over the last three consecutive year the average growth rate of the assests exceeded 60%, while the deposit growth rate exceeded 55%. Due to such high volume growth rate, share of banking assests amounted to 43% of the GDP in 2007, and it is expected to reach 60% by the and of 2009

Today, the banking services are more available for the broader public, which can be proved by the newly opened 120 branches of the banks and service centers, and double number of the ATM Machines and 60% increase in plastic card holders.

Loans and Portfolio

The dynamic development of the banking sector over the past several years resulted in the intensive growth and diversification of the loans available. Of particular importance is the progress of the loans available to the private sector including financing of small and medium enterprises. Domestic credit to the private sector continued to grow by more than 61 per cent in real terms during 2007, while the average growth rate for 2008QI-QII amounted to 51%. Mortgage lending increased significantly accompanied by improvements in the property registration system.    

Presently, the amount of mortgage loan available ranges from $2,000 to $300,000 (or in Euros) and depends on the average income of the potential borrower. Repayment period is from 3 months to 30 years. Formerly the share of mortgage loans in the loan portfolios of banks is around 18%. The volume of mortgage loans from 2003 increased more than twenty times.

The growing demand for loans stimulated by the impressive overall economic development and significant investments made in the banking sector resulted in strong competition between the banks operating in Georgia. This in its turn has influenced Georgian banks to offer favorable conditions of mortgage and business loans and decreased interest rates, which ranged from 16.7% to 20% in 2007, compared to previous years when the range was 20-25%.

In 2008 volume of crediting of the Georgian economy by the commercial banks in Georgia amounted to 5.4 billion GEL which is 56.9% more than in the same time period last year. The amount of loans issued in the Georgian currency exceeded 1.9 billion GEL (35% of total loans issued). The amount of loans issued in foreign currencies reached 3.5 billion GEL (65% of total loans issued) which is 37.3% than last year.

NBG and Liberal Regulation

The National Bank of Georgia (NBG) is the central bank of Georgia; its status is defined by the Constitution of Georgia. The main objective of the National Bank is to ensure financial stability and maintain the purchasing power of the national currency. The NBG shall ensure stability of the financial system, its transparency and support the sustainable economic growth without prejudice to its primary objective. The independence of the NBG is guaranteed by the Constitution. The central bank serves the interests of long term sustainable development of the country. In addition, the NBG is financially independent and all its expenditures are covered by its own funds. The NBG is not liable for the commitments of the Government of Georgia and in turn the Government of Georgia is not liable for the commitments of the NBG.

Georgia was one of the first countries to completely liberalize capital account transactions and currency regimes.Residents have the right to have current accounts opened with banks in foreign countries. Residents and non-residents of Georgia may make investment in commercial banks based in Georgia under equal terms and conditions. The banking license must be issued for any banking business and a minimum start-up capital of USD6.6 million is required. A single use banking license provides the right to perform any type of banking business provided by the law. Georgia’s currency regime is based on floating exchange rate principles. Intervention by the National Bank of Georgia targets against excessive exchange rate fluctuations on the currency market.

Financical Stability

To supervise and regulate the Financial Supervision Agency (FSA) has established at the NBG. The FSA is responsible for issuing licenses to commercial banks and other participants of the financial sector, granting them the authority to conduct relevant business activites.

After receving licenses all companies are subject to monitoring from the FSA. In the course of monitoring financial companies are obliged to observe the terms and conditions established by the FSA.

Until 2007 three different entities used to regulate the financial sector in Georgia.In particular, the Supervision Department of the NBG was responsible for regulating activities of commercial banks, microfinance organizations, credit unions and foreign exchange bureaus. The National Securites Commision used to minitor the securities market while the State Insurance Suprevisory Service used to minitor the insurance companies. Pursuant to the amandments made in 2007-2008 to the respective laws a single entity, the FSAwas set up merging the three entites above with purpose of regulating the financial sector.

There are many different models of financial sector supervision internationally. However, most of countres have obted for single supervisiory body. In some cases the function of financial sector supervision is assigned to central bank (e.g. Czech Republic, Cyprus) and in some other cases there is a separate entity set up for this purpose(e.g. in the United Kingdom, Bulgaria, China, Denmark, Finland, Japan, Hong kong, Sweden). Most of the coutries apply the second model.

The FSA of Georgia is an independent body which is not subordinate to any other body or government official. It has a balance sheet and a seal of its own. The Agency is accountable to the Board of the Agency and annually reports to the Parliament of Georgia. To carry out its activites, the Agency receives nessesary funds from the NBG.

Banking Supervision

Under Georian law, The Financial Supervision Agency has full authority to supervise the activites of commercial banks. The aim of banking supervision is to ensure stable functioning of the banking system through controlling local commercial banks and local branches of foregin banks, minimizing the probability of occurrence of systemic risks in the banking system and thus maximally protecting the depositors and other creditors funds as well as upholding the principles of completion in the banking system.

Payment System

A payment system plays a significant role in the development of economy. The payment system is an important part of the financial infrastructure and market economy. Its reliable and efficient functioning contributes to stability in the economy. The core task of payment system is to facilitate the settlement of monetary liabilities arising from the business avtivties in markets for goods and in financical markets. The payment system ensures the flow of monetaty funds secureties from one segment of the economy to the other. Payment system must be fast, secure, safe and effective for normal functioning of market economy.

Foreign Investment and International Recognition

Since 2003, Georgia has implemented liberal regulations in order to secure financial stability of the local commercial banks and to promote Georgian banking sector as the favorable investment destination. Favorable bank reforms have increased the interest of large foreign banks in the Georgian banking market. Alone in 2007 three new banks opened in Georgia and it the last three quarters of the same year the foreign direct investment in the banking sector amounted to USD 119 million.

In July 2007, HSBC obtained an operating license from the National Bank of Georgia. In March 2006 Group “Societe Generale” acquired the controlling stake in Bank Republic. In October 2005, Kazakh bank Turan Alem, one of the largest banks in the CIS acquired the controlling stake in Silk Road Bank. In January 2005, VTB bank of Russia acquired 51% of shares of United Georgian Bank, one of the top three banks in Georgia. In addition, subsidiaries and branches of commercial banks from Greece, Turkey, Azerbaijan and Germany are operating in the Georgian market.