Georgia, January, 24 2011 - The number of micro finance organizations (MFO) increased by 24% from January of 2010 when there were 38 such organizations to December of 2010 when there were 47 MFOs licensed - according to national bank statistics.

The main reason why people prefer taking loans from micro finance organizations than from commercial banks is a lack of bureaucracy/procedures required, despite the fact that interest rates are higher in MFOs than in banks.

The capital used by MFOs comprises: private capital, commercial bank credits, and investor capital (main source of finance attracted from abroad).

As Giorgi Isakadze told The FINANCIAL, the number of MFOs is expected to grow in the coming years.

“I am sure that in the next few years, when finances and money are generally deficit in this country, the quantity of micro finance organizations will continue to grow. And it’s very good, because consumers, borrowers have an alternative source of financing,” said Giorgi Isakadze, CEO of Georgian Small and Medium Size Association.

“SMEs and generally all businesses, should take into account the risks and should secure their business plans twice before borrowing money or making a specific loan agreement. Unfortunately, as a matter of fact, usually in Georgia businesses pay less attention to planning and then accounting which is a real problem,” said Isakadze.

“Despite easy conditions of getting loans from MFOs, the risk factor still remains low,” so Vusal Verdiyev, CEO of FINCA Georgia, told The FINANCIAL. “Currently portfolio at risk of FINCA Georgia is around 0.3% (delinquent loan portfolio as a percentage of total loan portfolio), which is an extremely strong quality indicator (based on today’s realities normal could be considered <3%),” he claims.

As Giorgi Isakadze says businesses should be careful when taking decisions about getting finance. “It really depends on the amount of money which should be borrowed. For small amounts, MFOs are more flexible.

“It’s lack of bureaucracy that attracts people but we should understand the rules of the banks, their responsibilities to their clients. When banks are requiring cash flows or some specific documents, we should follow and learn how to make the financial plans for the company, and not just criticize the banks for their bureaucracy. Micro finance organizations are financing SMEs more easily than the banks, because their money is more expensive, but procedures are simplified,” noted Isakadze.

FINCA International, Inc. which has been operating in Georgia through its affiliate FINCA Georgia since 1998, currently serves over 28,500 clients, operating through 29 offices countrywide. 85% of the total client base of FINCA Georgia is located outside Tbilisi. The rest of clients are residing in rural areas of the country. Their clients are mainly micro, small and medium sized entrepreneurs, involved in trade/merchandising, the services sector, agricultural activities and production to a certain extent.

FINCA Georgia provides only business loans to its customer base. Globally, FINCA serves around 800,000 clients.

“From our total 34,762,446 USD assets 7,546,604 USD is under the equity capital of FINCA Georgia, which is predominantly comprised of a loan portfolio. The sole shareholder of FINCA Georgia is FINCA International. 25,230,193 USD is short and long term notes (borrowings) payable to commercial/quasi-commercial financial institutions, predominantly foreign financial institutions,” said Vusal Verdiyev, CEO of FINCA Georgia.

“I believe 2010 has been a year of solid growth for the microfinance industry in Georgia. Only FINCA Georgia has increased its total clients by 17% this year,” said Verdiyev.

“The maximum total amount of a microcredit extended by a Microfinance Organization to a single borrower may not exceed 50,000 (fifty thousand) GEL. Paid-in share capital in an authorized capital of a Microfinance Organization may not be less than 250,000 GEL,” he said.

In addition to banks which gradually cut interest rates on certain types of loans, so do MFOs.

“FINCA Georgia has just reduced rates on nearly all loan products (on average by 6% per annum). This is attributable to numerous reasons - cost of funding (reducing), FINCA Georgia’s efficient cost structure, FINCA Georgia’s commitment for superior services, competition, risk management and some other reasons,” claimed Verdiyev.

“In general there is high market capacity in Georgia, particularly outside of the capital city. In most of the countries where FINCA Georgia operates, it is the biggest MFI in the country, with a comprehensive client base. (i.e. in Azerbaijan around 100,000 clients, Kyrgyzstan around 109,000 clients etc). The main objective in those countries is to make sure that FINCA preserves a role of leading MFI in the country and increases value added for the customer base. However, in Georgia we believe we are far from reaching the maximum capacity. As a golden figure FINCA Georgia targets reaching 50,000 clients in a two year term from now,” claims Verdiyev.

Repercussions of 2008 for MFOs

In August when there were only 22 micro finance organizations, most of them endured the crisis although it was a difficult challenge for them, none of them have left the market, in fact by the end of that year 5 MFOs were added.

“In principal, poor portfolio quality has been a concern of the industry in Georgia throughout the volatile times of 2008 through 2010. Reasons for different institutions were different. Among key reasons was the economic downturn, in late 2008 this was attributable to post-conflict impact on business environment and finally, one of the most important reasons - quality of pre-disbursement analysis, performed by financial institutions,” said Verdiyev.

“Unfortunately, even now as the business environment gradually revives from the crisis, we still observe as we call it a “raise to bottom” approach by some financial institutions (not only MFIs, but commercial banks too). This is primarily attributable to excessively simplified analysis procedures, driven by a highly competitive environment. In the end, this might again lead to client over indebtedness and deteriorated performance quality. As one of the pioneers in micro financing globally, comprehensive analysis has always been our strength.

Easy procedures for taking loans

“The Georgian microfinance market is highly competitive. Micro-finance institutions and commercial banks with downscaling strategy offer competitive terms in the market.

There are a number of reasons for strong client preference to FINCA Georgia services. Those are - consistent and uninterrupted delivery of services, even through difficult times (August war, economic crisis), rather competitive pricing policy, expeditious pre-disbursement period (24-48 hours from application time), uncollateralized business loans for up to 10,000 USD, minimum documentation requirement (passport/ID only) and more importantly highly professional customer service team,” said Verdiyev.

Dependence on foreign capital

“2009 has been challenging for Microfinance Institutions (MFIs) in terms of scarce availability of funding sources.

Since based on Microfinance Law MFIs can’t mobilize deposits, this makes MFIs dependent on external funding. MFIs in Georgia are predominantly dependent on international markets, for attraction of commercial funds. Due to economic crisis private lenders/investors became rather cautious in their performance. This resulted in serious liquidity constraints for some of the institutions in the market. This was not the case with FINCA Georgia, due to strong presence in capital markets and being a reliable international network. In principal we do expect continuation of positive trend observed in 2010 in the following years. However, it is important that all players in the market demonstrate their commitment to responsible lending and thus avoid client over indebtedness, which might lead to market deterioration again,” Verdiyev told The FINANCIAL. 

National Bank of Georgia regulations towards MFOs

Activities of all MFIs are regulated by the National Bank of Georgia and regulated under the law on Microfinance organizations. Types of activities that the microfinance organization can engage in are limited by law to the following types of activities:

a) Extend microloans, including personal, collateral, unsecured and group loans (credits) or loans on property and other to legal and real entities;

b) Invest in state and public securities;

c) Provide money transfer;

d) Operate as an insurance agent;

e) Provide consultation services in microcredit;

f) Receive loans (credits) from resident as well as non-resident legal and real entities;

g) Possess the share of the authorized capital of a legal entity the total amount of which does not exceed 15% of the authorized capital of the Microfinance Organization;

h) Provide other services and operations defined by Georgian legislation including micro leasing, factoring, foreign exchange, issue, realization, refunding of bonds and promissory notes and other operations connected with this.