Rural finance systems in Georgia

The supply of microfinance in Georgia comprises four microfinance systems:

- NGOs delivering micro-credit.

- Specialized microfinance banks.

- Downscaling programmes in commercial banks.

- Membership-based financial institutions, such as credit unions (CUs) and credit cooperatives.

To meet the microfinance demand, in 2000 a number of commercial banks started downscaling projects in order to offer microfinance products to all target groups. The only downscaling project for commercial banks is run by the Small Enterprise Lending Programme (SELP), which was established by the European Bank for Reconstruction and Development (EBRD). SELP cooperates with various banks, assists them technically with downscaling, and provides them with EBRD funds. The SELP partner banks expanded their outreach geographically by establishing MSE lending outlets in a number of Georgian regions. In 2003, the number of lending outlets increased from three to seven; one of them is situated in Gori, Shida Kartli’s capital (Kortenbusch &

Cervoneascii 2003 p. 74). The following table shows the micro-credit supply in Georgia by NGOs, CUs, and the banking sector:

Table 2.4-1: Micro-credit supply in Georgia

Outstanding loan portfolio as of 30 September 2003 Institution

US$ Percent NGOs 10,750,000 35.2

CUs 500,000 1.6

Banking sector 19,250,000 63.2

Total 30,500,000 100.0 Source: Kortenbusch & Cervoneascii (2003 p. 16)

The following section gives an overview of rural credit systems in Georgia, covering i) loan institutions and their outreach, ii) access to loans, iii) loan uptake, and iv) lending systems.

i) Loan institutions and their outreach

The United Georgian Bank (UGB), called VTB Bank since 2006, is one of the few Georgian commercial banks that has recently become involved in agricultural lending.

As competition between the increasing numbers of banks in Georgia rises, UGB is extending its business into the rural financial market with special credit offers for farmers. A study by Derflinger et al. (2006) describes the experiences of UGB with agricultural lending. Contrary to the widespread assumption that agricultural lending cannot be profitable due to higher risks and costs compared to urban micro-lending, UGB has experienced the opposite. After only two years, the bank found agricultural micro-lending to be successful, less risky, and more profitable than urban micro-loans (Derflinger et al. 2006). This was attributed to the following causes: 1) average loan sizes are smaller, which reduces the loan risk; 2) farmers prefer ‘express’

loans even though they have to pay higher interest rates and upfront fees; 3) farmers have fewer financing choices, and, therefore, they are more loyal to the bank and readily offer information about themselves and others in the community; 4) loan officers’ productivity is high due to the so-called cluster approach and because most farmers in a particular location are engaged in the same kind of agricultural activities, enabling loan officers to partly standardize the loan appraisal (Derflinger et al. 2006).

In contrast to other countries, such as Bangladesh (Yunus 2008) and Cameroon (Sika & Strasser 2000), agricultural micro-lending via loans with joint liability was not possible in Georgia. There are hardly any farmer organizations in Georgia (Derflinger et al. 2006 p. 9), and credit unions failed for the reasons mentioned above (IFAD 2007b). Therefore, UGB had to employ an individual lending scheme, which is very

expensive in rural areas because loan officers have to travel to each individual farmer.

Using a cluster approach simplifies the procedure through the selection of villages with good agricultural potential. The village head is informed beforehand about the loan scheme, and discussions with all relevant groups in the village follow. Without the cluster approach, UGB would never have been so successful in agricultural micro-lending (Derflinger et al. 2006). Alternatively to the cluster approach, the bank sends out its credit-mobile (Derflinger et al. ibid. p. 10), a re-equipped mini-bus designed to conduct initial interviews at farmer markets with potential loan clients. The credit-mobile has turned out to be a very useful tool with regard to agricultural micro-lending. The overall delinquency rate on agricultural loans is very low, and growth rates of 100 percent are targeted (Derflinger et al. 2006 p. 10).

ii) Access to loans

Until recently, the rural population in Georgia had little or no access to microfinance services (Hirche & Kortenbusch 2005; Kortenbusch & Cervoneascii 2003; Pytkowska

& Gelenidze 2005), which is reflected in how little formal credit (1 percent) is supplied to the agricultural sector (NBG 2006 pp. 46-48). Notwithstanding their recent involvement in agricultural lending, PCB and UGB (VTB Bank since 2006), two of the biggest banks in Georgia, have very lean agricultural loan portfolios. In 2004, ProCredit Bank disbursed 7–9 percent of all credits to the agricultural sector (KfW 2004 pp. 2-3), and United Georgian Bank (UGB) disbursed just 4 percent (Derflinger et al. 2006 p. 6). The share of agricultural loans provided by PCB declined still further to 2 percent in 2005 (PCB 2005 p. 20). As already mentioned, UGB has sought to increase its share through its successful new agricultural lending scheme. This positive development is supported by Revishvili & Kinnucan (2004), but they remark that, notwithstanding the beneficial impact of agricultural lending, smallholders are hardly affected at all. To improve access to loans for Georgian smallholders with limited collateral, Revishvili & Kinnucan (2004) note that it is crucial to promote the implementation of village credit unions that focus on enhancing living conditions and improving farm activities.

iii) Loan uptake

Generally, the rural loan uptake rate has developed positively in the last few years in a number of Georgian regions, which is reflected in the increasing proportion of farmers with credit experience, which was 16 percent in 2003 (Kortenbusch & Cervoneascii 2003 p. 57) and 30 percent in 2008 (Pavliashvili 2008). One-third of the farmers in Shida Kartli who took a loan obtained it from banks (99 percent) (Pavliashvili 2008).

Only one percent of them obtained a loan from an informal source (family or friends) (Pavliashvili 2008). The recent involvement of formal financial institutions in the rural credit sector is contrary to the experience in many developing countries, such as Cameroon, where 90 percent of the rural population depend on informal credit sources (Sika & Strasser 2000 p. 316). In addition to loans from the formal credit sector, Georgian smallholders also take loans from the informal sector, which, in Georgia, consists primarily of pawn shops. These are called ‘Lombardi’ in accordance with the type of loan they disburse. The number of pawn shops has increased greatly in the past couple of years, and they serve the urban as well as the rural poorer population, especially women. Borrowers predominantly put up jewellery or domestic appliances as collateral. Moneylenders, who dominate the informal loan sector in other countries (see Dufhues 2007 for Vietnam), are not very common in Georgia.

iv) Lending systems

Aghion & Morduch (2000) examined whether Eastern Europeans prefer loans with individual liability or loans with group liability. They state that, contrary to many other countries, where loans with joint liability prevail, individual lending is the dominant lending type in Eastern Europe. These findings are supported by the results of the present study, which indicate that nine out of ten farmers favour individual loans over loans with joint liability. Counter to these findings, joint liability lending plays a significant role in rural lending in Armenia (Kasarjyan & Buchenrieder 2008).

According to Aghion & Morduch (2000), in some cases, individual lending systems contain features of joint liability lending systems, like regular repayment schedules, which serve to sort out undisciplined borrowers. Armendáriz de Aghion & Morduch (2000) argue that individual lending in Eastern Europe could be installed without demanding collateral from the clients if mechanisms like direct monitoring, regular

repayment schedules, and the use of non-refinancing threats were implemented. These new features could help lenders target low-income clients.

In the Georgian city of Batumi, Vigenina & Kritikos (2004) investigated the incentive mechanism of individual micro-lending contracts offered by a bank and compared its key factors with those of joint-liability loan contracts offered by a NGO.

Vigenina & Kritikos (2004) point out that borrowers chose the individual lending approach if they were able to pledge the collateral, planned to start a business with a dynamic development perspective, and had a demand for relatively high or increasing loan sizes. Borrowers with business plans that had a more static development perspective and those who needed relatively low loan amounts preferred the joint-liability approach. Within this group a number of wealthier borrowers deliberately chose the joint-liability approach despite their ability to pledge collateral and even though the interest rate on the individual-liability loan was lower. These borrowers were willing to provide peer support within the group as a kind of insurance against repayment problems (Vigenina & Kritikos 2004). This also occurred in Japan, where rich merchants guaranteed the repayment of poorer members’ loans in a kou, a traditional semi-formal group savings and credit association (Izumida 1992). Vigenina

& Kritikos (2004 p. 175) conclude that ‘a combination of both approaches is necessary if it is aimed to reach all creditworthy borrowers irrespective of their initial wealth status and their ability to provide collateral and irrespective of the expected dynamics of the client’s business’.