A recent change in the law, initiated by the Ministry of Economy, is anti-competitive, discriminates against microfinance lenders (“MFIs”) with foreign shareholders – and makes it substantially more difficult for Georgian farmers to have access to foreign credit for agricultural loans.

Asmat Kardava received a microfinance loan to develop her farm from Crystal Fund, a Georgian microfinance lender with foreign shareholders.

The February 2014 legal amendment is a prolongation of an earlier ban, approved by Parliament in June 2013, that prohibits foreigners (and companies with a foreign shareholder) from acquiring agricultural land or assets that include a plot of agricultural land. One of the negative effects of this ban is that banks and MFIs that accept agricultural land/assets as security for a loan are now prohibited from acquiring and reselling the asset in the event of default by the borrower if they have a foreign shareholder.

Business associations also advocated against the blanket ban on land acquisitions by foreigners,and in February 2014, the Ministry of Economy amended the law, making banks exempt from this ban. However, the ban was not lifted on MFIs:

Archil Bakuradze, Chairman of the Georgian Microfinance Association (and Chairman of JSC MFO Crystal, which is 30% owned by US and UK shareholders), says that nine of its members have foreign shareholders and are therefore affected by this ban:

“As a result of this ban, we are effectively making these loans without security, at a much higher risk to ourselves, because we cannot sell these assets in the event of a default by the borrower. This is a complete violation of our private property rights. This subsequent February 2014 legal amendment is even more discriminatory against MFIs with a foreign shareholder than the original June 2013 ban was, because it now places banks and wholly Georgian-owned MFIs in a position of unfair competition over us.”

One MFI with European shareholders, that did not wish to be named, told TI Georgia it had been lending to the Georgian market for four years, has approximately eight offices and employs 40 Georgian staff. Before this ban came into force in June 2013, the MFI had already loaned 7 million GEL using agricultural land/assets as a collateral. These loans have not yet expired, but the MFI is concerned that now it effectively has no security for these debts, because if some of its borrowers default it will be prohibited from acquiring these assets.

According to data from the National Bank of Georgia, MFIs are more popular amongst borrowers in the agricultural sector than banks (see boxed statistics, additionally, on average MFIs lending portfolio is 25% agricultural lending, whereas banks agricultural lending is less than 1.5%).

Bakuradze says this ban restricts foreign finance from the Georgian lending market and the reduced competition will affect micro farmers and producers. MFIs average loan size is GEL 1,641: these micro farmers and producers are considered too unprofitable for mainstream banks: “It is these customers who have most to lose from this ban,” says Bakuradze.

“MFIs typically lend to micro farmers and producers. We have a strong network of branches in Georgia’s remoter regions and a business model tailored to the needs of small farmers. MFIs usually provide working capital loans (for example a short-term loan to finance seed purchases, fertilizer, extra labour before the harvest etc.) to farmers at competitive interest rates. However, access to credit is not only about interest rates but also staff competencies, the lending methodology, geographic proximity, and the extent to which a loan product (amount, currency and tenure) is tailored to the needs of a client. We strongly believe the government should let the market decide, if a customer prefers to borrow from a bank or an MFI — that is their choice.”

According to Nana Maisuradze, head of the Legal Department at Credit Plus Georgia JSC, a Lithuanian-owned microfinance lender established in Georgia in 2009, this ban limits foreign investors’ business activities and Georgia customers’ lending choices:

“Many customers prefer to borrow from MFIs as we have specialist staff who understand the agricultural sector and can offer advice on the most appropriate lending options that best suit farmers and rural producers so they avoid difficulties further on. This law may deter foreign investors from investing further in MFIs as they are now in a legally disadvantageous position to banks if their customers default on a loan.”

The amendment to the law making banks exempt from this ban was drafted by the Government. However, the ban was not lifted on MFIs. Iuri Lebanidze, director of the Georgian Microfinance Association says that they and the Georgian Banking Association, both lobbied against this law:

“In November 2013, when we heard about possible amendments to the ban, the Georgian Microfinance Association, on behalf of its members, sent letters to the Government and Parliament, trying to show them data and illustrate that MFIs are important financial institutions, especially in the agricultural sector. But we received no explanation of why MFIs, but not banks, were excluded under the new legal amendments.”

Recommendations

TI Georgia believes that this law is discriminatory, anti-competitive and is a complete violation of MFIs’ private property rights. This law should be amended so that both foreign and Georgian owned MFIs and banks are able to compete equally. We have drafted a legal amendment to this law which will be submitted to Parliament next week (see attachment).

• It is vital that lawmakers coordinate with all relevant stakeholders before, during and after the enactment of a draft law and thoroughly analyse all the relevant available data in order to create laws that are relevant and have a positive effect on businesses, financial institutions and the Georgian economy.

• The government should support, not limit competition in the financial sector, which serves to increase the available of credit and the quality and range of services offered to Georgian customers.

Disclosure: Mark Mullen, Chairman of the Supervisory Board of Transparency International Georgia, is a shareholder in Geocapital, a Georgian MFI. Geocapital does not take agricultural real estate as security for loans and is therefore not currently affected by this legal ban. TI Georgia’s Supervisory Board also includes the former director of the European Bank for Reconstruction and Development (EBRD) for the South Caucasus, Paul-Henri Forestier, and George Akhalkatsi, who is currently employed by the EBRD. The operations of the EBRD, which is a shareholder in several commercial banks and development projects in Georgia, may be affected by this law.