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Masaryk University Faculty of Economics and Administration Field of Study: Finance Masaryk University Faculty of Economics and Administration Field of study: Finance National Bank of Georgia and overview of banking system in Georgia Professor: Ing. Luděk Benada Student: Nino Khazalia - 440129 Brno, 2014 Table of Contents: General Information on Georgia ................................................................................................................... 3 National Bank of Georgia .............................................................................................................................. 4 Overview of Currently Existed Banking System in Georgia .......................................................................... 5 References .................................................................................................................................................... 7 Annex - Operating Licensed Commercial Banks In Georgia .......................................................................... 8 2 General Information on Georgia Georgia is located south of the Caucasus. The population of Georgia is approximately 4.49 million as of January 2014. The country is bordered by Russia to the north, Azerbaijan to the east, Armenia and Turkey to the south, and the Black Sea to the west. The capital is Tbilisi. Its official currency is the Georgian Lari (GEL).1 Georgian Economy Georgia’s economy sustained GDP growth of more than 10 percent in 2006–07, with strong inflows of foreign investment. However, GDP growth slowed in 2008 following the conflict with Russia, turned negative in 2009 as foreign direct investment and workers’ remittances declined in the wake of the global financial crisis, but rebounded in 2010 and stayed positive in the following years (see the chart below). Source: National Statistics Office of Georgia, http://geostat.ge/index.php?action=page&p_id=119&lang=eng The table below shows some economic indicators: 2010 2011 2012 2013 GDP at current prices, mil. USD 11,636.5 14,438.5 15,846.8 16,126.4 GDP real growth, percent 6.3 7.2 6.2 3.2 GDP per capita (at current prices), USD 2,623.0 3,230.7 3,523.4 3,596.6 Unemployment rate, percentage 16.3 15.1 15.0 14.6 Source: National Statistics Office of Georgia, http://geostat.ge/index.php?action=page&p_id=119&lang=eng 1 As of October 2014: 1 USD=GEL 1.7544 3 National Bank of Georgia The National Bank of modern Georgia was established in 1991 after the dissolution of the Soviet Union (the USSR). The banking legislation of the period had many defects. First of all, the independence of the National Bank was not distinctly expressed, which led to undesirable interference of the executive and legislative authorities in its business. Furthermore, its principal functions were not explicitly formulated. In particular, the central bank was simultaneously tasked with carrying out anti-inflation policy, stimulating "balanced development of economics" and activation of economy. All these issues were quite ill-defined, contradictory and partially beyond its scope, which, of course, hindered the implementation of effective policy. Against the background of liberal approaches the number of banking and other type credit institutions increased. For example, from 1991 to 1994 number of commercial banks functioning in country increased from 5 to 226. In the virtual absence of regulation, many of them could not perform elementary functions, naturally posing a danger to the country's economic stability. In addition, the National Bank carried out extensive monetary expansion within the scope of liberal monetary and credit policy, which caused hyperinflation in the country. Although the law never allowed the National Bank to provide direct financing of the budget deficit, the credit expansion was carried out through crediting of commercial banks, which lead to the same devastating results. The independence of the National Bank was also restricted because its managing committee used to be appointed for a five year term, which made the National Bank unprotected from the changes of political climate. Another factor affecting the bank's independence was its inability to emit money before April 1993. Georgia was part of the ruble zone, which made it dependent on the Russian government. The latter successfully made use of this dependence as a means of political and economic pressure. Given all this, it was important to put the coupon - a temporary monetary unit - into circulation on April 3, 1993, soon after Russia stopped providing Georgia with rubles. The coupon had to undergo all the difficulties of the transitional period until real national currency was issued. After the coupon was put into circulation, already difficult political and economic situation in the country became more complicated yet because unreasonably liberal monetary and credit policy led to the coupon's disastrous depreciation. Starting from 1992, with active assistance of international organizations, the work commenced in Georgia to create a legislative base necessary for modern monetary-credit and banking system. From May 25, 1994, commercial banks acting in Georgia under a special decree of the National Bank were assigned new norms of statutory capital, which led to a gradual increase in the capitalization of the banking system. The August 12, 1994 Decree of the Head of State, "On the Development of Banking System in Georgia", established a two-tier banking system. This same document was also essential as it meant to shift accounts of the Ministry of Finance to the National Bank to better regulate cash delivery and to free the National Bank from the function of providing direct settlement with clients and transfer such duty to commercial banks. On October 2, 1995 the lari – the new Georgian national currency – entered circulation and was declared the only legal means of payment in the whole territory of Georgia. 4 Currently, the status of the National Bank of Georgia is determined by the Constitution of the country. According to Article 95 of the Constitution, the National Bank is independent in its activities. Rights and obligations, business manner and guarantee of independence of the National Bank shall be specified under the Organic Law on the NBG, adopted on June 23, 1995. The Organic Law enables the Central Bank to be independent when carrying out its monetary and foreign exchange policies. The National Bank is free from any interference by the executive authority in its business. It is accountable to the legislative authority - the Parliament of Georgia, which annually approves "Principal Trends of Monetary and Foreign Exchange Policy", providing some basic quantitative parameters for the Bank's activities and enumerating strategic measures to be taken within the year to ensure the development of the monetary and country's balance of payments systems and the existence of prudential regulation. Overview of Currently Existed Banking System in Georgia Both the banking and non‐banking sectors are under the supervision of the National Bank, and are operating under well‐established legislative and regulatory strictures. There have been no major bank failures over the past several years. The Georgian financial system is dominated by commercial banks. Total assets of the banking system constituted approximately 64 percent of GDP as of end-2013. There are 21 licensed commercial banks operating in Georgia (see annex) out of which 20 are foreign controlled (including two branches of non- resident banks and 18 joint venture companies having foreign assets in their capital). The high proportion of foreign-controlled banks can be attributed to the combination of positive business environment and policies, high profitability and growth. Georgia’s two largest banks have significant foreign ownership. The Bank of Georgia (BOG) is listed on the London Stock Exchange and TBC Bank is owned by various international financial institutions, such as the EBRD, the IFC, DEG Bank (which is a member of the KFW Bank Group) and the Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. The top 5 Georgian banks in terms of total assets are: Bank of Georgia, TBC Bank, Liberty Bank, ProCredit Bank and Bank Republic (Societe Generale Group). The share of these banks in total banking assets are quite high and amounts almost 80%. Besides, the share of two leading banks (Bank of Georgia and TBC Bank) based on the same criterion amounts to 60.84% which indicates high concentration of financial assets. However, number of banks and other financial institutions, namely Microfinancial organizations is large enough to provide high level of competition. The Georgian banking sector has been growing significantly since 2004. The average growth rate of Loans to Non-Financial Sector and Households for the period of 2004-2013 years amounts to 32.95%. In 2009, the volume of loans declined 13 percent due to the global financial crisis and Georgia’s political situation with Russia. However, in the following years the volume still improved and growth rate also became positive at the average of more than 19% in 2010-2013. 5 What concerns to Non-bank Deposits, it’s worth remarking that in the abovementioned period of 2004- 2013 growth rate of deposits has never become negative, being more than 30% on average. This figure can be used as one of the proofs of increasing trust toward banking system in population which is itself good signal for country like Georgia. In general, since 2007 the Georgian banking sector has seen an increase in activities as reflected in the statistical information provided
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