Credit rates for Micro Finance Organizations are one of the highest in Europe
The young financiers discussed the tendencies for developing microfinance sector and highlighted the problems concerning the relationship between micro finance organizations and customers.
According to \"AFBA”, microfinance sector is one of the fastest developing fields, from the first time they appeared on microfinance market in 2006, until 2013 their assets increased 260 times, net loans 256 times, and net profit approximately 50 times.
With the latest statistics published by the national bank, microfinance sector in Georgia issued more than 320 units of loans with total sum of 620 million GEL. 98.5% of these loans, approximately 602 million GEL, are individual loans, 5,4 million laris are issued on group loans, and 3,6 million laris on legal entities, which represent 1% of the total number.
It is true, that investing in this sector is appealing for investors, because return is higher in comparison with other sectors. For example, if we take banking sector, one will have a clear comparison, for in 2012, the coefficient of return on assets was 7.1, while banking sector had a coefficient of 1. As of return on equity, banking sector has a coefficient of 5,8 while the number goes up to 28.2 for microfinance.
Furthermore, profitability and high margin are the fundamental factors which give strong stimuli for development of this sector. This high margin is derived from the interest rates, that microfinance organizations have on their loans.
\"Rates are especially high for auto and pawn loans. As a matter of fact, the national bank does not provide as thorough statistics for microfinance sector as it does for banking sector. Thus, official statistic of interest rates does not exist. But we calculated the average interest rate from the information supplied by market მოთამაშეები”, - stated vice president of \"AFBA”, Shota Gulbani.
According his information, \"AFBA” studied rates of mortgage loans provided by 30 active companies in microfinance sector, which usually represents the cheapest source of loans. As it turns out, rates on mortgage loans for microfinance sector start from 30 and can go all the way up to 60%. The rates for other types of loans are as follows:
Business loans – 31-32%
Customer loans – 28-30%
Auto loans – 58-60%
Pawn loans – 36-40%
Similar digit, in fact, is over the top compared to the conditions in European countries. Official data of European Central Bank shows, that interest rates on microcredits in European states are significantly less compared to Georgia. According to the data of 2013 published by ECB: Bulgaria – average interest rate 7.07%, Finland – 1.18%, Czech Republic – 2.68%, Estonia – 2,65%, Hungary – 7.0%, Latvia – 2.71%, Litva – 3.15%, Romania – 9.02%, Poland – 4.9%, Slovenia – 4.1%
The main concern of the organization is the fact that such interest rates in the country often lead to poverty of the citizens, for how capable a person is to annually pay back 30 to 60% on loans?
The young financiers see the core problem in the fact that microfinance organizations issue loans on customers despite their income and ability to pay back, because what most important is for them is the real estate put in as a security, which, if needed, is confiscated and sold.
\"The number of customers having a real estate and low income is quite high. They can take mortgage loans from microfinance organization while putting real estate as a security, and their abundance is determined by high unemployment level, high number of plea bargains and other social factors. Thus, microfinance organizations take advantage of this fact and on the basis of real estate security, they issue loans to people even though it is known from the beginning, that person will not be able to pay back the sum”, - explains Gulbani.
\"AFBA” considers it crucial to take preventing measures, to avoid negative effects in the future.
\"The problem that we’ve been faced with over last period, part of people left without housing is derived exactly from this kind of approach. The fact that problem is very critical is shown by current reality, thus, we consider regulation of loan issuing procedure by microfinance organizations highly important to prevent above stated circumstances in the future, for current regulation of microfinance sector is simply a formality. Furthermore, loan agreements are clearly unbalanced, for it only portrays the interest of microfinance organizations, while completely overshadowing those of the customers. There is vast number of risks in finance field and credit organizations are trying to put these risks on the shoulders of customers. Such approach is unacceptable for us and we consider that credit organizations should not take advantage of unfavorable economic circumstances and social problems existing in Georgia. Thus, the intervention of a regulator is crucial, to balance the interests of customer and credit institutions”, - states the president of \"AFBA”, Nodar Chichinadze.