Thomas Engelhardt, Chairman at AccessHolding Microfinance AG

Georgian Financial Sector Becoming Saturated, Leaving Less Room for Growth

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The FINANCIAL — from Frankfurt, Germany. Over the last ten years the microfinance market of Georgia has developed successfully. However, further growth is becoming limited now due to the small size of the country. The recent trend of the transformation of MFOs into commercial banks is believed will continue in the future. Overall the economic development of Georgia, including exchange rate, became more favourable from February 2016, however the situation in regard to political tensions in the region could still worsen, said Thomas Engelhardt, Chairman at AccessHolding Microfinance AG.

The FINANCIAL interviewed Mr. Engelhardt in Frankfurt, Germany, during the 49th Annual Meeting of the Asian Development Bank (ADB). AccessHolding Microfinance AG owns banks and MFIs in around ten countries. The company entered the Georgian market two years ago after acquiring shares of MFO Credo LLC.

“We were strongly positioned on the Azerbaijani market and wanted to expand operations on the Georgian market as well. Georgia has been a very interesting market for us. We thought that it would be belated to found a new institution in Georgia. So, we were very pleased to have the opportunity to acquire shares at an already existing company, which still has room for development,” said Engelhardt.

In Frankfurt, ADB presented the best transaction awards for 2015 to Credo LLC. Georgian Credo was honoured with the inaugural ADB Private Sector-CNBC Awards for its ground-breaking, impactful private sector solutions to key development challenges. The award focused on highly developmental transactions and underlined the important work clients of ADB’s Private Sector Operations Department (PSOD) undertake in developing countries in Asia and the Pacific, according to ADB.

ADB signed an agreement with Credo for a 4-year USD 23 million loan in 2015 and a technical assistance grant of USD 300,000 to support its efforts in developing full retail services and expanding its operational systems as it transitions to becoming a bank. ADB is expected to provide local currency funding to Credo, which it can on-lend in Georgian Lari, thereby removing the foreign exchange risk of borrowers. Credo is majority owned by Access Microfinance Holding.

In his exclusive interview with The FINANCIAL, Engelhardt provided his outlook on the Georgian financial sector. He drew comparisons between Azerbaijan and Georgia, as both countries have faced problems of dramatic devaluations of their national currencies.

Q. AccessHolding entered the Georgian market two years ago. What is your estimation of the Georgian microfinance sector?

A. Over the last ten years the microfinance market of Georgia has developed successfully. It means that some further growth is limited as Georgia is a small-scale country. Overall, our growth on the market should be organic and careful. MFOs are not going to see the same growth as we have seen over the last ten years. Individual players can move up the ladder. We have seen this interesting tendency, as some institutions like Constanta and Finca have become banks. Certainly that is a tendency that will continue. So, microfinance will become more and more private in the overall financial sector. That will be beneficial for the clients, as they will have access not only to credit, but also to other financial products upon their need. For the institutions it also means that they have to learn and comply with the regulations and also compete with the bigger players to a certain extent. It is going to continue to be an innovative market, where good players can still make significant steps forward. However, it is not India where you can see size tripled without changing anything in the product to develop.

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Q. The past two years have been quite difficult for the Georgian economy, mostly due to the dramatic fall of the Georgian Lari against the USD. From February of the current year the Georgian Lari has started strengthening its position. Do you feel a greater sense of stability now?

A. I am impressed with how Georgia is coping with the devaluation as a country on a client level and on an institutional level. If we compare it with the region, we have much bigger problems in Azerbaijan. However, it does not mean that in Georgia there are no problems. There is no single answer to what to do in such a case. We have always balanced the assets and the liabilities. The same goes for cost; that our income and cost structure has about the same currency structure. That means that devaluation does not immediately hit the profit and loss statement. So, these two ingredients present two main challenges: one is the credit risk for borrowers and the other is the refinancing part for the financial institution. Borrowers are very brave in Georgia and try to cope with the situation, even if the repayment gets higher, they try to fulfil that. Due to the lack of funds in Lari we are issuing loans in USD. So, while crediting in Dollars we assume that currency may depreciate and in case it happens the borrowers still have enough money to return the loan. On the other hand, for the refinancing for the bank it is also a challenge. You have to match the Dollar and also Lari financing. We need to get Lari either through commercial banks or through international channels that are available. That has become very difficult over the last year. Leading to a reduction in margin, because it became much more expensive and we do not want to pass that price on to the borrowers. Sometimes the maturities have shortened. This year it has stabilized again. So, we are in a comfortable position now. However, it is going to be a challenge to all players on the market. The ratio of dollarization is 40-45% for now.

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The economic development of Georgia, including exchange rate, has been more favourable from February 2016 than one could expect three months ago. However, there are additional risks. Things can still worsen. By this I mean political risks in the region.

Q. What is your suggestion regarding reduction of the dollarization rate in Georgia?

A. Recent years’ policy to move Georgia into an open economy was the right decision. Continuing to have an open economy is the only solution for reducing the dollarization rate in the Georgian economy.

Q. AccessHolding Microfinance owns Access Bank in Azerbaijan. Economic problems in Azerbaijan have been bigger than in Georgia, due to a dramatic fall in oil prices. From your perspective which country has managed to better avoid shocks?

A. Azerbaijan has much bigger problems currently than Georgia. It is not right to compare Azerbaijan and Georgia as the conditions are different. Azerbaijan had different opportunities in the past and grew extremely strong. However, it is now facing a crisis at a deeper rate. It is not their fault or achievement that they have oil. The main difference between Georgia and Azerbaijan is that Georgian people and the whole society is more used to ups and downs. Therefore, psychologically it is easier for Georgians to cope with the crisis. As for Azerbaijan, they have been growing up for the past fifteen years and now they are in a slump. So, people are just taking time to overcome that and get used to the new reality.

Q. This year’s meeting of ADB focused on key topics for sustainable development, including clean energy and climate change. How urgent are these topics among Georgian business society?

A. I have always been happy that we work in the macro and small finance sector, where environmental issues are not trade off. It is not like infrastructure where you have to balance the economic development with ecological sustainability. Coming from a country like Germany, that has done these issues and built infrastructure many years ago, it is easy to talk about environmental topics and the importance of building eco-friendly businesses. I am pretty sure that with our activities to help small farmers we are not harming the environment.

Q. How do MFOs manage to compete with commercial banks?

A. In Georgia it is very difficult, because there are very good commercial banks and they know their business. At the same time, as we see, it is quite possible to find a market niche. Regionally, in remote areas and also with very specialized customer services it really is manageable. One of the reasons we like Georgia is the healthy competition.


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