The FINANCIAL — Giorgi Isakadze, President of GSMEA (Georgian Small to Medium Size Enterprise Association) and the first vice president of the business association of Georgia.
Q. What would you name the three key challenges that today’s SMEs in Georgia are facing?
A. The three key challenges for SMEs in Georgia are:
Vision and planning
Q. What sources of finance are available for SMEs in Georgia and what are the problems associated with having access to them?
A. Actually, the sources are the same worldwide – banks, microfinance organizations, international donor organizations, etc. We also have some resources coming from the state budget for financing SMEs called “cheap credit”, which is financed by the federal budget. The interest rate for the latter was rather competitive in banks, so the program was a success over 2 years. As far as I know it’s been suspended. Also Tbilisi City Hall has the same programme for SMEs in the capital of Georgia. We have some international financial organizations very active in this direction like MCG (Millennium Challenge Georgia) and others.
Well, when we say, that “much is not cheap” in Georgia it’s a fact, that’s the reason for compliance coming from SMEs. But we have another problem within small businesses regarding the disbursement of the loans – we are facing some problems regarding the education and preparation of the business for relations with financial institutions. That’s another problem. SMEs are very often far from the standards and requirements of the banking system of Georgia. So there is another role of GSMEA being a mediator between the commercial sectors and banking system as well. We will very soon provide the results of our negotiations with the Georgian banks and hope that our joint offer will be rather attractive for both sides.
Q. Which business sectors get easy finance and what contributes to this matter?
A. I fully agree again that not having a viable vision of business is the main problem of SMEs in Tbilisi and in the regions, together with the problem of very expensive resources at our banks.
Banks easily finance structures with transparent management and an audited system, corporate management and a company with long strategically planned vision. The spheres of their interest are communication, infrastructure development, and most likely retail financing is back again.
Q. What are GSMEA’s plans for the future to further help such enterprises to advance in Georgia?
A. We plan to open a few GSMEA branches in the regions to have the full information about their problems and provide access for them to the sources what they don’t currently have in the regions, beginning from education – to cheap money resources. The local population is mostly oriented on agriculture, which is a priority for the Government now.
GSMEA was established a month ago and so far 26 SMEs have become part of this organization and by the end of this year we’ll have 100 businesses added to our list of businesses.
Interview with Thomas Lubeck – IFC Regional Head, Caucasus
Q. How would you evaluate the overall business climate for SMEs in Georgia and what are the three key challenges that SMEs are facing?
A. In general, over the past year, the macro economic situation in the country has stabilized and has gone to growth. Also, the Government has made regulations easier for SMEs. So there have been some positive developments for them. Regarding the challenges point I think one is for SMEs to get used to the new tax regime which the Government is serious about. So now the Government is putting huge efforts in to making SMEs be properly registered, have proper accounting and filing tax returns. Previously it was something done informally, but now there is no longer space for such practices in the Georgian economy, as everything needs to be “white”. By helping the Ministry of Finance (MOF) and revenue department we have designed procedures to first of all see how much it costs for small business to comply with the new tax requirement, then looking for the procedures and making them more easily understandable for small businesses. And the third thing is to help them in the revenue department with risk based audit techniques, so that MOF can be more efficient in how the audits of SMEs take place.
Over the past six years there’s been a huge shift, as most of the businesses were “black”, now they’re getting white. At first it was large businesses, where the situation is already regulated, whilst now it has come to SMEs, as it should.
Q. What about the cost of financing for SMEs in Georgia?
A. The cost of financing for SMEs is high in Georgia. However, the reasons for this are complicated depending on many factors. Georgia has a highly competitive banking sector which has constantly delivered better and cheaper products and services to its clients. And yet, the best corporate loans in USD have an interest rate between 16-18%, which is high in absolute terms, but much cheaper than when I started working on the Georgian banking sector in 1998.
The other piece of this equation is that, the main source of funding for banks are customer deposits. The deposit rates in Georgia are the highest I’ve seen in countries of the former Soviet Union. The largest Georgian banks are willing to pay up to 10% interest rates in USD and this is without any income tax or withholding tax. This is an extremely high level, so I think the ability of banks to further reduce the loans for borrowers is linked to rates on deposits coming down as well, this is actually quite important. The question of how to increase the level of deposits is something that I think about often. For some reason, Georgians still prefer to keep a large part of their savings in the form of real estate, cash or other assets.
Q. Which sectors of SMEs businesses are a priority for IFC and the banks en masse in Georgia?
A. During the tourist season, SMEs that were linked to supporting tourism especially on the coast were making money and getting credit easily as well.
Companies that are actually doing agro processing that show cash flows, are eligible for finance whilst things like primary agriculture, like farmers who actually need more capital to grow, they got virtually no access to finance at all.
Q. What about the challenges related to proper education for SMEs in Georgia?
A. As I’ve observed SMEs in Georgia have not the necessary formal skills, formal accounting system, they don’t have accounts that can be easily analyzed by banks which actually are the basis for making the lending decisions. As businesses have to show repeated cash flows, collateral, the latter which is an important thing that SMEs don’t usually have when applying for the loan. And then business owners sometimes don’t have realistic expectations about future growth forecasts and are sometimes overly optimistic when trying to get money from the banks. Working together with the companies we can actually create some of the internal structure to manage the business and to help them.
The banks themselves have quite experienced loan officers to understand the business and make recommendations to SMEs. We have just closed a corporate governance project which focused on helping them with some of the basics. But SMEs now can hire decent graduates who are aware of accounting and have business degrees which are all over the place in Georgia.
Q. What advice would you give to companies who have just started business (SMEs type), to take into account?
A. The first thing that I’d say is that they are very lucky that they live in a country where registering business takes the least time. The second thing is to make sure that the SME has properly filed its registration and to make sure that its tax and accounting records are in good order. If the SME is serious about getting credit from a bank, they should be able to demonstrate to a potential creditor the profitability of the business and the cash flows so you may have good records but at the same time you should have realistic projections about how much can be done in the future. Banks also like to see that the business owner has invested his or her own money, time and effort to make the business a success.
It makes sense to start working with a bank at a very early stage. Putting money in to deposits with a bank, to build some track record in monthly cash inflows and outflows can also be helpful, because it provides the bank with a firsthand source of information to undertake their credit analysis.
Q. What is the potential of SMEs’ development in Georgia?
A. On IFC’s side, previously we were mainly focusing on large investments in big businesses but now what we’ve observed and realized is that we’re definitely willing to consider financing small and medium sized businesses.
In the past, in order to reach the SMEs, IFC worked with local banks. In 2008 we made 50 million USD for the SMEs side for Bank of Georgia. In addition we’re financing TBC bank and Bank Republic which make up approximately 70% of the total banking market. So these three banks have access to IFC credits in Georgia.
Currently we’re really interested in working with agriculture and agricultural processing. There are a lot of SMEs particularly in this sector, especially outside of Tbilisi. We are thinking that working with this particular field is important because Georgia traditionally has a competitive advantage in it and the quality of food and vegetables that are grown here is very high.