Earlier this year the Parliament of Georgia adopted the Law of Georgia on Microbanks (hereinafter the “Law”) establishing a new financial institute in Georgia.
The main reason for the adoption of the Law was the institutional development and strengthening of the non-banking financial sector by the National Bank of Georgia (“NBG”). Moreover, compared to microfinance organizations, the microbanks will substantially reduce costs and enhance access to local and international financial markets. This will consequently contribute to reducing the cost of credit products and fostering increased competition.
Microbanks will be an addition to the Georgian non-banking sector which now encompasses microfinance organizations and lending entities. Given their crucial role in providing financial support to businesses and the population in Georgia’s regions, it became imperative to establish a distinct regulatory and supervisory framework for business models with varying contents, despite their similar status. This resolution is also in line with the need to enhance oversight over the non-banking institutions.
Under the Law, a microbank is a legal entity established in the form of a joint stock company which is licensed by NBG and is carrying out the banking activities as set out in the Law. Microbanks operate as financial institutions and serve as intermediaries between microfinance organizations and commercial banks. Their primary focus lies in lending to individuals who generate income through entrepreneurial endeavors, including agricultural activities. To maintain their distinct business model, at least 70% of the microbank’s credit portfolio consists of loans issued for entrepreneurial loans and/or the loans whose source of repayment is income from entrepreneurial activity.
It is noteworthy that the regulatory framework for microbanks will be different from other banking or non-banking institutions in terms of obtaining a license. In particular, while a commercial bank requires a capital of GEL 50 million, and a microfinance institution requires GEL 1 million, microbanks are mandated to have a charter capital of GEL 10 million to obtain a license. Additionally, microbanks shall not issue a loan exceeding GEL 1 million.
The Law limits the banking activities of the microbanks to the following:
- issuance of loans, guarantees, letters of credit and leasing, carrying out factoring operations within the limit established by the Law;
- attracting interest-bearing and interest-free demand and time deposits only within the limit established under the Law of Georgia on Deposit Insurance System as well as above the limit, servicing of current accounts in compliance with the liquidity requirements determined by NBG; as well as raising other repayable funds, including from individuals (including individual entrepreneurs) in accordance with the Law;
- opening and servicing of correspondent accounts;
- implementation of cash and non-cash payment operations and cash-collection services;
- issuance of payment cards and organizing their circulation;
- implementation of payment services, operation of the payment system, performance of settlement agent functions;
- provision of interest-free banking services;
- placement of derivatives, selling and purchasing of securities with own funds, except for the cases where the said activity requires a brokerage activity license;
- sale and purchase of foreign currency with own and clients’ funds;
- lease of property only for micro banking activities;
- provision of virtual asset services in favor of another person in accordance with the Law of Georgia on the National Bank of Georgia; and
- other services related to each of the above activities.
Microbanks will also be authorized, with the approval of NBG, to carry out the activities allowed for the brokerage company under the Law of Georgia on the Securities Market in accordance with the requirements established by the laws of Georgia.
The Law, among others, sets out the requirements for licensing of microbanks, the capital and reserves of the microbanks, the manner and limits of investments, the issues of transformation of the microbanks into a commercial bank, merger with the microbanks and division of the microbanks. The Law further regulates the issues of corporate governance, both the compatibility of the organizational structure and the criteria of the suitability of the governing bodies, the main issues of the formation and responsibility of the supervisory board, the directorate, and the issues of protection of bank secrecy and access to it.
As the Law regulates, a microfinance organization is authorized to apply for a microbank license. Under the Law of Georgia on Microfinance Organizations, a microfinance organization is generally authorized to provide various types of microloans, issue credit cards, invest in securities, handle remittances, act as an insurance agent, etc. However, after the introduction of the Law, applying for a microbank license shall also grant the microfinance organizations the authority to issue loans to individuals earning income from entrepreneurial activities (for example, agricultural activities) and combine other authorities granted to microbanks under the Law.
In case a microfinance organization applies for a microbank license, it is required to refrain from accumulating pledged assets for a period of two years from the date of receiving the microbank license, except for the monetary instruments of the NBG, which is necessary to ensure liquidity support. Moreover, during this period microbanks will have different individual requirements with respect to the liquidity coefficient. The Law shall enter into full force on 1 July 2023 and NBG shall issue acts stipulated by the Law by the said date.
The implementation of the Law is highly anticipated to have a significant positive impact on the country’s financial sector and overall economy. The expected effects include fostering healthy competition, enabling the provision of better quality and diverse financial services to customers, stimulating investments, enhancing organizational capacity and business assets, and supporting the growth of small and medium-sized businesses. These outcomes hold the potential to increase profitability, generate more employment opportunities, particularly in the regions, and contribute to the overall economic prosperity of the country.
As we look ahead, the Law presents a promising framework for fostering a robust and vibrant financial landscape that benefits both businesses and consumers alike.