The concept of microbanks was introduced in Georgia through the Law of Georgia on Microbanks (hereinafter the “Law”), establishing a new type of financial institution under the supervision of the National Bank of Georgia (NBG).
Purpose and Objectives of the Law
The primary objective of the Law is to promote the institutional development and strengthening of Georgia’s non-banking financial sector. Compared to microfinance organizations, microbanks are designed to lower operational costs and improve access to both local and international financial markets. These advantages aim to reduce the cost of credit products and foster increased competition within the financial system.
Role of Microbanks in the Non-Banking Sector
Microbanks operate as part of Georgia’s broader non-banking financial landscape, which includes microfinance organizations and lending entities. Their role is particularly significant in supporting businesses and individuals in regional areas. To ensure appropriate oversight, the Law introduces a distinct regulatory and supervisory framework tailored to the unique operational models of microbanks, despite similarities with other institutions.
Definition and Legal Structure of Microbanks
Under the Law, a microbank is a legal entity established in the form of a joint stock company and licensed by the NBG to carry out a defined set of banking activities. These institutions function as intermediaries between microfinance organizations and commercial banks, focusing primarily on lending to individuals whose income is derived from entrepreneurial and agricultural activities. To preserve their targeted lending model, at least 70% of a microbank’s loan portfolio must consist of such entrepreneurial loans.
Capital Requirements and Loan Limits
The regulatory framework outlines specific capital requirements and lending restrictions. While commercial banks are required to have a charter capital of GEL 50 million and microfinance institutions GEL 1 million, microbanks must hold a minimum of GEL 10 million in charter capital. Additionally, the maximum loan amount that a microbank may issue to a single borrower is limited to GEL 1 million.
Permitted Activities of Microbanks
Microbanks are authorized to conduct a range of financial services under the Law, including:
- Issuing loans, guarantees, letters of credit, leasing, and factoring;
- Accepting interest-bearing and interest-free deposits within the limits defined by the Deposit Insurance System, and managing current accounts subject to NBG liquidity requirements;
- Opening and servicing correspondent accounts;
- Conducting both cash and non-cash payment operations and offering cash-collection services;
- Issuing and managing payment cards;
- Operating as payment service providers, managing payment systems, and acting as settlement agents.
- Providing interest-free banking services;
- Conducting transactions involving derivatives and securities with their own funds (excluding activities requiring a brokerage license);
- Engaging in foreign currency exchange with one’s own or clients’ funds;
- Leasing property for microbank-related purposes;
- Providing virtual asset services in accordance with NBG regulations;
- Offering services related to the above-listed activities.
Additional Authorized Activities with NBG Approval
Subject to NBG approval, microbanks may also engage in activities typically allowed for brokerage companies under the Law of Georgia on the Securities Market, provided they comply with applicable legal requirements.
Licensing and Regulatory Provisions
The Law establishes clear requirements for the licensing of microbanks, including rules governing capital reserves, investment limits, corporate governance, and organizational structure. It also regulates the processes for transforming a microbank into a commercial bank, as well as procedures for mergers and divisions. Governance requirements address the formation and responsibilities of the supervisory board and directorate, along with provisions for maintaining and accessing banking secrecy.
Transition from Microfinance Organizations to Microbanks
Microfinance organizations are eligible to apply for a microbank license. While they already hold authority to issue microloans, provide credit cards, and handle remittances, obtaining a microbank license allows these entities to extend their services to include loans for entrepreneurial activities and additional operations under the Law.
Expected Impact of the Novel Regulations
The microbank framework is expected to positively impact Georgia’s financial sector by encouraging competition and improving access to financial services. It also aims to attract investments and strengthen organizational capacity. The enhanced support for small and medium-sized enterprises, especially in regional areas, is anticipated to increase profitability. It is also expected to stimulate job creation and contribute to the country’s overall economic development.
The Law on Microbanks establishes a comprehensive and forward-looking regulatory framework designed to strengthen Georgia’s financial system. By bridging the gap between microfinance organizations and commercial banks, microbanks are positioned to support sustainable economic growth. They also provide valuable financial services to underserved segments of the population.