Deep Dive Georgia

In a nutshell, the Georgian banking sector is one of the fastest growing and the backbone of the country's economy. Georgia is a small developing country with a population of 3.7 million, strategically located at the crossroads of Europe and Asia, making it a logistics and transit hub. Georgia's economy has grown steadily over the past decade, although like many other similar regions, it has faced the twin headwinds of a pandemic and international sanctions related to the Russia-Ukraine war. Due to its import dependency, the supply chain disruptions impacted the economy and the population, which in turn posed various challenges for the banking sector in particular.

However, while the lingering effects of geopolitical events continue, the economy has shown resilience. A GDP growth of 10.11% in 2022, coupled with an improvement in inflation levels, has created some uplift.

Georgia has signed an Association Agreement (AA) and a Deep and Comprehensive Free Trade Area (DCFTA) with the European Union (EU).  By reducing tariffs and removing technical barriers to exports to the EU, the economy will further benefit from free trade agreements with a market of 2.3 billion people (including EU, EFTA, CIS and China).

The lessons learnt from the recent events have led the regulators to take various prudential measures including monetary measures and focus on addressing some structural weaknesses such as high dollarization. The country still faces dollarization, which remains a structural constraint for the financial sector, although it has been steadily declining, supported by the macro and sensible measures introduced by the regulator, which have also been reinforced by the financial sector. Another important structural focus has been on improving corporate governance and transparency.

Georgia's macro-fiscal policy has remained sound, while its monetary policy has been relatively tight and is expected to remain so until inflationary pressures abate.

The banking sector is comparatively stable, well capitalized, liquid, and profitable. The stability of the Georgian banking sector has been reaffirmed by sound credit fundamentals (as at June 2023) and a positive outlook as outlined in recent IMF reports and supported by the international rating agencies. The role of the regulator, which requires the maintenance of solid capital and liquidity buffers against potential threats, has proven effective as the sector has emerged from several financial and geopolitical turbulences in recent years.

However, some imbalances remain. While there are 14 banks operating in Georgia, we continue to see high concentration, with 70% of total banking sector assets concentrated in the top two banks. For better market depth, diversification is needed. The solution lies in technology, and we see some of the newer age banks leveraging this to adopt modern practices with digital flows, AI/ML based models and API integrated journeys.

As we move forward, there are two key structural changes that will reshape the future of banking in Georgia.

One, a relatively new focus on the SDGs, in line with changing global sensitivities. In 2022, the National Bank of Georgia (NBG) approved Sustainable Finance – a classification system that assigns green, social, and sustainable status to the economic activities that meet certain technical criteria, and a green taxonomy that supports environmental goals and the development of a green economy.

The second change is the movement towards newer client segments, products and valuation methodologies. While the role of technology is crucial in this, the more important factor is the focus on supporting SMEs. This is critical if the Georgian economy is to reach the next level. With the support of financial institutions and the Georgian Investor Council, NBG along with the other state authorities have finalized the Factoring Law and it's only a matter of time before banks move to more demand-driven supply chain financing, beyond the traditional collateral-based lending.

Although macro indicators are improving, we need to keep our eye on the ball given the war next door, global economic unpredictability, and the evolving geopolitical situation. Given its performance over the past decade, I'm confident that Georgia will continue to grow and strengthen its economy and, by extension, its banking sector.

The regional geopolitical problems are an unavoidable and painful issue, as the country is highly exposed to geopolitical risks, as Russia has invaded the country and occupied the Georgian territories, Abkhazia and South Ossetia.

The ongoing war we are witnessing is an unbearable human tragedy with unprecedented impact on people, society, the region, and the world.

Overall, despite the turmoil in the region as the fallout from Russia's invasion of the Ukraine continues to unfold, Fitch Ratings has affirmed Georgia's long-term foreign currency issuer default rating (IDR) at 'BB' with a positive outlook through July 2023. Georgia ranks high in the region as a good place to do business.

Basisbank is celebrating its 30th anniversary this year. The journey has been long and there are many lessons the bank has learned along the way.

The bank has steadily grown to become the third largest commercial financial institution and has extremely loyal employees as well as loyal customers, many of whom have banked with the bank throughout the lifecycle of their businesses in an extremely competitive environment. Currently, Basisbank ranks among the top three banks in terms of business lending and services. This positioning is unique. It has not been achieved easily and must be maintained and developed.

Basisbank’s growth has been driven by three strategic priorities.

First, customer centricity. The bank has continued to play to its strengths, particularly in the mid-corporate segment, in a highly competitive market dominated by the top two banks.

Second, employee empowerment and loyalty has been a key cultural differentiator from other banks. This has helped the bank to remain nimble in responding to customer needs and to ensure the necessary transparency in its operations.

The third critical factor has been a clear focus on risk management and compliance. This has ensured the balance sheet robustness that will help the bank take calculated growth calls at the right time.

I think the current scenario presents some of these opportunities for the bank.

Sustainability, growth, and progress towards alignment with global financial developments, including digitalization, green finance, and the use of data and technology to provide a personalized and proactive approach, will be the key challenges the bank will face. All these developments will be backed by significant support from the shareholder, as well as technical support and expertise from local and international institutions and consultants.

Being a universal bank with a focus on midcorp, sector knowledge and tailored methodology, data driven and well digitized approach with a significant focus on ESG, makes Basisbank a reliable and transparent partner both for clients and international partner institutions. The bank positions itself as a financial services institution that strives to develop various financial services in one space to make the bank relevant in providing customer centric solutions to meet the financial needs of people anytime, anywhere, conveniently, and affordably.

A bank as a highly regulated financial service provider is being redefined and reshaped, and commercial banks need to keep up with the changes to stay in the game. Globally, we are seeing new entrants into the pool of financiers, such as fintechs, e-money, neobanks, institutions that offer services traditionally provided by banks, such as accounts, cards, FX, payments, remittances, and lending. However, because banks have balance sheet management, risk, and compliance - all the traditional functions - and at the same time are constantly innovating, they may be able to offer relevant financial services through channels such as mobile banking that many other players are unable to offer.

Banks are also facing an interesting trend with Gen-Z going straight to apps to open their first bank accounts, easily bypassing traditional banks. This leads me to think that they will feel less and less the need to have a direct relationship with a bank. I do not think that banks will be disintermediated, but they will certainly go through a process of redefinition, and a lot of it will have to do with technology. We are already seeing a lot being taken away from banks, and I expect more controls and regulations to follow soon.

Challenges and solutions - pressing challenge for the banking community on the impact of de-risking

To provide basic services to customers, including support for cross-border payments and trade, it is critical for banks to remain involved in the correspondent banking network and global ecosystem.

The recent trend for individual banks to withdraw correspondent banking relationships (CBRs) is based on a number of considerations. In general, such decisions reflect banks' cost-benefit analysis, driven by the re-evaluation of business models in the new macroeconomic environment and changes in the regulatory and enforcement landscape. However, today’s CBR networks are out of sync with national priorities and business trends, regulatory frameworks that discourage risk coverage in developing economies, atrophied correspondent banking architectures, banks that choose to cower in fear rather than creatively monetize opportunities, and financial services restrictions that have a direct negative impact on economies. The impact of the so-called "de-risking" trend is felt unevenly between small to medium and large institutions, but it has limited business opportunities and affected costs for both.

For Basisbank, it is a top priority to be sustainably inclusive and acceptable to the global community, therefore the agenda for the bank remains to be built on trustworthiness and through transparent collaborative dialogues and continuous developments in all areas to be aligned with the criteria and requirements of partner financial institutions.

A casual but difficult question to ask a Georgian!

Georgia is a wonderland with a magnetic attraction – that is what comes to my mind. Traveling and discovering the world is a blessing for me and somehow I was lucky to have this opportunity.  Having traveled to several parts of the globe, I have encountered many similarities and differences in landscapes, cultures, religions, people, lessons, and experiences that have shaped who I am today.

Each country leaves its footprint and flavor and much like a perfume and music, some are intense, some are pleasant, others are hectic, stressful, tasty or relaxing. Recently, I had friends who traveled to Georgia on vacation, and I also joined them on a tourist route as a tourist and it was a very interesting experience. My friend recently embroidered a message about Georgia, which I dare to share, as it mostly covers everything from the eyes of the visitor:

"With the breathtaking Caucasian landscape on one side and the Black Sea on the other, Georgia is a visitor's paradise. There are numerous tourist spots, from the snow-capped mountains to the ski resorts to the picturesque towns, fortresses, monasteries, hamams and nightlife of Tbilisi.” Recent improvements in infrastructure and connectivity have made it easier for locals and visitors alike to enjoy the countryside and offbeat destinations throughout Georgia.

But as a Georgian, my main recommendation will be to look beneath the surface and spend time exploring the cultural facets as well. Georgia is an ancient culture that has maintained its originality despite the various cultural influences from the north and south. On the one hand, you will find an amalgamation of different cultures and religions; on the other hand, the originality is clearly visible in the common thread of Georgian language, music and dance, and above all, Georgian hospitality.

Food and wine are an important part of Georgian culture. The variety of regional cuisines is a delight for any food lover. Georgia is known for its ancient but well-preserved wine-making techniques. We are one of the major exporters of wine and I invite you to plan a visit soon to experience the many flavors of Georgia.