Financing SMEs and Entrepreneurs 2024

15. Georgia

Key facts on SME financing

As of June 2023, 99.7% of active enterprises in Georgia were SMEs1. In 2022 SMEs accounted for 60.1% of business sector employment, 34.5% of business sector turnover and 51.4% of output in the business sector.

In recent years, credit to SMEs rose significantly, amounting to a staggering 412.5% increase from GEL 1 400 million in 2010 to GEL 7 174 million in 2022.2 Throughout this period, total business loans grew by more than 261%, and the proportion of SME loans as a percentage of total business loans grew from 33.8% to 48%. In 2021 and 2022 credit to SMEs increased by 15.2% and 7.5% while total business loans increased by 11.1% in 2021 and decreased by 0.1% in 2022. Accordingly, share of SME loans in business loans increased to 44.53% in 2021 and to 47.94% in 2022.

The average interest rate charged to SMEs in Georgia is high by OECD standards, but it has significantly declined over the last decade, from 17.5% in 2010 to 9.3% in 2020. Because of financial tightening interest rates rose to 9.9% in 2021 and 11% in 2022. Also, from 2018 interest rate spread has declined. Interest rate spread was 0.76 percentage points in 2021 and 0.14 percentage point in 2022.

In 2022, the overall volume of non-performing SME loans amounted to GEL 659 million (a decrease of 12% with respect to 2021). Despite a significant decrease in non-performing loans, the amount is still higher than it was before the pandemic. The share of non-performing SMEs loans is now at 5.3% (1.2 p.p. decrease from the last year).

The government of Georgia has prioritised SME development as the main source of private sector growth, job creation and innovation. For instance, the Innovation and Entrepreneurship Policy is one of the successful reforms the Georgian Government has conducted. Through budgetary support, in 2014, the Ministry of Economy and Sustainable Development of Georgia established two sister agencies, Georgia’s Innovation and Technology Agency (GITA) and Enterprise Georgia, with the main objective of promoting SME development and strengthening SME competitiveness. Both agencies provide financial support to SMEs, as well as a broader range of services that includes access to special infrastructure, mentoring, training and various advisory services. In addition to the establishment of these two agencies, the Government of Georgia has introduced several private sector development programmes, which include financial and technical assistance components to support SMEs at different stages of development.

Table 15.1. Scoreboard for Georgia

Indicators	Units		2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021	2022
Debt
Business loans, SME		GEL million	..	1 400	1 548	1 738	2 051	2 422	3 621	3 992	5 176	6 620	8 121	9 987	11 501	12 364
Business loans, total		GEL million	3 097	4 145	4 821	5 344	6 080	7 268	9 575	10 500	12 000	14 687	19 070	23 042	25 828	25 791
Business loans, SMEs		% of total business loans	..	33.8%	32%	32%	33.7%	33.3%	38%	38%	43.1%	45.1%	42.6%	43.0%	44.5%	47.9%
Non-Performing Loans, total		GEL million	926	784	666	810	791	988	1 202	1 380	1 337	1 480	1 414	3 203	2 255	1 838
Non-performing loans, SMEs		GEL million	..	145	134	111	102	101	161	206	221	407	400	974	749	659
Non-performing loans, total		% of all business loans	..	16.1%	11%	12%	10.7%	10.6%	9.8%	10.1%	7.7%	6.6%	4.9%	8.4%	5.2%	4.1%
Non-performing loans, SMEs		% of total SME loans	..	10.3%	8.7%	6.4%	5.0%	4.2%	4.4%	5.2%	4.3%	6.1%	4.9%	9.8%	6.5%	5.3%
Interest rate, SME		%	..	17.5%	16%	15%	12.9%	11.6%	13%	10.2%	10.4%	10.5%	9.9%	9.3%	9.9%	11%
Interest rate, large firms		%	..	14.9%	15%	13%	11.4%	10.2%	10%	9.6%	9.3%	9.3%	8.7%	8.4%	9.1%	10.8%
Interest rate spread			..	2.6%	1.0%	2.3%	1.5%	1.4%	2.4%	0.6%	1.0%	1.2%	1.2%	0.9%	0.9%	0.8%
Collateral, SMEs		%	..	..	..	..	95.6	..	..	..	..	..	..	..	..	..
Rejection rate		%	..	..	..	..	4.6	..	..	..	..	..	..	..	..	..
Utilization rate		%	..	..	..	..	95.4	..	..	..	..	..	..	..	..	..
Other indicators
Procedures of enterprises' liquidation (incl. bankruptcy)		Number	52	2 094	3 176	2 524	1 775	1 785	1 560	229	293	153	208	147	..	..
Procedures of enterprises' liquidation (incl. bankruptcy)		Year-on-year growth rate (%)	-14.75	3 926.9	51.67	-20.5	-29.68	0.56	-12.6	-85.3	28	-47.78	35.95	-29.33	..	..

Source: See Table 15.2.

Macroeconomic and financing conditions

Prior to the COVID-19 pandemic, the Georgian economy was characterized by robust growth, averaging 4.9% between 2017 and 2019. Georgia was hard hit by the COVID-19 pandemic, however, the Government effectively responded to the pandemic-related challenges and provided substantial support to vulnerable households and businesses. Government support measures and efficient response to the shock, created strong economic fundamentals for post-Covid recovery.

After the economic contraction of 6.8% in 2020, Georgia's economic recovery has gained surprising momentum. In 2021, economic growth reached 10.5% and real GDP exceeded by 3% the pre-pandemic level.

The economic figures for 2022 were quite promising as well, despite geopolitical tensions and related challenges. Economic activity in Georgia far exceeded expectations with a preliminary estimate of economic growth in 2022 reaching 10.4%.

In 2022, economic growth was mostly driven by net exports of goods and services and investments. In terms of economic sectors, increasing economic activity was mainly contributed by the real growth in transportation and storage, energy, construction, manufacturing information and communication and other services, including tourism-related activities.

According to IMF projections, Georgia will ensure the fastest economic growth in the medium term (2023 - 2028) among regional and European countries, amounting to 5.3% supported by infrastructure spending, FDI inflows and structural reforms to increase productivity.

Thanks to the strong macroeconomic fundamentals and fiscal discipline, fiscal deficit and public debt declined even more compared to previously projected figures – around 3.1% and 39.8% respectively in 2022. Fiscal deficit will be reduced to below 3% of GDP by 2023 to align with fiscal rule targets.

SMEs in the national economy

As of June 2023, 99.7% of active enterprises in Georgia were SMEs3. In 2022, SMEs accounted for 60.1% of business sector employment and 51.4% of output in the business sector. The share of the value added created by SMEs in the business sector amounted to 50.5% in 2022.

SME lending

In recent years, credit to SMEs rose significantly, amounting to a staggering 412.5% increase from GEL 1 400 million in 2010 to GEL 7 174 million in 2022.4 Throughout this period, total business loans grew by more than 261%, and the proportion of SME loans as a percentage of total business loans grew from 33.8% to 48%.

In 2021 and 2022 credit to SMEs increased by 15.2% and 7.5% while total business loans increased by 11.1% in 2021 and decreased by 0.1% in 2022. Accordingly, share of SME loans in business loans increased to 44.5% in 2021 and to 48% in 2022.

The average interest rate charged to SMEs in Georgia is high by OECD standards, but it has significantly declined over the last decade, from 17.5% in 2010 to 9.3% in 2020. Because of financial tightening interest rates rose to 9.9% in 2021 and 11% in 2022. Also from 2018 interest rate spread has declining trend. Interest rate spread equalled to 0.76 percentage points in 2021 and 0.14 percentage point in 2022.

Credit conditions

According to the 2023 World Bank Enterprise Survey, enterprises primarily rely on internal resources to cover investment costs, representing 68.6% of total investment expenses, a trend that has remained relatively stable since 2013. According to the same survey, 51.2% of small enterprises and 53.3% of medium enterprises have bank loans, with a higher rate of 73.9% observed in large enterprises. Notably, collateral requirements remain elevated, averaging 200.9% of the loan amount for small enterprises and 229.9% for medium enterprises, reaching an overall average of 203.5% for all enterprise types. Access to finance emerged as the third major obstacle for enterprises, as indicated by the surveys. Specifically, 16.7% of small and 17.7% of medium enterprises identified access to finance as their primary obstacle, while only 8.8% of large firms identified it as such.

Alternative sources of SME financing

One of the Objective of the SME Development Strategy 2025 is the development of local capital markets and creation of alternative sources of financing. Development of sources with higher risk is very important, as the readiness of commercial banks for financing such projects is relatively low. Such instruments as leasing and factoring are not developed properly and not considered by entrepreneurs as a good, or in certain circumstances as preferred alternative to bank credits. Accordingly, on the one hand it is important to develop alternative financing instruments, including through refining the legislative framework, and on the other hand to raise the awareness of entrepreneurs regarding the advantages of the alternative financing instruments.

The development of alternative financing mechanisms represents one of the most important dimensions for promoting access to finance, where Georgia, despite the substantial progress, has room for significant improvement. Within the framework of “Development of Alternative Financing Mechanisms for MSMEs”, the Government of Georgia has included the development of Factoring and Leasing regulatory framework, in line with best international practices, as an important tool to support private sector competitiveness.

Similarly, the Government of Georgia is implementing a Secured Transactions reform that aims to improve the legislative and institutional framework, which will significantly facilitate lending secured by movable assets and, consequently, facilitate access to finance for economic entities. In general, secured transaction systems increase access to finance while reducing credit risk, as well as reducing borrowing costs, increasing market competition, and facilitating loan portfolio diversification.

Other indicators

In 2022, the overall volume of non-performing SME loans amounted to GEL 659 million (a decrease of 12% with respect to 2021). Additionally, the share of non-performing loans for SMEs decreased from 8.4% in 2020 to 5.2% in 2021 and further to 4.1% in 2022.

Government policy response

The government of Georgia has prioritised SME development as the main source of private sector growth, job creation and innovation. For instance, the Innovation and Entrepreneurship Policy is one of the successful reforms the Georgian Government has conducted. Through budgetary support, in 2014, the Ministry of Economy and Sustainable Development of Georgia established two sister agencies, Georgia’s Innovation and Technology Agency (GITA) and Enterprise Georgia, with the main objective of promoting SME development and strengthening SME competitiveness. Both agencies provide financial support to SMEs, as well as a broader range of services that includes access to special infrastructure, mentoring, training and various advisory services. In addition to the establishment of these two agencies, the Government of Georgia has introduced several private sector development programmes, which include financial and technical assistance components to support SMEs at different stages of development.

Building on its solid track record as a top reformer, Georgia has made considerable progress since the 2012 SME Policy Index assessment and has adopted a more proactive approach to SME development through targeted initiatives. Since the beginning of 2016, the government of Georgia has been implementing its National SME Development Strategy 2016-2020. One of the core dimensions of this strategy was to ease SME lending. Georgia developed a new National SME Development Strategy 2021-2025, that focuses, among other priorities, on the improvement of the SME access to finance.

One of the priority for SME Development Strategy is access to finance. The strategy intends to achieve the set goal of improving access to finance through development of state financing programs, development of alternative mechanisms of financing, further improvement of financial literacy, expansion collateral base, increasing the transparency and quality of SMEs’ financial Information and through further development of Venture Capital (VC)” and business angels ecosystem.

Legal and institutional framework for SMEs

In 2015, the government of Georgia developed the National SME Development Strategy 2016-20 with support from the OECD. The strategy was adopted in 2016. The Ministry of Economy and Sustainable Development of Georgia was the main coordinator of the strategy’s implementation. In 2020 Georgia, developed new National SME Development strategy 2021-2025.

According to the study by the Organization for Economic Cooperation and Development (OECD) „SME Policy Index - 2024“ Georgia achieved unprecedented success - in 2024, Georgia’s score (compared to 2020) improved in 10 directions; Georgia was evaluated with the highest score in 11 out of 12 components among Eastern Partnership countries.

The new insolvency framework fully enacted in 2021, has successfully resulted in a significant increase in cases of rehabilitation and reduction in duration and business costs associated with insolvency proceedings, thus supports the releasing frozen assets back into the economy.

Timely and targeted SME support programs have proven an effective tool to address specific market failures, support risk diversification and credit supply growth.

Figure 15.1. Trends in SME and entrepreneurship finance in Georgia

Source: See Table 15.2.

Statlink

Table 15.2. Sources and definitions of Georgia’s Scoreboard

Indicators	Definition	Source
Business loans, SMEs	Bank loans to SMEs, amount outstanding (stocks) at the end of period.	National Bank of Georgia
Business loans, total	Bank loans to all non-financial enterprises, including SMEs loans, amount outstanding (stocks) at the end of period.	National Bank of Georgia
Non-performing loans, total	Substandard loans together with doubtful and loss loans, including interbank loans.	National Bank of Georgia
Non-performing loans, SMEs	Substandard loans together with doubtful and loss loans, including interbank loans.	National Bank of Georgia
Interest rate, SMEs	Annual Weighted Average Interest Rates on loans (stocks) to SMEs	National Bank of Georgia
Interest rate, large firms	Annual Weighted Average Interest Rates on loans (stocks) to all non-financial enterprises	National Bank of Georgia
Collateral, SMEs	Percentage of SMEs that were required to provide collateral on latest bank loan	National Bank of Georgia
Rejection rate	Percent of firms whose recent loan application was rejected	National Bank of Georgia
Bankruptcies, total	The number of bankruptcy proceedings that are actually initiated and registered in the Public Registry Agency of Georgia during the reference period.	Public Registry Agency

Notes

← 1.  According to the methodology introduced by the Georgian National Statistics Office in 2016 to gather statistics on the country’s SMEs and in pursuant of the National Strategy of SME development.

← 2.  Figures are inflation-adjusted, with 2010 as the base year.

← 3.  According to the methodology introduced by the Georgian National Statistics Office in 2016 to gather statistics on the country’s SMEs and in pursuant of the National Strategy of SME development.

← 4.  Figures are inflation-adjusted, with 2010 as the base year.