The Georgian economy relies heavily on small and medium-sized enterprises (SMEs), which provide more than 67% of employment and 61.5% of gross value added. Georgia performs strongly under the OECD SME Policy Index as the best performing country in the EU Eastern Partnership (EaP) region, with robust SME development policies and frameworks. However, SMEs tend to be clustered in relatively low value-added sectors (e.g. trade, real estate) and face barriers to scale up their operations.
Access to Green Finance for SMEs in Georgia
Report
Green Finance and Investment
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Executive summary
SME policy environment
Environment and climate policy
Georgia has brought forward a range of environmental policies and strategies to support the greening of the economy and to meet international obligations. Among others, the government has identified investment needs of USD 8 billion to support energy efficiency and USD 2 billion for climate change adaptation, both types of investments are envisaged to be implemented by 2030. However, renewable and energy-efficiency laws and action plans remain under development and there are no binding renewable energy targets. Enforcement of environmental standards (e.g. buildings performance, pollution) lacks consistency. The specific role of SMEs in green growth and the barriers they face are generally not explicitly considered.
Georgia has a significant informal economy much of which occurs within the SME segment. Alongside creating fiscal and macro-economic challenges, the presence of a large informal economy also creates issues for effective environmental regulation. The formalisation of the economy should therefore be a priority for government.
Financing market for SMEs
Access to finance has been identified as a challenge for SMEs as is common elsewhere in the region. Commercial banks are the main source of SME finance, but the sector is regarded by lenders as relatively high risk. Interest rates tend to be relatively high (15%+), as are collateral requirements (130% and more). Rates offered in the microfinance sector are considerably higher. Borrowers often are already over-indebted or lack sufficient assets against which to borrow. Project finance approaches and leasing and factoring financial products also remain underdeveloped. Dollarisation of lending offers lower rates, but also creates potential risks for individual borrowers. The government is already actively working on addressing some of these risks.
Market gap for green SME investments
One key challenge facing green SMEs is the gap in the market in terms of green credit for SMEs from financial institutions. Many banks providing dedicated green credit lines tend to serve larger customers and loan sizes are often more than what an SME might need (e.g. loans >EUR 500 000). This reflects the commercial economies of scale and lower processing costs associated with larger loan-size portfolios. At the other end of the scale, microfinance organisations serve smaller SMEs (e.g. loans of up to EUR 10 000), but at significantly higher rates of interest. Indeed, many Georgian SMEs might be considered micro-SMEs. In addition, many energy and resource efficiency investments made by small firms (e.g. with typical loan sizes of EUR 10 00030 000) are too big for microfinance institutions and too small for traditional bank lenders. This market gap requires special attention in government policies.
SME capacity challenges
Weak financial literacy, poor record keeping and business planning have constrained progress in building a market for green finance among SMEs. However, this has been improving. Borrowers may also lack awareness of the economic benefits of green investments. They may also have poor understanding of the potential paybacks, including productivity and quality benefits. Green investment may be regarded as an opportunity cost compared to expanding production.
Role of financial institutions
International financial institutions (IFIs) have already provided approximately USD 400 million in concessional credit lines to eight Georgian banks over the last decade for on-lending to green projects. These loans have primarily targeted renewable energy and energy efficiency. Of these banks, Bank of Georgia, TBC Bank and ProCredit Bank have been the most active in their support for green lending. Only ProCredit, however, has a sustained green lending product.
Barriers to access
IFI environmental credit lines provided to financial intermediaries have generally been allocated to larger companies and projects, with average loan sizes of USD 1 million. This reflects higher transaction costs of banks working with small borrowers, as well as poor alignment of IFI SME definitions with the Georgian context. Some credit lines have also been fungible between energy-efficiency and renewable energy projects. This has resulted in use of funds for hydropower rather than SME development.
Key success factors
Banks themselves have had to overcome capacity challenges to promote green lending. Any success can be attributed to a range of factors. These factors include senior management buy-in, development of standard green banking products, allocation of sufficient financial and staffing resources, a strong pipeline, economies of scale to offset potential transaction costs and a high level of transparency and governance.
Recommendations for policy makers
Significant economic and environmental benefits can be delivered through improving SME access to green finance given the important role played by small businesses in Georgia. Policy makers can support this process by addressing the following:
Adopt pending legislation on energy efficiency and renewable energy, develop robust sub-regulation (buildings, appliances), strengthen enforcement, ratchet environmental standards and reduce fossil-fuel subsidies to create market signals.
Ensure explicit policy consideration of the role of SMEs in the green transition and ensure that SME participation is included in national climate strategies and programmes.
Address wider issues of access to finance for SMEs, including enabling access to credit at sub-national level, building SME financial literacy, exploring credit guarantees for SME lending and promoting non-bank financing (e.g. leasing).
Lower cost of green credit and improve borrowing conditions for SMEs by working with national development funds and commercial banks to enhance interest rates and reduce collateral requirements.
Improve the availability, efficiency and effectiveness of green finance through green bond markets, pooled climate finance vehicles and the judicious use of central banking regulation and reporting to promote sustainable asset allocation.
Raise awareness among SMEs around energy-efficiency and renewable energy opportunities, support the uptake of energy management systems and promote the economic and commercial benefits of green investment and branding.