Trends in the Data: Declining trust in the banks in Georgia

The last few years have been turbulent for Georgia’s national currency, the Lari (GEL), the value of which started to decline in November 2014. While in October 2014 one US dollar traded for GEL 1.75, since February 2015 to date, the exchange rate has fluctuated between GEL 2 and 2.5 per dollar. Needless to say, the depreciation of the Lari has been widely covered by the media, and although it had numerous causes, a number of organizations and people were blamed for the devaluation. With this background in mind, this blog post looks at how reported trust in banks has changed in recent years in Georgia, using CRRC’s Caucasus Barometer (CB) survey data.

In 2015, for the first time since CB started asking the population about their trust in banks, more people in Georgia reported distrusting than trusting them. The decline in trust, however, started well before the GEL began to depreciate. While 27% reported trusting banks in October 2015, 53% did in October 2008.

Note: The original five-point scale was recoded into a three-point scale for this chart. Answer options “Fully trust” and “Trust” were combined into the category ‘Trust,’, while “Fully distrust” and “Distrust” were combined into ‘Distrust.’ “Neither trust nor distrust” was not recoded. The Caucasus Barometer survey was not conducted in 2014.

As is generally the case with trust in social and political institutions in Georgia, the population of rural settlements report less distrust in banks than residents of urban settlements. Nonetheless, since 2008, distrust in the banks in rural settlements has nearly tripled, from 11% in 2008 to 30% in 2015. In the capital, distrust has almost doubled during the same period.
 

Although there has been a decline in trust in the banks in recent years, this decline started before the devaluation of the Lari began in 2014. While the devaluation likely contributed to the decline in trust, the fact that trust began declining earlier shows that there is more to the story than the devaluation.
Given that the banking system, and trust in it, is crucial to the effective functioning of a country’s economy, the government of Georgia and banks themselves should consider efforts aimed at building trust in the banking sector.

What factors are at play in declining trust in the banks in Georgia? Join the conversation on the CRRC-Georgia Facebook page here, and to explore more data on Georgia and the South Caucasus, visit our online data analysis tool (ODA).

Levels of trust in the banks in Georgia: Changes over the past two years

Banking is one of the fastest-growing sectors of the Georgian economy, a point which was underlined in a 2009 report from the Ministry of Economic Development of Georgia. But does this development mean that society views banks as trustworthy partners for households (HH) in Georgia?

In fact, from 2008 to 2009, the overall level of trust in banks has decreased in Georgia, especially for the HHs who say they have savings and for those who say they have debts. This could in part be due to the global financial crisis which, according to the European Bank for Reconstruction and Development’s (EBRD) 2010 country strategy report, significantly affected the Georgian economy. The crisis revealed the financial sector’s weaknesses around the world and led to widespread doubt concerning the reliability of banks.

Households & Savings

For the small number of HHs who say they have savings (9 percent in 2008, 6 percent in 2009), the level of trust in banks has significantly decreased. According to the 2008 Caucasus Barometer (CB, previously referred to as the “Data Initiative”), combining the “fully trust” and “somewhat trust” categories shows that 60 percent of HHs with savings said they trusted banks. In 2009, however, this figure fell to 49 percent. As a place to put one’s money and keep it safe, apparently, fewer people view banks in a positive light.

Even for HHs without savings – the majority of the respondents – the level of trust in banks has fallen: in 2008, 53 percent of them had said that they trusted banks, whereas only 42 percent said the same in 2009 (see Figure 1). At the same time, the number of those saying specifically they distrust banks remained the same, hinting at a high degree of uncertainty with regard to banks among the population.



Households & Debts

The level of trust in banks among HHs who reported that they have debts saw an even larger drop. Although these could be debts either to banks or to private persons, without interest, this drop could be linked to the fact that it has become increasingly difficult for HHs to take out loans to help alleviate any debts they have. Overall, 43 percent (2008) and 42 percent (2009) of the HHs claimed to be indebted. Of these HHs, 59 percent said that they trusted banks in 2008, though only 45 percent claimed the same in 2009.

On the other hand, the level of trust remained broadly similar in those HHs who say they do not have debts. Forty-nine percent of them had said that they trusted banks in 2008, while 42 percent said the same in 2009.




Conclusion

The 2008 Caucasus Barometer was carried out from the second half of October to the middle of November, and these figures offer a snapshot of how the global financial crisis may have taken its toll on HHs’ trust in banks in Georgia. Still, there are certainly other factors which play a role, and further research and commentary are needed. We invite you to access the 2008 CB dataset to make your own comparisons here.

Banking and Financial Services in the Caucasus | CRRC Data

Have banking and financial services penetrated most households in the South Caucasus? Due to the topicality of finance news, an investigation on the usage of banking and financial services in the Caucasus seems justified. As banks fall, get nationalized and panic is spreading, our DI data on the usage of banking/financial services can be useful to understand the 2007 baseline. For instance: How many households in the South Caucasus have saving accounts that could, theoretically, be frozen if the financial situation further deteriorates?

As one can see in the graph above, banking/financial services are not used by the majority of the DI’s respondents. 66% in Georgia have not used banking/financial services compared to 57% in Armenia and 53% in Azerbaijan. Not many households are at risk of having their savings eaten up since only 1% of households in the region have savings accounts. It is remarkable that loans have been taken by so many Armenians (18%), but note that these people may not be owing money right now. For a look at household exposure, check our older post.

Now, let’s have a look at the usage of banking cards, which ought not to be confused with savings accounts. Although that few households have used banking/financial services in the South Caucasus, the numbers on usage of banking card is relatively high in the region, with Armenia being the exception that confirms the rule. 5% in rural Armenia and 23% in the capital are bearers of banking cards. Comparing this with 30% in rural Azerbaijan and 58% in its capital, one can see that the penetration of banking cards in Armenian households is relatively small. However, the largest regional differences are to be found in Georgia. Only 9% of households in rural Georgia have banking cards compared to 55% in its capital.

We also have data on public trust towards banks. But here one important limitation of the data above is that it is from 2007, so that it may not be sufficiently up to date. However, the DI 2008 will soon be available online (and yes, if the data show large inconsistencies, there will be a blog post on it). For the data above, check the CRRC Data Initiative (DI) 2007.

Credit Crisis in the Caucasus?

Over the past year questionable lending practices by major banks and lack of consumer education about credit risk in the United States among “sub-prime” borrowers caused a credit crunch that in turn erupted into a major financial crisis that threatens to lead to a recession and an international economic downturn.

Although little attention is paid to the issue of credit and debt, analogous risky practices are taking place in the banking sectors of the countries of the South Caucasus. A similar financial crisis in these countries could have a far more devastating effect, since one of the population groups most exposed to consumer debt is the small but consolidating middle class in the urban centers. This issue becomes particularly important in the wake of the August war in Georgia, as the region attempts to maintain economic stability in the face of infrastructural damage and reduced foreign investment.

The emerging middle class has been both a cause and a result of high levels of growth in the economies of all three South Caucasus countries over the past several years, and the banking sectors in these countries has been an area of particularly high growth because of structural reforms, increasing government regulation, and high demand for investment capital.

Banks have become more eager than in the past to extend consumer credit, but for a number of reasons interests rates in the region are extremely high: because of perceived risk of investment in the region and the risk of devaluation of local currencies (the highest interest rates for deposits are for accounts held in local currencies), and because of physical shortages of currencies as governments reduce outputs to combat inflation. Rates for consumer loans in the region average 15-20 percent, which are significantly higher than the 7-9 percent rates for sub-prime mortgages that precipitated the crisis in the United States.

Banks in the region have also been eager to introduce credit card services, offering the convenience of credit lines to their clients for purchases along the model long familiar in developed countries, with no interest if payments are made on time, but stiff penalties for missed payments. Advertising for loans and credit cards are ubiquitous in the capital cities, and credit booths are common in computer and furniture stores.

Yet although micro-credit programs have been functioning in the region for a number of years, particularly in rural areas, the whole phenomenon of commercial consumer credit is largely a new concept for the urban middle class. New borrowers have neither credit histories upon which banks can determine levels of risk, nor experience or deep understanding of the potential hazards involved in taking loans.

According to data from the Caucasus Research Resource Centers’ Data Initiative Project, while the number of households in Azerbaijan, Armenia and Georgia that take loans overall is not large (and real mortgages are practically nonexistent), the number is substantial enough to merit concern: 4% in Azerbaijan, 15% in Armenia and 9% in Georgia. The majority of those loans are for more than 100 USD (78% in the case of Georgia), and in Armenia and Georgia more than half of those who use credit have taken two or more loans. And while a portion of these loans in all three countries are taken for essential expenses such as medical care, utilities or food (demonstrating extreme poverty), approximately half of loans in all three countries are taken for consumption, investment or business purposes, or to repay previous loans.

While many consumers in the region may be making careful strategic choices in using credit, it seems that a significant amount of loans are being used for highly speculative investments, such as in real estate or in businesses that have been profitable in the past but are now close to saturation (e.g. restaurants and cafes and importing automobiles). The real estate markets in particular seem to be highly inflated in the urban centers (again, fueled by speculative trading financed by very high interest loans) and the resulting bubble is likely to burst if perception of a slowdown or reversal in rates of price increases were to appear.

For their part, banks in the region seem to take little interest in the types of projects that loans are being requested to finance, have set only the most minimal requirements for the extension of loans and credit cards (usually a letter from an employer stating a minimal average salary is sufficient), and have taken little initiative in providing consumer education for their clients.

High interest loans and risky investment decisions thus create a very real possibility of overextension by clients of consumer credit who owe more money than they currently earn, which in turn presents a very serious risk of a financial crisis that could threaten to undermine the banking and real estate sectors, particularly given the shocks to the system that resulted from the Georgian-Russian war in August. Such a financial crisis would most likely have far more serious consequences for the fragile economies of the South Caucasus countries than in more developed countries. It would threaten most directly the nascent middle class, which is such an important constituency for the further development of stability, rule of law and democracy in the region, and could therefore have serious consequences as well for the political stability of the region. It is in the interests of both governments and commercial banks and loaning organizations in the region to forestall such a crisis by implementing more rigorous requirements before extending credit and devoting resources to consumer education.