The establishment of the "Agro-business Bank of Georgia" (ABG) is a European Union (EU) funded project, and is the successor to the EU funded Regional Agricultural Reform Project (RARP1) credit component. This component on-loaned an amount of GEL (Georgian Lari) 10.2m into the agricultural sector of Georgia through Georgian commercial banks, revolving it nearly 3.5 times (GEL 38m) in three years with a high level of repayment. This had a significant positive impact upon Georgian agriculture, funding production and processing of 58,000 tonnes of wheat, 25,000 tonnes of maize and 14,000tonnes of other crops in addition to processing activities (e.g. 33,000 tones of flour) and input supply and distribution. The RARP1 projects also addressed the needs of the poorer agricultural community through developing Credit Unions. This too was successful (GEL 2m over 3years), albeit less so than lending through the commercial banks, with reasonable rates of repayment and repeat lending. RARP has also had a positive impact upon the banking sector, where it helped to reinforce good practice, and has also put the Georgian legal system to the test by pursuing defaulting borrowers (seven Georgian banks) through the Courts and obtaining positive Judgments. The RARP 1 projects terminated in March 1999. The new project - the establishment and formation of the ABG - commenced operations in May 1999. Following negotiation between the EC and the Government of Georgia, a new Memorandum of Understanding was signed on 1st December 1999. A full Banking License was granted to the ABG on 19th December 1999. President Shevardnadze inaugurated the Bank on 27th January 2000, and opened its doors for business on the 21st February 2000. The objective of the ABG Formation Project is to establish sustainability, commercialism and management skills in the establishment and operation of a new and effective agricultural credit institution - a Bank. This has been undertaken by converting the Credit Management Unit (CMU) established under RARP1 projects into the credit department of a new banking institution. Contemporaneously, the project has and continues to add to the Bank the functions necessary to achieve a fully autonomous, independent, commercial and comprehensive banking institution specialised in addressing the needs of the agricultural sector of Georgia. Particularly agro-business and agro-processing. These functions include: · Sight and Term Deposit/Savings Accounts · Treasury functions · Letters of Credit and inter-Bank payment systems · Personnel Department · Internal Audit provisions · Foreign Exchange and finance activities-correspondent banking · Leasing arm (when appropriate legislation has been introduced) · Farm and agro-business advisory services The following important strategic points are worthy of note: The seed capital of the Bank (ABG) is the counterpart Fund (CPF) which remains intact at GEL 9.9m following the operations of RARP 1over a period of three years. The CPF, in accordance with Georgian legislation, is provided to the Bank via four Foundations supervised by a Shareholder's Committee comprising: Two nominations of the Ministry of State Property Management and two nominations of the European Commission (The Project Team Leader and the Attaché of the EC Delegation in Georgia). The Founder of the Foundations is the European Commission. The Bank's Supervisory Board is made up of three representatives of the EC Delegation in Georgia, including the Head of Delegation and three nominations of the Government of Georgia - one nominated by the State Chancellery, one by the Ministry of Finance and one by the Ministry of Agriculture and Food. The Management Board consists of two Europeans ( Project Team Leader and his Deputy) and one Experienced Georgian Banker, Mr. Michael Mgaloblishvili. The Staff of the Bank totals some 15 personnel plus security guards, etc. The Bank directs the bulk of its lending into the agro-business and processing sub-sectors, addressing the financial requirements of the full range of agricultural activities. These processors then 'cascade' their investment into the production sub-sectors, purchasing the appropriate commodity from farmers. The Bank also, however, on-lends to farmers and producers in line with the level of viability reflected in their business plans. It is the ABG's intention to direct say, 40% of its lending portfolio through selected commercial Banks, using their branch network, (as under the RARP project). The ABG does not wish to be the only commercial lender in the Georgian banking system addressing exclusively the needs of agriculture. Rather, the ABG wishes to continue to encourage those commercial banks, which, during the RARP1 projects, found a niche in the agro-sector, to continue to lend into this sector. In this context, the banks are then held responsible for recovery and repayment of their sub-loans as hitherto. Interest is charged by the ABG to the Banks at 12% per annum to which the Banks add their margin of around 8-10% per annum. The remaining say, 60% of the Bank's lending portfolio is loaned directly to customers. Interest, in this context, is levied at 18-22% per annum. Collateral is taken in line with Georgian legislation and is enforced as necessary. Current account overdrafts are provided to fund working capital requirements, and loans to finance fixed asset purchase or refurbishment. Initially, loans are provided over a maximum term of three years. In April 2000, the Bank's directors and a contingent of Georgian Government officials travelled to London and Washington to make presentations to the EBRD, IFC and World Bank. The objective was to encourage these major donor institutions to provide funds in augmentation of the capital base of the Bank. These funds may take the form of loan capital, equity or credit lines. The purpose is to expand the Bank's capital base to enable it to make a greater impact upon the financial needs of the agricultural sector-currently estimated at a requirement of USD 500 million in total. With the same objective, in June, the Bank's directors visited the German state bank DEG and the biggest agricultural bank of the Netherlands "Rabbobank". The provision of a larger capital base will enable the Bank to reduce rates of interest and increase the amount of loans that can be provided. The ABG is not a State or Governmental Bank. The Founder is the European Commission. The first and only Banking institution established and founded by the EC in the Former Soviet Union. One of the prime objectives of the Bank is to operate in a commercial, independent and autonomous manner thereby ensuring eventual profitability and sustainability. Only then can the Bank be transferred to Georgian Management. The manner in which this is to be achieved is detailed in the Memorandum of Understanding dated December 1999. Brief History of RARP1 In October 1995, the European Union and the Government of Georgia signed a Memorandum of Understanding, which mutually agreed the utilisation of the results of monetisation of food aid previously granted by the EU to Georgia. The fund was designated the Counterpart Fund (CPF). A further Memorandum was signed in February 1996 in which it was agreed that a small portion of the CPF be designated to the establishment of the State Regulatory Board. The Memorandum, inter alia, described the manner in which GEL 10.2m was to be used in the provision of credit through selected commercial banks into the agricultural sector, particularly for cereal production and processing. The objectives were: · To assist Georgia in improving the quality and quantity of cereal production (in particular) in order to make the country less dependent upon food aid: · To "test" the efficiency of the commercial banking system of Georgia in their ability to lend and recover credit designated for the agricultural sector: · To test the efficiency of the legal system of Georgia in its ability to provide legal recourse against defaulting banks/customers. The project was in operation for a period of two years, and was then extended for a further one year. During the latter period, the targeting of credit was broadened to include all agricultural commodities in addition to the cereal sector. The positive results achieved have been described earlier. As a corollary to the successful outcome of the Project, and following correspondence between President Shevardnadze and Mr. Van den Broek (EC Commissioner) in May/September 1998, it was mutually agreed that the remaining CPF would be utilised as the seed capital for the formation and establishment of a new Bank addressing the financial needs of the agricultural sector of Georgia. This culminated in the signing of a new Memorandum of Understanding between the EU and the Government of Georgia in December 1999. This document set out the manner in which the CPF was to be used in the formation of the Bank. It also describes the manner in which the CPF may be returned to the Government of Georgia commencing in May 2003. |
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Project Supported by TACIS |
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