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Research Reports

Comparing Retail Interest Rates on Credit Products in ECA Region and Comparing Credit Quality in Bank vs Non-Bank Sector in Georgia
Monday, 11 June, 2018

The unique cross-country study compares interest rates for a set of retail credit products in Georgia and select transition economies. Preliminary findings suggest that the cost of credit in Georgia is lower than in the CIS countries which have been covered by the survey (namely, Kazakhstan, Russia, Ukraine, and in many cases Armenia) while it’s somewhat higher compared to a cohort of Central and Eastern European Countries (CEE) - this is true especially for local currency loans. However, when adjusted for the cost of funds, interest rates on retail products in Georgia come out to be among the lowest, even compared to the CEE countries.

The cross-country study offers a unique comparative perspective on retail credit costs, as it makes use of disaggregated survey data. Preliminary findings suggest that the cost of credit in Georgia is lower than in some CIS countries which have been covered by the survey (namely, Kazakhstan, Russia, Ukraine, and in many cases Armenia) while it’s somewhat higher compared to a cohort of Central and Eastern European Countries (CEE) - this is true especially for local currency loans. Higher interest rates compared to the CEE countries can be attributed to several factors. Among these factors-relatively high central bank policy rates and relatively high interest rates on term deposits, in particular for deposits in local currency. Both factors increase commercial banks’ cost of funds, driving the interest rates upward. After adjusting for these differences, interest rates on retail products in Georgia come out to be among the lowest, even compared to the CEE countries. The study also compares the quality of loans as measured by the number of loans in Bank vs Non-bank segments for Georgia. Data analysis suggests significantly poorer and deteriorating loan quality in the non-bank sector vs the stable quality of loans in the banking sector.

The project aims to provide cross-country comparative research of interest rates on various types of retail credit products in the ECA region. The study covers thirteen countries from the South Caucasus and European and Central Asia Developing Countries (ECA), namely Armenia, Azerbaijan, Georgia, Kazakhstan, Russia, Ukraine, Serbia, Romania, Poland, the Czech Republic, Croatia, Macedonia, and Albania.

According to the study methodology, the project team collected statistical data about the average interest rates on five credit products for individuals (in national and foreign currencies): fixed-rate mortgage credits, floating-rate mortgage credits, pledged consumer credits, non-pledged consumer credit, and credit cards.

The data was collected from a combination of four sources: direct contact with the representatives of the selected banks via phone; direct contact with the representatives of the selected banks via online chats; desk research of the official websites of the selected banks (Central Bank databases); and e-mail contact with representatives of the selected banks.

In addition to showing the effective interest rates on different products, the survey also provides interest rates adjusted for monetary policy rates and term deposit rates. The level of lending rates reflects the cost of funds, which should be taken into account when comparing lending rates across countries. Using both the policy rate and the term deposit rate is justified for countries such as Georgia or Serbia, wherein term deposits are a major source of bank funding. Also, this adjustment is relevant for countries like Georgia, Kazakhstan, and Armenia, where term deposit rates on local currency are above the policy rate set by the respective central banks.

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