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Lessons from commercial banks’ experience with lending to green SME investments in Georgia


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National Policy Dialogue on “Improving Access to Green Finance for Small and Medium-Sized Enterprises in Georgia”
→ Lessons from commercial banks’ experience with lending to green SME investments in Georgia – Matthew Savage

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Lessons from commercial banks’ experience with lending to green SME investments in Georgia

  1. 1. Lessons from commercial banks’ experience with lending to green SME investments in Georgia Matthew Savage Director Oxford Consulting Partners Tbilisi 16-07-19
  2. 2. IFI supported environmental finance in EAP • IFI credit line support for EAP clean energy investment • EE/clean energy credit lines for local financial institutions since 2005 • EBRD, IFC, EIB, KFW, NEFCO, OeDB, multi-lateral (GGF, GCPF, CTF) • SME/Industrial energy efficiency, residential, small-scale RE • c. EUR 2bn in CIS region (50% in in EaP) • 70+ local banks across CIS, c. 35 in EaP • Average credit line 10-20m EUR (range of EUR 3m - 150m) • Normally supported by dedicated IFI TA facility
  3. 3. SMEs in Georgia • Economy has heavy reliance on SMEs (employment, GVA) • Strong WB ‘Doing Business’ ranking supports SME development • Established support programmes (e.g. Enterprise Georgia, GITA, AMPA) • EU definitions of SMEs include many Georgian ‘corporates’ • High level of informality in SME sector means lower levels of regulatory oversight • SMEs tend to be in lower added value sectors • ‘Service economy’ has lower carbon intensity vs. regional norms Category No of employees Annual revenue (EUR) Total assets (EUR)Assets Single entrepreneur / micro 0-10 <2 000 000 <2 000 000 Small 11-50 <10 000 000 <10,000,000 Medium 51-250 <50 000 000 <43 000 000 Large >250 >50 000 000 >43 000 000 EU SME Definitions
  4. 4. SME access to finance • Credit availability generally in line with other markets • However • Banking sector conservative – major banks with international shareholders, high ROE • Georgian SMEs generally over leveraged with collateral constraints • Significant collateral (200%) and interest rate (16-23%) lending requirements for micro/SMEs • Short tenor and maturities make payback periods challenging • Dollarization and currency risk • Regional credit assessment is patchy • Gap in market between microfinance and bank lending portfolios USD 10-30,000 • Limited non-bank financing (e.g. leasing, factoring, private equity) • GoG provides SME interest rate/collateral support in target sectors • Produce in Georgia, AMPA, Host in Georgia 0.0% 5.0% 10.0% 15.0% 20.0% 2012 2013 2014 2015 2016 2017 %perannumgrowth Credit Growth GDP Growth
  5. 5. Green finance in Georgia • Financing needs • USD 8.3 billion 2017-2030 for energy efficiency (NEEAP) • USD 10.6 billion 2017-2030 for GHG abatement (LEDS) • USD 2.4 billion for hydropower 2017-2030 (Third UNFCCC NC) • USD 1.5-2.0 billion for climate change adaptation 2021-2030 (NDC) • Approaches to scaling finance • Dedicated agency for fund raising and blending of financial resources (NEEAP) • National Green Investment Bank (LEDS) • Blending budgetary, fiscal and external financing • Credit guarantees
  6. 6. Georgia IFI Environmental Credit Lines • 8 local banks/MFIs, c. 400m EUR since 2008 • Dedicated environmental products, blended with SME finance EBRD EIB FMO GCPF GGF KfW OeDB Bank of Georgia X X X X X Bank Republic X X X Basis Bank X Credo Bank X Crystal MF X ProCredit Bank X TBC Bank X X X X X VTB Bank X
  7. 7. Green finance challenges in Georgia • IFI credit lines normally targeted at larger SMEs • Significant financing flows to hydropower development • IFIs improve availability of capital, but still issued on commercial terms • Opportunity costs for lenders vs. other less complex products • Green microfinance available, but high cost of borrowing • Equity facilities emerging (e.g. Caucasus Clean Energy Fund)
  8. 8. Key Barriers • Demand side (Borrowers) • Lack of information about energy/resource costs • Poor energy management systems • Supply side (Lenders) • Perceptions of risk (technology) • Additional costs (appraisal, monitoring, reporting) • Lack of appreciation of cash flow benefits/project finance • Green regulation • Energy pricing, incentives • Governance, enforcement
  9. 9. Key success factors Financial Engagement • Access to longer term finance • Concessionality • Technical advisory (pipeline) • Training and business support • Minimise resource & reporting Product implementation • Management commitment • Resources and staffing • Skills and capacity building • Tools and methods Marketing/cross selling • Standard product structure Market Sustainability • Strong investment climate • Environmental policy support • Access to finance • Awareness • Energy pricing FI Engagement Product Delivery Market Sustainability Donor/IFI Role Local FI Role Government Role
  10. 10. Recommendations: Policy strengthening • Adopt pending legislation on energy efficiency and renewable energy • Develop robust sub-regulation (buildings, appliances) • Strengthen environmental enforcement, ratchet environment standards • Reduce fossil-fuel subsidies to create market signals • Green public procurement
  11. 11. Recommendations: Consider SME role • Explicit policy consideration of the role of SMEs in the green transition, • Understanding opportunities for and barriers to participation • Consider SME participation in national climate strategies/programmes.
  12. 12. Recommendations: Improve access to finance • Address wider issues of access to finance for SMEs • Enabling sub-national access to credit • Building SME financial literacy • Exploring credit guarantees for SME lending • Promoting non-bank financing (e.g. leasing)
  13. 13. Recommendations: Address barriers to credit • Lower cost of green credit (interest rates) • Improve borrowing conditions for SMEs (collateral requirements) • Partnerships between national funds and banks (e.g. Enterprise Georgia) • Mainstream environment into SME lending (e.g. EIB)
  14. 14. Recommendations: Scaling finance • Increase scale of available finance at national level • Green bond markets • Pooled climate finance vehicles • Central banking regulation and reporting
  15. 15. Recommendations: Raising awareness • Raise awareness among SMEs around EE/RE • Support the uptake of small scale energy management systems • Promote the benefits of green investment and branding (e.g. tourism)
  16. 16. Thank you