On 4 August 2016, during his meeting with the community in Lagodekhi, Shalva Natelashvili stated that in the case of a Labour party victory, the maximum margin of interest rates for bank loans will be imposed and not exceed 5%-6% as it is in Europe.

took interest in the accuracy of the statement.

According to the statistics of the National Bank of Georgia, the average interest rates for loans in Georgia issued in GEL was 24.2% for individuals and 12.6% for legal entities as of June 2016. The average interest rate for loans issued in USD was 9.6% for individuals and 9.1% for legal entities. The graph below illustrates how interest rates have fluctuated over the years.

 Market Interest Rates for Loans

place in the world in terms of the size of interest rates (65 countries have higher interest rates for bank loans than Georgia).

In regard to Europe, in some of the member countries of the European Union, interest is higher than the 5%-6% (see Table 1).

 Highest and Lowest Interest Rates in EU Countries

on Interest Rates Restriction reads that each country of the EU has an individual approach when it comes to the imposition of a maximum margin for its interest rate. Some of the member countries do not have a maximum margin at all; namely, Sweden, Cyprus, Ireland, Latvia, Lithuania, Romania and Spain. In other countries there are different maximum margins for different kinds of loans. For instance, in Portugal, a commercial bank was unable to issue a loan for education, medical treatment or investment in renewable energy for more than a 6.7% interest rate in 2010 with the maximum margin for consumer loans at 18.9%. Germany has the lowest margin of interest rates with an average of 5.12%. It is followed by Luxembourg with an average interest rate of 6.5%. None of the other EU member states has less than 8% as a maximum margin for its interest rate.

Of note is that the imposition of a maximum margin of interest rate does not automatically mean a decrease in the interest rate. For instance, there is no maximum margin on interest rates in Sweden but banks issue loans for a 2% interest rate. The same approach is shared by Lithuania and Ireland where the customer can get loans for 3.2% and 3.4%, on average.

The principal cause behind the low interest rates is the high competition between banks and the huge volume of capital for lending. The size of an interest rate is determined by supply and demand. The volume of capital for lending in European countries is high; therefore, interest rates are low. For instance, in Denmark, which is almost the same size as Georgia, there are five banks whose stock capital exceeds USD 10 billion whilst the total stock capital of every commercial bank operating in Georgia (19) is approximately USD 1.6 billion.

The imposition of a maximum margin of 6% (or even higher) for interest rates for bank loans will cause the destruction of Georgia’s banking system. The banks themselves have taken long-term deposits in GEL for 12% and in USD for 5.5% which means that they are unable to issue loans for low interest rates. Therefore, the population will be deprived of taking less expensive loans and, moreover, they will not be able to take loans at all. Low interest rates should be the result of competition on the loan capital market as well as economic development.

On average, commercial banks in European countries issue loans for lower interest rates as compared to Georgia. However, in ten EU member countries, the average interest rate exceeds 5%. Not every country imposes the maximum margin of the interest rate and only Germany has an average margin lower than 6%. On the other hand, in some other countries where there is no such regulation, the interest rate is lower than 5%. Interest rates are regulated by the loan market and even if maximum margins are absent, it is still possible for the banks to impose low interest rates. For this, a sufficient amount of capital is necessary which we do not have in Georgia at the present moment. However, capital is characterised by growth trends whilst interest rates show a tendency of decline. If we impose an artificial maximum margin for the interest rate, this will only cause the destruction of Georgia’s financial system and, ultimately, the entire country.