A Czech Solution to Georgia’s Debt Problem

Even before the COVID-19 pandemic, indebtedness in Georgia was a principle driver of poverty, homelessness, and inequality. But the economic impacts of COVID-19 have exacerbated these trends and highlighted the country’s alarming vulnerability around debt. According to the National Democratic Institute, roughly half of Georgia’s households are indebted, and 30 percent of families list paying debt as one of their biggest household expenses (NDI, 2019). Similarly, UNICEF reports that an astounding 17 percent of households say debt is the biggest problem that their family faces (UNICEF, 2017).

These figures are troubling, but they are not surprising. Credit in Georgia is characterised by high interest rates and low flexibility. Thanks to liberal lending policies, consumer debt has increased 7.5 times in the last 10 years, and according to the National Bank of Georgia, average interest rates for bank loans was 26 percent in 2020. Longer term bank credit has lower rates but is usually denominated in US dollars, which brings huge currency risks. Due to the recent devaluation of the Georgian lari, for instance, someone who borrowed in dollars in 2012 will have seen their local loan repayments double this year.

Non-bank related debt is also a huge problem. While surveys suggest that a relatively low percentage of households go to money lenders rather than banks, private lenders and non-banking institutions account for half of all repossessions. This is due to lenders’ exorbitant interest rates – which can exceed 100 percent – and other unscrupulous practices.

65,000 people forced into homelessness or deeper poverty

Unfortunately, due to social stigma, which leads to underreporting, it can be difficult to grasp the scope and impact of debt in Georgia. But the Tbilisi-based NGO Society and Banks revealed that during the past eight years, 20,000 homes were repossessed, with 65,000 people forced into homelessness or deeper poverty. This is likely just the tip of the iceberg.

Despite the clear demand for safe and affordable credit options, and the need for indebted households to make informed choices and resolve credit crises before losing their homes, there is little support for people in debt and minimal public conversation on the topic.

In the early 1990s, people in the Czech Republic faced similar problems as the result of deregulation. Kateřina Hůlová, PIN’s Czech Debt Expert, says: "Ten years ago, there was no public and political interest in debt issues in the Czech Republic. The public opinion was that indebtedness only concerns the socially excluded, people with little education, gamblers, or drug addicts. When we raised the topic during the economic crisis and drew media attention toward predatory creditors and their scandalous rates and approach, it turned out that a huge number of middle-class people were indebted and that the topic was not so marginal after all.”

In response, PIN developed a public advocacy strategy and toolkit to combat public indebtedness in the Czech Republic. To date, the innovative debt support and advocacy programme has demonstrated that it is possible to engage with policymakers to reduce predatory lending practices, raise public awareness, help rebuild personal finances, and reduce the number of people becoming impoverished, homeless, or incarcerated.

PIN believes a similar approach could work in Georgia. As Hůlová notes: “Based on the analysis of the Czech environment and comparing our Czech model with Western Europe, we have started to push important legislative changes that would enable the indebted population to get a second chance and better protect everyone from loan sharks and foreclosures. We believe that our experience in debt advocacy and debt advice services will be transferable to Georgia, where the project has the power to impact the lives of thousands of indebted people."  

Inspired by Czech experience

Inspired by its successful Czech experience, PIN will implement a project in Georgia to provide research, advocacy, and debt advice services to vulnerable Georgians. The programme’s goal will be to empower community actors to directly support indebted households, increase national public awareness of the topic, and provide evidence-based solutions and recommendations to improve the policy environment. 

Jonáš Háger, a representative from UNDP, said: "In the Czech Republic, PIN has gained wide recognition for its interventions in the area of debt. PIN helped thousands of individuals overcome problems caused by debt, and PIN’s efforts to prevent these situations in the first place is also remarkable. We are proud and excited that we can support the transfer of Czech expertise to Georgia, where the need for such a programme is high. We are looking forward to seeing the development and results of this ambitious, comprehensive, and truly inclusive initiative implemented under the Czech-UNDP Partnership for SDGs." 

The project will be implemented in partnership with GeoWel, an economic think tank with 11 years of experience in research and communication on economic and social issues affecting vulnerable communities in Georgia. GeoWel, in coordination with PIN, will facilitate a conversation on the nature of debt, the harm it causes, and possible solutions. This approach will use a multi-platform advocacy campaign to raise awareness and advocate for better consumer protection.  

“Access to financial services and loans is a precondition for many people to get out of poverty or to develop their livelihoods,” says Jan Mrkvička, director of PIN’s Relief and Development Department. “Unfortunately, such services can be easily misused as instruments to keep people in poverty for their entire lives. PIN realised this contradiction many years ago and decided to strive for improvement of the whole system in the Czech Republic. We achieved many tangible, positive results, and now we want to transfer our experience to other countries facing similar problems.”

PIN recognises that access to credit is a key contributor to household and national economic development, and that it can provide an essential safety net in times of need. However, unsafe and uninformed debt, employed as a negative coping strategy, threatens development gains. Through this project, PIN hopes to help Georgians increase their household economic security, ensure greater accountability of lenders, and establish credit policies that support individual investment in income generating activities and education. 

Contact:

Eva Fernández Martín, Project Manager, People in Need, eva.fernandez@peopleinneed.cz, +995 595113378 (Georgia).