Legal Status and Regulatory Foundations of Microfinance Organizations
In Georgia, a microfinance organization is a representative of the financial sector, and its activities are regulated by the Organic Law of Georgia on the National Bank. The law’s second article expressly lists a microfinance organization among the representatives of the financial sector. This classification means that such an entity is treated as a regulated part of the financial market and falls under the full supervisory regime of the National Bank of Georgia. The same system of definitions introduced the concept of a microbank, which is established in the legal form of a joint-stock company, licensed by the National Bank, and carries out the banking activities provided for by the Georgian Law on the Activities of Microbanks; the corresponding amendments to the legislation entered into force on 1 July 2023.
Starting microfinance activity is necessarily tied to registration with the National Bank,. Under the law on the National Bank, supervision includes the registration and deregistration of a microfinance organization, its inspection and regulation, the issuance of written instructions, and the imposition of additional requirements, restrictions, and sanctions.
Lawful Boundaries of Credit Activity
The law’s article 48-3 defines the boundaries within which funds may be raised and credits issued. No person may take deposits and, using them, issue credits without a banking activity license or a microbank activity license issued by the National Bank. Likewise, an entrepreneurial entity or a group of related persons may not, without registration as a microfinance organization, a credit activity license of a non-bank deposit institution, or a banking activity license, attract repayable monetary funds from more than twenty natural persons, including individual entrepreneurs, or receive a loan from them, and may not advertise the attraction of repayable funds from a wide circle of persons.
The restriction established by the same article does not extend to certain cases: public offerings of securities, private offerings of securities to an informed investor, insurance activity, private pension schemes, the activity of brokerage companies, a natural person issuing a loan to another natural person who is not an entrepreneur, a loan granted by a partner or shareholder to the same enterprise, contributions to capital, services related to electronic money, investment funds and asset management companies, a securitization special purpose entity, and other cases determined by the National Bank.
Registration, Capital Requirements, and Ongoing Control
The National Bank’s powers over microfinance organizations are broad. The Bank may demand and receive information about the sources of the organization’s capital, about the direct owners and beneficial owners of its significant share. By legal act, the National Bank sets requirements for holders of a significant share, norms for the classification of assets and reserves for possible losses, the minimum amount of supervisory capital and the rules for its formation, and the liquidation procedure of a microfinance organization.
The rules for registration and deregistration of a microfinance organization and of a currency exchange point, as well as the amount of monetary fines and the procedure for their imposition, are determined by normative acts of the National Bank, and the amounts of imposed monetary fines are directed to the state budget of Georgia. The National Bank is also authorized, under its own procedure, to examine a microfinance organization’s compliance with the requirements arising from the agreement between the Government of the United States of America and the Government of Georgia on improving the performance of international tax obligations.
Grounds for Refusal and Sanctions
Under the law’s article 48, the National Bank may refuse to register or license a person where registration may threaten the stability of Georgia’s financial sector where the interested person failed to submit complete information about the origin of the funds needed to meet the minimum capital requirements, where the person violates entrepreneurial, banking, or financial legislation, or where the structure of the group, ownership, or governance is not sufficiently transparent.
If legislation on facilitating the prevention of money laundering and terrorism financing is violated, the National Bank may suspend or restrict certain operations of a supervised entity, prohibit the distribution of profit and the accrual of dividends, impose a monetary fine, revoke the registration, and strip the license. Supervision in this area is carried out on a risk-based approach, and information on imposed sanctions is published on the official website of the National Bank.
Frequently Asked Questions about Microfinance Licensing
May microfinance organizations take deposits?
No. No person may take deposits and issue credits from them without a banking activity license or a microbank activity license. A microfinance organization has no right to take deposits, and performing such operations constitutes a violation of the law.
From how many natural persons may funds be raised without registration?
An entrepreneurial entity or a group of related persons may not attract repayable monetary funds from more than twenty natural persons, including individual entrepreneurs, without the relevant registration or license, and may not advertise such attraction either.
Who supervises the sector and what measures may be applied?
Supervision is exercised by the National Bank of Georgia, which may conduct inspections, issue written instructions, impose additional requirements and restrictions, and apply supervisory measures and sanctions, including monetary fines and deregistration; the amounts of fines are determined by normative acts.
Why might registration be refused?
Grounds for refusal include a potential threat to the stability of the financial sector, the risk of violating international obligations, failure to submit complete information on the origin of capital, substantial violations of legislation, and a non-transparent ownership or governance structure.
How We Help on Legal.ge
The Legal.ge team works on microfinance registration and licensing matters on a full-service basis: we analyze your business model, determine the appropriate registration form, prepare the documentation for submission to the National Bank, assess the risks of proving the origin of capital, and represent your interests at every stage of supervision. Contact us through the Legal.ge website for an individual legal plan for your financial activity.