Over the last 10 months, many Georgians struggling to repay so-called hard-money loans have demanded a bailout from the national government. While Prime Minister Bidzina Ivanisvhili promised before last year’s parliamentary election that his Georgian Dream coalition would “solve this issue,” so far his campaign promise hasn’t been fulfilled.
Generally known in the West as “loans of last resort,” hard-money loans provide short-term cash, at 12 to 22-percent monthly interest rates on average. The loan is secured by personal property that the applicant puts up. Microfinance banks and individual lenders do not take applicants’ creditworthiness into account, hence such transactions are often the resort of those with bad credit records. If repayment is not made, the lender takes ownership of the property placed as security. Among the former Soviet republics, Georgia and Ukraine have the highest interest rates on hard-money loans.
For Georgians unable to obtain funds via retail bank loans, such deals can be a lifeline. They have been used for home improvements, tourism-related small-business investments, paying medical expenses or for securing the release of loved ones from prison.
But the quick money comes with a risk. By late 2012, some 718 families had lost their homes to commercial banks, microfinance organizations and entities specializing in hard-money loan, according to the Ministry of Justice’s National Bureau of Enforcement, which oversees foreclosures. Within the first two months of 2013, 132 flats were sold, and foreclosures were expected on 500 houses over the following months. Half of these houses are linked to loans from commercial banks and half with loans provided by both individual lenders and microfinance organizations.
“Hold on a bit and we will solve this issue so that neither banks will lose anything, nor will people be evicted from their houses,” Prime Minister Ivansishvili declared during an election-campaign appearance in the Black Sea resort city of Kobuleti in the western region of Achara.
Protests over the property losses have occurred outside the prime minister’s own Tbilisi residence, the Georgian parliament in Kutaisi and regional government offices in Achara’s regional seat, Batumi. With a presidential election scheduled for October 27, such anger, left unchecked, risks becoming a political liability for the governing Georgian Dream coalition.
Justice Minister Tea Tsulukiani, whose ministry has been tasked with exploring solutions to the hard-money loan issue, has said that “strict regulations” could be introduced so that “individual lenders won’t be able to benefit from the insecurity of individual debtors.”
A recent measure proposed by a group of Georgian Dream MPs goes still further. It would impose a moratorium until February 2014 on paybacks of the loans and on property seizures in cases of default. The proposal sparked sharp criticism on July 24 from anti-corruption watchdog Transparency International Georgia, which argued that it risks destabilizing Georgia’s financial system and souring the country’s investment climate. [Editor’s note: Transparency International receives funding from the Open Society Foundations-Georgia, part of the Soros foundations network. EurasiaNet.org operates under the auspices of OSF in New York, a separate entity in the network].
In its statement, the watchdog also questioned whether a desire for political gains ahead of the presidential election had motivated the proposal. The alleged use of government resources to influence voters has been a repeated criticism of Georgian national elections in recent years.
In Batumi, one of the flash-points for hard-money-loan protests, such an initiative finds ready support. Both Batumi and Kobuleti experienced tourism booms before Georgia’s 2008 conflict with Russia, but in the immediate aftermath of the war, which occurred during the peak tourism season, many families were left without the expected income that could have allowed them to pay off their debts. Georgia’s annual economic growth slumped from 12.34 percent in 2007 to -3.78 percent in 2009, according to the World Bank.
Ivanishvili has blamed President Mikheil Saakashvili for exaggerating the potential of Georgia’s tourism market and, consequently, indirectly encouraging many such Georgians to take out loans they would be hard-pressed to repay.
But protesters see the guilt as more evenly distributed. “Misha’s building facades aren’t glittering anymore, and nor is the new government taking us into account to save our lives,” yelled one participant during a Batumi protest in February.
While spotty comprehension of personal finance tools plays a role in the dilemma of indebted Georgians, more complex reasons also exist.
Under Saakashvili’s government, a controversial system of plea-bargaining offered lighter or suspended sentences in exchange for cash. Conjecture still remains about the destination of these funds. One woman in her 60s who has been regularly attending the protests in Batumi since last November commented that she used a hard-money loan for nearly $60,000 to free her three sons from prison on charges of smuggling foreign nationals from Georgia into Turkey.
“What would a normal mother do in this situation? I just took a hard-money loan and got my kids free. But now my house has already been sold and I have nowhere to go.”
Similarly, despite recent improvements, access to high-quality medical care in Georgia often is problematic. Many economically disadvantaged families take out loans to cover the expenses of urgent medical care at home or abroad. One woman in her 50s attending the Batumi rallies stated that she had taken out a hard-money loan to pay for treatment for her daughter, who has liver cancer. The woman has since been evicted from her house. “I am a refugee from [breakaway] Abkhazia, but now I am a refugee in two senses; from Abkhazia and from my house in Batumi,” she exclaimed.
Taken together, these reasons for taking out loans are leading to further tragedy as the evictions continue. But what kind of legal solution will emerge and how it will impact protesters’ lives is yet to be seen.
Tamta Khalvashi is a PhD fellow at the University of Copenhagen in the Department of Anthropology. Her current research looks at the urban transformation of Georgia’s Black Sea city of Batumi. Dustin Gilbreath served as Tamta Khalvashi's research assistant for her Achara - based fieldwork.