ABSTRACT
This chapter engages with the early history of the Georgian financial system and embeds the roots of dollarization in the functioning of commercial banks and the central bank throughout the 1990s. Soviet legacies played an important role in creating an unstable financial system in Georgia, which encouraged the advent and persistence of dollarization. In the first years of independence, Soviet practices continued in the relations of the government, the central bank, commercial banks, and state-owned enterprises. The financial system completely disregarded societal needs and economic development aims. This kind of ‘isolation’ from public interests caused public distrust towards the financial institutions (which was also strengthened by financial speculation). Furthermore, a lack of knowledge and experience of market-based banking, barriers in accessing capital, and the context of a deteriorating economy made it even more difficult for the banks to cope with multiple challenges. They destabilized the system and supported the process of dollarization.
