Lithuanian Economy was hit considerably harder in 1999 by the crisis in neighboring Russia than orriginally expected, with gross domestic product contracting by 4.1 percent to LTL 42.6 billion (USD 10.65bln) according to provisional data.
Lithuanian’s economic performance was the worst among the three Baltic States, with Latvia’s GDP growing by 0.1 persent and Estonia’s contracting by 1.5 percent.
One of the critical disition of the Lithuanian government in October 1999 to sell US oil company Williams International a one third stake in the Mazeikiai Nafta (Oil) complex and operational control for USD 150 million. The Lithuanian Government was forced to commit to make USD 175 million in loans to Mazeikiai Nafta by the end of the first qu
This decition essancialy cut the budget and caused main internal costom indexes.
Financial Markets development: banking system
Financial markets in Lithuania have undergone substantial development throught the last decade. The main institutions are now in place, working reasonably well afteer a series of crises helped promote rationalisation in the financial sector and encouraged a trend of openness towards the international capital market.
Even if the banking sector has seen a rapid development during the years after independence the banks in general do not yet contribute as much as they shoul to the development of economy. Total deposits from private depositors are little more than 10 percent of GDP compared with 20 per cent in many other Eastern European countries and avarage more than 65 per cent of GDP in EU countries. Total lending makes up just 12 per sent of GDP compared with an avarage of 85 per cent of GDP in EU countries.
As financial sector in Lithuania is heavily bank dominated the whole sector has to characterised as underdeveloped.
The financial markets in Lithuania have generally adopted the “universal banking” model. The absence of mandatory seperation between banking and securities business has allowed banks to dominate the financial sector. Banks have acquired a dominant role in financial intemediation, taling the leading position in other segments of the market either directly or via non-banking subsidiaries. This development was accelrated in an environment, characterised by economis uncertainty and an incompleted legal infrustructure
The activities of parabanking institutions are not wide spread in Lithuania. There are Insurance companies, Credit unions (1997 -16), leasing companies (Hansa, Vilniaus bank has got its own leasing company, Lithuanian Savings bank (LTB, etc.). In the world practice parabanking institutions are being established when banks are prohibited to be engaged in certain operations and when the banking system does not react to the emergence of new activities and there are free niches for other institutions.
It must be pointed out, that the share of foreign capital in largest Lithuanian commercial banks is growing. In 1997 33% of capital belonged to foreigners in Vilnius bank, 74% -in Hermis bank and no foreign capital was available in other Lithuanian banks. Now the situation changed. The Industrial bank is bought by Parex bank (Latvia), Vilnius bank merched with Hermis and the main shareholder is SEB (Sweden), Lithuanian Agricultural bank is on the privatization procedures and Italian bank with Polish bank PEKAO alliance is a potential owner for this bank.
2. Competitive environment in banking operations
The competition among Lithuanian banks could be specified as interbank and external.
Up till now Lithuanian banking system cannot compete with foreign banks because of the size. External competition represented by foreign banking operations is small so far in Lithuania because Lithuanian legislation previously prohibited foreign banking operations.
After 1995-1996 crisis for the purpose of improving banking operations foreign banks were allowed to establish representative offices, branches, subsidiaries in Lithuania. Polish Kredit Bank PBL branch, Norddeutsche Landsbanken Girozentrale representative office, Societe Generale Vilnius branch was for two years and the was bought by Merrita bank. Hansa bank became first foreign bank, opened subsidiary in 1999. They are still not very active, but I think they will be expanding their operations. These institutions are making market research, observing their potential opportunities.
The bank assets computed by the end of 1997 reached 8257.3 mln.Lt. Vilnius bank had 21% and Hermis bank - 13.9% of the market. In case of merging it would cover 34.9% of the market and comprise 2954.9 mln Lt assets. It leads to the conclusion that Vilniaus bank is getting ready for competition with foreign banks espatially after merching procedures with Hermis bank in the end of 1999.
Lithuanian banks are not large in comparison with banks of other states. Two ratios indicate the size of Lithuanian banks:
the share capital
One can see, that Lithuanian commercial banks are not large as well. Assets of Estonian Hansabank and Hoiupang after merging made up about 5 billion Lt, assets of Danish Private bank - 110 000 mln Dkr. (1998). Within Lithuania not only state commercial banks but also other commercial banks can be classified as large ones. If in 1996 Vilnius and Hermis banks could not be accounted as large banks, then in 1997 both of them belonged to the group of the large banks. Besides, Snoras - to the group of the medium banks.
In my opinion, it is quite evident from the data, that at present banks are paying most attention to creditworthiness, are increasing share capital, which accounts for a small part as to assets, and deposit base increased significantly only in three banks. Equity in Vilnius doubled and increased greatly in LTB and Industrial banks.
Economic factors make a great impact on banking operations. In 1993 inflation achieved the ceiling and it started decreasing since 1994. Therefore the interest rate margin went down. The rapid reduction of the interest rate pointed out the problems of the previous years, such as: high interest rates led to high speculative profits, lots of problem loans granted without security (collateral), absence of special provisions, etc. The situation in other economic sectors also influences banking activity results. Operation of not reliable industrial and agricultural sector force banks to reduce volumes and they do not realize that in time they can go bankrupt. Namely in 1994-1995 many banks went bust. Who are banks most granting loans? 45.1% credits were provided for non-manufacturing companies. The banking crisis of 95-96 made worse the financial position of companies and natural persons. Because most lending funds were frozen and not repaid, settlements went out of order and the citizen’s purchasing power became weaker.
Lithuanian banking development has something in common with foreign states. For example, in France banks tried to expand their branch network and when the market became saturated and establishment of new branches became not profitable non perspective branches were closed. Later the concentration process started which is being felt up till now. In Germany the number of independent banks also reduced because of increase of operational volumes.
The share of securities market accounted for Lithuania is larger than in France. In terms of Lithuanian banking liabilities the largest share is accounted for customer deposits and it has greater power than in France, but lower than in the USA. Capital and reserve requirements are much stronger in Lithuania than in other foreign countries. Therefore banks are not willing to borrow from the Central bank (the Bank of Lithuania) because the interest rate is 2% higher than borrowing from other banks. Because of funding shortage the borrowing from other credit institutions is much lower.
3. A few significant aspects of Lithuanian banking system
Commercial banks and the Central bank can communicate and cooperate better and worse. In most cases the Central bank in order to make an impact on commercial banks takes certain measures. Relationship between commercial banks and the Central bank in Lithuania is similar to the situation in France as the National Bank of France is state-owned and accountable for the Finance Ministry, the commercial banking operations are being regulated by similar measures such as follows: minimal reserve standards, credit volume standards, the interest rate. However, there is one essential difference: The National bank of France directly imposes on the banking operations, the bank supervision function is very strong and a very big influence of the state is being felt. If the Bank of Lithuania had been implementing very strict supervision of the banks in 1992-1995, today in Lithuania there would not be 10 banks and the damage to customers had not reached 782 mln. Lt.
The major control measures applicable to the commercial banks by the Bank of Lithuania
are in compliance with world banking practice. They are the following:
The degree of the maximum risk per borrower;
regulated mandatory reserves for commercial banks;
regulated capital adequacy;
special provisions to cover losses;
liquidity ratios of the balance sheet.
Capital adequacy ratio is very relevant in order to guarantee the bank’s liquidity and its objective is to limit the risk of the bank’s operations. There are two systems being used for the purpose of capital adequacy evaluation: debt-equity ratio, and the risk-rated assets.
Commercial banks are making special provisions for doubtful loans and bad debts and because of that some commercial banks incurred losses. General provisions are being made for potential loan losses out of profit: 1% of the total loan portfolio. These provisions will assist banks to accumulate certain reserves and the reserves will allow the banks to avoid critical situations.
4. Banking services development
Banks activities are oriented towards providing services. Because almost all Lithuanian commercial banks operate as universal banks, the assortment of services provided is very similar and consists of opening accounts, taking deposits, lending, letters of credit, payment cards, etc. The largest and most modern banks pay attention to new services. The above mentioned services assist Vilnius bank to attract more and more new customers and increase their market shares. The pricing of services influences the customer’s decision to choose one or another bank. As all over the world the concentration of the banks in Lithuania makes a great impact on the pricing problem.
Banks are limiting publicly available information, different prices are set forth for the same services and the banks are differentiating their customers in this respect. Therefore the selection of the banks depends on the subjective factors. Various discounts are being applied to corporate and privileged customers, etc. I would like to give you an example.
VISA Electron cards were issued free of charge to UAB Philip Morris Lietuva company employees by Vilnius bank, that’s why the bank attracted almost 400 new customers and could make use of their funds as short-term financing source.
I think that the location of the bank plays a very significant role and the example of it would be Ukio bank in Kaunas, which has good opportunities to improve its operations because of large bank branches in the surroundings. Snoras bank being a customer-oriented bank also will have nice possibilities in the future.
Small loans can be granted using own funds and funding for large credits are attracted from external sources. In order to make more loans large banks are looking for cheaper lending sources abroad. For example Vilnius bank was granted 50 mln USD syndicated loan (LIBOR + 0.55% interest rate) and has signed an agreement for one more syndicated loan of 30 mln. USD.
The banks’ working hours and advertising also play a very significant role.
5.Banking crisis reasons
Within 10 years of development the Lithuanian banking system lost 16 banks (one case of aquesition) and it accounts for 52% of the total banking system.
The starting point of the crisis was the year of 1991, because the lending interest rate was limited up to 25% although the inflation rate was much higher, and this artificial decreasing of the interest rate increased demand for credits. Credits were granted without collateral and without sufficient security. I think that large volumes of loans granted to persons associated with the bank created criminal cases, and the limitation of the interest rates did not allow the banks to operate profitably. In 1992 the restriction of the interest rates was abolished. The law on Commercial banks, which came into effect in 1992, did not guarantee the protection of customer deposits. Qualified credit risk assessment experts were not available.
The currency board principles were implemented in Lithuania in 1994 and the exchange rate was established. If foreign banking operations had been legalized earlier in Lithuania the crisis of commercial banks would have been much softer.
I think, that commercial banks’ credit supervision department the main function of which is to control and monitor banks was rather passive.
In 1995 Arthur Andersen company suggested to the Bank of Lithuania to establish Turto Bank (Assets management bank), unfortunately this suggestion was rejected.
The Lithuanian financial sector seems to have been little affected by the Russian crisis directly. Banks held only 1.4 per cent of their total assets in Russia at the start of the crisis. This had fallen to 1.1 per cent by a year later.
The Lithuanian banking sector also benefited from banking crisis. The volume of banks’ assets continued to grow and banks returned to profitability in 1998. Banks’ capitalisation improved and avarage capital adequacy calculated according EU and BIS standards rose to almost 24 per cent by the end of 1998 from 10.8 per cent in 1997, but the maturity structure of deposits remains short term.The sector remains influenced by two state owned banks : Lithuanian Savings bank and Lithuanian Agricultural bank, - with a market shere of about 44 per sent. Though thias share is falling and both banks are now expected to be privatised.
6. Non-banking Financial Intermediation
There were modest developments in non-banking intermediation. Leasing companies, generally banks’ subsidieries, recorded strong growth and stock market capitalisation increased to 18 per cent of GDP in 1997. Foreign investors controlled about one theth of brokers operation in the stock exchange, but turnover in the market remain low.
7. The role of the Lithuanian Banking, Insurance and Finance Institute
The Lithuanian Banking, Insurance and Finance Institute (LBIFI) has been in existence for four years, continuing the activities started by the Banking Training centre, which was established in 1994. LBIFI is a non-profit organisation, and therefore receives its funding from a variety of different programs in order to finance and expand its activities. Since 1992, a large amount of international support has been provided to the Lithuanian banking sector from Great Britain’s Know-How Fund, USAID, IMF, by-lateral agreements, World Bank, EBRD, and EU specialized programs, including PHARE. The international program of technical assistance has multiple uses: achieving specific goals of the program, training of project participants, and the enrichment of cultural surroundings.
Founders: The Bank of Lithuania, The Ministry of Finance of Lithuania, Central Depository of Securities, State Insurance Supervisory Authority under Ministry of Finance, Association of Lithuanian Banks, Lithuanian Insurers Association.
Members: Vilnius bank, Lithuanian Agricultural Bank, Lithuanian Savings bank, Ūkio bank, Bank Snoras, Šiaulių bank, Medicinos bank, bank “Hansabankas” , Merita Nordbanken Vilnius branch, Norddeutsche Landesbank Girozentrale Vilnius branch, VB Vilfima.
providing high-quality training and educational services including Distance Learning for specialists of financial institutions;
technical assistance and international project implementation;
consulting and research: expertise, recommendations, research;
assistance to the State Authorities;
creating professional certification system;
developing and implementing Master Studies in Banking and Finance;
During 3 years of the activities, the Institute maid available to professionals in banking and finance a broad range of short term courses and seminars on disciplines: Economics, Finance, Accounting, Banking, Marketing, Management, Insurance, Leasing, Personnel Management; Security in Banks. Starting from 1995 LBIFI organized more 216 different short-term course, seminars and workshops where 3168 specialists had an opportunity to increase their professional competence.
Distance learning program
New training product- Distance learning program, developed under the EU Phare project with assistance of Lithuanian banking and finance specialists, was implemented in 1997 at LBIFI: Principles of Modern Banking; Financial Mathematics; Bank Balance Sheet; Bank Accounting; Assets/Liabilities Management; Introduction to Securities Markets; Bank Financial Management; Lending; Retail Banking Marketing; Foreign Banking Operations; Human Resources Management; Banking English.
LBIFI Training Activities in 1995-2000
Short term courses and seminars, conferences and workshops
Conference“Economic Policy in the Framework of Accession to the EU and EMU”organised under the framework of the phare programme by the delegation of the european commission to lithuania and the ministry of finance with the co-operation of the bank of lithuania Hotel Villon, Vilnius, February 2001
EU Research ProjectSPARTA, IST Project 1999-12637.
Project SPARTA (Security Policy Adaptation Reinforced Through Agents) proposes to develop a software application, based on the newest agent technology, consisting of several modules in order to reach and maintain a high level of the IT security.
Consortium partners: SEMA group, (one of the biggest companies providing software in Europe, Spain); ANAIP (the Spanish Plastics Industries Confederation), LBIFI (Lithuanian Banking, Insurance and Finance Institute), Cryptomatic, (development and implementation of data security system, consultations on information security, Denmark); " InfoService " Co. LTD Armenia; TUV (Technical University of Vienna ).
Objectives: creation, development, provision, composition and management of innovative and intelligent security modules across heterogeneous platforms and networks. The second objective is to define a methodology to elaborate efficient security policy in order to support such advanced functionality as intelligent agent based tools.
Sparta project is the complex part of the EU program on information society formation 1998-2000). Total budget of the project – 3, 6 billion EUR.
Further information: www.infosys.tuwien.ac.at/sparta
EU Phare project No LI9703: Technical assistance project to financial sector in Lithuania 1999-2000
The main objective of the EU Phare project is to strengthen the financial sector in Lithuania in order to prepare it for increased competition resulting from development of the market economy and the country’s integration into the European Union.
EU Phare project was started in April 1999 and should be finished in June 2000. LBIFI part in the project includes development of DL textbooks, DL courses preparation and organisation. of short term courses and seminars.
Partners in the project: Belgian Banking Academy (Consortium leader), Westdeutsche Bank Consult (Consortium partner), and Luxembourg Banking Training Institute (Consortium subcontractor).
Bilateral Agreement between the Luxembourg Ministry of Finance and the Bank of Lithuania in the Area of Bank Training Activities of 1998 where the Lithuanian Banking, Insurance and Finance and the Luxembourg Bank Training Institute act as technical agencies.
Main objective of the agreement to provide training: short term courses and seminars in LBIFI;
Training programs and internships in Luxembourg (Private Banking, Money Laundering, Investment).
EU Phare project “Awareness Campaign in Lithuania for the European Monetary Union”, 1999. Publishing of the overview study (book) “The Way Towards Monetary Union”.
World Learning- Hungary/USAID Seminars for Bosnian Financiers “External Debt Management” 1999.
World Learning- Lithuania/USAID Seminars for State Authorities 1999 and Credit Unions specialists.
Preceding main projects: EU Phare Distance learning program for banking sector in Lithuania -1996 – 1998; EU Phare project: SME Crediting – Bankakademie- 1997; EU Phare project: rural credit management – World Bank Credit Line- 1996/1997; Bilateral agreement: Training program " Bank Simulation”, financed by Flemish Government- 1996-1997; Bilateral agreement: Italian Training program: Rural credit management program, Giordano Dell'Amore Foundation, Milan- 1997-1998; Bilateral agreement: Norwegian Banking training program- 1997; Training programs financed by Know-How Fund (UK)- 1996-1997; Training program financed by USAID- 1995-1996.
In the framework of the Phare Project LI9703.03.03.02.01 – Technical assistance to the Financial Sector current project, LBIFI sought to increase the number of DL programs it offered. EU PHARE projects make it possible to develop products (i.e., textbooks) that require large investments that can be very difficult to find in Lithuania. Further, the training of specialists (study visits) is usually a necessary component of DL projects. This component is the most valuable aspect of the DL projects for local trainers.
LBIFI sought cooperation with insurance and leasing companies. For this reason, the project included the preparation of textbooks covering insurance and leasing.
The project “technical assistance to the financial sector” was financed under a grant of the European Union Phare 1997 National Programme for Lithuania with the general aim of strengthening the whole financial sector.
From 1992 to 1999, 328 MEUR have been allocated to Lithuania under the Phare Programme, including Institutional Building and Investment projects. 22,61 MEUR or 6,9% of that money went to assistance to the financial sector; the proportion dedicated purely to the banking sector was of 3,7 %.
The objective of this 1 M EUR project delivered by the Belgian Bankers’ Association in consortium with Westdeutsche Bank Consult was triple. First, a legislative assistance to the Bank of Lithuania and the Ministry of Finance in order to comply with the European Union Acquis Communautaire. This 15 months project fitted in with continuity of previous Phare assistance dedicated to the financial sector. Indeed some of the commercial banks received Phare support for the first time as they were not included in the twinning arrangements between Lithuanian and foreign banks funded under previous Phare projects. Furthermore, the project helped the LBIFI to complete the set of books drafted from 1996 to 1998 through the Phare financed project for development of a Distance Learning Programme.
It is worth mentioning that this project has been designed and implemented during a period where the Phare Programme was reformed.
In fact, the project has been initiated according to a “demand driven” approach. This explains the multiplicity of the objectives and their general character. From 1998 onwards, the Phare programme has become “accession driven” and based on the needs identified in the Accession Partnership, the National Programme for the Adoption of the Acquis and the Regular Report. This means that projects funded by Phare should concentrate mainly on objectives in line with the Acquis Communautaire. In addition, the contractor and the beneficiary are committed by the achievement of a guaranteed result.
The project was also the first in the financial sector to be managed by the Decentralised Implementation System (DIS). Using this system the National Fund established at the Ministry of Finance administers the Phare funds allocated under the responsibility of a National Authorising Officer (NAO).
A Central Finance and Contracting Unit (the CFCU under the Ministry of Finance LR) is in charge of carrying out all the tendering and contracting process in the programme. This means that the Contracting authority is no longer the European Commission (EC) but the CFCU.
The decentralisation signifies that a part of the responsibility previously assumed by the EC, in terms of implementation of the projects, is from now on the responsibility of the CFCU. The EC exercises an ex-ante control. This is a first step towards the full decentralisation of the Phare programme, whereas the EC will only exercise a ex-post control.
Moreover, this decentralisation also means that the responsibilities previously assumed by the EC in Brussels are being taken over by the EC Delegation in Vilnius. This decentralisation needs to be properly determined as “deconcentration”. Consequently, staff of the EC Delegation, the Phare Programme Managers work inside the Delegation to ensure a direct monitoring of the Phare projects.
New DL courses: Introduction to Insurance; Insurance products: life and non-life; Private Banking; Legal Environment for Banking, Mortgage Lending; Internal Audit; Leasing developed under the EU Phare project, expand the range of disciplines which will presented for financial sector specialists and increase the capability to satisfy urgent needs for professional training.
Research and consulting
One of the trends where the Institute is planning to expand their activities is consulting and research. At present Lithuanian Banking, Insurance and Finance Institute participates in research and consulting: Preparing experts conclusions for I-V books of Civil Code for the Government of the Republic of Lithuania; The Group of Independent Experts on Economy; The Board of Non-state adult education under the Ministry of Education.
MAIN FINANCIAL FIGURES
1. Subscribed capital unpaid
2. Fixed assets
4. Capital and reserves
Dr. E. Martinaitytė,
Financial System Development and The Role of the Lithuanian Banking, Insurance and Finance Institute. Dr.Eugenija Martinaityte, LBIFI