Lithuanian Banking:

On Its Way To The European Community

Vytenis Rasutis is a banking consultant for projects in Lithuania.

Starting in 1994, the Central Bank of Lithuanian became increasingly concerned about regulating banking and bringing order to the system, especially the standards for chartering new banks. Since then, the situation has become calmer and the banking sector has tended to normalize, and it is now trying to adapt to European Community standards of operation. Interest rates for deposits on loans are more in line with international levels.

Since 1994, the number of banks in Lithuania have decreased from 27 banks to ten banks, today. As compared to the past, these remaining banks are much better managed and supervised. They are also much better able to service the needs of their market with a wide range of services. The increase in the quality of banking can be attributed to a heightened level of bank regulation, and the elevation of skills and expertise in the banking sector.

The Central Bank has been very strict in overseeing the banking sector. The Central Bank requires that all commercial banks have their financial records audited every year by an international auditing firm, such as Arthur Andersen, Cooper & Lybrand or similar. Information regarding audits is normally included in the annual financial reports of each respective bank.

The quality of banking has risen dramatically by the rapid introduction and integration of Western banking principles. Many bankers have attended numerous seminars and courses, while some banks have partnership or "twining" arrangements with western banks that result in the transfer of important knowledge. These "twining" projects are partially sponsored by international aid projects for Lithuania which identify banking and capital markets as a priority sector.

The selection of banking services often matches those available in many western banks. Besides deposits and loans, services commonly available include currency exchange for most major currencies, travelers checks, debit cards, wire transfers, brokerage services, letters of credit, bank guarantees, and bill payments. The cost of most of these services is generally in line with western standards. Loans tend to be more expensive with interest rates for secured loans averaging 12 to 14 percent. Deposits tend to pay a higher rate as common in a capital deficient country. Deposits for three, six or 12 month time deposits pay six to nine percent. Lending tends to be short term: one to three years, and there is a very limited mortgage market because of some deficiencies in the public registration of property titles and ownership.

The services of Lithuanian banks are also open and used by non-residents including individuals and companies. One actively used service is the write transfer of funds. This service is efficient, low cost, and can be done in either direction and in multiple currencies. For example, an individual in North American could wire funds to a relative in Lithuania in the form of dollars by starting the process with their local U.S. banker by providing the relative's bank coordinates (name of bank, account number, etc.). These funds would be deposited in the relative's account usually in several days. Funds could be wired out of Lithuanian, as in the example of a Lithuanian business making payment for North American imports.

There are few restrictions in the movement of funds into and out of Lithuania. Since Lithuania is a small country and there is little demand for the litas outside of Lithuania, the banking system denominates many transactions in foreign currency such as US dollars. In fact, many deposits are kept in dollars. Dollars can be exchanged for litas: the fixed rate being four litas to one US dollar. This rate has been stable for several years and is one of the most stable aspects of the Lithuanian economy.

A non-Lithuanian resident can also open up a savings account with the presentation of a passport. One service that is not available in Lithuania to anybody is personal checking. There is no national clearing system for checks. Many payments are made by wire transfer. People pay their utilities and many other bills by going to a bank and ordering a wire transfer at a teller window.

Safety and trust are integral factors of banking. These two factors are constantly considered by the Lithuanian public when dealing with the banks. The past image of unstable banks consumed by insider dealings within an inflationary and erratic economy is an image that many in the general public find hard to forget. The result has been distrust by many of the entire banking system and the lack of savings going in banks. Many people simply feel safer stashing their savings at home. This is an image that banks will need to overcome.

One bank that the general public has trusted more than others is Taupomasis Bankas (The Savings Bank). Taupomasis may not be the most efficient bank, but it is the largest of the state-owned banks, and there is a perception that the state will always support this bank. Taupomasis is slated for privatization which will drastically change its character.

One development that is helping build confidence in the banking system is deposit insurance. Deposit insurance is a major confidence-builder of banking worldwide. Currently, small deposits are insured. Over the next several years, as reserve funds are accumulated, the scope and coverage of deposit insurance will increase. Currently, deposits up to 5,000 litai are 100% insured. By the year 2000, it is anticipated that deposits up to 25,000 litai will be 100% insured. As the public becomes more familiar with deposit insurance, a wider amount of funds will come out of hiding and will be more evenly spread throughout the banking sector. This will be a healthy and stabilizing boost to the entire banking sector and a capital deficient economy.

Credit unions have also appeared in Lithuania, with over 20 in operation. Most of these credit unions are small and focused around a specific group or region, and tend to be based outside major cities where banks are strong. All the credit unions were formed under the direct guidance of the international credit union movement and have completely avoided the turbulence that once affected the banking system. Credit unions tend to have a smaller scope of services but they also serve the needs of the individual, a group that the banking sector has not focused on very much. Non-Lithuania residents are generally not able to join credit unions since they would need to be part of an affiliation and Lithuanian citizenship is required.

The future for banks in Lithuania calls for a fewer number of banks and those will be of a larger size. This will be achieved mainly through mergers and consolidations, a trend that has gripped banking across the globe, as banking searches out even more efficient economies of scale. Vilniaus Bankas and Hermis have already entered into talks about merging, and there is a growing possibility of a pan-Baltic merger.

Estonian banks are interested in getting a firmer foothold in Lithuania. Foreign banks are also searching for partners or footholds in Lithuanian. Already Kredyt Bank from Poland has registered a branch office, and the French-based bank, Soci鴩 Generale has opened a representative office. There will be a much closer affiliation with European and other international banks. There will be more foreign bank branches in Lithuania as European integration comes closer.

Lithuanian banks will expand their foreign scope by establishing a larger presence mainly in the eastern markets of Russia and the Ukraine, still major trading partners for Lithuanian. If current trends continue, the Lithuanian banking sector will evolve into an effective capital-raising market based on traditional banking principles.