Download credit unions` system in lithuania

CREDIT UNIONS’ SYSTEM IN LITHUANIA
Jurgita Liutvinskienė
Head of Marketing and Product Development Department
Lithuanian Central Credit Union
Savanoriu pr. 363-211, Kaunas, Lithuania
[email protected]
INTRODUCTION
Over 15 years since its beginnings in 1995, the movement of Lithuanian credit unions has
produced a large network of financial co-operatives. At the beginning of 2014, the Lithuanian
credit unions had more than 150500 members and accounted for a 2.8 per cent market share of
the retail banking market.
In 1994, several years after Lithuania regained its independence, (1990), the idea of credit cooperation returned. It was promoted and supported by such foreign aid organizations as the
Canadian International Development Agency (CIDA), the Open Society Fund-Lithuania, USAID,
and also local leaders. As a result, two international organizations, Développement International
Desjardins (DID) and World Council of Credit Unions (WOCCU), launched two separate
projects to support and assist with the development of credit co-operatives in Lithuania.
Canada (Quebec province) and the US, where credit unions are successfully established as
significant players of the financial system, provided the majority of financial, technical and
know-how support for the development of the Lithuanian credit unions’ (Lt: kredito unijos)
network. Step by step the model of Desjardins credit unions (Canada), with some exceptions, was
adopted as the most appropriate form of credit union co-operation to Lithuanian market
environment.
1. The current model of credit unions system in Lithuania
The structure of the Lithuanian credit unions' system is presented in the Chart 1. As of 1st of June
2014, 63 credit unions were unified under the umbrella of the Association of Lithuanian credit
unions (Asociacija Lietuvos kredito unijos) and the Lithuanian Central Credit Union (Lietuvos
centrinė kredito unija). 5 credit unions were allied by the Association “Lithuanian Credit”
(Asociacija “Lietuvos kreditas”) and 7 credit unions acted independently.
Chart 1. Structure of credit unions system in Lithuania
MEMBERS (>130 000)
CREDIT UNIONS (63)
LITHUANIAN
CENTRAL CREDIT
UNION
ASSOCIATION OF
LITHUANIAN
CREDIT UNIONS
MEMBERS
CREDIT UNIONS (5)
MEMBERS
CREDIT UNIONS (7)
ASSOCIATION
“LITHUANIAN
CREDIT”
Source: The Bank of Lithuania, LCCU, ALCU, ALC, 2014
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1.1. The first level: structure and activities of credit unions
In Lithuania, only credit unions and commercial banks have the legal status of a credit institution
and are allowed to accept deposits from the public. Credit unions together with commercial banks
are covered by the state deposits insurance system and their activities are supervised by the
Central Bank.
The structure of a credit union is presented in the Chart 2. By law the General Members
Assembly elects the following governing bodies: Supervisory Board, Board of Directors, Loan
Committee and Commission of Inspectors.
Chart 2. Organizational structure of a credit union
GENERAL MEMBERS ASSEMBLY
Commission of
Inspectors (Inspector)
or
Independent auditor
(auditors’ entity)
when the assets exceed
10 million LTL
Supervisory Board
 3-9 members
 4 years term
Board of Directors
 Not less than 3
members
 4 years term
Loan Committee
 Not less than 3 members
 4 years term
Internal Audit Unit when
the assets exceed 10
million LTL
ADMINISTRATION
Head of Administration (General Manager)
Chief accountant and other employees
Source: The Law on Credit Unions, 2008
The Law on Credit Unions states that the General Members Assembly may not be replaced by the
meeting of representatives. This is a key difference from other co-operative entities in Lithuania,
as this is allowed by the Law on Co-operative Entities.
The profit at the end of the year may be distributed either by allocating dividends proportional to
the turnover of a member's business with the credit union or by allocating dividends in proportion
to shares in the credit union. However, the dividends are rarely paid as the members prefer to
receive the benefits in the form of favorable interest rates or a reduced service fee.
By law, the main activities of credit unions are the following:
1. Collection of term and demand deposits from members and other clients;
2. Lending to members;
3. Payment services to members and clients.
Lending services may be provided only to the members of a credit union. Saving services, with
some exceptions, may also be provided to clients, who are not obliged to become members:
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

Natural persons: children or foster-children, when at least one of their parents or fosterparents is a member of a credit union;
Legal persons: state or municipal institutions, associations, religion communities,
professional trades and charity and sponsorship funds from Lithuania, as well as
international and foreign charity and sponsorship funds. At the beginning of 2014, 97 per
cent of the clients of the LCCU credit unions were members of credit unions.
The law allows credit unions to provide a wide range of services. However, only LCCU member
credit unions are able to provide payment services such as money transfers in Litas and Euros,
internet banking, international payment cards and payments for utilities. Providing additional
services requires large investment and ongoing technological support. As a result, independent
credit unions can offer only basic services to their members: loans and deposits. All credit unions,
regardless of their membership in the second level organization, are local and act exclusively in
the Lithuanian market.
1.2. The evolution of a second level of credit unions’ system
The leaders of Lithuanian credit unions soon realized that the dependency on foreign grants was
not sustainable. The DID project's funding was extended twice: in 1997 and 2000, but on a
condition that credit unions will set up a consultancy center which will be fully supported by
credit unions. As a result, the Association of Lithuanian credit unions (ALCU) was established in
1997 on the premises of the DID project. From the very beginning it started to collect a small fee
from credit unions that helped credit unions to get used to the idea that the consultancy services
needed to be financed by their own funds.
In 1999 credit unions and politicians decided to create a centralized financial center to manage
the liquidity of credit unions and provide emergency loans. A model of the Central Credit Union
was designed in line with the model of a two-tier Desjardins credit unions' system in Quebec
(Canada) with some variations relevant to the Lithuanian legal environment. The law on the
Central Credit Union was passed on 18th of May 2000. The Lithuanian Central Credit Union
(LCCU) was established by 28 credit unions and the Government of Lithuania in 2001 and
licensed by the Central Bank at the end of 2002.
The Lithuanian Central Credit Union is a member-based, co-operative financial institution, which
provides services to credit unions. The same voting principle “one member – one vote” is applied
at General Assembly of the LCCU, regardless of the size of a credit union or the State's role of
the dominant shareholder.
Organizational structure of the LCCU is slightly different from the structure of a credit union.
These bodies are elected by the General Members Assembly: Supervisory Board, Board of
Directors, Stabilization Fund Commission and Head of the Internal Audit Service.
The profit at the end of the year may be allocated to members in the same form, as in credit
unions: turnover related dividends and share capital related dividends.
By law, LCCU main functions are the following:

Maintaining credit unions’ liquidity. In order to ensure the implementation of this
function, the LCCU has accumulated a reserve for maintaining credit unions’ liquidity..
Funds from the liquidity maintenance reserve can be used for extending liquidity loans to
member credit unions.

Maintaining credit unions’ solvency. To maintain credit unions' solvency, the LCCU set up
the Stabilization Fund, where credit unions pay annual fees. In case of a probable
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insolvency member credit unions may receive funds from the Stabilization Fund in the
form of subordinated loans or through gratuitous allocation of funds, which have to be
included into the reserve capital of the credit union. A credit union has a right to receive
support from the Stabilization Fund, but there is no obligation for the LCCU to recover
the losses of an insolvent credit union.

Auxiliary supervision and monitoring of credit union activities. The Board elected by the
LCCU General Member Assembly ensures the supervision and monitoring of activities of
member credit unions. The Board and the Stabilization Fund Commission organize a
continuous monitoring of credit unions' activities and provides recommendations on how
to minimize key risks.

Financial center activities. The LCCU provides a wide range of financial services to
credit unions: accepts deposits and repayable funds, grants loans and takes on the related
risks. Via the LCCU, credit unions are connected to the payment and clearing center of
the Central Bank and the payment cards' authorization center, owned by a private
company.

Provides other support to credit unions (risk management, IT systems' support, marketing,
training, general business consultations, etc.).
While providing these and other centralized services to credit unions LCCU plays an important
role in ensuring a better stability of the credit unions' sector as well as ensures the cost efficiency
at the operational level.
2. The importance of credit unions in the Lithuanian banking market
At the end of 2013, 76 credit unions, 1 Central Credit Union, 7 banks and 8 branches of the
foreign banks were operating in Lithuania. The market share of credit unions amounted to 2.8 per
cent as of 1st of January 2014. One large credit union terminated its activities at the beginning of
2014, so the market share of credit unions has shrunk slightly.
The contribution of credit unions to the Lithuanian economy is particularly visible in rural areas
and small towns, where they account for more than half of the local financial services. The
market share, calculated in the number of clients is larger than in assets and constituted 4.2
percent as of 1st January 2014. Measuring by the density of service points (excluding ATMs)
within the network, which consists of 62 credit unions' headquarters and 126 distant service
points, the common market share of the LCCU member credit unions was even 32.9 percent.
Credit unions focus on rural areas because the population there has no access to adequate
financial services. Credit unions became a strategic partner of farmers in many Lithuanian
regions and successfully contributed to the sustainable growth of the agribusiness sector.
Answering the specific needs of agricultural sector, credit unions provide very favorable and
competitive credit conditions. It's estimated that credit unions have 20-25 per cent of the
agricultural loans market share in rural areas.
Providing credit to micro and small enterprises is another focus of credit unions. At the end of
2011, 57 credit unions (LCCU members) offered a new product: business loans for start-ups
through the Entrepreneurship Promotion Fund. During the after-crisis period banks almost
stopped the lending to business start-ups. This business loans program is another example of the
important role credit unions play in the growth of the community wealth.
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3. Loans for business start-ups
The consortium organized of the Lithuanian Central Credit Union and its 57 credit unions signed
a tripartite agreement with UAB Investicijų ir verslo garantijos (INVEGA) regarding the
implementation of the project “Promoting Entrepreneurship” which is worth EUR 14.48 million.
Within the framework of the project’s program, fee-free training in the basics of entrepreneurship
for residents in different towns of Lithuania was launched in September, and the provision of
business loans on preferential terms from the Entrepreneurship Promotion Fund was started in
November 2010.
Basic conditions for loans from the Entrepreneurship Promotion Fund:

Loans are available to small and micro enterprises which have been operating for
no longer than a year, social enterprises and natural persons intending to start up or willing to
develop their business.

Loans can be intended for investments and working capital financing.

The maximum loan amount is EUR 24,907.

Interest on loan – from 5.49 to 9.49 %, depending on the variable interest part of
VILIBOR.

The final loan repayment term – 31 December 2018.

The term and schedule for loan use and repayment, security measures and other
loan granting conditions are determined by a mutual agreement between the borrower and the
credit union by concluding a loan agreement.

Up to 80 % of the loan amount can be secured by INVEGA guarantee.

A businessperson or an enterprise having taken out a loan and received INVEGA
guarantee or without one is compensated for 95 % of the interest paid.
Target groups for the use of the Entrepreneurship Fund are:




Youth up to 29 years old
Elderly starting 50 years old
Unemployed persons
Persons with disabilities
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