SHORT INTRODUCTION TO LITHUANIAN CREDIT UNIONS SYSTEM
CREDIT UNIONS DEVELOPMENT IN LITHUANIA
The movement of the Lithuanian credit unions started its first activities in 1995 and has reached significant results at the present. There are 58 credit unions in Lithuania having more than 35 600 members and 39 449 million Euro in assets in March 2004 (Lithuanian Central Bank, 2004). Credit unions provide saving services and loans for farmers and the other people who have poor access to bank services as well as small and medium business enterprises. 49 credit unions are joined in Lithuanian Central Credit Union which ensures stability and liquidity of the network, acts as clearing center for Lithuanian credit unions.
HISTORY IN BRIEF
Created with the pooled savings of common people the first Lithuanian credit union ("Taupmenu skolinimosi bendrove" - savings borrowing society) was established in 1871.
During 50 years credit unions (they were mainly called credit co-operatives at that time) movement spread throughout the country. There were 417 "people banks" in 1928. With the increasing need for more effective members' services, credit unions started their consolidation so that in 1939 there were 310 active credit unions with 119 000 members and assets of 85 million Litas (at that time 1 Litas was worth 10 present-day Litas, which today has a value of 3,45 Litas for 1 EUR), - with a 37% market share of deposits and 37,5% of loans. The World War II and the postwar regime terminated the existence of the movement (Terleckas, 2000).
During the period of the Soviet regime credit co-operatives were replaced by "savisalpos kasos" ("self-help credit unions") which were created by employees and usually based on small mandatory payroll deductions which were pooled and lent to employees on rotating basis. No interest was paid or charged, so in result it was a forced savings scheme that provided periodic access to accumulated personal savings. Due to the fact that there was no market economy, mainly the means lent from "savisalpos kasa" were deposited at the State Savings Bank.
In 1994 Canadian International Development Agency, Open Society Fund -Lithuania, Lithuanians in Canada with the help of Développement International Desjardins started a three year project to help Lithuanians to have access to alternative financial institutions - credit unions. After less than one year of project activity (in February 1995) the Parliament of Lithuania working closely with DID and WOCCU credit unions projects passed a Law on Credit Unions.
ORGANIZATIONAL STRUCTURE OF CREDIT UNIONS' MOVEMENT
Credit unions and Association Lithuanian Credit Unions
Organizational structure of the movement of credit unions in Lithuania consists of overall credit unions network including branches, Association of Lithuanian Credit Unions, and Lithuanian Central Credit Union.
A credit union ("kredito unija" - in the Lithuanian language) may be established by at least 50 natural persons of the Republic of Lithuania.
A minimum share capital of credit union cannot be less than 15 000 LTL (~4,344 EUR) and the minimum share of a member is 100 LTL (~29 EUR).
Membership in the credit unions is based on the following criteria:
- Employment at the same enterprise or institution;
- Membership in the same professional group;
- Belonging to a certain formal registered association;
- Residing at the same location: township or village.
Credit unions are established on a voluntary basis. A license to perform operations of saving and issuing loans for the members is done by Central Bank of Lithuania. Supervision of Lithuanian credit unions is performed by Central Bank of Lithuania, as well as for the other credit institutions in Lithuania (commercial banks). Deposits of credit unions members are insured by state deposit insurance system.
At the very beginning credit unions have had a clear idea that the help of international projects and donors is not durable and the movement has to become self-sustainable. The first step was made in 1997 when Association of Lithuanian Credit Unions was founded by 11 credit unions established with the help of DID project.
Until the establishment of Lithuanian Central Credit Union, Association used to provide all necessary services to credit unions - marketing, training, computerization, assistance in licensing, consultations, lobbying, credit lines and credit unions' liquidity management, monitoring. After some time it became clear that financial services have to be provided by a separate central financial facility and first steps to create it were taken. Lithuanian Central Credit Union was founded in 2002.
Figure 1 Structure of Lithuanian credit unions movement (2004 04 30)
Lithuanian Central Credit Union
Activities of Lithuanian Central Credit Union are based on cooperative principles. All Lithuanian credit unions may become members of Lithuanian Central Credit Union, which can make use of its services and will accept corresponding responsibilities.
The largest part of Lithuanian Central Credit Union share capital is owned by the Government of the Republic of Lithuania. The initial capital owned by the Government of the Republic of Lithuania was 5,300,000 Litas. The amount of the capital shares of the other credit unions is 1,000 Litas. During the first year of Lithuanian central credit union activities, credit unions bought out from Lithuanian Government shares for 1 000 000 litas. (1 LTL = 3,4524 EURO). In the long term share capital should be bought out from Lithuanian Government. Though the Lithuanian Government owns the largest part of the share capital, it does not have exclusive right of vote. Lithuanian Central Credit Union is governed by cooperative principle: one member - one vote.
Governing bodies of Central Credit Union are elected representatives from credit unions and work on voluntary basis. Services of Central Credit Union are directed to improve the economic and social being of credit unions members by ensuring safety and stability of credit unions. The surplus arising out of the operations of Central Credit Union after ensuring appropriate reserve levels belongs to and benefits all members with no member or group of members benefiting to the detriment of others.
Figure 2 Main functions of Lithuanian central credit union
Main functions of Lithuanian Central Credit Union are as follows:
1. The Stabilization Fund with the purpose of providing assistance to the credit unions having solvency problems is set up within the Central Credit Union.
2. The Liquidity Fund is a guarantee of liquidity and restoration of solvency of credit unions, which will ensure the credibility and safety of the credit union system.
3. Clearing Center to enhance settlements within credit unions system though credit unions only system.
4. Supervisory and control function ensures sound and safe operations of credit unions.
5. Administration of credit lines, deposits and other financial services.
Central Credit Union is also promoting education of the members, elected officers, employees of the credit union network in Lithuania by organizing seminars, training programs, providing educational material to credit unions and credit union members, by organizing radio, TV broadcasts, publishing articles on the use of cooperation and democracy, raising awareness in finance and economy, providing the information on credit union members rights and responsibilities.
OVERVIEW OF CREDIT UNIONS' ACTIVITIES
From the start of the activities of credit unions in 1995, credit unions have shown very impressive growth results. Credit union growth has fastened even more after the second edition of the Law on Credit Unions was passed by Lithuanian Parliament in 2000.
Number of credit unions
Figure 3 Number of credit unions in Lithuania 1995- 2003 III Q
Source: Lithuanian Central Bank
In average each year 6 credit unions received licenses. In year 2002 the growth of the number of credit unions was very high. The main reason for that is the closing of Lithuanian Savings Bank branches in rural areas. This caused the great demand for financial services in rural areas.
Membership growth in credit unions
Credit union membership growth has significantly increased during the year 2001 and 2002 mainly because of the decrease in minimal membership share from 300 LTL to 100 LTL according to the new edition of Law on Credit Unions.
Credit unions members are mostly individual persons (98 percent). Until the second edition of the Law on Credit Unions legal persons had no rights to become credit unions members. Now enterprises owned by credit unions members can also join credit unions. Credit unions serve only small and medium enterprises, which employ not more than 49 people annually.
All members in credit unions are divided in two groups: members and associated members. Associated members do not have a right to vote during the Annual General Members Assembly, so they can not influence credit unions governance but may use all the services of credit unions.
Figure 3 Total membership and average membership in credit unions members of Association Lithuanian credit unions
Figure 3 shows annual membership growth: total in the whole credit unions system and in average per one credit union. Membership growth in credit unions increased after year 2000, when the new amendments for Law of Credit Unions were made. They extended credit unions membership criteria and also introduced a concept of associated members.
Assets, loans and deposits dynamics in credit unions
1st of October total assets of 57 credit unions operating in Lithuania made 108 316 thousand Litas (1 LTL = 3,4524 Euro) (Figure 4).
Figure 4 The dynamics of credit unions assets, loans and deposits growth year 2000-2003
Loans to credit unions members made the major part of credit unions assets. Total loan portfolio reached 80 042 thousand Litas. Members deposits made major part of credit unions liabilities (78 201 thousands Litas).
Average assets growth in credit unions during the last five years exceeds 100 %. The large part of all assets is invested to loans in credit unions, for example, 73 % of all assets at the end of III Q 2003 were invested in loans to credit union members. The part of granted loans in total assets is increasing from 1997. In 1997 all loans made up 42 percent of all credit union assets.
In peak periods - spring and summer when farmers and small businesses begin major activities credit unions start to lack resources for loans granting. At this moment extra credit lines from Lithuanian Central Credit Union are used to increase assets size and financing capacities of credit unions.
Services in credit unions
Lithuanian credit unions provide saving services and loan products to members also make transfer payment. Saving products are - current account, savings account, children savings account, retirement savings account, also short term and long term deposits.
In addition, credit unions give loans to their members. Most popular loans types are business loan, consumer loan, and agricultural loans.
Figure 5 Credit unions loans by purpose 31st of December, 2003
From the start of 2002 credit unions began granting mortage (house (flat)) loans. Their part in the total portfolio has increased sharply from that time and now makes 24 percent of the total loan portfolio.
Changing economic environment, increase in GDP, total income has cause changes in the structure of credit unions loans terms. Part of long term loans has increased sharply from year 2002. The foundation of Lithuanian Central Credit Union and availability to use long term funds to finance long term loans has cause that loans over 5 years make up 22,5 percent of the total loan portfolio.
Credit unions also collect taxes for commodity enterprises, such as electricity, gas, water. A member in a credit union can also make different payments for goods, services or receive money from other persons.
Figure 6 ALCU (Association Lithuanian credit unions) credit unions loans by term 2000-2003
In most part credit unions serve individual persons. Savings of business enterprises and loans to enterprises make not more than 2 percent the whole credit unions savings and loan portfolio.
Credit unions market share
Though market share of credit unions is still very small (0,546 percent of the total banking assets in Lithuania), it is increasing sharply – e.g. on January, 2000 it was only 0,09 percent.
Figure 7 Credit unions market share
Assuming that deposits of private persons make up 98 percent of total deposits in credit unions, we calculated market share of credit unions by deposits of private persons. As we see this market share at the end of 2003 made up 1,21 percent.
The explanation for increase in market share is 4-5 times higher credit unions growth rates than comparing with banking sector (bank assets during year until IV quarter of 2003 grew by 22 percent, credit unions – 91,8 percent, bank loans by 40,2 percent, credit unions – 2,1 times).
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