Improve Access to Finance for SMEs: Loan Societies’ Role
- An in-depth look at the potential of Cooperative Savings and Credit Unions (CSCUs) to enhance access to finance for small businesses in Latvia, drawing lessons from the Lithuanian...
- The expansion of Cooperative Savings and credit Unions (CSCUs) could improve access to finance for small and micro enterprises,as well as new businesses in Latvia.
- However,it's crucial to note that expanding the mandate of CSCUs in Latvia will not solve all of the problems related to business financing accessibility.It should be viewed as...
Cooperative Savings and Credit Unions in Latvia: Opportunities and Challenges
Table of Contents
- Cooperative Savings and Credit Unions in Latvia: Opportunities and Challenges
- The Potential of Cooperative Savings and Credit Unions (CSCUs)
- Lithuanian CSCU Growth and Its Impact
- Regional and Sectoral Financing
- Sectoral Similarities Between Banks and CSCUs
- The Role of Agriculture and Forestry
- Interest Rates on CSCU Loans
- Risk and Client Base
- Size and Age of Borrowing Companies
- Experience of Borrowing Companies
- Conclusion
- latvijas Banka’s Perspective
- Cooperative Savings and Credit unions (cscus) in Latvia: Q&A
- What is the potential of CSCUs in Latvia?
- How meaningful is the CSCU sector in Lithuania?
- Where do Lithuanian CSCUs allocate their assets?
- Do CSCUs in Lithuania focus on specific regions or sectors underserved by banks?
- What sectors do CSCUs in lithuania primarily finance?
- What are the interest rates on CSCU loans compared to banks?
- Why are CSCU loan interest rates higher?
- What types of businesses do cscus typically finance?
- How does the lending experience of companies differ between banks and cscus?
- What are the limitations of CSCUs in the Lithuanian financial system?
- What is Latvijas Banka’s perspective on CSCUs?
- CSCU vs. Bank Lending: A Comparison
An in-depth look at the potential of Cooperative Savings and Credit Unions (CSCUs) to enhance access to finance for small businesses in Latvia, drawing lessons from the Lithuanian experience.
The Potential of Cooperative Savings and Credit Unions (CSCUs)
The expansion of Cooperative Savings and credit Unions (CSCUs) could improve access to finance for small and micro enterprises,as well as new businesses in Latvia. This is a especially relevant issue in the current economic climate.
However,it’s crucial to note that expanding the mandate of CSCUs in Latvia will not solve all of the problems related to business financing accessibility.It should be viewed as a step in the right direction.
Lithuanian CSCU Growth and Its Impact
Despite Lithuanian CSCUs more than doubling their assets from €600 million to €1.58 billion since the beginning of 2017, their meaning in the lithuanian financial sector has been low.In recent years, it has even slightly decreased compared to the banking sector.
A significant portion of CSCU assets is allocated to various loans, with nearly half going to households and almost a third to businesses. The remaining financial resources are placed in liquid assets to comply with prudential requirements.
Regional and Sectoral Financing
One potential benefit of expanding CSCU activities could be providing financing in regions and sectors where bank activity is low. However,evidence from Lithuania does not support this. Both banks and CSCUs concentrate their operations in the historically most economically active regions of Lithuania: Kaunas and Vilnius counties.
Sectoral Similarities Between Banks and CSCUs
Similarities between bank and CSCU activities continue when assessing by sector. In the case of CSCUs, approximately half of all loans issued to businesses are related to the real estate sector, including construction and real estate transactions. This is twice as much as in the case of banks. The situation in other sectors is similar for banks and CSCUs.
The Role of Agriculture and Forestry
Sectors such as agriculture or forestry, which have historically been closely associated with CSCUs, are currently represented in negligible amounts in the CSCU loan portfolio.
Despite the high concentration in sectors related to real estate development initially seeming like a disadvantage, it might very well be an advantage for Latvia. The development of commercial spaces and residential areas in Latvia substantially lags behind neighboring countries, and additional funding that these sectors could attract through CSCUs could provide at least some of the necessary support.
Interest Rates on CSCU Loans
One consideration is that loans issued by CSCUs have higher interest rates than bank alternatives. In Lithuania in 2024, approximately two-thirds of all CSCU-issued business loans had interest rates in the 8-10% range. Banks apply such interest rates only in isolated cases, and most often they are no higher than 8%.
Risk and Client Base
There may be several objective reasons for this, such as higher capital attraction costs. This indirectly indicates that CSCUs in lithuania operate with a riskier client base that exceeds the risk appetite of banks, even if the company’s sector of activity is well-known to the bank.
Size and Age of Borrowing Companies
Looking more closely at the companies to which banks and CSCUs issue loans, based on their size and age, CSCUs operate with a distinctly different clientele. In contrast to banks,CSCUs finance almost exclusively small and medium-sized enterprises (SMEs). Large companies often become bank clients.This is not surprising, as large companies, especially those that have proven their financial stability and health over time, will turn to banks that provide loans with lower interest rates.
Experience of Borrowing Companies
The age structure of the companies being credited also differs between banks and CSCUs. Banks mostly choose to lend to companies with significant operating experience. In half of the cases, these are companies with more than 15 years of experience. In the case of CSCUs, it’s 22%.
Even in the case of CSCUs, the companies being credited are not considered newcomers. Only 17% of the loans issued have been to companies that are younger than three years. However, the differences in the age structure of the companies being financed indirectly indicate that new companies have a greater chance of receiving a loan from a CSCU than from a bank.
Conclusion
The role of CSCUs in the Lithuanian financial system is limited. Therefore,in Latvia,a realistic view must be taken of the limitations that expanding CSCU activities could solve in terms of business lending and which require other solutions.
latvijas Banka’s Perspective
Latvijas Banka is organizing a public discussion about Central Cooperative Credit Unions and their potential development in Latvia. For more data, contact Latvijas banka at Bezdelīgu 3, Rīga, Phone +371 6702 2300, or via email at info@bank.lv.
Cooperative Savings and Credit unions (cscus) in Latvia: Q&A
This article explores the potential role of Cooperative Savings and Credit Unions (CSCUs) in Latvia, notably in improving access to finance for small businesses, drawing on the experience of Lithuania.
What is the potential of CSCUs in Latvia?
Improved Access to Finance: Expanding CSCUs in Latvia could provide better access to finance for small and micro-enterprises, as well as new businesses, which is particularly crucial in the current economic climate.
A Step in the Right Direction: Expanding the mandate of CSCUs is a move that offers promise,but on its own will not solve all business financing challenges in latvia.
How meaningful is the CSCU sector in Lithuania?
Despite significant asset growth, the lithuanian CSCU sector remains relatively small compared to the banking sector. Although Lithuanian CSCUs more than doubled their assets from €600 million to €1.58 billion since the beginning of 2017, their impact on the lithuanian financial sector has been limited, and has even slightly decreased in comparison to the banking sector.
Where do Lithuanian CSCUs allocate their assets?
A significant portion of CSCU assets in Lithuania is allocated to loans:
Nearly half goes to households.
Almost a third goes to businesses.
* The remaining financial resources are held as liquid assets to comply with regulatory requirements.
Do CSCUs in Lithuania focus on specific regions or sectors underserved by banks?
no, the evidence from Lithuania suggests that both banks and CSCUs tend to concentrate their operations in the most economically active regions, such as Kaunas and Vilnius counties. This indicates that CSCUs are not necessarily filling a regional gap in financing.
What sectors do CSCUs in lithuania primarily finance?
Similar to banks, CSCUs in Lithuania allocate a significant portion of their business loans to the real estate sector. Approximately half of all loans issued to businesses by CSCUs are related to real estate, including construction and real estate transactions. This is twice as much as in the case of banks.Other sectors show similar distribution patterns for both banks and CSCUs. Agriculture and forestry, sectors historically associated with CSCUs, currently represent negligible amounts in the CSCU loan portfolio.
What are the interest rates on CSCU loans compared to banks?
Loans issued by CSCUs generally have higher interest rates than those offered by banks. In Lithuania in 2024, approximately two-thirds of all CSCU-issued business loans had interest rates in the 8-10% range, while banks typically offer rates no higher than 8%.
Why are CSCU loan interest rates higher?
There may be several reasons for this, such as higher capital attraction costs. This indirectly indicates that CSCUs in Lithuania operate with a riskier client base that exceeds the risk appetite of banks, even if the company’s sector of activity is well-known to the bank.
What types of businesses do cscus typically finance?
CSCUs primarily finance small and medium-sized enterprises (SMEs).Large companies often become bank clients. Banks mostly choose to lend to companies with significant operating experience.CSCUs finance almost exclusively small and medium-sized enterprises (SMEs).
How does the lending experience of companies differ between banks and cscus?
banks prefer to lend to companies with significant operating experience, these are companies with more than 15 years of experience. In the case of CSCUs, it’s 22%. Only 17% of the loans issued have been to companies that are younger than three years.
What are the limitations of CSCUs in the Lithuanian financial system?
The role of CSCUs in the Lithuanian financial system is limited. Therefore, a realistic view must be taken of the limitations that expanding CSCU activities could solve in terms of business lending and which require other solutions.
What is Latvijas Banka’s perspective on CSCUs?
Latvijas Banka is organizing a public discussion about Central Cooperative Credit Unions and their potential progress in Latvia. For more data, contact latvijas banka at Bezdelīgu 3, Rīga, Phone +371 6702 2300, or via email at info@bank.lv.
CSCU vs. Bank Lending: A Comparison
| Feature | CSCUs | Banks |
| ———————— | —————————————— | ————————————————– |
| Interest Rates | Generally higher (8-10% in Lithuania 2024) | Generally lower (typically no higher than 8%) |
| Client Base | Riskier | Less risky |
| Company Size | SMEs | Often large companies |
| Company Experience | Newer companies, SMEs | Established companies with over 15 years experience|
| Sector Focus (Lithuania) | Real Estate, Construction | More diversified, but also significant Real Estate |