1. The Role of Regulation in Agro-Lending: The Case Study of Lithuanian Credit Unions Presented by: Edvardas Bumsteinas International Microfinance Consultant EastAgri Annual Meeting Rome, Italy 01 March 2005

2. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Why regulation for agro-lenders? Difficulties in start-up capitalization. Weak supervision by members - shareholding is dispersed among hundreds of stakeholders. Large and persistent maturity gaps in assets and liabilities - a strong incentive to lend long term, esp. for equipment and other long term assets, whilst funding is highly seasonal and short-term. Sharp seasonal fluctuations in demand result in liquidity problems. Unhealthy practice to restructure non-performing loans, usually by extending repayment dates or refinancing bad loans. Lack of financial professionalism in staff (e.g. credit committees and supervisory boards consist of farmers/ lack of permanent staff).

3. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Forms of regulation Formal regulation by state agencies and Central Bank. External regulation by donors and sponsoring organizations. Self-regulation by associations and centralized structures.

4. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Evolution of regulation in Lithuania (1) 1994: External donors open a central project office Sociéte de Développement international Desjardins (SDID) opens a central project office in Kaunas, Lithuania. 1995: Law on Credit Unions passed by the Parliament Lithuanian credit unions operate on the basis of the Law on Credit Unions issued on 21 February 1995 (Nr. I-796). The Law on Credit Unions is a modern law drafted largely by foreign experts. The law describes the process of the foundation of credit unions, defines their organizational structure and defines the regulatory mechanism. Most functions of supervision and regulation of Lithuanian credit unions were assigned to the Lithuanian Central Bank (LB). LB is authorized to grant and revoke licenses from credit unions, inspect and fine them. LB has to approve the nomination of all general managers of credit unions.

5. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Evolution of regulation in Lithuania (2) 1997:Association of Lithuanian Credit Unions established On 4 February 1997, Lithuanian credit unions formed Association of Lithuanian Credit Unions (ALKU). Over the next years, SDID gradually transferred to ALKU its functions related to the technical assistance and support of new credit unions. ALKU also became a formal lobbying institution of Lithuanian credit unions 2000:Major amendments to the Law on Credit Unions On 18 May 2000, the Law on Credit Unions was modified and a new Law on Central Credit Union was issued to allow for the foundation of Lithuanian Central Credit Union (LCKU). LCKU was established on 22 April 2002. On 28 November 2002, LCKU received a license from Lithuanian Central Bank. The share capital of LCKU was 5 328 thousand Lt as of 31 December 2002. The main shareholder of LCKU was the Government of Lithuania. It is envisioned that the ownership of LCKU is transferred to credit unions which are members of LCKU. As of 31 December 2004, LCKU had 53 members – credit unions.

6. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Lithuanian Central Credit Union LCKU performs five main functions: 1. LCKU operates a Liquidity Fund which provides additional liquidity for credit unions. 2. LCKU operates a Stabilization Fund which ensures that capital adequacy requirements are met by credit unions facing temporary capitalization difficulties. 3. LCKU acts as a clearing house for credit unions. 4. LCKU monitors the performance and financial risks of credit unions, members of LCKU. 5. LCKU facilitates inter-credit union lending by accepting deposits from credit unions with surplus liquidity and lending to credit unions that are in need of additional lending funds.

7. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM The results of regulation Regulation promoted growth in membership, total assets, loan portfolio, deposits and capitalization of credit unions. By 2005, the majority (53 out of 62) of Lithuanian credit unions joined the Association of Lithuanian Credit Unions and became members of Central Credit Union. The network of Lithuanian credit unions is independent of external assistance, both technical and financial.

8. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Growth in membership and number of credit unions Data for Association of Lithuanian Credit Unions only

9. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Capital, loans, deposits and total assets in litas, mln 1 EUR = 3.4528 LtData for Association of Lithuanian Credit Unions only

10. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Geography of Lithuanian credit unions Credit union Branch The majority of Lithuanian credit unions operate in rural areas and small towns.

11. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Lessons to be learned Starting point: institute an appropriate legal framework. Define and assign regulatory functions. Mobilize international assistance as appropriate (e.g. consultants, investment funds, microenterprise banks etc) Prevent dependency on external donors by creating and developing self-regulatory mechanisms.

12. EDVARDAS.BUMSTEINAS@MICROCAMELS.COM Useful links Law on the Central Credit Union (in English) http://www3.lrs.lt/cgi-bin/preps2?Condition1=119406&Condition2http://www3.lrs.lt/cgi-bin/preps2?Condition1=119406&Condition2= Law on Credit Unions (in English, 1995 only) http://www3.lrs.lt/cgi-bin/preps2?Condition1=21942&Condition2http://www3.lrs.lt/cgi-bin/preps2?Condition1=21942&Condition2= Amendment of the Law on Credit Unions (in English) http://www3.lrs.lt/cgi-bin/preps2?Condition1=106586&Condition2http://www3.lrs.lt/cgi-bin/preps2?Condition1=106586&Condition2= MICROCAMELS – Bank Rating System http://www.microcamels.com The MICROCAMELS website provides links and further information about credit unions in Lithuania.