INTERVIEW: Micro-lending with macro impact

By bne IntelliNews August 29, 2008

Mike Collier in Riga -

When Northern Rock was nationalised in the UK, most described the move as a disaster. But one Latvian bank is showing state ownership of banks can play an important role when given a clear purpose and competent management.

Making an extra €10m available to small and medium-sized enterprises (SMEs) maybe small beer by international standards, but according to Latvia's Hipoteku Banka chairman Inesis Feiferis, small amounts of capital can have a big impact when used strategically.

On July 15, Feiferis and Olegs Fils - his counterpart at another indigenous bank, Aizkraukles Banka - signed an agreement which means Aizkraukles will launch a new SME lending programme, with funding to the tune of €10m coming from Hipoteku. If that seems like an unusually generous gesture in a world of tightened interbank lending, the explanation is simple: Hipoteku is the only state-owned bank in the Baltic countries and is, in effect, a development bank run along commercial lines. Aizkraukles, by contrast, is a privately-owned commercial bank. "In 1993 the government decided to establish a bank for the tasks like SME development, agricultural development and mortgage lending," Feiferis tells bne in a interview. "At that time everything was short term, and there was a need for a more long-term approach. We started with less than LVL1m and today we have approximately LVL1bn (€1.4bn).

Though Hipoteku Banka actually means "mortgage bank" in Latvian, Feiferis says his institution isn't so much about mortgage lending today, as every bank can provide such loans. However, "in 2000 we launched a housing lending programme with 20- and 30-year loans at a time when other banks were only offering short-term loans. We also helped establish the rules for the market."

Indeed, Hipoteku's most valuable contribution has been its role as a financial "pathfinder," establishing rules and building confidence among the general public, businesses and financial institutions until commercial banks take up the slack.

Just as it got into mortgage lending early (now only a small part of its portfolio), Hipoteku played a crucial role in supporting Latvia's agriculture sector during the painful transition from the collectivised system to the market-driven economy, at a time when most western banks wouldn't touch post-Soviet agriculture with a pitchfork. "We are still important players in the agricultural sector," Feiferis said. "From all of our portfolio in the national economy, we are financing approximately 20%, which is a pretty large share, especially now when food production is going through some interesting developments." However, EU regulations limit the extent to which state support can be given to agriculture, even during a potential boom and the availability of EU structural funds makes them the first port of call for farmers these days.

State non-intervention

Feiferis is adamant that state ownership does not compromise his freedom to make decisions. "No. We make our decisions ourselves. Of course, we take into account the declarations of the government on which directions are important, as they are after all the shareholders. But usually our decisions are made ourselves, based on professional criteria."

Today, much of Hipoteku's effort goes into supporting companies in the industrial sector or those which offer export-oriented services in a bid to improve Latvia's yawning current account deficit - nearly 20% of GDP during the first quarter.

The next innovation being pioneered by Hipoteku is the fashionable phenomenon of micro-lending, as pioneered by the Nobel prize-winning economist Muhammad Yunus in Bangladesh. "This is a challenge, as it calls for a different way of thinking," Feiferis said. "Bankers find it difficult to think about providing money without collateral. We've run some small pilot schemes in the regions and they worked very well. Micro-lending is one of the things government institutions and the EU could do more because there are a lot of people who are not economically active just because they are not sure that they could do what they are able to do. It's our task to work with them and show that there are opportunities for everybody."

The model Hipoteku uses is fairly simple: the so-called "social guarantee" system. One person takes a loan and two or three people provide legal guarantees that if he or she fails, they will help them get out of the situation. "It creates better cooperation between people and local initiative groups," Feiferis said. "As in Bangladesh, we started with women. Businesses included cooking, knitting, beauty salons, typing, programming, berry growing and so on - even an animator producing cartoons." Once they have mastered the art of dealing with small sums (around LVL500 being fairly typical), entrepreneurs feel confident dealing with larger amounts, Feiferis believes.

And it's not just the recipients of micro-loans who benefit. Feiferis admits that it gives even his hard banker's heart a rosy glow when he sees success stories created from nothing. "At the beginning you see people who are depressed and don't believe in anything, then after a year they're smiling and saying 'Hey, I have great plans for the future'. Of course, that makes you feel good," he says.

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