High share of the informal economy will weaken the growth rate in the future.


The Association of Latvian Commercial Banks’ (ALCB) Lending Index has observed rapid growth of lending in the private sector over the last three years. It has attested economic growth, as well as residents' ability to borrow for their needs and banks' readiness to lend. At the same time, the Lending Index demonstrates that people are cautious — the ability to borrow in the private sector in general is higher than the desire to do so.


“The overall financial standing of the population of Latvia has improved, and as a result, banks’ readiness to lend is constantly growing. Banks’ ability and desire to lend is high. The volume of the loans issued is mostly connected to clients’ desire and ability to borrow. It should be kept in mind that the share of the informal economy in Latvia is 22% of GDP, and this negatively impacts the ability to borrow, thus hindering faster development, especially in the private sector,” comments Sanda Liepina, the Chairman of the Board at ALCB. She also adds that even though desire to borrow grows slower than banks’ willingness to lend, it is still rising and future growth in lending activity can be anticipated. For example, even more people are considering buying or building a house, in part influenced positively by governmental support programmes that are operating already.


According to the ALCB's Index newest data, lending in the private sector showed stable growth last year as well. In 2017, growth was even faster than the previous year, reaching 104 percent and marking the 4 percentage point improvement in the lending climate in the private sector, which has been the sharpest increase during the last three years. In comparison with 2016, index results in 2017 show steeper increase in people's ability to borrow (+8 percent). However, the desire to borrow has grown not as fast (+2 percent).


There have been substantial changes on the part of the banks too — the Index shows that the willingness of commercial banks to lend to private customers has grown by 11% in the past year. One of the most important factors that has led to this increase is people’s growing ability to borrow. This is reflected in a decrease in credit refusals, as well as in new loan offers. Moreover, banks are already offering new and innovative services, both to their current customers and to participants in the new economy.
“In recent years, as Latvia has enjoyed stable economic growth, the average salary has increased and the unemployment level has decreased. Both are important indicators of an increase in creditworthiness. Although being employed in the informal economy is still the most common obstacle to borrowing, the number of people with a stable and transparent income, and who are ready to take on credit obligations, is always growing. Payback indicators are very good too, and banks take all these factors into consideration when adjusting their loan offers to the current situation,” Ainars Balcers, co-chair of the ALCB Lending Committee, explains.


The ALCB’s Lending Index is a unique and complex measure used in the private lending sector. It measures both Latvian customers willingness and ability to borrow, and the willingness and ability of banks to lend. Fourteen different measurements are taken into account, including payment delays, changes in unemployment, proportional share of the informal economy, financial data from the banking sector, consumer sentiment, etc., thus providing a complete picture of lending — the propelling force of the economy. The ALCB’s Lending Index has been developed by analysing world best practice in cooperation with leading Latvian lending and economy experts.

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