Research guide to banking services in eastern Europe
The Estonian Economy Takes OffIn the early 1990s, the entire Estonian economy and way of life were revolutionized with a speed and depth unparalleled in the rest of the world. The Estonian economy used to have very close ties with the Soviet Union, for example, through a joint currency, financial market, industrial structure and foreign trade.Following the collapse of the Soviet Union, Estonia rapidly introduced its own currency, the Estonian kroon (Eek), which was pegged to the Deutschmark. At the same time, it smoothly shifted a major part of its foreign trade from East to West. Finland, a kindred nation, has made a major contribution to the powerful expansion of Estonia's foreign trade. Simultaneously the country's economic structure has also undergone rapid change: it is now dominated by the service sector, while the role of state-owned companies has shrunk significantly. Today the private sector accounts for around 65% of GDP. Estonia is spearheading developments in central and eastern European countries in their progress towards a market economy. In the first stage, the refocusing of Estonian resources resulted in negative GDP growth. That trend was reversed in 1993 and since then the economy has grown at an annual rate of around 6%. The prospects for future growth remain promising. The availability of skilled labour should allow productivity gains and improved competitiveness. Estonia benefits from good sea connections, its ports serving as gateways in East-West trade. It is also benefiting an increasing flow of tourists. Foreign companies have brought a new, dynamic business approach and modern technology. Foreign investment in Estonia in relation to GDP is already among the highest in the world, which is a reflection of investor confidence in the Estonian economy and its development prospects. Estonia's economic success is based largely on its currency board system, under which the kroon is pegged to the Deutschmark at a fixed exchange rate of Eek8/DM1. The exchange rate was deliberately fixed at a level which significantly undervalues the kroon to ensure the price competitiveness of Estonian products and permit a higher inflation rate than in other countries during the transitional phase. Under this system, the supply of money within the economy depends on the development in the country's foreign exchange reserves. This means that interest rates are also determined more or less automatically by currency flows, so that the central bank has little scope for pursuing an independent monetary policy. The currency board system has enhanced the stability of the economy during the recent period of sweeping change. THE BANKING SECTOR IN ESTONIAThe Estonian banking sector has undergone a profound restructuring and transformation process during the last few years. By the end of 1992 the number of commercial banks had risen to 42, but through mergers and bankruptcies the number of banks in the country had fallen to 15 in January 1996.The central bank (Bank of Estonia) issues licences to commercial banks and is in charge of banking supervision. Bank of Estonia is currently aiming to aligning Estonian financial regulations with those of the European Union by the year 2000. A law on credit institutions was approved by parliament in December 1994 and became effective in January 1995. It laid down a minimum capital requirement of Ecu5 million by January 1, 2000. To meet this requirement Bank of Estonia issued minimum requirements concerning the own funds (including retained earnings and loan loss reserves) of Estonian banks in September 1994. Accordingly, Estonian bank's own funds should exceed Eek75 million (around $6.3 million) by the beginning of 1998. As a result of this requirement the number of commercial banks fell from 20 to 15 in 1995, mainly as a result of mergers. The total assets of the Estonian banking sector accounted for around Eek15 billion ($1.3 billion) as of January 1996. The largest banks in Estonia are Hansabank, Estonian Savings Bank, Union Bank of Estonia, North Estonian Bank and Bank of Tallinn. The five largest banks controlled 75% of the Estonian banking market in January 1996. Due to this centralization it is probable that the number of banks in Estonia will fall further in the future and new bank mergers are likely. Several Estonian Banks have successfully completed international share issues. For example, Estonian Forexbank, Hansabank and Bank of Tallinn all attracted foreign capital through international share issues in 1995. Hansabank became the first Estonian company to be listed in the Helsinki Stock Exchange (on the brokerage list). Merita Bank is the officially appointed main custodian of Hansabank shares in Finland, recording all trades done through the stock exchange. Separately, the EBRD has acquired 27.2% of the total share capital of Estonian Savings Bank, which is the leading in Estonian retail bank with over 200 branches. Merita Bank, the biggest Finnish commercial bank, has a branch office in Tallinn and is the only western bank with a full banking licence in Estonia. Merita Bank offers banking services for both western and local companies. These include current accounts and deposits, payments, foreign exchange services, finance and bank guarantees. The Tallinn branch is able to call on the expertise and resources of the whole Merita Group, be it for everyday needs or for questions related to other markets or specialist products. ESTONIAN KROONCurrency reform began in June 1992. The kroon was pegged to the Deutschmark at the rate of Eek8/DM1 with a maximum fluctuation of 3% in the exchange rate. The kroon cannot be devaluated without a legislative change. In April 1994 the Bank of Estonia started to support commercial banks in DM/Eek forward contracts at a fixed rate. After 12 months this support was stopped but the central bank has promised to support the market in future if necessary. Investor confidence in the Estonian kroon has remained firm.The central bank arranges 28-day CD auctions every second week with the maximum amount of bids Eek30 million. The auctions began in May 1993. Estonian interest rates have come down from 8.92% to the present level of 4.35%. The first Talibor (Tallinn Interbank Offered Rate) and Talibid quotations were introduced in January this year. Fixings are held every Wednesday and are based on the rates of five leading commercial banks. Quotations are available for periods of a week, a month or three-months. The size of the market is relatively small. Daily FX volume is Eek500 million and the short-term money market volume is Eek200 million. Unlike the other Baltic states, there is a forward market up to one year. Merita Bank was the first foreign bank to issue a 3-year Estonian kroon bond of Eek64 million. ACCOUNTS AND PAYMENTSThere are no special regulations restricting non-resident companies in their banking arrangements. Current accounts and deposits are allowed in any currency. Merita Bank also provides services for companies under the registration process in Estonia.The settlement time for international payments depends essentially on the correspondent network the local bank has. Merita Bank is able to offer the advantage of a world-wide network of 7,000 correspondents banks compared to a few hundred for the largest of the other local banks. Merita's speciality is faster payments within the Merita Group between Tallinn and Finland or Sweden. The domestic payment system in Estonia is at a relatively advanced level. A local currency payment from sender to receiver must be executed within 48 hours, with domestic clearing arrangements run by the central bank. The account numbers, reference numbers and payment order blankets follow the same pattern for all banks. This results in more reliable and faster payments, and the improved reconciliation of payments against sales ledger entries for corporate clients. ELECTRONIC BANKINGSome banks in Estonia also offer their customers modem-linked PC programs to execute payments and receive account information. Merita Bank has customers located physically both in Estonia and Finland using Merita Bank's Solo banking software. Merita Bank account holders are able to send payment orders and receive account statements through the SWIFT network to anywhere in Europe if the correspondent bank has electronic software with the following features: SWIFT's MT 198/MT100 and MT940 messages).All in all, Merita Bank has now achieved a strong position in the emerging markets, especially in the Baltic States and Russia, based on its extensive knowledge of local conditions and different types of financial instruments. for further information please contact: Merita Bank Ltd Merita Bank Ltd Mr Jyrki Jarvinen/ Mr Erkki Monthau Ms Anu Koskelainen General Manager Emerging Market Tallin Branch Fleminginkatu 27 A Harju 6 Helsinki EE-0001 Tallinn FIN-00020 MERITA Estonia Finland Tel: +372 6 314 040 Tel: +358 0 1655 9530 Fax: +372 6 314153 Fax: +358 0 726 1281 SWIFT MRITEE2X Reuters Dealing MEEM |