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By Aldas Kriauciunas; USAID/Lithuania

May 31, 2000

The Financial Sector Program implemented by USAID/Lithuania provided technical assistance, training, and material support to many elements of the Lithuanian financial sector. Through targeted activities covering both government and private institutions, USAID helped to strengthen the stability of Lithuania's banking and capital markets sectors and improve the economic prospects of the country. These two sectors were chosen since an efficient financial sector is very important to any country's economic growth. Banks and capital markets provide a means to collect capital and then invest the capital where it provides the greatest benefits.

The USAID financial sector programs started in 1992 and has focused on eight primary areas: credit institutions supervision, commercial bank training, commercial bank technical assistance, corporate governance focused on the banking sector, monetary policy assistance, banking legislation, capital markets, and financial sector support. Fourteen organizations and companies from Lithuania and the United States participated in implementing these programs. They included private companies, volunteer organizations, and entities of the U.S. Government. The main clients of USAID assistance were the Bank of Lithuania (BOL), Ministry of Finance, most commercial banks, National Stock Exchange, Lithuanian Securities Commission, and Central Securities Depository. USAID also helped form one non-governmental organization (Lithuanian Banking, Insurance, and Finance Institute) and strengthen two others (Lithuanian Free Market Institute and National Association of Financial Brokers). In total, more than $15 million was provided for programs in support of the financial sector.

It is difficult to attribute success in the financial sector for two reasons. The progress depends on other broader developments in the economy and since much of the work was done to avoid future problems, one can never know what crises were avoided as a result of the assistance. However, one can use international benchmarks to show how Lithuania's financial systems have improved since 1992. At that time, inflation was very high, domestic production was falling, the capital markets system did not exist, the banking sector was still very young, and market regulation was just developing. Much has been accomplished in a very short time. The BOL undertakes annual bank examinations according to international standards and has implemented internal systems to undertake discretionary monetary policy. The banking sector is more competitive with a wider variety of services, supported by a deposit insurance system. The capital markets have greatly increased volume and opportunities for investment. Investor rights are much improved and the current brokerages are financially stronger than just a few years ago. Legislation supporting a transparent financial sector has been passed in areas of money laundering, collateral, foreign bank entry, and financial reporting. Foreign investment has increased greatly and various parts of the financial sector, such as Central Depository, Securities Commission, and Credit Institutions Supervision, are proving to be models to other organizations in the region. Most importantly, the citizens of Lithuania have greater choice in making banking, credit union, insurance, and capital markets investments. This choice and competition, coupled with strengthened regulatory oversight, provides for a healthy financial sector.

The reasons for the success of the above programs varies, but they share some common characteristics that helped improve the potential for success. Some of the characteristics that USAID found important were the continuity in program management, qualified advisors, and working counterparts. Also important was that a pre-implementation assessment of the situation was conducted, training was integrated into the assistance program, and the program provided for a gradual reduction in assistance while increasing client involvement. These haracteristics have allowed for tremendous progress over the past eight years and have resulted in reforms and programs that can be considered self-sustaining and fully utilized by the Lithuanian counterparts.

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The United States Agency for International Development (USAID) has played a major role in the economic, political and social development of Lithuania since 1992. The primary goals have been to stimulate the growth of a free market economy, promote strong democratic institutions and a dynamic civil society, improve environmental protection, and strengthen the social safety net. USAID assistance has enhanced Lithuania’s capacity to integrate into Western political and security structures, develop a healthy economy, and achieve democratic reforms which rival many Central and Eastern European countries. Expertise has been provided by various U.S. Governmental agencies, the private sector, and Non-Governmental Organizations (NGOs). By the year 2000, the United States will have provided almost $90 million in technical assistance, training, equipment, and investments.

Initially, USAID’s program of activities was broad-based and designed to affect many segments of the transforming society. More than 55 projects were undertaken in ten strategic areas. In the first years of activity, USAID experts worked with local partners to initiate legal reforms, improve the protection of human rights, and strengthen the media. USAID provided assistance in drafting the Lithuanian Constitution, and worked with the government, political parties and the media to increase professionalism in the political arena and public activism in local and national elections. USAID strengthened the energy sector by improving environmental regulation and reducing environmental hazards. USAID’s environmental projects provided examples of economically sound investments, and at the same time reduced industrial pollution. Other priorities included regional energy planning, national energy pricing, and safety at the Ignalina Nuclear Power Plant.

In the economic sector, USAID supported privatization, helped set up the national budget process, improved fiscal and financial policies, and strengthened capital markets. After the banking crisis in 1995, USAID helped the Government and Central Bank to improve bank supervision. This raised the standards for bank operations and rebuilt public confidence in banks, enabling the financial sector to recover. More than 300 Lithuanian businesses obtained technical assistance,and more than 100 entrepreneurs received business training in the United States. Independent evaluators have estimated the direct economic impact of USAID programs to exceed $400 million, and approximately 8,000 jobs have been created.

After a broad-based program review in 1995, including extensive consultations with Lithuanian counterparts in the public and private sectors, USAID narrowed its activities to focus on four areas. They are: improving fiscal policy and national budgeting, developing a more stable financial environment with better capital markets, strengthening national energy policy and nuclear safety, and increasing democratization via enhanced citizen participation.

The Financial Sector programs have been a major part of the USAID program in Lithuania from the very beginning. By working with different partners in the public and private sectors, in banking and capital markets, USAID has helped to build a stable and dependable financial sector that will provide leadership for Lithuania's economic growth in the years to come.

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Since the start of the USAID/Lithuania Mission in 1992, the U.S. assistance program has focused on improving the financial sector in Lithuania. This has been accomplished by providing technical expertise and training in three key areas: banking, capital markets, and other financial services. The financial sector has been a particular focus, given the important role of financial institutions as intermediaries in a free market system. The ability to accumulate capital and allocate it to productive sectors of the economy is a fundamental requirement for a free market system to work, hence its importance in the USAID Lithuania program. Given the need to both strengthen and deepen the financial markets, the overall goal was to help create a more stable financial environment with consumer confidence in the banking sector and an effective capital markets system.

The USAID financial sector program activities were organized into the eight following areas: 1) Credit Institutions Supervision, 2) Commercial Bank Training, 3) Commercial Bank Technical Assistance, 4) Banking Corporate Governance, 5) Monetary Policy Assistance, 6) Banking Legislation, 7) Capital Markets, and 8) Financial Sector Support. Most of these relate to banking system reforms; a major focal point of assistance since 1996 has been to strengthen the BOL, the country's Central Bank. The general category "capital markets" has included programs to develop an active stock exchange, reliable market information, improved regulatory oversight, alternative investment options, a well functioning capital market depository/settlement and clearing system, a self regulating brokers association, and increased public awareness.

Implementers have at time worked together to combine skills and resources. Experts assigned to one area have often contributed to performance success in other areas, e.g., bank supervision helps corporate governance. Moreover, USAID programs in other sectors have tended to reinforce activities targeted at the financial sector. For example, the Mission's fiscal policy program which works on upgrading Treasury functions contributes to the goal of upgrading the capacity of the Central Bank and its ability to carry out monetary policy. The same can be said of advice to the Ministry of Finance on preparing the state-owned banks for privatization and improving the capability of Turto Bankas to complete work-outs of bad loans. Overall, the mission used fourteen implementing organizations over eight years to implement this program and are listed at the end of this report.

One key country-specific factor remains that is likely to affect the expansion and sustainability of USAID's financial sector results over the long term. The financial sector institutions need to continue to build the trust of all investors. Lithuania has an aging population, a group that tends to have little confidence in the banking sector and little inclination to invest in the stock exchange. The country has a low savings rate which, if increased, will deepen and strengthen financial institutions. The underground cash economy, though shrinking, will only continue to decrease in size as trust in financial intermediaries increases. These factors are challenges for the financial sector and government representatives that will continue to require attention to ensure foreign and domestic investor interest, economic growth and financial stability.

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From a broad perspective, USAID’s program in the banking and capital markets sectors falls into two distinct periods. The first covers the years from the start of the program in 1992 to the banking crisis in December 1995. During the first phase of the program, from 1992 to the banking crisis of 1995, projects in these areas were for the most part initiated and administered by USAID/Washington. Beginning in 1996, the USAID Vilnius Mission, in partnership with Lithuanian counterparts and USAID/Washington colleagues, led development of USAID’s assistance program to Lithuania. The work for the second phase was reviewed and redefined in early 1996 in light of key leadership changes at the BOL and the Government’s response to the banking crisis.

USAID’s program of assistance to Lithuania, which began in 1992 just a year after the country regained its independence from the Soviet Union, was broadly designed to facilitate the shift from a socialist style economy to one based on free-market institutions. With this as the underlying objective,the program has provided consistent and strong support over the past eight years to developing two key elements of market-driven financial systems - banking and capital markets. The centerpiece of the program has been an integrated set of projects to assist the BOL, the country’s reestablished Central Bank. This included experts to revise its bank supervision strategy and to set up a program of internal training in bank examination. Pivotal to this effort was the passage of the December 1994 law relating to the BOL, which, since its establishment in 1990, had operated as both a commercial bank and a central bank. The new Central Bank law divested the BOL of its commercial banking functions, but gave it greater oversight authority over commercial banks, which were predominantly state owned and managed. The new Commercial Bank Law authorized the BOL to establish prudential standards and to impose sanctions on banks not in compliance with BOL standards. Although private commercial banks had begun operating in 1988, licensing and supervision by the BOL needed improvement, as was the case throughout the region. At the start of 1994 there were 24 private commercial banks constituting 45 percent of banking sector assets, with three state banks making up the rest of the market.

In addition to work at the Central Bank, USAID's first phase of its Lithuania financial program focused on commercial banking and other financial services. The World Council of Credit Unions (WOCCU) began to help build a network of credit unions. The American Bar Association Central and East Europe Legal Initiative (ABA/CEELI) provided assistance in judicial reform,legal professional reform, legal education, and criminal law reform. The International Executive Service Corps (IESC) provided volunteers to advise managers of private and state owned commercial banks. The Lithuanian Free Market Institute (LFMI), a non-government think tank devoted to research on economic reform issues also received funding and was instrumental in the passage of key laws improving the transparency and operations of the financial sector.

The banking crisis that occurred in December 1995 was in some measure, ironically enough, testimony to the very success of USAID and other outside donors in helping the BOL put in place a more efficient mechanism for regulating the country's newly emerging banks. During the period from June to December 1995, on the recommendation of its recently trained bank examiners, the BOL placed restrictions on the operations of four private commercial banks, whose assets represented over 25 percent of all assets held by the banking sector. This greatly shook the confidence in the commercial banking sector.

Beginning in March 1996 with the appointment of a new Governor of the Central Bank, the GOL and USAID re-examined its assistance in the areas of banking and capital markets. The resulting plan, prepared by USAID, redirected the program to accomplishing two objectives: 1) to increase confidence in the banking sector, and 2) to strengthen the capital markets. As part of this program, USAID also requested the U.S. Treasury to provide a long term advisor to the Governor of the BOL on monetary policy. The ability of USAID to be directly involved in developing contracts, specifying needs, and selecting implementers, rather than having that full responsibility based in USAID Washington marks, along with the refocusing of the program mentioned above, a turning point in the management of USAID’s Lithuanian banking and capital markets efforts.

In addition to starting new assistance on monetary policy, advisory assistance also began to the Ministry of Finance on corporate governance. This second phase also saw an increased focus on building up capital markets with a particular emphasis on strengthening the Lithuanian Securities Commission. Work by the Financial Services Volunteer Corps, then Price Waterhouse and later Pragma Corporation, was directed to fill gaps in the regulatory environment, improve market surveillance and financial disclosure, and introduce a trading system that can cope with rapid growth in activity. Local professionals were also given a more prominent role in the implementation of the capital markets program.

This impact report describes USAID’s activities and accomplishments in financial sector development in Lithuania, with a particular focus on the period from 1995 to the present. In addition to its presentation of specific programs and results, the report includes highlights of "success stories" and "lessons learned" that might serve as a useful guide to other assistance programs and USAID missions implementing similar projects.

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This section provides a review and evaluation of eight program areas: Credit Institutions Supervision, Commercial Bank Training, Commercial Bank Technical Assistance, Banking Corporate Governance, Monetary Policy Assistance, Banking Legislation, Capital Markets, Financial Sector Support. The discussion in each case follows a similar format: description of the initial situation, description of the USAID assistance provided, and an analysis of results. They are presented in approximate order of their introduction in the USAID Lithuania program.

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Credit Institutions Supervision

Initial Situation: When the BOL was reestablished as Lithuania’s Central Bank in 1990, it was charged with the responsibility of licensing and supervising all types of financial institutions, including an increasing number of private commercial banks. Monitoring these many, mostly unprofitable operations proved a burdensome task for the new Central Bank given the limits to its supervisory independence and its unfamiliarity with supervisory practices common to banking communities in market economies. To assist the BOL develop an effective supervisory framework, in April 1994 USAID requested KPMG Peat Marwick to undertake a diagnostic review of inadequacies in the present system. The review pointed out the lack of qualified auditors in the country, need for increased inspection frequency, as well as an array of bank management problems: lack of banking experience, inadequate use of financial analysis in assessing credits, lack of control over loans to outsiders, no provisions for loan losses or charges to equity for bad debt reserve, and no loan work-out expertise. At a broader level, problems existed in lending procedures, particularly the lack of a secure lending code and the banks’ inability to perfect their loan collateral and to foreclose on real estate. Credit rating agencies did not exist, and lending was on a short term "secured" basis due to the short term nature of the deposit base and the lack of financial statements or skill in analyzing financial information.

USAID Assistance: With the twin goals of increasing confidence in the banking sector and creating a strong market oriented private banking sector, USAID, beginning in the spring of 1994, financed a series of advisers through private accounting firms and the U.S. Treasury to help upgrade the banking system’s regulatory framework. Most of these programs continued after the outbreak of the banking crisis in December 1995, a crisis brought about in some measure by the very success of the early-stage assistance in helping the BOL identify four poorly performing private banks that accounted for 25 percent of banking sector assets.

Following the KPMG Peat Marwick review, USAID contracted with Barents/KPMG to assist the BOL's Credit Institutions Supervision Department to strengthen its on-site inspection capability and its enforcement ability, including bank liquidation. In August 1994, Barents provided a resident adviser to strengthen the Credit Institutions Supervision Department's supervision and monitoring capabilities and to develop an efficient enforcement mechanism.

In addition, in January 1995 Barents provided a long-term adviser to work with the Department's Problem Bank Division in establishing internal systems, policies and controls concerning oversight and resolution of failing banks. Ten banks closed down between mid-1994 and the end of 1995. The advisor extended his assignment by three months to work with administrators at the Ministry of Finance and Office of the Prime Minister who had been appointed to govern failed banks. Barents also brought in one of its advisers in Latvia on a short-term basis to brief the BOL on how to handle crimes associated with the banking crisis. In 1997, Barents was replaced by a smaller firm, IBTCI, but without any change in advisory personnel. Barents’ principal adviser to the BOL on bank supervision was retained by IBTCI, until October 1996 on a long-term basis and since then for regularly scheduled short-term assignments concerning risk-modeling and evaluating more complex financial instruments. The gradual reduction in the level of assistance allowed the Supervision Department to have assistance for specific questions when needed while also strengthening the ability of the supervisors to work independently according to international standards.

Apart from Barents/IBTCI, USAID funded advisers from the American Bar Association's Central and East European Legal Initiative (ABA/CEELI) and the International Executive Service Corps (IESC) to provide occasional short-term assistance in support of bank supervision. CEELI organized a workshop in the spring of 1996 with the Association of Lithuanian Banks on money laundering and IESC advised three banks on liquidity and solvency problems, which included asset-liability and credit management. In addition, the U.S. Treasury’s long-term adviser to the Ministry of Finance on corporate governance worked on establishment of a deposit insurance scheme and a work-out bank for bad loans transferred from closed/merged state owned and private banks.

Results: In terms of bilateral donors, USAID has been the major adviser to the BOL on bank supervision. With the assistance of USAID-financed advisers, the BOL made substantial progress in strengthening its role as the ultimate supervisor of all credit institution operations. First, it introduced and strengthened enforcement of loss recognition provisions adopted in 1994; all banks were given a comprehensive CAMEL (capital, asset quality, management, earnings and liquidity) rating. The CAMEL rating is a standard method to measure five key aspects of a bank to determine its viability. Second, a manual for inspectors was completed and all bank inspection supervisors received training in use of handbook procedures, CAMEL analysis, and bank rating methodologies. With uniform procedures now in place for onsite inspectors, an early warning monitoring system and CAEL (like CAMEL, but only focusing on financial measures) system was developed and communications between on-site and off-site supervisors were improved. These changes will help identify banking sector problems before they become a crisis. Third, the BOL created a Problem Bank Division and, with the help of USAID’s long-term adviser, developed policies and procedures for management of poorly performing banks. The supervisory staff of the new division was given comprehensive training and is now qualified to oversee disposition of the banks. To make supervision and resolution of problem banks more effective, administrative judges were also trained in new procedures. Fourth, a code of conduct was developed for inspectors, and the BOL provided more protection to its examiners when reporting their findings. Laws relating to enforcement activities were revised. Fifth, the Credit Institutions Supervision Department developed a manual for inspecting credit unions. The BOL now has a staff of well qualified bank inspectors responsible for conducting annual examinations of each bank (nine) and credit union (36) every year. These inspectors are qualified to impose restrictions when an institution is not operating according to Central Bank requirements for minimum financial safety. All banks, including state owned banks, must publish annual audited financial statements prepared in accordance with International Accounting Standards.

On matters indirectly related to bank supervision issues, USAID-financed Central Bank advisers played an active role in passage of a law outlawing money laundering and in discussions leading to a decision to allow foreign branch banks to operate in Lithuania. In the case of money laundering, ABA/CEELI held a high-profile workshop on the issue prior to drafting the new law; once the law passed, CEELI held a series of lectures at Vilnius Law School on its implications for the banking and business communities. USAID advisers also briefed counterparts in the BOL and the Government of Lithuania as well as members of the Seimas (Parliament) on the technical aspects of collateral law, collateral registration, financial analysis, bank management, and a secured lending code.

Both Central Bank senior officials and commercial bankers regard the USAID assistance program to establish a regulatory framework and to strengthen and refine the BOL's supervision and monitoring capabilities for credit institutions as highly successful and likely to be self-sustaining.

The efforts of USAID have contributed to the broader improvements in the commercial banking sector. Confidence in the banking sector has increased. Total deposits and long term deposits as a percentage of total deposits have increased. The banking sector has had a net profit for the past several years, foreign banks have opened branches, and the number of state owned banks and their share of total bank assets have decreased. Representatives of international organizations in Vilnius, such as the World Bank, European Union assistance program (EU Phare) and the International Monetary Fund,the local banking community, and the client, the Credit Institutions Supervision Department of the BOL, give high ratings to the work of USAID advisers and the training provided under the credit institutions supervision project.

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Commercial Bank Training

Initial Situation: In 1994 AID/W requested Barents/KPMG to undertake a survey and assessment of the skill levels of Lithuanian commercial bankers with a view to designing an appropriate skills upgrading program. In an environment of increasing bank failures, fraud and lax regulations, instituting such a program rapidly and across-the-board was of critical importance. The diagnostic included the bankers’ own assessment of their training needs along with careful analysis of skills available. Barents identified particular needs in credit analysis and asset and liability management. In their judgment also, while training services were minimally available in the Vilnius head offices, such facilities were virtually non existent in branch offices. At the time, there was little coordination in the banking sector in providing bank training nor was there a clear understanding (prior to the assessment) of the needs in the banking community.

USAID Assistance: As part of achieving the goal of a stronger, market oriented banking sector USAID requested Barents to work with the Lithuanian Banking Training Center to design a training of trainers program geared to overcoming skills gaps identified in the Barents diagnostic and to provide training to bankers in Lithuania. Nine Lithuanian trainers were selected based on presentational ability, ability to offer training outside Vilnius, and professional qualifications, particularly in capital markets, credit analysis and asset and liability management. The group was sent to the University of South Carolina in the fall of 1995 for six weeks oftraining including credit analysis, asset and liability management course preparation and presentation. In addition, USAID contracted with Barents’ instructors to offer 22 courses in seven areas - credit analysis, international accounting standards, internal audit, foreign exchange, asset-liability management, bank simulation and branch management - using curricula developed by Barents in other countries. In all, 260 people in four cities - Vilnius, Siauliai, Kaunas and Klaipeda - participated in these courses over a five month period, from September 1995 through January 1996.

Results: The evaluations of the instructors who offered the 22 courses in Vilnius and three other cities were generally favorable and classes were well attended. The banking crisis of late 1995, which occurred as these programs were being implemented, increased the interest of bankers to learn international banking practices, as they recognized that Lithuania was not immune to problems associated with violating accepted banking standards. This awareness probably increased the likelihood that the newly trained commercial bankers used the skills they gained through the Barents training. The training costs were partially covered by participant fees which provided support in establishing a training institute for bankers. Established as a Training Center in December 1994, the Lithuanian Banking,Insurance and Finance Institute (LBIFI) now receives financial support from Lithuanian commercial banks, outside donors, such as EU Phare and the U.K Know How Fund, to undertake specific training programs. The Institute provides training for employees of financial institutions, designs professional qualification and certification systems, publishes reports on banking and finance topics, and organizes distance learning sessions. The bankers give the Institute and its director, Dr. Eugenijia Martinaityte high marks; Dr. Martinaityte praises USAID’s role in getting a professional, concerted bank training program started in Lithuania. Several of the training of trainers participants continue to work with the LBIFI in the areas of training and curriculum preparation.

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Commercial Bank Technical Assistance

Initial Situation: Private banks began to form in Lithuania in 1988 and the total number peaked at 28 in early 1994. These early banks lacked many of the fundamental systems needed to operate properly. By the end of June 1995, ten smaller banks, including Aura Bank with total assets of $37 million, were under appointed administrators. Failures multiplied: By the end of 1995, Innovation Bank (the second largest bank) and Litimpeks (the seventh largest bank) were under a temporary moratorium and Vakaru Bank (the sixth largest bank) was closed and placed under an administrator.

USAID Assistance: In August 1995, in response to a growing number of bank failures over the previous year, USAID included in its plan for FY 1996 a commercial bank assistance program specifically geared to increasing the eligibility of banks to receive credit from the World Bank under its Enterprise and Financial Sector Assistance Project (EFSAP). The proposed program was viewed as complementary to an on-going USAID effort to improve bank operations through assistance to the BOL's Credit Institutions Supervision Department. Due to contracting difficulties, in June 1996, USAID tapped into an existing relationship with the IESC to undertake the assignment. IESC in timely fashion supplied short-term advisers to Litimpeks Bank (which had reopened) in credit management, auditing, and strategic planning/training and to Siauliai Bank in marketing, strategic planning, and auditing. IESC was a logical choice as it had provided advisors and training experts to seven commercial banks between 1993-1995 in various facets to help the fledging banking sector. IESC had also organized a seminar on Commercial Bank Operations for 175 representatives of 15 banks in 1995.

Results: The IESC assistance to Litimpeks Bank did not begin until after the bank had reopened in June 1996. IESC's experts reviewed the bank’s operations and made recommendations on increasing deposits. From June 1996 until the fall of 1997 Litimpeks Bank opened 6200 new accounts and showed $325,000 in net profit. The bank expanded very successfully, raised $37.5 million in foreign equity capital and recorded a positive return on assets in 1998. Siauliai Bank, a private bank started in 1991 from a branch of a Soviet bank, continued to operate successfully and expand services in northwest Lithuania.

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Banking Corporate Governance

Initial Situation: In the fall of 1995, a few months before the banking crisis, the Ministry of Finance requested assistance from USAID for a long term advisor on reform, privatization or resolution, and governance of the state-owned banks. At the time, there were three state-owned banks: State Savings Bank, State Agricultural Bank, and State Commercial Bank. These three banks emerged from former Soviet banks and comprised half of the banking sector deposits and assets. There was a clear corporate governance problem: state owned banks were poorly managed and subjected to political interventions. Also, by law, all board members of state owned banks, who represent the state’s share, were required to be government officials.

USAID Assistance: As part of USAID’s effort to increase confidence in the banking sector and to promote the development of a strong market-oriented private banking sector, USAID provided the requested long term adviser on corporate governance. The assignment was for 30 months, 1996-1998 and then intermittently until the present. The Minister of Finance who took office about the same that the advisor arrived in January 1996 set a priority of accelerating the privatization of the State Commercial Bank and later the Agricultural Bank. Privatization of the state owned banks was also a high priority for the IMF, World Bank, EU Phare and USAID. The advisor focused on privatization of the three state-owned banks, as well as a fourth bank put under receivership. He also worked on the establishment of the bad loan work-out bank (to be formed into Turto Bankas), previously worked on by a USAID financed advisor to the Office of the Prime Minister, and the establishment of an agency, the Deposit Insurance Agency, to manage the newly created Deposit Insurance Fund. In this latter effort he was assisted by two short term advisors, one provided under the U.S. Treasury contract, and the other under the IBTCI contract. Both worked on policies and procedures for the new Deposit Insurance Agency. For one year, 1995, USAID financed an advisor to the BOL's Credit Institutions Supervision Department's problem banking unit. This advisor was then assigned for three months to work with the Office of the Prime Minister on matters related to the four banks that had closed in the second half of 1995. He also worked on the creation of Turto Bankas as the repository of non-performing loans from insolvent banks. USAID, through World Learning, also arranged training in management of distressed banks for the head of the banking division of the Ministry of Finance and in operating procedures for work-out banks for the Chairman of Turto Bankas and his deputy.

Results: Turto Bankas was established with the help of the corporate governance advisor and the advisor assigned to the Office of the Prime Minister. Innovation Bank was liquidated and its assets transferred to Turto Bankas for disposal. With help from EU Phare and USAID’s corporate governance advisor at the Ministry of Finance, the government attempted to sell the State Commercial Bank, but without success. This bank was liquidated and its good assets and all liabilities were transferred to the state owned Savings Bank and non-performing assets were transferred to Turto Bankas. The Ministry of Finance prepared the Agricultural Bank for privatization, again with help from the USAID financed corporate governance advisor and contractors financed again by EU Phare. The advisor assisted the Ministry of Finance in negotiations with the EBRD on a subordinated loan to the Agricultural Bank and an equity investment in the State Commercial Bank before it was liquidated and merged with the Savings Bank.

The Deposit Insurance Agency is up and running and it performed very well in the aftermath of the banking crisis of 1995-1996 by paying all depositors of Tauro Bankas within 60 days of its failure. The government made its first promised contributions to the fund and all banks have contributed insurance premiums for several years. The Seimas (Parliament) passed a law raising the deposit coverage to 65,000 litas in 2000, which reflects European Union standards.

The corporate governance advisor helped the Ministry of Finance prepare for country ratings from three rating agencies. The input, guidance and training helped Lithuania achieve an investment grade rating. This added to Lithuania’s ability to access international capital markets. Previous ratings done by Moody and IBCA were not investment grade. The advisor served on the Parliament’s money laundering committee and helped draft a money laundering bill that was enacted. The favorable Standard; Poor rating, the establishment of the deposit insurance program and the passage of a money laundering law all contributed to enhancing confidence in the banking system, a major objective of USAID’s assistance in the financial and capital markets.

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Monetary Policy Assistance

Initial Situation: In April 1994, Lithuania adopted a currency board arrangement, which tied its national currency, the litas to the U.S. dollar at a four-to-one ratio. This severely limited any discretionary monetary policy on the part of the BOL. As indicated earlier, the banking crisis of December 1995 brought into question the BOL’s supervisory and regulatory capacities and undercut confidence in the entire banking sector. The profitability of banks diminished significantly in the mid 1990s (return on assets was negative in 1995) and the number of banks in operation continued to decline from a high of 27 in early 1994 to 12 in March 1997. The state-controlled State Commercial Bank and Agricultural Bank managed to remain solvent after the banking crisis only because the Government of Lithuania provided capital injections or special treatment in terms of government programs, liability coverage or transfer of additional government deposits. The Seimas’ (Parliament's) response to the crisis was to pass laws, applicable to state-controlled banks, designed to circumvent the authority of supervisory authorities. In an attempt to strengthen the BOL's independent regulatory authority, in March 1996, the newly appointed Central Bank governor requested USAID assistance in accelerating banking sector reforms, including provision of an adviser on monetary policy.

USAID Assistance: With the overall objective to strengthen the capacity of the central bank, USAID requested the U.S. Treasury to supply an adviser to work with the Central Bank on monetary policy. This advisor began her work in January 1997. The objective of the advisory assignment was to assist the BOL to make the transition from a Central Bank governed by a currency board to an independent entity able to employ discretionary monetary policy. To accomplish this, the adviser worked directly with the Governor of the BOL and helped upgrade management of operations, liquidity smoothing methodologies, and macro-economic forecasting and research. In addition to the resident advisor, USAID, again through its operating arrangement with Treasury, provided two short-term advisers to the Central Bank on forecasting bank reserves and market liquidity and balance of payments statistics.

To strengthen the skills provided through technical assistance, USAID arranged short term training courses for the BOL’s Director of Market Operations Department on foreign exchange reserve management at the Federal Reserve Bank of New York and Head of the Bank’s Policy Division in financial crisis management at the University of Maryland and the Chicago Federal Reserve. USAID also had its training contractor, World Learning, arrange for the Manager of the Securities Division at the BOL to study legislation regulating the primary dealers system for government securities at the U.S. Treasury.

Results: With the assistance of USAID-financed advisers and training described above, the BOL took several important steps to institutionalize and regularize its role in monetary policy. First, it established the Committee on Money Market Questions, which is composed of representatives from three departments, Market Operations, Bank Policy, and Credit. The committee provides a forum for discussion of monetary policy using data from three different perspectives, excellent preparation for BOL personnel as the Central Bank implements its monetary policy program. Second, in 1997 the BOL began limited money market liquidity smoothing operations, such as repos and deposit auctions, which were first steps to discretionary monetary policy. Third, in 1998 the BOL installed a fully collateralized Lombard discount facility. Fourth, the BOL can now forecast bank reserves and market liquidity. This gives early warning of potential problems and provides the Central Bank information with which to have a more informed dialogue with the government on monetary issues.

During her three years, the long-term Treasury adviser also worked closely with the BOL Governor on such issues as risks of devaluation, the Central Bank’s relations with state-owned banks, and foreign branch banking, issues which the BOL must have the capacity to resolve to function effectively as the nation’s Central Bank. She actively participated in discussions with Seimas (Parliament) members on money laundering which resulted in the passage of a money laundering law in the fall of 1997. The advisor also focused assistance on domestic and foreign public relations and public information guidance to ensure stability in domestic financial markets. Finally, she helped the BOL organize a conference of central and east European central banks to discuss managing foreign exchange reserves. This strengthened the BOL's direct contacts with central bankers in the region, which facilitated sharing of information and experiences.

As a result of USAID-funded advisory activities, the BOL is better prepared to manage the phase-out of the currency board. The Central Bank's capacity and credibility have improved and informal mechanisms have been put into place to encourage integration of fiscal and monetary policy. Overall, the project can be considered a success and is now self-sustaining.

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Banking Legislation

Initial Situation: Absence of an adequate legal framework governing loan recovery, foreign branch banking and depository insurance constrained expansion of banking activities in the 1990s. Lithuanian credit laws have traditionally been debtor friendly. Banks, as well as other corporations/legal entities may not legally own land and other foreclosure procedures are unwieldy, thus making it difficult to collect residual values on bad loans or to seize collateral in case of default. As a result, banks have tended to limit their lending, to search for informal ways to gain access to collateral, and to actively develop the leasing market where they can retain title to the property during the lease agreement. In the case of foreign branch banking, again, the larger issue at stake was how to make commercial banking a more competitive industry. Until the banking crisis of late 1995, the Lithuanian banking sector was not competitive. Three state owned banks and four private banks dominated the market. While foreign banks could set up subsidiaries, it was costly for them to meet capital requirements specified under the then provisions of the Commercial Bank Law. In addition, it was extremely difficult for them to be licensed as branch banks without a change in the Commercial Bank Law. Both the BOL and the Lithuanian Bankers Association had reservations about allowing foreign branch banking, particularly on the issue of responsibility for inspections. USAID, the International Monetary Fund (IMF), World Bank, and EU Phare, on the other hand, saw foreign branch banking as a means to increase competition and provide better services to citizens and corporations.

The critical need for new rules protecting deposits came into sharp relief with the banking crisis. At that time, only deposits in state owned banks were secure. When the BOL limited operations of two medium-sized banks in the second half of 1995, and then placed a moratorium on two more banks, including the largest private one in December 1995, depositors began either switching deposits to larger banks from smaller ones or just withdrawing deposits. The Lithuanian parliament, known as Seimas, immediately passed numerous deposit protection laws, including limited coverage to depositors in private banks and the establishment of a deposit insurance fund. This legislative fund would be the backbone of future deposit protection, but, to operate, it needed an organizational structure and well-defined policies and procedures. Changes in other commercial laws were also needed to provide for a better lending environment.

USAID Assistance: As part of its goal of increasing confidence in the banking sector, USAID targeted new legislation in three areas: collateral management, foreign branch banking, and depository insurance. In the fall of 1996 USAID launched an initiative to address such constraints beginning with advisers to assist the Seimas to draft new laws on collateral, bankruptcy, competition, and leasing. USAID assistance in the area of foreign branch banking was explicit but informal. Both of USAID’s long-term advisers, one working on supervisory issues with the BOL, the other on corporate governance with the Ministry of Finance, encouraged the Government of Lithuania to amend the Commercial Bank Law to allow foreign banks to establish branches in Lithuania. Their discussions were reinforced by similar representations from the USAID Lithuania Mission Director, the Program Officer, and the U.S. Ambassador. International Monetary Fund, World Bank, European Bank of Reconstruction and Development (EBRD) and EU Phare officials also weighed in on the side of changing the law. In the case of depository insurance, USAID provided two short-term advisers with FDIC experience and the aforementioned corporate governance adviser at the Ministry of Finance. They worked on assisting the Deposit Insurance Agency to manage the newly enacted deposit insurance fund. The head of the Agency was sent to the U.S. on a short term training program.

Results: USAID's advisory assistance had positive results. The bankruptcy law was amended to allow creditors to recover the residual value of collateral. Commercial bank lending to private persons has increased and private banks are now offering up to 5-10 year mortgages and considering 20 year mortgages. Changes made to the Commercial Bank Law now make it legally possible to establish foreign branch banks, and a new Deposit Insurance Agency is up and running. Currently, four foreign banks have branches and four have representative offices. The Deposit Insurance Agency is now up and running. It performed very well when the BOL closed down Tauro Bankas in 1997. All eligible depositors were paid within 60 days. The government has contributed through budgetary appropriations and the banks through assessed premiums of 1.5 percent on deposits. The deposit coverage requirement for this new agency, so critical to public confidence in the banking sector, is expected to meet EU standards by the year 2001. Lithuania has registered the Deposit Insurance System with the U.S. FDIC, one of the first 35 countries to do so.

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Capital Markets Development

Initial Situation: Before 1992, individuals and institutional investors in Lithuania had few alternatives to traditional banks as depositories for accumulated savings. New enterprises or companies requiring capital for expansion in production were also forced to rely almost entirely on banks, which only provided debt financing. In some cases, companies were able to fund expansion through retained earnings, but this limited the ability to expand. As part of the effort to stimulate the economy through market-based reforms, the Government of Lithuania passed a series of resolutions and laws between 1992 and 1995 to construct the institutional framework for a capital market. The National Stock Exchange of Lithuania, the Central Securities Depository of Lithuania, and the National Association of Finance Brokers began operations in 1993 and the following year the BOL opened a new clearance function. The Lithuanian Securities Commission, which started operating under a special provision in 1992, was designated by law in January 1996 as the agency for regulating all aspects of trading public securities. Lithuania’s mass privatization program, begun in 1991, supplied the participants with a new market. In fact, the percentage of the population (40 percent) holding shares in Lithuania--shares obtained through the distribution and redemption of free vouchers--is comparable to that in the U.S. Since August 1994, the Government of Lithuania has allowed purchases of Government T-bills on the Stock Exchange.

Passage of additional legislation, specifically, the Law on Public Trading in Securities, set the stage for building a system of rules, regulations, and procedures to govern the new entities, thus encouraging efficiency in capital market operations. At this time, 1995 activity on the stock exchange was small ($4.2 million on the Central Market, of which $1.25 million was in T-bills) liquidity was limited (average 31,400 shares/day traded on the Central Market), and confidence in the Exchange was low, partly because the population was not knowledgeable about a stock exchange and partly because of the growing number of failed banks. Institutional investors, such as private pension funds and mutual funds, did not exist. Their absence limited liquidity in the market. Regulations were unclear or non existent on transparency issues such as rules of disclosure, conflict of interest, a code of conduct for brokers, and accounting standards. There was also a need for rules on capital adequacy of brokerage firms, and on market surveillance and enforcement.

In the initial phase of developing a capital market, the Government of Lithuania faced two problems: 1) how to increase trading in equities on the exchange, and 2) how to build a system of rules, regulations, and procedures to enable a robust and efficient capital market. The USAID program initially focused on the second problem. However, a third problem quickly surfaced: how to make market intermediaries in the financial and capital market more responsive to the needs of suppliers and users of capital. For instance, the primary market for investments in securities was negligible, and banks did not get involved in mergers and acquisitions or asset management activities. Moreover, banks did not handle mortgage lending, equipment leasing and car loans, engage in long-term lending or syndicated loans for large projects, or aggressively lend to small and medium sized companies.

USAID Assistance: In October 1995, USAID, working first through Price Waterhouse, later through Pragma, launched a comprehensive program of technical assistance and training to strengthen the four capital market institutions: Securities Commission, Stock Exchange, Central Securities Depository, and Brokers Association. Assistance to a small commodity exchange was begun but dropped after the first year. Among outside donors, USAID has been the only major provider of assistance to Lithuania’s capital market development since mid-1995. The French assistance agency was the only donor from 1993-1995 and helped establish the trading system at the National Stock Exchange of Lithuania and the depository and settlements system at Central Securities Depository of Lithuania.

The original plan called for assistance to all the major components of the Lithuanian capital markets system, to be provided by Price Waterhouse. Six consultants worked with the Stock Exchange in the following areas: 1) developing a strategic plan, 2) helping public companies raise capital, 3) improving the trading system, 4) setting up an internal regulatory system, 5) developing market surveillance, security regulation and enforcement systems, and 6) public relations. Seven advisers, including the long-term advisor, worked with the Securities Commission, on policy and regulatory matters and implementation of the European Capital Adequacy Directives. They provided guidance on corporate disclosure, broker examination programs, investment company regulations, investment company accounting, enforcement methodologies, and market surveillance. Five advisers assisted the Brokers Association to develop internal regulations, design training modules for financial intermediaries, upgrade back office software to integrate it with new trading and depository systems, and create a public relations department. One advisor worked on a strategic plan for the commodity exchange.

The Financial Services Volunteer Corps, under an AID/Washington regional contract and in coordination with Price Waterhouse in the field, provided technical assistance and training to the Central Securities Depository and Securities Commission over the period 1995-1997 in the following areas: rules on capital adequacy criteria and market incentives, investment analysis and portfolio management, a recovery plan for depositors, clearing and settlement accounts, and investment company and broker inspection. USAID also helped upgrade Central Securities Depository’s and Securities Commission’s library resources, with access for all market participants.

In late 1996, the contract for capital market assistance was shifted from Price Waterhouse to a smaller firm, Pragma. To ensure continuity of assistance, Pragma hired the original group of local and foreign advisers on a sub-contract basis for six months. The new contract placed greater emphasis on assistance to the Securities Commission. A decision to fund local professionals was made at the suggestion of the head of the Securities Commission. The local professional staff included two attorneys, one economist, two financial analysts, an accountant, and two translators. The work with the Securities Commission focused on drafting rules and regulations, developing competence in enforcement and market surveillance, including the ability to conduct inspections of registered entities, and drafting and reviewing amendments to Lithuanian laws on securities, investment companies and joint stock companies. In addition to assistance to the Securities Commission, the USAID contract included funding to upgrade the trading system at the Stock Exchange to handle the larger number of transactions on the exchange anticipated as the economy grew and people became more aware of the stock exchange. This assistance was coupled with short term advisors to help the Stock Exchange improve its market surveillance capability. Other advisors worked to upgrade the Brokers Association’s back office computer system.

In addition to the contract with Pragma, USAID has financed a number of smaller-scale, complementary activities designed to promote rapid development of an efficient capital market. IESC advisers worked with VB Vilfima, a leading brokerage firm, on fund management and market research and organized a seminar for 40 participants on mutual funds. With the Brokers Association, IESC organized two training sessions for brokers on financial services (15 participants) and on securities (15 participants). As part of its phase-out program, USAID funded two policy studies: 1) Analysis of the Lithuanian Capital Markets, and 2) Ways to More Effectively Increase Investor Interest in the Lithuanian Capital Markets. Both were undertaken by a local company, MAS Consult, with the goal of increasing the policy analysis undertaken in the capital markets sector and to form links between capital markets clients and domestic providers of assistance.

Training was a fundamental part of the program, with the goal of ensuring skill transfer to the clients. Training seminar and conference topics in Lithuania included U.S. investment companies, back office systems, corporate disclosure, market surveillance and enforcement, self regulatory organization development, European capital adequacy directives, commodity exchanges, corporate governance and competitiveness, director obligations, trends in private pension funds, and capital adequacy rules for financing brokerage houses. Training abroad included trips sponsored by the U.S. Securities and Exchange Commission on regulatory issues, training for 14 brokers and other market participants at the Chicago Stock Exchange, training at the London Securities Institute, as well as visits to other Central and East European Countries.

Results: With assistance from USAID over the period 1995 to 2000, Lithuania has made significant progress in creating a well-regulated and efficient capital market. Specific actions include the following: First, based on recommendations from USAID-financed advisers, the Securities Commission established a code of ethical conduct for brokerage firms and rules to protect minority shareholders and punish inside trading by firms. Second, in response to a specific Seimas request, Stock Exchange, Depository, Securities Commission, and Brokers Association representatives worked with USAID advisers to draft modifications of laws governing companies, securities, and mutual funds which were enacted largely as presented. One of the additional benefits of this action was encouraging the four institutions to exchange ideas and work together. Third, a new regulation on capital requirements for brokerage firms drafted with advisory help was passed in November 1997. This changed the brokerage industry by forcing weaker companies either to close or merge and stronger companies to increase their capital. The remaining brokerages are financially stronger and the smaller number allows for better monitoring, including annual inspections. Fourth, on the recommendation of both local and expatriate advisers, the Securities Commission approved new trading rules for the exchange in January 1998. These included formation and management of trading lists, de-listing of securities, trading, clearing and settlement procedures, admission to stock exchange membership, clarification of member rights and obligations, suspension and resumption of member rights to participate in trading, and creation of a stock exchange information system. Finally, advisers have prepared new regulations and amendments to existing laws regarding investment companies and valuation of assets and accounting and financial reporting standards for brokerage firms and investment funds. Exams for brokers have been designed and verified, and market surveillance techniques have been adopted, though modifications are required for a small, volatile market such as Lithuania’s. The Brokers Association is now well on its way to becoming a self-regulatory organization and software has been installed to link brokers with the Stock Exchange and the Depository. The Brokers Association organized an extensive public awareness campaign, including workshops in six cities with over 500 participants.

During the final year of USAID technical assistance in market regulation, the Securities Commission adopted rules to systematize and clarify the requirements for brokers working with their clients to protect the interests of the latter and eliminate potential violations in the execution of orders. Two sets of accounting documents were prepared with USAID assistance on reporting requirements and forms of financial statements for brokerage firms and mutual funds. As a result, brokerage firms’ and investment companies’ financial statements will better reflect the special reporting needs of financial companies and enable brokerages to disclose their financial status and performance more comprehensively according to international standards. This will help attract more capital from abroad, and improve the Securities Commission’s ability to better understand and analyze the specific operations of financial brokerages. The project to improve the trading system at the Stock Exchange was completed in early 2000 and built upon the continuous trading system put in place earlier. This system allows for faster and more reliable trading, can handle larger volumes (volumes increased from $35 million in 1995 to almost $225 million in 1988), and improves market surveillance.

USAID gets high marks for its work in capital markets from other outside donors and the Government of Lithuania alike. Activity on the Stock Exchange, a key indicator of successful intervention, has increased significantly since 1995, both in terms of capitalization and turnover. This is a remarkable achievement given the fact that the economy is still immature, the Russian ruble crisis resulted in substantial withdrawals from the Stock Exchange by Estonian investors, Stock Exchange securities issued as part of the cash privatization program decreased significantly in 1998, and T-bills which pay 10-13 percent offer an attractive alternative to Stock Exchange-traded equities. USAID has assisted in establishing a sound foundation for the capital markets; for it to grow and flourish, conditions must evolve that favor higher savings rates and more demand for equity capital, such as greater competition in the banking sector; a diversity of maturities so a bond yield curve and a corporate bond market will develop; the establishment of institutional investors, e.g., mutual funds and private pension funds, and the privatization of state ownership in good companies through the Stock Exchange.

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Financial Sector Support

Credit Unions: Through 1995, the citizens of Lithuania had no alternative to the banks for depositing money and no recourse for consumer loans. To assist the Government of Lithuania in the development of credit unions, USAID, beginning in 1994, provided a grant to WOCCU to fund short-term advisers and training to local office staff at the WOCCU Lithuania office. Work in this area was greatly facilitated by passage in February 1995 of an amendment to the Commercial Bank Law, which recognized credit unions as legal entities. The WOCCU Lithuania office helped in developing the legal foundation that allowed credit unions to be formed. WOCCU assistance has included special training for credit union inspectors at the BOL, advice on forming a National Credit Union Association, and the development of a system to track the health of existing credit unions and guide the formation of new ones. WOCCU has also worked with groups desiring to form credit unions and provided training to managers of credit unions. With the help of WOCCU, the National Credit Union Association is now in place and credit institutions supervision department inspectors received training specific to credit union operations. Over the period 1995-1999, the number of credit unions has increased from four to 36 and total assets increased to almost $3 million, with over one-third of these credit unions developed through WOCCU assistance. Credit unions provide banking services to small-scale depositors and borrowers, a market ignored by commercial banks, as well as seed-money to entrepreneurs.

Financial Sector Legislation and Public Advocacy: With the transition to a free-market economy, Lithuania lacked non-governmental organizations, especially those with knowledge and understanding of the new economy. The Lithuanian Free Market Institute (LFMI) was the first such organization to begin working in Lithuania. Given the need to educate the public and work on financial legislation, the Institute had much work to do. USAID began providing funding in 1993, with improving financial sector laws as one of its priorities. LFMI was a strong advocate of forming the currency board as a means to maintain public confidence in the national currency, the litas, and in the BOL at a time of rapid change and uncertainty about the path of Lithuania’s financial strategy. LFMI has also been a strong advocate of using privatization proceeds to capitalize private pension funds and investment companies and has assisted the government in drafting a new pension law. The work of LFMI has had a positive influence in initiating and improving financial sector laws, resulting in improved safety, soundness, and transparency – three key aspects of a well-structured financial sector.

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Over the past eight years, the USAID program in Lithuania has had a number of successes. Although the foundation for this success varies from project to project, there are some common factors that resulted in very positive results for Lithuania.

• Continuity in USAID Management in Vilnius and Washington D.C.: USAID Lithuania benefited from having the same Program Officer responsible for the financial sector from 1993-1999. This continuity allowed for strong bonds and a high level of trust to be built up between the Mission and Lithuanian counterparts. Another element of this team effort was continuity in Washington D.C., both in USAID (such as in bank supervision) and the U.S. Treasury. As a result, U.S.-based experts built up strong in-depth knowledge on events in Lithuania and were better able to provide experts and assistance to ensuring project success.
• Continuity in Qualified Advisors: Although the foundations of market economics are consistent across countries, each transitional economy has its own set of laws and special features. As a result, it was standard in Lithuania for a long-term advisor to take six months before he or she was fully utilized - it took that long to sufficiently understand the sector as well as to build a good rapport with the client. Having continuity in good advisors ensured that they would be productive for longer periods of time. When USAID Washington required the USAID Lithuania Mission to shift to smaller implementing organizations, the transition was smooth and the work continued in an effective manner because the new implementing organizations also wisely hired the same, well respected consultants used by the larger firms in starting the activities. Although name recognition of the implementing organization was beneficial in getting a good start, experience showed that it was the quality of the advisor, not his/her institutional affiliation, that counted.
• Continuity of Qualified Counterparts: Having committed and skilled leaders as counterparts significantly increased the chance of success of implementation. Such clients were committed to the project and ensured that the whole organization participated in tapping the resources being offered. No where was more clear than in the capital markets activities. Leadership at the four capital markets participating institutions---the Stock Exchange, Securities Commission, Central Securities Depository, and Brokers Association---remained almost the same for five years and their commitment was strong throughout the project. The same can be said of work at the Central Bank in monetary policy and credit institutions supervision.
• Starting with a broad diagnostic: Bank supervision and capital markets development are complex and highly technical undertakings. USAID made the right decision in starting each of these programs with large, experienced implementing organizations equipped with well tested analytical, diagnostic and verification techniques to help build a framework for bank supervision and an efficient and transparent capital market. These activities in Lithuania got off to a good start which provided a basis for USAID to continue the work successfully with smaller firms at a later date. The diagnostic for capital markets, with five initial clients, improved planning and implementation. This allowed for a comprehensive, across-the-board approach, rather than piecemeal, scattered activities.
• Training: Practically every financial sector project emphasized that training is vital to success. Such training should be based on a careful assessment not only of domestic institutional needs but also of training locations, which might include neighboring countries as well as the U.S. In some cases, the training was done by the advisors working with counterparts and in other cases, by having counterparts participate in special programs. In special circumstances, with sufficient demand, a local institution was formed - the Lithuanian Banking, Insurance, and Finance Institute. Where practical, every effort should be made in the training program design to provide for modifications of the curricula based on the initial training experience and to incorporate the revised training curricula into on-going training efforts. The training is essential to program success where people have come to their new positions without previous experience in market-based institutions.
• Gradual Phase-Out and Increased Client Involvement: Every USAID Mission typically has a two year notice of the end of in-country presence and has goals that are to be achieved within certain funding levels. The USAID Lithuania Program Officer utilized this phase-out period by progressively shifting program management responsibility to the client. He accomplished this by phasing out long-term advisors in bank supervision and capital markets programs and then shifting to a local professional staff (capital markets) and to short terms advisors (capital markets, corporate governance, bank supervision and monetary policy). This effort was largely successful and allowed for a smooth process of the client working with only intermittent assistance. The Mission officer also sought ways to increase the client’s ownership of the program through client review and written approval of work plans, goals, levels of effort, and resumes of potential advisors. The Mission officer also encouraged the client to set priorities among tasks within a designated budget level, such that if an unforeseen need developed, the client made the decision of what to cut out of the planned work to meet this new need.

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Lithuania’s financial and capital market institutions were either in their infancy or non-existant when USAID began its financial sector assistance program in 1992. During this time, USAID spent over $15 million for programs to assist the Lithuanians in building a well regulated, robust financial environment consisting of strong, market oriented, and self sustaining institutions. USAID has accomplished that objective and the programs will be able to continue without active U.S. Government assistance.

Largely as a result of USAID’s program, confidence in the BOL has increased and the Central Bank has developed the information systems, organizational structure and experience to move confidently towards a more discretionary monetary policy and eventual membership in the EU. The credit institutions supervision department, which was a major focus of the USAID program, now has the necessary staff, manuals, information systems, and experience to provide continuing professional oversight of the expanding banking and credit union industries. The BOL now requires all banks to publish annual financial statements audited according to international accounting standards and the Stock Exchange does the same for companies that want to be included in the listing of official (blue chip) shares. USAID successfully assisted the Government of Lithuania in significantly improving the trading efficiency of the Stock Exchange, the ability of Securities Commission to regulate brokers and the securities markets, the operations of a de-materialized, depository and settlements system by Central Depository, and the management of a partially self regulating Brokers Association. Like the credit institutions supervisory group at the BOL, these institutions are virtually self sustaining and competent to handle expanded and diversified activity on the exchange in an efficient and transparent manner.

USAID also takes pride in its cost effective contributions to the development of two, non-governmental institutions: 1) LFMI and 2) The Lithuanian Banking, Insurance and Finance Institute (LBIFI). LFMI is a strong advocate of adopting market solutions to achieve political and economic objectives and LBIFI is an industry supported, self sustaining, local training and accreditation institution for bankers, brokers and insurers. Citizens and companies now have a broader choice of financial institutions, with the appearance of foreign banks and domestic credit unions. In addition, Deposit Insurance Agency provides a safety net for depositors, further increasing public confidence in the banking sector.

The success of the USAID Financial Sector Program is vivid not only in the direct impact of the assistance, but also in the conducive environment that has been formed in Lithuania. The foreign investments in Vilnius, Hermis, and other banks and the opening up of foreign branch banks revolutionized the banking industry and the capital markets. For instance, four General Depository Receipts (GDR – equity issued abroad) have been successfully launched, corporate debt has been issued, banks are active in leasing, mortgage lending, and insurance (there are now 40 private insurance companies with annual premiums of $180 million). Some banks organize initial public offerings (IPOs) and will do underwriting on a limited scale; many have mergers and acquisitions (M&As) departments for asset management, corporate finance, and private placements. There have been several eurodollar placements, and syndicated loans are no longer uncommon. Lithuanian companies are increasingly adopting International Accounting Standards (IAS) for their financial reporting - further improving financial market transparency and increasing investor interest. The list could go on.

USAID is proud of having the opportunity of working with the Government of Lithuania and private sector counterparts. The joint-efforts of the advisors working with Lithuanian specialists has formed the foundation for a stable financial sector which will serve Lithuania in the years ahead.

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$thousands
 

	FY95	FY96	FY97	FY98	FY99	SUM
Lithuania Policy Support	0	0	0	70	0	70
Monetary Policy
US Treasury (BOL)	0	400	375	375	0	1150
Capital Markets
Price Waterhouse	899	250	0	0	0	1149
Pragma	0	541	1350	400	0	2291
IESC	0	30	30	30	0	90
U.S. SEC	20	20	20	20	20	100
Credit Institution Supervision
KPMG	591	0	0	0	0	591
IBTCI	475	834	110	0	25	1444
Banking Legislation
US Treasury (MOF and BOL)
KPMG/Barents
ABA/CEELI	100	100	100	0	0	300
Banking Corporate Governance
US Treasury (MOF)	400	310	340	150	0	1200
Commercial Bank Training
KPMG	500	0	0	0	0	500
Commercial Bank Assistance
IESC	60	60	60	50	0	230
Other
WOCCU	350	350	350	350	300	1700
World Learning	100	100	150	45	40	435
LFMI	100	200	100	100	0	500
Global Bureau Loan Guarantee	n/a	n/a	n/a	n/a	n/a
FSVC	200	288	0	0	0	488
TOTAL	3795	3483	2985	1590	385	12238

Notes

1. The annual obligations for CEELI, IESC and World Learning for Financial Sector activities are estimated.

2. All the money for WOCCU was obligated in FY94. The annual expenditures are estimated.

3. Banking legislation is estimated at 10 percent of obligations for Monetary Policy, Banking Corporate Governance and Credit Institution Supervision (excluding WOOCU).

4. Exact spending figures prior to 1995 are unavailable, and thus not reported here, though program spending did occur.

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Since 1995, USAID Lithuania has collected information on the progress in the Lithuanian financial sector. The table below indicates the initial situation (first year of information collection) along with the goal and actual levels in 1998 for each of the general goals set out in the financial sector.

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