Despite high concentration in Lithuania's banking sector, there is no shortage of competition, according Kristalina Georgieva, a managing director of the International Monetary Fund.
Speaking at an online discussion organised by the Lithuanian president, she said the country was facing three key challenges: a high degree of concentration in Lithuania's banking sector, inadequate access to financing for small and medium businesses, and the banks not providing enough credit during downturns.
Read more: Lithuania moves closer to establishing a state bank
“Lithuania's three largest banks represent three-fourths of total assets. Our analysis suggests that, so far, concentration has not resulted in a lack of competition, and that banks’ strong profitability seems to reflect high efficiency,” Georgieva said during the conference on Thursday. “But this does not mean that high concentration cannot turn into a problem of inefficiency.”
Speaking of the difficulties for small and medium enterprises to access finance, the IMF chief said that many countries faced the same problem and they opted to address it through public development institutions, such as INVEGA in Lithuania that engages in limited direct lending or loan guarantees.
The Lithuanian president's office argues that the problem could be solved with a national development bank that would focus on lending to small and medium enterprises.
However, Georgieva warned, establishing such an institution would not come without risks.
“[State banks] can fulfill functions that are not performed by private banks, provide financing for projects that benefit the wider economy, and provide countercyclical lending. Public banks have implicit or explicit government guarantees, which is what leads to their low funding costs, but could represent significant fiscal risks,” she said.
On Thursday, the Lithuanian president, as well as representatives of the government, international institutions, the parliament, economists and others discussed prospects for setting up a national development bank in Lithuania.
President Gitanas Nausėda has backed the idea, saying that the country's small and medium enterprises do not have sufficient access to financing. The president's office has also stressed that a state bank would not be competing in retail banking.
Last week, the Lithuanian parliament, Seimas, authorised the government to begin procedures for the establishment of a state bank.
Read more: Public bank gets go-ahead from Lithuanian parliament
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