A credit market analysis reveals that the Estonian financial services market is among the least diverse ones in Europe and concentrated in the hands of a few large banks.
A FinanceEstonia-commissioned analysis by KPMG reflects that the Estonian financial services market is among the least diverse ones in Europe. Consumer credit as a percentage of GDP is approximately two times smaller than in the rest of Europe and the financial services market is concentrated in the hands of a few large banks.
According to Andrus Alber, the head of FinanceEstonia’s credit providers’ working group, during the five years following the economic crisis the volume of consumer credit dropped in almost all countries of the European Union. In Estonia, the decrease exceeded 40%. “Development of the consumer credit market provides an opportunity to support Estonia’s general economic development. The more diverse the financial services sector, the more developed the whole economy,“ commented Alber on the conclusions of the analysis.
Consumer credit has become a hot topic in the context of over-borrowing. However, in reality the sector’s contribution to individuals’ loan burden is almost non-existent. Today, one of the key problems in Estonia is that the local financial services market is too highly concentrated compared to the rest of Europe. In Estonia, 89% of the assets are held by the five largest credit institutions. The only country in Europe where things are worse is Greece where the figure is 95%.
At the same time, the non-bank financial services sector serves individuals and companies that for different reasons are not served by regular commercial banks. It is important to tell the difference between the market situation before the new Creditors and Credit Intermediaries Act was adopted in March 2016 and now. “Consumer credit services need to be regulated and this has been done in Estonia – a regulated market operates reasonably,” summarised Alber.
Further work needs to done to create an appropriate operating environment for agile and innovative companies. Among other things, we should consider whether Europe’s strictest advertising restrictions are serving their purpose or rather reducing companies’ opportunities to launch new, innovative services that are also more favourable for consumers.
We must also continue improving financial literacy in Estonia, as the consumers’ awareness of market diversity is still limited. Strict advertising restrictions are creating obstacles in this area too. “A large share of consumers do not consider alternatives when making a loan decision. Most people choose the solution offered by their home bank although other credit providers could offer the same service on more favourable terms,“ described Alber today’s situation.
The analysis raises the conclusion that many problems and fears persisting in the market could be solved by creating a positive credit register. Estonia is one of the few European countries without such a register.