Internship Experience

Investor considerations

�� The monetary system is stable, and inflation is low.

�� The banking system is well developed and regulated.

�� The insurance industry continues to develop.

�� The investment and pension funds industries are currently underdeveloped.

�� There are no restrictions on foreign currency transactions, profit repatriation and transfer of funds.

Banking system

The Latvian banking system has been marked by rapid growth over recent years. The total assets of the 22 banks of the country and branches of foreign banks were LVL 4.4 billion at the end of 2002. The three largest banks control approximately two-thirds of the banking market. Almost all banks are seeking to become full-service domestic banks. Some banks also actively target clients from CIS.

The market is relatively saturated in traditional banking services such as account maintenance and settlements, lending and leasing, but still underdeveloped in corporate finance, asset management and other services.

Central bank

The Bank of Latvia is the independent central bank of Latvia. It is responsible for the development and execution of monetary policy.

The Bank of Latvia has followed a tight monetary policy. The domestic currency, the lat, is stable and the inflation rate during recent years has been around 3 % or below per annum. The exchange rate of the lat is fixed to the SDR (a basket of currencies) and has remained stable since the early 1990s. The monetary policy has followed a process of intervention in the local foreign exchange market, changes in the refinancing rate for loans issued to Latvian banks and trade with debt securities issued by the government. The Bank of Latvia holds large foreign exchange currency reserves mainly in U.S. dollars and this ensures full convertibility for all lats issued. It is expected that Latvia will begin to deal in euros as a domestic currency by 2008.

Financial and Capital Market Commission

A new joint financial market supervisory authority supervising banking, insurance and securities markets - the Financial and Capital Market Commission (FCMC) - was established in July 2001. In the banking sector, the FCMC has introduced strict regulations concerning the operations of Latvian banks. These regulations are among the most rigorous in Central Europe, based on the monitoring requirements established by the Basle Committee and relevant EU directives. All banks are required to prepare financial statements in accordance with

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Doing Business and Investing in Latvia 2004

International Financial Reporting Standards and must be audited by international audit firms.

Banking market

The majority of banks operate as commercial banks offering a wide range of traditional banking services. Interest income on loans and commissions for payments and other services are the major sources of income.

The structure of income and the client base has changed since the Russian crisis of 1998 and only a limited number of banks are still working in the CIS market. Competition for local clients has increased. Banks are shaping their strategies, defining target client base and prime income sources and actively marketing their services in order to increase their market share.

At present the leading banks in Latvia in terms of assets and revenues are Latvijas Unibanka, Parex Banka, Hansabanka, Rietumu Banka, Latvijas Krajbanka and Aizkraukles Banka. Foreign banking groups control two of the three leading Latvian banks at present - Skandinaviska Enskilda Banken (more than 99 % of shares in Latvijas Unibanka) and Swedbank (100 % of shares in Hansabanka through Hansapank in Estonia). German Norddeutsche Landesbank owns close to 98% of shares in Nord/LB Latvija. Two international banking groups - HypoVereinsbank and Nordea Bank Finland - have branches and subsidiaries in Latvia.

Latvijas Hipoteku un Zemes Banka is the only fully state-owned bank, focusing on mortgage lending and servicing loans issued by the World Bank for the development of the agriculture industry.

Specialized financial institutions

Leasing and factoring services are provided both by banks and specialized companies, which in most cases, are part of banking groups.

Mortgage lending has become more popular in recent years. This market is dominated by banks. Several banks are operating as niche banks in this market, and new banks are still entering the market there.

Insurance market

Close to 90 % of insurance premiums are generated from non-life insurance services. The low level of premiums in the life