Higher rates - Big Banks vs Savings an Loan Associations in Estonia

Higher rates - Big Banks vs Savings and Loan Association

Savings and Loan Association (hereby SLA) is a financial institution that offers financial services as permitted by the relevant legislation. Most of these activities include accepting deposits, giving out loans and mortgages to members. They are owned privately by the members - who are depositors and borrowers. These members have voting rights, and have the power to dictate the financial and managerial goals of the association. Depositors and borrowers become members through a small membership fee.

 

Savings and Loan Associations in Estonia

 

In terms of Estonia, their activities are defined and regulated by the Estonian Savings and Loan Associations Act and they offer term deposits, loans, mortgages, and some investment opportunities for members. Under the SLA Act, the membership is determined by simply joining an SLA and paying a small entry membership fee (article 11), that is refundable (art 19). Deposits are for a minimum of 3 months and can go up to 2 years. Interests are paid either every month or you can compound on it. Early termination of the deposit contract before the term will result in the member losing rights on the interests on his deposits (art 20). 

 

A total of 23 cooperatives operate in Estonia today. In recent years, the number of members of savings and loan cooperatives and the volume of assets has increased significantly, and as of today, the cooperatives have a total of 15,400 members and the total assets amount to about 160 million euros. Although small compared to commercial banks, their popularity has been growing since 2016 and many people are opting to deposit in SLAs due to their high-interest rates on the deposit accounts. They can offer high-interest rates because of their loan interests that they charge their loan-clients.

 

Savings and Loan Association - What members should know

 

On the downside, deposits in SLAs are not covered by guarantee schemes unlike commercial banks where their bankruptcy will still ensure their customers up to 100,000 Euros. But if the Association goes bankrupt, the members will lose everything. To see whether your deposits are covered by the guarantee, please check Tagatisfond. 

 

Nevertheless, SLAs are bound by strict rules for financial activities and to keep the deposits secure. 

 

Art 22 requires that SLAs have a minimum share capital of 31,950 Euros and there must be a legal reserve of at least half the amount of the share capital (art 24). Article 26 requires SLAs to cover losses from the legal reserves. The SLA Act also strictly mentions that SLAs must not take excessive risks that could result in insolvency (art 31(4)).

Savings and Loan Association - Recent Developments

 

Of course, how the Act is implemented is very subjective to individual SLA. There have been instances of SLAs defrauding their members out of their savings. As a result, there have been attempts to implement stricter measures for SLA to make activities more transparent and secure customers at least up to 20,000 Euros in the event of bankruptcy. A Bill was proposed for SLAs to apply for a bank license on deposits exceeding 5 million Euros or having more than 3000 members. This measure would have also subjected SLAs to more regulations, the Credit Institutions Act and would be subject to supervision by the Financial Supervision Authority. Other changes were proposed, such as increasing the share capital requirement and the amount of membership fee. However, the Bill was not implemented due to its unpopularity amongst the SLAs.