The Latvian central bank recently published its annual report on the state of affairs in its sector—the financial market. The institution notes that the market has begun to emerge from stagnation, although the population remains cautious regarding loans. There are also a number of systemic issues that hinder the country from reaching a decent European level.
Borrowers' Lives Made Easier
According to the "2025 Financial Accessibility Report" by the Bank of Latvia (BoL), credit activity in Latvia began to recover in 2024 after years of stagnation. The volume of loans issued to businesses and households grew faster than GDP. The growth continues into 2025. The main factor is the decrease in interest rates on loans due to falling EURIBOR market rates and reduced additional interest rates. Mortgage rates, in particular, fell significantly: after peaking in 2023, they decreased by more than 2 percentage points.
Legislative changes that simplified and made refinancing cheaper also played an important role. In the first eight months of 2025, conditions improved for 9,356 mortgage loans totaling about 690 million euros, which accounts for 14% of the country's mortgage portfolio. Borrowers save an average of 350–515 euros per year, and the total potential gain over the loan terms is estimated at 44.7 million euros. Despite these improvements, the loan-to-GDP ratio remains low—mortgage loans make up only 13% of GDP compared to 17% in Lithuania and 31% in Estonia.
The Latvian housing market is characterized by high overcrowding and small living spaces. To stimulate mortgage lending, the Bank of Latvia proposes developing a market for mortgage-backed securities, potentially involving state financial institutions, to give banks access to external financing and free up capital.
It's Time to Limit Fees
In the corporate lending segment, the decrease in rates has been less noticeable, and the level of interest remains high. There is significant variability in rates between banks and industries, indicating market segmentation and weak competition. The key factor in differences in interest rates is the specific lending institution rather than the industry or size of the company. This indicates that available offers for businesses are limited despite the large number of credit institutions.
To enhance competition, the Bank of Latvia and the Ministry of Finance have developed a project to limit early repayment fees, as they make refinancing unprofitable. Currently, fees typically range from 1.5% to 2% of the loan balance, and only a few enterprises benefit from changing lenders. Analysis shows that a fair fee covering actual administrative costs should not exceed 0.1% of the amount.
Too Strict Collateral Requirements
The Bank of Latvia also notes that the financial situation of Latvian enterprises is stabilizing: equity has exceeded borrowed funds for the first time in 15 years, profitability remains stable, and the level of insolvency is low. However, a significant portion of companies still has negative equity, which limits their ability to attract financing and creates a negative perception of the business environment. However, the Bank of Latvia believes that the scale of the problem is exaggerated: many "negative" enterprises are small, and their significance for the economy is minimal.
Worse still, businesses face some of the strictest collateral requirements in the eurozone: the average collateral value for loans reaches 162% of the loan amount and often exceeds it by double. The practice of personal guarantees is also common, which hinders business development.
Falling Short
The BoL report also highlights the limitations of non-bank financing and the need to develop the capital market. Unlike developed economies, Latvian companies are almost entirely dependent on banks. There is potential for growth: the loan-to-deposit ratio in banks is only 64% compared to the eurozone average of about 94%. Expanding the role of the stock market could attract long-term investments and facilitate Latvia's transition to a high-income country.
Overall, the Bank of Latvia notes the first signs of a revival in lending but emphasizes that financial accessibility for businesses and households is still limited. For sustainable growth in the credit market, there is a need for: higher competition among banks, reduced refinancing fees, liberalization of collateral requirements, development of mortgage securities, and strengthening of non-bank financing. Only a comprehensive set of measures will bring Latvia closer to the financial development levels of other eurozone countries.
The Population is Cautious
The BoL report also examines the situation in the household sector. The growth of household incomes and employment stability have allowed for an increase in lending volumes, but the debt burden of the population remains one of the lowest in the eurozone. This indicates a cautious attitude towards borrowing among residents, formed after the financial crisis of 2008.
The BoL predicts that if the trend of decreasing rates and stable macroeconomic conditions continues, credit activity will continue to grow in 2026. However, for the sustainability of this growth, systemic obstacles must be removed. Among them are the weak development of the capital market, limited access to financing for small enterprises, low financial literacy among the population, and insufficient digitalization of banking services.
A Need for Balance
In conclusion, the Bank of Latvia emphasizes that long-term financial stability requires a balance between protecting the interests of creditors and stimulating economic growth. Excessively strict regulations and high collateral requirements hinder entrepreneurship development, especially in innovative and rapidly growing sectors. A phased reduction of barriers to competition, improvement of the legal framework for refinancing, and active involvement of state structures in the development of capital markets are recommended.
Overall, 2025 is assessed as a turning point: the recovery of credit activity has begun, borrowers' positions have strengthened, and the financial health of enterprises has improved. However, Latvia's level of financial integration still lags behind its neighbors and the eurozone average. To bridge this gap, the country needs to transition from a cautious financing model to a more dynamic and competitive one, based on a combination of banking, non-banking, and market sources of capital.
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