Lánasjóður sveitarfélaga - Municipality Credit Iceland (MCI), first established in 1967, is a limited liability company owned by all Icelandic municipalities.

With an Act on MCI, effective as of January 1st 2005, the responsibility for the operation of MCI was transferred from the Ministry of Social Affairs directly to the municipalities. In this relation, the municipalities formulated a new strategy for MCI, proposing a more active role for its financing of the municipal borrowing needs and, consequently, increased borrowing activity of MCI.

As of January 1st 2007 MCI was incorporated as a statutory limited liability company. The share capital of MCI is ISK5 billion. Before the incorporation the capital of MCI was reduced by ISK3 billion, the amount to be distributed to the municipalities in the years 2007-2010. Year end 2009, MCI had equity of ISK 12.930 million.

Its Nordic peers include Kommunalbanken, Norway; Kommuninvest i Sverige, Sweden; KommuneKredit, Denmark; and, Municipality Finance Plc, Finland.

Pursuant to the new Acts, MCI became a fully-fledged financial institution and is, as such, supervised by the Icelandic Financial Supervisor (FME) and bound by the regulations of the Central Bank of Iceland, regarding capital adequacy ratio, large exposures, market risks, minimum reserve requirements, liquidity ratio and other relevant stipulations.  For capital adequacy purposes, loans to Icelandic municipalities carry a 20% risk-weighting.

Its objective is to secure loans on favourable terms to Icelandic municipalities, their institutions and enterprises for projects of general public interest [1]. The supreme authority at MCI rests with the Annual General Meetings. These meetings are attended by representatives appointed by the municipalities. The AGM elects a Board of 5 members, approves the accounts and selects the auditors, among other things. MCI is managed by the Managing Director.

MCI is based in Reykjavik, at the same premises as the Association of Local Authorities in Iceland. 

Operations and Funding
At year end 2008 MCI provided 21% of Icelandic municipalities’ financing needs, up from 18% in 2006 and 10% in 2004. MCI’s five-year plan should allow it to increase its market share to 25-30% of municipal financing needs. 

MCI’s activities, reflecting the areas of Icelandic municipal responsibilities, include lending principally for projects in education (kindergartens, primary and lower secondary schools including sport facilities), geothermal heating, followed by financing of capital investment projects for roads, sewerage, harbours, recreation, solid waste and wastewater treatment and disposal.
Until 2005 MCI still granted loans predominantly against its capital. However, its borrowing activity has increased since 2003, the first year it started issuing bonds on the domestic market.  At the end of 2009 borrowing had increased significantly compared with 2006.  Due to its limited size, MCI has so far not borrowed at the international capital markets, hence has not applied for a formal rating as of yet.  Foreign funding has been limited to loans from financial institutions on a bilateral basis. As of October 2008 MCI has increased its bond issuing in the local market considerably with the issuance of LSS150224 which is identical to the HFF24 bond issued by the Housing Financing Fund.

As for the process for granting loans, municipalities apply to MCI, whether for a new project or for refinancing of some of the higher interest-rate investment loans.  MCI then makes the assessment of the financial position of the applying municipality in accordance with the loan rules set by the board. MCI maintains the same loan conditions for all its borrowers.  MCI has suffered no loan losses since its inception in 1967.

Security
Unlike some of its Nordic peers, MCI does not benefit from joint and several guarantees of its municipal owners.  However, MCI does benefit from asset guarantees given a collateral system in place.

Article 73 of the Local Government Act no. 45/1998 stipulates that a municipality may put up its revenues (such as contributions from the Local Authorities´ Equalisation Fund and income tax revenue) as security for loans it receives from MCI and for guarantees it provides in favour of the MCI’s borrowers[2].  In other words, should a municipality default on its loan obligation to MCI, the equalisation transfer or income tax transfer would, instead of being paid out by the Ministry of Social Affairs or by the State Treasury in case of income tax to the municipality, go directly to MCI. When granting loans, MCI requires in all cases that such security be provided by all borrowing municipalities.

MCI value added
MCI’s competitiveness stems from the low margins it charges and its lower cost of funding in the market. Only a few larger municipalities have the capacity to access the domestic capital market or borrow in foreign currency, often managing this activity and the resulting foreign exposure through banks.  For loans financed with borrowed funds, a modest margin is charged to cover costs.

MCI’s added value therefore underlies in the fact that it can help smaller, Icelandic municipalities to have access to domestic and international capital markets in the financing of their social infrastructure investments, thereby decreasing their cost of funds. This should also contribute to reducing regional imbalances throughout the country.

The most important points regarding MCI’s financial fundamentals are presented in the table below:

Key financial figures 2007 and 2008

(* CAD ratio in annual report 2007 is calculated useing Basel I)

Please note, however, that the same law stipulates that those assets of a municipality which are necessary in order for it to perform its mandatory tasks are not subject to attachment for debt, and that municipalities can not be subject to insolvency proceedings.