Scientific Advisor – Stupak M.H., Chernivtsi Trade and Economics Institute of KNTEU, Chernivtsi
THE PROSPECTS FOR FUTURE ECONOMIC STABILITY OF THE BANKING SECTOR IN UKRAINE
The economy of Ukraine continues to display characteristics of an emerging market. These characteristics include the existence of a currency that is not freely convertible outside the country, high inflation, a low level of liquidity in the public and private debt and equity markets. Additionally, the banking sector in Ukraine is particularly impacted by currency fluctuations and economic conditions. Furthermore, the need for further developments in the bankruptcy laws, the formalized procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the difficulties experienced by banks currently operating in Ukraine. As a matter of fact, both the government and the National Bank of Ukraine (NBU) have been discussing the issue of placing restrictions on local banks being taken over by the foreigners by limiting the total share of foreign ownership in the entire banking sector in Ukraine at some level. The problem is defining the level that would be more or less optimal for the country. Indeed, the entrance of foreign banks is often associated with improvement in the sector due to increased competition. The average consumers and businesses feel this improvement directly – through a decrease of interest rates for the loans they can take, a decrease of prices for the services, an increase in quality and variety of services they can get from a bank. Such improvements in one bank induce other banks to improve as well, or cause them to leave the market – and this is exactly what brought the Ukrainian banking sector to a level that is better than that in many other transitional countries [2]. The first issue the government should really worry about, instead of raising entry barriers, is to make sure that the concentration within the sector remains low; consequently this keeps the competition high. In general, it should not matter whether foreigners or locals buy a bank, but what should matter is the resulting quality of services offered by the new owner, its reliability, and how that purchase would affect the level of competition in the entire financial sector of the country and its particular regions. The second issue of vital importance is the weakness of many small banks that are on the verge of bankruptcy. As a matter of fact, Ukrainian banking is very likely to be approaching a large shakeout. An industry shakeout is the period of development that is characterized by a massive exit of many players and consolidation of other players in the sector. Having examined various industries in the world it appeared that all of them went through such a period, with the first shakeout emerging, as a rule, around the 15th year of development – with some variation depending on the industry and economy specifics. Ukrainian banking has already lived through 15 years of development and satisfies one of the key factors economists believe to be detrimental for inducing the shakeout – a decent level of maturity in producing and supplying the main products (for banking, these are loans and deposits for business and consumers). So, in the next 2-3 years it is very likely that we will observe a substantial reduction of banks in Ukraine, together with enlargement of some banks, as well as an attempt of some small banks to survive by introducing relatively new products for Ukrainian consumers (leasing, factoring, etc.). An important question is how this massive exit of banks from the environment will be performed. In the worst case, we will see a large wave of bankruptcies. A way to prevent or at least minimize the number of bankruptcies is to encourage mergers between and acquisitions of small banks – whether by locals or by foreigners [1]. Indeed, many of the small banks that are likely to be on the edge of bankruptcy don’t have fatal problems but just management and marketing difficulties that can be resolved through replacement of their management, which is a natural step after the merger or acquisition. One of the main reasons, however, that kept investors away from buying such banks is their low level of transparency, which did not allow getting a clear picture of true problems of the banks by potential investors. Naturally, what the government and the NBU could and should do in this respect is to make the international standards of transparency mandatory for all banks in Ukraine. To sum up, the prospects for future economic stability of the banking sector in Ukraine are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory and political developments, which are beyond the banks’ control. However, the dynamics of the sector and the recent prophylactic measures taken by the authorities in Ukraine suggest that Ukrainian banking is about to go through dramatic changes which, we believe, would help it reaching a more advanced and robust level. Selected bibliography: 1. Frederic S. Mishkin. Money, Banking and Financial Markets. – Fifth Edition, 2005. – 740 p. 2. http://advisors.com.ua/en/publications/show/28
