But the credit market is preparing changes
Ukrainian Finance Minister Ihor Ushko has requested between one and a half and two years of intensive work in order to complete credit reforms in Ukraine. Among the new institutions necessary to create a civilized market infrastructure are a credit bureau to track the credit history of bank clients and a center to register debts and establishments, which would check the authority of borrowers representatives. This was discussed at a round table on development problems of the credit market. However, the main questions are the normalization of relations between creditors and borrowers which today, according to Minister Ushko, have turned head over heels. The extension of credit in Ukraine has become a risky business, inasmuch as there exists a high probability they will fail to return, while the law courts in practice do not defend creditors.
As the head representative of the World Bank in Ukraine Gregory Jedrzejczak believes, there is uncertainty among investors that money invested will be returned to them, leading to major gap between the production potential of Ukraine and the potential of financing it: “Here is the center of the problem.” In his opinion, apart from passing laws to create a reliable mechanism to defend creditor rights (first of all this concerns the institution of collateral) Ukraine must obtain experience in the procedure of attaching debtors’ property on loan agreements. Mr. Jedrzejczak stated that with the aim of stimulating a land market in Ukraine (still in his words, the land is dead capital) the World Bank is ready for a big and interesting project of extending credit to Ukrainian agriculture.
As well as leading to the high price of credit, the high risk that borrowers will fail to return loans causes reluctance from financial institutions to grant long-term credit. Of the credit structure, commercial banks extended only 21.7% long-term loans in 2001. The average loan interest rate from commercial banks in recent years has significantly exceeded deposit rates, the rate of the National Bank of Ukraine and the level of inflation. Although, as Volodymyr Stelmakh, representative of the National Bank of Ukraine stated, since the beginning of the year, loans by Ukrainian banks have increased by 30% (the amount of long term credit has amounted to 8.4 million hryvnias), while the average price of bank credit has fallen to 19.74%.
Of course, several local improvements do not influence the general level of credit, which does not bear comparison with international experience. In particular, Minister Ushko compared the state of the Ukrainian loan market with two countries where the population and activity of banks is significantly lower than here, Hungary and Estonia. However, the amount of credit resources per capita is quite the opposite, $125 in Ukraine in comparison with $1430 in Hungary and $1800 in Estonia. The average figure in central Europe is $3000. And this is not the only comparison not in our favor. According to the World Bank, in developed countries, of the sources of financing in the economy, the volume of long-term credit is three times bigger than the volume of capital possessed by companies. World experience shows that a close connection exists between the level of economic development in countries and the volume of domestic loans in its economy. In particular, the correlation of bank credit and GDP volume, increases in direct proportion to the level of development in such countries. In countries with a low level of revenue it is 25.1%, in countries with revenue levels below the average 47.1%, in countries with revenue levels above the average 61.3%, in countries with high revenue levels 108.2%. In Ukraine the figure is 23.1%. However, the Minister of Finance and a representative of NBU both assert that Ukraine is capable of attaining world standards in the development of its credit market, as it also can for its considerable domestic resources.
