The absurdity and paradoxes of Ukraine's banking system

Author : Oleksandr Okhrymenko

Source : 112 Ukraine

The closure of banks largely led to the fact that many legal entities and some individuals lost a lot of money, which resulted in a sharp increase of problem loans
16:28, 23 May 2016

All the world's leading economic schools will soon consider our banking system as an example of the absurdity and paradoxes. Ukrainian banking system after the "reforms" is actually a vivid example, which denies all theories and dogmas previously existing in the world of economic.

According to National Bank of Ukraine (NBU), in the first four months of 2016 standard H4 (instant liquidity) reached the level of 72.25% for conventional norms of not less than 20%, and the standard of H5 (current ratio) stood at 80.96%, while in the normal state it should be not less than 40%. It turns out that Ukrainian banks have substantial liquidity surplus, which is many times higher than the standards. But this raises the question: why Ukrainian banks do not lend to business and population?

Related: Balcerowicz: Ukraine starts economic recovery

According to the NBU, during the four months of 2016 the total amount of loans issued by banks in Ukraine has decreased by 3.3 billion UAH (by $ 513 million). So why banks are not lending if they have so much money to spend?

In many ways, this is the guilt of the NBU, which offers to sell the certificates of deposit at the rate of 19%, and the average rate of hryvnia loans to banks in April was 20.4% (NBU data). It is clear that the purchase of deposit certificates has considerably less risk than the issuance of loans in Ukraine.

For information: only in April 2016 NBU sold its deposit certificates to banks in the amount of 41.2 billion UAH (NBU certificates are usually for a period of 14 days). In April, NBU paid for its certificates about 305 million UAH.

The question is where NBU took the money to pay interest on their deposit certificates? The answer is more than prosaic: NBU just made hryvnia emissions.

Related: Pyatt: Ukraine’s economy must be at a much higher level

Deposit certificates of NBU is an effective mechanism of monetary regulation of the economy. But it is effective only when it is in good hands of those who understand the strengths and weaknesses of the financial instrument. However, NBU leadership is actually blocking the incentive of banks to lend to the economy, and thereby it is exacerbating the situation in the credit market. The economy of Ukraine cannot grow if there is no crediting. Banks are just gambling with NBU, with its deposit certificates. They are not trying to revive lending system in Ukraine.

Actually, there are some other factors that constrain lending. Unfortunately, the leadership of the NBU did not understand that the banks cannot be closed for subjective reasons. Any closure of the bank is a tragedy for his clients and the economy. The NBU leadership boasts that it shut down for about 70 banks in Ukraine.

Related: Ukraine lost more than 9 million U.S. dollars due to economic crimes in Donbas

The closure of banks largely led to the fact that many legal entities and some individuals lost a lot of money, which resulted in a sharp increase of problem loans. As of May 1, 2016 the total amount of problem loans in the banking sector was 266 billion UAH, or 27% of all loans.

It is difficult to answer, when the absurdity of the Ukrainian banking system will change.The NBU leadership simply ignores the problem. It is trying to create the image of "reform," but does not want to notice the real problems, which have emerged in the banking system and economy of Ukraine. 

Related: World Bank: Ukraine’s economy contracted by 10%, 1% increase expected in 2016

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