Why "paycheck to paycheck" loans are so popular in Ukraine

Author : Olexandr Honcharov

Source : 112 Ukraine

Officials in developed countries understand that it is very difficult to service consumer loans at 50-70%, or even 100% per annum
11:00, 24 September 2018

Open source

Prime Minister Volodymyr Groysman has announced that in 2019 the minimum wage will grow from 132 USD to 149 USD. Maybe, the government is really worried about the rapid growth of so-called "paycheck to paycheck" loans, taken by our citizens, while there are no any innovations protecting ordinary borrowers since the beginning of the financial crisis. In September, consumer prices and utility tariffs began to rise again, while real incomes of people are declining (according to the forecast of the National Bank, by the end of 2018, inflation should be 8.9% in Ukraine).

Related: World Bank says preparing $650 million loan guarantee for Ukraine

We must honestly say that effective interest rates on consumer loans from a number of banks are simply off the scale. If the credit institution shows the client 50+% with a few more important terms of the contract, then probably the state should prohibit such loan agreements, right? Officials in developed countries understand that it is very difficult to service consumer loans at 50-70%, or even 100% per annum. Such a family can fall into poverty.

Such astronomical rates are often hidden from the Ukrainian borrowers. We should take into consideration the Polish solution here. The lawmakers have banned issuing loans four times higher than the refinancing rate of the Central Bank. That is, bankers do not consider consumers of financial services as a source of profit.

Related: Four years ago Ukraine received IMF loan: What went wrong?

In the context of this issue, our officials, repeatedly voice an argument: why should the state fight the idiocy of consumers? On the fertile soil of high inflation, devaluation of the hryvnia and the absence of a national program to increase the financial literacy of the population, many Ukrainian banks and microfinance organizations began to actively return to high-risk and, consequently, high-margin express lending. And what should people do? Money is not even enough to pay the utilities. Yes, and high inflation has not fully responded to the continued depreciation of the hryvnia.

Of course, with the rise in the price of goods and services, people would have even fewer opportunities to buy something. Plus, this will greatly affect the creation of jobs, since if there is no crediting of large investment projects, it will not be possible to create new jobs where specialists could earn good money.

Related: IMF forces poverty upon Ukraine, - MP

Old tricks in the financial market will start again, the market for consumer crediting and borrowing from microfinance organizations has not been settled for more than 10 years, there is no special law. Why is this topical issue out of the attention of lawmakers and the state regulator?

In addition, it turns out that our judicial system is not effective. Banks also complain that courts often do not provide a refund. This is also the economy of our difficult life on credit. It seems that no one is going to reform anything on the Ukrainian borrowing market. Moreover, the Cabinet of PM Groysman is also waiting for another loan from the International Monetary Fund, without conducting any cardinal reformist changes. And the market now expects from the government and the Verkhovna Rada legislative support in terms of pledges, regulatory acts to improve the efficiency of enforcement proceedings.

Related: Ukraine’s poverty and insecurity cannot be hidden

Those processes that we continue to observe in 2018, namely, the growing geopolitical risks that coincide with the aggravation of the political situation in the pre-election Ukraine and unfavorable macroeconomic conditions, will continue to increase the negative impact on our economy and the banking system. There were no economic incentives for us to replenish bank deposits; so far they have not appeared from anywhere. But there are enough incentives for withdrawing hryvnia deposits and buying cash foreign currency. Plus, the credibility of the hryvnia, which was won over the years, has quickly disappeared. This is another vivid confirmation that the banking sector is a mirror of all those processes that occur in the country's economy.

Now it is difficult to say when structural reforms would begin in Ukraine, especially in terms of the political pre-election dynamics. Finally, who will personally take control of interest rates and operations in our money market?

Related: Poverty level in Ukraine in 2017 decreased to 12%, - Institute of Sociology

I would like to think more optimistically, but, unfortunately, I cannot. Especially when you know the level of the salaries in the EU countries, which are many times higher than in Ukraine. Also, Germany, the UK, and a number of US states have long banned usury. But for some reason, we do introduce Western best practices and continue to preserve the worst ones.

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This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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