In nonmarket times the formula that money ruins relationships still played a key role in regulating interpersonal relations. Apparently, it has gradually merged into our mentality, becoming an integral part of it (you borrow what belongs to others but give back your own), and has been reflected in Ukrainian financial legislation. Thus, Oleksandr Suhoniako, president of the Association of Ukrainian Banks, has repeatedly stressed that Ukrainian laws have been designed to protect the debtor and not the creditor, and for this very reason the country is in short supply of credit resources and investment.
Meanwhile, according to estimates of the Center for Economic Analysis of Legislation (Washington DC, USA), to secure the income level of the developed states Ukraine would have to invest $4 trillion into its fixed assets, that is, infrastructure and equipment. This is roughly 100 times Ukraine’s recently registered GDP. Therefore, we cannot cope without loans and investment. And to attract them we should amend legislation in such a way so as to make it possible to use property (fixed assets) as collateral.
Early this year, unpaid loans in Ukraine totaled UAH 27.8 billion, which is up 45% from last year. The ratio between the credit extended and nominal GDP is a mere 13.8%, of which only 3% are long-term loans. The level of crediting of the economy is seen as one of the key indices fostering the socioeconomic development of countries the world over. According to the World Bank, the ratio between credit volume and GDP in Ukraine is 23%, while the average for countries with a low income level is 25%, and 61.3% for countries with incomes above average. Having analyzed this disparity and drawing on foreign experience, lawmakers hit upon the idea of a bill, On Meeting the Demands of Creditors and Registering Liabilities, which was discussed at a session of the parliamentary committee on finance and banking activity.
As a result, Finance Minister Ihor Yushko felt obliged to speak not only of logic in the actions of the government and parliament, but also to insist that there is a certain degree of consistency in them. According to him, there are too many unpaid loans: “Interest on three loans should be used to cover the fourth, unpaid, loan banks need to form reserves.” As Mr. Yushko put it, this keeps interest rates high (on average, annual interest rates on loans set by commercial banks are four times the NBU rate of 8%).
Drawing on his practical experience as a banker, committee chairman Serhiy Buriak said that this law is one of the fundamental elements of the legal groundwork “for ensuring creditors’ rights in Ukraine,” without which growing volumes of long-term crediting of the economy and lowering of interest rates are out of the question. He went on to say that high risk is one of the major reasons for Ukraine’s stagnating credit market. To lower those risks a holistic legal groundwork must be laid. People’s Deputy Mykola Onyshchuk believes that the court practice of invalidating credit agreements has become too widespread in Ukraine.
Antonina Palamarchuk, vice president of the Association of Ukrainian Banks, cites political instability and inadequate economic growth forecasts among causes of high risks connected with crediting the Ukrainian economy. According to her, as of January 1, 2002, the capital of Ukrainian banks was a mere $1.5 billion, which is only 76.5% of the Ukrainian banking system capital in 1996. Ms. Palamarchuk has also attributed the low saturation of the Ukrainian financial sector to the fact that private pension funds and insurance companies are virtually nonexistent in Ukraine, while in the developed world the resources accumulated by them are used for long-term investments. The level of confidence of the population in the state and banking system is also quite low. According to Ms. Palamarchuk, while deposits in banks totaled UAH 16 billion, some UAH 24 billion is still outside the banking system. In this connection, Ms. Palamarchuk has spoken against taxing interest on bank deposits, calling it an “imprudent” measure. She underscored that the state demands that banks encourage long-term loans and bring down credit interest rates, but simultaneously it has not been doing much to protect the rights of creditors, giving precedence to the rights of debtors.
All those participating in the discussion of the proposed bill concluded that, if voted into law, it would help overcome all of the mentioned negative factors and, accordingly, breathe a new life into the Ukrainian financial market. However, People’s Deputy Serhiy Teriokhin, who has cosponsored the proposed bill, believes that before it is endorsed they need to decide what to do with scores of laws limiting or forbidding altogether the alienation of mortgaged property. All told, a law that would protect creditor’s rights is long overdue and business feels an acute need for it. In all probability, the consideration of this bill spells a fight between two lobbies: debtors and creditors. Incidentally, there are more than enough of the former. Suffice it to recall the affairs involving Bank Ukrayina, Slovyansky, and Hradobank.
