How many state-owned banks do we need?

By May 17, 2017, the Ministry of Finance must present an updated concept on the development of state-owned banks in Ukraine.
Date: April 25, 2017

By May 17, the Ministry of Finance must present an updated concept on the development of state-owned banks in Ukraine. We have agreed on this at a meeting of our parliamentary financial committee with the Ministry of Finance. It is obvious to everyone that the approaches to the state-owned banks reform developed by the previous government have completely lost their relevance after the nationalization of PrivatBank. In our opinion, the basis of the new strategy should be using the emerging opportunities for driving economic growth and improving the country's welfare.

Breaking the vicious circle

Ukraine continues on the path towards complete impoverishment. Last year's limited improvement following a two-year plunge of extraordinary depth should not calm us down. Systemic problems in the banking sector, energy security, judiciary have not been solved. The aggressive neighbor at our borders is still there. Corruption is thriving. Law enforcement keeps robbing the businesses. What kind of investment climate can we talk about? Judging by the monetary indicators set in the memorandum with IMF (targets for money supply in the economy), we can hardly expect quick economic growth. And the next crisis may be just as painful for Ukraine.

In these circumstances, we cannot expect long-term investment in complex technological projects. Nobody wants to invest in expensive machines that will pay back after 10-12 years. It is much easier to cut and sell some timber abroad, getting your money right away on your offshore account. Strangling competition or lender using corrupt prosecutors is way easier than meticulously working to increase the quality of goods and services and honestly playing by the rules of competition.

The more raw materials and the less processed goods we sell abroad, the deeper our crises and the poorer our people will be. The only way to raise the citizens' welfare is restoring the technological level of our industries. For this, we have to create comfortable conditions for the investors, at least partially solving the problems listed above. Among those problems is also the accessibility of cheap loans. It is impossible to compete against foreign companies that can get loans with a 2-5% interest rate. In order to provide cheap money to their producers, all successful countries create complex institutional systems for growth.

Today, Ukraine is left with too few tools to be able to adequately compete with foreign businesses in its own market and in the markets in other countries. The state-owned banks are one of those tools. They can deliver the money from NBU's production emission, government programs, international financial organizations straight to the prioritized sectors of the Ukrainian economy. This could be done primarily through a dramatic reduction in the loan interest rates. With the minimal influence on the rates of inflation.

What should the state-owned banks take care of

Unfortunately, over the two past years, the essence of the vision of the Ministry of Finance and National Bank of Ukraine of the future of the state-owned banks was that at some point all those institutions had to be privatized. They are treated as regular commercial banks. The banal argument 'state is the worst manager' is used all the time to justify selling strategic assets for nothing in the future. This is an ostrich-like behavior: hiding one's head in the sand and not willing to face the danger.

We could agree with the statement on the current inefficiency of our state. But then we need to raise this efficiency! Prosecutors and courts are not so efficient yet, too. But nobody proposes to sell them, do they?

So, what have we got? State-owned banks have almost transformed into regular, universal banks. But, as the Japanese expert Masaru Tanaka says, state-owned banks should not compete with the private ones. They have to be solving long-term strategic national problems.

One of their strategic areas of work should be supporting the exporters. Again, Urkeximbank was supposed to fulfill this function. But without a system of long-term government programs and without the political will, it becomes a honeypot for the powerful. Lending to exporters and insuring them is just one of the many other banking operations of the bank. While the essence of its work, in fact, should be systematic support of non-raw materials exports, lending to the exporters and their buyers, as well as lending for import of technology and equipment in order to create new complex production chains in the territory of Ukraine.

Another function the state needs the state-owned banks for is supporting small and medium businesses. Probably, every high school student knows by now what share of the GDP of Poland or any other European country is accounted for by the income of the small businesses, the basis of the middle class. Small and medium businesses minimize any losses from crises for the economy and the society overall, increasing their stability. In Ukraine, it is believed that even the simplified taxation system is too much for the SMEs, and the government is trying to make this segment operate under the general rules, under any pretext. Nobody is even talking about microloans, free connection to the infrastructure, special conditions for project support, consultations on planning and risk evaluation at the state level. Even though multi-level programs supporting small and medium businesses exist in the European Union and many Asian countries.

Another key area of work is strategic infrastructure and high tech projects. And this is not only about the ports, airdromes or bridges, but also about the renovation of the rolling stock of both cargo and public transport (recall Kyiv Metro heavily borrowing from Russian banks), about supporting innovative enterprises in the real sector, including those created and running in cooperation with academic institutions, raising energy efficiency in the industries and housing, modernizing obsolete production facilities. Energy efficiency government programs carried out in partnership with EBRD and through Ukrainian banks are a great example of a comprehensive institutional system for growth in action. We just need to dramatically raise the efficiency of this system, as well as its scale and funding.

Of course, in Ukraine, propositions of this kind always lead to discussions about potential corruption and fraud. But nobody is really proposing to introduce such mechanisms without establishing anti-corruption mechanisms also. Had the leading global states like Canada, Japan, South Korea, Brazil and others where such mechanisms are working successfully not created the tools for stimulating economic growth solely because of their fear of corruption, they would never have achieved as much as they have. Initially, the level of corruption in those countries was not lower than in Ukraine. And, in some cases, higher.

Of course, anything that the state-owned banks do not need for fulfilling their key missions should be gradually sold.

And there is an array of other tasks that we can and should be addressing today.

Restoring the trust

Given the massive bank closures in many countries, the state-owned banks are becoming a safe haven for citizens and businesses.

For instance, after the Asian crisis, in order to save the trust, Japan introduced nearly full guarantees of deposits in any banks. Before nationalizing PrivatBank, our parliament had passed a law on guaranteeing deposits in all state-owned banks as well. And this is the right policy. At least throughout the several years to come, we have to maintain this policy. We have to accelerate the rate of the money coming back into the banking system.

But in the future, it would be reasonable to have only one state-owned bank for fulfilling the savings function, to attract deposits from the population. Also, it can and should fulfill the function of being the one-stop shop for processing all social welfare payments and receiving payments for or even providing certain administrative services. Bank Khreshchatyk demonstrated an example of this with the Kyiv resident card before it was shut down. Oshchadbank is now trying to work out a similar model. But, for instance, introducing commission for utility payment is a step back. Here, the state's goal of restoring trust is in conflict with the bank's commercial interests. Create a more profitable set of conditions for the population, and the people will return their money to the banks again.


Today, 53% of the banking system belongs to the state, including the most high tech bank in the country and, by some parameters, the most high tech bank in the world. If the Ministry of Finance, Ministry of Economic Development and Trade and National Bank of Ukraine act together and in a smart fashion, they can transform the situation in a very positive way. Firstly, they can stimulate a significant reduction in cash payments in the market. Not with prohibitions and fees, but with more profitable fees and more convenient services. Then, the businesses and the citizens will simply shift towards a cashless economy. If the state-owned banks show true leadership in the quality of services they provide while solving state problems, the private banks will just have to follow.

Secondly, with a long-term development strategy, we can restore a civilized market of interbank lending, make it easier to control the currency market and make it much easier to lower the long-term loan interest rates. And state-owned banks can become leaders in this process, too.

We expect that by May 17, the Ministry of Finance will at least propose the basic vision regarding all these issues. In the course of discussion with the experts and the banking community, we will be able to create the best model for Ukraine, based on the most successful international experiences, taking into account the specific realities of our country. I call on all those interested - first of all, the current and the former management of the state-owned banks - to voice their opinions regarding this approach, in order to make the discussion more objective.

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