The goal of the reform is to create a financial system capable of supporting sustainable economic development by effectively redistributing financial resources in economy by creating a genuine market competitive environment based on EU standards.
The reform of the financial sector includes a series of activities designed to achieve three key goals:
- financial stability;
- consumer and investor rights protection; and
- institutional capacity of regulators.
When carried out in full, this reform will bring about a financial system which:
- can support sustainable economic development;
- operates in a competitive market environment;
- is regulated in line with EU standards;
- is integrated in the European market of financial services.
The reform of the financial sector has clear and specific indicators to be ultimately achieved:
- Consumer Price Index (annualized, %) — 5% ± 1 percentage point
- foreign exchange reserves (USD) — as required by the IMF program
- cash in economy (M0/GDP) — ≤9.5%
- cashless payments — 55%
- POS-terminals per 1 mln people — 11,000
- concentration in the banking sector (HHI index) — ≥800
- loans and deposits in US dollars — ≤40%
- loans to deposits (gross loans) — ≤110%
- nominal rates of new loans in the national currency — ≤12%
- insurance penetration rate — 0.75%
- pension system tier two assets — at least 2%
- assets of public CII [Collective Investment Institutions] — at least 10%
Why change anything?
The financial sector evolved in fits and starts in 2009–2014.
The banking system grew preemptively compared with other segments of the financial sector, but the quality of banks' assets and their business models left much to be desired (though this became obvious a little later). The development of the non-bank financial sector was held back by lack of effective laws, systems of regulation and prudential supervision, spawning captive financial institutions and "financial pyramids".
All of this caused a crisis of trust in the financial sector in general. The 2014 events, especially the annexation of Crimea and the outbreak of the armed conflict in the east, heavily hit economic development by undermining the trust of consumers of financial services in the banking sector and by unbalancing financial markets.
Declining economic activity and the imbalances of foreign trade in 2014–2015 resulted in devaluation and increased inflation rates. All this ultimately worsened the quality of banks' loan portfolios and created the need to clean up balance sheets in the banking system.
The situation with the banks' troubled balance sheets was aggravated by lack of effective protection systems for creditor and consumer rights, primarily guarantees of ownership and fair trial.
Main features of systemic problems in Ukraine's financial sector in early 2015 include:
- a spiking share of troubled assets in banks' balance sheets, with non-performing loans in the banking sector growing from 12.9% in early 2014 to 24.7% at the close of Q2 2015;
- a significant outflow of deposits from the banking sector, which lost 45.4% of foreign currency deposits and 17.9% of hryvnia deposits in 2014 and Q1 2015;
- a high percentage of loans and deposits in the US dollar, 55.9% and 53.4%, respectively, as of the close of Q1 2015;
- an unbalanced base of the banks' assets and liabilities, with the loan to deposit ratio peaking at 226.7% in 2009 to become 158.8% at the close of Q1 2015;
- 47 banks, including one systemically important bank, were declared insolvent between Q1 2014 and Q2 2015;
- inadequate equity and regulatory capital of banks as a result of the declining quality of loans and other assets and supplementation of provisions for asset transactions since early 2014;
- a massive exodus of large European players of the financial sector from Ukraine, with about 10 European banks selling off their subsidiaries in Ukraine and closing down their retail business after the 2008–2009 crisis;
- lack of Ukrainian companies' IPOs at local and foreign stock exchanges in 2013–2014;
- trading volumes in domestic stock exchanges (except for government bonds) falling by 38% in 2014 to UAH 76 bn, including a decline of 46% to UAH 36 bn for trading in stocks and derivatives;
- lack of an effective support mechanism and infrastructure for funding investment projects of small and medium-sized enterprises (SMEs), which prevents raising loans from international financial institutions for a rapid renewal of economic growth and support of the domestic producer;
- an invariably low percentage of insurance companies in the structure of the financial sector in 2008–2014 — 2.6% to 3% of total assets;
- a small share of nongovernmental pension assets — UAH 2.5 bn or 0.2% of GDP as of the close of 2014.
What does the reform involve?
The reform of the financial sector covers 52 different areas, from liberalizing capital flows, improving the protection of creditor and consumer rights, ensuring sustainable development of cashless payments, financial technologies, and the insurance market to providing tax incentives for the development of the financial sector and enhancing its infrastructure.
The fundamental principles below underlie the reform:
- approximating regulation of the Ukrainian financial market to EU rules and standards;
- liberalizing financial markets and joining the EU's internal market of financial services;
- balancing economic interests by creating a market-driven competitive environment;
- independence and performance of regulators, risk-based supervision;
- transparency and high standards of disclosure by financial sector participants and regulators;
- responsibility and trust between financial sector participants and regulators;
- integrity of the financial system, comprehensive protection of creditor, consumer, and investor rights.
The reform concerns all segments of the financial sector — banking, non-bank financial institutions, capital markets.
To make the reform effective, thorough changes are required:
- financial sector regulators — reinforcing the institutional capacity of regulatory bodies and the Individual Deposit Insurance Fund and creating conditions required for effective supervision and impact, increasing the robustness of the country's financial system, growing its credit and investment potential;
- financial sector participants (of different forms of ownership) — getting rid of "ballast" and troubled institutions, improving financial robustness and solvency of participants, restoring and strengthening trust in market players, encouraging development, transparency, and competition in all segments, providing for the equality of financial sector participants.
What has the reform changed already?
Key results of three years of reforms in the financial sector:
- galloping inflation curbed. Now it is controlled and proceeds according to NBU forecasts;
- transparency of the banking system improved (disclosure of ultimate beneficial owners);
- the banking sector develops steadily and generates profits;
- currency regulation significantly mitigated (by adopting the Law On Foreign Currencies and Foreign Exchange Transactions);
- conditions created for FinTech development;
- a system launched for remote customer identification to simplify remote access to financial services (Bank ID);
- creditor rights protection enhanced (by adopting the Law On Creditor Rights Protection);
- transparency provided for the creation of supervisory boards of state-owned banks (introduction of corporate governance in progress, the Independent Directors School created);
- NBU loan register launched;
- modernization, consolidation, and development of the stock exchange, settlement, and clearing infrastructure of capital markets secured;
- NBU internally transformed;
- electronic document flows introduced for banks (the Paperless project).
Documents and useful links
The Comprehensive Development Program for the Ukrainian Financial Sector 2020
Progress with the Comprehensive Development Program for the Ukrainian Financial Sector 2020
The 2018 Implementation Report for the 2020 Comprehensive Development Program for the Ukrainian Financial Sector