Banking Sector Reform In Ukraine

The banking sector in Ukraine has a two tier structure. The first tier consists of the central bank and the the second tier consists of the various commercial banks.

Laws pertaining to banking governance:

There are two laws, which govern the working of the different banks in the country. The first law is “On Banks and Banking”, introduced in 1991 and the second law is on “On National Banks of Ukraine”, introduced in 1996. The law pertaining to ” On National Banks of Ukraine”, regulates the functioning of the NBU or National bank of Ukraine, which has been entrusted with the responsibility of currency stabilization and supervision of the working of the commercial banks in Ukraine.

Stages in banking sector reform in Ukraine:

Banking sector reform in Ukraine can be categorized in six stages.

First stage- 1991 to 1993:

First stage of banking sector reform in Ukraine took place between 1991 and 1993. This stage of banking sector reform in Ukraine was characterized by growth and restructuring of the banking industry.

Reforms:

There was re registering of banks by the National Bank of Ukraine. These banks were earlier registered with the State Bank Of USSR. Several banks came into being.

Second stage- 1994 to 1995:

The second stage of banking sector in Ukraine was characterized by the following events:

a) Bankruptcies
b) For the first time foreign banks entered the country

Reforms:

The banking sector reform in Ukraine during the second stage witnessed the National Bank of Ukraine working upon banking activities and regulations of the banks. Setting international standards, monitoring financial indicators, which influence a bank’s equity percentage, liquidity, risk per client, capacity of paying the clients. There was implementation of automated payment system, re formulation of monetary policies to control hyperinflation.

Third stage- 1996 to mid 1998:

The main events that took place during this period consisted of stepping up stabilization process of the banking system. Liquidation of 16 banks in 1998. This occurred due to the financial crisis in Russia in mid 1998. Depreciation of the hryynia took place due to the same.

Reforms:

The hryvnia was introduced. The National bank of Ukraine together with the government tightened policies pertaining to budget deficit. Monetary policies were also tightened. Rates of inflation as well as interest rates were reduced. The banking sector was doing very well during this period when it was suddenly hit by the financial crisis in Russia in mid 1998, the effects of which got carried over to the Ukraine banking sector as well.

Fourth stage-Mid of 1998 to Mid of 2001:

Fourth stage of banking sector reform in Ukraine was a phase of modernizing the banking industry.

Reforms:

The number of banks possessing foreign capital increased. Relationship between the clients and the banks became more “close”. Retail banking, securities and schemes pertaining to the settlement of share acquisition, services of the registrar were some of the programs and products offered by the banks to the customers.

Fifth stage-mid of 2001 to 2003:

Due to the entry of foreign banks in Ukraine, people had pinned their hopes on further improvement of the banking sector but all hopes were met with a jolt. The reason being that the nation was “black listed” by FATF or Financial Action Task Force in the year 2001 September. Since the country did not introduce any law pertaining to money laundering as per international standards, this action was taken against Ukraine. However, the banking sector continued to grow.

Sixth stage- 2004 to 2006:

Earlier part of 2004 witnessed Ukraine’s removal from FATF’s black list. A number of banks in Ukraine were acquired by foreign banks.