Kyiv, 30 April 1998 (RFE/RL) -- Marble lobbies and new computers at Ukrainian banks suggest a profitable industry that is remaking itself in the Western image. But beyond the polished facades, institutions that should be fostering investment have become little more than currency and bond market arbitrageurs, and glorified payment agents.
Meanwhile, a government expected to reform banks for the good of the national economy remains heavily-indebted itself -- and has shown favoritism to those who lend money to loss-making state firms and officials' pet projects.
Ukraine has too many banks chasing too little money. The Ukrainian Banking Association, an industry group, counted 113 banks in March with total assets of less than $6 billion. By comparison, there are only five banks in all of Finland.
Even more disturbing, a dangerous amount of Ukrainian bank assets are thought to be bad debts -- loans made to firms or individuals who are either unable or unwilling to repay the money.
In a bid to stop the proliferation of weak banks, the government has introduced higher minimum reserve requirements and, starting this year, is requiring international accounting standards that will make an honest assessment of the sector possible.
But these are merely the first steps of banking sector reform. Industry experts say corruption remains rampant. The queue for credits often forms at a bank's back door rather than its loan application counter. And many Ukrainian banks cannot escape their past as a private piggy bank for their founders.
Ulla Tornroos, a credit line adviser from the European Bank for Reconstruction and Development (EBRD), says many of the smaller Ukrainian banks literally work for one customer. He said as long as that customer needs a bank, the institution will stay in business -- no matter how profitable or unprofitable it is. And under Ukraine's current accounting methods, such banks tend to define "non-performing loans" as those made to people other than insiders.
Mykhailo Vlasyuk, director of the Ukrainian Banking Association, said big industrial bosses who are part-owners of a bank are sure to receive loans at below-market interest rates. Meanwhile, the larger banks that have existed since the Soviet era and are too big to be captives of a single commercial concern must placate the most powerful insider of them all - the government.
That's not to say that banks aren't making money. Last year, the industry posted profits of 825 million hryvnas, up by a third over 1996. Unfortunately for the overall economy, profits depend on the banks' trading acumen and the ability to stay on good terms with the government. In an economy that is chronically starved of credit, banks have not built strong loan portfolios.
Ukrainian banks still have a long way to go before they regain the trust of savers. Many Ukrainians developed the habit of hoarding cash under their mattresses during the early 1990s when hyper inflation and fly-by-night trust companies plagued the country and decimated personal savings accounts. Deposits have recovered lately. But bankers still must learn how to lend money in an economy where half the business is conducted on the black market, where the most popular means of settlement is barter, and where the absence of enforcement mechanisms makes foreclosures troublesome.
It is an environment that limits the maturity of most "long-term" loans to one year and forces the few lucky loan recipients to put up collateral worth 20 percent more than what they borrow. Not that the banks miss the lending business. The same economic chaos that has dried up credit and foreign investment has presented banks with a torrent of profitable trading opportunities on the currency and bond markets.
Alfa Capital analyst Paul Gregory notes that Ukrainian banks have been in no hurry to put money into safer offshore investments. With real interest rates on the domestic government bond market topping 35 percent and the new reserve requirements encouraging banks to buy treasury bills, there has been little reason to look elsewhere.
Gregory says a bank needs a lot to convince it to lend money to a private customer when it can purchase three month government T-bills at an annual interest rate of 50 percent. That is, unless the loan recipient is the bank's founder or one of his business partners.
Even using Ukrainian accounting standards, bad loans at the end of last year were estimated to account for a dangerous 21 percent of the total assets of Ukraine's 30 largest banks. Bad debts were even more disturbing at the three largest banks -- forming about one third of the loans issued by Ukraina Bank and Oschadbank, and 19 percent of Ukrsotsbank's portfolio.
And non-performing loans issued to failing state firms reportedly were coaxed by the government. Ukraina Bank has been the primary cash conduit for Ukraine's large collective farms and agrobusinesses. The bank's shaky finances reflect the continuous decline of the agricultural sector since 1990.
Another Soviet-era survivor, Prominvestbank, has bankrolled the government's effort to keep loss-making heavy industry afloat. Although its bad debts form 17 percent of its loan portfolio, Prominvestbank executives aren't worried about its future. Managers openly admit that their guarantee of survival is the continued need of the government. In March, when Prominvestbank agreed to rejoin six other government agent banks authorized to handle public funds, it was characteristically required to make a large investment in government bonds in order to win the designation.
Banking industry insiders say government regulators tend to be friendlier to banks that help the government. Two years ago, a Western firm was checking Ukraina Bank's books on behalf of an potential foreign investor. But, as one western analyst recalls, the State Property Fund still owned the buildings where the privatized Ukraina Bank is housed. Meanwhile, the government needed more loans to keep agriculture functioning.
A deal reportedly was made that gave Ukraina Bank the title to its buildings in exchange for another round of loans to the loss-making agricultural firms. Alarmed by such dubious business practices, the Western investor eventually went elsewhere.
Although the official economy is expected to bottom out this year, the government's influence remains so pervasive that analysts say it will be some time before banks can truly strike out on their own and build commercial relationships with long-term clients.
For now, 30 percent of bank profits come from activities other than lending - mostly trading - and the rest mostly from short-term loans to favored customers.
Western analysts say it will take years for bank reforms to be completed. The new rules should force bankers to own up to their mountain of bad debt, and to prevent bad loan portfolios from growing larger. Foreign banks see a brighter future in Ukraine. A select group has set up a presence in the last few months, including Creditanstalt Austria (teaming up with Aval Bank, Ukraine's fifth-largest); the Dutch bank ING Barings, and the Austrian Raiffeisenbank. The EBRD also has made investments in the industry.
Ukrainian law does not discriminate against foreign-owned banks beyond requiring them to open a resident office one year before applying for a banking license.
Most foreign banks serve the subsidiaries and joint ventures of multinational corporations by extending short- and medium-term credits and assisting in export transactions. Foreign investment now accounts for 13 percent of the industry's capital.
Alarich G. Fenyves, Creditanstalt's deputy chairman in Kyiv, said his bank is in Ukraine initially to service corporate customers who need services to support trade. He said the market can "only grow."
But Vlasyuk, of the Ukrainian Banking Association, says "until the economy is reformed, nothing is going to change. There just won't be enough money out there for the bankers to make money with."
Ukrainian National Bank spokesman Dmytro Rikberg agrees. He said that until has real growth, it is unrealistic to talk about "a real banking industry."