OTTO-VON-GUERICKE-UNIVERSITY MAGDEBURG
Faculty of Economics & Management
DONETSK NATIONAL TECHNICAL UNIVERSITY
Faculty of Management
Department of International Business Activity
The banking system of Ukraine
Artyom Lysenko
Pervomayskaya st. 52ª
86391 Zhdanivka
International Economics
Specialisation "European Studies"
Semester: 3
E-Mail: tema92-07@inbox.ru
Date of submission: 17.10.2010
Abstract
1. Introduction.
2. Banking system of Ukraine.
2.1. Structure of banking system.
2.2. Classification of banks and their functions.
2.3. The National Bank as the main element of the banking system of Ukraine.
2.4. Commercial bank: its role and functions in the economy.
3. Problems and weaknesses of the banking system of Ukraine. Solutions.
4. Conclusion.
References
2
Abstract
This paper deals with the banking system of Ukraine. Also described a brief
history of its establishment, structure, types of banks, their functions, problems and
solutions. Formation of the Ukrainian banking system is described in general terms.
Key words: bank, banking system.
3
1.Introduction
The banking system - an essential component of any economy. The banks,
spending cash payments, crediting the economy, acting as intermediaries in the
distribution of capital, significantly increase the overall efficiency of production,
promote growth of productivity of labor. The practical role of the banking system is
determined by the fact that it manages in the state system of payments and settlements;
most of their commercial transactions carried out through contributions, investment and
lending operations; along with other financial mediators banks direct the savings to
firms and industrial structures.
Modern banking system - an area of diverse services - from traditional depositloan and cash transactions determining the basis of banking, to the newest forms of
monetary and financial instruments used by banks. The stability of the banking system
has emergency importance for the effective implementation of monetary policy. The
banking sector is a channel through which impulses are transmitted monetary authorities
across the economy. Namely the need to study such an important component of a
market economy is determined by the relevance of the topic.
“The banking system plays a crucial role in normal development of economies.
Ukraine is not exception, and the transition to a market economy it has developed a new
banking system. Naturally, it has some peculiarities, its own complexity and ways of
solving them.”1 The whole system is currently in its infancy and can not avoid crises
and shocks. That is why the aim of my work is to understand how to reduce the negative
impact to a minimum. That's why the theme of the Ukrainian banking system today is
particularly important for stabilizing the economy of our country.
1
Финансовые риски ”Банки”(2008)
4
2.Banking system of Ukraine
2.1.Strukturе of banking system
The banking system of Ukraine was founded following the adoption by the
Verkhovna Rada in March 1991, the Law of Ukraine ""On Banks and Banking
Activity" 2. “It is a two-tier and consists of the National Bank of Ukraine and banks of
various types and forms of ownership. National Bank of Ukraine is the central bank,
which conducts a single state monetary policy to ensure the stability of the national
currency. Banks are on the stock or mutual basis legal and natural persons.” 3 Their
functions banks realize through the implementation of operations such as fundraising
companies, institutions, organizations and people to deposit, deposit accounts and nondeposit fundraising, lending to business entities and citizens, investing in securities
formation of the cash balances and reserves formation of other assets, cash and
settlement services to the national economy, the implementation of foreign exchange
and other banking operations.
The current banking system has a two-tier organization. Upper level - is the
central bank, the lower level of commercial banks and lending institutions. The central
bank is crucial for the banking system, its activity can regulate and control the monetary
relations as a whole while maintaining the freedom of private enterprise, which is
provided by commercial banks. Central banks in all countries is the main part of the
banking system, institutions which carry out regulatory functions of the entire banking
system. It can be make the following simple scheme of the banking system of any
country:
2
3
The Law of Ukraine: "On Banks and Banking Activity"
Финансы Украины”Структура банков”(2008)
5
Institute of the upper level of the banking system
Central bank
Institutes of the lower level of the banking system
Commercial banks
Universal banks
Specialty banks
Investment banks
Mortgage banks
Savings banks
Banks of the consumer Credit
Branch banks
Intra-bank
In order to improve the effectiveness and efficiency of regulatory activities of
the Central Bank's practice division of the banking system in the sector, including
functional characteristics similar to those of institutions. For example, the sector of land
banks, the sector of consumer credit sector, leasing companies, etc. The main purpose of
this fragmentation - the selective use of regulatory procedures and rules, depending on
the specifics of the organization's operations and activities of institutions of a sector.
2.2. The classification of banks and their functions
The main function of banks - concentrate in their own funds and make them
available on loan. Historically, the original function of banks is to mediate in payments.
They shall keep the money of entrepreneur on behalf of which lead to settlements with
suppliers and customers, make payments to the state treasury, leading settlement service
6
firms. Banks are also accumulating in their incomes and savings, means the state, public
and other organizations. By themselves, these amounts are intended for consumption as
the purchasing or payment. Meanwhile, when they fall into the hands of businessmen,
they used for profit. Banks issue credit as a means of circulation - the cost of the signs
that serve as money in trade and payments. Ukrainian banks perform their functions in
two interrelated types of operations: passive - operations to create a bank of resources
and active - operations on their placement and use of (Table 1.). Cash advances from
banks are made up of their own capital and deposits - deposits from customers.
Functions of banks
Passive
Time deposits
Active
Demand
Discount
Stock
Business
deposits
of bills
exchange
loan
Blank credit
transaction
Table1:Functions of banks4
Active operations includes a variety of loans: promissory notes, stock, Bottom,
blank. The most common is discounting bills. Bank buys the bill from the entrepreneur
if he wants to turn it into money before maturity. Banks lead stock transaction - give
loans against securities - stocks, bonds, mortgages, etc., and also buy such securities.
Commercial loan granted bail products, located in warehouses in the way of turnover. If
the loan is not repaid on time, the pledged securities and commodity-material assets
transferred to the ownership of banks. The largest businesses, which pay no doubt,
given a blank credit: loans are granted without collateral. In addition to the passiveactive operations and transactions, banks are engaged in trade and commission work buy and sell gold, exchange the domestic currency to a foreign place their loans, sell
stocks and bonds, etc.
Under market conditions, banks are the key link, feeding the economy with
additional financial resources. . By its location, the banks are closest to the business, its
needs, changing business environment. Thus, the market inevitably puts the bank in a
4
Economy and the State (2007)
7
number of fundamental elements of economic regulation. In practice, operates a variety
of banks. They are classified according to various criteria shown in Table 2.
Criterion
Type of Bank
By the form of ownership
Public
Stock
Cooperative
Private
Mixed
On the legal form of organization
Stock Open
Liability Company
By functionality
Emission
Deposit
Commercial
By the nature of the operations
Universal
Specialty
By service sector
Industry
Consumer
Regional
Municipal
Interregional
National
International
On the number of branches
Branchless
Multibranch
On the scale of activity
Small
8
Average
Large
Banking consortia
Interbank association
On economic grounds
Industrial
External trade
Agricultural
Shopping
Table 2:Types of banks5
In practice, in its pure form
the bank almost never occur. In a modern
monetary economy are more common combination of operations performed by the bank
while preserving the main direction of their activities, which allows us to allocate some
of their styles.
2.3. The National Bank as the main element of the banking system of Ukraine.
“Central Bank (National Bank of Ukraine (NBU)) - founded in 1991 on the
basis of the former Ukrainian Republican office USSR State Bank and its regional
departments. It is a system of single bank and includes a central office, located in Kiev,
Crimean Republican administration and 24 regional governance. Legal status, principles
of organization and activities of the National Bank of Ukraine are defined by the
Constitution and the Law of Ukraine "On National Bank of Ukraine"”6. According to
the Constitution and the law "On National Bank of Ukraine" NBU sole issuer of
currency and organizes her treatment, is the lender of last resort for banks and organized
system of refinancing for banks to establish rules of engagement provides banking
regulation and supervision, carries out foreign exchange regulation, determine order of
operations in foreign currency, organizes and implements foreign exchange controls
5
6
Вестник НБУ”Классификация банков”(2006)
НБУ(2005)
9
over banks and other financial institutions. In addition, the NBU sets official hryvna
exchange rate to foreign currencies and make it public. National Bank establishes
design, security and national denominations of banknotes. NBU also stores the banking
and precious metals, stones and other valuables. National Bank allocates foreign
exchange reserves and performs with them, establishes the procedure for determining
the discount rate and other interest rates on its operations, determined by the Bank
standard of emergency funds. However, the strategic goal and the fundamental
responsibility of the NBU is to create a supportive environment in which the operating
commercial banks and other financial institutions. This means that the main purpose of
the NBU are:
1) to protect and ensure the stability of the currency of Ukraine;
2) developing and strengthening the banking system;
3) ensuring effective and smooth functioning of the payments system. Reliable
payment system that meets the needs of businesses and individuals in a safe and
efficient transfer of funds - a prerequisite of successful development of a market
economy in each country;
4) To establish and support a competitive environment;
5) Promote the use of new instruments of monetary policy a significant
achievement for the National Bank became the input of electronic interbank payments.
Another progressive step is the introduction of e-mail, through which the NBU can
receive a daily balance of the banking system.
“Belong to the NBU authorities of the National Bank and the Board of the
NBU. The Council consists of 14 members. Chairman of the NBU council elected by
the members of the Council for three years. 7 of 14 board members, including the head
of the NBU, appointed by the President of Ukraine. Head of the NBU is appointed for
five years. The remaining 7 members are appointed and dismissed by the Verkhovna
10
Rada. The Board is headed by the head of the NBU. The composition is approved by
the Council on recommendation of the head.”7
2.4. Commercial bank: its role and functions in the economy
“Commercial banks are the main link of credit system in the country, which
includes credit institutions, carrying out a variety of banking transactions for its clients
on the basis of commercial calculation. To do this, they use not only their own capital,
but also attracted financial capital in the form of deposits, deposits, interbank loans and
other sources. And the funds raised are usually significantly higher than the amount of
equity capital of commercial banks.”8
Initially commercial banks were created primarily as a branch. Some banks
have emerged as subsidiaries of state specialized banks. So, for example, was formed
Ukrinbank. Banks such as Demosbank, Kiev Cooperative Bank - predecessor
Gradobank, emerged as a co-operative commercial banks. This is because while the
cooperatives of the production of goods, execution of works and services were the first
market structures, acting in an environment of public enterprises, organizations and
institutions, and often when they. To make it easier and faster to solve problems
obtaining loans for its development, cooperatives were set up their banks. In the future
the shareholders or stockholders of commercial banks have increasingly become the
various businesses and individuals. This process is particularly intensified after the end
of 1992 state enterprises were allowed to be founders of commercial structures,
including banks, and in 1993 it was decided to transfer due to the specified companies
dividend income, respectively, the subordination of the state or local budget.
Cooperative banks have equal rights with the commercial.
Supervision of commercial banks and the regulation of their activities pursued
mainly two objectives: providing stability and preventing bank failures, limiting the
concentration of capital in the hands of the few banks in order to prevent monopoly
control over money market.
7
8
Экономическая наука “Состав НБУ”(2007)
Финансовые риски”Банки”(2008)
11
Mandatory for each commercial bank are the following economic standards set
by the National Bank of Ukraine:
• solvency of the bank;
• indicators of balance sheet liquidity;
• maximum risk per borrower;
• the size of mandatory reserves placed with the National Bank of Ukraine.9
In order to constantly increase its authorized capital, commercial banks mainly
carry out such policies on dividends, which contributes to the market price of the shares.
This allows us to sell a significant portion of shares in new issues on the high market
rate, and thus gain significant exchange difference that is used by banks in
hyperinflationary economies primarily on the indexing of shares of previous issues. To
increase the authorized capital of the bank can use the undistributed profits of the bank,
and at the request of shareholders' dividends due to them.
One of the main purposes of commercial banks profit, which is the source of
payment of dividends to shareholders, funds of banks, the base of the well-being of
employees of the bank, etc. The bank's profit is the difference between its gross income
and expenditure. The main source of income for most commercial banks are the interest
charged to borrowers for the use of loans. This is explained by the fact that banks are
financial intermediaries engaged in the redistribution of funds among those from whom
they were freed and those who at the time they had a need.
The interest rate for credit is determined by negotiation between the bank and
the borrower at the conclusion of the loan agreement. And the percentage is not the
same in the same bank in relation to different customers.
In setting the interest rate is also taken into account:
• The size of the base interest rate set by the NBU;
• The cost of attracting credit resources in the market loan capital;
9
НБУ”Нормативы банковской системы Украины”(2006)
12
• supply and demand for credit;
• degree of risk;
• the size and maturity of the loan;
• the level of costs of the bank;
• the economic outlook and inflation.
“Banks receive significant revenues from transactions in foreign currencies.
Banks may also receive income from securities transactions, but as this market is not
developed, the revenue until low. Operations with foreign currency and securities may
carry only those banks who have a license issued by the NBU and the Ministry of
Finance of Ukraine.” 10 Many commercial banks charge their clients a fee for the
commission payment transactions
translation, letter of credit, collection. This fee
should cover the expenses of the bank to perform payment transactions, including bank
fees and a regional clearinghouse for the conduct of electronic payments. Relatively
constant is the cost banks pay and charge to it, forms and stationery, maintenance of
premises, security, fire alarm systems and more. Profit is an important parameter for
evaluating the performance of commercial banks. It is used by analysts to determine the
rankings of banks based on their balance sheets. Now, neither we nor abroad there is no
generally accepted methodology for calculating ratings of commercial banks. Therefore,
ratings, calculated by different methods can differ, and hence will be assessing the
various activities of banks.
Main indicators of banks in Ukraine over the past 7 years can be seen in Table3
consecutive
Title index
number
1
10
Number of registered banks
Вестник НБУ”Банки Украины”(2003)
13
01.01.
01.01.
01.01.
2003
2007
2010
182
179
197
2
Excluded from the register bank
12
6
6
3
The number of banks who are in the process
24
19
14
of liquidation
4
Number of acting banks
157
170
182
4.1
Of which: foreign capital
20
35
51
4.2
Including a 100-percent foreign capital
7
13
18
5
Total assets (mln.UAH.)
67774
353086
1001626
5.1
Net assets (mln.UAH.)
63896
340179
880302
6
Highly liquid assets (mln.UAH.)
9043
44851
96384
7
Loan portfolio (mln.UAH.)
46736
269688
747348
8
Long-term loans (mln.UAH.)
10690
157224
441778
9
problematic credits(mln.UAH.)
2113
4456
69935
10
Investments in securities (mln.UAH.)
4402
14466
39335
11
Liabilities (mln.UAH.)
63896
340179
880302
12
Equity (mln.UAH.)
9983
42566
115175
13
Liabilities of banks (mln.UAH.)
53913
297613
765127
14
Individuals' funds (mln.UAH.)
19092
106078
210006
15
Regulatory capital (mln.UAH.).
10099
41148
135802
16
Income (mln.UAH.)
10470
41645
142995
17
Cost (mln.UAH.)
9785
37501
181445
14
18
The result of activity(mln.UAH.)
685
4144
-38450
19
Return on assets (%)
1.27
1.61
-4.38
20
Return on equity (%)
7.97
13.52
-32.52
Table 3:Main indicators of banks of Ukraine on 01.03.191011
3.Problems and weaknesses of the banking system of Ukraine. Ways to solve them
“It is unlikely that today in Ukraine there is a person, company or organization,
entirely satisfied with the work of the domestic banking system. In this range of
estimates is quite wide: from total denial of any positive developments in recent years to
the triumphant reports of outstanding achievements. In a number of negative ratings can
be found as follows: "the weakest point of the Ukrainian economy", "not responding not
only to European Union requirements, but also the requirements of economic
development", "tends to move to the line of destruction", "... state absolutely can not
meet any current size, or quality of the banking system. " Among the more lenient
ratings - is not sufficiently developed to support the many promising projects, "" not
healthy, deep and stable, rather fragile, surface. " So why are not supported the work of
Ukrainian banks?”12
“We can distinguish some basic problems of the banking system of Ukraine.
In 1991, the start to be formed, "youthful" Ukrainian banking system has
suffered a blow sokruschayushy. The collapse of the Union, the disintegration of the
USSR State Bank into its constituent parts - the National Bank, the loss of the Savings
Bank of Ukraine, all contributed to the fact that the population's deposits in Sberbank to
dust. All further attempts of Ukrainian politicians to use this theme as an excuse to raise
their own political ranking led only to the fact that people are more and more to
11
Вестник НБУ”Основные показатели деятельности банков Украины на 01.01.10”
12
http://www.zn.ua/
15
dissuade a possible return of lost funds.” 13 People carried their money, believing in
getting at least some profit, at least some compensation, to protect their money in a
runaway hyperinflation. And then there came a sharp sobering. And understanding that
no one will be responsible for the money. Thus was born and strengthened total
disbelief. Distrust of depositors to banks, distrust of the state, unable to protect savings
of their citizens from thieves and swindlers in beautiful suits and ties. The situation
became critical, and only the creation of the Deposit Guarantee Fund of individuals
(FGVFL) was able to reverse the trend. “Originally FGVFL guaranteed return of
deposits in an amount not greater than 500 hryvnia. Gradually increased and the amount
reimbursed by the end of 2008 reached 150 thousand hryvnia (the last increase in the
amount - to 3-fold, from 50 to 150,000 hryvnia - have already been conducted during
the period of the last moratorium in October 2008).”14 The first such moratorium was
imposed NBU under the leadership of Arseniy Yatsenyuk in December 2004 - and then
he played a positive role. The dollar was retained at around 5.41, no one was hurt. “And
now, the volume of deposits in banks is far behind "pre-crisis". The bulk of the
population that has suffered a money back into banks, according to the testimony of
employees deposit department, puts it on deposit currency. Crisis of confidence grows.
So what to do to melt the ice of distrust investors to Ukrainian banks? The answer is
obvious: only a very long period of stability and the absence of shocks can turn the face
of depositors in banks. But this takes time.”15
“Rampant hyperinflation, almost daily devaluation of the ruble at first, then coupon-karbovanets led to the fact that in order to preserve their savings citizens began
to pay attention to the only alternative at that time - the American dollar.”16 The dollar
remained himself, despite the series of changes in the national currency's purchasing
power also remained unchanged, he was accepted for payment all - and legal and
natural persons. Gradually, the dollar is not only a means of accumulation, but began to
perform other important functions of money - became a means of payment.
Alternatively people did not have. Worse, that the state and national bank for too long
13
http://minfin.com.ua/
14
http://ukrstat.gov.ua/
Экономика и государство” Проблемы банковской системы Украины: пути их решения ”(2009)
15
16
Deputy Chairman of the Index-Bank, Sergei Borisov
16
could not implement adequate measures to protect and promote its national currency.
“Now that all these processes are already partially behind the role of currency naturally
decreases gradually. The dollar ceases to play the function storage means and all rarely
used as means of payment.” 17 But finally dismissed in the first place, many years
formed the mentality of the population, and, secondly, the dangers that beset even the
fledgling Ukrainian economy in the face of continuing economic crisis, I think, still not
worth it.
“One of the main problems of the banking system of Ukraine - a crisis in
personnel matters. For anybody not a special secret of how personnel issues are
resolved in the majority of companies in Ukraine. Most often, the lower and middle
management positions were appointed by the children of important customers or
employees of regulatory bodies.”18 And there would be nothing - as "thieves" usually
complemented the true pros in their field, able to work for himself and for "that guy" to
meet their and others' responsibilities, often settle for lower wages in general - keep
afloat Bank in which he works. But the situation changed abruptly in late 2008. Then, as
a result of shocks occurring in the banking system on the street was set as the
surprisingly, professionals, behind which there were no "right people". Skill and
experience have been sacrificed because of "the right people." “As a result, the overall
level of professionalism in the banking system dropped sharply. Has suffered great
harm as the banking system as a whole and the individual banks, which could not then
survive in the fierce competition.” 19 Can the banking system and revive the selforganization in this matter? Difficult to answer specifically, one thing is clear: from
such malpractice in personnel matters must be resolutely rejected.
All of this speaks only of one. In no event should not be considered the
banking system as a coherent and clearly never giving a failure mechanism. He has the
problem that is not always visible on the surface. Try to anticipate potential problems,
understand their severity, time to react to them, find the correct solution of the problems
17
http://www.dengi-info.com/
Бухгалтерский учет и аудит”Проблемы украинских банков”(2009)
19
Банковские риски”Влияние кризиса на банки Украины”(2009)
18
17
- that is the task of those who are going okay to build a business in our country, those
who simply want to preserve their capital. "Who warned - that is armed"20
20
proverb
18
4. Conclusion.
It can be say that the domestic banking system is going through hard times.
The reason for this situation are the increased competition among banks, unstable socio
- economic situation, the imperfect and constantly changing legislation, and risky
lending policies of many banks in the pursuit of high profits. The absence of an
effective system of deposits left investors of the Ukrainian banks with little or no
guarantee a return on their money. In this the hard way could see many thousands of
people. The role of the banking system in any economy is extremely high. Strict
"separation of powers", that is, the definition of clear lines of authority and division of
spheres of influence between the Central Bank and commercial banks can significantly
improve the efficiency of the banking system, which will help the local economy.
19
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http://polpred.com/?ns=1&ns_id=234777
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20