4 Banking, finance and insurance

Content

• 4.1 Banking system
• 4.2 Foreign currency rules
• 4.3 Specialised financial institutions
• 4.4 Investment institutions
• 4.5 Capital markets
• 4.6 Insurance

4.1 Banking system

Ukraine has a two-tier banking system. The National Bank of Ukraine (NBU) is Ukraine's central bank. Commercial banks, including the state-owned State Export-Import Bank of Ukraine (Ukreximbank) and the State Savings Bank of Ukraine (Oschadbank), operate under the authorisation and supervision of the NBU.

National Bank of Ukraine

According to the 1999 National Bank Law, the primary function of the NBU is to ensure the stability of the Hryvnia (UAH), the national currency of Ukraine. The NBU's objectives are also to maintain stability in the banking system, as well as price stability within the scope of its power.

The highest governing body of the NBU is the Council, consisting of 15 members. Seven members are appointed by Parliament, seven by the President, and the Governor (who acts ex officio as the fifteenth member) is nominated by the President and appointed by Parliament. The Council is responsible for developing the principles of Ukraine's monetary policy.

Banking sector

The Ukrainian banking sector was historically characterized by a number of significant weaknesses, including undercapitalisation, weak corporate governance and management, poor asset quality and excessive political intervention in some banks. The situation is improving and reforms are continuing. Banks are required to prepare accounts that are based on International Financial Reporting Standards (IFRS).

Most banking services are available, and consumer credit facilities are expanding rapidly. Intermediation costs remain fairly high, although the presence of Western banks, particularly in retail banking, should force the sector to become more efficient over time. In November 2006, Parliament passed a law that will permit foreign banks to operate branch offices in Ukraine once Ukraine joins the WTO.

As of 31 December 2006, 193 commercial banks were registered in Ukraine, out of which 170 banks have been granted licences by the NBU to perform banking transactions. There are around 40 representative offices of foreign banks.

The Ukrainian banking sector has a high level of concentration. According to data published by the NBU, over 50% of the banking sector's total assets were held by the ten largest Ukrainian banks. According to the NBU, as of 31 December 2006 the total loans granted by banks amounted to UAH 245 billion (USD 48.6 billion), and their total statutory capital amounted to UAH 26 billion (USD 5.1 billion). At least 35 banks in Ukraine had some foreign capital, of which 13 were fully owned by foreign owners, and 38% of the total statutory capital of all Ukrainian banks was represented by banks with foreign capital (these include four of the ten largest).

Commercial banks require a license from the NBU. The NBU has established requirements for capital adequacy, minimum statutory capital requirements and minimum regulatory capital requirements. For banks registering after 4 October 2006, the minimum statutory capital requirement is EUR 10 million.

4.2 Foreign currency rules

Foreign currency operations are regulated by the 1993 Cabinetof Ministers Decree, On The System Of Currency Regulation And Currency Control, as well as a number of implementing rules issued by the NBU. A number of foreign currency transactions may only be undertaken if an individual license is obtained from the NBU. However, there has been an ongoing trend toward less restrictive rules, the most recent development being the removal in 2005 of the requirement that Ukrainian residents convert at least 50% of any foreign currency proceeds into local currency (hryvnia).

Some of the main points to note about Ukraine's current exchange control regulations are:

• Payments under foreign trade contracts between a resident and a non-resident entity should be in foreign currency only.
• Payments in foreign currencies between residents in the territory of Ukraine are generally prohibited (although there are some exceptions, such as bank loans).
• Salaries to Ukrainian staff must be paid in Ukrainian currency.
• Foreign loans must be registered with the NBU before funds are remitted to Ukraine. NBU rules also limit the maximum interest and other charges that may apply to foreign currency loans from non-residents.
• Proceeds from export must be credited to the exporter's Ukrainian bank account within 90 days from customs clearance (for goods) or date of services delivery. Similarly, prepaid goods must be imported and cleared through customs within 90 days of payment. Failure to do so can result in a fine of 0.3% of the amount of due or paid for each day of delay.
• The purchase of foreign currency is subject to a 1% Pension Fund charge, which is withheld by the bank.
• Payments by Ukrainian business entities for services rendered by non-residents for amounts exceeding EUR 100,000 require confirmation from the Foreign Markets Monitoring Centre (FMMC) that the fee for the services does not exceed market prices. Provided relevant documentation is in place, this should not be more than an administrative issue. However, the process cannot be taken lightly. If the FMMC rejects an application, no payment will be permitted.

• Cash investments abroad for the acquisition of fixed assets, intangible assets, corporate rights, securities and derivatives.
• In-kind contributions and transfer of property to a foreign branch.
• Purchase of Ukrainian securities from non-residents.
• Opening bank accounts with foreign banks.

4.3 Specialised financial institutions

The Ukraine leasing market is still relatively small, but is growing rapidly. According to the Ukrainian Leasing Development Project run by the International Finance Corporation (www.leasing.org.ua/en), the number of active leasing companies in Ukraine more than doubled between 2004 and 2006. A number of foreign banks have established leasing companies, while other potential investors have already been to Ukraine to assess their development opportunities.

Aircraft, car and truck leasing account for around three-quarters of the leasing market.

4.4 Investment institutions

The law, On Joint Investment Institutions (Unit Investment Trusts and Corporate Investment Funds), was enacted in 2001 and provides a framework for the establishment of mutual funds and investment funds. Some funds exist, but they are not yet a prominent feature in the Ukraine investment landscape.

4.5 Capital markets

The Ukrainian equity market has grown rapidly in the past few years. There are more than 250 traded companies, although the ten largest companies account for more than half of the market capitalisation. Despite its rapid growth, the equity market is highly fragmented, lacks price transparency, and is illiquid. It is estimated that around 90% of securities transactions occur outside the organized market.

There are several stock exchanges in Ukraine, but almost all trading is now effected through the PFTS Stock Trading System (www.pfts.com/eng), which went electronic in 2005 and was finally afforded stock exchange status in June 2006. Shares, domestic and external government bonds, municipal bonds, corporate bonds, Ukrainian treasury bills, savings certificates, investment certificates and other types of securities are traded through PFTS.

4.6 Insurance

The insurance market continues to develop in Ukraine, and is undergoing dynamic growth. There are more than 50 Ukrainian insurers with foreign capital, and a broad range of insurance services are available. The market is regulated by the State Financial Markets Commission, and initiatives to strengthen industry practices are ongoing.

There are significant restrictions on Ukrainian residents wishing to make insurance payments abroad.