- High inflation rates also interfered with the development of
- the banking system.
- The slow pace of privatization also affected adversely the
- progress of the banking system's development.
- Imperfect or total absence of appropriate legislation, espe
- cially in the area of protecting the deposits of private individuals.
- Absence of a system of insurance for loans offered by com
- mercial banks.
- Lack of efficient personnel.
- High risk credit policy followed by certain banks to maxi
- mize profits.
- Dearth of capital of the banks.
- Untimely or default payment of loans lead to prolongation
- of the period of paying back of loans.
- Lack of liquidity leading to failure in servicing clients.
The fragile financial position of commercial banks is a direct result of their lack of rights and actual isolation from the capital markets. Unlike in other countries, restrictions imposed on commercial banks with regard to the high level of minimum statutory fund by the National Bank of Ukraine interfere with the development of financial-industrial groups and the establishment of banks as their financial instruments. This is aggravated by the fact that large volumes of-fmancial resources revolve in the informal economy in the form of cash. It is therefore important to mobilize resources into the banking system using administrative and economic tools.
Activeness of the commercial banks in providing long-term credits is low even at present when the days of unstable currency is over and Hryvnia has attained some strength. The nature of banking activity should undergo some change in order to meet investment needs and measures supporting Ukrainian banks to take part in capital markets should be encouraged.
It is high time the National Bank of Ukraine to decide what kind of banking system is optimum for Ukraine. The policy of the NBU in breaking the isolation of the commercial banks from privatization and participation in the stock markets is pertinent, however the NBU should follow a rational correlation between its general and particular policies towards commercial banks. It is necessary to avoid unified approach in identifying banks, the preferable mode being to divide them into universal and specialized ones (with certain types of functions). This opens the way for collateral, investment, savings and other types of banking activity, to which commercial banks pay less attention due to high risk, as well as facilitate the growth of state and quasi-state institutions -"development banks" which will function in the priority areas of development, agriculture, machine building etc.
Although restrictive measures are inevitable during financial stabilization, there should be a differentiated approach to statutory reserves and their terms, as is the case in FRG. In February 1996, the Supreme Council of Ukraine adopted a supplement to the law QnJdanh and^ Banking. This amendment withdrew the restrictions on banks' participation in the funds of other banks and restrictions on their activities in the securities market. The amendment revises the provision related to the bank-authorized fund that by January, 1998 must equal 1 million ECU or its license can be withdrawn. In addition, the Council prohibited the registration of foreign banks subsidiaries and increased registration requirements for banks with the participation of foreign capital (their authorized funds must be between 3 to 5 millions ECU). Finally, the Council decreed that all commercial banks would be transformed into open joint-stock companies, granting the NBU a right to formulate requirements when licensing commercial banks for specific transactions.
2) Role of the National Bank of Ukraine during transition
Before independence, when Ukraine had no national currency and banking system, the role of the central bank in such conditions consisted in implementing the financial plan and financing or refinancing loans to enterprises on the basis of this plan and provide cash in exchange of salary cheques based on payments plan. Interest rates were determined by administrative means, loans to key sectors of the economy often were made at privileged low interest rates. The banking system included central and other state specialized banks, which extended loans to various branches of the economy. At first glance, it seems to be a two-tier banking system, but in reality, this was a conglomeration of monopolists, each serving their own segments of economy. There was no place in these circumstances for monetary policy as an instrument of macroeconomic discipline, monetary policy was part of the planning process and regulated interest rate and selectively regulated credit resources. Such regulation did not aim at macroeconomic stabilization rather at achieving microeconomic ends through centralized means.
After the declaration of independence, the issue of introducing national currency as one of the attributes of an independent state was of utmost importance. Transition from the centrally planned system to a market oriented economy objectively called for exit from the ruble zone, introduction of national currency and thus creation of the bases for monetary and currency policy.Any system is characterized best by its product or result, in other words, what it gives to people in the ultimate end. The product of the banking system is - the national currency. Independent Ukraine started its journey without any monetary policy of its own, without a banking system and without knowledge of normal economic relations for 60 years. We started from a negative mark and that is why in 1992 and 1993 and part of 1994 the slogan "defending the domestic producer" was the order of the day: it was considered that the domestic producer should be helped by privileges and benefits 'and practically unlimited loans. A heavy price was paid for such a mistake - during this period inflation levels were highest in the world, and the karbovanets lost two of its most important functions: to be a unit of both value and value-added.
Radical changes in economic and monetary policy since October 1994 saved the country from national disaster. A new era emerged for the currency system in Ukraine - the currency embodied in itself that economic essence which is embedded in it by the whole history of societal development. This principle guided the activities of the National Bank during 1995-1996.
Stable currency is not only the primary condition for providing a more or less predictable level of economic management and consumption. It is a component of pragmatic systemic reform in production, in the social sphere and also in "support of effective payable demand of the population, producers and the state". A socially drientated/responsible economy starts from a stable national currency. It is impossible to set things in order in the finance sector if there is no stable currency and vice versa.
Considering this, it is difficult to discuss what should be stabilization like - "monetary-financial" or "financial-monetary". There is no sense to juxtapose measures to support balance between demand and supply ofmpney in an urgent need to introduce order in the use of resources. These are different but closely connected issues. In Ukraine, there will never be enough currency in circulation if 40% of taxes are not collected; in budget accounts everyday 1/3 or 1/2 of monthly revenues are accrued; in increasing the rolling capital of enterprises resources worth more than GDP produced is directed and in increasing the reserves of goods and assets 2/3 of GDP is spent; under conditions of constantly rising mutual indebtedness between enterprises a high degree of use value of the product is preserved in significant terms in different branches; 1/3 of profits are used for the exchequer instead of fulfilling payment obligations; under conditions of impoverishment of labor, only 14% of the. profits are used for the social sphere; while accounting mutual indebtedness, payment arrears are announced, volumes of which are 3 times less than officially recorded indebtedness. .x
The world civilization has an universal unit - stable currency lying at the basis of fair exchange of goods and services, that is, stable prices. Only stable currency paves the way to financial/ fiscal discipline and leads to economic activity.
Role of the National Bank (NBU) is important and it has been often judged as being monetarists, and is accused of disregarding priorities in order to succumb to the complexities of financial policy. Using its authority derived from law, the National Bank on rare occasions used its competence to regulate monetary-currency policy. Through the standard of national currency, the NBU ensures stable consumer prices. NBU policy during this period was aimed at achieving this goal.economic sphere and pricing based on demand and supply, has been a powerful factor of economic stabilization. The state released itself from controlling and commanding currency and immediately received a flow of currency. As a result the following tendencies were noticeable:
1.Trust on hryvnia increased. Its exchange rate became one of
2.the most reliable indicators.
3.The process of integration of Ukraine's economy with the
4.world economy was activated on the basis of liberalization of
5.economic management, where the producers and consumers exer
6.cise freedom in choosing their foreign partners.
7.Currency trade became a great economic factor for stabili
8.zation.
NBU's careful attitude towards currency trade is not an expression of monetary fetishism. The growth in volume of currency sale "extracts hot money" from the consumption market, and slows down inflation. It is also important to note, that growth of currency exchange stimulates foreign trade.