The macrocosm of micro-lending expanding in Ukraine

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The impending re-privatization of a number of Ukranian enterprises is pushing commercial banks to develop microfinancing schemes as this is the least risky type of a loan. In addition, Ukraine?s bankers are taking advantage of the moment and learning from foreigners, who are now demonstrating their eagerness to help Ukranian business.

The stream of investments that in the past slowly flowed into Ukraine has very good chances of turning into a deluge. The statement released by the German bank KfW (Kreditanstalt fur Wiederaufbau) about increasing its investments into the micro-financing of the Ukranian economy is yet further proof supporting this supposition. The managers of Germany?s largest lending institution decided to the volume of micro loans to Ukraine from the planned US $ 191 mn to US $ 450 mn by the end of the year. In order to achieve such indicators, the foreigners intend to act in two direction, expanding their branch network simplifying the procedure for receiving loans. In particular, coordinator for the Ukraine Micro Lending Program (UMLP) Volker Speicher stated that the number of offices in KfW partner banks will be increased by the end of the year from the current 206 to 336. In addition, new types of loans will be introduced. For example, the first loans to the domestic agricultural sector will be allocated under the Agro Plus program. In order to make loans more affordable, the number of required documents for receiving them will be substantially reduced.

There are several reasons for the foreign bank becoming a ?good Samaritan?. The first is that risks that banks face in such activity are minimal. ?Small loans are paid off quite well. ?The principle of the less money you borrow, the greater responsibility you feel for paying them back has been confirmed,? says Kamen Zakhariyev, Director of the European Bank for Reconstruction and Development in Ukraine. For this reason, it has not been ruled out that micro loans will be allocated to Ukraine in the required volumes, regardless of certain limitations.

Ukranian banks will have to follow suit as well. Lately, they have mainly been financing small and medium enterprises, as well as individuals. Over the next several months, these will continue to be the least risky investments. Moreover, Ukranian banks are quit prudent and cautious about issuing loans to large enterprises. ?There has been a certain pause in large loans. The more talk there is about revision of privatization terms and conditions, the more caution banks are taking when it comes to financing enterprises that could potentially be put on the ?black list?, explained Privatbank Chairman Oleksandr Dubilet.

There is one more reason for the future prosperity of micro-financing. Earlier managers of large enterprises went with their ?cap in hand? to Ukranian banks. Today, the latter have brought the attention of foreign banks to our country?s industrial ?monsters?. This is very profitable for enterprises, seeing as foreign loans will not run them an interest rate of 15-16% per annum as it is when borrowing from Ukraine banks, but 5-8% as is customary in Europe. For this reason there will definitely be more banks expressing their willingness to lend money for business development in Ukraine.

Whatever the case may be, Ukranian banks will not see a return from the introduction of new products until next year. Up until that time, they have to spend money on technology, personnel training and promoting micro-financing in the provinces. This is why the majority of Ukranian banks are trying to get into the international programs. By participating in them, they will receive an opportunity to use mechanisms tested by western financial institutions for free. ?We have been given an opportunity to learn new technologies. Both banks and their customers are working with the new list of products. We teach borrowers how to draw up a business plan properly, calculate income and so on. On the other hand, I has a clear benefit - there is no need to develop new products, since they can be copied,? stated Forum Bank Chairman Yaroslav Kolesnyk.

After going through a free education along with their customers, Ukranian bankers intend to transfer micro-financing programs to their own financing. So far, only the market?s old timers can afford to do this. At the moment, the share of large banks using their own money is around 25-30% of the micro-financing market. The rest receive the support of financial donors. Ukranian bankers think that it will take them about 18 months to master and copycat the international technologies of micro-financing. By the time, their micro-financing portfolios will have doubled or tripled. Accordingly, then they will be able to lend money independently.

Kyiv Weekly, March 11-18 2005, p.7.