Lack of pub­lic trust still plagues bank­ing sec­tor

Kyiv Post - - Business Focus - BY MATTHEW KUPFER [email protected]

Anas­ta­sia, a 40-year-old in­for­ma­tion tech­nol­ogy com­pany em­ployee, wants to save money, but life gets in the way.

Last month, her grand­mother was un­ex­pect­edly hos­pi­tal­ized. The grand­ddaugh­ter paid for two weeks of in­pa­tient care and med­i­ca­tion. It cost her over $700, more than dou­ble the av­er­age monthly salary in Ukraine.

But when Anas­ta­sia has money, she doesn’t want to save it in Ukraine. She has no faith in the coun­try’s cur­rency, the hryv­nia, and ques­tions the se­cu­rity of the Ukrainian bank­ing sys­tem.

“In the last 10 years, sev­eral large and well-known banks have col­lapsed and the de­pos­i­tors lost money,” she says. “So I have no rea­son to trust the bank­ing sys­tem in Ukraine.”

Anas­ta­sia agreed to share per­sonal fi­nan­cial de­tails on the con­di­tion that her last name is not pub­lished for pri­vacy rea­sons.

Ex­perts say her dis­trust of Ukraine's banks and cur­rency is com­mon. And with­out restor­ing con­sumer trust, Ukraine's bank­ing sec­tor will strug­gle to reach its full po­ten­tial.

Why dis­trust

In the wake of Rus­sia’s 2014 in­va­sion of Crimea and the eastern Don­bas re­gion, Ukraine’s econ­omy went into a tail­spin. The coun­try’s gross do­mes­tic prod­uct de­clined by over 6.5 per­cent in 2014 and 9.7 per­cent in 2015, ac­cord­ing to World Bank data.

Fur­ther­more, in 2014, Ukraine agreed to carry out a se­ries of re­forms in re­turn for In­ter­na­tional Mon­e­tary Fund — or IMF — fi­nanc- ing. That year, to ful­fill one of the con­di­tions, the Na­tional Bank of Ukraine tran­si­tioned the hryv­nia to free flota­tion in­stead of be­ing ar­tifi- cially fixed. The cur­rency rapidly lost 70 per­cent of its value against the

dol­lar, dec­i­mat­ing the pop­u­la­tion’s spend­ing power and sav­ings.

An­other con­di­tion was to clean up the coun­try’s un­der­cap­i­tal­ized and of­ten cor­rupt banks. Start­ing in 2014, the Ukrainian govern­ment de­clared more than 90 banks in­sol­vent. Com­bined, these in­sti­tu­tions ac­counted for roughly 30 per­cent of the bank­ing sec­tor’s to­tal as­sets, ac­cord­ing to Anna Parkhomenko, head of cor­po­rate fi­nance at KPMG in Ukraine.

The govern­ment even na­tion­al­ized Pri­vatBank — 20 per­cent of the Ukrainian bank­ing sec­tor — in De­cem­ber 2016. Af­ter seiz­ing the bank, the au­thor­i­ties dis­cov­ered a hole in its ledger of Hr 148 bil­lion (roughly $5.3 bil­lion).

In the wake of these events, “the level of trust (in) banks de­creased sig­nif­i­cantly” and clients be­gan to with­draw their de­posits, Parkhomenko told the Kyiv Post in a mes­sage.

To­day, few in Ukraine can af­ford to put aside large sums of money. As a re­sult, peo­ple with smaller sav­ings are of­ten hid­ing them away at home, says Gabriel As­la­nian, a lawyer and bank­ing spe­cial­ist at the Asters law firm in Kyiv.

But even those with more cash are in­clined to avoid the bank.

“You can’t store $50,000 to $100,000 un­der your mat­tress — you need to in­vest it some­where,” he says. That in­vest­ment is fre­quently an apart­ment or an au­to­mo­bile.

But this hes­i­tancy to trust fi­nan­cial firms is not only a prod­uct of the coun­try’s most re­cent re­ces­sion. Rather, it also re­flects the wide­spread poverty and long-stand­ing eco­nomic in­sta­bil­ity that Ukraini­ans have faced since in­de­pen­dence.

“For Ukraini­ans, it’s strange to think about put­ting away ( money) for 20 years,” says fi­nan­cial plan­ner Lyubomyr Ostapiv. “They think that if they put money away…it will lose its value or be stolen.”

Ostapiv is do­ing his part to change those at­ti­tudes. He runs the pop­u­lar “Fam­ily Bud­get” blog, which pro­vides ad­vice on sav­ing and in­vest­ing. And he also gives free lec­tures at uni­ver­si­ties and ed­u­ca­tional in­sti­tu­tions to help young peo­ple bet­ter plan for their fu­ture.

Part of his work is sim­ply help­ing peo­ple know their op­tions and find ap­proaches to sav­ing and in­vest­ing that suit them per­son­ally.

“Peo­ple are very cau­tious, and of­ten they don’t have enough knowl­edge,” Ostapiv says. “Be­sides a sav­ings ac­count or an apart­ment, they don’t re­ally know how (to in­vest).”

But if more peo­ple were to take his ad­vice, it wouldn’t just help them. It would also likely ben­e­fit the bank­ing sys­tem.

Broad pub­lic ret­i­cence to de­posit money helps cre­ate a vi­cious cy­cle that un­der­mines Ukrainian bank­ing. For the bank­ing sec­tor to develop, the banks need more de­posits. But to get more de­posits they need more con­sumer con­fi­dence.

“It’s about trust­ing the bank enough to bring your money to the bank,” says Asters’ As­la­nian.

Build­ing trust

But not ev­ery­thing is bad. Over the last two years, the lev­els of de­posits in banks have been ris­ing, de­spite a de­crease of the in­ter­est rates on de­posits, ac­cord­ing to KPMG’s Parkhomenko. These could be signs that pub­lic trust is in­creas­ing.

The bank­ing sec­tor is also show­ing good fi­nan­cial results, says Volodymyr Mudryi, a mem­ber of OTP Bank’s man­age­ment board. And banks are in­creas­ingly ready to give loans both to busi­nesses and in­di­vid­u­als — al­beit at Ukraine’s pro­hib­i­tively high in­ter­est rates.

Still, con­sumer con­fi­dence re­mains one of the key prob­lems, Mudryi says. But he be­lieves the prob­lem is more a lack of trust in the Ukrainian cur­rency, than in the bank­ing sys­tem.

To pro­mote pub­lic trust, he be­lieves that the banks must be trans­par­ent and hon­est about their sav­ings ac­count rates and other ser­vices they pro­vide.

With­out greater trans­parency across the bank­ing sec­tor, “any con­sumer will think: okay, they’re rip- ping me off here…they may rip me off else­where,” he says.

OTP Bank has taken its own ap­proach to in­creas­ing trust. If clients aren’t ready to en­trust the bank with their money for a yearly de­posit, they start with a shorter pro­gram. That helps to demon­strate to clients that they can pre­serve and even grow their wealth by de­posit­ing it in the bank.

Mudryi notes that, ac­cord­ing to re­search OTP Bank car­ried out sev­eral years ago, what peo­ple want from their bank is a straight­for­ward and hon­est ap­proach.

“We think that the client needs this: for (the bank­ing ser­vice) to be max­i­mally sim­ple, con­ve­nient, and trans­par­ent (about) how much he is pay­ing, how much he gets,” he says.

But Asters’ As­la­nian be­lieves the so­lu­tion to the prob­lem of dis­trust lies nei­ther with the banks, nor the reg­u­la­tors. Rather, it’s a mat­ter of time.

“What (the govern­ment) is do­ing right is keep­ing the (bank­ing) mar­ket sta­ble,” he says. “This is the main achieve­ment. These days we do not see any liq­ui­da­tion of banks or detri­men­tal de­ci­sions for the bank­ing sec­tor. It has been sta­bi­lized.”

But if the Na­tional Bank is con­duct­ing re­spon­si­ble fi­nan­cial pol­icy, Anas­ta­sia, the IT em­ployee, isn’t notic­ing a dif­fer­ence.

She says that she never felt the ef­fects of the 2008 global fi­nan­cial cri­sis, when the hryv­nia was still pegged to the dol­lar. But the 2014 cri­sis has hit her head on.

If she were to make some ex­tra money, Anas­ta­sia would likely buy Bri­tish pounds to pro­tect her earn­ings. She would also like to pur­chase an apart­ment. Right now, how­ever, that’s far out of reach.

“I don’t have those kinds of fi­nan­cial flows to in­vest in some­thing,” she says. “I try to in­vest in my­self.”

Peo­ple wait in line out­side a cur­rency ex­change in cen­tral Kyiv on Nov. 1. For Ukraini­ans wary of de­posit­ing their money in a bank, con­vert­ing it into dol­lars or eu­ros is an­other way to pre­serve its value. (Oleg Pe­tra­siuk)

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