As loan activity increases in Ukraine, market insiders continue to point to the vast untapped potential of the financial services sector.
While loan activity increased by roughly 20% in 2005, according to Standard & Poor's, and the Ukrainian government has actively created laws designed to improve access to credit, lending remains at a fraction of the market's true potential.
Although high interest rates and collateral requirements are a deterrent to would-be borrowers, another challenge to mass credit and lending is the lack of a credit reporting agency. At present, no single database exists on which banks and other lenders can call upon to obtain accurate and timely information on a loan applicant.
As Ukrsotbank's Vadym Beresovyk put it, "Today, every bank has its own clients' credit history database, which is not shared with other banks, and it is impossible to protect yourself from bad borrowers, who often switch banks."
The risk to the lender is higher, and further, consumers who are qualified for large loans may get a fraction of the amount they would otherwise be eligible to obtain. Processing time is also long and costly, as investigations into a borrower's personal history may be required.
Only 20-25% of qualified costumers are able to make use of credit, due to the strict requirements banks place on borrowers, according to Andriy Kiyak, head of the International Bureau of Credit History (IBCH). It can also take a week or longer to issue a normal business loan, pending approval by the lending bank's security service, which dampens business development.
However, plans are in the pipeline to make financial services more accessible for customers by establishing credit bureaus with the legal mandate to monitor borrowers.
The Ministry of Justice is working on licensing regulations for credit agencies, according to the Kyiv Post.
One of the key issues will be implementing a well-enforced law guarding the privacy of individuals' credit histories. It is a new practice in the country to ask permission to create a credit history for a client. However, now the practice is becoming more common, according to Kiyak.
The necessary legislation and regulatory framework has yet to be approved by the parliament. Without it, one cannot be sure of the security of the personal information that credit bureaus will hold.
In order for a company to get a licence to open a credit bureau, it must have been registered for at least three years prior to the application, have no tax or other debts, and the bureau itself must have a statutory fund of not less than $996,000 and a sophisticated software system.
At present, IBCH, partly owned by TAS Financial Group, the Ukrainian Bureau of Credit Histories, associated with top local bank Privat, and the First All-Ukrainian Bureau of Credit History (FAUBACH), created by the Association of Ukrainian banks, are all waiting for approval by the Ministry of Justice.
Once all the conditions are met and the draft law passed, the new credit bureaus can begin accumulating the accepted minimum of 500,000 individual credit histories needed to begin formal operations.
The draft law was developed under the supervision of the US Agency for International Development (USAID), through its Commercial Law Centre in Ukraine, in consultation with local banking institutions.
USAID is also helping the Ministry of Justice to develop regulations for monitoring the credit agencies once they become operational. The flow of information not only to lenders but also to other credit agencies must be ensured and protected against unwanted third parties to provide transparency and trust in the system and prevent a monopoly on credit information.
Once the law is passed, market watchers say loan activity will quickly expand. The IBCH has predicted that consumer loans will grow between 80 and 90%, mortgage loans between 50 and 70% and automobile loans between 70 and 80% over the next three years.
However, there are other obstacles that the sector must overcome to achieve these high levels of growth, according to the Commercial Law Centre. These include the development and implementation of a national education programme on credit and its uses, the establishment of a sound ownership structure, and the need for the availability of the significant capital outlay that must be made prior to any revenue being generated through the sale of credit reporting agency products. The centre reported that these obstacles are surmountable in the short to medium term.
Analysts see the opening of authorised credit bureaus as necessary for the creation of a more favourable business environment. At present, the country has a cash economy, where consumers must wait and save to make large purchases, such as a house or a major appliance, which slows demand and growth. The availability of credit creates immediate demand, leading to increased employment opportunities.
Demand for housing is already rising, fuelling robust construction and real estate markets. Widely available loans would further increase demand.
Banks are increasing their focus on retail lending to meet demand, and will welcome credit reporting agencies as a means to speed processing and lower costs, thus freeing up more time and capital to serve clients.