Francis Malige: State-directed lending costs the country too much

As Managing Director for Financial Institutions at the EBRD, what priority is Ukraine at this new post?

In this new post, I’m in charge of investments and financial sectors for all 38 countries in which the EBRD operates, from Mongolia to Morocco, covering three continents: Europe, Asia and Africa. Still, Ukraine is among the EBRD’s top five priority countries. Sometimes it’s even #2 or #3. There are many items on the agenda, in terms of privatization, products for energy efficiency, women in business – all of these are part of the financial institutions framework. We finance a lot of trade as well. And of course there are non-bank financial institutions. That’s insurance companies, capital market development, insurance funds, asset management, payment infrastructure – all of them are in need of investment and needed to reform the country. Those are all areas where I expect the EBRD to continue focusing its attention in Ukraine.

Which area is a greater priority with financial institutions, banks or non-banks?

It’s more banks than non-banks in Ukraine. But in the Financial Institutions portfolio, banks and non-banks are equally important. For example, we have more non-bank investments in places like Turkey and Poland, perhaps because the non-bank market is a little bit more developed there. But I think it needs to develop in Ukraine as well, and that’s why you will find the EBRD there. When the market is ready to develop, we’ll be the first to step in.

How does the active presence of the IFIs in Ukraine affect financial sector development?

The World Bank, the IMF and the EBRD are the team that’s looking at banking sector reform, the financial stability of the country, and its monetary policy. The partnership among these three IFIs is solid. And the World Bank, of course, includes the International Finance Corporation, which is the WB Group’s private sector arm.

Every time something moves in Ukraine’s banking sector, the IFIs get together with the Ministry of Finance, the National Bank and banking associations to discuss.

Poor rule of law remains a top foreign investor concern. How has the legal framework for doing business in Ukraine changed over the past few years?

When I arrived in Ukraine in 2014, rule of law was a major problem in the banking sector. There were a lot of “pocket banks” dominated by related parties that were basically lending vast sums to their own shareholders. Since then, those banks have been closed down or nationalized. This has established a much more favorable rule of law environment for the entire banking sector.

One thing about rule of law that is very important for a banker is prudent banking decisions. Sometimes things go wrong, such as a client goes through difficulties. But if you have a good creditor rights protections, if you have an effective way to resolve this kind of situation in the form of a modern bankruptcy law, and if you have a court system that works well – all of these make good decisions about lending happen much easier. There’s a very strong link between a court system that works well and a banking system that lends well.

Moreover, this is also in the interests of the entrepreneur. If you are a business owner and your company goes through some difficulties – the last thing you need is to spend 15 years in court. What you need is to spend maybe 6 months to wind the bankrupt business down and then, hopefully, start a new, more successful business, having learned from your mistakes. A modern bankruptcy code is a huge benefit to all involved.

Since the nationalization of PrivatBank, the majority of banking assets in Ukraine are state-owned. That’s a problem that needs to be resolved through privatization. Another thing that will help the banking sector is better corporate governance. We now have better governance rules for state banks in the State Bank Law that has just been signed by the president and published, so the nomination of independent boards can proceed. This is a great step forward for the state-owned banking sector.

Why is it so important to have an independent supervisory board with absolutely no state interference in its work?

Otherwise, you will see a continuation of the state-directed lending that has cost the country so much already. Over the past 10 years, National Bank has had to invest $15.5bn in recapitalizing its banks. That’s almost the same as the original IMF programme worth $17bn. How many schools, hospitals and kilometers of highway would this buy? And it went to state banks and banks being nationalized because the lending decisions of these banks were not always done professionally or for purely banking reasons. As long as you don’t have independent governance, this will continue.

Since the deputy chair of Oschad Bank’s board was recently accused of embezzling, will the EBRD continue to work with this bank?

Business reputation is above all. When this sort of things happens with an existing client, as is the case of OschadBank, where we haven’t invested yet, but we have been lending, the first thing we do is we ask for an analysis of the situation: what happened, how do they intend to deal with it, what measures need to be taken. And then we make our decision: if the bank is not working to fix the situation, we stop working with them. Sometimes we will offer help working together on an improvement plan.

The process with OschadBank continues. As there is an investigation, we are in dialog to determine what the response of OschadBank is going to be and what the EBRD’s response should be.

What should be done to make Ukraine a country investors want to invest in?

The best advocates for investing in Ukraine are those who are investing in Ukraine. If we focus on the financial sector, we rarely meet someone who says, “I’m so glad I invested in Ukraine.” When diplomats, government officials or IFIs whose job is to help with reforms say Ukraine’s making progress, our voice is listened to. Still, there’s nothing better than a happy investor to encourage investment decisions. It works for the banking sector just as it works for the rest of economy.

The progress in Ukraine’s banking sector has been huge. A few years ago, different regulations applied to foreign investors than to local ones. That was a major problem. Today, one major market distortion remains in Ukraine’s financial sector – 100% guarantees on deposits are for state banks only. So if you are a Ukrainian citizen or a client in Ukraine and put your money in a state bank, it’s entirely protected. But if you put money into privately-owned banks, it’s guaranteed only to a certain amount. That’s a market distortion that must be fixed so that conditions are equal for state banks, foreign-owned and private banks.

The conditions for healthy competition are there. Profitability is returning to the banking sector – also a good sign. It took years, an extraordinary transformation by the National Bank, and considerable patience among IFIs to change Ukraine’s banking sector. But now it’s fundamentally in much better shape.