Paper

Rural Finance without Markets in Ukraine, 1991-2000

Why does Ukraine have a weak financial sector?
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This paper explores the reasons of absence of a strong financial sector in Ukraine and the government's response aimed at the development of this sector.

The paper highlights that three institutional pillars form the foundations of sustainable financial markets:

  • A pool of profitable and diverse rural clients with the ability to service loans;
  • Well-run financial institutions which are financially self supporting, and;
  • An enabling policy environment.

It further highlights that Ukraine has not been successful in developing a robust rural financial market because it has consistently undermined these three institutional pillars.

This is evident from:

  • Soft government-provided/subsidized directed credits;
  • Distribution of government directed soft credit at unsustainable interest rates by financial institutions serving agricultural enterprises;
  • Opposition to policies on clear property rights, enforceable contracts and transparent farm restructuring and privatization.

The paper concludes that the government responded to this problem by:

  • Privatizing agricultural enterprises;
  • Writing off or rescheduling farm debt;
  • Changing its main form of financing agricultural input markets from direct state involvement to substantial credit subsidies.

About this Publication

By Sedik, D.
Published