Rural Finance without Markets in Ukraine, 1991-2000

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.