Case Study Foreign Capital Entry to Banking Systems of Economies in Transition: Prospects for Ukraine

Submitted to:to:Submitted by:by:Mr. Deepak Dhingra Shweta Kalia (Asst. Prof) (707) M.Com IV Sem

INTRODUCTION


The paper focuses on peculiarities of the foreign banks entry into the economies in transition. As a case for research case was selected Ukraine, the post-soviet state currently facing an postever increasing interest of foreign investors, in particular in the banking sphere. The paper compares Ukraine s progress in the area with a number of Central and East European (CEE) states, such as Bulgaria, Poland, Hungary, and Baltic states. The paper finds that the CEE model of foreign banks almost 100%-dominance 100%in the banking system will not be implemented in Ukraine due to the initial differences: banking system is stable, majority of the banks are private-owned, and banking sector is privatesignificantly protected At the same time, the national banking consolidation, which could help to sustain big national players, is complicated due to overregulation of Ukraine s legal environment. Currently there is evidence that the banking system of Ukraine is preparing for foreign capital inflow and most of the bank managers are obsessed with the task of profitably selling their bank.

Currently Ukraine is facing the increased interest of foreign investors, willing to purchase assets in the country. Thus national banks need to elaborate the strategy towards foreign banking giants expansion. They have a number of options: either merge with their national counterparts to gain the size that will allow competing with the foreigners, or look for a foreign acquirer. They also can adopt a short-term strategy aimed shortat finding the niches, which will not be filled in by the foreign banks at their initial entry stage. With this aim analysis of the Central European states experience will be useful, taking into consideration that privatization and economic liberalization in Poland, Czech Republic and Hungary resulted in foreign control over 60 to 95% of banking assets.

II. Literature review

Entry of foreign banks to the economies in transition is a contradictory topic for research. In particular, Galac, T., and Kraft, E., (2000) discuss the consequences of foreign banks entry for Croatian banking system, among which they find introduction of new products and services; possession of cheaper funding sources; having equal knowledge of local market; and employing better cadre than local banks. Also they argue that the foreign banks raise deposits both from domestic and foreign clients, but lend more to domestic clients. The foreign banks also played important role via channeling funds to domestic banks during 1998-99 banking crisis. 1998-

The study focused at foreign banks entry into Hungary, Czech Republic, Slovakia, Poland, Slovenia by Mr , K., and Valentinyi, M.E., (2003) has shown the positive consequences as foreign banks helped to recapitalize troubled domestic banks, to improve the quality and quantity of financial services, to spread technology and knowknowhow, to exert competitive pressure on domestic banks. It has also found relatively low number of foreign branches as a form of entry due to remaining restrictions prior to joining the EU.

III. Foreign banks motivations for entering the CEE banking sector
Banking sector is traditionally regarded as one of the last bastions of national ownership. Even in the developed countries of the West, which advocate for free capital movement, the foreigners were let into the banking sector reluctantly. Though transnational capital is tending to overcome all possible Central and International Research Journal of Finance and Economics - Issue 6 (2006) 68 Eastern European states, except of Slovenia, the majority of banking assets are owned by the foreigners. In Bulgaria, Czech Republic and Lithuania this accounts for about 90% of the banking sector, in Romania and Latvia more than 50%. The leader of banking sector globalization is Estonia with 98% of banking sector foreign owned In comparison to these countries the closed banking sector of Ukraine and Russia is looking at least unusual. Before October 2005, when a purchase of Ukrainian Aval by Raiffeisen was exercised, the share of foreign capital at Ukraine s banking sector was less than 10%.

IV. Market Strategy of Foreign Banks at the CEE Markets

As a rule, big international banks work on the foreign markets under their own well-known brand. After entry to foreign market majority wellof their operations constituted credits and services to big corporate or private VIP clients. Correspondingly, the sector of micro financing as well as retail banking, in particular consumer credits and mortgage, remained a niche for smaller national banking capital. After becoming familiar with the new market the international business starts to fortify positions in these areas as well. In 2003-2004 foreign banks in Central Europe were making 2003stronger strategic accent on credits to small business as well as development of network for services to retail clients, in particular payment cards. The banks realize high potential of this segment of the market, as in 2003 in the CEE the share of this market in overall bank operations was insignificant

V. Recommendations for Ukrainian banking system

As proves the CEE states experience, the big sustainable foreign banks entered their markets, which practically left no room for national capital in the banking sector. Selling of the biggest national banks to foreign ownership was initiated by state with the aim to draw banking system from the crisis. Such a model is inappropriate for Ukraine due to a number of reasons.

First fact that Ukrainian banking system is fragmented and consists of more than 150 mainly small banks, it remains in the state of relative stability. Besides, big state banks, such as Oshadbank and Ukreximbank are in the most profitable toptop-5. And there are no signs of considering their selling to foreigners so far. Second, Ukraine is unlikely to open its banking sector as fast, as it was done by the CEE states, which were preparing to enter the EU. More likely is the policy of Ukrainian government directed at improving of banking sector competitiveness level by merging national banks. Third, foreign banks came to Poland, Hungary, Slovakia and Estonia only after activation of foreign investments inflow to other sectors of economy, e.g. metallurgy, energy, machine building. In spite of high rates of foreign investments growth last year, the level of investments per capita in Ukraine is only $177, which is low comparing to the CEE states.

VI. Conclusion


The CEE model of foreign banks almost 100%-dominance in 100%the banking system is not likely for Ukraine due to several reasons. First of all, Ukraine s banking system is fragmented, but stable. There is no need in crisis managers, there is a need in application of Western standards and practices of banking services provision. Majority of the banks are privateprivateowned, so there is an immediate difference from Central European states, which were selling banks in the process of privatization. Ukraine s banking sector is significantly protected, foreign banks are prohibited to open subsidiaries in Ukraine and the amendments to the law are not supported by the parliament, though this is required by WTO entry rules. So far, the only opportunity for foreign banks is purchasing the national banks. Also, we don t observe significant inflow of foreign investments to other sectors of Ukrainian economy, which preceded the foreign entry to banking sector of the Central European states.. Thus, the state regulators should make efforts to facilitate the process of national banks M&A, as increase in concentration at Ukraine s banking market is inevitable.

THANKS