In Ukraine, borrowing money, even from a financial institution, is still seen as a last resort. This is despite the fact that most Ukrainians can’t afford a car or a mortgage or any other big household purchase on their incomes.
While in many countries consumer credit is a common practice, Ukrainians are unaccustomed to taking such loans. Financial institutions often use this unfamiliarity to their advantage by running deceptive advertising and offering unfair and opaque conditions, a recent U.S. Agency for International Development consumer lending survey has revealed.
“Ukrainian consumers are generally misinformed and unprotected when it comes to borrowing money from financial institutions,” Yulia Vitka, deputy chief of party at USAID’s Financial Sector Transformation Project, said at the “Protection of Consumer Rights” international conference in Kyiv on Sept. 12.
The survey showed that 73.6 percent of ads gave no information about the cost of a loan. Some TV commercials promised fast loans, often in cash, with only a passport being required to obtain a loan.
Sending “mystery shoppers” posing as potential borrowers, the researchers found out that 68 percent of visits to financial institutions were limited to oral consultations without any written materials or a sample contract.
As for the loan agreements, according to the USAID survey, two thirds didn’t comply with the legislation. They either lacked information, such as a clear payment schedule or the total cost of the loan, or included at least one illegal item, such as hidden commission fees. And more than half of the contracts had unfair terms and conditions that violated a borrower’s rights, the survey concluded.
Unprotected
Kateryna Rozhkova, the deputy governor of the National Bank of Ukraine, said that the poor state of affairs of consumer lending market was exacerbated by low financial literacy of Ukrainians and poor standards of information disclosure for lenders.
A draft law on improving protections for consumers of financial services is being prepared for the second reading in parliament, she told the conference on Sept. 12.
“If passed, the bill will give the NBU the mandate to raise financial awareness and monitor how much information consumers get about all types of banking services,” Rozhkova said.
The USAID survey also showed that borrowers felt unprotected in the event of dispute with a financial institution. The only existing option is going to court, but the process may take months. Most wronged borrowers decide not to stand up for their rights, and simply avoid taking out any loans at all in future.
In order to increase legal protections for consumers, USAID has drafted a bill proposing to establish the position of financial ombudsman to resolve disputes between borrowers and financial institutions quickly and out-of-court.
Vitka said that the organization would conduct another two similar surveys to gauge the effect of the new law on consumer lending passed by Ukraine’s parliament, the Verkhovna Rada, in November 2016. The law came into force on June 10, 2017.
Growth prospects
All the same, the development of the consumer lending market in Ukraine will primarily depend on the country’s economic growth, experts believe.
One of the main impediments to market development is Ukrainians’ low income per capita and low disposable income, which, in conjunction with high interest rates on loans, make it hard for regular Ukrainians to borrow and repay. Interest rates in banks are currently over 20 percent per annum, and even higher at non-banking financial institutions (NBFIs).
According to data from the 2016 IFC Population Debt Survey, a third of borrowers in Ukraine take loans of Hr 4,000-6,000 ($154-231). Twenty-five percent owe Hr 4,000 or less, while about 21 percent owe over Hr 8,000 ($308).
Banks remain the main source of consumer loans, but in recent years they have tightened their lending policies due to the economic crisis and high risk. In addition, the Ukrainian banking system is riddled with dodgy debts – 58 percent of all loans are non-performing, according to the NBU.
Moreover, of the 90 banks operating in the country, only 15 are actively lending. The undisputed leader on consumer lending market, PrivatBank, was nationalized at the end of December 2016.
According to NBU data, the total credit portfolio of Ukrainian banks amounted to Hr 955 billion ($36.7 billion) as of end of July 2017. Consumer loans account for only 17 percent of that sum, or about Hr 162 billion ($6.2 billion).
Trying to benefit from the banks’ low appetite for risk, non-banking financial institutions have been developing their retail networks and have launched online lending services for individuals.
However, the amount of loans provided by non-banking financial institutions is significantly lower compared to the sum lent by the banks – Hr 13.4 billion ($515,000) as of the end of 2016.
