DDP 767. Khwaja M. Sultan and Dimitar G. Michev. "Role of the Financial System in Economic Growth in Transition Countries – the Case of Ukraine’s Banking System." June 2000. 25 pp.

The banking system in Ukraine is one of the weakest in the world, with the 200 odd banks providing very little inter-mediation. Deposits from firms and households, as well as lending to the private sector, are tiny even when compared to very poor countries. This weakness has serious implications for growth. There is empirical evidence that shows that a well functioning financial system is a precursor for growth. This paper attempts to find out the main constraints on the banking system in Ukraine and suggests actions that are required to remedy the situation. Failure to take remedial action quickly could land the country into a poverty trap.

Keywords: Banking System, Collaterals, Contract Enforcement, Directed Lending, Economic Growth, Financial Institutions, Land Market, Transition Economies, Ukraine

JEL Codes: G18, G21, G28, N1

Khwaja M. Sultan is Senior Advisor at the Harvard Institute for International Development (HIID), Kiev office. Earlier, as Director, Fiscal Policy in India, he played a key role in fiscal reforms there in the early 1990s. He has also advised on fiscal policy issues in Lithuania and the Philippines, and is on the panel of experts of the Fiscal Affairs Department of the IMF. Email: ksultan@hiid.kiev.ua

Dimitar G. Mishev works as a consultant at HIID on financial sectors. Earlier, he worked as analyst for the Association of Banks in Bulgaria. He graduated from the University of National and World Economy (UNWE), Sofia, Bulgaria. Email: dmishev@hiid.kiev.ua