Credit Unions: Shaping Ukraine’s Future Evolution

Walter Kish is the Kyiv Field Manager for the Ukrainian Credit Union Strengthening Project and a New Pathways columnist. On a recent trip to Toronto he spoke to associate editor Olena Wawryshyn about the project and the current state of the credit-union movement in Ukraine.

NP: How was the Ukrainian Credit Union Strengthening Project was initiated?
WK: When Ukraine became independent, activists from the Ukrainian Credit Union movement in Canada went to Ukraine to raise interest in forming credit unions.

Prior to the First World War there were thousands of credit unions in Ukraine. After the communists came they were all liquidated. But there were people who remembered the credit union movement and the positive influence it had on the community. So, there was a lot of interest in the early ‘90s.

The credit union, aided by the Ukrainian community, lobbied the Canadian government, which, in 1993, gave a foreign aid grant through CIDA (Canadian International Development Agency) to help organize credit unions in Ukraine. There was a second project from 1997-2001, again sponsored by the Canadian government, which accelerated the process. By 2000 there were over 1,000 credit unions in Ukraine.

Unfortunately they were growing and developing in an environment where there was no law, federal regulator, controls. In 2002, the Ukrainian government passed a law governing the operations of credit unions, putting in fairly strict controls, and put in place a government regulator. That brought some order and cleaned the system of all those institutions that weren’t credit unions (a lot were pyramid schemes, scams, institutions and people masquerading to make or steal money from people).

The Canadian government awarded a third grant for the further development of credit unions [through the Ukraine Credit Union Strengthening Project], which I’m working for. It began its operations in August 2004.

There was a grant of 4.5 million dollars awarded by CIDA. The administration and management of this project was subcontracted to a partnership, formed by the Canadian Co-operative Association and the Council of Ukrainian Credit Unions of Canada.

The purpose is to help build infrastructure for the credit unions, to make them stable, orderly, and enable their further development and evolution [through things like]: liquidity funds, stabilization funds, training and development centres, helping them to organize, develop credit bureaus and those kinds of services and infrastructure that are part of a healthy and mature credit union movement, that in Ukraine were lacking and to a large extent still are.

NP: What are the project’s main goals?
WK: We’re going to create eight regional development centres across Ukraine where we want to staff specialists (lawyers, accountants, etc.) who can provide consulting services to credit unions. In the smaller towns and villages, people have the desire to start credit unions but don’t have the experience and expertise. That’s the first step.

A quarter of the credit unions in Ukraine, because of very rapid uncontrolled growth and a lack of expertise, are in financial trouble.  These regional development centres will play a role in rehabilitating them. The other thing that we’re actively working on is a deposit-insurance scheme. It will probably involve legislation, so that’s an important aspect of it too.

Training is also a major part. When you have such rapid growth and new credit unions being born and created all the time you need to provide training.

A focus of our project is rural crediting. Agriculture is in very dire straits. They broke up the kolhospy, the collective farms, gave small patches of land to farmers, who don’t have the capital to do anything with it. Farmers can’t afford to buy a tractor. They are in dire need of credit but don’t have anything to put up as collateral because Ukraine has not completed the land reforms that will privatize land that will enable a farmer to put up land as collateral for a loan. The banks won’t touch them so we are working with the Ministry of Agriculture and with various agricultural associations to see if we can develop some innovative loan products that will help farmers get out of this rut.

There are also competing national credit union associations. The original one started 10 years ago, but there are now two other national associations. One of the goals of is to bring them together to one unified movement.

NP: People in Ukraine don’t feel comfortable dealing with banks. Do they perceive credit unions differently?
WK: In various surveys that we run it comes out that people trust credit unions more than banks because they themselves are running the credit union or know the people running the credit union; they’re their neighbours, friends, the leaders of their community and I think that’s one of the reasons why the credit unions are growing so quickly. The credit union movement is growing at a rate of about 50% a year for the last couple of years.

NP: How many people do you have working on this project?
WK: Our office in Kyiv has a staff of four, and we are in the throes of building an organization throughout Ukraine in regional centres. By the time the project is running at full speed, we’re likely to have around 30-40 people.

The Council of Ukrainian Credit Unions of Canada sends experts to Ukraine; there’s also a flow of Ukrainians from Ukraine, to Canada. We have an internship program for experts in specialist areas, like marketing, rural crediting, governance, operating branches. Every year, we send six to eight Ukrainians, for four to six weeks, to work within credit unions in Canada or within related structures so that they can pick up the necessary skills and experience.

In Ottawa, at the Canadian Cooperative Association there’s a project officer. At least half of his time is devoted to this project, interfacing with the government.  We also have a branch office in Toronto, where we have Adriana Buyniak. She works two days a week and handles the coordination between our office, the project in Kyiv, and the Council of Credit Unions and the communication and public relations effort.

NP: What kinds of services do credit unions currently offer in Ukraine?
WK: In Ukraine, the law restricts credit unions; all they can do is take deposits and give loans. They can’t deal in foreign currency or in insurance. They can’t give mortgages. There’s a lot of lobbying going on and there are going to be some changes to the law, which I think, very shortly, will expand what they can and can’t do. 

NP: Have there been noticeable changes in since the Orange Revolution?

WK: There’s a lot of hope and promise for the future. In terms of actual concrete results there have been [some] in specific areas. You’re seeing less corruption. People are a lot more afraid to try to extort bribes but the central administrative bureaucracy is still there. Yushchenko is making a determined push to simplify that and that will happen, I think, between now and the end of the year.

In terms of the practical aspects of working in Ukraine, there’s not that much has changed yet. There’s a certain level of impatience amongst the population because there’s a desire to see instant change, and that’s unrealistic.

NP: What would be your wish list for credit-union related reforms?
WK: The total assets of all the credit unions in Ukraine amounts to about 1 billion hryvni or about 250 million dollars Canadian, a pittance compared to the billions held by Ukrainian banks. So they haven’t devoted too much thought, effort or attention to credit unions, and their problems and to helping them expand, but I think that is starting to change.

I think appreciation is sinking in to the Ukrainian government that one of the best ways of dealing with the crisis in the agricultural sector is through credit unions. The banks aren’t very interested in financing the rural sector because of the risk so they’re starting to look at credit unions as a catalyst and a tool that will help them realize a strategic objective in reforming the agricultural sector. I think we’re starting to get a little more clout in terms of putting through legislation that will help the movement. We’re hoping to see the concrete actions over the next 6, 12 months.

NP: Do your project’s activities extend to Eastern Ukraine, and if so, to what extent?
WK: Yes, absolutely that was one of the priorities of the first two projects. They deliberately made a point of working in eastern Ukraine If you look at the distribution of credit unions across Ukraine there are actually more per capital in eastern Ukraine than in western Ukraine.

NP: Why are eastern Ukrainians embracing credit unions?
WK: Most of the people who have been brought up under communism knew the essential principles of organizing labour and distributing wealth. Going from that extreme to a completely free enterprise system is a very uncomfortable culture shock to most people.

I think it found acceptance a lot easier than a totally open free market economy, which to some extent in eastern Ukraine has been discredited by the corruption, the oligarchy. A lot of people think that that’s what free market capitalism and free enterprise system is.

A credit union embodies a co-op, collective spirit but functions in a free market enterprise and can encompass the best features of both.

NP: Why do you feel this project is important for Ukraine?
WK: You can talk about the practical problems of moving to a free market economy and changing the political and civil infrastructure – but the biggest challenge is to change the mentality that was ingrained in people for two to three generations, that soviet collectivized top-down centralized, ‘do what you’re told’ mentality. To move from the old soviet way of life to the western way is a big leap. The credit union is a good tool that makes that transition a bit easier, from an ideological point of view, and also in making sure that the transition is controlled because it runs on the basis of governance by the membership. If you implement a credit union properly good governance comes by almost automatically.

One of the biggest problems Ukraine has, whether it has in politics or business, is that they have no governance. They have centralized oligarchic control of business and politics. The credit union is owned by its members, and the members are like boards of directors that control the credit union. The board of directors appoint the management who are accountable to the board of directors; you’re building in a structure that can carry over to other modes of life, to the political management of a selo or an oblast. Those same principles apply: accountability, governance from the grassroots up. It’s a good political, sociological tool on which to base the future evolution of Ukraine from a centralist, soviet way of life to a more westernized way of life.

NP: How long will the project be running?
WK: It’s a five-year project, to March 2009. We’ve got some time, which is good, because a lot of foreign-aid projects tend to be short. When you’re dealing with the structural issues that you have in Ukraine, you can’t do anything in a year or two; you’ve got to look at it from a longer term and have the time to do the job properly.

NP: What are the project’s plans from now to 2009?
WK: It would be foolish for me to forecast what I would anticipate happening because even in the last 12 months in Ukraine there has been no shortage of surprises. We’ve got a plan; we have to be flexible. The laws will change, the players will change, the governing structures we will be dealing with will change, hopefully for the better. We’re there for the long haul and have to work to the plan as much as we can. Regardless of what happens, we’ve got an accumulated base of project-wisdom that we can count on to make sure whatever we do is in the best interest long-term of the credit union movement in Ukraine.