Ukraine needs to develop a deep and liquid capital market that can efficiently leverage domestic and international financial resources. Less than 3% of the population participates in investment funds, and an equally small number invests in securities issued by Ukrainian companies. To increase domestic investor participation, authorities should support trust in financial institutions and markets, strengthen the role of institutional investors, liberalise foreign exchange controls when conditions allow, and improve investment fund legislation. Capital market issuance activity and liquidity remain low, with government bonds dominating. Developing secondary markets for corporate bonds and equities will increase liquidity and contribute to investor confidence. Ukraine should also consider listing selected state-owned enterprises to support capital market activity, as well as finalise the alignment of capital market regulations with international standards.
While Ukrainian banks have remained resilient, their capacity to finance the real economy needs to be strengthened. Authorities should continue reforms to prepare the banking system for the post-war reconstruction. State-owned banks account for about half of Ukraine’s total banking system assets. In the longer term, state ownership in banks should be reduced to boost efficiency and attract investment. Banks’ exposure to sovereign debt should be decreased gradually and cautiously, using appropriate regulatory measures. Further reducing non-performing loans by developing a secondary market will also increase banks’ lending capacity.
Businesses and households face significant financial constraints. Subsidy schemes, which currently play an important role in supporting corporate lending, should be gradually narrowed to avoid market distortions and fiscal pressure, focusing on strategic sectors and vulnerable groups, and aligned with the EU’s State Aid framework. Credit guarantees might better support firms with limited collateral and encourage bank lending, but they must be carefully designed to manage contingent liability risks. Expanding access to factoring and leasing could also boost business activity. For example, in 2023 the penetration ratio of factoring in Ukraine was only 0.4% of GDP, compared with 6.4% on average in peer countries. Furthermore, Ukraine should develop its mortgage market to support housing construction.
A strong and well-resourced regulator is essential for dynamic capital markets. There is room to improve the capacity, independence and governance of the National Securities and Stock Market Commission (NSSMC). Reinforcing its methodology department, improving market consultation practices, and rapidly issuing outstanding regulations should all be prioritised. Revising the rules and procedures for nominating and appointing commissioners will contribute to stronger governance and increased market confidence. In the longer term, progressively shifting towards more independent funding arrangements would support greater autonomy. However, this should proceed only once broader economic and security conditions have stabilised.
The corporate governance framework has been strengthened in recent years, but more progress is needed. Ukraine has not yet established a national monitoring and reporting system for companies’ disclosure of compliance with a national corporate governance code. Such a code should clarify the scope of applicability and disclosure requirements. It could initially apply to all listed companies but provide flexibility for SMEs listed on a growth segment. In the short term, the NSSMC should continue to be the authority responsible for monitoring and enforcing compliance by companies. A national aggregate report on companies’ adherence to the corporate governance code could also enhance transparency. Companies’ discretion on what they can report should also be reduced or repealed to improve transparency and comparability.
An effective and resilient public debt management function and strategy are crucial to support market access. The development and integration of the middle office function would allow for better assessment and monitoring of costs and risks in the debt portfolio. This function could also play a greater role in monitoring, reporting, and advising on contingent liabilities. Meanwhile, Ukraine’s debt management strategy should focus on further supporting the development of the local currency bond market. About 80% of Ukraine’s local currency bonds are held by the central bank and commercial banks. Improved cash and liquidity management techniques could be pursued, and digital innovations could also be explored.
Financial consumer protection and financial literacy frameworks need to be strengthened. Wartime pressures and martial law restrictions have delayed the adoption of certain laws and regulations, while many consumers face increased financial hardship. Although complaints handling and redress mechanisms have been strengthened, including alternative dispute resolution mechanisms, all financial service providers should be required to have effective complaints handling and redress mechanisms in place across all sectors and regardless of the distribution channel. Further work will be necessary to ensure that alternative dispute resolution mechanisms are effective, accessible, and widely understood by consumers. Ukraine should also aim to make further progress on protecting consumers from over-indebtedness by implementing recent legislation and improving compliance by consumer credit providers.
The development of asset-backed pensions will help diversify financing sources for a resilient pension system, while also contributing to capital market development. Key considerations for regulators before and during implementation include the institutional setup, costs, provider types, governance, supervision and financing sources that complement existing schemes. Design priorities include incentives to boost participation and to promote cost-efficiency, suitable default investments, sound risk management practices, and strong supervision. Proactive communication is vital to build public trust in the new system, supported by independent reviews and outreach through diverse information channels.
