White Book of Reforms 2025. Chapter 4. Monetary policy and banking sector

Before 2019

After the Revolution of Dignity, Ukraine’s banking system got rid of the “legacy” of the 1990s and significantly modernized. 

First, the National Bank of Ukraine (NBU) underwent the process of institutional strengthening and internal transformations. In the 1990s, NBU operated under the control of the government (Ministry of Finance) and Parliament, which led to multiple crises and soaring inflation. Amendments to the law “On the National Bank of Ukraine” introduced in 2015 reinforced the independence of the institution by clearly defining its mandate and insulating it from political and other undue influences.

Second, in 2016, the NBU adopted inflation targeting with a flexible exchange rate instead of an unsustainable fixed exchange rate policy. This enhanced stability and shock absorption. As a result, Ukraine has met the target inflation level of 5%±1% in 2019-2020.

Third, new risk management systems and macroprudential tools were introduced to reduce bankruptcy risks. The central bank reformed the banking sector, improving banks’ transparency and capitalization, removing non-viable institutions (Figure 4.3), and nationalizing the largest private bank in Ukraine — PrivatBank, despite high costs. The banking sector is one of the few areas in Ukraine where rules had been not only adopted but also properly implemented. This paid off very well: both during the COVID-19 crisis and the full-scale Russian invasion there was no banking crisis while during previous crises the banking sector suffered a lot.

Structural reforms ensured sound policymaking, and today monetary policy decisions are made in a transparent and accountable way.

Fourth, within the framework of e-governance development, the NBU implemented the electronic system BankID to ensure secure remote identification of individuals and legal entities when accessing public administrative services online, as well as enabled banks to use electronic signatures. 

2019 and after

After 2019, the central bank focused its reform efforts on institutional development, maintaining macroeconomic stability, developing the financial services market, and digital transformation.

Reform of the Nonbank Financial Services Market

Similar to the reform of the banking system, Ukraine has transformed other sectors of its financial system to increase transparency, efficiency, and alignment with international standards, particularly in light of European integration.

In July 2020, the National Bank of Ukraine received regulatory authority over the nonbank financial services market as a part of the “split” reform. The National Commission for the Regulation of Financial Services Markets was dissolved and regulatory powers divided between the central bank and the National Securities and Stock Market Commission. Consequently, Ukraine transitioned from a sectoral to an institutional regulatory model. The central bank’s regulatory and supervisory scope expanded beyond banks to include insurance companies, leasing and factoring companies, credit unions, pawnshops, and other financial institutions.

Simultaneously with the regulatory changes, the central bank transformed itself to effectively interact with its new “wards”. Specialized departments such as the Department of Methodology for Nonbank Financial Institutions and the Nonbank Financial Services Supervision Department were created. Other departments (e.g., Licensing, Financial Monitoring, and others) received additional functions related to the non-bank financial sector.

The reform of the nonbank financial services market also implied a fundamental change in the regulation and supervision of market participants. Similar to the banking sector, the NBU practices a preventive approach, using early intervention and corrective measures instead of punitive actions. The central bank conducts risk-based supervision of market participants, considering their societal importance, company size, business model, and individual risk level.

Between 2021 and 2023, Parliament established new “rules of the game” for financial market participants by passing legislation that radically updated the approach to market management, such as the laws “On Financial Services and Financial Companies,” “On Insurance,” and “On Credit Unions.” A range of special sub-legal acts were adopted to implement the norms of these laws, most of which took effect in 2024.

These regulations strengthened requirements for transparency of the ownership structure, corporate governance, and fairplay for market participants. Some requirements applied by the central bank to nonbank financial institutions are the same as were previously introduced for banks. This includes market entry procedures — registration and licensing, requirements for the business reputation of significant ownership and management, corporate governance standards, market behavior, and consumer protection.

Regulation of insurance companies and credit unions was significantly updated, since the laws governing these areas were adopted in the 1990s and by now had become outdated. Regulatory changes introduce a consumer-centric approach, ensuring transparency and integrity of financial service providers, and aligning with international, particularly European, practices (e.g. recently Parliament aligned car and driver insurance to the EU norms).

Specifically, instead of more than 50 types of insurance, 23 insurance classes have been introduced (5 classes of life insurance and 18 classes for non-life insurance). Accordingly, instead of obtaining a licence for individual types of insurance, an insurer can obtain a licence for an insurance class that covers several types of insurance. An insurance company can modify the scope of its licence by adding new classes or removing classes from the licence. At the same time, companies are not allowed to combine life and non-life insurance services. For registration, an insurance company must provide a three-year business plan, and the NBU approves the executives of insurance companies and persons responsible for key functions to ensure they meet the qualification requirements for professionalism and business reputation.

In the same spirit of aligning regulation with European standards, the credit union segment has been reformed. Credit unions were allowed to earn profits (previously they had to be non-profit only) and can offer new types of services. Depending on the type of licence — simplified or standard — a credit union either only provides loans in cash or bank metals, or can also attract funds and bank metals on deposit. Upon a specific application, provision of guarantees or payment services (except for interactions with electronic money) can be included in the licence, and a separate licence is required if a credit union wants to conduct currency exchange and/or currency transfers without opening an account.

One of the main innovations is the expanded accessibility of credit unions. Previously, only individuals were allowed to become credit union members. Now members can be individual entrepreneurs and certain legal entities (farmers, cooperatives, primary or local trade unions, religious organizations, homeowners’ associations, and micro-enterprises).

The new law improves the management system of credit unions: it outlines general requirements (which were previously absent), introduces changes to the procedure for holding general meetings (for example, allowing remote meetings via video conferences), and requires the establishment of an internal control system (risk management, compliance, internal audit).

Consumer protection has become one of the key financial market reform areas during this period. In this area, the NBU works in three main directions: handling citizen appeals, establishing requirements for financial institutions, and monitoring compliance with legislation, particularly in financial services advertising. All financial institutions must provide accurate, complete, and precise information on their websites without manipulation or complicating consumer understanding. Imposing additional services is prohibited. Violations of financial service provision practices can result in fines.

Initially, the reform envisioned establishing a financial ombudsman office — a mediator to provide out-of-court dispute resolution. However, this draft law was scrapped, and today this role is effectively implemented by the Consumer Protection Department of the National Bank of Ukraine.

Wartime Reforms

The full-scale war forced the central bank to take immediate measures to maintain the stable operation of the financial system, overcome panic, and preserve public trust.

On February 24, the NBU immediately adopted a resolution on the operation of the banking system during martial law, establishing a series of restrictions. The central bank paused the foreign exchange market, imposed a moratorium on cross-border foreign exchange payments, and limited bank cash withdrawals to UAH 100,000, while leaving cashless transactions unrestricted. Bank branches were to continue operating where it was safe, and ATMs were to be supplied with cash without restrictions. Additionally, certain rules for banks were relaxed, e.g. penalties for violations of reserve requirements and non-submission of reports if they occurred after the start of the full-scale invasion were lifted. Similar measures applied to the operation of the nonbank financial market.

Monetary Policy

In April 2022, the NBU Council adopted the monetary policy guidelines under martial law. High economic and political uncertainty due to active hostilities made it impossible to stick to inflation targeting and a floating exchange rate. In this document, the NBU stated that during the war, it had abandoned inflation targeting, the use of the key interest rate as the main tool of monetary policy to reduce inflation, and the publication of its macroeconomic forecasts.

Initially, the National Bank of Ukraine (NBU) held the key interest rate at 10%, but in June 2022, it raised it to 25% to contain inflation because in 2022, as an extraordinary measure, the central bank financed government expenditures. The central bank maintained the key rate at 25% for over a year and started to gradually lower it in July 2023 due to reduced inflation and stable currency market. The NBU plans to return to inflation targeting and lift capital controls when it becomes possible (this is one of the benchmarks of the IMF program).

As the economy adjusts to the wartime conditions, the central bank gradually returns to monetary policy that resembles peacetime policy, while accounting for wartime risks and the need to support economic recovery.

Since the start of the full-scale invasion, Ukraine has received much funding from international partners in the form of grants and loans (Figure 4.5), because its tax revenues sharply declined. At the same time, given the significant needs for financing the war effort, which cannot be covered by external funds and the lack of internal fiscal capabilities, Parliament adjusted the legislation to allow the central bank to finance the state budget by purchasing government bonds from the Ministry of Finance during martial law. The NBU issued UAH 400 billion of funding in 2022 and became one of the largest domestic creditors. In September, 2024, the NBU held about 40% of the domestic debt (Figure 4.6), although at other times, this share had been higher. The Ministry of Finance will be repaying these debts until the 2050s.

In 2014-2015, at the start of the Russian invasion, the NBU had to finance the budget too. The country paid the price for it in the form of increased inflation — 49% in 2015 and 20% in 2022. In 2023 and 2024 the NBU did not resort to direct budget financing. Hopefully, Ukraine receives enough foreign support to preserve this situation since printing money would exacerbate the economic challenges.

To prevent this, first, the government is working on ensuring the inflow of external financing by fulfilling reform commitments. Second, it develops policies to increase fiscal revenues, as outlined in the National Revenue Strategy until 2030. 

Foreign Exchange Market Regulation

To stabilize the situation, the NBU resorted to administrative restrictions on the foreign exchange market and capital controls. On the day of the full-scale invasion, the central bank fixed the official exchange rate at 29.25 UAH/USD and supported it with strict capital controls to prevent rapid devaluation of the national currency. The central bank initially banned, then limited, cash foreign exchange withdrawals, restricted the purchase of virtual assets, and imposed limits on foreign transactions for purchasing securities.

In addition, the Cabinet of Ministers approved the list of critical import goods — those for the purchase of which importers could buy foreign currency. This list was constantly updated and expanded until it was eventually canceled and replaced with a list of services that could be imported.

Gradually, the NBU eased the restrictions reacting to the war situation and state of the economy. For instance, on July 21, 2022, the NBU devalued Hryvnia by 25% and fixed the exchange rate at 36.57 UAH/USD. Additionally, non-cash foreign currency purchases were allowed for individuals who have term deposits, and in late August 2022, the ban on online currency purchases in banks was lifted.

A significant step towards returning to market instruments was the introduction of a managed exchange rate float in October 2023, which set the rate based on the situation on the interbank foreign exchange market. The NBU allows the exchange rate to move but smoothes its fluctuations. From December 1, 2023, all restrictions on the sale of cash foreign currency to the public were lifted to reduce the gap between cash and non-cash exchange rates and stabilize exchange rate expectations.

The return to a somewhat flexible exchange rate would not have been possible without the accumulation of sufficient international reserves. In 2023, Ukraine’s international reserves increased by 42%, to over USD 40.5 billion. This accumulation of assets is due to financial aid from foreign partners (the European Union, the World Bank multi-donor trust fund, the IMF).

In early April 2024, the reserves reached a record high of USD 43.8 billion. Today FX reserves are substantial but they gradually decline as the NBU uses them to support the exchange rate.

Minimizing Russian influence on Ukraine’s financial system

A separate set of restrictions on interactions with the aggressor country was applied. The NBU banned transactions with Russian individuals and legal entities and tightened restrictions on transactions with Russia-related counterparties that were in place before February 24. For them, only transactions supporting Ukraine’s Armed Forces remain possible. Additionally, the NBU allowed to cancel the licences for Russian bank representative offices during martial law, prohibited Russian residents from participating in the management of banks in Ukraine, and refused to provide unsecured refinancing to banks with Russian shareholders.

On February 25, 2022, the regulator issued a resolution allowing the liquidation of Russian-controlled banks. The next day, the National Bank revoked the licences and liquidated banks controlled by Russia — the International Reserve Bank (100% owned by the state-owned “Sberbank of Russia”) and Prominvestbank (99.77% owned by the state corporation “VEB.RF”).

In May 2022, the National Security and Defense Council decided to confiscate the assets of these banks because they were owned by Russian state structures. Although the process of transferring these assets to the state was quite long, eventually, the funds were used to repay creditors of these banks and to finance the Ukrainian Army. By May 2024, the Deposit Guarantee Fund had sold assets of these banks worth UAH 43 billion.

The issue with the systemically important Russian “Sense Bank” (until December 2022 known as “Alfa-Bank”) was solved differently. In February 2022, the EU imposed sanctions on its owners Mikhail Fridman and Petr Aven. Meanwhile, the NBU deprived them of voting rights and appointed an external manager to the bank. Later, Parliament approved the laws on resolving systemically important banks during martial law and on the peculiarities of resolving banks owned by sanctioned individuals, which allowed its nationalization in July 2023. After the war, the regulator plans to privatize this bank along with a few others.

Digital transformation of the financial system

Since 2019, Ukraine has made significant progress in the digital transformation of its financial system. Banks are developing mobile applications and enhancing the functionality of online banking, introducing new digital services available anywhere in the world. 

Market participants are developing the fintech ecosystem in Ukraine. To frame this development, the Ukrainian Parliament has passed the laws on virtual assets and transfer of funds. The latter defines the clear procedure for transfer of funds, the procedure for implementing payment orders, the principles of payment systems operations, and the oversight of payment infrastructure in Ukraine. It also regulates the issuance and use of digital currencies in Ukraine and establishes the rights, obligations, and responsibilities of payment market participants.

Issuers of digital currencies and operators of e-wallets can be not only banks but also other payment service providers who have an appropriate licence (e.g. postal service providers). These wallets enable instant payments, money transfers within Ukraine and abroad, and even utility bill payments.

Ukraine has implemented the open banking concept — provision (with clients’ consent) of continuous access to their accounts and financial information to other payment service providers, which will facilitate the development of new services (applications). This will allow for the rapid, secure, and efficient exchange of information within the network of banks and other payment service providers.

The war has not hindered cashless economy development. According to the NBU, the share of cashless transactions using payment cards reached 65% in 2023, 4 percentage points higher than in the pre-war 2021.

Moreover, since April 2023, the NBU has launched a new generation of the System of Electronic Payments (SEP NBU), which operates 24/7 based on the international standard ISO 20022. This means that interbank transactions are conducted 24 hours seven days a week without interruption between calendar days. The meaning of this event is comparable to the introduction of the SEP itself in 1993.

Further financial sector developments

Some of the upcoming changes are outlined in the commitment plans that Ukraine sets for itself to continue receiving financial assistance from international partners.

Although capital controls remain in place and the NBU is cautious about relaxing them to maintain the confidence of the financial system, the National Bank needs to develop and publish updated strategies and roadmaps with steps and potential timelines for returning to market-based regulatory instruments. Moreover, taking into account the European integration vector of Ukraine’s development, it would be reasonable to peg Hryvnia to Euro instead of US dollar.

Upon market stabilization, it is crucial to reduce the state’s share in the banking sector. Currently, state-owned banks hold over 50% of the sector’s net assets and over 60% of household deposits. State-owned banks, such as “PrivatBank,” “Ukrgasbank,” and “Sense Bank,” must be privatized.

Equally important is recovery of the financial system from the war. The necessary steps include a plan to reduce non-performing loans (NPLs). Ukrainian banks’ NPL ratio gradually declined from 56% in 2018 to 26.7% before the full-scale invasion in 2022. After the full-scale war started, borrowers’ ability to pay debts rapidly deteriorated while the NPL ratio reached 39.3% in August 2023 with state-owned banks accounting for the major part of such loans (however, by the end of 2024 NPL ratio declined to 30%). Combining a decentralized approach (which was used by Ukrainian banks after the 2008 crisis and worked quite well) with some elements of centralization, e.g. a “bad bank,” would be advisable. The final decision will depend upon the scale of destruction when the war ends.

Reforms in the nonbank financial services market should continue, primarily in the insurance segment, especially with regard to war-risk insurance. Taking into account Ukraine’s exceptionally high financing requirements, the resilience of the banking system and financial sector in general is critical for survival and recovery of the country.