Decapitalization of non-banking financial institutions: factors and consequences

Formation and development of non-bank financial institutions is associated with a variety of systemic problems. The main problems of non-banking financial institutions include: contradictions in the current legislation; vulnerability of the rights of the consumers of financial services; underdeveloped financial infrastructure and others. One of the main problems of the non-bank financial institutions is their decapitalization, which particularly applies to the credit unions and insurance companies. Before the financial and economic crisis of 2008, credit unions in Ukraine developed quite dynamically. The number of credit unions and their members was constantly growing, which was indicative of the consumers' growing interest in this sector of the credit market. The system of credit co-operatives and micro-credit had certain advantages over bank lending, in particular, for the middle-strata. Decapitalization of the domestic credit unions (along with the unfavorable financial and economic conditions) was due to a number of problems: improper fulfillment of obligations to the members of the credit union; systematic violation of the rights of the members of credit unions and the lack of protection of their rights, in particular with respect to the deposit guarantees; the presence of the informal sector in the activities of a significant number of credit unions; lack of access to cheap credit facilities for a wide range of participants (loans were mostly granted to "own people"); lack of proper infrastructure of financial and technical support for effective operation of credit unions; unsuitable operating activities and after-sales support of the financial services provided by credit unions; low level of professional and technical equipment of the vast majority of credit unions; functioning of a critical number of credit unions which, in its activities, did not adhere to the basic principles of the international cooperative movement and requirements to protect the rights of their members; inadequate legal support and supervision by the regulator; registration of fictitious loans and other non-transparent transactions. Given the social importance of the insurance market in the context of de-capitalization nonbank financial institutions, the author considers the problems of the development of domestic insurance companies. Despite the crisis in the financial sector of Ukraine, the insurance market remains the most capitalized in comparison with other market segments. At the same time, the activities of insurance companies are associated with a number of challenges: the weak interaction of state bodies regulating the financial markets in general and insurance in particular; numerous violations of the rights of consumers of insurance services and the lack of classification of offenses; poor quality of services; limited opportunity for investment of insurance reserves; inconsistency and imperfection of the legislation in the field of licensing, registration and monitoring of the activities of insurance companies; legislative issues which do not allow to develop the pension insurance and compulsory health insurance; as well as imperfect legal framework of the insurance of agricultural risks; weak legal and regulatory framework of the activities of insurance intermediaries, actuaries, average commissioners and the poor quality of their services; problems of the taxation of insurance companies (tax arbitrage) and reinsurance. The article notes that, in Ukraine, non-bank financial institutions will have appropriate development provided that a coherent and integrated state policy in the financial sector is pursued. The reforms that have been implemented are not sufficient for their recovery. Today we need a new and deep program of financial sector reforms in Ukraine. In particular, such reforms should include a coherent long-term development strategy for the financial sector.