Good Moves for Banks in Eastern Europe

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Fortunately, evidence thus far suggests that foreign banks in transition countries can actually help stabilize them in times of crisis.

Another issue is that some foreign banks are promoting household borrowing much more than lending to smaller businesses, as individual credit risk is easier to assess than that of micro, small, and medium-sized enterprises (defined as firms with up to 250 employees). Indeed, consumer debt in some countries is reaching Western European levels. That said, there has been an overall leap in lending to smaller firms which, with the right financial backing, have the greatest potential to create jobs and wealth across these emerging economies.

Micro, small, and medium-sized enterprises are now the single most important customer category for almost all types of banks studied in the Transition Report's Banking Environment and Performance Survey. The shift to supporting small business reflects vital reforms in financial laws and regulation, particularly regarding collateral pledges to secure loans. Serbia's ProCredit Bank reports that reforms have allowed it to cut its time for processing loans to small and medium-sized enterprises from 10 days to one.

Limited Product Range

Of the 1,200 micro, small, and medium-sized enterprises surveyed in Ukraine, Russia, Georgia, and Bulgaria, the number receiving bank loans doubled between 2001 and 2004. Loan sizes increased by one-third, interest rates fell by 12%, and loan maturities rose from 14 to 20 months. Access to bank credit increased average revenue growth by 75% in the companies polled.

Despite many improvements, banking in the region continues to lag far behind Western Europe. For example, the amount of bank credit available relative to gross domestic product in Russia is one-sixth of that in Portugal. In Croatia, it is one-third as high. Many Russian businesses are still completely outside the formal financial system, and the range of products their banks offer is still too limited.

Widening financial access and deepening the financial system requires a raft of new measures. Banking supervision, competition policy, and creditor protection all should be bolstered. The financial sector must grow beyond banks to more fully embrace other sectors such as equity, leasing, pensions, and insurance. Governments and the financial industry must play their parts in ensuring the sector is strong enough to further underpin the growth that is already improving lives and bringing greater stability to Eastern Europe.

Bergl�f is the chief economist and special advisor to the president at the European Bank for Reconstruction and Development in London.