Financing SMEs and Entrepreneurs 2024

45. Ukraine

Key facts on SME financing

Since the start of Russia's full-scale military invasion of Ukraine, Ukraine’s economy has been operating in the face of unprecedented security challenges. The aggressor state has focused considerable efforts on the purposeful destruction of energy, transport and other critical infrastructure, production capacities of individual enterprises. Direct and indirect economic losses from destruction have already estimated by hundreds of billions of dollars and continue to grow daily.

The massive destruction, combined with other factors, such as a significant reduction in solvent demand in the domestic market, the destruction of logistics routes, the loss of traditional sales markets, deficiency or a significant increase in prices for some resources, the imbalance of the labor market due to large-scale internal migration led to the fact that many enterprises have significantly reduced their activities or even completely suspended their work. As a result, the fall of the economy in 2022 was 28.8%.

The logical consequence of the economic decline, the loss of Ukraine’s access to international capital markets and an unprecedented increase in defense spending (defense spending in 2022 increased by more than 10 times) was the imbalance of the state budget (tax revenue in 2022 decreased by 14.2%, while costs increased by 81.4%) and an increase in public debt (in 2022 the state debt increased by 15 billion US dollars).

In such a difficult situation, the possibilities of the government and the central bank to improve the conditions for business financing are extremely limited. However, the Government takes anti-crisis measures aimed at minimizing the impact of the war on business, in particular, such as:

• implementation of a mild fiscal policy;

• extension and improvement of state programs that provide partial compensation of interest rate on loans and guarantees of government loans;

• implementation of programs of irrevocable financial support for business (providing grants);

• implementation of the state program of business relocation, which suffered from the war;

• cancellation of the need to obtain the vast majority of permits and licenses for doing business.

At the same time, the efforts of the National Bank are primarily aimed at:

• uninterrupted functioning of the financial system in conditions of war and cyber threats;

• preservation of liquidity of the banking sector, in particular through active refinancing of banks;

• maintaining control over inflationary processes;

• stabilisation of the exchange rate.

The increase in credit risks caused by hostilities led to tightening credit standards by financial institutions and reducing the demand for corporate lending. As a result, during the second half of 2022 and the first half of 2023, the corporate loan portfolio had a steady downward trend.

The situation with corporate lending improved slightly in the second half of 2023. Economic growth and higher business credit demand ensured the gradual growth of the corporate loan portfolio. This was also facilitated by a significant reduction in the NBU discount rate at the end of 2023 to 15%, while from June 2022 to July 2023 it was 25%.

The state program of preferential lending for business “Affordable loans 5-7-9%” continues to play a key role in lending of small and medium-sized businesses. Despite the fact that in some periods the activity under this program decreased significantly (in October 2022, the volume of gross debt within this program decreased for the first time since its introduction), even in such a situation it continued to be the main driver of corporate lending. As of 1.1.2024 since the beginning of a full-scale invasion within the framework of the state program “Affordable loans 5-7-9%”, 44 142 loan agreements totaling UAH 177.2 billion have been concluded.

In turn, in 2023, government carried out a change in the design of the program, in particular, identified the following priority areas of financing such as business that creates the greatest added value (separate sectors of the processing industry), energy modernization projects, business in the areas of high military risk zone. Thus, this program of preferential lending remains not only a means of supporting and developing business, but also an instrument that contributes to a radical change in the structure of the economy as a whole.

Additionally, it can also be noted about the introduction and development of state programs of irrevocable financial assistance under the common name eRobota. Although the amount of assistance provided within the framework of this project is still not very significant (as of 1.1.2024, almost 11 000 grants were provided for the total amount of almost UAH 6 billion), but the implementation of this program contributes to improving the employment situation, reviving business activity, increases the survival of the most vulnerable small business, which is especially important in conditions of high cost of credit resources.

Like corporate lending, the retail loan portfolio also had a steady tendency to decline since the beginning of a full-scale invasion. The resumption and growth of retail lending began only in April 2023. Despite the long-term growth over several months (an average of 2.6% monthly), as of November 2023, loans for individuals are still a quarter lower than before a full-scale invasion.

One of the key factors that contributed to the stabilization of the situation of financing of medium and small businesses was the preservation of inflationary processes. The growth of consumer prices at the end of 2022 despite the full-scale war and high world inflation was moderate (the consumer price index increased by 26.6%) due to a set of crisis measures of the NBU and the government, as well as financial support of international partners. An important role in maintaining the control of inflationary processes was played by fixing the exchange rate. Maintaining exchange rate stability not only directly hindered the growth of the cost of goods and services, but also mitigated the fundamental price pressure, positively affecting the inflationary expectations of citizens and businesses.

The fall of Ukraine’s economy in 2022 as a result of a full-scale invasion was the deepest in the modern history of Ukraine. However, the high ability of businesses and households to adapt, successful actions of the Ukrainian defense forces, receiving significant international assistance, as well as balanced state policy allowed to minimize this decline and move to the recovery of the economy and its growth in the shortest possible time.

Table 45.1. Scoreboard for the Ukraine

Indicator	Unit	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021		2022
Debt
Outstanding business loans, SMEs	UAH billion	..	..	..	..	..	..	..	..	..	..	443	445	432	451	468		455
Outstanding business loans, total	UAH billion	271	460	482	520	597	626	716	809	807	837	845	874	761	737	774		773
Share of SME outstanding loans	% of total outstanding business loans	..	..	..	..	..	..	..	..	..	..	52.42	50.86	56.77	61.23	60.41		58.83
New business lending, total	UAH billion	627	724	685	958	1 079	1 121	1 330	1 231	1 213	1 446	1 407	2 011	2408	2498	2794		2011
New business lending, SMEs	UAH billion	..	..	..	..	..	..	..	..	..	..	..	678	799	792	1124		728
Share of new SME lending	% of total new lending	..	..	..	..	..	..	..	..	..	..	..	33.74	33.18	31.68	40.22		36.19
Outstanding short-term loans, SMEs	UAH billion	..	..	..	..	..	..	..	..	..	..	200	215	213	243	274		262
Outstanding long-term loans, SMEs	UAH billion	..	..	..	..	..	..	..	..	..	..	243	230	218	208	194		193
Share of short-term SME lending	% of total SME lending	..	..	..	..	..	..	..	..	..	..	45.12	48.34	49.42	53.8	58.58		57.51
Government loan guarantees, SMEs	UAH billion															3.6		28.4
Government guaranteed loans, SMEs	Thousands issued															4.2		16.7
Interest rate, SMEs	%	..	..	..	..	..	..	..	..	..	..	..	17.35	17.51	13.84	11.59		15.14
Interest rate, large firms	%	..	..	..	..	..	..	..	..	..	..	..	15.52	14.09	8.68	7.39		13.76
Interest rate spread	%	..	..	..	..	..	..	..	..	..	..	..	1.82	3.42	5.16	4.21		1.37
Non-bank finance
Venture and growth capital	UAH billion	..	61.2	75.9	100.3	121.6	148.7	173.3	202.9	232.2	225.6	257.2	296.2	338.7	407.8	518.9		526.8
Venture and growth capital (growth rate)	%	..		24.01	32.22	21.20	22.34	16.51	17.07	14.43	-2.83	14.01	15.19	14.32	20.40	27.26		1.52
Leasing and hire purchases	UAH billion	12	8	2	3	9	9	25	6	5	10	13	22	26	26	40		12
Factoring and invoice discounting	UAH billion	0	1	2	6	7	12	10	24	17	17	31	48	56	85	72		47
Other indicators
Bankruptcies, all businesses	Number of subjects of entrepreneurial activity	..	..	..	..	..	9 540	7 168	6 098	6 292	6 007	4 920	4 075	3260	3173	3319		3404
Bankruptcies, all businesses (growth rate)	%	..	..	..	..	..	..	-24.86	-14.93	3.18	-4.53	-18.10	-17.17	-20.00	-2.7	4.60		2.56

Source: See Table 45.2.

Macroeconomic conditions

The strong post-pandemic recovery was interrupted by Russia’s war of aggression against Ukraine. Large labour and financial resources are assigned to the war effort and important industrial centres and swaths of agricultural land have been occupied. For the period from 24.2.2022 to 8.10.2023, the Office of the UN High Commissioner for Human Rights recorded 27768 losses among the civilian population of Ukraine: 9806 killed and 17962 wounded. Moreover, one-third of the population has been internally or externally displaced. According to the UN, more than 8 million people, mostly women and children, have left the country. According to the Ministry of Economy, as of 1.4.2023, economic losses associated with human losses as a result of the armed aggression of the Russian Federation only in 2022 are estimated at 5.727 trillion UAH (177.1 billion US dollars). According to the Institute of Kyiv School of Economics, the physical damage caused by the war to buildings and infrastructure reached USD 151.2 billion as of September 1, 2023. Production capacity has been further damaged by additional supply-chain disruptions from the ceasing of civilian flights, blocked ports, and widespread electricity shortages. In consequence, the economy shrank by 28,8 % in 2022.

The worst-affected sectors include manufacturing, reflecting the high concentration of heavy industries in war zones, and agriculture. Less affected sectors include the IT sector, which is mostly located in non-war zones and could, if necessary, easily relocate production. Construction sector output is underpinned by completing unfinished projects and reconstruction work. Moreover, activity in the defence industry continues to expand, while restaurants and other personal services are resuming activity outside war zones. These trends are reflected in stronger business confidence and underpinned by the restoration of electricity supply and a state programme to help businesses relocate to safe areas. In addition, business confidence in the retail sector benefits from the restoration of consumer supplies. Exports have benefitted from greater trade openness toward the European Union and the resumption of exports of agricultural produce from ports. The improved economic situation has induced an increasing number of refugees to return. Nonetheless, private consumption remains subdued under the impact of falling employment and high inflation. The latter has been partially contained by price controls on some basic food and energy products but has nonetheless increased from around 10% prior to the war to 26.6 % in December 2022 (an annual estimate). Inflation started to slow in early 2023, falling to 5.1 % in November 2023 (an annual estimate).

SMEs in the national economy

Small and medium-sized enterprises (SMEs) form the backbone of the Ukrainian economy. SMEs are widespread across sectors in Ukraine, including agriculture, machinery, construction, and technology.

Before the Russian full-scale invasion in February 2022, SMEs played a significant part in GDP growth as they constitute 99.97 percent of total registered businesses in Ukraine. These small businesses employed almost 82 percent of the Ukrainian workforce, or almost 7.3 million people, and generated almost 66 percent of total sales in goods, works, and services in the country.

SME lending

Since the beginning of the full-scale war, the funds of commercial banks have increased by 33.4 % (UAH 158 billion) and business entities by 29.4 % (214 billion UAH).

The demand for bank lending was suppressed. After reaching the peak in June of the net loan portfolio in the national currency, the trend began to reduce corporate lending. Since June, the repayment of loans in general exceeded the new issuance. In total, in 2022 in solvent banks net loans to business entities in the national currency increased by 0.5 %, in foreign currency decreased by 23.9 % in dollar equivalent. At the same time, net SME loans for 2022 in national currency increased by 2.7 %, in foreign currency decreased by 34.2 % in dollar terms. The share of SMEs in the net loan portfolio in the national currency was about 55 %.

Credit conditions

Ukraine has managed to maintain the stability of the banking system. However, due to the decrease in demand for some time there was a reduction in bank loans both in the corporate segment and in the segment of lending to individuals. Corporate lending is driven mainly by subsidised credit programs, while market lending declined.

The dynamics of prices in commodity markets, uncertainty, the need to increase the attractiveness of hryvnia instruments led to a tighter monetary policy of the NBU, which was reflected in the key rate, which rose to 25 % since June 3, 2022.

Other indicators

Data on bankruptcies is available for all businesses (with no distinction between SMEs and other firms).

Since 2021, the number of bankruptcies has increased due to impact of prolonged COVID-19 pandemic. Also, the large-scale aggression of Russia against Ukraine resulted in almost a fifth of all businesses in the country closing down and two-thirds cutting production. After some period of stagnation from February to June 2022, the rate of insolvency in the sector is back. According to the statistics, in 2022, about 500 cases were filed in courts, a drop from 770 cases in 2021. It is expected that implementation of EU Directive 2019/2023 into national legislation and other achievements in reforming of insolvency legislative framework will lead to improving of the efficiency of bankruptcy procedures. It is expected that implementation EU Directive 2019/2023 into national legislation and other achievements in reforming of insolvency legislative framework will allow viable enterprises and entrepreneurs that are in financial difficulties to gain access to effective national preventive restructuring frameworks, it will lead to improving of the efficiency of bankruptcy procedures that will be also adapted to the needs and specificities of SMEs.

In 2022, the share of non-performing loans (NPL) of business in the banking sector increased to 43 % or by 9 percentage points. For a large part of debtors, the reason for default was the loss of markets or falling domestic demand.

Government policy response

The procedure for providing state guarantees on a portfolio basis was approved by the Resolution of the Cabinet of Ministers of Ukraine dated July 14, 2021 No. 723 "Some issues of providing state guarantees on a portfolio basis". The purpose of providing guarantees on a portfolio basis is to support micro, small and medium-sized businesses in Ukraine by simplifying access to bank financing for enterprises. State guarantees on a portfolio basis are provided to banks participating in the programme that meet the requirements of Resolution 723, according to their applications, provided that the state budget has not exceeded its guarantee limit for the relevant year. Due to state guarantees being offered on a portfolio basis, participating banks have the opportunity to independently form a portfolio of loans, the obligations of which are partially secured by a state guarantee on a portfolio basis (up to 50% of the principal debt obligations for the loan portfolio and up to 80% for each a separate loan).

Another programme, which is playing an important role in support of SMEs is the state programme Affordable Loans 5%–7%–9%. This programme offers credit financing to businesses and is implemented by the Government of Ukraine through the Business Development Fund (which is under the mandate of the Ministry of Finance). Since the war broke out, this programme has also been the primary driver of the provision of credit financing to businesses. As of 1.1.2024 since the beginning of a full-scale invasion within the framework of the state program “Affordable loans 5-7-9%”, 44 142 loan agreements totaling UAH 177.2 billion have been concluded. The Business Development Fund also provides its own credit guarantees distinct from guarantees on a portfolio basis.

Also, the Ministry of Economy of Ukraine together with the Ministry of Finance of Ukraine launched the program “Affordable factoring”, which aims to strengthen support of the state of Ukrainian business. The administrator of the program “Affordable factoring” was appointed the Business Development Fund, which has already concluded cooperation agreements with 5 financial institutions-partners.

In accordance with the terms of this program:

• business support under factoring agreements is carried out by the Business Development Fund within the received funds provided in the state budget;

• a factor can only be a bank that has the appropriate license, and only under internal factoring agreements;

• maximum financing limit for the counterparty and group is up to 95% of the amount of monetary claim, or up to UAH 150 million;

• maximum period of use of factoring financing for a business entity – 360 days;

• the state compensates the entrepreneur the expenses for payment of basic remuneration to the level of 13% per annum.

The eRobota project was introduced by the Government of Ukraine in July 2022 to support businesses and stimulate the creation of new jobs. It includes several grant programmes. Moreover, these include micro-grant programs for starting or developing a business, grants for establishing and developing processing enterprises, planting a garden, and establishing viticulture and greenhouse facilities.

Both existing entrepreneurs and people with no business experience can apply for a grant. Applications are submitted through the Diia portal together with business plans.

A mandatory condition for receiving a grant is the creation of new jobs, ranging from 1-2 for micro grants to several dozen for grants in other programs. Grant funds are returned to the state in the form of taxes and fees paid in the course of the enterprise’s activities over a period of three years.

During 2022, twelve waves of selection of recipients were held to provide micro-grants for the development of their own businesses. In total, during this period 16 171 applications for obtaining micro-grants in the amount of UAH 3.7 billion were submitted, of which 3 321 positive decisions were made by the State Employment Center on granting micro-grants in the amount of UAH 776.8 million, including 1 427 decisions on granting micro-grants to women (43% of the total number of positive decisions) totalling UAH 329.4 million. As of 1.1.2024, almost 11 000 grants were provided for the total amount of almost UAH 6 billion.

Figure 45.1. Trends in SME and entrepreneurship finance in the Ukraine

Source: See Table 45.2.

Statlink

Table 45.2. Sources and definitions of the Ukraine Scoreboard

Indicator	Definition	Source
Debt
Outstanding business loans, SMEs	Loans granted to SMEs, which are related to other financial corporations, non-financial corporations, individual entrepreneurs (outstanding amounts at end of period)	National Bank of Ukraine
Outstanding business loans, total	Loans granted to the corporate sector (outstanding amounts at end of period)	National Bank of Ukraine
New business lending, total	New loans granted to the corporate sector	National Bank of Ukraine
New business lending, SMEs	New loans granted to SMEs, which are related to other financial corporations, non-financial corporations, individual entrepreneurs	National Bank of Ukraine
Outstanding short-term loans, SMEs	Short-term loans (original maturity up to 1 year) granted to SMEs, which are related to other financial corporations, non-financial corporations, individual entrepreneurs (outstanding amounts at end of period)	National Bank of Ukraine
Outstanding long-term loans, SMEs	Long-term loans (original maturity more than 1 year) granted to the corporate sector (outstanding amounts at end of period)	National Bank of Ukraine
Interest rate, SMEs	Interest rates on new loans granted to SMEs, which are related to other financial corporations, non-financial corporations, individual entrepreneurs	National Bank of Ukraine
Interest rate, large firms	Interest rates on new loans granted to the large companies	National Bank of Ukraine
Interest rate spread	The difference between the interest rates on new loans granted to SMEs and the interest rates on new loans granted to large enterprises which are related to other financial corporations, non-financial corporations, individual entrepreneurs (for the last month of the period)	..
Non-bank finance
Venture and growth capital	Total capital invested (seed, round A, Round B, Growth, other)	Ukrainian Venture Capital and Private Equity Association
Leasing and hire purchases	Article 1 of the Law of Ukraine "On financial leasing" (https://zakon.rada.gov.ua/laws/show/723/97-%D0%B2%D1%80) 1. Financial leasing (hereinafter - leasing) is a type of civil law relations arising from a financial lease agreement. 2. Under a financial lease agreement (hereinafter referred to as a leasing agreement), the lessor obligates to acquire ownership of the item from the seller (supplier) in accordance with the specifications and conditions established by the lessee and transfer it to the lessee for use for a specified period of not less than one year for the established fee (leasing payments)	National commission for the state regulation of financial services markets
Factoring and invoice discounting	..	National commission for the state regulation of financial services markets
Other indicators
Bankruptcies, all businesses	Subjects of entrepreneurial activity which were under the bankruptcy procedure (data is presented excluding Autonomous Republic of Crimea and city Sevastopol)	Ministry of Justice of Ukraine