Deposits Abound, Loans Are Scarce: The Banking Paradox Holding Back Ukraine’s Economy

Ukraine’s banking system has accumulated enormous financial resources. Yet their redistribution into investments and other forms of business support remains unsatisfactory. Since 2023, only 40 percent of bank deposits have been transformed into loans provided by banks. The prolonged freezing of hryvnia funds by banks, along with the high cost of credit resources, has exacerbated depressive trends in the economy.

The annual GDP growth rate for the first seven months of 2025 was +0.9 percent, far lower than the actual growth in 2024 (+2.9%) and 2023 (+5.5%). Real GDP is constrained both by physical destruction and high wartime risks, as well as the unavailability of credit resources for many economic actors.

In July 2025, the average interest rate on bank loans to non-financial corporations in hryvnia stood at 16.8 percent. The ratio of bank loans to GDP fell to a historic low of 14 percent in 2024, and rose slightly to 14.5 percent by mid-2025. For comparison, in 2021 lending stood at 19.1 percent of GDP. Among emerging markets, Ukraine has the lowest level of bank lending.

The traditional function of banks has been to attract household deposits and provide loans to businesses, thereby optimizing capital allocation in the economy and financing necessary investments. Over time, banks acquired the ability to create new loans without a direct link to deposits, expanding the money supply. Such lending increased nominal demand and positively affected production. When new loans were directed to productive investments, they also supported long-term growth.

Unfortunately, in Ukraine bank loans represent only a marginal source of financing for capital investments—just 3–4 percent of total financing sources.

The NBU’s bold statements about a revival of lending in 2025 lack any objective basis. Loan growth rates barely matched annual inflation and lagged far behind producer price growth, pointing to stagnation in bank lending.

The stock of gross hryvnia loans to non-financial corporations in July 2025 was only 10.7 percent higher than in July 2024, while total loans were 14.8 percent higher. This comes despite banks currently enjoying record levels of liquidity and capital adequacy.

It should also be noted that about 30 percent of banks’ loan portfolios consist of government preferential loan programs (which have tripled in nominal terms during the war). In other words, the actual state of market-based bank lending in Ukraine is far worse than official statistics suggest.

Another negative factor is the dominance, within banks’ lending structure, of raw-material industries and sectors with rapid capital turnover. According to NBU data, over the past year the highest growth rates in bank lending were recorded in agriculture, wholesale trade and the food industry. Clearly, this does not contribute to structural diversification of the economy or to productivity growth.

As in the past, banks’ core liabilities are formed by attracting deposits. The experience of various countries during the global financial crisis showed that banks financed through domestic deposits proved more resilient, while those reliant on international wholesale funding markets often collapsed.

In Ukraine, the structure of bank liabilities is quite stable: 92 percent comes from funds and deposits of individuals and businesses in Ukraine. Yet banks allocate only about 40 percent of these deposits for lending.

According to the latest NBU data, in July 2025 accumulated deposits of residents in Ukrainian banks reached UAH 2.8 trillion, while the stock of loans issued to residents (excluding financial corporations) was UAH 1.2 trillion. Of this, about half—UAH 627 billion—were loans with maturities of one year or longer.

The ratio of total bank loans to deposits (see Figure 1) has fallen by a factor of 1.7 since the start of the war—from 67.6 percent in 2021 to 39.4 percent in 2024—before rising to 43 percent in July 2025. In other words, banks currently use only 43 percent of deposits to extend loans to households and businesses.

The flip side is that loans to households and businesses account for only 26.3 percent of banks’ net assets (down from 36.1 percent in 2021). The share of domestic government bonds also fell, from 28.6 percent to 26.1 percent between 2022 and 2025. By contrast, compared to 2021, the share of NBU deposit certificates in banks’ net assets rose sharply (from 10.4 percent to 15.5 percent), as did other funds held in the NBU and banks (from 13 percent to 20.3 percent).

The absence of targeted measures to revive lending and financial intermediation, the NBU’s chronically tight monetary policy and banks’ receipt of guaranteed interest income from the state are the main reasons for the contraction in lending and the unfavorable structure of bank assets. These factors, compounded by high security risks, amplify the negative effects on the economy.

According to the World Bank’s Global Financial Development database (see Figure 2), in 2021 the average ratio of bank loans to deposits across 127 countries was 89 percent. That is, loans lagged deposits by 11 percent. In Ukraine, as noted above, the loans-to-deposits ratio in mid-2025 was 43 percent, meaning that deposits exceeded loans by a factor of 2.3.

By contrast, in countries such as Armenia, New Zealand, Costa Rica, Tajikistan, Paraguay, Georgia, Panama, Iceland, Sweden, Colombia, Norway, Uzbekistan, Denmark, Vietnam and China, the ratio of loans to deposits exceeded 130 percent. Among Ukraine’s nearest neighbors, this ratio was 64 percent in Moldova and Lithuania, 66 percent in Bulgaria, 67 percent in the Czech Republic, Romania and Hungary, 75 percent in Poland, 92 percent in Belarus and 109 percent in Slovakia.

Large volumes of deposits in Ukrainian banks that are not transformed into loans continuously depress deposit rates. Banks simply have no incentive to raise or maintain high deposit rates. The average interest rate on hryvnia deposits of residents in July 2025 was 10.3 percent per annum, while hryvnia term deposits of individuals averaged 12.9 percent per annum. Meanwhile, the average rate on hryvnia loans to residents was 20.2 percent per annum.

This level of nominal deposit rates does not protect savings from inflation and results in net losses for depositors. For example, with a hryvnia deposit at 12.9 percent per annum, inflation at 14.3 percent and the obligation to pay personal income tax and the military levy, an individual faces a net real deposit rate of –4.4 percent per annum.

The “surplus” of deposits from individuals and businesses, combined with the oligopolistic structure of the banking market, generates high bank margins. In July 2025, the interest margin (the spread between loan and deposit rates in hryvnia) was about 10 percentage points. Moreover, this margin of 10–12 points has been maintained by banks for a long time.

The absence of bank bankruptcies and their sustained high profitability despite minimal lending to the real sector is explained by large-scale state subsidies. Above all, these subsidies take the form of guaranteed income sources for banks—interest payments on NBU deposit certificates and domestic government bonds.

Between 2022 and the first half of 2025, banks received almost UAH 250 billion in interest on NBU deposit certificates. The NBU’s profits and transfers to the state budget decreased by the same amount. In addition, over the same period, banks received UAH 276 billion in interest on government bonds and UAH 60.4 billion in interest on government-subsidized business loans.

The existence of guaranteed state-backed income discourages banks from lending to riskier projects in the real economy. The share of interest income received from the state in total bank interest income reached 58 percent in the first half of 2025. Notably, this share was 30 percent in 2020 and 37 percent in 2021.

At the same time, in 2025 loans to businesses generated only 23 percent of banks’ interest income. Under such proportions, it is difficult to call Ukrainian banks credit institutions (perhaps that is why in NBU statistics they appear as deposit corporations). It is also unrealistic to expect these “deposit corporations” to increase lending significantly while the welfare of their shareholders is guaranteed by state funds.

Looking ahead, after the acute phase of the war, there will be an objective need to fully mobilize internal reserves for recovery, modernization and the formation of a sustainable development trajectory. Resources accumulated by banks, with lending raised to a new level, should become a significant source of financing.

To achieve this and overcome the deposit–credit gap in Ukrainian banks, it is essential to shift to a stimulative monetary policy, abandon the NBU’s practice of placing term deposit certificates, launch specialized development institutions with the involvement of the NBU and international donors, ease financial regulatory requirements for banks and introduce targeted instruments to stimulate lending activity.