The Polish Banks in Transition

By Diana Jauregui, by Eric Rothman, by Hasnain Alibhai.

The Banking System during the Polish Transition

By Diana Jauregui

Remember where the revolution began, here, in Poland. Make no mistake: The path you have chosen is the right path. (Kranish 1992) George Bush spoke these words at a time when the Poles themselves were losing faith in capitalism. The transition from command to market economy had been more difficult than people had expected. Different countries used different methods to introduce capitalism into their economy. Both, gradual and rapid approaches were used to achieve this goal. The gradual method that Hungary has used has proven to be successful since Hungary is the most rapidly growing nation in that section of the world. Poland's use of a shock therapy reform proved to be valuable as well. Rapid privatization and private companies built from scratch made Poland's method extremely successful. However, its growth is now stalling, and one reason is that its banking sector was allowed to continue as a state enterprise for a long time. Poland is working on privatizing its banking sector more easily in order to jump-start the growth that it once had in its private sector.

Poland had implemented a big bang economic reform that would rapidly convert the communist economic model into a free-market system and reintegrate the Polish economy into the global economy. (Britannica 1998) It was successful but at a high social price.  It sought to stop rapid inflation, eliminate shortages, make the currency convertible, and liberalize trade and prices, and by 1990, it had succeeded. The economic reforms that dazzled the world and gave the Soviet Union an example to strive for, however, had stalled after about two years. Increased unemployment, high prices, and soaring inflation began to plague Poland and other Eastern European nations. However, Poland became the first East European country to return to positive GDP growth, with 1 percent in 1992, and in 1996, it also became the first nation in that area to surpass its 1989 output by 1.6 percent. Although there are signs of growth in the economy, it is not growing at a rate as fast as it was in the beginning. Many economists blame the banking sector for this, and in 1996, the economy had decided to concentrate on privatizing this sector because it was not considered a strategic area to the state anymore.

    In 1989, Poland embarked on its most important banking reform by doing away with the centralized banking system under which nearly all monetary operations in the national economy were implemented by the National Bank of Poland. The National Bank abandoned its former functions as a credit and deposit bank for all companies and households and took on a supervisory role over the banking systems operations. It was also equipped with instruments to regulate credit activities. Nine banks were formed to service the areas that only the central bank served before the reform. (Jedrzejczak 95) Private banks were allowed to be established if they met with the three set criteria:   (Johnson 189)

  1. The bank sponsors were required to contribute capital of $500, 000 in case of Polish ownership or $7 million in case of foreign ownership,

  2. Premises had to be suitable for banking operations,

  3. Senior banking officials were required to have adequate experience and training.

By 1992, over one hundred licenses were given out for private and co-operative banks, but over 80 percent of the Polish economy’s portfolio was under the nine state-owned banks. Although these reforms were made in order to help the Polish transition from the command economy, it ended up being too slow and inefficient to help the private sector grow in the beginning.

    Many Polish entrepreneurs lacked capital, collateral, or connections for Polish or foreign credit, so the private sector was hurt because many businesses could not be funded. Another reason why the private sector was not assisted by the banking sector was that the nine state-ran banks were responsible for most of the economy.   These banks were just the regional branches of the former national bank. They lacked experience is permitting private loans because they were used to giving out loans to state-run enterprises only. It was hard to justify a loan to a Polish entrepreneur because they lacked track records and private businesses were still shaky at that time. Their staff was not ready for this change, and neither was the bank’s operation method. In fact, the banking system was not equipped to make rapid foreign transactions, so in the beginning, bank presidents traveled with cash to the countries with which it made business. Otherwise, the transaction could take months. There are many reasons why these problems occurred, but one reason was that government officials were so caught up in making the shock therapy system work in the Polish economy that they left the banking sector alone because it was still strategically important to the welfare of Poland.

    In December 1990, state banks were responsible for at least 97 percent of all credits in the Polish economy, but this number has steadily declined in the last couple of years, especially because two formerly state-owned banks are now privately owned. A new department created in the Ministry of Finance also now regulates banks. State bank’s balance sheets have been cleaned up, lending practices are more transparent, and loans to state enterprises have been reduced because of the careful supervision of this department. Competition among the banks, as well as an ending of government subsidies to banks, has also proved to make the banks more efficient in order to survive.

    It takes several years for a market-oriented banking system to develop. New banks have to raise capital and develop financial expertise, which was entirely lacking in the communist system. (Johnson 199) Banks that existed from before the transition have to reorganize in order to fulfill its duty with an emerging private sector. Therefore, it is unrealistic that one should expect changes in the banking system over night, but government officials could have done more. They should have realized that would have been hard for entrepreneurs to borrow if there was no way for the banks to check if they were a risky investment. The private sector should have also been given an easy way to come up with collateral since everything was publicly owned in the communist system. Loans to the private sector should have been encouraged, as well as the establishment of private banks in order to promote efficiency through competition. However, it is easier to point out mistakes after the fact. Banks needed to charge high interest rates for loans because Polish inflation was very high, and no financial institution was going to lend money to a person that risks losing nothing if their business does not work. A supervisory department in the Ministry of Finance was a good way to keep the banking system from falling back into its communist ways.  More rapid restructuring of the banking system and bank privatization would have had a positive effect, but as Lech Welesa, former Polish president once said, We need more time to learn about democracy, and, obviously, private banking. (Kranish 1992)


  • Johnson, Simon and Gary Loveman. Starting Over in Eastern Europe. Boston: Harvard Business School Press, 1995.

  • Jedrzejczak, Grzegroz T. and Krzysztof Kalicki. The Banking and Monetary System. New York: St. Martin's Press, 1991.

  • Kranish, Michael. Put Faith in the Market, Bush Tells Poles. The Boston Globe. 07/06/92 pg 2.

  • "Poland: History: Poland in the 20th century: Poland since1989." Britannica Online.     

  • Hyperlink



Report on the Andrzej Rudka's Article: 

"Reform of the Banking System in Poland" 

by Eric Rothman



The reform of the financial sector in the Eastern European economies presents one of the single biggest obstacles to reform and transformation to a market style economy. Banking and the financial markets (money, monetary, and credit) that are created by banks plays a crucial role in all market style economies. It is what provides for the growth of the economy through investment credit, and helps to stabilize the economy through fiscal policy and intervention in the currency markets. The Polish banking system, in particular, is in need of serious reform. This is the subject of the article, Reform of the Banking System in Poland written by Andrzej Rudka. This article underscores the many problems that plague the Polish banking sector and analyzes the attempt to transform the archaic and over simplified banking system into a modern internationally viable one. In describing the need to complete restructuring, Rudka explains the urgency of the situation. He lays out the steps that the Polish government has taken up to this point (1991), and expresses his opinions about the direction of future policy. Poland is attempting a major overhaul of the banking system. It will not be easily accomplished due to the numerous problems present. The biggest challenge is going to come from restructuring the system and creating a two tiered system with a strong central bank. The role of banking in the economy must be radically altered, money and capital markets must be created from scratch, the banks need to assume different tasks, and the entire banking infrastructure must be upgraded to provide for efficient banking in the new economic era.

There are four major areas of reform that are targeted by Polish officials. The first goal is the establishment of a Western-style two tiered banking system. This will consist of a strong and independent central bank which will have regulatory control over a network of private commercial banks and other banks. This federal bank will oversee the functioning of a money market and other subsidiary financial markets. The second goal is the reform of Polish banking laws and accounting practices so as to bring them into line with those of the West. The third step is the privatization of the state owned banks and the creation of conditions favorable to the establishment of new banks. The final and fourth major component of reform is to attract foreign capital into the Polish banking sector through active measures.

The problems affecting the Polish banking sector are numerous to say the least. The single biggest hindrance to reform is the financially weak positions of so many of the Polish banks. Banks are forced to increase their margins in order to maintain profitability. The weak positions deter banks from lending money to new enterprises, creating a credit crunch. It causes a dangerous situation, as the possibility of runs are great and instability remains a constant threat. In Poland the newly privatized and commercialized banks maintain an average disposable funds to assets ratio of 1:25 (Rudka, 75). This posses serious danger to monetary and budgetary policies. Moreover, it forces a reduction in the range and depth of banking services available, while simultaneously prohibiting innovation. 

Problems inflicting the banking system are a great deal more complex than simply the general weaknesses that plague the industry. There is a grave shortage of banking services relative to the demand for them. This sets up problems resulting form the lack of competition which are inherent in such a monopolistic business environment. The services that are provided are narrow in scope and of poor quality. There is a lack of developed subsidiary markets and support institutions for banking services. There were no capital or money markets in existence in pre-reform Poland. Moreover, there is insufficient capital to fund an expanded banking sector. The basic infrastructure for a properly running modern banking system required is poor and out of date. Many banks have yet even to be computerized. The telecommunications networks and equipment required to run a system of nation wide or regional branch offices are in poor condition or entirely non-existent. The people staffing the banks and carrying out the basic daily operations of the bank are poorly trained and inefficient in their jobs. 

The former banking system was a very simple one. Essentially, other than four much smaller and more specialized banks, the National Bank of Poland (NBP) was the only bank in the country. The deposits of all households were placed in the NBP prior to the banking reforms undertaken in 1991 and 1992. Money and capital markets were completely non-existent, as all investment was undertaken by the government. The internal structure of the bank was highly centralized. The main role that it played in the economy, to help implement the economic plans of the central planners, necessitated this highly simple and centralized structure. Therefore, the primary mission of banking reform was to create from this simple, centralized, monobank structure, a complex two tiered banking system. It would be comprised of a first tier with a strong federal reserve type bank that would manage regulatory powers and a second tier of independent, private profit -oriented commercial banks. The NBP was to be divided up and radically restructured. In all, nine commercial banks were created out of the old NBP, and the NBP took on an entirely different form and role.

The first step in creating a two tiered banking system was the creation of a strong central bank along the lines of the Federal Reserve of the United States. This was done by turning the NBP into such a federal bank. Rudka explains the process by stating all of the following premises in his analysis. The role of the NBP was altered in terms of scope and function. The reforms have defined a new, more limited role for the NBP. The primary mission of the newly created central bank will be to protect the value and stability of the Zloty, the Polish currency. It will oversee the activities of other banks and regulate the private banks. The new role of the NBP will be to shape monetary policy and to issue currency. Furthermore, it will organize the circulation of money in the system and put forth a newly organized accounting standard. Another major responsibility will be to control banking liquidity by setting and adjusting reserve requirements. (Rudka, 77)

The next crucial step in restructuring is the development of a money market. There are plans for the introduction of a treasury bill and a secondary market for it. This will encourage banks to maintain a stricter discipline in maintaining the required reserve levels. Short term and very short term banking deposits in the NBP were introduced in the first fiscal quarter of 1990 (Rudka, 78). The mechanism by which the NBP supplies refinance credits was down-sized in order to encourage banks to operate and make transactions on the money market. The final pillar in the reform of the banking and subsidiary market was the creation of an inter bank market open to third parties. All of this was done with the intent of forcing banks to frequent the money market and in turn, contribute to the demand for, and thus development of, new banking services in Poland. All of these measures were planned to be introduced by the end of 1991. Any further development of the money market will depend upon the individual initiatives and creativity of banks in creating more and better services. The author believes that this development will be rapid and spontaneous as it has been in many other countries (Rudka, 78). The development of these markets, and the increased activity on these markets, it is believed (and rightfully so), that the market forces will come to determine the interest rate, which is currently being set by the NBP.

As Rudka reports, the restructuring of the banking system is a great deal more extensive than the above described measures. There are three main features to the reconstruction as Rudka reports it. The first is to restructure the banks financial positions by cleaning up their balance sheets. It is hoped, that from the information gathered in this process, the banks will be able to develop their own long term and medium term plans. As has been planned for the other sectors of the economy, although all too slowly implemented to date, the privatization of the commercial banks is a necessity. The last measure will be to restructure banking services and instruments used to stimulate economic growth and development. (Rudka, 79)

In order to improve the poor condition of Polish banking services, Rudka explains several major areas of concentration. Rudka points to the importance of developing much needed competition. This is required to head off monopoly problems, but it is also required if these reforms are to have an impact on the improvement of banking services, as only through innovation and real competition can this come about. In order to improve banking services and efficiency, the basic banking infrastructure needs to be modernized and better developed. The information system must be enlarged and easily accessible to all commercial banks in all parts of the country. There needs to be improvement in the area of inter bank accounting and information sharing. Telecommunications systems and computer systems are being introduced, but at a slow rate. The target of reformers is to have all inter bank payments and settlements made electronically, however, due to the lack of computing and networking systems this is not likely to happen for quite sometime. Another badly needed reform is in the area of improving the training of workers in the banks. Polish bankers are unprepared to face the new banking system without proper training. An effort has been launched to better educate the bankers to the workings of Western style banking system by the Polish government with the help of Western officials and experts

The failure of the restructuring of the former Polish banking system will have profound negative repercussions on the attempts to reform the whole of the Polish economy. A well functioning banking system and credit market is an essential part of a smoothly functioning market economy. A missing credit market is one of the greatest obstacles to economic reform in Eastern Europe. Fortunately for Poland, enough political resolve has been put into action to prevent this from happening, and the banking sector is being reformed, with the cooperation and assistance of the international banking community and many international financial institutions. 

Kemme, David M., and Rudka, Andrzej, eds. Monetary and Banking Reform in Post Communist Economies. Institute for East-West Security Studies : New York. 1992. HG 930.7.M66 1992. 



by Hasnain Alibhai.




Poland's transition to a market economy implied a shift from monobank status (in which the bank played the role of the central as well as the commercial bank) to a two tier banking structure. In February 1989, some regional branches of the NBP were converted to separate entities, and nine independent commercial banks were formed.

According to NBP President, the reconstruction of the banking sector and establishment of the two tier system were the prerequisites in transforming the NBP instruments into tools of the market economy. The NBP then abolished administrative mechanisms such as the setting of compulsory limits on regional credit utilization. New indirect mechanisms were then employed. These included: interest rates, reserve requirements, the exchange rate, money market instruments and others.The reserve requirement and the refinancing credit rate introduced in 1989, have now become the basic reference for the whole banking system. In the previous two years, discount credit and lombard credit instruments have also been put in force. The NBP administers the international exchange reserves, and executes the exchange rate policy. The NBP has been active in creating money markets in Poland. Halfway into 1990, it introduced the sale of short term Money Market Bills (NBP bills). These were sold via auction. Then in 1991, the NBP started the sale of treasury bills and repurchase agreements.

The NBP has also been promoting establishment of interbank markets, where the regional branches of the NBP serve as middlemen in interbank transactions. In Poland the National Bank is considered to be the 'bank of banks'. So in some cases it serves as the lender of last resort. It monitors the activities of the other banks and assists in the creation of 'prudential' regulation. The NBP has also helped to establish The Banking School in Katowice.

Even though the NBP is a state owned bank, it is not in the control of the government. That is to say that it operates almost as a separate entity. To quote one NBP President, 'The financing of the budget is an internal problem of the government.....I will stress once more that the Polish National Bank will not finance a budget deficit that exceeds the level specified in the budget proposal. There will be no deviation from this goal since it is our firm intention to protect the value of the currency well into the future'.

Since there is low liquidity of several banks, the NBP has implemented emergency measures at the nine regional banks. These are:

-The analysis of loans in two categories : doubtful and write off, and the development of a list of borrowers in these two classes.

-The selection of borrowers with a chance of recovery and the provision of assistance via a restructuring program.

-Starting liquidation or bankruptcy proceedings of banks that have no chance of survival.

More recently, the NBP has obtained confirmation of Britain's consent to the use of money contributed by Britain to the zloty stabilization fund for the development of the banking system. Furthermore, Britain has agreed to supply $ 100 million more, to be used for restructuring the banking system.

Another important fact is that the NBP has purchased enough T-Bills to finance much of the deficit (this is the most inflationary way to do so).The reason for this is that the money market is very underdeveloped. Aside from this the NBP has imposed emergency management in 12 commercial banks and 40 cooperative banks since 1991. The NBP has recently suspended the Agrobank's operations and filed for bankruptcy proceedings. Although the NBP has refused to provide bridge financing in inter bank settlements (on the grounds that it facilitated malpractice related to borrowing against debt), if on any one day, a bank cannot meet its requirement, it can borrow money from the NBP. Alternatively, it may borrow from the inter-bank market. (lombard credit). This may be hard to do as most Polish banks are already in trouble and the borrowing bank would, at the very least have some form of overseas security.

Since it takes so long for money to be transferred, and since specialized banking services are so rare, two Banks have risen to the top:

Citibank Polska is an American bank in Poland. Citibank stresses cash management services which are more extensive than those of other banks. The bank also provides loans and credit-lines, wire transfer, hard currency accounts for eligible businesses, letters of credit, forwards and personal banking services. Citibank, for the most part, works with large companies and multinationals and is normally not interested in small business or start-up activities. The banks group of products includes: export and import transactions, cash management services, foreign exchange operations, and project finance and advisory services.

Cash Management: These center around speedy collections and investing surplus liquidity, either short or long term. Collections that could take up to 4 weeks are accomplished within 48 hours. Citibank works with banks all over Poland to accomplish this. This is appealing because it reduces the need for a firm to borrow locally. 
Trade/Money Transfer Services: Export and Import services include LC's, standby, sight and revolving payments, documentary collections, and discounting bills. Citibank guarantees funds will arrive within 48 hours.
Special Services: Bank specialists work with business to tailor bank services to meet their needs. Citibank also offers electronic modem services, allowing firms anywhere to call in and check their accounts. Loans are made by Citibank, but they require stateside or offshore security.

However things are not as good as they look. One of the main reasons is technological problems. Different systems result in book keeping problems. 
Telecommunications are also not up to par, resulting in loss of electronic information. The bank also has to contend with corruption in the middle ranks. Lending officers have to be monitored closely.

Once the official trade bank for the state, BH is now a leading commercial bank as well as the largest trade bank in Poland. The bank is modernizing in order to maintain its' lead but is facing growing competition. Because of the banks branches in Europe and the US, it is well placed to perform a wide range of business services.

The Branch Network: BH is rapidly expanding its branch system. At present it has 20 branches, and intends to open 10-15 more. One branch will offer special services for high net worth customers. The bank has representative offices in New York, Rome, Belgrade, Moscow, London, affiliations in Frankfurt, Vienna, Brussels, and Luxembourg.
Loans: Because of its size, Bank Handlowy can make larger loans than most entities in Poland. However, due to the problem of bad credit, lending is hampered by the bad debt overhang and retraining of loan officers is required. The bank accepts various kinds of security. Bank guarantees are accepted from banks deemed acceptable. Since property values are low, the bank requires them to be worth two to three times more than the amount of the loan. Delayed payment deposits are accepted at 30-35% interest. The bank is exploring the possibility of making loans in zloty but indexed in to an amount in foreign currency: The amount payable would be the foreign currency + interest, converted to zloty at the exchange rate for when the loan is payable.
Trade Services/Money Transfer: In this aspect, Bank Handlowy is similar to Citibank. Payments are fast, that is within 48 hours.

In reality, however, BH is also not running as smoothly as it should be. One main reason is that the banks lending priorities are still warped by past obligations. Besides this, the bank has brought forward the debts of the previous communist regime. These bad debts account for approximately30% of the banks total assets. Aside from this, the NBP, upon advice by the IMF, has imposed ceilings on lending 15% of total tier one capital to one company and ten percent to one project. This leaves BH with little available medium credit. In addition to these, the bank also faces the technological problems and corruption faced by Citibank Polska.









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