This year is the beginning of the next decade of the banking sector transformation. Intense works were started in 1989 to pass the new banking legislation which provided the central bank with full independence, also making it possible to establish a two-tier banking system. In 1989, nine regional commercial banks emerged from the structures of the National Bank of Poland (NBP) to take over the service of enterprises. The NBP focused on monetary policy and ensuring a sound settlement system, ie, functions pertinent to a central bank. Since then, the Polish banking sector has been facing intense institutional development, but has positively resolved the problem - common to all emerging economies in 1993-1994 - of bad debts, instead entering a path of stable development. Forthcoming years constitute a period of challenges related, among other things, to the globalisation of financial markets and Poland's expected accession to the European Union (EU).

Universal banking is the model adopted by Polish legislation. Thus, banking institutions are classified according to the form of ownership rather than the type of activity. In Poland, there are two state-owned banks that have specific functions and numerous, although considerably dispersed, co-operative banks. Private banks are the hinges of the banking sector, amongst which institutions controlled by foreign investors play an important role. Foreign capital controls almost 17 per cent of banks' assets, and holds more than 40 per cent of the equity capital of the sector.

Since 1 January 1999, the banking services market in Poland has opened to the competition of foreign capital. Banks from the Organisation for Economic Co-operation and Development (OECD) Member States may freely establish their branches throughout Poland, although they must be subject to the same authorisation procedure as domestic entities wishing to establish a bank. So far, foreign investors have decided to act in the form of subsidiaries. Foreign capital has also participated actively in the rehabilitation of weaker domestic banks, entering the market in this manner. It is expected that, in the future, international financial corporations will take advantage of the right to open branches in Poland.

Poland is a marvellous market for banking activity. In comparison with EU countries, it still has fewer banks per the number of potential customers. Also, households do not use banking services as extensively as Poland's western neighbours. Although the number of banks has been increasing fast and their activity has been developing, their size, in terms of international standards, is still small. Banking sector assets to Gross Domestic Product (GDP) amounts to about 60 per cent. The above weaknesses of the banking sector represent the potential to provide vast opportunities for the development of the banking sector, both as a whole and its elements.

In 1997, Parliament passed a new banking law. When formulating its provisions, effort was made to come as close as possible to the solutions existing in the common market. To my satisfaction, it may be confirmed that the Polish banking law has been, in the majority of aspects, harmonised with EU banking standards, particularly in the case of authorisation procedures and prudential regulations. Following the example set by its European partners, Poland has introduced collective management of the central bank. The Monetary Policy Council comprises experts in banking, economics and law.

Past years reflect efforts to establish modern supervision over the credit institutions. Surveillance over the banking system has been entrusted to the Commission of Banking Supervision which carries out its mission through a separate NBP department. The NBP's supervision acts in close co-operation with the Basle Committee of Banking Supervision. Its efforts focus on the implementation of 25 rules of the effective supervision worked out by the Committee, and on the efficient monitoring of their compliance.

Some years ago, the NBP also introduced the system of qualification standards specifying skills and ethic rules required from banks' staff.

Establishment of the deposit guarantee system in compliance with EU standards was also a success of recent years. Existing levels of guaranteed funds are still far below European standards, however, works have been taken up to increase it by up to 20,000 euro before the end of this century.

So far, dynamic development of modern banking in Poland has been slowly changing direction. Banking institutions have been less concerned with increasing competition, and consequences arising from international agreements and Poland's aspiration to access the EU.

The most important problem of the medium-term banking sector development in Poland is still to reconcile decreasing banks' productivity and the need for substantial investment in banks' information technology (IT) infrastructure. Declining inflation expectations and increasing competitiveness, also of banks controlled by foreign capital, result in a decrease of interest income. Banks face the necessity of having to modernise their infrastructure and prepare accurately for the forthcoming year 2000.

Poland meets the obligations assumed towards OECD and other international organisations and agreements. In this context, the banking sector faces new challenges. In the near future, the challenge related to development of cross-border services, and freedom of borrowing and placing deposits abroad, available after the year 2000, will emerge.

Provision of smooth settlement in euro for enterprises co-operating with trading partners from the EMU area is also an important task facing the sector. Economic and monetary union is also associated with another issue of concern, ie, modification of the national system of real-time gross settlements and its adjustment to RTGS requirements, binding for member states. The NBP has also been working to provide for conditions that would make it possible, in the future, to settle transactions relating to common monetary policy pursuit.

The success of the Polish banking sector, the reform of which started just before other key economic reforms at the beginning of the 1990s, has been accompanied by the crucial transformation of other sectors of the economy. The 1990s are marked with mass privatisation. At present, more than 60 per cent of GDP is generated by the private sector, which also hires about two-thirds of the total labour force. In recent years, the average growth rate of the economy ranged from five to seven per cent on an annual basis. It is also worth mentioning that Poland is the first post-communist country where real GDP exceeded the level noted before the transformation (1996). Since 1990, Poland experienced US$30 million inflow of foreign capital in the form of direct investment, which placed it in the first flight in terms of foreign capital commitment. In 1998, inflation fell for the first time in 18 years to a one digit figure; the fiscal deficit amounted to about 2.5 per cent of GDP; and public debt was far below the Maastricht criterion equalling 42.9 per cent of GDP. Despite some slowdown in economic growth, resulting from external shocks, the prognosis for the current year is promising; inflation should not exceed eight per cent, and growth rate will stay at about four per cent.

During the last ten years of the economic transformation, Poland's economic relations changed. In this period, considerable changes in the geographical structure of trading occurred. At present, its major trading partners are EU Member States, accounting for two-thirds of Poland's trade with non-residents. At the same time, Poland still co-operates with Central and Eastern Europe and the former Union of Soviet Socialist Republic (USSR) states, since it is a member of the Central European Free Trade Agreement (CEFTA). In 1998, trade with Central and Eastern Europe accounted for 20 per cent of total foreign trade, of which trade with CEFTA was seven per cent. The above numbers show that the Polish economy has not been very vulnerable to economic shocks experienced by the East, as proven by a moderate reaction to the Czech crisis in 1997 and the Russian one a year later.

The rapid changes and economic success of Poland has affected the way it is perceived by analysts and foreign investors. Increasingly, Poland is called a converging rather than an emerging market. Favourable perceptions of foreign investors are represented by ratings awarded to Poland by top rating agencies. Poland's financial standing received the following ratings: according to Standard & Poor's BBB-, Moody's Baa3, and IBCA BBB+. It means that Polish Treasury securities have an investment rating, and related risk is relatively low. Also, according to the Institutional Investor, a major international financial magazine, Poland's credit standing has been continuously increasing. According to the latest rating of September 1998, the country was rated 38th, scoring 54 points per 100. This justifies the positive opinion of Poland expressed by international rating agencies. Moreover, according to the rating of the Economist Intelligence Unit, related to the British Economist, which evaluates the so-called business environment, Poland has been ranked 29th, the highest ranking amongst all Central and Eastern European and former USSR countries. In the ranking assessment outlook for 1998-2002, Poland scored 6.88 of ten points, and is the only country in Central and Eastern Europe to be placed in the first half of the list.

In 1996, Poland became an OECD member, and in November 1998, accompanied by other countries associated with the EU, it started negotiations on full integration. The prospect of Poland's unification with the EU is a fundamental challenge for the forthcoming years.