Why aren’t municipal bonds widespread yet?

When Ukrainians talk about investments, they most often mention government bonds (OVDPs). People buy them through banks and apps; they are constantly discussed in the media; and the number of investors has increased nearly 12-fold during the full-scale war.

At the same time, there is another instrument that operates on a similar principle but remains little known to the general public. These are municipal bonds (OVMPs) — securities that can be issued by local self-government bodies to raise funds for development.

Why have government bonds become a common feature of the financial market, while municipal bonds have not? And why is this topic back on the agenda right now?

Similar but different

Both OVDPs and municipal bonds are debt securities. In both cases, the investor lends money to the issuer for a specified term and then receives it back along with interest. But there is a fundamental difference: OVDPs are issued by the state, while municipal bonds are issued by local governments. There is another difference that often influences an investor’s choice: unlike municipal bonds, income from OVDPs is not taxed for individuals in accordance with the Tax Code.

While the state raises funds to finance national needs, local communities raise funds for specific local projects: transportation, water supply, energy, housing, or other infrastructure. These may also include projects aimed at achieving energy independence for communities — such as on-site power generation, energy storage systems, modernization of district heating, and other solutions that enhance a city’s resilience.

That is precisely why municipal bonds are a common tool for urban development in many countries. So why haven’t they become popular in Ukraine?

A market that lost confidence too early

Municipal bonds were first issued in Ukraine back in the mid-1990s. The most well-known example is the 1997 Odesa municipal bond issue, which — due to a change in government and the 1998 economic crisis — was unable to repay investors on time. Although the issue was eventually resolved, confidence in the instrument had been undermined.

Over nearly 20 years — from 2004 to 2022 — just over 60 municipal bond issues were registered in Ukraine; the market did not come to a complete standstill, but it never became a mass market.

Following this incident, the state significantly tightened its control over local borrowing, and the bond issuance process itself became complex and time-consuming. Communities opted for simpler instruments — bank loans, international grants, or budgetary financing. As a result, local bonds remained the preserve of a few large cities, and with the outbreak of the full-scale war, this market was effectively put on hold.

But the issue was not just the complexity of the procedure or the historical pattern of failure to repay funds by the specified deadlines.

In the years that followed, communities gained access to other sources of funding. During the COVID-19 pandemic — and especially after the outbreak of full-scale war — the role of government, international, and donor support increased significantly. Grants, aid programs, and preferential financing became critical to enabling the country and its communities to weather these extraordinary challenges.

However, this model cannot last forever.

Donor funds and international aid will remain an important resource for Ukraine, but the long-term development of communities cannot depend primarily on external support for decades. Building housing and modernizing transportation, water supply systems, heating networks, the energy sector, and other infrastructure will increasingly have to be funded by the country’s own economic resources — budget funds, business, and private capital.

This is where municipal bonds can take on a new role.

What changed this time

In 2026, the National Securities and Stock Market Commission simplified the rules for issuing local bonds. Whereas previously local councils had to go through the full procedure of obtaining approval for the loan and registering the issuance of OVMPs for each series, they can now approve a base prospectus if they intend to conduct more than one public offering. Furthermore, if necessary, new series can be issued by drafting a separate resolution on the issuance and final terms for each series, without having to repeat the approval of the base prospectus. In short, the community spends less time on bureaucratic procedures.

A base prospectus may be used for several bond series, and their aggregate face value must remain within the borrowing limit approved by the Ministry of Finance for the relevant year.

Why do communities need this?

Let’s imagine a city that wants to purchase trams, repair the water supply system, or build a new bridge. Or generate its own electricity or implement another project that will increase the community’s energy independence.

There are several ways to fund such projects:

1. Use funds from the local budget;
2. Take a loan from a bank;
3. Secure an international grant;
4. Raise funds through the issuance of municipal bonds.

This latest tool does not replace other sources of funding; rather, it simply expands the options available to communities. It is designed for large-scale development projects. This is exactly how cities around the world build bridges, schools, and subways — by raising funds from private investors through bonds.

This is especially important when it comes to large-scale projects that cannot be completed within a single fiscal year. A bridge, a residential block, a new water supply system, a transportation network, or an energy facility cannot be built in a matter of months. Such projects require funding over several years.

Municipal bonds may offer advantages over bank loans. The interest rate on them may potentially be lower, and funds can be raised from multiple investors rather than from a single lender.

There is also an important difference between a loan and a bond. A loan generally remains a relationship between the community and a specific bank until it matures. A bond is a security and can be traded on the secondary market. An investor who purchased a long-term bond has the potential to sell it to another investor before maturity, provided there is a liquid market for that security.

The longer the investment horizon, the more important this option becomes for the investor. After all, the investor does not necessarily have to hold the security until maturity. That is precisely why bond financing may make more sense for long-term infrastructure projects that take years to complete.

Another advantage is flexibility. Communities can determine the nominal value of the bonds, their maturity dates, and the payment schedule, linking them to a specific project and their future revenues.

For example, a community may provide for the payment of interest to investors on bonds in accordance with a schedule specified in the terms of the issue. This makes it possible to plan budget funds for debt repayment in advance. In addition, the project itself often begins to benefit the community — by generating revenue or reducing expenses — which can then be used to repay the bonds.

This is particularly evident in the case of energy projects: on-site power generation, energy storage systems, modernization of heat supply, or improvements in energy efficiency can simultaneously strengthen a community’s resilience and reduce its future costs.

Furthermore, the very public nature of an OVMP issue increases the transparency of fundraising: investors receive information about the issuer, the terms of the issue, and the purposes for which the funds are being raised. Thus, municipal bonds form a direct link between investments and the development of a specific community.

Why this topic became relevant specifically during the war

The full-scale war has increased communities’ need for long-term funding. Some need to rebuild destroyed infrastructure, while others need to build new housing for people who lost their homes due to Russian attacks or moved to safer areas. At the same time, cities are developing transportation, utility networks, energy infrastructure, schools, hospitals, and other large-scale projects. All of this requires significant funds that will need to be invested over many years.

Energy resilience poses a particular challenge.

Following Russia’s systematic attacks on Ukraine’s energy infrastructure, for many communities, local power generation sources, energy storage systems, the modernization of heating networks, and other energy independence projects are no longer simply a matter of cost savings. It is a matter of a city’s ability to provide basic services even during crises.

Such projects are expensive and take years to complete.

Today, a significant portion of these needs is covered by the state budget, international partners, and donors. This support is critically important for the country during the war. However, Ukraine must gradually create mechanisms under which an increasing share of development will be financed by funds generated within the economy itself.

Private capital could be one such source.

It is for this very purpose that the Commission is expanding its dialogue with communities on the practical use of this tool. In the spring of 2026, Commission Chairman Oleksii Semeniuk, together with NSSMC Commissioners Arsen Ilin and Maksym Libanov, discussed the possibility of issuing municipal bonds with the Lviv City Council. Lviv is considering becoming one of the first pilot sites for the new procedure for issuing OVMPs.

The Commission has been holding similar discussions with other regions as well. Representatives of local communities in Ivano-Frankivsk Oblast have already been briefed on the mechanism for issuing local bonds and the possibilities for using the raised funds for specific projects: from rebuilding housing for internally displaced persons to developing infrastructure and the energy sector.

Is the market ready for the next step?

As of 01 August 2026, there were 271,300 unique investors in Ukraine. Since the beginning of 2022, their number has increased nearly 12-fold. Since the beginning of this year alone, another 43,300 people have entered the market — more than 6,000 per month. This shows that an increasing number of Ukrainians are willing to invest through capital markets.

At the same time, municipal bonds will have to compete with OVDPs for investors’ money. Currently, income from OVDPs earned by natural persons enjoys a tax benefit, and government bonds are more attractive to banks in terms of risk assessment requirements. Therefore, simplifying the issuance procedure is an important — but not the only — step needed for the municipal bond market to become mainstream.

There is another goal as well — to develop a secondary market for municipal bonds. It is precisely the ability to buy and sell these securities after their initial placement that makes long-term bonds potentially more attractive to a wider range of investors.

The next step is to ensure that investors have more opportunities and that communities have more ways to raise funds. Municipal bonds could be one such tool.

However, communities need to have high-quality projects and understand how to attract funding, while investors need clear terms, sufficient information about the risks, and the ability to assess exactly what they are investing in.

The history of municipal bonds in Ukraine began nearly thirty years ago, but this instrument never gained widespread use. Now, the Commission is updating the rules to make it easier for local governments to access capital markets and for investors to better understand where and under what terms they are investing their money.

International aid is helping Ukraine hold out today. But the country will need decades to rebuild its roads, housing, transportation, energy sector, and new infrastructure. And the Ukrainian economy itself must learn how to generate a significant portion of the funds needed for this.

If OVDPs have taught Ukrainians to invest in bonds, then municipal bonds could be the next step — an instrument that will help channel private capital toward the development of specific cities and communities: new transportation, housing, water supply, or their energy independence.