mongolia special focus

8/12/2019 Mongolia Special Focus

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Mongolia aimsfor a brighterbanking future

July 2014 www.euromoney.comC e l e b r a t i n g 9 0 y e a r

o f b a n k i n g i n M o n g o l i a


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Contents

Banking system marks its 90th anniversary in good shapeMongolias banking sector has come a long way since its foundation, with Russian help, in 1924.

The industry proved resilient during the nancial crisis and competition has stimulated expansionand innovation, although there are worries about over-dependence on the resource sector 2

A stable base for future growthAs Mongolia moves away from dependence on mineral resources, Bold Sandagdorj,chief economist and advisor to the Bank of Mongolia, explains the central banks rolein creating more sustainable economic growth

4

Capital markets struggle to make headwayHampered by a lack of liquidity and trading activity, capital markets have been slow toevolve, despite government efforts to create a sympathetic regulatory environment8

Building on an old traditionBold Magvan is president of the Mongolian Bankers Association and CEO of Tenger Financial Group.

Tengers largest subsidiary XacBank is a systemic bank in Mongolia with 10% of market share; the groupalso has leasing, insurance and investment advisory arms, and a greeneld micronance company in China

5

Foreign investors ponder developing potentialMongolias rich mineral resources have attracted considerable foreign capital but the government also now

hopes to attract investment in its efforts to diversify the economy. The long-running dispute over the OyuTolgoi mining project may be dampening interest, however 10

Bringing banking to the steppesDespite its small and widely dispersed population, Mongolia rates highly inthe nancial inclusion stakes14

Expansion and consolidationEven after a series of closures and mergers, Mongolia

probably still has too many banks for its small population 16


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SPECIAL REPORT :MONGOLIA July 2014 www.euromoney.com2

Banking system

MONGOLIAS BANKING SYSTEM has changed out of allrecognition from its humble beginnings in the 1920s, helping totransform the country along the way into the pocket economicpowerhouse it is today.

When the countrys rst bank, the Trade and Industry Bank ofMongolia, opened with a single branch in June 1924 it was withthe help of its Soviet neighbour and staffed mostly by Russians.Mongolia also had no national currency, presenting the bankwith the headache of trying to full nancial and monetarypolicy with the foreign currencies then in circulation.

The togrog (MNT1,823 = $1) was introduced the followingyear and by 1954 Mongolia had gained sole ownership andcontrol of the bank, which was renamed State Bank of Mongolia(now the Bank of Mongolia the central bank).

Transition to market economyBut the most signicant milestone in the sectors 90-year historycame in 1990 with the start of the transition from Soviet-stylecommunist rule, with its centrally-planned economy, to a multi-party democracy with a market economy.

The countrys rst commercial bank, Trade and DevelopmentBank (TDB), was founded in October of that year, followedby Khan Bank three months later. The 1991 Banking Lawestablished the central bank and a statutory minimum paid-incapital requirement for banks. All banks, however, remainedunder state ownership. That year also saw the establishment ofthe Mongolian Stock Exchange in Ulaanbaatar.

However, early promise soon evaporated in the face of aneconomic crisis resulting from the collapse of the Soviet Union,on which Mongolia had relied for nearly all its trade as well asmedicine, fuel, and machinery.

When reform efforts and private enterprise eventually fedthrough in the mid-1990s, economic growth resumed butbanks over-extended credit. This left them poorly positioned toweather the Asian nancial crisis that followed in the second

half of the decade and a number of banks closed.With Golomt Bank leading the way, by the early 2000s the

sector had been transformed into a mostly privatized bankingsystem, with 16 commercial banks regulated by the Bank ofMongolia. In 2006 the Financial Regulatory Commission wasestablished to supervise the rest of the nancial sector includinginsurers, securities houses, credit and savings unions, and non-banking nancial institutions.

In 2007, TDB became the rst bank to tap the internationaldebt market with a $75 million bond issue. It repeated theexercise in 2010 and 2012, doubling the value of its issuanceon each occasion. In January, TDB priced Mongolias rst

renminbi-denominated bonds. The banks so-called dim sumbond offering, raising RMB700 million ($115 million), was twiceover-subscribed.

Resilient in crisisThe global nancial crisis did cause problems with two bankfailures, two mergers and the formation from the liquidatedbanks assets of a new state-owned bank, State Bank, in2009. Overall, the sector proved rather resilient, with growthdipping only briey in the initial stages, helped in part by theintroduction of an interim blanket bank deposit guaranteescheme in 2008.

That year saw the rst foreign banking presence when Dutchbank ING set up a representative ofce. The UKs StandardChartered followed in 2011 and Bank of China in 2013. Japansnumber one and two banks Bank of Tokyo-Mitsubishi andSumitomo Mitsui Banking Corporation opened representativeofces in 2013. Goldman Sachs took a 4.8% stake in TDB in 2012.

In 2010, the Banking Law was strengthened, boostingminimum paid-in capital to MNT8 billion ($4.39 million) andlimiting a banks exposure to any single borrower. The law alsoprohibits a single investor from signicant inuence in morethan one bank, requires banks to notify the regulator of majorchanges in the shareholder structure, and prioritizes prudentialcompliance over dividends. The minimum paid-in capital

requirement was doubled again last year to MNT16 billion as partof counter-cyclical measures being pursued by the central bank.

Mongolias banking sector has come a long way since its foundation, withRussian help, in 1924. The industry proved resilient during the nancialcrisis and competition has stimulated expansion and innovation, althoughthere are worries about over-dependence on the resource sector

Banking system marks

its 90th anniversaryin good shape


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www.euromoney.com SPECIAL REPORT :MONGOLIA July 2014 3

The Development Bank of Mongolia was established in 2011to extend medium- to long-term nancing to strategicallyimportant sectors loans for infrastructure and industrialand energy developments to be funded through bond sales.The banks rst issue of debt government backed in 2012raised $580 million and was 10 times oversubscribed, followedlast December by a Samurai bond issue. The $290 millionof yen-denominated debt was guaranteed by Japan Bank forInternational Cooperation.

In January last year parliament passed the Deposit InsuranceLaw, replacing the earlier temporary measure that expired at theend of 2012. The industry-funded scheme guarantees deposits upto MNT20 million in the event of the failure of a member bank.

In July 2013, Savings Bank, the fth largest lender, failed pulled down by the non-performing loans of its afliates and itsinsolvent parent company and was taken over by State Bank.

Dynamic sectorThis evolution over many decades means that, today, Mongoliahas a dynamic banking sector comprising 13 banks ranging fromdominant players like TDB, Khan and Golomt to communitydevelopment and micronance providers such as XacBank.

Seeing the development of the banking system over the lastdecade, although there have been problems all theyve doneis helped highlight and weed out the weaker players, saysTDB president Randolph Koppa. So were getting, I feel, anincreasingly stronger system thats providing a broader arrayof nancial services to Mongolians in general than it was nineyears ago when I arrived here.

Competition has spurred banks to expand, particularly their

retail businesses, and created a strong innovation pipelineproducing advances in payment systems and branchless bankingthat have made Mongolia a leader in nancial inclusion.

But the banking system faces risks from Mongolias growingdependence on mining, resources exports and governmentstimulus which, while producing double-digit GDP growth, isalso driving rapid loan growth of more than 50% a year.

One of the central banks roles is to ensure the stability ofthe nancial system and we have worked to make sure banksare sufciently capitalized and work to international prudentialstandards, says Sandagdorj Bold, adviser to the governorof the Bank of Mongolia. The average core tier 1 ratio ofMongolian banks is 17% at the present time, against a minimumrequirement of 12%. The average liquidity ratio is 41%, againsta minimum of 25% and non-performing loans are stable at amoderate 5%.

But fund managers have doubts. Sturgeon Capitals founder andCEO Clemente Cappello warns that while Mongolia is undergoinga transition for the good, over-investment in recent years willcause problems in future: The only thing theyve done outsidenatural resources has been real estate, and I think theres beensome over-investment there, certainly some capital misallocation.That is going to be linked to some volatility in the banking sectorbecause real NPLs are increasing. The banks are limited in size andthey just went through a huge boom and now, when capital is

not there, I think they will face some troubles.Total assets were up 59% year on year in April to MNT21.21

trillion, with loans up 51.5% to MNT11.69 trillion, BOM datashows. Total togrog deposits were up 46% year on year in Aprilto MNT6.97 trillion, with personal savers accounting for almosttwo-thirds, but failed to keep pace with loans pushing up theloan-to-deposit ratio from 117% to 122%. The loan-to-GDP ratiostood at around 60% at the end of 2013.

TDBs Koppa says that the headline gures are slightlyoverstated due the distorting effect of a weakening togrog,which depreciated by around 25% against the dollar in the sameperiod. Expressed in dollars, the asset growth in the bankingsector was about 46% in 2013 which is signicant but the gurewas 28% in 2012, 35 % in 2011, and 62% in 2010, so assetgrowth has been quite strong in the past.

Much of the growth last year was because of temporary BOMprogrammes to stimulate nancing of small apartments throughlending to banks to increase their mortgages and other fundingto stimulate development of construction materials companies,and exports of cashmere and other sectors.

This dedicated funding showed up as increased assets in thebanking sector but as the economy continues to expand at adouble-digit rate, the percentage increase each year will have tocome down so instead of 28% we would be looking at 15-20%,then down to 15% annually.

Koppa says the elevated loan-to-GDP ratio is partly aconsequence of the lack of capital markets, which meansthe funding load for business growth falls almost entirely tothe banking sector, with domestic banks responsible for asignicant proportion.

The loan-to-GDP ratio will have to continue to increase sothat means that banks will continue to grow a little bit faster

than the rate of GDP growth in real terms for the next threeyears, at which point I think the loan-to-GDP ratio will stabilizeat around 75-80%. We should then see bank growth pretty muchin line with GDP growth.

Short-term headwindsThe sector does face some headwinds in the short term fromrapid credit growth and imbalances injected by ination above12% and a substantial current account decit combined withtogrog depreciation. The foreign currency loan-to-deposit ratiojumped to a record high of 120% at the end of last year withforeign currency deposits accounting for more than a quarterof total loans.

Ratings agencies are concerned that, even through mostFX lending is to corporations with hedged positions, thebanking system faces credit risks given the degree of togrogdepreciation. They also cite wider macro risks from thedeteriorating environment for resources, the countrys keyexport, and that banks and the BOM may be underestimatingthe true extent of NPLs.

However, with the decit set to fall, a weakening inationtrend, Mongolians fondness for saving and sustained economicexpansion over the medium to long term, should ensure the sectorprevails. GDP growth is forecast to spike to almost 13% this yearaccording to the IMF, before slowing in 2015. However, growth is

expected to stay well above 7.5% for the remainder of the decade,making it one of the worlds fastest-growing economies.


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Central Bank interview

THE BANK OF Mongolia (BOM) was established in 1924 and hasplayed a key role in maintaining macroeconomic and nancialstability. Although its primary objective is similar to that of othercentral banks, it promotes balanced economic growth by ensuring

nancial stability thanks to regulatory changes under the newBasel framework, prudential policies and risk-based supervision.

The monetary policy committee of the central bank consistsof 14 members, comprising seven bank ofcials and sevenindependent representatives from academia, the public sectorand private institutions. In the past 18 months, the committeehas faced challenges caused by global and regional economicslowdown, weaker growth, falling commodity prices, continuousdeterioration of the terms of trade, a decline in capital inows andpressure on the balance of payments.

Responding to challenges

The bank has responded well to the challenges it has faced withconventional and unconventional monetary policy measures tocontrol ination, protect the real incomes of low- and middle-income households, safeguard the nancial sector, support thebanking sector through countercyclical policies that aim toprevent a potential credit crunch, stabilize monetary and creditgrowth, and increase middle-class savings through a sustainablemortgage nancing programme.

As a result, the share of supply-driven and cost-pushinationary pressure in consumer price ination has signicantlydeclined, the increase in net domestic assets has offset the declinein net foreign assets, and the economy expanded by 11.7% in realterms in 2013, producing double-digit real growth for the thirdconsecutive year. Indeed, over 70% of the real GDP growth in2013 was contributed by unconventional monetary injections inthe real sector by the BOM within the framework of its economicstabilization measures.

Due to balance of payments pressure, the nominal effectiveexchange rate of the Mongolian currency, the tugrug, depreciatedby 15.5% and in real terms by 7.2% last year. Although thedepreciation was typical of exchange rate trends in emergingmarkets and commodity-driven economies, the daily averagevolatility of the tugrug was just 0.23%, much less than othercurrencies. The Bank of Mongolia has been fully committedto its exible exchange rate policy and the positive impact of

that exibility was absorption of external shocks and necessaryadjustments and normalization on foreign trade as well as the

current account. Since the beginning of 2014, exports have beengrowing slightly while imports have been declining. We expectfurther decreases in current account decits and, once exports aresignicantly increased, the trade balance is expected to have a

sustainable surplus.One of the central banks roles is to ensure the stability of the

nancial system. The overall banking sector has been sound andstable. The systemic average capital adequacy ratio is almost17% at present, which is ve percentage points higher than theminimum requirement of the BOM. The liquidity ratio is around40% against a minimum requirement of 25% and the non-performing loan ratio has been stable at a moderate level of 5%.

Mongolia is shifting from a mineral-dependent, consumption-based economy to more of a savings-based economy throughmacroeconomic policy reforms, which intend to move the econ-omy away from its reliance on commodities. The mining sector

is an intermediate industry, but not the ultimate destiny of theMongolian economy. Mongolia aims to maintain more sustain-able economic growth and diversify its economy by developingmore competitive, technologically advanced and sustainablenon-mineral sectors, including agriculture.

To encourage a savings-based economy, the central bankhas launched a new and sustainable mortgage nancingprogramme to promote middle-class savings. Over the past20 years, the mortgage-to-GDP ratio never exceeded 6%, butin the past year it has grown to 14%, and we aim for it toreach at least 30% to 40%. By encouraging people to savemore, we believe that they will consume in a more disciplinedmanner, rather than spending money on imported goods andunnecessary consumption.

The measures have also encouraged banks to move away fromshort-term borrowing and towards long-term nancing and weexpect further development of a local currency securities marketthanks to securitization of mortgage loan portfolios by theissuance of mortgage-backed securities (MBS) by the MongolianMortgage Corporation. The MBS will be traded in both theprimary and secondary markets, and will be more attractive toforeign investors than local currency-denominated governmentbills and bonds.

Thanks to high and sustainable economic growth, mediumand long term policy commitment, greater opportunities for

business and investments, we expect more economic prosperityin Mongolia.

As Mongolia moves away from dependence on mineral resources, BoldSandagdorj, chief economist and advisor to the Bank of Mongolia, explainsthe central banks role in creating more sustainable economic growth

A stable base for

future growth


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MBA interview

THIS YEAR MARKS the 90th anniversary of the modernMongolian banking system, but it is worth remembering thatthe 20th century saw not the rst banking system in Mongolia,but instead the revival of a much older industry.

Centuries ago, Mongolia operated one of the worlds rstbanking systems, under the auspices of the Mongolian empire.As early as the 13th century, Mongolia established trade linksbetween Asia and Europe and a system of nance to support tradebetween continents. Archaeologists have found traces in coinageand later, as the Chinese provinces were united under the Mongolbanner, in ancient printing machines for paper money, recorded intablets of wood and bronze. The currency was issued by KhubulaiKhan, the grandson of Genghis Khan, and versions of the originalprinting machines are still kept in archives in China and Japan.

As the Mongolian empire expanded so did its monetarysystem, and examples of 800-year-old silver Mongolian coins

have been found as far away as Crimea and Ukraine. At itsheight the empire traded with the majority of countries ineastern Europe and Asia. However, after the collapse of theempire, Mongolian trade reverted to the barter system, with tea,sheep and commodities being the main currencies of exchange.In recent centuries foreign coinage began to be used and wehave found examples of Chinese currencies, US dollars, Britishpounds and even the Mexican peso an enduring mystery asnobody is sure how those coins came to be in Mongolia.

20th century bankingThe system of barter dominated until around 1921, whenMongolia decided to partner with the Soviet Union. Three yearslater, with Russian assistance, a commercial bank was establishedin Ulaanbaatar, or Urgoo, as it was known at the time. The bankwas more or less a 20th century nancial institution, thoughadapted for a planned economy. In the following years thebank played the role of commercial and central bank, settingmonetary policy and providing commercial banking services,taking deposits from individuals around the country andchannelling funds to state companies.

There were no private companies in Mongolia until 1990,but after the fall of the Berlin Wall there was a huge changeand the nation started to transit to a market-orientatedeconomy. The rst purely commercial Mongolia bank, the

Industrial Bank of Mongolia, was established in 1990, followedby the Trade and Development Bank and the Agricultural Bank,

formed out of former departments of the central bank.The larger commercial banks were state owned until 1998, when

a process of privatization was initiated. In the meantime a numberof small private commercial banks were established, encouraged

by low minimum capital requirements. Nowadays some 90% ofMongolian banking system assets are held in private banks.

A professional industryIn recent years international investors have taken stakes inMongolia banks, and the industry has become increasinglyprofessionalized. Now the ve largest banks have a 90% marketshare, and all Mongolian banks subscribe to internationalaccounting standards and are audited by the top accountancyrms. Total assets are around 120% of GDP, which is a relativelystrong penetration of the banking system in the economy.

Banks are working hard to comply with the international

Basel II and Basel III capital and prudential standards, and withcredit rating agency backing have started to issue bonds andsenior and syndicated loans in the international capital markets.At the same time we have launched an exciting initiative insustainable nance, with banks trying to lead sustainable growthwhile providing nancial services and working with clients toprotect the environment and well-being of communities.

Fortunately, Mongolia banks were not exposed to the complexderivative products that were associated with the nancial crisis,and retail business remains one of the most important segments.Mongolian banks are focused on reaching out to the population,nearly 50% of which still lives in rural areas. Technology playsan increasing role, and even herders can use mobile bankingapps to make payments and transfer money.

Some of the large mining projects in Mongolia require vastresources of capital, and Mongolian banks are focused onstarting to work with international partners to attract fundingresources and distribute capital. At the same time banks workdirectly with numerous companies in the supply chain.

The Mongolian banking system has an exciting future,and is growing fast. In terms of total assets it grew 75% lastyear, so things are changing very quickly. We are also seeinga lot of young people come into banking, and the averageage of bankers is 29 or 30 years. We are a young and growingpopulation and as Mongolia embraces the challenges of the

21st century, the banking fraternity looks forward to an era ofglobal cooperation and partnership.

Bold Magvan is president of the Mongolian Bankers Association and CEO ofTenger Financial Group. Tengers largest subsidiary XacBank is a systemicbank in Mongolia with 10% of market share; the group also has leasing,insurance and investment advisory arms, and a greeneld micronancecompany in China

Building on an old tradition


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9/19

A EUROMONEY MAGAZINE sponsored statement

Khan Bank is the biggest retail bankin Mongolia, providing exceptional

nancial services to more than three-quarters of domestichouseholds, alongside a growingrange of corporate solutions.

The banks dominant positionis built on an extensive domesticbranch network across 530locations, an unrivalled 340 ATMsand a commitment to innovationevidenced by a comprehensiverange of mobile banking ser vices.Our aim is to ensure ourcustomers have access to KhanBank solutions wherever andwhenever they need them.

As the consumer technologyrevolution has taken hold, KhanBank has pioneered internetbanking in Mongolia, and was rst

to offer mobile and SMS text

services. Our multichannel strategyhas reaped rewards, and the banksSmart Phone Banking solution isranked rst in Mongolia amongbanking and nance applications.

Investing in innovationThe banks success in developinginnovative digital services is theresult of a long-term commitment

to investment across the retail andcorporate segments. We wereproud last year to open a 24-hour

Express Banking Centre in UlanBator city centre. The centre is astate-of-the-art one-stop shop,offering banking services acrossa menu of channels, alongsideadvisory and information resources.

A key driver of Khan Banksstrategy is a belief in continuousimprovement that has helpedmake us the most trusted andaccessible bank in the country.

One example of our commitmentis the scale of investment inour branch network, withmany branches last year given amakeover to ensure they keeppace with customers expectations.

Our work to respond tocustomer needs has beenrewarded with new customersand more business. Total customerdeposits increased by 34% in 2013

to MNT2.8 trillion, while loansgrew 42% to MNT2.5 trillion. Ourloan business has quadrupledover the past ve years, and weare constantly seeking to expandour product offering across loans,deposits and foreign exchange.

Corporate coverageIn the corporate space, thebank is a major provider of

payment services, domesticallyand internationally, leveraging our

technology resources to makesure our customers can operateseamlessly across the paymentsvalue chain.

The bank also runs credit anddebit card schemes, alongsidepayment card schemes forsalaries and pensions, and recentlyintroduced contactless payments,following investment in near- eldcommunication technology. As

competition in the payment sphereincreases we aim to developmobile and card-based solutions

that keep Khan Bank ahead of ourbanking and technology rivals.

We provide tailored, low-cost solutions for companies,including commodity rms andconsumer goods suppliers. Forexample, the bank offers trading

rms management of transit and

transpor tation regionally andinternationally, often workingwith partner banks to make sureexporters control risks through

the trade l ife-cycle. The serviceis backed by AAA-rated tradefacilitation programmes andinsurance coverage from exportcredit agencies and developmentbanks.

Khan Bank is a member of VisaInternational and China Union Payand accepts Visa and CUP cardsof all types through some 1,700merchants. Last year, Khan Bankintroduced the Bancassuranceservice in all of its branches,offering six insurance types

through our partners.

Social responsibilityAs the leading Mongolian bank,

we seek not only to be anexcellent commercial partnerbut also a responsible memberof the community, playinga leading role in promotingcorporate social responsibility.The bank supports numerousprojects in education, health andenvironmental protection andworks to support disadvantagedgroups in society.

Established in 2007, the KhanBank Foundation administers

funding support to programmesaimed at educational andcultural advancement, assistingdisadvantaged groups andsupporting communitydevelopment and environmentalprotection.

In one example, Khan Bankcollaborated with the NationalCancer Centre and MongolianNational Broadcaster to conduct

a national campaign againstcancer. The campaign was runin eight provinces with highercancer levels in 2013, helpingsome 15,000 people.

Looking outwardsKhan Bank is active in the capitalmarkets and in 2013 borrowed$111 million through a syndicatedloan facility, the rst of its kindfor a Mongolian bank. It alsosecured $35 million of long

term funding from the EuropeanBank for Reconstruction andDevelopment, with the aim ofimproving credit to small andmedium-sized businesses andbuilding relationships with publicand private entities.

Khan Bank and theInternational Investment Bank

(Moscow) last year agreed astrategic partnership to increasecollaboration in loans, trade

nance, inter-bank lending andforeign exchange. We havealso signed a memorandum ofunderstanding with SumitomoMitsui Banking Corporation, partof our commitment to expandingour international network.

The banks nancialperformance has been on anupward trajectory. Net pro t after

tax was MNT96.7 billion in 2013,an increase of 35% from 2012. Ithas also built on solid foundations

to increase its capital base: totalcapital rose 41% to MNT471.2billion in 2013, while total assetsincreased 72% to MNT4.8 trillion,putting us in a strong position toremain the Mongolian peoplespartner of choice in the excitingyears ahead.

KHAN BANK: PARTNER OF CHOICEInvestment in technology and an extensive branch network has helped Khan Bank consolidateits position as Mongolias biggest retail bank and build new business and product offerings

Seoul Street -25, PO Box-192, Ulaanbaatar-14250, MongoliaTelephone: +976 11 332333Email: [email protected]: www khanbank com


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Capital markets

MONGOLIAS CAPITAL MARKETS are at an embryonic stagedespite being more than two decades in the making, with onlya small number of stocks and corporate and government bonds

changing hands with any frequency.The country burst on to the global capital markets stage in

November 2012 with a whopping $1.5 billion sovereign bondissue the equivalent of one-fth of GDP but the momentumfrom that initial leap forward has since zzled.

Companies listed on the local stock exchange have been deniedor are unable to avail themselves of the opportunities to accesscapital offered by issuing depository receipts or dual listing.

Analysts say that, together with a lack of domestic investors,this has produced a vicious cycle in which the lack of tradingactivity creates low liquidity making investors even less willingto trade ensuring institutional

investors stay away.The capital-hungry resources

sector is almost entirely fundedfrom overseas through listingson exchanges elsewhere, inNorth America, Australiaand Hong Kong, syndicatedloans from global banks anddevelopment bank loans, andbond sales.

Size limitsCorporate banking is well developed, with the larger banksproviding most services from lending, trade nancing andleasing to cash management, treasury and guarantees. Giventhat the largest bank has assets of only about $2.85 billion,corporate loans are small by international standards, restrictedto around $50 million maximum. The small size of the bankingsector effectively precludes banks direct participation in theresources sector: a single project like Oyu Tolgoi could swallowmore than half of the assets of Mongolias entire bankingsystem. According to Fitch Ratings, given the current weaknessof the mining sector, that is probably a good thing.

Clemente Cappello, founder and CEO of Sturgeon Capital,says Mongolian banks can gain exposure by targeting lending

to suppliers, or suppliers of suppliers, of the large companiesdeveloping multi-billion-dollar projects. Unfortunately, the

high cost to domestic banks of raising capital, at least 10%, isultimately going to be paid by the customer. If youre a largecorporate you can probably access foreign funding, which will

be very much cheaper, so there is no way of competing againstinternational banks on the ultra-large loans. What they can dois have high margins on the smaller loans in spaces where theyhave a lot of clients. Thats where they can make money.

Until recently, corporate banking has been the main focus.Investment banking exists, but with domestic IPOs, debtofferings and private placements few and far between, demandis insufcient to spur growth. The basics without whichinstitutional investors cannot invest, such as custodian servicesand delivery-versus-payment, are not yet available. Trades arepre-funded with settlement and depository functions handled by

the state-owned Clearing House

& Central Depository.Investment banking as a

sector is really quite small, saysTDB president Randolph Koppa.We have a capital marketscompany, TDB Capital, whichhas a brokerage licence, it has anunderwriting licence and it cando advisory service.

We were joint lead managerof the governments sovereignbond issue and have advised on

syndicated loan arrangements in the capital markets. Wevealso had a couple of mandates and probably have a couple ofpotential mandates to underwrite IPOs when the exchangeis properly functioning and conditions are more favourable.But capital markets activity has been pretty modest in thelast couple of years. Were really geared to be the leader incorporate lending activity.

Indirect routeInstitutional investors current exposure to Mongolia ismostly restricted to indirect portfolio plays on resourcescompanies listed overseas or private equity investments inunlisted Mongolian companies in hopes of an IPO, acquisition,

merger or recapitalization. The government has redressed thelack of an enabling regulatory and legal framework, blamed

If youre a large corporate you can probablyaccess foreign funding, which will be very muchcheaper, so there is no way of competing against

international banks on the ultra-large loans

Clemente Cappello, Sturgeon Capital

Hampered by a lack of liquidity and trading activity, capital marketshave been slow to evolve, despite government efforts to create asympathetic regulatory environment

Capital markets struggle

to make headway


11/19


for restricting the capital-raising opportunities available toMongolian companies but to little avail.

Analysts warn Mongolia will struggle to make headway whiledoubts persist over whether the government will stay the coursewith its pro-foreign investment agenda and liquidity levels aresuch as to make it almost impossible to exit equity positions.

Theyre trying to create an infrastructure thats moreconducive to trading and especially institutional interest butunfortunately theres just too many other outstanding issuesright now where I dont really see a strong pick-up in capitalmarkets in the near term, says Calvin Wong, analyst at QuamAsset Management in Hong Kong. Certainly theyre moving inthe right direction. In terms of policies and regulations theyretrying to create a more liberal market and to create liquiditybut it really is being held back by how slow the governmentmoves. Therere a lot of issues still outstanding especially withthe mining sector and licensing. Obviously, Oyu Tolgoi isstill outstanding and there are various macro factors causing

currency weakness, increased risk of overleveraging theeconomy and ination.

The best chance of a strong rebound is international equitiesof Mongolian companies. The liquidity is better and thereare more institutional investors within those companies, andperhaps on the sidelines looking at these companies, so theywould be more sensitive to certain triggers such as the resolutionof the Oyu Tolgoi dispute.

Liquidity lackingThe Mongolian Stock Exchange (MSE) was formed in 1991 asa means for the government to privatize hundreds of state-

owned enterprises it inherited from the socialist era by issuingshares to all citizens. Secondary trading began only in 1995but volume and turnover were low and no new companieswere listed because of the lack of legal, underwriting andregulatory frameworks. Despite moving to electronic tradingand market capitalization spiking to an all-time high in 2011of MNT2.20 trillion ($2 billion at that time), low liquidity hasbeen a persistent problem plaguing MSEs efforts to become aworld-class exchange.

Trading began to take off in 2005 led by volume whichpeaked in 2008. Equity volume and trading value more thandoubled between 2010 and 2012 but even at its historical peakin 2012, trading value was just MNT144.7 billion ($83 millionat the time). Last year, the value of equities traded tumbled toMNT97.6 billion, according to data from MSE. Volume slumpedfrom 133.8 million shares in 2012 to 65.8 million for 2013, asituation not helped by the fact that only around a third of thestocks of the 249 companies listed actually trade. In March thisyear, trading virtually dried up before rebounding in April when11.7 million shares of 79 companies were traded with a value ofMNT3.15 billion. The three most actively traded companies property developer Mongolia Development Resources, ready-mixconcrete producer Remicon and logistics rm Bayankhairkhan accounted for 13% of volume.

While there was an IPO as recently as April, when local

construction company Merex raised $1.5 million, there has beenonly one other listing since 2008.

The bond market is even slimmer, with zero turnover inboth government and corporate bonds in the rst four monthsof this year. In 2013 there was just one government bondtransaction on the exchange, worth MNT1 billion. In 2012,the most recent year for which corporate bond trading data

is available, 1.8 million bonds worth MNT19.61 billion weretraded though the exchange.

Building an infrastructureThe government has placed strong emphasis on creating aninfrastructure to foster sustainable development of the countryscapital markets with institutional investors clearly in its sights.

Wide-ranging new legislation the Securities Markets Lawand the Investment Fund Law came into force in January.The changes allow MSE to adopt a new clearing, settlementand custody environment based around the T+3 globalstandard, paving the way for institutional investors and

overseas funds to invest.Dual listing both of domestic listed rms overseas and of

overseas rms on the MSE is now permitted and the rangeof tradable securities that may be issued has been expanded toinclude options, futures and depository receipts. The minimumproportion of outstanding shares rms are permitted to oat hasbeen raised to 25% and nancial statements must now be ledin both English and Mongolian.

However, the dual listings and arrival of global custodianbanks and institutional investors have yet to materialize.

Quam Asset Managements Wong says that the changes areall-important because a functioning and free capital marketfurther down the line will not be possible without them. But hewarns this type of market is a considerable period of time away.Institutions arent going to suddenly say oh now we can tradeoptions and futures, lets increase our Mongolian allocation.There are too many things that need to be xed before its alegitimate investment opportunity for institutional investors,especially larger funds.

Annual turnover on the MSE is the size of one trade for abig fund. Even if you can get into positions over time, gettingout is a big issue. Its really not an investable market for alot of people. I wouldnt buy options on Mongolian equitiesbecause theres no real tangible and predictable return I canearn. With the regulations on nancial reporting and the

current trade participants within the market its too hard toplay as a pure equity investor.

Certainly theyre moving in the right direction.In terms of policies and regulations theyre

trying to create a more liberal market and tocreate liquidity but it really is being held back by

how slow the government moves

Calvin Wong, Quam Asset Management


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Foreign direct investment

RESOURCES-RICH MONGOLIA has been attracting long-termforeign investment on an ever-increasing scale since the 1990

transition. But net inows exploded following the nancialcrisis, reaching $4.45 billion in 2012 up from just $372.8 millionin 2007, World Bank gures show.

FDI dipped to $2.3 billion in 2013, largely due to the fallingprice of commodities and completion of phase one of Rio Tintos$6 billion Oyu Tolgoi gold and copper mining project in theGobi desert. The joint venture with the Mongolian governmentwas investing around $180 million a month throughout 2011and 2012 on everything from a copper concentrator plant andpower and water supplies to roads and an airport complete withterminal, as it raced to bring production on line. Work on thedeep-mine phase two has been halted by disagreement over

nancing arrangements which the government says can only beapproved by parliament.

State Bank says sweeping legislation restricting foreigninvestment in sectors of strategic national importance deterredoverseas investors and delayed projects. Our economicanalysis reveals that FDI has declined dramatically. By the rstquarter of this year, FDI inows were down by almost 60%year on year, says State Banks director of investment banking,Gombosuren Khandtsooj.

This was due not only to the completion of Oyu Tolgoi but tostagnation in the mining sector, especially the coal industry. Thepassage of the Strategic Entities Foreign Investment Law (Sel) inMay 2012 also pushed FDI out. Parliament responded by updatingthe legislation and approving the new Investment Law.

Government gures show coal exports slumped by more than40% to $1.12 billion last year as a slowdown in growth in China,the destination for almost 90% of coal shipments, and disputeswith foreign mining investors, took their toll.

Negotiations with international mining rms over rights todevelop the West Tsankhi section of the 6 billion ton TavanTolgoi coal deposit have been stalled for two years. A $3 billionHong Kong-Ulaanbaatar-London listing planned for late 2012 ofErdenes Tavan Tolgoi, which is managing development of EastTsankhi, has yet to materialize.

Untapped richesEven so 2013 FDI, at more than 22% of GDP the equivalent

of around $800 per head of population remains one ofhighest proportions of any country. The country sits atop some

of the largest untapped deposits of coal, copper, gold and otherminerals in the world, worth as much as $2 trillion, that havebarely begun to be exploited. Oyu Tolgoi alone is forecast toboost annual gold and copper production from 8 tons and644,000 tons respectively in 2013 to around 1.2 million tonsand 32 tons when its $6.3 billion underground phase twocomes fully on stream.

Mongolia is also an oil exporter and has commerciallyexploitable deposits of a further 80 of the 111 elements on theperiodic table, from molybdenum and platinum to tungsten anduorspar as well as 25 of the 40 heavy elements.

But, unlike in many of its counterparts, Mongolias natural

bounty is not a source of conict and division. Mongoliasrobust free-market democracy means its policy of developingits mineral wealth by the most transparent but commerciallyefcient means, while hotly debated, is in the end consensual.Tapping the resources and expertise of global mining companieshas proved benecial not only to foreign investors, but also inhelping fast-track economic and social development.

Mongolia ranks 42nd out of 132 countries for opportunity inSocial Progress Imperatives 2014 Social Progress Index, far aheadof China and most other developing countries in the region.Mongolia scored even more highly for private property rights,freedom of movement, assembly/association and political rights,which are enshrined in law. SPI says Mongolias democracyis exemplary, pointing to six free and fair parliamentary andpresidential elections since the 1990 transition from one-partystate socialism. Mongolia also bested China on meeting basichuman needs and the fundamentals of well-being.

Opportunities aheadMongolias development is still in its early stages androbust economic growth for the foreseeable future meansopportunities for overseas investors in almost every area fromtransport infrastructure and housing to water security andair pollution. Surveys and technical assessments are alreadyunder way ahead of the start in 2016 of construction work on

a $1.5 billion mass transit railway system serving the capital,Ulaanbaatar. The 16.6km line, of which the central 6.6km will

Mongolias rich mineral resources have attracted considerable foreigncapital but the government also now hopes to attract investment inits efforts to diversify the economy. The long-running dispute over theOyu Tolgoi mining project may be dampening interest, however

Foreign investors ponder

developing potential


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run underground, is scheduled to be completed in 2020. Fivetransit corridors are also being developed to link landlockedMongolia to its export markets including a new railwaynetwork and a new highway connecting the northern borderto the south. There are also plans for both a gas pipeline andan oil pipeline and a longer-term aspiration to form a bridgeconnecting Europe with APEC nations.

The World Bank and IMF designated Mongolia a middle-income country in 2011 and living standards have risendramatically in recent years thanks to per capita GDP growththat is far outpacing that of regional rivals Indonesia andVietnam. Real income per capita more than tripled between2005 and 2012 and is forecast to reach $7,500 in just fouryears time.

Increasing wealth has brought with it more disposable incomefor more people and shopping malls have sprung up acrossthe capital to meet demand for everything from fashion andcosmetics to watches and consumer electronics. Brand awareness

is strong. AT Kearneys 2013 Global Retail Development Indexranks Mongolia seventh, up from ninth in 2012, just belowthe UAE and Turkey. The rm groups Mongolia among what itcalls little gems markets that general retailers should stronglyconsider as the starting point for regional strategies. For luxuryretailers, small population, unique countries like Mongolia arenewfound hubs.

According to Asia Pacic Investment Partners (APIP) morethan 40 global luxury brands have established presences inUlaanbaatar in the past three-and-a-half years, from LouisVuitton and Burberry to Tag Heuer and Bang & Olufsen.

APIP says that with consumer and retail spending set to boom

over the coming decade dozens of new brands are planning toenter the market, including more mid-range brands, which tendto do well in Mongolia. High Street brands often perform poorlyin Asia relative to luxury brands.

Diversication efforts

The recent volatility in investment ows has, however,prompted the government to launch efforts to further diversifythe economy to reduce reliance on resources which accountfor almost a quarter of GDP. Agriculture makes up about16%, retail 15%, and transport, real estate and education 8%,6% and 4% respectively. Financial services comprise around5-6% of GDP. The public sector accounts for the remainder.The competitiveness of the non-mining sector, particularlymanufacturing and tourism, is being boosted by the weakertogrog, which depreciated by 15% last year.

The positive impact of that move was that it helped absorbexternal risks and promote exports, while reducing imports,says Sandagdorj Bold, adviser to the governor of the centralbank. Last year we had a balance of payments decit but inthe rst part of 2014 exports rose by 18% and imports fell by12%. Over the past two months the currency markets haverecognized the progress we have made and the togrog hasstabilized.

The government has implemented a number of key reforms

and initiatives aimed at removing uncertainty that it is hopedwill kick-start renewed FDI ows. New legislation came into

force in November replacing the Sel law of 2012 and the 1993Foreign Investment Law. The new Investment Law frees upforeign investors from having to secure government permission

to invest in the mining, banking and telecommunicationsindustries. The waiver does not apply to foreign state-ownedcompanies, which are still required to seek approval.

The legislation also introduced tax stabilization certicatesguaranteeing uniform tax treatment for between ve and 22 yearscovering corporate tax, VAT, mining royalties and import duties.

In April, prime minister Norov Altankhuyag unveiled a 100-day action plan to promote foreign investment through majorconstruction projects, reissuing mining exploration licences, taxincentives for foreign banks and cutting red tape. Projects includea road linking Mongolia to Russia and China, power plants andtwo economic free zones. An additional $1 billion worth of

concessions in sectors from mining to tourism will be offered.The country is also pinning hopes on its stock exchange and

asset management, passing a new securities markets law thatcame into force in January and an investment fund law in thesecond half of 2013.

The government has also launched a From Big Governmentto Smart Government drive, paving the way for sweepingreforms including separating business from the state, makingofcials more accountable and simplied procedures for issuinglicences and approvals.

John Grogan, chairman of the Mongolian-British Chamber ofCommerce, is not convinced the governments efforts will achievemuch until the deadlock over Oyu Tolgoi is resolved. The failureto progress in settling the issues over Oyu Tolgoi affects othersthinking of investing in Mongolia. Its denitely having a chillingeffect. Theres a lot less interest than there was a year or 18months ago. Im not sure that well see any appreciable pick-up inFDI while this dispute remains unresolved.

Mining and the distribution of mining prots is a verysensitive issue where Mongolia quite rightly wants to strike theright balance and follow Norways example of mineral wealthdevelopment, rather than Nigerias.

Its determined to get a good deal but now is the timeto strike that deal. One option I know is being discussed isconvening a grand coalition in the Khural to approve the deal so

that all parties are signed up to it. That was the way the originalOyu Tolgoi agreement was signed.

Oyu Tolgoi mine


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Sponsored chapter

Mongolia has been one of thefastest-growing economiesin the world in the past fewyears and the mining sectorhas been the driving forcebehind this rapid growth.As one of the top threebanks in Mongolia, how doesGolomt bank evaluate this

scenario, with the countrysdevelopment dependentupon a single sector?Mongolia has been one of

the most exciting investmentopportunities in Asia in the pastfew years. According to theIMF, the Mongolian economygrew by 11.7% in 2013 and isexpected to grow 9.6% in 2014.Recent exploration of mineral

resources, which are valued atan estimated $3 trillion, has givenour country a great advantage,and the opportunity to growand develop faster than mostdeveloping economies around theworld. That said, the Mongolianeconomy is currently challengedby declining global commodity

prices, due to the slowdown inChina, the main export destinationfor Mongolian minerals. Mongoliais a young market economy and

the development of our miningindustry has been challenging, bothin terms of capital and humanresources. However, in the pastyear the government has takenspeci c steps to help the countrymove forward, introducing new

investor-friendly laws to encourageforeign investment and to spurinfrastructure development in thecountry. More importantly, thegovernment is encouraging thedevelopment of other importantsectors of the economy that willde ne Mongolias future.

What are the sectors towhich the government mustpay attention besides mining?How can the economysustain its growth whenthe mining sector doesnt

perform well?The government needs to supportits high-priority sectors, suchas agriculture, manufacturing,hospitality, tourism and education.Mongolias vast land resources(approximately 1,565,000 squarekilometres) give us great potentialnot only to be self-suf cient infood commodities but also thepossibility of exporting agriculturalproducts to our neighbours.Production of leather and

cashmere and wool industries,which are at the beginning of

their development, are suppor tedby government programmes toenhance their capacity and allowaccess to export markets. However,

to achieve these ambitious goals,we need to introduce the latest

technology and exper tise, anddevelop these sectors in the mostef cient ways.

GOLOMT BANK IS SET TO WORK CLOSEWITH ALL STAKEHOLDERS TO GENERATPOSITIVE OPPORTUNITIES IN THE MININSECTOR AND BEYONDOyun-Erdene Lamjav, VP and director of Golomt banks Corporate Banking Division,spoke to Euromoney about her banks efforts to help develop and diversify the economy

Golomt bank headquarters, Ulaanbaatar

Head Of ce of Golomt bank, Great Chinggis Khaans Square 5, P.O.Box 22, Ulaanbaatar 15160, Mongolia Web: www.golomtbank.comEmail: [email protected]: +976 7011 1646

The governmentdecided to supportagricultural sectors...from Chinggis bondproceeds. This projecthas great economicsignicance in creatingjobs, enhancing thecapacity of domesticmanufacturers andpotentially increasing

export revenues.Golomt bank has beenchosen to be the soleprovider of this loan.


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Sponsored chapter

What role does Golomt bankplay in the development ofthese sectors?As our countrys developmentaccelerates, Golomt bank willcontinue to play a major role. We

provide close to 25% of total bankloans in the Mongolian market andour policy is to diversify our loanportfolio across the economys majorsectors. Our role is primarily as acapital provider, but we also adviseour clients, which include someof the largest mining, engineeringand agricultural companies andmanufacturers in Mongolia.

One of our main goalsis to assist in developing asustainable, green economy andwe have participated in cleanenergy projects. We have beeninstrumental in introducing ISOstandards in food production in

the rst our mill and at meatprocessing factories.

To facilitate access to long- term nancing, we work withinternational institutions such as

the Asian Development Bank, JapanInternational Cooperation Agencyand KfW and with export credit

agencies and regional developmentbanks including the Eximbanks ofTaiwan, South Korea, Germany,Hungary, China, Czech Republicand Italy. We have trade nance

facilities with more than 20 banks to suppor t export of equipmentand technology from othercountries into Mongolia.

The Mongolian governmentissued $1.5 billion of Chinggisbonds to the internationalmarkets in 2012, andrecently decided to fnanceagricultural sectors fromChinggis bond proceeds.Your bank is chosen as thesole commercial bank toissue these loans. Couldyou discuss your progressand the importance of thisproject in developing thecountrys manufacturingsector?In 2013, the government decided

to suppor t agricultural sectorsincluding cashmere, wool, wintergreenhouses, dairy farming and

textiles from Chinggis bondproceeds. This project has greateconomic signi cance in creating

jobs, enhancing the capacity ofdomestic manufacturers andpotentially increasing exportrevenues.

Golomt bank has been chosen to be the sole provider of this loan.The bank has conducted signi cantresearch in these sectors so thatwe are not only acting as lender

but also helping the developers toensure success in their projects.

One example is our work in thecashmere industry, one of the mostvaluable sector s of our economy,which has received $68 millionof nancing from Chinggis bondproceeds. The funding has led toa 60% rise in the manufacturingcapacity of the cashmere industrywhile creating over 700 new jobs.

Another potential area for growthis processing of wool, which is almostentirely exported as a raw material.There is potential to produce wallinsulation eco-material from woolusing Japanese technology and ourbank has nanced these companieswith Chinggis bond proceeds.Another project under considerationfor development is production ofwool yarn.

Through Chinngis bondproceeds we also nanced

numerous other projects with highgrowth potential, including dairyfarms, bringing in milking cows andequipment from France, Germanyand the Netherlands to increasemilk production and to guarantee

the supply of fresh milk to thecitizens of Ulaanbaatar throughout

the year. We have supportedwinter greenhouse projects toprovide fresh vegetables and we

have nanced seven hectares ofland to implement greenhouse

technologies from the Netherlandsand China.

In the next fve to 10 years,how do you see Mongoliassustained economic growth?The Mongolian government willfocus on developing and diversifying

the local economy through

various investments in the comingyears, and is encouraging foreigninvestors to invest in the country.Mongolia already ranks highly inprotecting investors (#22) andenforcing contracts (#30), according

to the World Bank/IFC DoingBusiness report 2014, which ranks188 countries across the globe.Meanwhile, mining developments, aswell as railway development, logisticchannels and power station projectswill continue to come on stream.

Our economic and politicalrelationships with neighbours andother countries are highly engaged.

With over 60% of the populationbelow 35 years old, Mongoliaalso has great potential to buildprofessional, well-educated humancapital. Golomt bank is set to workclosely with all stakeholders togenerate positive opportunities, in

the mining sector and beyond.

Winter greenhouse opening ceremony

Cashmere factory


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Financial inclusion

MONGOLIA SCORES IMPRESSIVELY when it comes to ensuringaccess to nancial services considering it is the least denselypopulated country in the world, with a population of 2.9 millionspread out over 1.5 million square kilometres.

Around a quarter of the population are nomadic herdersof goats or yaks on the steppes, far beyond the reach of the

countrys almost non-existent transport infrastructure. Provisionof services of any kind let alone banking is a challenge.

Yet almost 80% of Mongolians have a formal bank account,according to the World Banks 2012 Global Financial InclusionDatabase (Findex), with the level of penetration far exceedingthat of most of the countrys neighbours including China,Russia and Kazakhstan.

Mongolia outperforms other low-to-middle income countrieson every nancial inclusion variable apart from health insurance,its East Asian neighbours on most measures, and even rivals somehigh-income developed countries in areas such as penetrationof debit cards. One in four has a loan; the number of women

with bank accounts exceeds men by 10% with the proportionapproaching that of North America and the Euro area. It scoresparticularly highly in inclusion of groups whose access tonancial services is most commonly limited, including thosewith only a primary education, low incomes and rural residents.

Reaching the peopleMongolian banks are focused on reaching out to thepopulation, nearly 50% of which still lives in rural areas, saysMagvan Bold, chief executive of Tenger Financial Group whoselargest subsidiary is XacBank. Technology plays an increasingrole, and even herders can use mobile phone banking apps tomake payments and transfer money.

Banking services have traditionally been the preserve of themiddle class and the wealthy but these are a small minority in acountry with huge income disparity where around one-fth ofthe population, according to ACDI/VOCA, exists on $1.25 day.

The high level of banking penetration may be due in largepart to universal cash handouts from the governments HumanDevelopment Fund as well as pensions, health insurance, andstudent tuition payments. Around 50% of all bank account holdersover the age of 15 cite receiving government payments as the mostcommon use for a bank account, according to Findex; only around30% of customers say the main use is for payroll credits.

Many of the people out in the countryside where Khan Bank

and State Bank have a lot of branches are getting paymentsregularly and have to receive them through a bank so Im not

so sure its a problem of people lacking bank accounts, saysTDB president Randolph Koppa. There isnt a lot of consumernance that banks do thats unsecured. We can count thenumber of mortgage holders in the banking sector at about55,000 so, thats maybe only covering 200,000 people. Theresstill some room to grow in terms of getting home nancing and

other retail nancing services to more people.The big three retail banks, XacBank, Khan Bank and State

Bank, have proactively targeted marginalized consumers inremote rural areas, including nomadic herders with the aim ofproviding accessible banking services.

XacBank, part-owned by the International FinanceCorporation, the European Bank for Reconstruction andDevelopment, ethical investors and NGOs, has equitable accessto banking products and services for all, including SMEs, asone of its primary goals. Created in 2001 from the merging ofinternational development organizations rural micronanceoperations, XacBank extended into all 21 provinces within its

rst year of operation. Building on its micronance roots, it hassince expanded with more branches and extensions throughthe use of tie-ups with savings and credit unions, franchisearrangements and agents.

XacBanks micro loans account for around 17% of its $600million loan portfolio with delinquency rates among the verylowest. With almost one in four customers a (secured) micro-loan client, XacBanks success is in many ways an object lessonin responsible lending. It uses an end-to-end approach builtaround an outreach strategy of setting up small outlets in remoterural centres, gradually establishing a network of relationshipsto disseminate no-obligation information about micro nance.The bank is equally meticulous in providing ongoing post-loandisbursement advice and support.

Khan Bank, with three out of every four of its 524 branchesserving the provinces, claims to provide banking services to anestimated 70% of the population. Card services are provided to 1million customers via a network of 310 ATMs.

On the phoneSelf-service facilities are on the rise with 50% of bankaccount holders already using ATMs as their main mode ofwithdrawals. However, Mongolias saturation-level mobilephone density is an increasingly important factor in thepenetration of banking services.

According to the Communications Regulatory Commissionthere are 103.8 mobile phones per 100 inhabitants with almost

Despite its small and widely dispersed population, Mongolia rateshighly in the nancial inclusion stakes

Bringing banking to

the steppes


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3 million mobile phone line subscribers. That compares to theworldwide gure of 85 mobile phones per 100 inhabitants. Themobile network is accessible to 95% of the population coveringall provinces and 335 districts, although some subscribers in themost remote areas have to travel several kilometres to get a signal.

The big three have taken advantage of the networksexhaustive coverage to make banking by mobile phone availableto customers previously beyond the reach of any type ofbanking services. A number of other banks have followed theirlead or partnered with mobile operators e-money schemes.Broadband internet service is also available in 34 district centres,although the better off enjoy the same connectivity available inany developed nation via solar-powered satellite dishes.

Khan Bank pioneered mobile phone banking in Mongoliain 2007 as part of its e-banking strategy and led the way ininstalling ATMs in rural provinces. All customers have accessto branchless banking not only via mobile phone, SMS andcomputer, but through internet connected televisions.

XacBank says AMAR, its mobile phone banking service, startedin 2009 with help from the World Bank and the ConsultativeGroup to Assist the Poor, has 140,000 registered users. XacBankclaims its rollout of branchless banking together with its 97branches, alliances with 70 savings and credit unions, and 400agents, means its banking services are used by 500,000 customers.

Mongolians are East Asias biggest users of mobile phones topay bills and send and receive money particularly among ruraldwellers and herders who may be grazing their animals on thesteppes a 100 or more kilometres from the nearest branch or ATM.

Most banks have an app so that a herder can transfer moneyto his children or to Ulaanbaatar City without visiting and can

stay out on the pasture, says Tenger Financial Groups Bold.Mobile phone companies are also getting into the business butmost are working with the banks and do not yet pose a threat.

More accessible nance

State Bank claims to serve 2.8 million Mongolians throughits 531 branches, 444 of them in rural areas, combined withTV banking, which it pioneered, and mobile and internetbanking. Becoming a no-branch bank is one of State Bankstop priorities, along with consumer protection. The bank saysit is also committed to making nance more accessible throughcompetitive rates and halving the number of supportingdocuments required for loan approvals. Nomads often possessfar fewer ofcial documents than the settled population.

Electric power to charge phones, and run TVs and otherelectrical appliances, is available to around 100,000 herderhouseholds from solar panel arrays through the governmentsSolar Ger Electrication Programme. To achieve its100,000-family target, the programme borrowed heavily fromXacBanks marketing model of combining a hub-and-spokeoperation with using established local businesses as agents.

Mongolia scores much lower on the Global Findex when itcomes to home loans, with just over 3% of people holding amortgage despite a relatively mature home lending market. TheBank of Mongolia says it has taken measures to make home

loans more accessible that are already yielding results.As part of our aim to encourage a savings-based economy,

the central bank has launched a mortgage nancing programme

to promote household savings, says Sandagdorj Bold, adviserto the governor of the central bank. Over the past 20 years themortgage-to-GDP ratio never exceeded 6% but in the past year ithas grown to 14% and we aim for it to reach 30-40%.

Mongolia is a member of the global Alliance for FinancialInclusion (AFI Global) and in 2012 signed the Maya Declaration,which aims to unlock the economic and social potential of theworlds 2.5 billion unbanked.

Signatories make a measurable commitment to adopt andimplement a nancial inclusion policy that fosters the harnessingof affordable technology to increase access to and lower the costsof nancial services. The declaration also calls for a regulatoryframework that encourages the development of new nancialservices and draws on other countries best practice; a highpriority on consumer protection and putting customers rst;and the use of data to make informed policy and track results.Authorities self-monitor and submit regular progress reports.

In its update for 2012-13 the Financial RegulatoryCommission, which is responsible for nancial inclusion,reported it had achieved a number of concrete targets.These included strengthening the regulatory framework andsupervision of e-money services, and implementing a policy thatsupports e-money services. The commission noted that e-moneyservices operations were being successfully used for handlingthe payments of non-banking nancial institutions loans

and interest, insurance fees, and fund transfers for the HumanDevelopment Fund allocated through Capital Bank.

Technology plays an increasing role, andeven herders can use mobile phone banking

apps to make payments and transfer money

Magvan Bold, president, Mongolian Bankers Associationand chief executive, Tenger Financial Group


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Expansion

IN LITTLE MORE than two decades since the rst commercialbanks sprang up in the early 1990s, the banking sector inMongolia has undergone repeated periods of rapid expansionfollowed by consolidation.

Five years ago there were 16 banks. Three failures, two ofthem in an eight-week period in 2009, one new bank and threemergers later the sector has shrunk by a fth to its smallest sizesince the turn of the century.

Even with the 13 banks that remain today, the sector remains

highly concentrated with the top ve TDB, Khan Bank,Golomt Bank, XacBank and State Bank accounting for 90% ofall assets within the system.

Analysts have long believed that the sector is overcrowdedand that half a dozen banks would be better suited to servea small market of 2.9 million people. Further possibleconsolidation could take the form of a merger of two of thesystemically important banks or one or more of the eightsmaller niche banks relinquishing their licences or being takenover by the dominant players.

Consolidation wouldmake sense and were seeing

something similar in othercountries. But our experiencehas been that consolidationonly happens when people arereally desperate, says ClementeCappello, founder and CEOof Sturgeon Capital. Its notnecessarily a rational process butrather consolidation happenswhen banks are being bailedout, or a foreign bank comes in and effectively is buying thefranchise and the licence rather than the actual nancial valueof the company.

I dont see that happening in Mongolia and I think theyshould be very careful about inviting in large foreign banks.A Chinese bank takeover and rebranding of a domestic bankwould introduce unfair competition that I dont think thecentral bank is going to allow to happen.

TDB president Randolph Koppa, argues the threat fromforeign banks is overstated, but for different reasons. Foreignbanks are seen as a chance to get cheaper money into thecountry and have lower priced loans but there isnt a big localdomestic pool of funds they can tap. Without a proper localmoney market or a big consumer base to get retail deposits anyforeign bank that gets a licence for banking operations, either

in subsidiaries or branches, would probably have to fund intoMongolia from abroad.

Thats no different to the representative ofces they currentlyhave but as cross-border lenders they dont have the considerableadded costs of running a bank in the country and all thatentails both from local requirements and from headquarters compliance ofcers, IT support and controls on money transfers.

Privatization planKoppa believes that there is further potential consolidationamong the big ve to come because the central banks ultimate

goal is to privatize State Bank; one of the other four, or a foreignbank, could be the acquirer. Beyond that Im not sure howmuch more of a gain could be made in terms of competitivenessbecause theres a point at which if you put together two bankseach with 25% or 30% market share you get a bank with 50%plus and that starts to look a bit too controlling of the market.

In a wave of consolidation starting in October 2009, SavingsBank took over Mongol Post Bank, doubling its assets tobecome one of the countrys largest banks. A month later, Bank

of Mongolia (BOM) placedinto receivership a further twotroubled banks, Anod which

it had taken over the previousDecember and the MSE-listedZoos. Anod, the fth largestlender, was dissolved and allits accounts were transferredinto Savings Bank. A whollygovernment-owned bank, StateBank, was then set up to holdthe good assets and accountsof Zoos Bank.

Last July, weighed down by bad loans to afliates and lossesfrom the Mongol Post merger, Savings Bank was itself declaredinsolvent and taken over by BOM. Its assets of around $600million, 1.7 million accounts, 500 branches and around 3,000staff were transferred to State Bank, transforming it into one ofthe largest lenders.

State Bank was merged with Savings Bank due to SavingsBanks failure to meet the BOMs prudential requirements andits passive operations exceeding its active operations, saysGombosuren Khandtsooj, State Banks director of investmentbanking. At that time State Bank was a small commercial, state-owned bank. After the merger it is much larger, ranking fth interms of activity, and the largest by number of branches.

Personally, I assume that a lesser number of larger banks ismore important for the future of the Mongolian banking sector.

However, it also depends on the stage of Mongolian development.The too big to fail phenomenon can happen anywhere.

Even after a series of closures and mergers, Mongolia probablystill has too many banks for its small population

Expansion and consolidation

Theres a point at which if you put togethertwo banks each with 25% or 30% market share

you get a bank with 50% plus and that startsto look a bit too controlling of the market

Randolph Koppa, TDB


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mongolia special focus

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