The Development Bank of Mongolia:

Today - Tomorrow

KHASHCHULUUN Chuluundorj

Chairman, National Development and Innovation

Committee of Mongolia

Ulaanbaatar, 25 January 2010

Development Bank

Development Bank is a national or regional financial institution

with intention of providing mid and long term capital for the

creative investment /economic development.

If we focus on the development banks as national development

institutions:

National Development Bank is a financial institution primarily

concerned with offering long-term capital finance to projects

generating positive externalities and hence underfinanced by

private creditors.

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Development Banks’ yesterday

At the time of industrial revolution, the banks in England,

French, Italy were performing some of the functions of modern-

day development banks for their growing industries.

Medici Bank, Rothschild and the House of Morgan etc.

After World War II, the lack of long-term funding for

investment projects encouraged many countries to make

decisions of establishing Development Banks.

Korea Development Bank, Development Bank of Japan, KFW Banking

Group of German etc.

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Development Finance in the market economy

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HIGH

HIGH

LOW

LOW

Profitability

of operation

Public nature

of operation

B. Mixed public and

private sector

A. Public sector

C. Private sector

Operating Scope of the Development

Bank of Mongolia(DBM)

To make mid and long term

loans and do other financial

activities with the intentions

to support development of the

sectors referred in Mongolia’s

development policy, produce

more value added goods and

improve the economical

competitiveness.

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Development Bank and Economic Growth

The Roles of a Development Bank, a development finance

institution, are vital for a nation’s economic growth,

particularly during the crisis.

International Conference on Financing for Development (Monterrey,

Mexico,2002), Doha Declaration on Financing for Development(2008)

The establishment of the Development Bank of Mongolia takes

a critical place for Mongolia’s development.

Exploit the strategically important mining deposits

Accelerate economic growth through implementation of large

industrialization projects

Develop processing industry

Re-structure economy

Promote competitiveness of Mongolia in a global arena

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The scope of financing options is limited to implement large

volume infrastructure and industrial projects referred in the

government action plan.

Domestic financial sector remains scarce and lending rates of commercial

banks are high.

The DBM needs to be established to expand more investment

for the implementation of government action plan, to create a

new source of the official development assistance and to develop

national financial market.

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The Government Action Plan and

the Development Bank of Mongolia

Development Bank Partnership with Commercial Banks

The DBM will not compete with commercial banks in their

funding activities, it will provide conditions for

harmonious and mutually beneficial cooperation with

commercial banks.

The DBM will provide long term funding for large, technology intensive

industrial projects that CBs can’t provide.

The DBM partnership with CBs will create new banking

activities.

Funding large projects through loan syndication

Assisting in raising funds in international markets

Providing guarantees to private sector

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The DBM and International Bond Market

The current credit rating for Mongolia that evaluates her abilityto repay her debt on time is lower to issue sovereign bond ininternational bond market.

Standard & Poor’s –BB/, Moody’s Investors Service В1

To issue its bond in international market, the one’s credit ratingmust be BBB at least.

Credit rating for the DBM can be higher than Mongolia’s.

Downgraded credit rating for the government doesn’t have to mean thather total industrial output declined.

A legal entity whose investors are well known in global arena andmanaged to build strong competitive advantages in international marketcan upgrade its credit rating while the government credit ratingdowngrades.

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Common reasons for success of Development Banks:

The DBs only make loans to bankable projects.

Interest rates of the DBs must be determined to be sufficient to cover its expenses.

The independence of loan decision process must be ensured.

The management team of DB should be independent

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Corporate Governance of Development Bank

Good corporate governance of the DBM is a key factor for not

repeating the state owned commercial banks’ failures in the

past.

Therefore, on one hand the DBM needs to secure equity

participation from international organization and on the other

hand the DBM’s Board of Directors should include

representatives from the government and domestic investors.

Finding and attracting the best experienced specialists with the

required skills set are vital to the DBM, while their

compensation should be competitive with the compensation

offered by commercial banks.

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JICA Experts’ advice on establishment of the DBM

Lend in accordance with the government development

programs

Lend only bankable projects with interest rates that cover

funding costs and other expenses.

Have a mechanism to receive subsidy or equivalent in case the

DBM has to lend not bankable projects, but priority to the

GOM projects.

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JICA Experts’ advice on establishment of the DBM

Have an able management team with determination to

lend based on objective credit analysis

Cooperate with Mongolia’s commercial banks

Carry out ample training with an emphasis on

management of development bank and credit analysis

Number of expected employees are 45.

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