Mongolia aims for a brighter banking future

July 2014 www.euromoney.com

Celebrating 90 years

of banking in Mongolia

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Contents

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

The industry proved resilient during the financial crisis and competition has stimulated expansion and 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 bank’s role in 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 to evolve, 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.

Tenger’s largest subsidiary XacBank is a systemic bank in Mongolia with 10% of market share; the group also has leasing, insurance and investment advisory arms, and a greenfield microfinance company in China 5

Foreign investors ponder developing potentialMongolia’s 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 Oyu Tolgoi mining project may be dampening interest, however 10

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

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

probably still has too many banks for its small population 16

SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com2

Banking system

MONGOLIA’S BANKING SYSTEM has changed out of all

recognition from its humble beginnings in the 1920s, helping to

transform the country along the way into the pocket economic

powerhouse it is today.

When the country’s first bank, the Trade and Industry Bank of

Mongolia, opened with a single branch in June 1924 it was with

the help of its Soviet neighbour and staffed mostly by Russians.

Mongolia also had no national currency, presenting the bank

with the headache of trying to fulfil financial and monetary

policy with the foreign currencies then in circulation.

The togrog (MNT1,823 = $1) was introduced the following

year and by 1954 Mongolia had gained sole ownership and

control of the bank, which was renamed State Bank of Mongolia

(now the Bank of Mongolia – the central bank).

Transition to market economyBut the most significant milestone in the sector’s 90-year history

came in 1990 with the start of the transition from Soviet-style

communist rule, with its centrally-planned economy, to a multi-

party democracy with a market economy.

The country’s first commercial bank, Trade and Development

Bank (TDB), was founded in October of that year, followed

by Khan Bank three months later. The 1991 Banking Law

established the central bank and a statutory minimum paid-in

capital requirement for banks. All banks, however, remained

under state ownership. That year also saw the establishment of

the Mongolian Stock Exchange in Ulaanbaatar.

However, early promise soon evaporated in the face of an

economic crisis resulting from the collapse of the Soviet Union,

on which Mongolia had relied for nearly all its trade as well as

medicine, fuel, and machinery.

When reform efforts and private enterprise eventually fed

through in the mid-1990s, economic growth resumed but

banks over-extended credit. This left them poorly positioned to

weather the Asian financial 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 banking

system, with 16 commercial banks regulated by the Bank of

Mongolia. In 2006 the Financial Regulatory Commission was

established to supervise the rest of the financial sector including

insurers, securities houses, credit and savings unions, and non-

banking financial institutions.

In 2007, TDB became the first bank to tap the international

debt market with a $75 million bond issue. It repeated the

exercise in 2010 and 2012, doubling the value of its issuance

on each occasion. In January, TDB priced Mongolia’s first

renminbi-denominated bonds. The bank’s so-called ‘dim sum’

bond offering, raising RMB700 million ($115 million), was twice

over-subscribed.

Resilient in crisisThe global financial crisis did cause problems with two bank

failures, two mergers and the formation from the liquidated

banks’ assets of a new state-owned bank, State Bank, in

2009. Overall, the sector proved rather resilient, with growth

dipping only briefly in the initial stages, helped in part by the

introduction of an interim blanket bank deposit guarantee

scheme in 2008.

That year saw the first foreign banking presence when Dutch

bank ING set up a representative office. The UK’s Standard

Chartered followed in 2011 and Bank of China in 2013. Japan’s

number one and two banks – Bank of Tokyo-Mitsubishi and

Sumitomo Mitsui Banking Corporation – opened representative

offices in 2013. Goldman Sachs took a 4.8% stake in TDB in 2012.

In 2010, the Banking Law was strengthened, boosting

minimum paid-in capital to MNT8 billion ($4.39 million) and

limiting a bank’s exposure to any single borrower. The law also

prohibits a single investor from ‘significant influence’ in more

than one bank, requires banks to notify the regulator of major

changes in the shareholder structure, and prioritizes prudential

compliance over dividends. The minimum paid-in capital

requirement was doubled again last year to MNT16 billion as part

of counter-cyclical measures being pursued by the central bank.

Mongolia’s banking sector has come a long way since its foundation, with Russian help, in 1924. The industry proved resilient during the financial crisis and competition has stimulated expansion and innovation, although there are worries about over-dependence on the resource sector

Banking system marks its 90th anniversary in good shape

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

The Development Bank of Mongolia was established in 2011

to extend medium- to long-term financing to strategically

important sectors – loans for infrastructure and industrial

and energy developments – to be funded through bond sales.

The bank’s first issue of debt – government backed – in 2012

raised $580 million and was 10 times oversubscribed, followed

last December by a Samurai bond issue. The $290 million

of yen-denominated debt was guaranteed by Japan Bank for

International Cooperation.

In January last year parliament passed the Deposit Insurance

Law, replacing the earlier temporary measure that expired at the

end of 2012. The industry-funded scheme guarantees deposits up

to MNT20 million in the event of the failure of a member bank.

In July 2013, Savings Bank, the fifth largest lender, failed –

pulled down by the non-performing loans of its affiliates and its

insolvent parent company – and was taken over by State Bank.

Dynamic sectorThis evolution over many decades means that, today, Mongolia

has a dynamic banking sector comprising 13 banks ranging from

dominant players like TDB, Khan and Golomt to community

development and microfinance providers such as XacBank.

“Seeing the development of the banking system over the last

decade, although there have been problems all they’ve done

is helped highlight and weed out the weaker players,’’ says

TDB president Randolph Koppa. “So we’re getting, I feel, an

increasingly stronger system that’s providing a broader array

of financial services to Mongolians in general than it was nine

years ago when I arrived here.’’

Competition has spurred banks to expand, particularly their

retail businesses, and created a strong innovation pipeline

producing advances in payment systems and branchless banking

that have made Mongolia a leader in financial inclusion.

But the banking system faces risks from Mongolia’s growing

dependence on mining, resources exports and government

stimulus which, while producing double-digit GDP growth, is

also driving rapid loan growth of more than 50% a year.

“One of the central bank’s roles is to ensure the stability of

the financial system and we have worked to make sure banks

are sufficiently capitalized and work to international prudential

standards,’’ says Sandagdorj Bold, adviser to the governor

of the Bank of Mongolia. “The average core tier 1 ratio of

Mongolian banks is 17% at the present time, against a minimum

requirement of 12%. The average liquidity ratio is 41%, against

a minimum of 25% and non-performing loans are stable at a

moderate 5%.’’

But fund managers have doubts. Sturgeon Capital’s founder and

CEO Clemente Cappello warns that while Mongolia is undergoing

a transition for the good, over-investment in recent years will

cause problems in future: “The only thing they’ve done outside

natural resources has been real estate, and I think there’s been

some over-investment there, certainly some capital misallocation.

That is going to be linked to some volatility in the banking sector

because real NPLs are increasing. The banks are limited in size and

they 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 data

shows. Total togrog deposits were up 46% year on year in April

to MNT6.97 trillion, with personal savers accounting for almost

two-thirds, but failed to keep pace with loans pushing up the

loan-to-deposit ratio from 117% to 122%. The loan-to-GDP ratio

stood at around 60% at the end of 2013.

TDB’s Koppa says that the headline figures are slightly

overstated due the distorting effect of a weakening togrog,

which depreciated by around 25% against the dollar in the same

period. “Expressed in dollars, the asset growth in the banking

sector was about 46% in 2013 which is significant but the figure

was 28% in 2012, 35 % in 2011, and 62% in 2010, so asset

growth has been quite strong in the past.

“Much of the growth last year was because of temporary BOM

programmes to stimulate financing of small apartments through

lending to banks to increase their mortgages and other funding

to stimulate development of construction materials companies,

and exports of cashmere and other sectors.

“This dedicated funding showed up as increased assets in the

banking sector but as the economy continues to expand at a

double-digit rate, the percentage increase each year will have to

come 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 a

consequence of the lack of capital markets, which means

the funding load for business growth falls almost entirely to

the banking sector, with domestic banks responsible for a

significant proportion.

“The loan-to-GDP ratio will have to continue to increase so

that means that banks will continue to grow a little bit faster

than the rate of GDP growth in real terms for the next three

years, at which point I think the loan-to-GDP ratio will stabilize

at around 75-80%. We should then see bank growth pretty much

in line with GDP growth.’’

Short-term headwindsThe sector does face some headwinds in the short term from

rapid credit growth and imbalances injected by inflation above

12% and a substantial current account deficit combined with

togrog depreciation. The foreign currency loan-to-deposit ratio

jumped to a record high of 120% at the end of last year with

foreign currency deposits accounting for more than a quarter

of total loans.

Ratings agencies are concerned that, even through most

FX lending is to corporations with hedged positions, the

banking system faces credit risks given the degree of togrog

depreciation. They also cite wider macro risks from the

deteriorating environment for resources, the country’s key

export, and that banks and the BOM may be underestimating

the true extent of NPLs.

However, with the deficit set to fall, a weakening inflation

trend, Mongolians’ fondness for saving and sustained economic

expansion over the medium to long term, should ensure the sector

prevails. GDP growth is forecast to spike to almost 13% this year

according 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 world’s fastest-growing economies.

SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com4

Central Bank interview

THE BANK OF Mongolia (BOM) was established in 1924 and has

played a key role in maintaining macroeconomic and financial

stability. Although its primary objective is similar to that of other

central banks, it promotes balanced economic growth by ensuring

financial stability thanks to regulatory changes under the new

Basel framework, prudential policies and risk-based supervision.

The monetary policy committee of the central bank consists

of 14 members, comprising seven bank officials and seven

independent representatives from academia, the public sector

and private institutions. In the past 18 months, the committee

has faced challenges caused by global and regional economic

slowdown, weaker growth, falling commodity prices, continuous

deterioration of the terms of trade, a decline in capital inflows and

pressure on the balance of payments.

Responding to challengesThe bank has responded well to the challenges it has faced with

conventional and unconventional monetary policy measures to

control inflation, protect the real incomes of low- and middle-

income households, safeguard the financial sector, support the

banking sector through countercyclical policies that aim to

prevent a potential credit crunch, stabilize monetary and credit

growth, and increase middle-class savings through a sustainable

mortgage financing programme.

As a result, the share of supply-driven and cost-push

inflationary pressure in consumer price inflation has significantly

declined, the increase in net domestic assets has offset the decline

in net foreign assets, and the economy expanded by 11.7% in real

terms in 2013, producing double-digit real growth for the third

consecutive year. Indeed, over 70% of the real GDP growth in

2013 was contributed by unconventional monetary injections in

the real sector by the BOM within the framework of its economic

stabilization measures.

Due to balance of payments pressure, the nominal effective

exchange rate of the Mongolian currency, the tugrug, depreciated

by 15.5% and in real terms by 7.2% last year. Although the

depreciation was typical of exchange rate trends in emerging

markets and commodity-driven economies, the daily average

volatility of the tugrug was just 0.23%, much less than other

currencies. The Bank of Mongolia has been fully committed

to its flexible exchange rate policy and the positive impact of

that flexibility was absorption of external shocks and necessary

adjustments and normalization on foreign trade as well as the

current account. Since the beginning of 2014, exports have been

growing slightly while imports have been declining. We expect

further decreases in current account deficits and, once exports are

significantly increased, the trade balance is expected to have a

sustainable surplus.

One of the central bank’s roles is to ensure the stability of the

financial system. The overall banking sector has been sound and

stable. The systemic average capital adequacy ratio is almost

17% at present, which is five percentage points higher than the

minimum requirement of the BOM. The liquidity ratio is around

40% 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 through

macroeconomic 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 the

Mongolian economy. Mongolia aims to maintain more sustain-

able economic growth and diversify its economy by developing

more competitive, technologically advanced and sustainable

non-mineral sectors, including agriculture.

To encourage a savings-based economy, the central bank

has launched a new and sustainable mortgage financing

programme to promote middle-class savings. Over the past

20 years, the mortgage-to-GDP ratio never exceeded 6%, but

in the past year it has grown to 14%, and we aim for it to

reach at least 30% to 40%. By encouraging people to save

more, we believe that they will consume in a more disciplined

manner, rather than spending money on imported goods and

unnecessary consumption.

The measures have also encouraged banks to move away from

short-term borrowing and towards long-term financing and we

expect further development of a local currency securities market

thanks to securitization of mortgage loan portfolios by the

issuance of mortgage-backed securities (MBS) by the Mongolian

Mortgage Corporation. The MBS will be traded in both the

primary and secondary markets, and will be more attractive to

foreign investors than local currency-denominated government

bills and bonds.

Thanks to high and sustainable economic growth, medium

and long term policy commitment, greater opportunities for

business and investments, we expect more economic prosperity

in Mongolia.

As Mongolia moves away from dependence on mineral resources, Bold Sandagdorj, chief economist and advisor to the Bank of Mongolia, explains the central bank’s role in creating more sustainable economic growth

A stable base for future growth

www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 5

MBA interview

THIS YEAR MARKS the 90th anniversary of the modern

Mongolian banking system, but it is worth remembering that

the 20th century saw not the first banking system in Mongolia,

but instead the revival of a much older industry.

Centuries ago, Mongolia operated one of the world’s first

banking systems, under the auspices of the Mongolian empire.

As early as the 13th century, Mongolia established trade links

between Asia and Europe and a system of finance to support trade

between continents. Archaeologists have found traces in coinage

and later, as the Chinese provinces were united under the Mongol

banner, in ancient printing machines for paper money, recorded in

tablets of wood and bronze. The currency was issued by Khubulai

Khan, the grandson of Genghis Khan, and versions of the original

printing machines are still kept in archives in China and Japan.

As the Mongolian empire expanded so did its monetary

system, and examples of 800-year-old silver Mongolian coins

have been found as far away as Crimea and Ukraine. At its

height the empire traded with the majority of countries in

eastern Europe and Asia. However, after the collapse of the

empire, 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 we

have found examples of Chinese currencies, US dollars, British

pounds and even the Mexican peso – an enduring mystery as

nobody is sure how those coins came to be in Mongolia.

20th century bankingThe system of barter dominated until around 1921, when

Mongolia decided to partner with the Soviet Union. Three years

later, with Russian assistance, a commercial bank was established

in Ulaanbaatar, or Urgoo, as it was known at the time. The bank

was more or less a 20th century financial institution, though

adapted for a planned economy. In the following years the

bank played the role of commercial and central bank, setting

monetary policy and providing commercial banking services,

taking deposits from individuals around the country and

channelling 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 change

and the nation started to transit to a market-orientated

economy. The first purely commercial Mongolia bank, the

Industrial Bank of Mongolia, was established in 1990, followed

by 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 number

of small private commercial banks were established, encouraged

by low minimum capital requirements. Nowadays some 90% of

Mongolian banking system assets are held in private banks.

A professional industryIn recent years international investors have taken stakes in

Mongolia banks, and the industry has become increasingly

professionalized. Now the five largest banks have a 90% market

share, and all Mongolian banks subscribe to international

accounting standards and are audited by the top accountancy

firms. Total assets are around 120% of GDP, which is a relatively

strong 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 with

credit rating agency backing have started to issue bonds and

senior and syndicated loans in the international capital markets.

At the same time we have launched an exciting initiative in

sustainable finance, with banks trying to lead sustainable growth

while providing financial services and working with clients to

protect the environment and well-being of communities.

Fortunately, Mongolia banks were not exposed to the complex

derivative products that were associated with the financial 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 plays

an increasing role, and even herders can use mobile banking

apps to make payments and transfer money.

Some of the large mining projects in Mongolia require vast

resources of capital, and Mongolian banks are focused on

starting to work with international partners to attract funding

resources and distribute capital. At the same time banks work

directly 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% last

year, so things are changing very quickly. We are also seeing

a lot of young people come into banking, and the average

age of bankers is 29 or 30 years. We are a young and growing

population and as Mongolia embraces the challenges of the

21st century, the banking fraternity looks forward to an era of

global cooperation and partnership.

Bold Magvan is president of the Mongolian Bankers Association and CEO of Tenger Financial Group. Tenger’s largest subsidiary XacBank is a systemic bank in Mongolia with 10% of market share; the group also has leasing, insurance and investment advisory arms, and a greenfield microfinance company in China

Building on an old tradition

A EuromonEy magazinE sponsored statement

Khan Bank is the biggest retail bank in Mongolia, providing exceptional financial services to more than three-quarters of domestic households, alongside a growing range of corporate solutions.

The bank’s dominant position is built on an extensive domestic branch network across 530 locations, an unrivalled 340 ATMs and a commitment to innovation evidenced by a comprehensive range of mobile banking services. Our aim is to ensure our customers have access to Khan Bank solutions wherever and whenever they need them.

As the consumer technology revolution has taken hold, Khan Bank has pioneered internet banking in Mongolia, and was first to offer mobile and SMS text services. Our multichannel strategy has reaped rewards, and the bank’s Smart Phone Banking solution is ranked first in Mongolia among banking and finance applications.

Investing in innovationThe bank’s success in developing innovative digital services is the result of a long-term commitment to investment across the retail and corporate segments. We were proud last year to open a 24-hour Express Banking Centre in Ulan Bator city centre. The centre is a state-of-the-art one-stop shop, offering banking services across a menu of channels, alongside advisory and information resources.

A key driver of Khan Bank’s strategy is a belief in continuous improvement that has helped make us the most trusted and accessible bank in the country.

One example of our commitment is the scale of investment in our branch network, with many branches last year given a makeover to ensure they keep pace with customers’ expectations.

Our work to respond to customer needs has been rewarded with new customers and more business. Total customer deposits increased by 34% in 2013 to MNT2.8 trillion, while loans grew 42% to MNT2.5 trillion. Our loan business has quadrupled over the past five years, and we are constantly seeking to expand our product offering across loans, deposits and foreign exchange.

Corporate coverageIn the corporate space, the bank is a major provider of payment services, domestically and internationally, leveraging our technology resources to make sure our customers can operate seamlessly across the payments value chain.

The bank also runs credit and debit card schemes, alongside payment card schemes for salaries and pensions, and recently introduced contactless payments, following investment in near-field communication technology. As competition in the payment sphere increases we aim to develop mobile and card-based solutions that keep Khan Bank ahead of our banking and technology rivals.

We provide tailored, low-cost solutions for companies, including commodity firms and consumer goods suppliers. For example, the bank offers trading firms management of transit and

transportation regionally and internationally, often working with partner banks to make sure exporters control risks through the trade life-cycle. The service is backed by AAA-rated trade facilitation programmes and insurance coverage from export credit agencies and development banks.

Khan Bank is a member of Visa International and China Union Pay and accepts Visa and CUP cards of all types through some 1,700 merchants. Last year, Khan Bank introduced the Bancassurance service in all of its branches, offering six insurance types through our partners.

Social responsibilityAs the leading Mongolian bank, we seek not only to be an excellent commercial partner but also a responsible member of the community, playing a leading role in promoting corporate social responsibility. The bank supports numerous projects in education, health and environmental protection and works to support disadvantaged groups in society.

Established in 2007, the Khan Bank Foundation administers funding support to programmes aimed at educational and cultural advancement, assisting disadvantaged groups and supporting community development and environmental protection.

In one example, Khan Bank collaborated with the National Cancer Centre and Mongolian National Broadcaster to conduct

a national campaign against cancer. The campaign was run in eight provinces with higher cancer levels in 2013, helping some 15,000 people.

Looking outwardsKhan Bank is active in the capital markets and in 2013 borrowed $111 million through a syndicated loan facility, the first of its kind for a Mongolian bank. It also secured $35 million of long term funding from the European Bank for Reconstruction and Development, with the aim of improving credit to small and medium-sized businesses and building relationships with public and private entities.

Khan Bank and the International Investment Bank (Moscow) last year agreed a strategic partnership to increase collaboration in loans, trade finance, inter-bank lending and foreign exchange. We have also signed a memorandum of understanding with Sumitomo Mitsui Banking Corporation, part of our commitment to expanding our international network.

The bank’s financial performance has been on an upward trajectory. Net profit after tax was MNT96.7 billion in 2013, an increase of 35% from 2012. It has also built on solid foundations to increase its capital base: total capital rose 41% to MNT471.2 billion in 2013, while total assets increased 72% to MNT4.8 trillion, putting us in a strong position to remain the Mongolian people’s partner of choice in the exciting years ahead.

Khan BanK: partner of choice Investment in technology and an extensive branch network has helped Khan Bank consolidate its position as Mongolia’s biggest retail bank and build new business and product offerings

Seoul Street-25, PO Box-192, Ulaanbaatar-14250, MongoliaTelephone: +976 11 332333 Email: callcenter@khanbank.comWeb: www.khanbank.com

SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com8

Capital markets

MONGOLIA’S CAPITAL MARKETS are at an embryonic stage

despite being more than two decades in the making, with only

a 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 bond

issue – the equivalent of one-fifth of GDP – but the momentum

from that initial leap forward has since fizzled.

Companies listed on the local stock exchange have been denied

or are unable to avail themselves of the opportunities to access

capital 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 trading

activity creates low liquidity making investors even less willing

to trade – ensuring institutional

investors stay away.

The capital-hungry resources

sector is almost entirely funded

from overseas through listings

on exchanges elsewhere, in

North America, Australia

and Hong Kong, syndicated

loans from global banks and

development bank loans, and

bond sales.

Size limitsCorporate banking is well developed, with the larger banks

providing most services from lending, trade financing and

leasing to cash management, treasury and guarantees. Given

that the largest bank has assets of only about $2.85 billion,

corporate loans are small by international standards, restricted

to around $50 million maximum. The small size of the banking

sector effectively precludes banks’ direct participation in the

resources sector: a single project like Oyu Tolgoi could swallow

more than half of the assets of Mongolia’s entire banking

system. According to Fitch Ratings, given the current weakness

of 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 companies

developing multi-billion-dollar projects. “Unfortunately, the

high cost to domestic banks of raising capital, at least 10%, is

ultimately going to be paid by the customer. If you’re a large

corporate you can probably access foreign funding, which will

be very much cheaper, so there is no way of competing against

international banks on the ultra-large loans. What they can do

is have high margins on the smaller loans in spaces where they

have a lot of clients. That’s where they can make money.”

Until recently, corporate banking has been the main focus.

Investment banking exists, but with domestic IPOs, debt

offerings and private placements few and far between, demand

is insufficient to spur growth. The basics without which

institutional investors cannot invest, such as custodian services

and delivery-versus-payment, are not yet available. Trades are

pre-funded with settlement and depository functions handled by

the state-owned Clearing House

& Central Depository.

“Investment banking as a

sector is really quite small,” says

TDB president Randolph Koppa.

“We have a capital markets

company, TDB Capital, which

has a brokerage licence, it has an

underwriting licence and it can

do advisory service.

“We were joint lead manager

of the government’s sovereign

bond issue and have advised on

syndicated loan arrangements in the capital markets. We’ve

also had a couple of mandates and probably have a couple of

potential mandates to underwrite IPOs when the exchange

is properly functioning and conditions are more favourable.

But capital markets activity has been pretty modest in the

last couple of years. We’re really geared to be the leader in

corporate lending activity.”

Indirect routeInstitutional investors’ current exposure to Mongolia is

mostly restricted to indirect portfolio plays on resources

companies listed overseas or private equity investments in

unlisted Mongolian companies in hopes of an IPO, acquisition,

merger or recapitalization. The government has redressed the

lack of an enabling regulatory and legal framework, blamed

“If you’re a large corporate you can probably

access foreign funding, which will be very much

cheaper, 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 markets have been slow to evolve, despite government efforts to create a sympathetic regulatory environment

Capital markets struggle to make headway

www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 9

for restricting the capital-raising opportunities available to

Mongolian companies – but to little avail.

Analysts warn Mongolia will struggle to make headway while

doubts persist over whether the government will stay the course

with its pro-foreign investment agenda and liquidity levels are

such as to make it almost impossible to exit equity positions.

“They’re trying to create an infrastructure that’s more

conducive to trading and especially institutional interest but

unfortunately there’s just too many other outstanding issues

right now where I don’t really see a strong pick-up in capital

markets in the near term,’’ says Calvin Wong, analyst at Quam

Asset Management in Hong Kong. “Certainly they’re moving in

the right direction. In terms of policies and regulations they’re

trying to create a more liberal market and to create liquidity

but it really is being held back by how slow the government

moves. There’re a lot of issues still outstanding especially with

the mining sector and licensing. Obviously, Oyu Tolgoi is

still outstanding and there are various macro factors causing

currency weakness, increased risk of overleveraging the

economy and inflation.

“The best chance of a strong rebound is international equities

of Mongolian companies. The liquidity is better and there

are more institutional investors within those companies, and

perhaps on the sidelines looking at these companies, so they

would be more sensitive to certain triggers such as the resolution

of the Oyu Tolgoi dispute.”

Liquidity lackingThe Mongolian Stock Exchange (MSE) was formed in 1991 as

a means for the government to privatize hundreds of state-

owned enterprises it inherited from the socialist era by issuing

shares to all citizens. Secondary trading began only in 1995

but volume and turnover were low and no new companies

were listed because of the lack of legal, underwriting and

regulatory frameworks. Despite moving to electronic trading

and market capitalization spiking to an all-time high in 2011

of MNT2.20 trillion ($2 billion at that time), low liquidity has

been a persistent problem plaguing MSE’s efforts to become a

world-class exchange.

Trading began to take off in 2005 led by volume which

peaked in 2008. Equity volume and trading value more than

doubled between 2010 and 2012 but even at its historical peak

in 2012, trading value was just MNT144.7 billion ($83 million

at the time). Last year, the value of equities traded tumbled to

MNT97.6 billion, according to data from MSE. Volume slumped

from 133.8 million shares in 2012 to 65.8 million for 2013, a

situation not helped by the fact that only around a third of the

stocks of the 249 companies listed actually trade. In March this

year, trading virtually dried up before rebounding in April when

11.7 million shares of 79 companies were traded with a value of

MNT3.15 billion. The three most actively traded companies –

property developer Mongolia Development Resources, ready-mix

concrete producer Remicon and logistics firm 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 been

only one other listing since 2008.

The bond market is even slimmer, with zero turnover in

both government and corporate bonds in the first four months

of this year. In 2013 there was just one government bond

transaction 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 were

traded though the exchange.

Building an infrastructureThe government has placed strong emphasis on creating an

infrastructure to foster sustainable development of the country’s

capital markets with institutional investors clearly in its sights.

Wide-ranging new legislation – the Securities Markets Law

and the Investment Fund Law – came into force in January.

The changes allow MSE to adopt a new clearing, settlement

and custody environment based around the T+3 global

standard, paving the way for institutional investors and

overseas funds to invest.

Dual listing – both of domestic listed firms overseas and of

overseas firms on the MSE – is now permitted and the range

of tradable securities that may be issued has been expanded to

include options, futures and depository receipts. The minimum

proportion of outstanding shares firms are permitted to float has

been raised to 25% and financial statements must now be filed

in both English and Mongolian.

However, the dual listings and arrival of global custodian

banks and institutional investors have yet to materialize.

Quam Asset Management’s Wong says that the changes are

all-important because a functioning and free capital market

further down the line will not be possible without them. But he

warns this type of market is a considerable period of time away.

“Institutions aren’t going to suddenly say ‘oh now we can trade

options and futures, let’s increase our Mongolian allocation’.

There are too many things that need to be fixed before it’s a

legitimate investment opportunity for institutional investors,

especially larger funds.

“Annual turnover on the MSE is the size of one trade for a

big fund. Even if you can get into positions over time, getting

out is a big issue. It’s really not an investable market for a

lot of people. I wouldn’t buy options on Mongolian equities

because there’s no real tangible and predictable return I can

earn. With the regulations on financial reporting and the

current trade participants within the market it’s too hard to

play as a pure equity investor.”

“Certainly they’re moving in the right direction.

In terms of policies and regulations they’re

trying to create a more liberal market and to

create liquidity but it really is being held back by

how slow the government moves”

Calvin Wong, Quam Asset Management

SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com10

Foreign direct investment

RESOURCES-RICH MONGOLIA has been attracting long-term

foreign investment on an ever-increasing scale since the 1990

transition. But net inflows exploded following the financial

crisis, reaching $4.45 billion in 2012 up from just $372.8 million

in 2007, World Bank figures show.

FDI dipped to $2.3 billion in 2013, largely due to the falling

price of commodities and completion of phase one of Rio Tinto’s

$6 billion Oyu Tolgoi gold and copper mining project in the

Gobi desert. The joint venture with the Mongolian government

was investing around $180 million a month throughout 2011

and 2012 on everything from a copper concentrator plant and

power and water supplies to roads and an airport complete with

terminal, as it raced to bring production on line. Work on the

deep-mine phase two has been halted by disagreement over

financing arrangements which the government says can only be

approved by parliament.

State Bank says sweeping legislation restricting foreign

investment in sectors of strategic national importance deterred

overseas investors and delayed projects. “Our economic

analysis reveals that FDI has declined dramatically. By the first

quarter of this year, FDI inflows were down by almost 60%

year on year,” says State Bank’s director of investment banking,

Gombosuren Khandtsooj.

“This was due not only to the completion of Oyu Tolgoi but to

stagnation in the mining sector, especially the coal industry. The

passage of the Strategic Entities Foreign Investment Law (Sefil) in

May 2012 also pushed FDI out. Parliament responded by updating

the legislation and approving the new Investment Law.”

Government figures show coal exports slumped by more than

40% to $1.12 billion last year as a slowdown in growth in China,

the destination for almost 90% of coal shipments, and disputes

with foreign mining investors, took their toll.

Negotiations with international mining firms over rights to

develop the West Tsankhi section of the 6 billion ton Tavan

Tolgoi coal deposit have been stalled for two years. A $3 billion

Hong Kong-Ulaanbaatar-London listing planned for late 2012 of

Erdenes Tavan Tolgoi, which is managing development of East

Tsankhi, 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 of

highest proportions of any country. The country sits atop some

of the largest untapped deposits of coal, copper, gold and other

minerals in the world, worth as much as $2 trillion, that have

barely begun to be exploited. Oyu Tolgoi alone is forecast to

boost annual gold and copper production from 8 tons and

644,000 tons respectively in 2013 to around 1.2 million tons

and 32 tons when its $6.3 billion underground phase two

comes fully on stream.

Mongolia is also an oil exporter and has commercially

exploitable deposits of a further 80 of the 111 elements on the

periodic table, from molybdenum and platinum to tungsten and

fluorspar as well as 25 of the 40 heavy elements.

But, unlike in many of its counterparts, Mongolia’s natural

bounty is not a source of conflict and division. Mongolia’s

robust free-market democracy means its policy of developing

its mineral wealth by the most transparent but commercially

efficient means, while hotly debated, is in the end consensual.

Tapping the resources and expertise of global mining companies

has proved beneficial not only to foreign investors, but also in

helping fast-track economic and social development.

Mongolia ranks 42nd out of 132 countries for opportunity in

Social Progress Imperative’s 2014 Social Progress Index, far ahead

of 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 Mongolia’s democracy

is exemplary, pointing to six free and fair parliamentary and

presidential elections since the 1990 transition from one-party

state socialism. Mongolia also bested China on meeting basic

human needs and the fundamentals of well-being.

Opportunities aheadMongolia’s development is still in its early stages and

robust economic growth for the foreseeable future means

opportunities for overseas investors in almost every area from

transport infrastructure and housing to water security and

air pollution. Surveys and technical assessments are already

under 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

Mongolia’s 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 Oyu Tolgoi mining project may be dampening interest, however

Foreign investors ponder developing potential

www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 11

run underground, is scheduled to be completed in 2020. Five

transit corridors are also being developed to link landlocked

Mongolia to its export markets including a new railway

network and a new highway connecting the northern border

to the south. There are also plans for both a gas pipeline and

an oil pipeline and a longer-term aspiration to form a bridge

connecting Europe with APEC nations.

The World Bank and IMF designated Mongolia a middle-

income country in 2011 and living standards have risen

dramatically in recent years thanks to per capita GDP growth

that is far outpacing that of regional rivals Indonesia and

Vietnam. Real income per capita more than tripled between

2005 and 2012 and is forecast to reach $7,500 in just four

years’ time.

Increasing wealth has brought with it more disposable income

for more people and shopping malls have sprung up across

the capital to meet demand for everything from fashion and

cosmetics to watches and consumer electronics. Brand awareness

is strong. AT Kearney’s 2013 Global Retail Development Index

ranks Mongolia seventh, up from ninth in 2012, just below

the UAE and Turkey. The firm groups Mongolia among what it

calls ‘little gems’ – markets that general retailers should strongly

consider as the starting point for regional strategies. For luxury

retailers, small population, unique countries like Mongolia are

newfound hubs.

According to Asia Pacific Investment Partners (APIP) more

than 40 global luxury brands have established presences in

Ulaanbaatar in the past three-and-a-half years, from Louis

Vuitton 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 to

enter the market, including more mid-range brands, which tend

to do well in Mongolia. High Street brands often perform poorly

in Asia relative to luxury brands.

Diversification effortsThe recent volatility in investment flows has, however,

prompted the government to launch efforts to further diversify

the economy to reduce reliance on resources which account

for almost a quarter of GDP. Agriculture makes up about

16%, retail 15%, and transport, real estate and education 8%,

6% and 4% respectively. Financial services comprise around

5-6% of GDP. The public sector accounts for the remainder.

The competitiveness of the non-mining sector, particularly

manufacturing and tourism, is being boosted by the weaker

togrog, which depreciated by 15% last year.

“The positive impact of that move was that it helped absorb

external risks and promote exports, while reducing imports,”

says Sandagdorj Bold, adviser to the governor of the central

bank. “Last year we had a balance of payments deficit but in

the first part of 2014 exports rose by 18% and imports fell by

12%. Over the past two months the currency markets have

recognized the progress we have made and the togrog has

stabilized.”

The government has implemented a number of key reforms

and initiatives aimed at removing uncertainty that it is hoped

will kick-start renewed FDI flows. New legislation came into

force in November replacing the Sefil law of 2012 and the 1993

Foreign Investment Law. The new Investment Law frees up

foreign investors from having to secure government permission

to invest in the mining, banking and telecommunications

industries. The waiver does not apply to foreign state-owned

companies, which are still required to seek approval.

The legislation also introduced tax stabilization certificates

guaranteeing uniform tax treatment for between five and 22 years

covering 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 major

construction projects, reissuing mining exploration licences, tax

incentives for foreign banks and cutting red tape. Projects include

a road linking Mongolia to Russia and China, power plants and

two 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 that

came into force in January and an investment fund law in the

second half of 2013.

The government has also launched a ‘From Big Government

to Smart Government’ drive, paving the way for sweeping

reforms including separating business from the state, making

officials more accountable and simplified procedures for issuing

licences and approvals.

John Grogan, chairman of the Mongolian-British Chamber of

Commerce, is not convinced the government’s efforts will achieve

much until the deadlock over Oyu Tolgoi is resolved. “The failure

to progress in settling the issues over Oyu Tolgoi affects others

thinking of investing in Mongolia. It’s definitely having a chilling

effect. There’s a lot less interest than there was a year or 18

months ago. I’m not sure that we’ll see any appreciable pick-up in

FDI while this dispute remains unresolved.

“Mining and the distribution of mining profits is a very

sensitive issue where Mongolia quite rightly wants to strike the

right balance and follow Norway’s example of mineral wealth

development, rather than Nigeria’s.

“It’s determined to get a good deal but now is the time

to strike that deal. One option I know is being discussed is

convening a grand coalition in the Khural to approve the deal so

that all parties are signed up to it. That was the way the original

Oyu Tolgoi agreement was signed.”

Oyu Tolgoi mine

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Mongolia has been one of the fastest-growing economies in the world in the past few years and the mining sector has been the driving force behind this rapid growth. As one of the top three banks in Mongolia, how does Golomt bank evaluate this scenario, with the country’s development dependent upon a single sector?Mongolia has been one of the most exciting investment opportunities in Asia in the past few years. According to the IMF, the Mongolian economy grew by 11.7% in 2013 and is expected to grow 9.6% in 2014. Recent exploration of mineral

resources, which are valued at an estimated $3 trillion, has given our country a great advantage, and the opportunity to grow and develop faster than most developing economies around the world. That said, the Mongolian economy is currently challenged by declining global commodity prices, due to the slowdown in China, the main export destination for Mongolian minerals. Mongolia is a young market economy and the development of our mining industry has been challenging, both in terms of capital and human resources. However, in the past year the government has taken specific steps to help the country move forward, introducing new

investor-friendly laws to encourage foreign investment and to spur infrastructure development in the country. More importantly, the government is encouraging the development of other important sectors of the economy that will define Mongolia’s future.

What are the sectors to which the government must pay attention besides mining? How can the economy sustain its growth when the mining sector doesn’t perform well?The government needs to support its high-priority sectors, such as agriculture, manufacturing, hospitality, tourism and education. Mongolia’s vast land resources (approximately 1,565,000 square kilometres) give us great potential not only to be self-sufficient in food commodities but also the possibility of exporting agricultural products to our neighbours. Production of leather and cashmere and wool industries, which are at the beginning of their development, are supported by government programmes to enhance their capacity and allow access to export markets. However, to achieve these ambitious goals, we need to introduce the latest technology and expertise, and develop these sectors in the most efficient ways.

“Golomt bank is set to work closely with all stakeholders to Generate positive opportunities in the mininG sector and beyond”Oyun-Erdene Lamjav, VP and director of Golomt bank’s Corporate Banking Division, spoke to Euromoney about her bank’s efforts to help develop and diversify the economy

Golomt bank headquarters, Ulaanbaatar

Head Office of Golomt bank, Great Chinggis Khaan’s Square 5, P.O.Box 22, Ulaanbaatar 15160, MongoliaWeb: www.golomtbank.com Email: corporates@golomtbank.com Tel: +976 7011-1646

“The government decided to support agricultural sectors...from Chinggis bond proceeds. This project has great economic significance in creating jobs, enhancing the capacity of domestic manufacturers and potentially increasing export revenues. Golomt bank has been chosen to be the sole provider of this loan.”

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What role does Golomt bank play in the development of these sectors?As our country’s development accelerates, Golomt bank will continue to play a major role. We provide close to 25% of total bank loans in the Mongolian market and our policy is to diversify our loan portfolio across the economy’s major sectors. Our role is primarily as a capital provider, but we also advise our clients, which include some of the largest mining, engineering and agricultural companies and manufacturers in Mongolia.

One of our main goals is to assist in developing a sustainable, green economy and we have participated in clean energy projects. We have been instrumental in introducing ISO standards in food production in the first flour mill and at meat processing factories.

To facilitate access to long-term financing, we work with international institutions such as the Asian Development Bank, Japan International Cooperation Agency and KfW and with export credit agencies and regional development banks including the Eximbanks of Taiwan, South Korea, Germany, Hungary, China, Czech Republic and Italy. We have trade finance

facilities with more than 20 banks to support export of equipment and technology from other countries into Mongolia.

The Mongolian government issued $1.5 billion of Chinggis bonds to the international markets in 2012, and recently decided to finance agricultural sectors from Chinggis bond proceeds. Your bank is chosen as the sole commercial bank to issue these loans. Could you discuss your progress and the importance of this project in developing the country’s manufacturing sector?In 2013, the government decided to support agricultural sectors including cashmere, wool, winter greenhouses, dairy farming and textiles from Chinggis bond proceeds. This project has great economic significance in creating jobs, enhancing the capacity of domestic manufacturers and potentially increasing export revenues.

Golomt bank has been chosen to be the sole provider of this loan.The bank has conducted significant research in these sectors so that we are not only acting as lender

but also helping the developers to ensure success in their projects.

One example is our work in the cashmere industry, one of the most valuable sectors of our economy, which has received $68 million of financing from Chinggis bond proceeds. The funding has led to a 60% rise in the manufacturing capacity of the cashmere industry while creating over 700 new jobs.

Another potential area for growth is processing of wool, which is almost entirely exported as a raw material. There is potential to produce wall insulation eco-material from wool using Japanese technology and our bank has financed these companies with Chinggis bond proceeds. Another project under consideration for development is production of wool yarn.

Through Chinngis bond proceeds we also financed numerous other projects with high growth potential, including dairy farms, bringing in milking cows and equipment from France, Germany and the Netherlands to increase milk production and to guarantee the supply of fresh milk to the citizens of Ulaanbaatar throughout the year. We have supported winter greenhouse projects to provide fresh vegetables and we

have financed seven hectares of land to implement greenhouse technologies from the Netherlands and China.

In the next five to 10 years, how do you see Mongolia’s sustained economic growth?The Mongolian government will focus on developing and diversifying the local economy through various investments in the coming years, and is encouraging foreign investors to invest in the country. Mongolia already ranks highly in protecting investors (#22) and enforcing contracts (#30), according to the World Bank/IFC Doing Business report 2014, which ranks 188 countries across the globe. Meanwhile, mining developments, as well as railway development, logistic channels and power station projects will continue to come on stream.

Our economic and political relationships with neighbours and other countries are highly engaged. With over 60% of the population below 35 years old, Mongolia also has great potential to build professional, well-educated human capital. Golomt bank is set to work closely with all stakeholders to generate positive opportunities, in the mining sector and beyond.

Winter greenhouse opening ceremony

Cashmere factory

SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com14

Financial inclusion

MONGOLIA SCORES IMPRESSIVELY when it comes to ensuring

access to financial services considering it is the least densely

populated country in the world, with a population of 2.9 million

spread out over 1.5 million square kilometres.

Around a quarter of the population are nomadic herders

of goats or yaks on the steppes, far beyond the reach of the

country’s almost non-existent transport infrastructure. Provision

of services of any kind – let alone banking – is a challenge.

Yet almost 80% of Mongolians have a formal bank account,

according to the World Bank’s 2012 Global Financial Inclusion

Database (Findex), with the level of penetration far exceeding

that of most of the country’s neighbours including China,

Russia and Kazakhstan.

Mongolia outperforms other low-to-middle income countries

on every financial inclusion variable apart from health insurance,

its East Asian neighbours on most measures, and even rivals some

high-income developed countries in areas such as penetration

of debit cards. One in four has a loan; the number of women

with bank accounts exceeds men by 10% with the proportion

approaching that of North America and the Euro area. It scores

particularly highly in inclusion of groups whose access to

financial services is most commonly limited, including those

with only a primary education, low incomes and rural residents.

Reaching the people“Mongolian banks are focused on reaching out to the

population, nearly 50% of which still lives in rural areas,” says

Magvan Bold, chief executive of Tenger Financial Group whose

largest subsidiary is XacBank. “Technology plays an increasing

role, and even herders can use mobile phone banking apps to

make payments and transfer money.”

Banking services have traditionally been the preserve of the

middle class and the wealthy but these are a small minority in a

country with huge income disparity where around one-fifth of

the population, according to ACDI/VOCA, exists on $1.25 day.

The high level of banking penetration may be due in large

part to universal cash handouts from the government’s Human

Development Fund as well as pensions, health insurance, and

student tuition payments. Around 50% of all bank account holders

over the age of 15 cite receiving government payments as the most

common use for a bank account, according to Findex; only around

30% 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 payments

regularly and have to receive them through a bank so I’m not

so sure it’s a problem of people lacking bank accounts,” says

TDB president Randolph Koppa. “There isn’t a lot of consumer

finance that banks do that’s unsecured. We can count the

number of mortgage holders in the banking sector at about

55,000 so, that’s maybe only covering 200,000 people. There’s

still some room to grow in terms of getting home financing and

other retail financing services to more people.”

The big three retail banks, XacBank, Khan Bank and State

Bank, have proactively targeted marginalized consumers in

remote rural areas, including nomadic herders with the aim of

providing accessible banking services.

XacBank, part-owned by the International Finance

Corporation, the European Bank for Reconstruction and

Development, ethical investors and NGOs, has equitable access

to banking products and services for all, including SMEs, as

one of its primary goals. Created in 2001 from the merging of

international development organizations’ rural microfinance

operations, XacBank extended into all 21 provinces within its

first year of operation. Building on its microfinance roots, it has

since expanded with more branches and extensions through

the use of tie-ups with savings and credit unions, franchise

arrangements and agents.

XacBank’s micro loans account for around 17% of its $600

million loan portfolio with delinquency rates among the very

lowest. With almost one in four customers a (secured) micro-

loan client, XacBank’s success is in many ways an object lesson

in responsible lending. It uses an end-to-end approach built

around an outreach strategy of setting up small outlets in remote

rural centres, gradually establishing a network of relationships

to disseminate no-obligation information about micro finance.

The bank is equally meticulous in providing ongoing post-loan

disbursement advice and support.

Khan Bank, with three out of every four of its 524 branches

serving the provinces, claims to provide banking services to an

estimated 70% of the population. Card services are provided to 1

million customers via a network of 310 ATMs.

On the phoneSelf-service facilities are on the rise with 50% of bank

account holders already using ATMs as their main mode of

withdrawals. However, Mongolia’s saturation-level mobile

phone density is an increasingly important factor in the

penetration of banking services.

According to the Communications Regulatory Commission

there are 103.8 mobile phones per 100 inhabitants with almost

Despite its small and widely dispersed population, Mongolia rates highly in the financial inclusion stakes

Bringing banking to the steppes

www.euromoney.com SPECIAL REPORT : MONGOLIA · July 2014 15

3 million mobile phone line subscribers. That compares to the

worldwide figure of 85 mobile phones per 100 inhabitants. The

mobile network is accessible to 95% of the population covering

all provinces and 335 districts, although some subscribers in the

most remote areas have to travel several kilometres to get a signal.

The big three have taken advantage of the network’s

exhaustive coverage to make banking by mobile phone available

to customers previously beyond the reach of any type of

banking services. A number of other banks have followed their

lead 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 in

any developed nation via solar-powered satellite dishes.

Khan Bank pioneered mobile phone banking in Mongolia

in 2007 as part of its e-banking strategy and led the way in

installing ATMs in rural provinces. All customers have access

to branchless banking not only via mobile phone, SMS and

computer, but through internet connected televisions.

XacBank says AMAR, its mobile phone banking service, started

in 2009 with help from the World Bank and the Consultative

Group to Assist the Poor, has 140,000 registered users. XacBank

claims its rollout of branchless banking together with its 97

branches, alliances with 70 savings and credit unions, and 400

agents, means its banking services are used by 500,000 customers.

Mongolians are East Asia’s biggest users of mobile phones to

pay bills and send and receive money – particularly among rural

dwellers and herders who may be grazing their animals on the

steppes a 100 or more kilometres from the nearest branch or ATM.

“Most banks have an app so that a herder can transfer money

to his children or to Ulaanbaatar City without visiting and can

stay out on the pasture,” says Tenger Financial Group’s Bold.

“Mobile phone companies are also getting into the business but

most are working with the banks and do not yet pose a threat.”

More accessible financeState Bank claims to serve 2.8 million Mongolians through

its 531 branches, 444 of them in rural areas, combined with

TV banking, which it pioneered, and mobile and internet

banking. Becoming a ‘no-branch bank’ is one of State Bank’s

top priorities, along with consumer protection. The bank says

it is also committed to making finance more accessible through

competitive rates and halving the number of supporting

documents required for loan approvals. Nomads often possess

far fewer official documents than the settled population.

Electric power to charge phones, and run TVs and other

electrical appliances, is available to around 100,000 herder

households from solar panel arrays through the government’s

Solar Ger Electrification Programme. To achieve its

100,000-family target, the programme borrowed heavily from

XacBank’s marketing model of combining a hub-and-spoke

operation with using established local businesses as agents.

Mongolia scores much lower on the Global Findex when it

comes to home loans, with just over 3% of people holding a

mortgage despite a relatively mature home lending market. The

Bank 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 financing programme

to promote household savings,” says Sandagdorj Bold, adviser

to the governor of the central bank. “Over the past 20 years the

mortgage-to-GDP ratio never exceeded 6% but in the past year it

has grown to 14% and we aim for it to reach 30-40%.”

Mongolia is a member of the global Alliance for Financial

Inclusion (AFI Global) and in 2012 signed the Maya Declaration,

which aims to unlock the economic and social potential of the

world’s 2.5 billion ‘unbanked’.

Signatories make a measurable commitment to adopt and

implement a financial inclusion policy that fosters the harnessing

of affordable technology to increase access to and lower the costs

of financial services. The declaration also calls for a regulatory

framework that encourages the development of new financial

services and draws on other countries’ best practice; a high

priority on consumer protection and putting customers first;

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 Regulatory

Commission, which is responsible for financial inclusion,

reported it had achieved a number of concrete targets.

These included strengthening the regulatory framework and

supervision of e-money services, and implementing a policy that

supports e-money services. The commission noted that e-money

services operations were being successfully used for handling

the payments of non-banking financial institutions’ loans

and interest, insurance fees, and fund transfers for the Human

Development Fund allocated through Capital Bank.

“Technology plays an increasing role, and even herders can use mobile phone banking

apps to make payments and transfer money”

Magvan Bold, president, Mongolian Bankers Association

and chief executive, Tenger Financial Group

SPECIAL REPORT : MONGOLIA · July 2014 www.euromoney.com16

Expansion

IN LITTLE MORE than two decades since the first commercial

banks sprang up in the early 1990s, the banking sector in

Mongolia has undergone repeated periods of rapid expansion

followed by consolidation.

Five years ago there were 16 banks. Three failures, two of

them in an eight-week period in 2009, one new bank and three

mergers later the sector has shrunk by a fifth to its smallest size

since the turn of the century.

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

highly concentrated with the top five – TDB, Khan Bank,

Golomt Bank, XacBank and State Bank – accounting for 90% of

all assets within the system.

Analysts have long believed that the sector is overcrowded

and that half a dozen banks would be better suited to serve

a small market of 2.9 million people. Further possible

consolidation could take the form of a merger of two of the

systemically important banks or one or more of the eight

smaller niche banks relinquishing their licences or being taken

over by the dominant players.

“Consolidation would

make sense and we’re seeing

something similar in other

countries. But our experience

has been that consolidation

only happens when people are

really desperate,” says Clemente

Cappello, founder and CEO

of Sturgeon Capital. “It’s not

necessarily a rational process but

rather consolidation happens

when banks are being bailed

out, or a foreign bank comes in and effectively is buying the

franchise and the licence rather than the actual financial value

of the company.

“I don’t see that happening in Mongolia and I think they

should be very careful about inviting in large foreign banks.

A Chinese bank takeover and rebranding of a domestic bank

would introduce unfair competition that I don’t think the

central bank is going to allow to happen.”

TDB president Randolph Koppa, argues the threat from

foreign banks is overstated, but for different reasons. “Foreign

banks are seen as a chance to get cheaper money into the

country and have lower priced loans but there isn’t a big local

domestic pool of funds they can tap. Without a proper local

money market or a big consumer base to get retail deposits any

foreign bank that gets a licence for banking operations, either

in subsidiaries or branches, would probably have to fund into

Mongolia from abroad.

“That’s no different to the representative offices they currently

have but as cross-border lenders they don’t have the considerable

added costs of running a bank in the country and all that

entails both from local requirements and from headquarters –

compliance officers, IT support and controls on money transfers.”

Privatization planKoppa believes that there is further potential consolidation

among the big five to come because the central bank’s ultimate

goal is to privatize State Bank; one of the other four, or a foreign

bank, could be the acquirer. “Beyond that I’m not sure how

much more of a gain could be made in terms of competitiveness

because there’s a point at which if you put together two banks

each 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, Savings

Bank took over Mongol Post Bank, doubling its assets to

become one of the country’s largest banks. A month later, Bank

of Mongolia (BOM) placed

into receivership a further two

troubled banks, Anod – which

it had taken over the previous

December – and the MSE-listed

Zoos. Anod, the fifth largest

lender, was dissolved and all

its accounts were transferred

into Savings Bank. A wholly

government-owned bank, State

Bank, was then set up to hold

the good assets and accounts

of Zoos Bank.

Last July, weighed down by bad loans to affiliates and losses

from the Mongol Post merger, Savings Bank was itself declared

insolvent and taken over by BOM. Its assets of around $600

million, 1.7 million accounts, 500 branches and around 3,000

staff were transferred to State Bank, transforming it into one of

the largest lenders.

“State Bank was merged with Savings Bank due to Savings

Bank’s failure to meet the BOM’s prudential requirements and

its passive operations exceeding its active operations,” says

Gombosuren Khandtsooj, State Bank’s director of investment

banking. “At that time State Bank was a small commercial, state-

owned bank. After the merger it is much larger, ranking fifth in

terms of activity, and the largest by number of branches.

“Personally, I assume that a lesser number of larger banks is

more 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 probably still has too many banks for its small population

Expansion and consolidation

“There’s a point at which if you put together

two banks each 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”

Randolph Koppa, TDB