1

Regional Conference on Microfinance

“What does the Bank of Mongolia

do to Promote Microfinance”.

O. Chuluunbat

Governor of the Bank of Mongolia

March 14, 2005

Manila, Philippines

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank. The Asian Development Bank does not guarantee the accuracy of the data presented. The countries listed in this presentation do not imply any view on ADB's part as to sovereignty or independent status or necessarily conform to ADB's terminology.

2

Facts about Mongolia:• Location: Central Asia• Area: 1,566,000 sq km • Population: 2.6 mln• Population density: 0.6 person per 1 sq km• Altitude: 1.580 meters above sea level• Currency: TOGROG• Official language: Mongolian• Weather: continental climat ( 4 seasons)• Adult rate of literacy: 96 %• Member of IMF since 1991• Member of WTO since 1997• Member of ADB since 1991

3

MAP OF MONGOLIA

4

Facts about Mongolia:• GDP: US$ 1.5 billion

• GDP per capita: US$ 600

• GDP growth rate in 2005: 10.6 %

• 568,6 thousands of households

• 45 % of households in remote and rural areas

• 80 % of rural population are herdsmen

• 36.1 % of population in poverty

• 30.3 % of urban & 43.4 % of rural population in poverty

• Gini coeffient is 0.329 (income inequality coefficeint)

5

6

POVERTY ALLEVIATION PROGRAM (WB/Government)

LAW ON NON-BANK FINANCIAL ACTIVITIES

AGRICULTURAL BANK in SME and MF

1ST SAVINGS & CREDITCOOPERATIVE

6 NGO + MICROSTART (UNDP)

1ST NBFI – X.A.C.

1994

1996

1998

1999

2001

2002

DEVELOPMENT OF MICROFINANCE IN MONGOLIA

7

1998 < 1 %

2000 5%

2002 15%

2004 37%

ACCESS TO LENDING SERVICES FROMFORMAL MICROFINANCE INSTITUTIONS

1998-2004

8

Year of MF & Support to Small and Medium Entrepreneurship

A year 2005 was declared as a “Year of Microfinance and Support to Small and Medium Entrepreneurship” in Mongolia by government resolution. This year is dedicated to:

I. Raise awareness among the decision makers and the general population about the importance and contribution of microfinance and entrepreneurship in eradicating poverty and job creation

II. Building sustainable, inclusive financial sectors

III. Create a favorable condition and environment for the microfinance and entrepreneurship development.

9

The main objectives of the Year of Microfinance and Support to Small and Medium Entrepreneurship are to:

Increase public awareness and improve knowledge on MF and SME related issues among MFIs and policy and decision makers as well as donors through working with mass media and other related means

Expand the outreach (depth and scale) of microfinance services and entrepreneurship in the country through promoting partnership and networking of relevant stakeholders at the national as well as aimag level (“aimag” is administrative unit such as province, county, prefectures)

Create a sustainable financial system through building the capacity of active and newly established MFIs and SME development institutions and their clients.

Improve the legal environment of and enhance coordination among MFs and SMEs in order to further promote sustainable development in the country.

10

TYPES OF MICROFINANCE SOURCE PROVIDERS:

FORMAL INSTITUTIONS

SEMI-FORMAL INSTITUTIONS

INFORMAL SOURCES

I

III

II

11

FORMAL FINANCIAL INTERMEDIARIES:• commercial banks 17• non-bank financial institutions 114• savings & credit coopreratives 570• pawnshops 900• insurance companies 16• financial leasing companies 1SEMI-FORMAL & INFORMAL FINANCIAL INTERMEDIARIES:• national & international NGOs• government funds• other informal sources (relatives, friends etc )

12

WHAT BANK OF MONGOLIA PLAN TO ACHIEVE THROUGH MICROFINANCE PROMOTION

•develop the legal and regulatory framework required forthe efficient operation of NBFIs

• contribute to meet the Millennium Development Goal• contribute to the socio-economic development

of the country• job creation• poverty reduction & alleviation• provide access to comprehensive financial services to all • outreach of financial services to low-income and rural

remote households• develop further SME sector

13

WHEN CENTRAL BANK GET INVOLVE IN MF

1. Since the establishment of two-tier banking system in 19912. 1st NBFI in Mongolia got its license from BoM in 1999

& was regulated by “Regulation on licensing of NBFIs”3. BoM initiated Law on Non-Bank Financial Activities 20024. BoM now licenses, supervises and regulates NBFIs5. BoM took active participation in the operation of NCC 6. Guidelines on Prudential Ratios for SCCs7. BoM is implementer of “Microfinance Development Fund”

since 2003

14

FORMAL FINANCIAL INTERMEDIARIES:• commercial banks 17• non-bank financial institutions 114• savings & credit coopreratives 570• pawnshops 900• insurance companies 16• financial leasing companies 1SEMI-FORMAL & INFORMAL FINANCIAL INTERMEDIARIES:• national & international NGOs• government funds• other informal sources (relatives, friends etc )

15

LEGAL & REGULATORY FRAMEWORK OF FORMAL FINANCIAL

INTERMEDIARIES (in the context of banks and NBFIs)

•Banking Law, 1996 •Law on Non-Bank Financial Activities, 2002•“Regulation on prudential ratios for NBFIs”•“Regulation on licensing of NBFIs”•“Regulation on on-site inspection of NBFIs”•“Guidelines on off-site surveillance of NBFIs”

16

COMMERCIAL BANKS

• 1991 establishment of two-tier banking system• 1995, 1998 two waves of banking crisis• 1998 financial sector reform• 2000-2004 stability in banking sector & recovery

of public confidence :1) Financial deepening ( M2/GDP)2) Increase of Loans, Deposits and Assets3) NPL4) Bank privatization

• Microfinance Development Fund in 8 banks &6 NBFIs.

17

REAL GDP GROWTH RATE, %

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

1989 1991 1993 1995 1997 1999 2001 2003 2004

18

Indicators 1998 1999 2000 2001 2002 2003 2004Real GDP growth 3.5 3.2 1.1 1.0 4.0 5.5 10.6M2/GDP 20.5 23.8 25.4 29.7 37.9 51.6 46.9Loan/GDP 10.5 8.4 6.6 12.1 18.7 32.5 33.6Deposits/GDP 13.6 13.7 15.5 19.9 28.2 42.0 34.6Assets/GDP 22.0 19.7 22.1 29.8 39.7 60.6 61.3CPI growth 6.1 10.0 8.1 8.0 1.6 4.7 11.0Annual growth of M2 -1.7 31.6 17.6 27.9 42.0 49.6 20.4

Selected financial indicators

19

MICROFINANCE PROVIDERS (commercial banks)

1. XAC Bank – is the only bank in Mongolia with explicit commitment to microfinance

2. Agricultural Bank – is the only financial service providers having substantial outreach in rural areasthrough its extensive network of 361 branches

20

XAC Bank

Established in 199926 branches in rural areas11 branches in UBAverage loan size 500 $

Structure of active loan

Micro loan 53%Consumer loan 36.7%Growth loan 4.5%SME loan 2.6%Herder loan 0.3%Other loans 0.6%

KHAAN Bank

Established in 1991392 branches in rural areas27 branches in UB

Structure of active loan

Small business loan 36.9%Pension loan 15.4%Herders loan 8.5%Investment loan 0.3%Salary loan 8.4%Crop loans 7.2%Other loans 23.0%

21

MDF’s PURPOSEThe Microfinance Development Fund is established in the framework the Sustainable Livelihoods Projects which is jointly implemented by the Government of Mongolia and International Development Association of the World Bank, in order to expand the outreach of financially &institutionally sustainable MF services in rural Mongolia.

FUND’S PRINCIPAL AIM: • to intensify the delivery of the sustainable microfinance servicesto the poor and vulnerable groups with small income individuals, households in terms of financial and organizational structure

• provide a wholesale loan to accredited MFIs for on-lending to thetarget population in the selected rural areas: 8 aimags & 1 district of UB (Bayan-Olgii, Bayanhongor, Dundgovi, Dornod, Ovorhangai,Omnogovi, Tov, Uvs, and Bayangol district).

22

MDF’s MANAGEMENT STRUCTURE

HLSPOWORLD BANK

(donor)

BANK OF MONGOLIA(implementer)

MICROFINANCE DEVELOPMENT BOARD

MICROFINANCE MANAGEMENT OFFICE

23

MICROFINANCE DEVELOPMENT BOARD

1. Bank of Mongolia (chairperson of the board)2. Ministry of Finance3. Ministry of Social Welfare & Labor4. Household Livelihoods Support Program Office (HLSPO)5. Academia6. NGOs7. Private Sector

24

1999 – 2 NBFIs2000 – 7 NBFIs2001 – 24 NBFIs2002 – 65 NBFIs2003 – 88 NBFIs2004 – 114 NBFIs

DYNAMICS OF NBFIs DURING LAST 6 YEARS

0

20

40

60

80

100

120

1999 2000 2001 2002 2003 2004

25

According to the Law, the non-bank financial activities include the following (2002):

1. Lending;2. Factoring; 3. Financial lease;4. Issuing a guarantee;5. Issuing payment instruments;6. Electronic payment, remittance service;7. Foreign currency exchange;8. Trust service;9. Investment into short-term financial instruments;10. Provision of investment and financial consultancy

and/or information services

26

Structure of the services provided by NBFIs(end of 2004)

69%

16%2%3%2%6%1%1%

lending foreign currency exchangetrust leasingfactoring transfer, remittancepayment card issuance consulting

27

2.9

8.4

12.5

18.9

28.7

0

5

10

15

20

25

30

35

Assets of NBFIs, (in billion Togrogs)

2000 2001 2002 2003 2004

28

FROM A PILOT PROJECT MICROFINANCEIN MONGOLIA :

• Became a powerful tool for poverty alleviation, asset accumulation & income generation

• Demostrated a regional example of a transition economy• Contributed to international “best practice”• Achieved international recognition • Proved the success of projects run by professional

institutions

29

MICROFINANCE PARTICIPATING INSTITUTIONS

30

LOOKING AHEAD

• further creation of favorable legal environment for MF (tax deduction of loan loss provision, acquisition of collaterals of default borrowers etc)

• establishment of United Financial Supervisory Agency• introduction of new regulatory framework in order to

prevent from possible risks• adoption of Anti-money Laundering Law• further coordination of donors’ and government policies

with the development of MFIs in Mongolia

31

Thank you for your attention.

For further information: www.mongolbank.mnwww.yearmicrocredit.mn