Mongolia aims

for a brighter
banking future
July 2014 www.euromoney.com
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Contents
Banking system marks its 90th anniversary in good shape
Mongolias 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 expansion
and innovation, although there are worries about over-dependence on the resource sector
2
A stable base for future growth
As Mongolia moves away from dependence on mineral resources, Bold Sandagdorj,
chief economist and advisor to the Bank of Mongolia, explains the central banks role
in creating more sustainable economic growth

4
Capital markets struggle to make headway
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
8
Building on an old tradition
Bold 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 group
also has leasing, insurance and investment advisory arms, and a greeneld micronance company in China 5
Foreign investors ponder developing potential
Mongolias 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 steppes
Despite its small and widely dispersed population, Mongolia rates highly in
the nancial inclusion stakes
14
Expansion and consolidation
Even 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.com 2
Banking system
MONGOLIAS 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 countrys rst 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 full nancial 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 economy
But the most signicant milestone in the sectors 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 countrys rst 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 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 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 nancial sector including
insurers, securities houses, credit and savings unions, and non-
banking nancial institutions.
In 2007, TDB became the rst 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 Mongolias rst
renminbi-denominated bonds. The banks so-called dim sum
bond offering, raising RMB700 million ($115 million), was twice
over-subscribed.
Resilient in crisis
The global nancial 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 briey in the initial stages, helped in part by the
introduction of an interim blanket bank deposit guarantee
scheme in 2008.
That year saw the rst foreign banking presence when Dutch
bank ING set up a representative ofce. The UKs Standard
Chartered followed in 2011 and Bank of China in 2013. Japans
number one and two banks Bank of Tokyo-Mitsubishi and
Sumitomo Mitsui Banking Corporation opened representative
ofces 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 banks exposure to any single borrower. The law also
prohibits a single investor from signicant inuence 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.
Mongolias 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 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 nancing to strategically
important sectors loans for infrastructure and industrial
and energy developments to be funded through bond sales.
The banks rst 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 fth largest lender, failed
pulled down by the non-performing loans of its afliates and its
insolvent parent company and was taken over by State Bank.
Dynamic sector
This 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 micronance providers such as XacBank.
Seeing the development of the banking system over the last
decade, although there have been problems all theyve done
is helped highlight and weed out the weaker players, says
TDB president Randolph Koppa. So were getting, I feel, an
increasingly stronger system thats providing a broader array
of nancial 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 nancial inclusion.
But the banking system faces risks from Mongolias 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 banks roles is to ensure the stability of
the nancial system and we have worked to make sure banks
are sufciently 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 Capitals 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 theyve done outside
natural resources has been real estate, and I think theres 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.
TDBs Koppa says that the headline gures 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 signicant but the gure
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 nancing 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
signicant 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 headwinds
The sector does face some headwinds in the short term from
rapid credit growth and imbalances injected by ination above
12% and a substantial current account decit 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 countrys key
export, and that banks and the BOM may be underestimating
the true extent of NPLs.
However, with the decit set to fall, a weakening ination
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 worlds fastest-growing economies.
SPECIAL REPORT : MONGOLIA July 2014 www.euromoney.com 4
Central Bank interview
THE BANK OF Mongolia (BOM) was established in 1924 and has
played a key role in maintaining macroeconomic and nancial
stability. Although its primary objective is similar to that of other
central banks, it promotes balanced economic growth by ensuring
nancial 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 ofcials 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 inows and
pressure on the balance of payments.
Responding to challenges
The bank has responded well to the challenges it has faced with
conventional and unconventional monetary policy measures to
control ination, protect the real incomes of low- and middle-
income households, safeguard the nancial 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 nancing programme.
As a result, the share of supply-driven and cost-push
inationary pressure in consumer price ination has signicantly
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 exible exchange rate policy and the positive impact of
that exibility 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 decits and, once exports are
signicantly 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 and
stable. The systemic average capital adequacy ratio is almost
17% at present, which is ve 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 nancing
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 nancing 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 banks 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 rst banking system in Mongolia,
but instead the revival of a much older industry.
Centuries ago, Mongolia operated one of the worlds rst
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 nance 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 banking
The 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 nancial 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 rst 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 industry
In recent years international investors have taken stakes in
Mongolia banks, and the industry has become increasingly
professionalized. Now the ve largest banks have a 90% market
share, and all Mongolian banks subscribe to international
accounting standards and are audited by the top accountancy
rms. 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 nance, with banks trying to lead sustainable growth
while providing nancial 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 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 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. Tengers 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 greeneld micronance
company in China
Building on an old tradition
A EUROMONEY MAGAZINE sponsored statement
Khan Bank is the biggest retail bank
in Mongolia, providing exceptional
fnancial services to more than
three-quarters of domestic
households, alongside a growing
range of corporate solutions.
The banks 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 frst
to offer mobile and SMS text
services. Our multichannel strategy
has reaped rewards, and the banks
Smart Phone Banking solution is
ranked frst in Mongolia among
banking and fnance applications.
Investing in innovation
The banks 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 Banks
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 fve years, and we
are constantly seeking to expand
our product offering across loans,
deposits and foreign exchange.
Corporate coverage
In 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-feld
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 frms and
consumer goods suppliers. For
example, the bank offers trading
frms 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 responsibility
As 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 outwards
Khan Bank is active in the capital
markets and in 2013 borrowed
$111 million through a syndicated
loan facility, the frst 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
fnance, 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 banks fnancial
performance has been on an
upward trajectory. Net proft 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 peoples
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 Mongolias biggest retail bank and build new business and product offerings
Seoul Street-25, PO Box-192, Ulaanbaatar-14250, Mongolia
Telephone: +976 11 332333
Email: callcenter@khanbank.com
Web: www.khanbank.com
SPECIAL REPORT : MONGOLIA July 2014 www.euromoney.com 8
Capital markets
MONGOLIAS 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-fth of GDP but the momentum
from that initial leap forward has since zzled.
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 limits
Corporate banking is well developed, with the larger banks
providing most services from lending, trade nancing 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 Mongolias 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 youre 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. Thats 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 insufcient 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 governments sovereign
bond issue and have advised on
syndicated loan arrangements in the capital markets. Weve
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. Were really geared to be the leader in
corporate lending activity.
Indirect route
Institutional 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 youre 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.
Theyre trying to create an infrastructure thats more
conducive to trading and especially institutional interest but
unfortunately theres just too many other outstanding issues
right now where I dont 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 theyre moving in
the right direction. In terms of policies and regulations theyre
trying to create a more liberal market and to create liquidity
but it really is being held back by how slow the government
moves. Therere 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 ination.
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 lacking
The 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 MSEs 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 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 been
only one other listing since 2008.
The bond market is even slimmer, with zero turnover in
both government and corporate bonds in the rst 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 infrastructure
The government has placed strong emphasis on creating an
infrastructure to foster sustainable development of the countrys
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 rms overseas and of
overseas rms 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 rms are permitted to oat has
been raised to 25% and nancial statements must now be led
in both English and Mongolian.
However, the dual listings and arrival of global custodian
banks and institutional investors have yet to materialize.
Quam Asset Managements 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 arent going to suddenly say oh now we can trade
options and futures, lets increase our Mongolian allocation.
There are too many things that need to be xed before its 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. Its really not an investable market for a
lot of people. I wouldnt buy options on Mongolian equities
because theres no real tangible and predictable return I can
earn. With the regulations on nancial reporting and the
current trade participants within the market its too hard to
play 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 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.com 10
Foreign direct investment
RESOURCES-RICH MONGOLIA has been attracting long-term
foreign investment on an ever-increasing scale since the 1990
transition. But net inows exploded following the nancial
crisis, reaching $4.45 billion in 2012 up from just $372.8 million
in 2007, World Bank gures show.
FDI dipped to $2.3 billion in 2013, largely due to the falling
price of commodities and completion of phase one of Rio Tintos
$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
nancing 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 rst
quarter 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 to
stagnation in the mining sector, especially the coal industry. The
passage of the Strategic Entities Foreign Investment Law (Sel) in
May 2012 also pushed FDI out. Parliament responded by updating
the legislation and approving the new Investment Law.
Government gures 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 rms 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 riches
Even 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
uorspar 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. Mongolias
robust free-market democracy means its policy of developing
its mineral wealth by the most transparent but commercially
efcient means, while hotly debated, is in the end consensual.
Tapping the resources and expertise of global mining companies
has proved benecial 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 Imperatives 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 Mongolias 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 ahead
Mongolias 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
Mongolias 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 Kearneys 2013 Global Retail Development Index
ranks Mongolia seventh, up from ninth in 2012, just below
the UAE and Turkey. The rm 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 Pacic 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.
Diversication efforts
The recent volatility in investment ows 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 decit but in
the rst 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 ows. New legislation came into
force in November replacing the Sel 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 certicates
guaranteeing uniform tax treatment for between ve 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
ofcials more accountable and simplied procedures for issuing
licences and approvals.
John Grogan, chairman of the Mongolian-British Chamber of
Commerce, is not convinced the governments 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. Its denitely having a chilling
effect. Theres a lot less interest than there was a year or 18
months ago. Im not sure that well see any appreciable pick-up in
FDI while this dispute remains unresolved.
Mining and the distribution of mining prots is a very
sensitive issue where Mongolia quite rightly wants to strike the
right balance and follow Norways example of mineral wealth
development, rather than Nigerias.
Its 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
Sponsored chapter
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 countrys
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
specifc 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
defne Mongolias 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 doesnt
perform well?
The government needs to support
its high-priority sectors, such
as agriculture, manufacturing,
hospitality, tourism and education.
Mongolias vast land resources
(approximately 1,565,000 square
kilometres) give us great potential
not only to be self-suffcient 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
effcient 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 banks Corporate Banking Division,
spoke to Euromoney about her banks efforts to help develop and diversify the economy
Golomt bank headquarters, Ulaanbaatar
Head Offce of Golomt bank, Great Chinggis Khaans Square 5, P.O.Box 22, Ulaanbaatar 15160, Mongolia
Web: 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
signicance 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.
Sponsored chapter
What role does Golomt bank
play in the development of
these sectors?
As our countrys 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 economys 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 frst four mill and at meat
processing factories.
To facilitate access to long-
term fnancing, 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 fnance
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 fnance
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
countrys 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 signifcance 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 signifcant
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 fnancing 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 fnanced these companies
with Chinggis bond proceeds.
Another project under consideration
for development is production of
wool yarn.
Through Chinngis bond
proceeds we also fnanced
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 fnanced seven hectares of
land to implement greenhouse
technologies from the Netherlands
and China.
In the next fve to 10 years,
how do you see Mongolias
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.com 14
Financial inclusion
MONGOLIA SCORES IMPRESSIVELY when it comes to ensuring
access to nancial 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
countrys 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 Banks 2012 Global Financial Inclusion
Database (Findex), with the level of penetration far exceeding
that of most of the countrys neighbours including China,
Russia and Kazakhstan.
Mongolia outperforms other low-to-middle income countries
on every nancial 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
nancial 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-fth 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 governments 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 Im not
so sure its a problem of people lacking bank accounts, says
TDB president Randolph Koppa. There isnt a lot of consumer
nance that banks do thats unsecured. We can count the
number of mortgage holders in the banking sector at about
55,000 so, thats maybe only covering 200,000 people. Theres
still 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 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 micronance
operations, XacBank extended into all 21 provinces within its
rst year of operation. Building on its micronance 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.
XacBanks 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, XacBanks 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 nance.
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 phone
Self-service facilities are on the rise with 50% of bank
account holders already using ATMs as their main mode of
withdrawals. However, Mongolias 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 nancial 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 gure 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 networks
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 Asias 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 Groups 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 nance
State 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 Banks
top priorities, along with consumer protection. The bank says
it is also committed to making nance more accessible through
competitive rates and halving the number of supporting
documents required for loan approvals. Nomads often possess
far fewer ofcial 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 governments
Solar Ger Electrication Programme. To achieve its
100,000-family target, the programme borrowed heavily from
XacBanks 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 nancing 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
worlds 2.5 billion unbanked.
Signatories make a measurable commitment to adopt and
implement a nancial inclusion policy that fosters the harnessing
of affordable technology to increase access to and lower the costs
of nancial services. The declaration also calls for a regulatory
framework that encourages the development of new nancial
services and draws on other countries best practice; a high
priority 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 Regulatory
Commission, which is responsible for nancial 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 nancial 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.com 16
Expansion
IN LITTLE MORE than two decades since the rst 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 fth 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 ve 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 were 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. Its 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 nancial value
of the company.
I dont 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 dont 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 isnt 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.
Thats no different to the representative ofces they currently
have but as cross-border lenders they dont have the considerable
added costs of running a bank in the country and all that
entails both from local requirements and from headquarters
compliance ofcers, IT support and controls on money transfers.
Privatization plan
Koppa believes that there is further potential consolidation
among the big ve to come because the central banks ultimate
goal is to privatize State Bank; one of the other four, or a foreign
bank, could be the acquirer. Beyond that Im not sure how
much more of a gain could be made in terms of competitiveness
because theres 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 countrys 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 fth 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 afliates 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
Banks failure to meet the BOMs prudential requirements and
its passive operations exceeding its active operations, says
Gombosuren Khandtsooj, State Banks director of investment
banking. At that time State Bank was a small commercial, state-
owned bank. After the merger it is much larger, ranking fth 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
Theres 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