Introduction to Mongolian Financial Institution System
Introduction
Following seven decades of communist rule, Mongolia adopted democracy in 1990, closely followed by a shift to a market economy (Wagner). The transition has been beset with turmoil, and the Mongolian financial system has undergone crises in ‘1994, 1998 and 1999’ (ADB), primarily due to the government’s predilection of interfering in the lending policies of banks and directing credit to poorly performing enterprises. More recently, the global financial crisis of 2008 and a drop in copper prices triggered another financial crisis in Mongolia, prompting the government into entering a standby arrangement with the IMF till 2010. The standby arrangement was successful in infusing a modicum of stability to the country’s financial system (ADB).
Structure
Mongolia’s financial system consists of ‘fourteen commercial banks’ (ADB), out of which one is state owned. As much as ‘96%’ (ADB) of the system assets are controlled by the banks. Non bank financial institutions account for only ‘3.5%’ (ADB) of the financial assets, and consist of ‘192 microfinance companies, 170 savings and credit cooperatives (SCCs), 17 insurance companies and 88 brokerage firms’ (ADB). Mongolia has a relatively low penetration of leasing companies (ADB).
The top five banks control as much as 87% of the total banking assets. Banks earn most of their revenue from bank loans, most of which are disbursed in Ulaanbaatar. 65% of the loans are given to the trade, construction, real estate, mining and manufacturing sectors (ADB). A miniscule share of the lending (2%) lies in the hands of microfinance companies, while SCCs combine to provide 1% of the financial sector lending. Nearly one third of the borrowers in the financial system borrow funds from microfinance companies. The SCCs serve mostly low-income and rural households (ADB).
The insurance industry of Mongolia is in its embryonic stages. Nearly three quarters (80%) of the insurance premiums are written for property insurance. Mongolia has only one life insurance company, while 16 others are engaged in general insurance. In 2005, the World Bank introduced index-linked insurance for herders, who constitute 30% of the country’s population and are exposed to the vagaries of weather and livestock mortality (World Bank).
Mongolia set up its stock exchange in 1991 to act as a medium to privatize large-scale state owned enterprises. As of March 2012, the Mongolian Stock Exchange has ‘332 listed companies’ with a market capitalization of $2.3 billion (ADB). 99% of the investors are individuals, while the balance is made up of investment funds (ADB).
Performance
The banking system has recovered from the 2008 financial crisis. Domestic credit and deposits in the banking system are increasing. While assets have increased from $2.4 billion to $7 billion from 2007 to 2011, loans have also doubled in the same period.
Micro lending by microfinance companies remains in stages of infancy, and is underdeveloped. There is no specific legal and regulatory framework for microfinance. Mongolia has yet to enunciate a national policy for development of the microfinance sector (ADB).
The insurance sector is witnessing steady year-on-year growth. It recorded a 60% growth in 2011 (ADB). The Mongolian government has a policy allowing 100% foreign direct investment in the insurance sector (World Market Intelligence).
The Mongolian Stock Market has witnessed rapid growth. In 2014, Mongolia introduced a securities law, introducing concepts of depository receipts, custodian banks, beneficial and nominee shareholders in the stock exchange (IFLR). Mongolia has an agreement with the London Stock Exchange (LSE) to upgrade its stock market infrastructure (ADB).
Challenges
Interest Rates. The Mongolian financial system has its own set of challenges. The spread between deposit and lending rates remains wide, ranging from between 5% to almost 8%. Even with lower inflation, interest rates have remained sticky and deposit rates have remained high, indicating risk-taking behavior by banks that compete for deposits quoting high interest rates and disburse loans to risky borrowers.
Vulnerable Banking System. The overall outlook of Mongolia’s banking system remains negative (Moody’s) due to a challenging operating environment owing to tight macroeconomic policies and high real interest rates, amidst which the asset quality and capital are in a state of deterioration and funding and liquidity are tight (Moody’s).
Access to Finance. Lack of access to finance is one of the prime causes of widespread poverty in Mongolia. Lack of access to finance is not limited to individuals; as much as 38% of Mongolian firms report constraints in tapping funds for growth (ADB).
Underdeveloped Segments. The capital market remains underdeveloped. Out of the 332 companies, only 40 to 50 issues are actively traded. The market float is only 5% of the market capitalization (ADB).
Works Cited
Asian Development Bank (ADB). “Financial Sector Assessment.” ADB.org. n.d. Web. May 8, 2016.
International Financial Law Review (IFLR). “Mongolia Stock Exchange: New Securities Law Explained.” IFLR.com. June 13, 2013. Web. May 8, 2016.
Moody’s. “Moody’s: Outlook for Mongolia Banks remains Negative on Challenging Operating Environment.” Moodys.com. March 14, 2016. Web. May 8, 2016.
Wagner, Allen. “Mongolia: Growth, Democracy and Two Vary Neighbors.” NBR.org. May 03, 2012. Web. May 8, 2016.
World Bank. “New Insurance Model Protects Mongolian Herders from Losses.” WorldBank.org. March 4, 2015. Web. May 8, 2016.
World Market Intelligence. “Governance, Risk and Compliance- The Mongolian Insurance Industry.” TimeTricreports.com. February 2016. Web. May 8, 2016.
