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Mongolia aims for a brighter banking future
July 2014 www.euromoney.com
Celebrating 90 years
of banking in Mongolia
This special report is for the use of professionals only. It states the position of the market as at the time of going to press and is not a substitute for detailed local knowledge.
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Banking system marks its 90th anniversary in good shapeMongolias 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 banks role in creating more sustainable economic growth
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.
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 greenfield microfinance company in China 5
Foreign investors ponder developing potentialMongolias 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
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 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 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 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 Mongolias first
renminbi-denominated bonds. The banks so-called dim sum
bond offering, raising RMB700 million ($115 million), was twice
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 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
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 banks 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.
Mongolias 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 banks 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
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 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 financial services to Mongolians in general than it was nine
years ago when I arrived here.
Competition has spurred banks to expand, particularly their