Financial Sector

May 14, 2007 at 1:00 am Leave a comment


The official monetary unit of Mongolia is the Tugrik (MNT). Whereas the Tugrik is the official currency for settlement of payments, the Bank of Mongolia is authorized to approve other currencies acceptable as legal tender. Certain government agencies have implemented standard form contracts requiring government agencies to be assessed in other designated currencies, such as the US dollar.

Since 1996, all cash payments are made in Tugriks, except services for foreigners. The exchange rate fluctuates but is approximately US$1=MNT1172 as of July 2006. Money can be exchanged at the authorized currency exchange points, as well as at banks and hotels.

Bank and Financial Sector Development

Prior to the spring of 1991, no western-style commercial or central banking system existed in Mongolia. The State Bank was the only bank in Mongolia and fulfilled all banking functions, both domestic and international.Under the 1993 Banking Law, a two-tiered banking system was created consisting of the Central Bank of Mongolia (BOM or Bank of Mongolia) and the commercial banking sector. As a result of sound monetary and fiscal policy, confidence in the banking system by the public, business people, and organizations has significantly increased. Role of financial intermediation within the economy has deepened and a positive influence of the banking system on the real economy, including foreign investment in the financial and banking sector has occurred.

Reform of the banking sector was an essential component in the transition process. Priorities include the reduction of government stakes in the banking sector through the privatization program, elimination of bank insolvencies while minimizing the cost to the exchequer and the creation of a modern and efficient banking sector.

Mongolia suffered three banking sector crises in 1994, 1996 and 1998. Three banks placed under receivership were the Investment and Technological Innovation Bank (ITI), Reconstruction Bank (RB) and Agriculture Bank (AB). The cost of the 1994 restructuring was estimated at over 2% of GDP. The cost of the 1996 restructuring exercise as measured solely by issuance of government reconstruction bonds, amounted to MNT46 billion or 7.8% of GDP. Under closer examination, the situation in these banks appeared worse than had been initially suspected with doubts about the quality of the ‘performing’ loan portfolio and a reclassification which resulted in an increase in the share of loss loan assets. Whereas AB may be re-capitalized in the context of a sale to new private owners, ITI and RB have been scheduled for liquidation and their licenses were revoked.

During 1999, the BOM also took several steps to strengthen banking regulation and supervision. Measures included the development of a new chart of accounts and a revised accounting framework introduced in January 2000. A range of banking-related legal amendments were also enacted and aimed at strengthening the powers of conservators and receivers, providing explicit powers for writing down shareholders capital in insolvent banks, ensuring enforcement of court orders and speeding up the enforcement of collateral.

During 2001, the Mongolian banking system was stabilized and the fundamental basis for further steady growth was in place. At the end of 2001, 16 banks and 28 non-bank financial institutions were providing banking services through their 538 offices (105 branches, 419 sub-branches, & 13 cash offices) located in all aimags of the country. Rural offices represent more than 80 percent of all banking offices. During 2000, banks focused on expanding their operations only in aimags with well-developed infrastructure, industry and agriculture. But during 2001, they began opening new branches in Gobi-Sumber, Khovd, and Selenge which indicates that there was competitive pressure between banks and a desire to enter new markets. Improvements in the financial condition of the Agricultural Bank, derived from implementation of a memorandum of understanding, helped to restore public confidence in the rural area.

As of the end of 2005, 17 banks were carrying out an activity in Mongolia and 732 subsidiaries of these banks across the country (including 107 branches, 590 payment and settlement centers and 31 cash offices) were providing banking service to customers.

Out of 17 commercial banks 1 was state-owned, 2 had minor state participation and the remaining 14 banks were under full private ownership. Of 14 private banks, 6 were with foreign investment (the majority interest of 5 banks is owned by foreign investors). State-owned and state-participated banks held 10.8 percent of deposits and 8.5 percent of current accounts in the banking sector.

In recent years, banks have been adopting new technologies, including non-cash settlements and Internet banking. Furthermore, banks have been focusing on providing tailor-made services to individual customers by diversifying basic banking services and products, such as deposits and loans. Thus the expansion of banking services has supported the rapid growth in microfinance development, and facilitated poverty reduction and employment generation.

The number of current account holders reached 899,600, the number of depositors 627,600, and borrowers 322,700, showing the broadening of financial services and growing public confidence in the banking system.

Banking sector

In 2005, money supply (M2) made up 51.6 percent of GDP. The ratio of outstanding loans to GDP was steadily rising; in 2005 it reached 37.9 percent. According to the Resolution of the Governor of the Bank of Mongolia, banks must increase their statutory capital up to MNT 8.0 billion by the end of March, 2006. Rising minimum capital requirement for banks leads to enhanced resilience to various types of risks, improve public confidence in the banking system, bring greater exposure to individual borrowers and broaden the scope of financial intermediation. The share of currency outside banks in GDP has fallen for the last four years, indicating the rising public confidence in the banking system.

In 2005, the ratio of banks total assets to GDP increased to 69.9 percent. The growth in total assets resulted from 34.1 percent or MNT 176.5 billion increase in deposits (of which, MNT 134.7 billion accounts for deposits of individuals), 69.8 percent or MNT 129.9 billion pick up in current accounts, 76.5 percent or MNT 53.6 billion increase in liabilities to other financial institutions, and 23.9 percent or MNT 40.0 billion increase in capital. Return on assets (ROA) was estimated at 1.5 percent.

Bank of Mongolia (BOM)

The principle objective of BOM is to ensure the stability of the national currency, the ‘Tugrik’ and to implement state monetary policy. In order to implement its objectives, the Bank of Mongolia conducts the following activities:

1) Issuing currencies into circulation;

2) Formulation and implementation of monetary policy by coordinating money supply in the economy;

3) Acting as the Government’s fiscal intermediary;

4) Supervision of banking activities;

5) Organization of inter-bank payments and settlement;

6) Holding and management of the State’s reserves of foreign currencies.

The 1996 Law on the Central Bank invested broad powers of financial oversight in the Bank of Mongolia. These powers include the management and oversight of interest and exchange rates, government borrowing, inter-bank settlements and lending, printing and issuance of bank notes, minting of coinage and management of state foreign currency reserves. Fulfilling the functions of a central bank, the Bank of Mongolia is independent of government. The Speaker of the Mongolian Parliament nominates the BOM Governor, who in turn nominates the Bank’s First Deputy Governor and Deputy Governor. The Mongolian Parliament approves all three nominates, together with salary levels. The Parliament has, however, only a supervisory role in implementing the state’s monetary policy.

The Bank of Mongolia also reviews applications for the establishment of new commercial bank as well as issuing approvals for the creation of branches of existing banks. The requirements for new commercial banks, and the creation of branches of existing banks are outlined in the Law on the Central Bank. While the Bank of Mongolia is responsible for regulating foreign exchange rate policy, private currency transactions at rates other than the official rate are not illegal. This has lead to a considerable variation from official rates in the private market.

Non-Bank Financial Institutions

At the end of 2005, the number of operating NBFIs reached 150. NBFIs were classified by activity as stated in the Law on Non-Bank Financial Activities as follows: providing loans 144, foreign currency trading 50, trust services 16, financial leasing 13, factoring 5, remittances 19, electronic transactions 1, financial consulting 1. These activities were carried out in accordance with license terms and additional permissions.

Out of total NBFIs, 7 carry out activities in Dornod Aimag, 3 in Darkhan-Uul Aimag, 2 in Zavkhan Aimag, 2 in Arkhangai Aimag, 2 in Khovsgol Aimag, and one in each of the following aimags such as Tov, Selenge, Sukhbaatar, Orkhon, Govi-Altai, Uvs, and Bayankhongor. Total assets held by these NBFIs were worth MNT 888.3 million, which represents 2.3 percent of total assets held by all NBFIs.

Moreover, the Bank of Mongolia took policy measures to boost the operations of NBFIs by encouraging foreign investment in the financial sector. The Bank of Mongolia encouraged international financial organizations to establish NBFIs with special legal status. “Imperial Gold” Ltd. received a license to conduct activities as an international financial organization.

The number of NBFIs with foreign investment rose to 13. Total assets held by these NBFIs reached MNT 11.3 billion, or 29.5 percent of total assets of all NBFIs, and their capital accounted for MNT 7.3 billion, making up 28.6 percent of total capital.

Breaking down NBFIs by the origin of their investment shows that 2 NBFIs were financed by the EU TASIS program and the international non-governmental organization “World Vision”, and another 10 NBFIs were supported with full or joint foreign investment. There were 3 NBFIs with Japanese investment, 2 with British, 2 with Chinese, and 3 with full Russian, Italian and Korean ownership.

In 2005, the number of NBFIs shareholders and employees reached 411 and 546, respectively. Moreover, NBFIs provided financial services to about 51,200 customers. Total NBFI assets comprised 2.4 percent of the banks total assets, while the return on the assets (ROA) stood at 3.6 percent.

In order to raise NBFI capital and diminish risk, the minimum requirement for statutory capital was increased by the BOM. NBFIs carrying out activity in Ulaanbaatar city are required to establish paid-in capital of at least MNT 200.0 million, those operating in Darkhan Soum, Darkhan-Uul Aimag and Bayan-Ondor Soum, Orkhon Aimag are required to have MNT 100.0 million, and in other aimag centers the requirement is for MNT 10.0 million. Moreover, NBFIs conducting electronic transactions, remmitances and trust services should have paid-in capital of at least MNT 500.0 million.

Further state regulation of issues such as the introduction of new financial products, expansion of financial intermediation, and development of fair competitiveness will facilitate deepening financial intermediation in its classic form, according to the best international practices and reduce risk in the financial sector.

Under the Law on Legal Status of the Financial Regulatory Committee, enacted by the Parliament on November 17, 2005, a Financial Regulatory Committee was established with fixed legal status. The Committee is responsible for issuing, suspending or revoking licenses for financial activities with respect to non bank financial activities, insurance, securities and saving and loan , as well as setting out standards for compliance and supervising activities to protect investors and customers rights. The establishment of the Financial Regulatory Committee should greatly facilitate further development of the non bank financial institutions, saving and loan cooperatives, the stock market, insurance and leasing activities.


Except for the first cross-border lease of the Airbus by Mongolian Airlines in 1998 and Fokker 50 by Aero Mongolia LLC in 2003, the main types of leasing as a financial product are the leasing of mining equipment mainly by suppliers-sometimes by collaborating banks-and short-term leasing of consumer items ranging from mobile phones to provides cars. The latter are often for items of less than 12 months, though can go up 24 months in the case of vehicles.

As of December 2005, there are 13 companies (as compared to 11 in 2004) providing leasing/lease type products in Mongolia, of which seven are commercial banks, two non bank financial institutions, and rest are suppliers. In 2005 the lease providers issued 23,708 leasers for a total value of USD10.7 million, showing on increase of 40.2% compared to the previous year.

The total value of the outstanding leases was USD 7.12 million on 31 December 2004 and had grown by 51% to USD 10.73 by 31 December 2005.

A significant increase (813%) in outstanding leases for banks appeared in 2005, while it increase for NBFI by 200% and decreases for suppliers by 5.3%, the decrease in outstanding leases of other lease providers (suppliers) is mainly due to insufficient financial sources. The research shows around 50% to 60% of sources of the suppliers that used to finance leases came from local and foreign bank loans.

The estimated value of outstanding leases as compared to outstanding loans in the banking sector is 1.59 % in 2005, which indicates a 0.1 % growth from 2004.

Demand for leasing Leasing could be an important source of medium and long term financing for the acquisition of assets, for producers that currently are not able to benefit from the loans offered by the banking sector, either because they do not possess sufficient collateral, or because they don’t have credit history to quality for loans. Another major reason of unavailability of bank loan is a gap between demand and supply of loan sources.

Leasing is considered one of the ways to fill this gap and promote herder, farmer and small business income expansion, adopt a better technology and improve productivity.

Government support to develop leasing Strengthening the financial sector, and leasing in particular, is part of the Action Plan of the Government of Mongolia for the economic development of the country in 2004-2008. Within the frame of the Action Plan, the year 2005 was declared as a “Year of microfinance and Support to Small and Medium Entrepreneurship” by government and this year was mostly dedicated to creating favorable conditions and environment for microfinance, raising awareness among public about the importance of microfinance.

In a year of microfinance the Government drafted the law on financial leasing and tax amendments with the assistance of MLDP and on January 20, 2006 the approved version of draft leasing legislation presented to the Secretarial of Parliament by the Government.

Lessors The financing of assets through leasing-even though the “leasing” mentioned might not fully adhere to the definition of financial leasing-in Mongolia is done by banks, NB-FIs (including leasing companies and credit unions), and vendors. Some donor funded projects are also considering leasing, through they seem to be more interested in operational leasing.

As the following chart demonstrates the biggest volume of leasing in monetary terms is financed by the suppliers of large equipment –mostly related to the mining sector. The equipment suppliers finance part of their equipment sales through leasing arrangements and will continue to do it until the banks and other leasing companies offer sufficient lease financing.

Banks come in second place with approximately 40 % of the lease volume, while NB-FIs are responsible for less than 3 % of the volume of leases.

Since the banks are mainly engaged in the leasing of consumer goods while the four vendor-lessors are engaged in the leasing of mining equipment, it is not meaningful to calculate the average size of all leases. The average size of lease agreements executed by banks was only US$ 340; in contrast, the average size of the leasing deals executed by the lessor-vendors was US$ 35,117.

Banks There are 17 commercial banks in Mongolia, 7 of which are advertising products that they call “leasing” or “leasing loans”. There are: Trade and Development bank (TDB), Golomt, XAC Bank, Capitron bank, Agricultural Bank, Zoos Bank and Anod Bank. Banks offer a variety of leases; they finance mainly consumer goods such as mobile phones, household appliances and vehicles, but also some productive equipment. Under the present regulatory framework, banks have an advantage over other companies that would be interested in leasing because they process leases similarly to loans and pay less tax. Unfortunately, there are disadvantages related to banks engaging in leasing activities: Precisely because they are deposit-taking institutions they must be closely supervised, adhere to prudential regulations and minimize risks. As a consequence, they are not well equipped to offer an attractive leasing product that is fast, flexible, with a reasonable term and doesn’t require extra collateral; therefore they mainly engage in consumer type of leasing. Banks have not yet seen an urgent need to develop genuine leasing because their loan products are successful and absorb their available resources. Banks that engage in leasing of consumer products and private vehicles usually draw up an agreement with certain vendors. In some cases they get a discount for the leased assets- unbeknownst by the lessees.

Vendors There are four large suppliers of mining equipment that resort to leasing because their clients are not able to buy the equipment outright and cannot get loans for acquiring the goods. Their outstanding lease portfolio declined slightly from USD 6.44 million to USD 6.10 million and was probably picked up by banks (foreign and Mongolian).

Leasing products The 3 main types of leases assets are consumer goods (electronics, household appliances), private cars (used and new) and productive equipment.

Typically, leases for consumer items and vehicles have terns up to 12 months (sometimes up to 24 months), down payments of 20-30% and monthly interest rates (in tugrik) range between 1.1% -3 % is mainly done by banks. Only 1.2% of the number of leases drawn up by banks in 2005 is for more than one year, corresponding to 13.3% of the value of those leases.

Particularly, in the case of consumer goods, the banks provide financing for goods of certain specific suppliers with whom they have a contract (and sometimes they pay less than the retail price for those goods nut the consumer doesn’t know that). Sometimes a small commission is paid by the customer or supplier.

Generally, the lesser owns the asset or at least holds the title of the asset until the end of the lease term, but the assets are not recorded on their balance sheet.

Collateral is only requested when it is not fully clear whether the customer’s cash flow might be sufficient to cover the lease payments.

Heavy Equipment Concerning the leasing of productive equipment per sector, in terms of value of leases, the mining sector is clearly the sector that makes the most use of leasing deals. This is probably due to the fact that the mining equipment is very expensive as compared to other types of equipment and mining companies can’t afford to pay upfront or get bank loans.

The interest rate used in the equipment leasing of the suppliers is between 12-18% per annum. This is lower than the average market interest rates, the reason being that these Vendors don’t see themselves as lessors and make their money on the sale of equipment.

Vehicles Private vehicles are usually mentioned separately from consumer items, though many of them are, in fact consumer items. Vehicles are an attractive asset to lease because they are easier to keep track of (vehicle registration) and have a clear re-sale value.

The operations of taxi-services in Ulaanbaatar are interesting in that they demonstrate a need for the availability of more lease financing. Below is an example of how they operate:

An undisclosed taxi company offers a service to taxi-drivers that is similar to a finance lease; it makes a “Sale-Purchase” agreement with each taxi driver for a car stating that after 320-360 working days, depending on the payment schedule, the ownership will transfer to the taxi driver. The driver pays a USD 500 deposit, is responsible for the maintenance, and pays around USD 5 037 over 18-20 months in daily installments of about USD 15 per working day.

The company manager says that the drivers benefit a lot from this service, because they do not pay any interest. However, the actual cost of these vehicles in the market is around USD 2 642; this means that the company makes 91% on its investment over 18-20 months, which, depending on the way it is calculated, is nearly 3 or 4 times the average loan interest rate in Mongolia. Of course, the drivers don’t quality for bank loans because they do not have any acceptable collateral. The development of leasing companies would bring down these extortionate interest rates. This demonstrates the weak position lessees in Mongolia are generally, in: Even though, according to the Mongolian laws, financial lease is considered a type of lease and the Civil Code promulgates a principle of equally of a contract, in practice lessors often take a dominating position in concluding a contract while in Mongolia lessees are constrained by the lack of choice of lessors and a lack of knowledge on leasing.

Mongolian Stock Exchange (MSE)

The Mongolian Stock Exchange was created in 1991. The Mongolian privatization program, to a greater extent than in other countries, was connected with the development of the capital market.

In the first phase from February 1992 to August 1995, the MSE operated as a mechanism of voucher distribution (blue coupon privatization of big enterprises). Until the first half of 1995, the MSE sold shares of 470 companies worth MNT19, 400 million, served about 1.1 million people, and traded 1.540.500 blue vouchers and 1.377.200 pink vouchers received from over 460.000 people.

During the second phase, beginning in August 1995, the MSE assumed the role of the regular stock exchange. In September 1995, the State Great Khural (the Parliament) adopted the “Law on Securities” and set up the “Securities Committee”. This solved many problems related, firstly, to the reorganization of the MSE as a not-for-profit entity. Secondly, the privatization of brokerage firms. Thirdly, the financial resources needed to conduct a secondary securities market. Fourthly, the creation of conditions for effective participation of regulations on distribution of dividends, and, finally, prices of shares traded in cash. Therefore, the fledging securities market was open for domestic and foreign investors, “playing” on an equal playing field under the same rules and regulations.

With the start of secondary market activity, shares of over 38.8 billion tugriks /32.1 million USD/ have been traded in 1996-2004. Since the government bond trading in 2000, corporate bond trading in 2001 to date government bonds worth of 117.9 billion tugriks /97.5 billion USD/, and corporate bonds worth of 9.9 billion tugriks /8.2 billion USD/ have been traded.

Revision to the securities and exchange law adopted by the Parliament in December 2002, stated the MSE as a business entity, which is allowed to carry out legal business services. According to the Government resolution, the MSE was reorganized as a profit making, state-owned shareholding company and divided two independent organizations such as “Mongolian Stock Exchange” and “Securities Clearing House and Central Depository”.

Depository, Clearing and settlement of securities on the MSE market are executed through the “Securities Clearing House & Central Depository”/SCHCD/ Co.,Ltd. All listed securities on the MSE are deposited in dematerialized form with SCHCD. The clearing and settlement of securities is performed without the physical transfer of certificates between seller and buyer. This method enable to be cleared and settled on the day the transaction is executed (T+1) for Government and Corporate bonds and on the next business day following the day of transaction (T+1) for shares.

Trading on the MSE is performed only by member broker-dealers companies licensed by the Securities Exchange Commission. The relations between members and MSE, and the requirements, procedures and fees are stipulated in the “Regulations of Membership of the MSE”.

In 2005, there were 253 securities trades on Mongolian Stock Exchange, trading 257 stock companies 25.9 million shares, 305.4 thousand company bonds and 70.0 thousand Government bonds with total transaction value of 12.0 billion MNT. Comparing with the last year, the total value of share trading was increased by 1.9 billion MNT or 3.9 times, the trading value of company bond and government bond decreased to 112.8 million MNT or 4.1 times.

At the end of 2005, the MSE’s TOP-20 index stood at 1019.20, which exceeded the same indicator for the previous period by 326.63 points. Visit for more information


Entry filed under: Financial Sector.

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Information contained in this web site are partly derived from a CD-ROM "Guide to Investment and Trade-Mongolia", produced by Foreign Investment and Foreign Trade Agency (FIFTA). All trademarks are properties of their own respective owners.

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