Special report: Mongolia: Banking system marks its 90th anniversary

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Mongolia’s 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

Mongolia's 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 country’s 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 economy

But the most significant milestone in the sector’s 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 country’s 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 Mongolia’s first renminbi-denominated bonds. The bank’s so-called 'dim sum’ bond offering, raising RMB700 million ($115 million), was twice over-subscribed.

Resilient in crisis

The 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 UK’s Standard Chartered followed in 2011 and Bank of China in 2013. Japan’s 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 bank’s 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.

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 bank’s 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 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 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 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 microfinance providers such as XacBank.