Special report: Mongolia: Building on an old tradition
Bold Magvan is president of the Mongolian Bankers Association and CEO of Tenger Financial Group. Tenger’s 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
This year marks the 90th anniversary of the modern Mongolian banking system, but it is worth remembering that the 20th century saw not the first banking system in Mongolia, but instead the revival of a much older industry.
Centuries ago, Mongolia operated one of the world’s first 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 finance 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 financial 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 first 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 five largest banks have a 90% market share, and all Mongolian banks subscribe to international accounting standards and are audited by the top accountancy firms. 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 finance, with banks trying to lead sustainable growth while providing financial 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 financial 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.