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Special report: Mongolia: Bringing banking to the steppes

Despite its small and widely dispersed population, Mongolia rates highly in the financial inclusion stakes

Mongolia scores impressively when it comes to ensuring access to financial services considering it is the least densely populated country in the world, with a population of 2.9 million spread out over 1.5 million square kilometres.

Around a quarter of the population are nomadic herders of goats or yaks on the steppes, far beyond the reach of the country’s almost non-existent transport infrastructure. Provision of services of any kind – let alone banking – is a challenge.

Yet almost 80% of Mongolians have a formal bank account, according to the World Bank’s 2012 Global Financial Inclusion Database (Findex), with the level of penetration far exceeding that of most of the country’s neighbours including China, Russia and Kazakhstan.

Mongolia outperforms other low-to-middle income countries on every financial inclusion variable apart from health insurance, its East Asian neighbours on most measures, and even rivals some high-income developed countries in areas such as penetration of debit cards. One in four has a loan; the number of women with bank accounts exceeds men by 10% with the proportion approaching that of North America and the Euro area. It scores particularly highly in inclusion of groups whose access to financial services is most commonly limited, including those with only a primary education, low incomes and rural residents.

Reaching the people

“Mongolian banks are focused on reaching out to the population, nearly 50% of which still lives in rural areas,” says Magvan Bold, chief executive of Tenger Financial Group whose largest subsidiary is XacBank. “Technology plays an increasing role, and even herders can use mobile phone banking apps to make payments and transfer money.”

Banking services have traditionally been the preserve of the middle class and the wealthy but these are a small minority in a country with huge income disparity where around one-fifth of the population, according to ACDI/VOCA, exists on $1.25 day.


"Technology plays an increasing role, and even herders can use mobile phone banking apps to make payments and transfer money"

Magvan Bold, Tenger Financial Group 

The high level of banking penetration may be due in large part to universal cash handouts from the government’s Human Development Fund as well as pensions, health insurance, and student tuition payments. Around 50% of all bank account holders over the age of 15 cite receiving government payments as the most common use for a bank account, according to Findex; only around 30% of customers say the main use is for payroll credits.

“Many of the people out in the countryside where Khan Bank and State Bank have a lot of branches are getting payments regularly and have to receive them through a bank so I’m not so sure it’s a problem of people lacking bank accounts,” says TDB president Randolph Koppa. “There isn’t a lot of consumer finance that banks do that’s unsecured. We can count the number of mortgage holders in the banking sector at about 55,000 so, that’s maybe only covering 200,000 people. There’s still some room to grow in terms of getting home financing and other retail financing services to more people.”

The big three retail banks, XacBank, Khan Bank and State Bank, have proactively targeted marginalized consumers in remote rural areas, including nomadic herders with the aim of providing accessible banking services.

XacBank, part-owned by the International Finance Corporation, the European Bank for Reconstruction and Development, ethical investors and NGOs, has equitable access to banking products and services for all, including SMEs, as one of its primary goals. Created in 2001 from the merging of international development organizations’ rural microfinance operations, XacBank extended into all 21 provinces within its first year of operation. Building on its microfinance roots, it has since expanded with more branches and extensions through the use of tie-ups with savings and credit unions, franchise arrangements and agents.

XacBank’s micro loans account for around 17% of its $600 million loan portfolio with delinquency rates among the very lowest. With almost one in four customers a (secured) micro-loan client, XacBank’s success is in many ways an object lesson in responsible lending. It uses an end-to-end approach built around an outreach strategy of setting up small outlets in remote rural centres, gradually establishing a network of relationships to disseminate no-obligation information about micro finance. The bank is equally meticulous in providing ongoing post-loan disbursement advice and support.

Khan Bank, with three out of every four of its 524 branches serving the provinces, claims to provide banking services to an estimated 70% of the population. Card services are provided to 1 million customers via a network of 310 ATMs.

On the phone

Self-service facilities are on the rise with 50% of bank account holders already using ATMs as their main mode of withdrawals. However, Mongolia’s saturation-level mobile phone density is an increasingly important factor in the penetration of banking services.

According to the Communications Regulatory Commission there are 103.8 mobile phones per 100 inhabitants with almost 3 million mobile phone line subscribers. That compares to the worldwide figure of 85 mobile phones per 100 inhabitants. The mobile network is accessible to 95% of the population covering all provinces and 335 districts, although some subscribers in the most remote areas have to travel several kilometres to get a signal.

The big three have taken advantage of the network’s exhaustive coverage to make banking by mobile phone available to customers previously beyond the reach of any type of banking services. A number of other banks have followed their lead or partnered with mobile operators’ e-money schemes. Broadband internet service is also available in 34 district centres, although the better off enjoy the same connectivity available in any developed nation via solar-powered satellite dishes.

Khan Bank pioneered mobile phone banking in Mongolia in 2007 as part of its e-banking strategy and led the way in installing ATMs in rural provinces. All customers have access to branchless banking not only via mobile phone, SMS and computer, but through internet connected televisions.

XacBank says AMAR, its mobile phone banking service, started in 2009 with help from the World Bank and the Consultative Group to Assist the Poor, has 140,000 registered users. XacBank claims its rollout of branchless banking together with its 97 branches, alliances with 70 savings and credit unions, and 400 agents, means its banking services are used by 500,000 customers.

Mongolians are East Asia’s biggest users of mobile phones to pay bills and send and receive money – particularly among rural dwellers and herders who may be grazing their animals on the steppes a 100 or more kilometres from the nearest branch or ATM.

“Most banks have an app so that a herder can transfer money to his children or to Ulaanbaatar City without visiting and can stay out on the pasture,” says Tenger Financial Group’s Bold. “Mobile phone companies are also getting into the business but most are working with the banks and do not yet pose a threat.”

More accessible finance

State Bank claims to serve 2.8 million Mongolians through its 531 branches, 444 of them in rural areas, combined with TV banking, which it pioneered, and mobile and internet banking. Becoming a ‘no-branch bank’ is one of State Bank’s top priorities, along with consumer protection. The bank says it is also committed to making finance more accessible through competitive rates and halving the number of supporting documents required for loan approvals. Nomads often possess far fewer official documents than the settled population.

Electric power to charge phones, and run TVs and other electrical appliances, is available to around 100,000 herder households from solar panel arrays through the government’s Solar Ger Electrification Programme. To achieve its 100,000-family target, the programme borrowed heavily from XacBank’s marketing model of combining a hub-and-spoke operation with using established local businesses as agents.

Mongolia scores much lower on the Global Findex when it comes to home loans, with just over 3% of people holding a mortgage despite a relatively mature home lending market. The Bank of Mongolia says it has taken measures to make home loans more accessible that are already yielding results.

“As part of our aim to encourage a savings-based economy, the central bank has launched a mortgage financing programme to promote household savings,” says Sandagdorj Bold, adviser to the governor of the central bank. “Over the past 20 years the mortgage-to-GDP ratio never exceeded 6% but in the past year it has grown to 14% and we aim for it to reach 30-40%.”

Mongolia is a member of the global Alliance for Financial Inclusion (AFI Global) and in 2012 signed the Maya Declaration, which aims to unlock the economic and social potential of the world’s 2.5 billion ‘unbanked’.

Signatories make a measurable commitment to adopt and implement a financial inclusion policy that fosters the harnessing of affordable technology to increase access to and lower the costs of financial services. The declaration also calls for a regulatory framework that encourages the development of new financial services and draws on other countries’ best practice; a high priority on consumer protection and putting customers first; and the use of data to make informed policy and track results. Authorities self-monitor and submit regular progress reports.

In its update for 2012-13 the Financial Regulatory Commission, which is responsible for financial inclusion, reported it had achieved a number of concrete targets. These included strengthening the regulatory framework and supervision of e-money services, and implementing a policy that supports e-money services. The commission noted that e-money services operations were being successfully used for handling the payments of non-banking financial institutions’ loans and interest, insurance fees, and fund transfers for the Human Development Fund allocated through Capital Bank.

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