Owing primarily to extensive investment in new mining projects, Mongolia’s economy is ona path of very rapid long-term growth. At the same time, prospects for the economy are
overshadowed by the recurrent risk of overheating, fuelled by expansionary fiscal policy, volatile
global commodity prices, and rising capital flows. Coordination of fiscal, monetary, and
exchange rate policy agendas and properly enforced micro- and macro supervision measures will
be essential to maintaining inclusive growth and financial sector stability.
Despite a severe banking crisis in 2008-2009, Mongolia’s financial sector assets have nearly
tripled in size since the last Financial Sector Assessment in 2007. However, there is still large
potential to deepen and broaden financial intermediation to channel the gains of the resource
boom toward productive investments. In light of this opportunity, the authorities have requested
the World Bank to conduct an FSAP Development Module to examine specifically access to
financial services (with the focus on SMEs), capital markets, and housing finance, and to make
recommendations for key policy reforms.
While financial intermediation in Mongolia has been growing fast, access to finance
remains a critical constraint for enterprises, and especially for small and medium
enterprises (SMEs). Improving access to financial services will require strengthening the legal
and regulatory framework and financial infrastructure, including the secured transactions
framework, creditor rights and insolvency regime, credit information sharing system, platform
for technology-based banking products, regulation and supervision of nonbank financial
institutions, and consumer protection in financial services. In designing programs to enhance
SME access to finance, authorities are advised to consider risk-sharing mechanisms, such as
partial credit guarantees and TA for improving SMEs’ borrowing capacity, as opposed to
directed lending schemes.
Improvements in the institutional, regulatory and supervisory framework are required to
achieve Mongolia’s ambitious plan for developing the domestic capital market. An
immediate priority is the enactment of a new Securities Market Law consistent with international
good practice. The Financial Regulatory Commission, as supervisor of the non-bank financial
sector, needs greater human and financial resources, and the Mongolian Stock Exchange and
market intermediaries need to invest substantially in skills and capacity. Improving the function
of government bond markets is also vital to develop a reference yield curve. One of the most
important ingredients for a strong domestic capital market is a diversified institutional investor
base, and the regulatory agencies need to provide an enabling environment to develop the
insurance and pensions sectors and to attract institutional investors.
Strengthening the housing finance market is another area of high priority, as the rapidly
urbanizing population raises demand for housing far beyond the current supply. To avoid a
real estate bubble and keep mortgage lending in balance with housing supply, banks and
regulatory authorities are advised to: adopt a conservative approach to mortgage lending, further
enable property modernization, and allow for the expansion of small-scale housing finance for
lower-income groups. The housing finance market also needs a stronger mortgage market
liquidity facility to provide long-term funding. Finally, publicly-funded, subsidized housing
programs, such as the “100,000 Apartments” Program, need to be carefully planned and implemented, so that the desired social objective is achieved with minimal distortion to the
broader housing finance market.
FINANCIAL SECTOR ASSESSMENT
MONGOLIA
MONGOLIA
MACROECONOMIC ENVIRONMENT AND FINANCIAL SECTOR LANDSCAPE
1. Mongolia’s economy has embarked on a very high, long-term growth trajectory,
driven primarily by extensive investment in new mining projects, including the largest copper
deposit in Asia and the world’s largest coking coal deposit, and proximity to Asian markets.
Mongolia’s real GDP is expected to grow at an average annual rate of 16 percent for the 2011-
2013 period and to accelerate further in the years following.
2. Mongolia’s massive economic growth has contributed to a demographic transition
in the country. While the share of rural, primarily nomadic, population remains large at 47
percent, many are seeking new opportunities in the capital, and the population of Ulaanbaatar has
more than doubled since 2000. The population is also very young compared to the region and to
post-socialist neighbors: about 70 percent of the population is below the age of 35 years.
3. The growth prospects are overshadowed by recurrent risk of overheating, fuelled by
expansionary fiscal policy, volatile global commodity prices, and rising capital inflows. Fiscal
spending increased by 50 percent in real terms in 2011, and a 32 percent increase is envisioned
for 2012. As a result of structural factors and expansionary policies, consumer price inflation
reached 11.1 percent in 2011, and is expected to remain in double digits in the near- to mediumterm.
Further aggravating the inflation problem, Mongolia’s open economy is prone to a high
degree of price and exchange rate volatility, due to its dependence on imported fuel and
foodstuffs, and its commodity-dominated export structure.
4. Against this backdrop, financial intermediation in Mongolia has grown rapidly
since 2007 but remains highly volatile, mirroring the boom-and-bust nature of the economic
cycle. Although the banking sector assets nearly tripled from US$2.4 billion to US$6.8 billion at
end-2011, the system went through a severe crisis and credit crunch in 2008-2009. Since late
2009, renewed economic growth and strong capital inflows have resulted in an extended period
of accelerated credit growth.
5. The financial sector is dominated by the banking sector, accounting for 96 percent
of financial sector assets (Table 2). The system comprises 14 commercial banks, of which 13
are private domestic banks, and one is a state-owned bank; banks are supervised by the Bank of
Mongolia (the central bank). The banking system is highly concentrated, with the top 3 banks
accounting for about 70 percent of market share, and the top 5 banks accounting for over 86
percent. A very small portion of financial sector assets is held by nonbank financial institutions
that are supervised by the Financial Regulatory Commission (FRC).
6. To realize fully its economic potential, Mongolia needs to build a diversified,
efficient and stable financial system, capable of intermediating both on a large scale and in
specific market segments. Due to its focus on the development agenda, and specifically on
access to finance for the SME sector, capital markets development, and housing finance market
development, this report does not address financial sector stability issues4. It must be noted,
however, that preserving stability and preventing the build-up of risks in the financial (especially
banking) system through the combination of properly enforced micro- and macro supervision
measures is an absolute pre-requisite for sustainable development of the three above-mentioned
market segments. This is also contingent upon the authorities’ ability to maintain a stable macroeconomic environment through a mix of sound and properly coordinated fiscal, monetary
and exchange rate policies.
2013 period and to accelerate further in the years following.
2. Mongolia’s massive economic growth has contributed to a demographic transition
in the country. While the share of rural, primarily nomadic, population remains large at 47
percent, many are seeking new opportunities in the capital, and the population of Ulaanbaatar has
more than doubled since 2000. The population is also very young compared to the region and to
post-socialist neighbors: about 70 percent of the population is below the age of 35 years.
3. The growth prospects are overshadowed by recurrent risk of overheating, fuelled by
expansionary fiscal policy, volatile global commodity prices, and rising capital inflows. Fiscal
spending increased by 50 percent in real terms in 2011, and a 32 percent increase is envisioned
for 2012. As a result of structural factors and expansionary policies, consumer price inflation
reached 11.1 percent in 2011, and is expected to remain in double digits in the near- to mediumterm.
Further aggravating the inflation problem, Mongolia’s open economy is prone to a high
degree of price and exchange rate volatility, due to its dependence on imported fuel and
foodstuffs, and its commodity-dominated export structure.
4. Against this backdrop, financial intermediation in Mongolia has grown rapidly
since 2007 but remains highly volatile, mirroring the boom-and-bust nature of the economic
cycle. Although the banking sector assets nearly tripled from US$2.4 billion to US$6.8 billion at
end-2011, the system went through a severe crisis and credit crunch in 2008-2009. Since late
2009, renewed economic growth and strong capital inflows have resulted in an extended period
of accelerated credit growth.
5. The financial sector is dominated by the banking sector, accounting for 96 percent
of financial sector assets (Table 2). The system comprises 14 commercial banks, of which 13
are private domestic banks, and one is a state-owned bank; banks are supervised by the Bank of
Mongolia (the central bank). The banking system is highly concentrated, with the top 3 banks
accounting for about 70 percent of market share, and the top 5 banks accounting for over 86
percent. A very small portion of financial sector assets is held by nonbank financial institutions
that are supervised by the Financial Regulatory Commission (FRC).
6. To realize fully its economic potential, Mongolia needs to build a diversified,
efficient and stable financial system, capable of intermediating both on a large scale and in
specific market segments. Due to its focus on the development agenda, and specifically on
access to finance for the SME sector, capital markets development, and housing finance market
development, this report does not address financial sector stability issues4. It must be noted,
however, that preserving stability and preventing the build-up of risks in the financial (especially
banking) system through the combination of properly enforced micro- and macro supervision
measures is an absolute pre-requisite for sustainable development of the three above-mentioned
market segments. This is also contingent upon the authorities’ ability to maintain a stable macroeconomic environment through a mix of sound and properly coordinated fiscal, monetary
and exchange rate policies.
ACCESS TO FINANCIAL SERVICES
A. Status of Access to Finance
7. Financial intermediation in Mongolia has grown significantly in recent years; credit
and deposit penetration are on par with the average in the East Asia and the Pacific (EAP)
region. Bank credit increased on average by 47 percent in 2006-2008, although banks virtually
stopped lending in late 2008 due to the crisis. Credit growth resumed in late 2009 as the
economy rebounded strongly, and in 2011 credit grew substantially by more than 70 percent yoy.
Deposits have also grown rapidly after the crisis, by an average of 53 percent in 2010 and 2011.
At end-2010, credit to the private sector accounted for 49 percent of GDP and deposits for 60
percent of GDP, compared to an average of 52 percent and 63 percent in the EAP region,
respectively. Credit by nonbank financial institutions (NBFIs) and savings and credit
cooperatives (SCCs) has also increased, although it accounts for a small share (about 3 percent)
of total financial sector lending, as NBFIs and SCCs remain small and underdeveloped.
8. Bank lending is growing rapidly to both households and corporates, including
SMEs. About a third of total loans are to households, which have increased by about 80 percent
yoy in 2011. Corporate loans account for 66 percent of total loans and have increased by more
than 70 percent yoy in 2011. The bulk of bank lending is concentrated in Ulaanbaatar, and in five
sectors of the economy—trade, construction, real estate, mining, and manufacturing—that
account for 65 percent of total lending. At end-2011, 19 percent of total bank lending was to
entrepreneurs and SMEs. Bank credit to SMEs has more than doubled from 2008 to 2011, to
about US$735 million at end-2011.
A. Status of Access to Finance
7. Financial intermediation in Mongolia has grown significantly in recent years; credit
and deposit penetration are on par with the average in the East Asia and the Pacific (EAP)
region. Bank credit increased on average by 47 percent in 2006-2008, although banks virtually
stopped lending in late 2008 due to the crisis. Credit growth resumed in late 2009 as the
economy rebounded strongly, and in 2011 credit grew substantially by more than 70 percent yoy.
Deposits have also grown rapidly after the crisis, by an average of 53 percent in 2010 and 2011.
At end-2010, credit to the private sector accounted for 49 percent of GDP and deposits for 60
percent of GDP, compared to an average of 52 percent and 63 percent in the EAP region,
respectively. Credit by nonbank financial institutions (NBFIs) and savings and credit
cooperatives (SCCs) has also increased, although it accounts for a small share (about 3 percent)
of total financial sector lending, as NBFIs and SCCs remain small and underdeveloped.
8. Bank lending is growing rapidly to both households and corporates, including
SMEs. About a third of total loans are to households, which have increased by about 80 percent
yoy in 2011. Corporate loans account for 66 percent of total loans and have increased by more
than 70 percent yoy in 2011. The bulk of bank lending is concentrated in Ulaanbaatar, and in five
sectors of the economy—trade, construction, real estate, mining, and manufacturing—that
account for 65 percent of total lending. At end-2011, 19 percent of total bank lending was to
entrepreneurs and SMEs. Bank credit to SMEs has more than doubled from 2008 to 2011, to
about US$735 million at end-2011.
9. While financial intermediation has been growing fast, enterprise surveys and
industry players suggest that access to finance remains a top constraint for firms, and
especially for SMEs. The World Bank’s Enterprise Survey5 shows that access to finance is the
most important constraint among the top-10 constraints as reported by firms. More than 30
percent of firms in Mongolia perceive access to finance as the biggest problem to their
operations (higher than the average of 17 percent in the EAP region).
10. Access to finance is particularly constrained for SMEs, which are also more
sensitive to an unstable macroeconomic environment, characterized by high inflation and
exchange rate fluctuations. Loan terms and conditions for SMEs are characterized by high
interest rates, short maturities of loans that are inadequate to meet investment needs, relatively
small loan sizes, and predominantly immoveable collateral-based lending requirements.
Encouraging the entry of foreign banks could improve competition in the banking sector, as well
as bring more sophisticated credit appraisal techniques and longer term funding. In the
meantime, the SME sector would benefit from business development services to improve
management skills and financial reporting.
11. There are limited financial instruments for SMEs in Mongolia. Mongolian banks
predominantly offer loans, deposit and savings products, and some trade financing to SMEs.
There is no factoring, there is very limited leasing, and equity finance is not available. Leasing
remains underdeveloped, with an estimated leasing penetration rate6 of about 2-3 percent.
Leasing companies providing financial leasing are not currently regulated and supervised.
Factoring is not present in Mongolia, although it is allowed in the legal framework covering
banks and NBFIs. To encourage the growth of factoring and leasing, the authorities are advised
to: (i) provide tax incentives in the leasing law that would encourage the development of the
industry; (ii) review the legal framework governing contracts between parties and assignment of
receivables to ensure that the current framework is adequate for the development of factoring;
and (iii) provide education to SMEs about financial products.
12. Nonbank financial institutions and savings and credit cooperatives remain small,
but could play an important role in expanding access to finance to SMEs and
microenterprises, especially during economic downturns. SCCs provide savings and loan
services to low-income and rural households. Lending by SCCs has more than doubled from
US$14 million in 2007 to US$33 million in 2011. SCCs may accept deposits and provide loans
only to their members. NBFIs provide a variety of financial services: loans, payment guarantee,
currency exchange, remittances, factoring, leasing, short-term investment, trust funds, and
electronic payments. Between 2007 and 2011, lending by NBFIs more than tripled, from US$26
million to US$79 million, and accounted for up to 8 percent of total SME credit in 2011.
However, they face significant funding constraints that limit their growth—they are not allowed
to take deposits and are thus mainly dependent on their capital base and borrowings from banks
and foreign institutions to fund loans.
industry players suggest that access to finance remains a top constraint for firms, and
especially for SMEs. The World Bank’s Enterprise Survey5 shows that access to finance is the
most important constraint among the top-10 constraints as reported by firms. More than 30
percent of firms in Mongolia perceive access to finance as the biggest problem to their
operations (higher than the average of 17 percent in the EAP region).
10. Access to finance is particularly constrained for SMEs, which are also more
sensitive to an unstable macroeconomic environment, characterized by high inflation and
exchange rate fluctuations. Loan terms and conditions for SMEs are characterized by high
interest rates, short maturities of loans that are inadequate to meet investment needs, relatively
small loan sizes, and predominantly immoveable collateral-based lending requirements.
Encouraging the entry of foreign banks could improve competition in the banking sector, as well
as bring more sophisticated credit appraisal techniques and longer term funding. In the
meantime, the SME sector would benefit from business development services to improve
management skills and financial reporting.
11. There are limited financial instruments for SMEs in Mongolia. Mongolian banks
predominantly offer loans, deposit and savings products, and some trade financing to SMEs.
There is no factoring, there is very limited leasing, and equity finance is not available. Leasing
remains underdeveloped, with an estimated leasing penetration rate6 of about 2-3 percent.
Leasing companies providing financial leasing are not currently regulated and supervised.
Factoring is not present in Mongolia, although it is allowed in the legal framework covering
banks and NBFIs. To encourage the growth of factoring and leasing, the authorities are advised
to: (i) provide tax incentives in the leasing law that would encourage the development of the
industry; (ii) review the legal framework governing contracts between parties and assignment of
receivables to ensure that the current framework is adequate for the development of factoring;
and (iii) provide education to SMEs about financial products.
12. Nonbank financial institutions and savings and credit cooperatives remain small,
but could play an important role in expanding access to finance to SMEs and
microenterprises, especially during economic downturns. SCCs provide savings and loan
services to low-income and rural households. Lending by SCCs has more than doubled from
US$14 million in 2007 to US$33 million in 2011. SCCs may accept deposits and provide loans
only to their members. NBFIs provide a variety of financial services: loans, payment guarantee,
currency exchange, remittances, factoring, leasing, short-term investment, trust funds, and
electronic payments. Between 2007 and 2011, lending by NBFIs more than tripled, from US$26
million to US$79 million, and accounted for up to 8 percent of total SME credit in 2011.
However, they face significant funding constraints that limit their growth—they are not allowed
to take deposits and are thus mainly dependent on their capital base and borrowings from banks
and foreign institutions to fund loans.
13. The Financial Regulatory Commission, as the regulator and supervisor of NBFIs
and SCCs, is encouraged to take further measures to promote the sector’s growth, while
efficiently allocating supervisory resources. As noted also in the capital markets section, the
FRC needs major investments in staff, technology and capacity to handle its broad and
increasing responsibilities. It might also consider streamlining prudential requirements for nondeposit
taking NBFIs, and categorizing NBFIs and SCCs by size and risk in order to allocate
supervisory resources accordingly.
B. Secured Transactions, Insolvency, and Bankruptcy Framework
14. Access to credit in Mongolia is adversely affected by a number of problems in the
legal framework.7 In particular, there are important issues in the design and functioning of
secured transactions, in the enforcement of claims, and in the judicial and administrative
institutions supporting the bankruptcy and insolvency regime.
15. A modern secured transactions framework allows for pledging of movable assets by
borrowers, and its essential elements include: (i) a wide scope of movable assets that can be
taken as security; (ii) clear priority rules over competing interests; (iii) a central electronic
security interest registration system; and (iv) effective and low-cost enforcement of the security
interest. In Mongolia, a Pledge Law has not yet been approved, there is no centralized movable
assets registry (rather there are several specialized registries), and awareness about movable
assets financing is limited. Improvements in the legal and regulatory framework, establishment
of a single, centralized movable collateral registry, and training for borrowers and lenders should
be a high priority in Mongolia. An effective secured transactions regime would facilitate lending
to SMEs, which typically have a wide range of movable assets and limited immovable assets.
16. Enforcement of creditor rights also presents important challenges in the Mongolian
legal environment, as enforcement of court decisions is often more difficult than obtaining the
judgment itself. The enforcement of claims is severely affected by debtors’ delaying tactics,
weaknesses in the Bailiff’s Office, inefficiencies in the rules for valuation of immovable assets,
and irregularities at auctions. In this context, authorities are recommended to finalize the
enforcement regime and allow for out-of-court enforcement of security interests and a
streamlined court enforcement regime.
17. The legislative framework does not facilitate enterprise workouts or restructurings
by encouraging lending to or investment in viable distressed enterprises. The legal
framework should be amended to provide favorable tax treatment with respect to losses or writeoffs,
to guide negotiation of restructuring agreements for financial institutions, and to provide an
instrument whereby informal agreements can be easily converted into binding insolvency plans.
In addition, the bankruptcy legislation has proved inadequate, and bankruptcy procedures are
hardly ever used, since secured creditors stand to lose significantly from the process. Virtually all
procedures are liquidations
and SCCs, is encouraged to take further measures to promote the sector’s growth, while
efficiently allocating supervisory resources. As noted also in the capital markets section, the
FRC needs major investments in staff, technology and capacity to handle its broad and
increasing responsibilities. It might also consider streamlining prudential requirements for nondeposit
taking NBFIs, and categorizing NBFIs and SCCs by size and risk in order to allocate
supervisory resources accordingly.
B. Secured Transactions, Insolvency, and Bankruptcy Framework
14. Access to credit in Mongolia is adversely affected by a number of problems in the
legal framework.7 In particular, there are important issues in the design and functioning of
secured transactions, in the enforcement of claims, and in the judicial and administrative
institutions supporting the bankruptcy and insolvency regime.
15. A modern secured transactions framework allows for pledging of movable assets by
borrowers, and its essential elements include: (i) a wide scope of movable assets that can be
taken as security; (ii) clear priority rules over competing interests; (iii) a central electronic
security interest registration system; and (iv) effective and low-cost enforcement of the security
interest. In Mongolia, a Pledge Law has not yet been approved, there is no centralized movable
assets registry (rather there are several specialized registries), and awareness about movable
assets financing is limited. Improvements in the legal and regulatory framework, establishment
of a single, centralized movable collateral registry, and training for borrowers and lenders should
be a high priority in Mongolia. An effective secured transactions regime would facilitate lending
to SMEs, which typically have a wide range of movable assets and limited immovable assets.
16. Enforcement of creditor rights also presents important challenges in the Mongolian
legal environment, as enforcement of court decisions is often more difficult than obtaining the
judgment itself. The enforcement of claims is severely affected by debtors’ delaying tactics,
weaknesses in the Bailiff’s Office, inefficiencies in the rules for valuation of immovable assets,
and irregularities at auctions. In this context, authorities are recommended to finalize the
enforcement regime and allow for out-of-court enforcement of security interests and a
streamlined court enforcement regime.
17. The legislative framework does not facilitate enterprise workouts or restructurings
by encouraging lending to or investment in viable distressed enterprises. The legal
framework should be amended to provide favorable tax treatment with respect to losses or writeoffs,
to guide negotiation of restructuring agreements for financial institutions, and to provide an
instrument whereby informal agreements can be easily converted into binding insolvency plans.
In addition, the bankruptcy legislation has proved inadequate, and bankruptcy procedures are
hardly ever used, since secured creditors stand to lose significantly from the process. Virtually all
procedures are liquidations
payment instruments by extending the infrastructure needed for the use of cards in smaller cities
and rural areas, and it is introducing a national chip-based credit card.
23. Banks are increasingly using mobile banking as a low-cost delivery channel,
particularly in remote and rural areas. In the past two years, mobile banking has expanded
greatly, with nine banks and a number of NBFIs providing mobile banking services. Mobile
phone banking is supported by four operators, and banks are effectively limited to contacts with
clients served by one operator. Internet banking is also a new, fast-growing product. Government
initiatives such as the e-Mongolia National Program are increasing internet awareness and usage
throughout the country. The BOM is encouraged to take the lead in establishing a national
platform for internet and mobile phone banking services that can introduce better standards and
reduce costs, allow entrance of qualified non-bank institutions, and improve customer security.
E. Consumer Protection and Financial Literacy8
24. Consumer protection and financial literacy are critical to ensuring confidence in the
financial system and increasing financial inclusion. Given the rapid pace of the development
of the financial sector in Mongolia, and technological innovations that create new risks for
consumers, consumer protection and financial literacy become particularly important. For
example, it appears to be a common practice in Mongolia to quote interest rates on a monthly—
rather than annual percentage rate—basis. Large banks have set up their internal complaint
mechanisms to address consumer complaints, but there is no independent financial ombudsman
scheme. There is a general consumer protection law in Mongolia, but no specific financial
consumer protection law. The institutional framework for financial consumer protection is not
clear, and specific consumer protection provisions need to be enacted in laws and regulations. An
improved consumer protection framework should: (i) protect against unfair or deceptive
practices; (ii) improve transparency through disclosure and plain language requirements for
products and pricing, in a way that allows consumers to easily compare offers of financial
products; and (iii) establish an efficient and fair mechanism for resolving customer complaints
and disputes.
F. Government Policies and Programs Related to Access to Finance
25. Aiming to increase the number and productivity of SMEs, improve the sector’s
competitiveness, and promote business capability, the GoM is allocating greater resources
to programs promoting SME lending. The SME Credit Program is currently the largest
government initiative, which channels subsidized, longer-term credit through banks to qualifying
SMEs pre-screened by provincial councils. Given the considerable fiscal cost (around 3 percent
of GDP in 2011), the GOM is strongly advised to conduct an independent evaluation of the
effectiveness of the program to date, measuring its outreach, additionality and sustainability.
26. Going forward, the authorities may consider less costly, market-based mechanisms,
that will involve risk-sharing with financial institutions, and avoid the distortions
and rural areas, and it is introducing a national chip-based credit card.
23. Banks are increasingly using mobile banking as a low-cost delivery channel,
particularly in remote and rural areas. In the past two years, mobile banking has expanded
greatly, with nine banks and a number of NBFIs providing mobile banking services. Mobile
phone banking is supported by four operators, and banks are effectively limited to contacts with
clients served by one operator. Internet banking is also a new, fast-growing product. Government
initiatives such as the e-Mongolia National Program are increasing internet awareness and usage
throughout the country. The BOM is encouraged to take the lead in establishing a national
platform for internet and mobile phone banking services that can introduce better standards and
reduce costs, allow entrance of qualified non-bank institutions, and improve customer security.
E. Consumer Protection and Financial Literacy8
24. Consumer protection and financial literacy are critical to ensuring confidence in the
financial system and increasing financial inclusion. Given the rapid pace of the development
of the financial sector in Mongolia, and technological innovations that create new risks for
consumers, consumer protection and financial literacy become particularly important. For
example, it appears to be a common practice in Mongolia to quote interest rates on a monthly—
rather than annual percentage rate—basis. Large banks have set up their internal complaint
mechanisms to address consumer complaints, but there is no independent financial ombudsman
scheme. There is a general consumer protection law in Mongolia, but no specific financial
consumer protection law. The institutional framework for financial consumer protection is not
clear, and specific consumer protection provisions need to be enacted in laws and regulations. An
improved consumer protection framework should: (i) protect against unfair or deceptive
practices; (ii) improve transparency through disclosure and plain language requirements for
products and pricing, in a way that allows consumers to easily compare offers of financial
products; and (iii) establish an efficient and fair mechanism for resolving customer complaints
and disputes.
F. Government Policies and Programs Related to Access to Finance
25. Aiming to increase the number and productivity of SMEs, improve the sector’s
competitiveness, and promote business capability, the GoM is allocating greater resources
to programs promoting SME lending. The SME Credit Program is currently the largest
government initiative, which channels subsidized, longer-term credit through banks to qualifying
SMEs pre-screened by provincial councils. Given the considerable fiscal cost (around 3 percent
of GDP in 2011), the GOM is strongly advised to conduct an independent evaluation of the
effectiveness of the program to date, measuring its outreach, additionality and sustainability.
26. Going forward, the authorities may consider less costly, market-based mechanisms,
that will involve risk-sharing with financial institutions, and avoid the distortions
associated with subsidized lending. A Credit Guarantee Fund (CGF) is being established as a
public-private partnership to issue guarantees to banks and NBFIs for loans primarily to SMEmanufacturers.
In order for the new CGF to be effective, it will be important to put in place a
regulatory framework that ensures that the CGF is sound, has adequate initial capitalization,
carefully defines its target beneficiaries, offers additionality, and that participating financial
institutions practice strong credit risk management.
III. STRENGTHENING CAPITAL MARKETS
A. Current State of Capital Markets
27. With a financial market dominated by the banking sector, the undeveloped capital
market is ill-equipped to support the growth momentum that the country aspires to over
the next 10 years. The nonbank financial sector constitutes less than 4 percent of the total assets
in the financial sector, with capital markets contributing less than 1 percent. Instruments
available for long-term investment remain limited, and the growth of both the retail and
institutional investor bases have lagged. The bond markets remains quite small.
28. Over the past two years, there has been a growing appreciation by the authorities of
the need for a well-diversified financial market, which can meet the demand of savers and
investors in a cost-effective way. A major milestone is the strategy to modernize the Mongolian
Stock Exchange (MSE), supported through a strategic partnership with the London Stock
Exchange Group (LSEG), signed in December 2010. The project’s goal is to establish the
Mongolian capital market as a world-class market, with the MSE operating according to
internationally accepted standards and participating as one of LSEG’s key partners in Asia.
During the first phase of the project, LSEG will collaborate with MSE on the modernization of
the MSE, the Securities Clearing House (SCH) and the Central Securities Depository (CSD),
with the view to eventual privatization of the MSE.
29. The growth momentum in the domestic economy was reflected in the impressive
performance indicators of the MSE. The price indices, market capitalization, and number of
transactions have risen rapidly over the past two years. By end-2011, the market capitalization
of MSE increased by MNT 794.6 billion or by 58 percent compared to 2010, reaching MNT 2.2
trillion (US$1.6 billion). The price indices and turnover levels of the MSE surged in 2009-2011,
with the MSE becoming one of the best-performing emerging stock markets in the world.9
30. Nonetheless, the Mongolian stock market is still very small and illiquid. The ratio of
stock market capitalization to GDP was merely 16 percent at its peak in 2010.10 Listed
companies are still few in number and small in size, and turnover is among the lowest compared
to other emerging market peers. Deepening capital markets requires implementation of a
comprehensive, prioritized reform program that should set the stage for expanding the supply of
securities. Key areas for reform are detailed below.
public-private partnership to issue guarantees to banks and NBFIs for loans primarily to SMEmanufacturers.
In order for the new CGF to be effective, it will be important to put in place a
regulatory framework that ensures that the CGF is sound, has adequate initial capitalization,
carefully defines its target beneficiaries, offers additionality, and that participating financial
institutions practice strong credit risk management.
III. STRENGTHENING CAPITAL MARKETS
A. Current State of Capital Markets
27. With a financial market dominated by the banking sector, the undeveloped capital
market is ill-equipped to support the growth momentum that the country aspires to over
the next 10 years. The nonbank financial sector constitutes less than 4 percent of the total assets
in the financial sector, with capital markets contributing less than 1 percent. Instruments
available for long-term investment remain limited, and the growth of both the retail and
institutional investor bases have lagged. The bond markets remains quite small.
28. Over the past two years, there has been a growing appreciation by the authorities of
the need for a well-diversified financial market, which can meet the demand of savers and
investors in a cost-effective way. A major milestone is the strategy to modernize the Mongolian
Stock Exchange (MSE), supported through a strategic partnership with the London Stock
Exchange Group (LSEG), signed in December 2010. The project’s goal is to establish the
Mongolian capital market as a world-class market, with the MSE operating according to
internationally accepted standards and participating as one of LSEG’s key partners in Asia.
During the first phase of the project, LSEG will collaborate with MSE on the modernization of
the MSE, the Securities Clearing House (SCH) and the Central Securities Depository (CSD),
with the view to eventual privatization of the MSE.
29. The growth momentum in the domestic economy was reflected in the impressive
performance indicators of the MSE. The price indices, market capitalization, and number of
transactions have risen rapidly over the past two years. By end-2011, the market capitalization
of MSE increased by MNT 794.6 billion or by 58 percent compared to 2010, reaching MNT 2.2
trillion (US$1.6 billion). The price indices and turnover levels of the MSE surged in 2009-2011,
with the MSE becoming one of the best-performing emerging stock markets in the world.9
30. Nonetheless, the Mongolian stock market is still very small and illiquid. The ratio of
stock market capitalization to GDP was merely 16 percent at its peak in 2010.10 Listed
companies are still few in number and small in size, and turnover is among the lowest compared
to other emerging market peers. Deepening capital markets requires implementation of a
comprehensive, prioritized reform program that should set the stage for expanding the supply of
securities. Key areas for reform are detailed below.
B. Improving the Regulatory Framework
31. Modernizing the legal and regulatory framework is a critical prerequisite for
deepening the capital market in Mongolia. A new Securities Markets Law (SML) is being
drafted, which seeks to align the framework for securities regulation in Mongolia with
international best standards. In particular, the new SML is expected to facilitate the introduction
of new and innovative products, such as depository receipts, and to facilitate cross-listings on the
MSE. It is important that a quality law is enacted soon, addressing, inter alia, the following
critical policy issues: (i) clarifying the roles of the FRC and the MSE, particularly in relation to
listings; (ii) incorporating a market-based due diligence system by qualified valuation experts;
(iii) introducing a sponsor system to support IPO listing on MSE to enhance due diligence; (iv)
reviewing FRC’s internal systems and processes to ensure that appropriate checks and balances
operate on its supervisory judgments; and (v) introducing a “Know Your Customer” (KYC)
obligation on regulated entities that provide investment advice to clients.
C. Improving Supervisory Effectiveness
32. The FRC must have sufficient financial resources and operational autonomy
commensurate with its expanding responsibilities to effectively meet the complexity and
challenges in supervising the capital markets. The FRC faces the multiple challenges of filling
the gaps in the legal framework, and strengthening the regulatory, supervisory, governance,
internal control, and accounting and auditing processes. With the rapid modernization of the
capital markets, the FRC will need: (i) enhanced operational independence; (ii) a reasonable
level of human and financial resources (for example, by allowing FRC to retain the fees it
collects and to share a small percentage of clearing fees from sales and purchase transactions that
are effected on the stock exchange); and (iii) stronger statutory protection for its staff against
legal actions brought against them in the course of the discharge of their statutory functions.
D. Modernizing Market Infrastructure
33. The commitment of the authorities to the modernization of market infrastructure
for the securities markets is highly commendable. A modern, automated surveillance, trading
and settlement system to be shared by MSE, SCH, CSD, and the FRC is being installed in the
MSE. However a market readiness assessment by an independent professional firm is critically
important. A settlement guarantee mechanism11 appears to be absent from the design of the new
system; this is important to mitigate settlement risk, and should be combined with appropriate
capital standards for intermediaries. Also, the system should detail the roles and responsibilities of
all market participants and relevant stakeholders to minimize uncertainties.
E. Strengthening Domestic Bond and Equity Markets
34. There has been some progress in government debt management since 2008, and a
number of important reforms have been initiated, but significant improvements are still
required to develop a robust, local-currency bond market. The MOF has no predetermined
31. Modernizing the legal and regulatory framework is a critical prerequisite for
deepening the capital market in Mongolia. A new Securities Markets Law (SML) is being
drafted, which seeks to align the framework for securities regulation in Mongolia with
international best standards. In particular, the new SML is expected to facilitate the introduction
of new and innovative products, such as depository receipts, and to facilitate cross-listings on the
MSE. It is important that a quality law is enacted soon, addressing, inter alia, the following
critical policy issues: (i) clarifying the roles of the FRC and the MSE, particularly in relation to
listings; (ii) incorporating a market-based due diligence system by qualified valuation experts;
(iii) introducing a sponsor system to support IPO listing on MSE to enhance due diligence; (iv)
reviewing FRC’s internal systems and processes to ensure that appropriate checks and balances
operate on its supervisory judgments; and (v) introducing a “Know Your Customer” (KYC)
obligation on regulated entities that provide investment advice to clients.
C. Improving Supervisory Effectiveness
32. The FRC must have sufficient financial resources and operational autonomy
commensurate with its expanding responsibilities to effectively meet the complexity and
challenges in supervising the capital markets. The FRC faces the multiple challenges of filling
the gaps in the legal framework, and strengthening the regulatory, supervisory, governance,
internal control, and accounting and auditing processes. With the rapid modernization of the
capital markets, the FRC will need: (i) enhanced operational independence; (ii) a reasonable
level of human and financial resources (for example, by allowing FRC to retain the fees it
collects and to share a small percentage of clearing fees from sales and purchase transactions that
are effected on the stock exchange); and (iii) stronger statutory protection for its staff against
legal actions brought against them in the course of the discharge of their statutory functions.
D. Modernizing Market Infrastructure
33. The commitment of the authorities to the modernization of market infrastructure
for the securities markets is highly commendable. A modern, automated surveillance, trading
and settlement system to be shared by MSE, SCH, CSD, and the FRC is being installed in the
MSE. However a market readiness assessment by an independent professional firm is critically
important. A settlement guarantee mechanism11 appears to be absent from the design of the new
system; this is important to mitigate settlement risk, and should be combined with appropriate
capital standards for intermediaries. Also, the system should detail the roles and responsibilities of
all market participants and relevant stakeholders to minimize uncertainties.
E. Strengthening Domestic Bond and Equity Markets
34. There has been some progress in government debt management since 2008, and a
number of important reforms have been initiated, but significant improvements are still
required to develop a robust, local-currency bond market. The MOF has no predetermined
auction schedule and issues government bonds through the MSE on an irregular basis. To-date
government bonds worth US$171 million have been issued. There is no comprehensive bonds
database available, and pricing of recent government bond issues does not appear to have been
market-based. As such, the market lacks a reference yield curve. Weaknesses in the government
bond market are impeding the development of corporate bond and derivatives markets that are
very small at only US$11 million in issues to date. Most Mongolian companies prefer to seek
financing either from banks or abroad.
35. In addition to fiscal objectives, public debt management needs to have market
development and liquidity objectives in mind. To improve transparency and the ability of
market participants to plan and absorb the government’s funding requirement, the Debt
Management Office should consider publishing quarterly updates of the auction calendar,
announcing its intentions for the quarter in terms of specific volumes and tenors to be auctioned.
The GoM should reconsider the suitability of using the MSE auction system for primary issuance
of government and corporate bonds, and consider the feasibility of introducing a primary dealer
system. The design of government bonds should be standardized and their issuance concentrated
in a limited number of popular, benchmark maturities.
36. In the equity market, growth is hampered by a lack of large and quality issuers, a
poor valuation process, weak capital market intermediaries, a narrow investor base, and a
limited product range. A major challenge for the MSE is that there are very few large, “blue
chip” listings.12 Most Mongolian companies do not disclose their earnings with an adequate
degree of transparency and accuracy,13 making valuation difficult. Although the government has
contributed to the growth of the MSE by privatizing state-owned assets through listings, it has
applied pre-determined valuations and admitted many poor-performing firms with inadequate
financial disclosure. Most capital market intermediaries are poorly capitalized, inactive, or
unable to effectively intermediate between savers and the capital market.14 Also, a low equity
culture and a low level of investor literacy have further deterred investor confidence in the stock
market.
37. In order to attract quality issuers to list on the MSE, FRC will need to ensure that
key elements of the legal and institutional framework are in place, and should allow for a
market-based price discovery process. Further, FRC should provide a framework that
facilitates foreign listings or dual listings, and it should allow for a broader product range from
MSE, including depository receipts.
F. Developing a Sound Institutional Investor Base
38. One of the most important dimensions of domestic capital market development in
Mongolia is the need to develop a diversified institutional investor base, including mutua
government bonds worth US$171 million have been issued. There is no comprehensive bonds
database available, and pricing of recent government bond issues does not appear to have been
market-based. As such, the market lacks a reference yield curve. Weaknesses in the government
bond market are impeding the development of corporate bond and derivatives markets that are
very small at only US$11 million in issues to date. Most Mongolian companies prefer to seek
financing either from banks or abroad.
35. In addition to fiscal objectives, public debt management needs to have market
development and liquidity objectives in mind. To improve transparency and the ability of
market participants to plan and absorb the government’s funding requirement, the Debt
Management Office should consider publishing quarterly updates of the auction calendar,
announcing its intentions for the quarter in terms of specific volumes and tenors to be auctioned.
The GoM should reconsider the suitability of using the MSE auction system for primary issuance
of government and corporate bonds, and consider the feasibility of introducing a primary dealer
system. The design of government bonds should be standardized and their issuance concentrated
in a limited number of popular, benchmark maturities.
36. In the equity market, growth is hampered by a lack of large and quality issuers, a
poor valuation process, weak capital market intermediaries, a narrow investor base, and a
limited product range. A major challenge for the MSE is that there are very few large, “blue
chip” listings.12 Most Mongolian companies do not disclose their earnings with an adequate
degree of transparency and accuracy,13 making valuation difficult. Although the government has
contributed to the growth of the MSE by privatizing state-owned assets through listings, it has
applied pre-determined valuations and admitted many poor-performing firms with inadequate
financial disclosure. Most capital market intermediaries are poorly capitalized, inactive, or
unable to effectively intermediate between savers and the capital market.14 Also, a low equity
culture and a low level of investor literacy have further deterred investor confidence in the stock
market.
37. In order to attract quality issuers to list on the MSE, FRC will need to ensure that
key elements of the legal and institutional framework are in place, and should allow for a
market-based price discovery process. Further, FRC should provide a framework that
facilitates foreign listings or dual listings, and it should allow for a broader product range from
MSE, including depository receipts.
F. Developing a Sound Institutional Investor Base
38. One of the most important dimensions of domestic capital market development in
Mongolia is the need to develop a diversified institutional investor base, including mutua
and investment funds and other contractual savings institutions, such as pension funds and
insurance companies. They provide an institutional framework for long-term capital
accumulation and act as a stable source of demand for long-term debt securities and equity
investments. The insurance and pensions sectors and other contractual savings institutions are
not developed in Mongolia, and they have insignificant investments in equities and bond
instruments. Individual investors comprise 99.8 percent of the total number of accounts
maintained in the CSD. However, it should be pointed out that more than 60 percent of these
accounts are dormant and are not traded.
39. Developing a sound investor base will require: (i) creating the conditions for a more
active role of banks in the growth of institutional investors; (ii) ensuring that regulations of
commercial banks, insurance and pensions are consistent with the expansion of capital markets
to private enterprises; and (iii) monitoring eventual regulatory arbitrage opportunities created by
the fast-growing wealth management products. Efforts to build a strong investor protection
system and improve public awareness and investor education should complement market
development efforts.
40. The regulatory system must adequately address corporate governance and
disclosure, especially financial disclosure to ensure the quality of price discovery. The
accounting and auditing standards that underpin financial disclosure are crucial to build this
credibility.
G. Building Capacity of Regulators, MSE and Market Intermediaries
41. Capacity of the FRC, MSE and market participants needs substantial strengthening
to meet the challenges and sophistication that come with capital market development.
Systematic training should also be planned for each level of member staff of the FRC, MSE and
SCH to keep up with developments and new products in the marketplace. With the clearing and
settlement system moving from a pre-settlement system to T+3, it is imperative for a risk-based
supervisory approach and the requisite skill sets to be built for the staff of FRC, MSE and SCH.
42. Finally, it is important that proper attention is given to prioritization of the reform
measures going forward. In this regard, a roadmap for the next five years of capital market
development in Mongolia would be very useful to document the relevant challenges and ensure
better coordination between stakeholders.
insurance companies. They provide an institutional framework for long-term capital
accumulation and act as a stable source of demand for long-term debt securities and equity
investments. The insurance and pensions sectors and other contractual savings institutions are
not developed in Mongolia, and they have insignificant investments in equities and bond
instruments. Individual investors comprise 99.8 percent of the total number of accounts
maintained in the CSD. However, it should be pointed out that more than 60 percent of these
accounts are dormant and are not traded.
39. Developing a sound investor base will require: (i) creating the conditions for a more
active role of banks in the growth of institutional investors; (ii) ensuring that regulations of
commercial banks, insurance and pensions are consistent with the expansion of capital markets
to private enterprises; and (iii) monitoring eventual regulatory arbitrage opportunities created by
the fast-growing wealth management products. Efforts to build a strong investor protection
system and improve public awareness and investor education should complement market
development efforts.
40. The regulatory system must adequately address corporate governance and
disclosure, especially financial disclosure to ensure the quality of price discovery. The
accounting and auditing standards that underpin financial disclosure are crucial to build this
credibility.
G. Building Capacity of Regulators, MSE and Market Intermediaries
41. Capacity of the FRC, MSE and market participants needs substantial strengthening
to meet the challenges and sophistication that come with capital market development.
Systematic training should also be planned for each level of member staff of the FRC, MSE and
SCH to keep up with developments and new products in the marketplace. With the clearing and
settlement system moving from a pre-settlement system to T+3, it is imperative for a risk-based
supervisory approach and the requisite skill sets to be built for the staff of FRC, MSE and SCH.
42. Finally, it is important that proper attention is given to prioritization of the reform
measures going forward. In this regard, a roadmap for the next five years of capital market
development in Mongolia would be very useful to document the relevant challenges and ensure
better coordination between stakeholders.
STRENGTHENING THE HOUSING FINANCE MARKET
A. Overview of the Housing Finance Market
43. After a severe crisis in 2008-2009, the Mongolian housing finance market has
recovered very rapidly, with portfolio outstanding increasing by 190 percent to US$482 million
between 2009 and 2011. This represents 8 percent of 2010 GDP and 12 percent of the 2011
banking sector loan book. The average mortgage loan amount for originations in 2011 was MNT
32 million (US$24,000), and the average loan-to-value (LTV) ratio is 70 percent. Most lending
is concentrated in and around Ulaanbaatar.
44. At the same time that demand for housing finance is growing fast, the housing stock
and critical infrastructure are under-developed. Housing stock in Ulaanbaatar is comprised of
semi-formal, traditional ger (or yurt) districts, where almost half of the city population lives, and
formal housing, consisting primarily of older block houses. In the meantime, the supply of new
homes is limited given the short construction season and critical bottlenecks in housing
infrastructure, such as power and heating. In this environment, Housing prices have risen
sharply over the past two years, particularly in 2011, when house price appreciation for
apartments typically purchased with mortgage loans was 36.7 percent.
45. A number of weaknesses hamper sustainable growth in the housing finance market,
with the majority of recommendations from the 2007 FSAP remaining relevant. Even
though the Law on Mortgage has been adopted, lenders report that foreclosure court cases take
several years with little certainty; market participants report gaps in legal enforcement, in part
due to weak judicial capacity; real estate brokerage and appraisal sectors appear to lack adequate
supervision and capacity. The local banks have limited access to longer-term funding to finance
mortgage loans, and the secondary mortgage market is very small.
46. As the Mongolian mortgage market grows, and the government pursues an
ambitious social housing agenda, there is an urgent need for a holistic sector approach.
First, there is a need to better balance housing supply and demand, which requires the authorities
to focus on prudent mortgage lending standards and supervision, as well as on provision of
power and utility infrastructure and zoned land. Second, it will be important to ensure effective
implementation of ongoing and planned public housing finance programs, with a focus on
minimizing mortgage market distortions channeling resources in a transparent manner to lowincome
segments of population. Third, it will be important for authorities to consider facilitating
better balance in the composition of mortgage funding, through developing a functioning market
liquidity facility.
B. Balancing Housing Finance Supply and Demand
47. In order to prevent overheating of the real estate sector, the authorities should seek
to re-balance supply and demand of housing. On the supply-side, GoM is advised to support
the increase of volume of residential construction by focusing on provision of power and utility
infrastructure, particularly in the context of larger-scale projects. On the demand side, BOM is
advised to continuously monitor and refine prudential regulation for banks’ mortgage loans, for
example, by calibrating prudential requirements for mortgages collateralized by pre-2000
buildings, for multiple loans held by the same borrower, etc. In addition, in order to provide a
foundation for sustainable mortgage market development, the capacity, quality and efficiency of
operations of the State Immovable Property Registry (SIPR) should be enhanced.
C. Strengthening Publicly-Funded Housing Programs
48. GoM pursues an ambitious publicly-funded social housing agenda to address the
social and environmental challenges resulting from the country’s housing shortage. The
largest such program to date, “100,000 units”, has been announced in 2011 and its details are
currently being formalized. Mongolian Housing Finance Corporation, a state-owned financial
institution, serves as the main implementing vehicle for such programs. MHFC provides
and critical infrastructure are under-developed. Housing stock in Ulaanbaatar is comprised of
semi-formal, traditional ger (or yurt) districts, where almost half of the city population lives, and
formal housing, consisting primarily of older block houses. In the meantime, the supply of new
homes is limited given the short construction season and critical bottlenecks in housing
infrastructure, such as power and heating. In this environment, Housing prices have risen
sharply over the past two years, particularly in 2011, when house price appreciation for
apartments typically purchased with mortgage loans was 36.7 percent.
45. A number of weaknesses hamper sustainable growth in the housing finance market,
with the majority of recommendations from the 2007 FSAP remaining relevant. Even
though the Law on Mortgage has been adopted, lenders report that foreclosure court cases take
several years with little certainty; market participants report gaps in legal enforcement, in part
due to weak judicial capacity; real estate brokerage and appraisal sectors appear to lack adequate
supervision and capacity. The local banks have limited access to longer-term funding to finance
mortgage loans, and the secondary mortgage market is very small.
46. As the Mongolian mortgage market grows, and the government pursues an
ambitious social housing agenda, there is an urgent need for a holistic sector approach.
First, there is a need to better balance housing supply and demand, which requires the authorities
to focus on prudent mortgage lending standards and supervision, as well as on provision of
power and utility infrastructure and zoned land. Second, it will be important to ensure effective
implementation of ongoing and planned public housing finance programs, with a focus on
minimizing mortgage market distortions channeling resources in a transparent manner to lowincome
segments of population. Third, it will be important for authorities to consider facilitating
better balance in the composition of mortgage funding, through developing a functioning market
liquidity facility.
B. Balancing Housing Finance Supply and Demand
47. In order to prevent overheating of the real estate sector, the authorities should seek
to re-balance supply and demand of housing. On the supply-side, GoM is advised to support
the increase of volume of residential construction by focusing on provision of power and utility
infrastructure, particularly in the context of larger-scale projects. On the demand side, BOM is
advised to continuously monitor and refine prudential regulation for banks’ mortgage loans, for
example, by calibrating prudential requirements for mortgages collateralized by pre-2000
buildings, for multiple loans held by the same borrower, etc. In addition, in order to provide a
foundation for sustainable mortgage market development, the capacity, quality and efficiency of
operations of the State Immovable Property Registry (SIPR) should be enhanced.
C. Strengthening Publicly-Funded Housing Programs
48. GoM pursues an ambitious publicly-funded social housing agenda to address the
social and environmental challenges resulting from the country’s housing shortage. The
largest such program to date, “100,000 units”, has been announced in 2011 and its details are
currently being formalized. Mongolian Housing Finance Corporation, a state-owned financial
institution, serves as the main implementing vehicle for such programs. MHFC provides
mortgage loans on heavily subsidized terms, as well as developer finance for housing
construction. By late 2011, MHFC accumulated over 25 percent of the total outstanding
mortgage loan portfolio.
49. Similar to subsidized housing schemes elsewhere, Mongolia’s recent initiatives carry
two key risks: (i) potential market distortion as private lenders are forced to compete with
subsidized loans carrying below-market interest rates; and (ii) implementation inefficiencies,
resulting from inadeqauate supervision, reporting, transparency, and governance of state-funded
programs. The Mongolian housing market presents specific challenges due to its rather small size
and severe infrastructure constraints.
50. Prior to the start of implementation of the “100,000 unit” Program, the GOM needs to
develop a detailed implementation strategy addressing: stringent governance, transparency, and
safeguards requirements for Program administrator; mechanism for investments in required
housing infrastructure, zoning and local construction capacity; carefully designed eligibility
criteria for beneficiaries; yearly funding allocations correlated with available supply of new
housing; and regular independent monitoring and evaluation of program results.
D. Improving Mortgage Funding Structure
51. Banks’ capacity to deliver housing finance in a prudent and sustainable manner is
affected by the shortage of longer-term funding. The total liquidity provided in 2011 through
Mongolian Mortgage Company (MIK), a private mortgage intermediary, amounted to just 1
percent of originations. Market participants report that MIK’s cost of funds is not competitive
with high yields on deposits; that MIK’s business model based on an “asset swap” technique is
no longer relevant to Mongolia; and that limited availability of funding at MIK makes provision
of liquidity to lenders inconsistent in volume and timing.
52. It is recommended that the authorities and the banking community critically
reassess MIK’s business model, with a goal to develop a functional and relevant mortgage
market liquidity facility, by enhancing its corporate governance to the level of current
international practices; providing specific regulatory preferences to MIK debt instruments,
supporting domestic issuance of MIK mortgage-backed securities; and providing a defined
amount and term of sovereign guarantees of MIK debt with a clear sunset provision.
construction. By late 2011, MHFC accumulated over 25 percent of the total outstanding
mortgage loan portfolio.
49. Similar to subsidized housing schemes elsewhere, Mongolia’s recent initiatives carry
two key risks: (i) potential market distortion as private lenders are forced to compete with
subsidized loans carrying below-market interest rates; and (ii) implementation inefficiencies,
resulting from inadeqauate supervision, reporting, transparency, and governance of state-funded
programs. The Mongolian housing market presents specific challenges due to its rather small size
and severe infrastructure constraints.
50. Prior to the start of implementation of the “100,000 unit” Program, the GOM needs to
develop a detailed implementation strategy addressing: stringent governance, transparency, and
safeguards requirements for Program administrator; mechanism for investments in required
housing infrastructure, zoning and local construction capacity; carefully designed eligibility
criteria for beneficiaries; yearly funding allocations correlated with available supply of new
housing; and regular independent monitoring and evaluation of program results.
D. Improving Mortgage Funding Structure
51. Banks’ capacity to deliver housing finance in a prudent and sustainable manner is
affected by the shortage of longer-term funding. The total liquidity provided in 2011 through
Mongolian Mortgage Company (MIK), a private mortgage intermediary, amounted to just 1
percent of originations. Market participants report that MIK’s cost of funds is not competitive
with high yields on deposits; that MIK’s business model based on an “asset swap” technique is
no longer relevant to Mongolia; and that limited availability of funding at MIK makes provision
of liquidity to lenders inconsistent in volume and timing.
52. It is recommended that the authorities and the banking community critically
reassess MIK’s business model, with a goal to develop a functional and relevant mortgage
market liquidity facility, by enhancing its corporate governance to the level of current
international practices; providing specific regulatory preferences to MIK debt instruments,
supporting domestic issuance of MIK mortgage-backed securities; and providing a defined
amount and term of sovereign guarantees of MIK debt with a clear sunset provision.
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