OVERVIEW OF THE BANKING SECTOR IN MONGOLIA

A few years into Mongolia’s transition to a market economy, the banking sector was hard hit by rocketing interest rates, poor banking practices, an underdeveloped legal system, and defaulting borrowers. In 1996, the rate of non-performing loans in the banking system was about 47 percent and the structure of bank loans was such as to discourage productive businesses.

However, current condition of Mongolian financial and banking sector is relatively stable and favorable, as compared to the situation in the 90s. As of the first half of 2008, 16 banks, 1057 branches and units have served 3.4 million bank customers or deposit owners. The commercial banks’ current account and deposits have grown due to accepted current account balance or time deposits from public, enterprises and other organizations. In fact, compared to the second quarter of 2007, current account amounts increased 2.2 times, which is 467.7 to 853.2 billion MNT increase, while time deposits increased by 31.7 percent, resulting to 1,692.4 billion MNT. Fast growth in credit has also reduced the non-performing loans ratio, falling below 2.8 percent as of August 2008. This is due to an enormous effort on improving bank loan management. Total loans of banking sector reached 2,649.9 billion MNT in the first half of 2008, accounting for 58.1 percent of GDP. Looking at sector allocation of loans issued by commercial banks, new credit over the second quarter of 2008 went primarily into trade services, construction, and manufacturing. A significant share has also gone to real estate sector. The mortgage portfolio of banks has been rising rapidly over the past couple of years but is still not a significant proportion of the total lending portfolio. According to statistics from Bank of Mongolia, total assets of banking sector reached 3,760 billion MNT, amounting in 82.5 percent of GDP as of June 2008.

Major commercial banks are actively expanding reach of their operations by opening new branches. Number of bank branch and units has increased by 76 or by 7.7 percent from the last year. New branch and units are mostly being established in rural areas of the country (aimags), with the common objectives of banks to increase the competition within the financial sector as well as to contribute to lower interest rate and longer maturity of loans.

Non-bank financial institutions also play an important role in the banking sector of Mongolia. These institutions fill the gap created by absence of banking services to some segments of population, namely, the middle- and low-income individuals, micro enterprises and rural population.

Due to the fall of copper prices and world economic slowdown, close supervision is required given the fast growth of credit, high inflation and the likely slowdown of activity, although key indicators of the soundness of the Mongolian financial system appears to be stable.       

Commercial banks