BANKING SYSTEM IN MONGOLIA
Prepared by Tsend-Ayush Ganbaatar /440133@mail.muni.cz/
I. Current banking system situation
ongolia is an emerging country in Asia
with Gross Domestic Product of $10.6
billion1
as in 2013. The banking system
has overall assets in amount of $11.8 billion as
June, 2014 increased by 34.4% (yoy) compared to
that of previous year, which is so high growth
compared to other countries as Moody's stated
in its report (Report, 2013).
Figure I-1: Overall asset in USD billions
Source: www.mongolbank.mn
Loan portfolio has increased by 54.8% (yoy) and
reached at $6.6 billion, of which 75.7% is loan
disbursed in MNT, the rest is in other currencies.
Figure I-2: Loan Portfolio in USD billions
1
The GDP is in nominal basis
Source: www.mongolbank.mn
For the liability side, current account, demand
and time deposit are increasing with high speed
as well but not so fast as asset and loan portfolio
grow. For instance, overall current account
amounted to $1.3 billion increasing by 6.1%
(yoy), while demand and time deposit reached at
$2.9 billion at the end of June, 2014 increased
by 33.2% (yoy).
Figure I-3: Current account, Deposits in USD billion
Source: www.mongolbank.mn
The overall equity of the banking system has
reached at $1.1 billion with increasing speed of
52.6% (yoy) at the end of June, 2014.
I.1 The relationship between macro
economy and banking system
The factor, which made the banking system grow
so fast in short time was obviously macro
economic situation in that time and expansionary
monetary policy impact. During 2010-2011 (after
the Financial Crisis), Mongolian economy was
appreciating very much from the increase in
main mining products' price like copper and coal.
For instance, real economic growth for 2011
reached at 17.5% (yoy), which is the fastest
growth in the world thanks to foreign direct
investment inflow and government spending for
some projects. As Mongolia is in a progress of
two large mining deposits such as Oyu-Tolgoi
11.8
34.4%
20%
30%
40%
50%
60%
70%
80%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
I II III IV I II III IV I II
2012 2013 2014
Total Assets
Growth (yoy) %
6.6
54.8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
I II III IV I II III IV I II
2012 2013 2014
Loan Portfolio
Growth (yoy) %
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
I II III IV I II III IV I II
2012 2013 2014
CA DD, TD CA (yoy) % DD, TD (yoy) %
M
2
(OT)2
and Tavan tolgoi (TT), the cash flow into
banking system (into the economy) is increasing
so fast recently, generating high economic
performance. Besides economic impact on
banking system, expansionary policy played key
role in banking system strong growth, which we
will see in following part of the essay.
I.2 Banking system structure
Who plays the key roles in the banking system to
generate high performance is of course central
bank. Bank of Mongolia (BoM) is the only
institution, which governs and implements
monetary policy throughout the economy
independently. Moreover, there are 14
commercial banks having their over operations:
The biggest five commercial banks are here:
Table I-1: Commercial banks in Mongolia
Banks' name Asset ($ billion) Websites
TDB 2.7 www.tdb.mn
Khan bank 2.6 www.khanbank.mn
Golomt 2.3 www.golomt.mn
XacBank 1.0 www.xacbank.mn
State bank 1.0 www.statebank.mn
Source: banks' official websites
The biggest 5 commercial banks are Trade and
Development bank, Khan bank, Golomt bank,
Xacbank and State bank (State bank is owned by
the government, all other banks are jointly
funded by foreign and domestic companies).
II. Brief history of the banking system
BoM was established in 1924, having 90 years of
history from now and the national currency MNT
(Tugrik) was issued in 1925. One level banking
system was dominant until 1990 and new two
level of system introduced, separating central
bank and commercial banks.
III. Monetary policies of central bank
Bank of Mongolia (BoM) is the only institution
implementing "Monetary Policy" to the whole
economy passing through banking system. Bank
of Mongolia's main aim is to maintain the
stability of MNT. Maintaining the stability of
national currency has several aspects in terms of
its definition. As, maintaining the stability of
national currency somehow means that keeping
the inflation as low as possible, but it also means
that keeping exchange rate stable at the same
2
Link is available here: http://ot.mn/en
time. Thus, BoM aims to keep inflation rate as
low as possible, while keeping exchange rate in
certain range. Historically, BoM has been
implementing several policies, which were
targeting to monetary aggregates, however,
recently it has changed its monetary policy way
into targeting inflation to keep the national
currency stable.
III.1 Central bank activities
In order to keep the national currency stable,
BoM's has been implementing several classical
instruments like changing policy rates each times
influencing the interbank activities and banking
system, the whole economy at the end. In
addition to this traditional monetary ways, BoM
is recently introducing a new counter-cyclical
(Making some capital buffer during economic
prosperous times and using the capital buffer in
recession times) policy named "Macro-Prudential
Policy" (IMF, Key Aspects of Macroprudencial
Policy , 2013 ). In the policy, the prudential
ratios such as TIER 1 ratio, concentration ratios
for single borrowers, ratios for foreign asset and
liabilities, CAR% (Capital Adequacy Ratio %) and
liquidity ratios are included to be managed.
Addition these, BoM has introduced brand new
(non-traditional) monetary policy in cooperation
with the government, which were projects
named "Price Stability for medium term3
" and
"Project for Mortgage4
" to ease the problem that
the economy has faced in 2013, while keeping
inflation low as possible.
III.2 The "Price Stability for medium term"
and "Project for Mortgage"
The projects are designed to decrease the
inflation, which is resulted from supply shortage,
however, eventually the projects' purpose
changed to ease the impact of external shocks on
the economy, save the employment and keep the
economic growth at double digits. In 2013,
inflation rate was relatively lower at 8.3%
compared to other years due to weak economic
performance and this economic condition gave
an opportunity to the central bank to ease its
monetary policy. Thus, BoM printed out MNT3.8
trillion ($2.1 billion) and injected it into the
economy conveying by the banking system for
several projects following:
3
Link is available here:
http://www.mongolbank.mn/pricestability.aspx
4
link is available here:
http://www.mongolbank.mn/ipotek_statistic.aspx
3
Table III-1: The projects implemented by BoM
Price Stability for medium term $0.8 billion
Government deposit $0.5 billion
Mortgage loan $0.8 billion
Source: www.mongolbank.mn
Thanks to the money printing, the real economic
growth for 2013 was kept at 11.7% (yoy) still in
double digits. However, the policy had very bad
effect on currency market and made MNT
depreciate against other currencies hugely. As in
2013, the currency market had been already
contracted due to sharp fall in foreign
investment, however, the printing of MNT and
injecting it into the economy simulated MNT
depreciate more against other currencies
dramatically. The expansionary monetary policy
also had negative impacts on banking system in
direct and indirect ways, generating much risk
for the banking system.
IV. Banking system risks
Moody's assessed Mongolian banking system
remains negative for five main aspects like
operating environment, asset quality, funding
and liquidity, profitability and efficiency as well
as systemic support (Report, 2013).
IV.1 Credit risk (Asset quality)
Thanks to the projects pursuing by BoM, the
asset quality has been deteriorating recently
because amount of disbursed loan for 2013 and
2014 was so enormous compared to previous
years, however, the macroeconomic situation in
Mongolia is getting worse due to shortage of
foreign cash flow. As there is strong correlation
between the economy and the system, loan
repayment burden is getting bigger and bigger,
making great credit risks in near future.
Figure IV-1: Non-performing loan (USD billion) and NPL%
Source: www.mongolbank.mn
Furthermore, concentration on single borrower
and counterparty risks are the main risks for the
system. It is easily shown from the Figure IV-1: Nonperforming
loan (USD billion) and NPL% that NPL ratio
(Non-performing loan ratio) has increasing trend
currently. The Non-performing loan portfolio has
reached $0.2 billion, which is 2.73% of overall LP
as June of 2014.
IV.2 Market risk: Exchange rate risk
Macroeconomic condition in Mongolia is slowing
down due to sharp fall in foreign direct
investment as mentioned before so that the
exchange rate (MNT against USD) is fluctuating
dramatically. Besides that, the impact of
printing much money (the impact of BoM's
project named "Price Stability") and injected it
into the economy intensified the currency
votalities throughout the currency market. The
high vulnerability can be easily shown from
figure named Figure IV-2: Exchange rate and fluctuation.
The official MNT rate has depreciated against
USD by 18.65% (yoy) compared to that of 2013
and reached 1,862.2 at the end of August, 2014.
The high depreciation is making much burden for
the commercial banks, which has short positions
in direct ways. For Mongolia, liability for banks is
not only coming from deposit but it is also
consisted of borrowed funds from foreign
institutions, meaning that some banks usually
have short positions on their liability side.
Therefore, high currency votalities had a big
negative effect on the banks, which have short
positions.
Figure IV-2: Exchange rate and fluctuation (mom %)
Source: www.mongolbank.mn
Furthermore, the MNT depreciation influenced
loans' repayments, which were borrowed in
foreign currencies in negative ways, making
2.7%
2.0%
2.1%
2.2%
2.3%
2.4%
2.5%
2.6%
2.7%
2.8%
2.9%
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
0.16
0.18
0.20
I II III IV I II III IV I II
2012 2013 2014
Non-Performing Loan
NPL ratio %
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2007 2008 2009 2010 2011 2012 2013 2014
USD VS MNT Growth %
4
credit risks as well (IMF, 2011). This kind of
impact of exchange rate fluctuation on loan
repayment is called indirect way to affect
banking activity.
IV.3 Liquidity risk
Liquidity risk could be risen in near future due to
high speed of loan growth, a result of money
easing process (printing money), since public
(specially, term deposit) deposit is not increasing
as fast as loan portfolio increases recently on the
other side.
Figure IV-3: LP, CA, DD and TD (USD billion)
Source: www.mongolbank.mn
It is seen from the above picture of Loan to
deposit ratios (Current Account + Demand +
Term Deposit), the ratio is increasing recently
and reached to 156.8% (20.9% higher than the
peak point during the Financial Crisis (2008-
2009)).
V. The results from the projects
The projects introduced by BoM were successful
in keeping the real economic growth at higher
level and saving employment, however, we paid
much just for keeping economic growth at higher
level. We sacrificed MNT's independencies, which
led to high inflation again. As Mongolia is hugely
dependent on imports from other countries,
strong fluctuation of MNT made the import goods
more expensive, which led to high inflation
again. For this reason, BoM has increased the
policy rate from 10.5% to 12.0% in August, 2014
to tight up the economy and catch the inflation
at lower level. Moreover, the trade off for
keeping economic growth stable is that making
the whole banking system at risks like credit,
market and liquidity. However, It was a good
lesson and good exercise for monetary policy
implementation as an observer's view.
Table of contents:
I. Current banking system situation............1
I.1 The relationship between macro economy and
banking system .......................................... 1
I.2 Banking system structure........................ 2
II. Brief history of the banking system .........2
III. Monetary policies of central bank ...........2
III.1 Central bank activities........................... 2
III.2 The "Price Stability for medium term" and
"Project for Mortgage" .................................. 2
IV. Banking system risks ...........................3
IV.1 Credit risk (Asset quality) ....................... 3
IV.2 Market risk: Exchange rate risk................. 3
IV.3 Liquidity risk ...................................... 4
V. The results from the projects ................4
VI. Bibliography......................................4
List of the figures:
Figure I-1: Overall asset in USD billions ................. 1
Figure I-2: Loan Portfolio in USD billions................ 1
Figure I-3: Current account, Deposits in USD billion .. 1
Figure IV-1: Non-performing loan (USD billion) and
NPL% ......................................................... 3
Figure IV-2: Exchange rate and fluctuation (mom %) . 3
Figure IV-3: LP, CA, DD and TD (USD billion) ........... 4
List of the tables:
Table I-1: Commercial banks in Mongolia ............... 2
Table III-1: The projects implemented by BoM......... 3
VI. Bibliography
1. IMF. (2011, May). Mongolia: Financial System
Stability Assessment . Washington, D.C.: IMF.
2. Mongolia, B. o. (2014 , July ). Monetary Policy
Implementation for 2014 . Ulaanbaatar, Mongolia :
Bank of Mongolia .
3. Report, M. (2013, April 11). Banking System
Outlook. Moody's Rating Agency.
Note: the document was prepared only for study
use but not for publishing and sharing. All the
information in the document was collected from
the official website of Bank of Mongolia
(www.mongolbank.mn).
6.6
(1.3)
(2.9)
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
(6.0)
(4.0)
(2.0)
-
2.0
4.0
6.0
8.0
I II III IV I II III IV I II
2012 2013 2014
LP CA DD, TD Loan/Deposit %