Mongolia’s Financial Sector Struggles with Compliance Issues Despite Reforms

Ulaanbaatar, Mongolia - A Major Concern for Authorities

The Mongolian financial sector has made significant strides in recent years, but compliance remains a major concern for authorities responsible for financial stability. The country’s banking sector, which dominates the financial landscape, underwent several crises in the 1990s.

History of Banking Crises

Following the severe banking crisis of 1998-1999, the government implemented measures to restructure ailing banks, privatize major banks, and strengthen market discipline and incentives for sound bank management. As of January 2011, the minimum capital requirement for commercial banks stood at MNT 8.0 billion ($6.4 million), while non-performing loans with arrears in principals had declined to 17% from 25% in November 2009.

Current Challenges

Despite the challenges, deposit growth continued, reaching $1.3 billion in mid-2010, driven by increased confidence in the financial system and expectations of currency appreciation. Nominal interest rates on lending and borrowing remained high as banks struggled with liquidity problems. General levels of non-performing loans remained high throughout 2010.

Authorities Responsible for Financial Stability

The authorities responsible for financial stability are:

• Bank of Mongolia: responsible for supervising banks
• Financial Stability Council: oversees other financial institutions, including insurance companies, security companies, credit and savings unions, and non-banking financial institutions
• Financial Regulatory Commission: responsible for regulating and supervising financial institutions

Efforts to Reduce Financial Risks

In 2009, the Supervision Department’s objective was to reduce financial risks in the banking sector and add risk capacity. To achieve this goal, a new banking law was approved by Parliament, and preparatory work was done for:

• Consolidated supervision
• Information technology inspections
• Proper management monitoring
• Amendments to supervisory regulations

Compliance Remains a Major Concern

However, despite these efforts, compliance remains a major concern for authorities. The demand for credit is expected to increase substantially in the coming five years as greater necessity for capital spreads across all sectors of the economy. In response, the Deposit Guarantee Law has been amended, pledging no longer unlimited.

Expert Warning

Experts warn that Mongolia’s financial sector still faces significant challenges, including:

• The need for greater transparency and accountability
• Prioritizing compliance and risk management to ensure the stability of the financial system and support sustainable economic growth

In conclusion, while Mongolia’s financial sector has made progress in recent years, compliance remains a major concern for authorities. To address this challenge, the country must continue to prioritize compliance and risk management to ensure the stability of the financial system and support sustainable economic growth.