Regulatory Compliance for Financial Institutions in Mongolia: Challenges and Opportunities

Mongolia’s financial sector has undergone significant changes since the banking crisis of 1998-1999. The Government implemented measures to restructure ailing banks, privatize major banks, strengthen market discipline, and improve regulatory compliance.

Current State of Banking Sector

As reported by Resource Investment Capital, the current state of Mongolia’s banking sector is characterized by:

• Minimum capital requirement for commercial banks: MNT 8.0 billion ($6.4 million), set by the Bank of Mongolia
• Non-performing loans with arrears in principals as a percentage of total outstanding loans: declined to 17% in Q3 2010 from 25% in November 2009

Real Interest Rates and Deposit Growth

Real interest rates have plummeted due to inflationary pressure, resulting in negative returns on depository accounts. Despite this:

• MNT deposits continued to rise, reaching $1.3 billion in mid-2010 (51% increase yoy)
• Driven by the Deposit Guarantee law and expectations of currency appreciation

Concentration of Bank Lending

Bank lending has become more concentrated, with around 50 largest borrowers accounting for approximately 30% of total loans or $690 million.

Regulatory Authorities

Authorities responsible for financial stability and institutional coverage include:

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

Supervision Department’s Objectives

The Supervision Department’s objective in 2009 was to reduce financial risks of the banking sector and add risk capacity. To achieve this:

• A new banking law was approved by Parliament
• Preparatory work was completed for establishing consolidated supervision arrangements, information technology inspections, proper management monitoring, and amendments to supervisory regulations

Prioritizing Regulatory Compliance

As demand for credit is expected to increase significantly in the coming five years due to greater necessity for capital across all sectors of the economy, Mongolia’s financial institutions must prioritize regulatory compliance to ensure sustainable economic growth. To achieve this:

• The Deposit Guarantee Law has been amended, limiting the pledge to a certain amount
• Financial authorities must continue to strengthen supervision and regulation, fostering a stable and competitive financial infrastructure in Mongolia

By prioritizing regulatory compliance, Mongolia’s financial institutions can address fundamental weaknesses in the banking sector and meet growing credit demands, ultimately driving sustainable economic growth.