Financial Regulation in Mongolia: A Crucial Step Towards Stability
Overview
In an effort to strengthen financial stability and regulation, the Mongolian government has implemented several measures to overhaul its banking sector. The country’s financial sector has undergone significant changes since the severe banking crisis of 1998-1999.
Banking Sector Composition
The Mongolian banking sector consists of:
- 14 commercial banks
- 188 non-bank financial institutions
- Over 200 savings and credit cooperatives
Regulatory Developments
According to a report by Resource Investment Capital, as of January 2011, the minimum capital requirement for commercial banks stood at MNT 8.0 billion ($6.4 million). Non-performing loans (NPLs) have declined to 17% in Q3 2010 from 25% in November 2009.
Challenges
Despite this improvement, general levels of NPLs remained high throughout 2010. Real interest rates have plummeted, resulting in negative returns on depository accounts due to inflationary pressure. Bank lending has become more concentrated, with the top 50 borrowers accounting for around 30% of total loans worth $690 million.
Deposit Growth
MNT deposits continued to rise, reaching $1.3 billion in mid-2010, a 51% increase year-on-year, driven by the Deposit Guarantee law and expectations of greater currency appreciation. However, nominal interest rates on lending and borrowing remained high as banks struggled with liquidity problems.
Priorities
Despite increased business activities in 2010, officials acknowledge that addressing the fundamental weaknesses of the banking sector remains a top priority. The demand for credit is expected to increase substantially over the next five years as the economy expands and capital requirements grow across all sectors.
Key Authorities
The authorities responsible for financial stability and supervision include:
- Bank of Mongolia: oversees banks
- Financial Regulatory Commission: supervises other financial institutions, including insurance companies, security firms, credit unions, and non-banking financial institutions
- Financial Stability Council: develops a sound and competitive financial infrastructure and improves financial services in terms of quality and access
Supervision Department Achievements
The Supervision Department has achieved several milestones in 2009, including:
- Reducing financial risks in the banking sector
- Increasing risk capacity
- Completing preparatory work for consolidated supervision, information technology inspection, proper management monitoring, and amendments to supervisory regulations
Conclusion
As Mongolia continues to navigate the complexities of financial regulation, its authorities are committed to ensuring a stable and resilient financial system that supports sustainable economic growth and development.