By B.Zulbayar
The article was published on UB Post, a Mongolia's national English newspaper on 17th of September 2014 and Online text can be found here: http://www.24tsag.mn/content/63869.shtml
According to the National Statistical Office of Mongolia, at the end of July 2014, non-performing loans (NPL) throughout the entire banking system reached MNT 599.7 bln, up MNT 32.7 or 5.8 percent from the previous month, and MNT 146 bln or 32.4 percent up from the same period of the previous year.
Even though the Bank of Mongolia reported that money supply at the end of July 2014 reached MNT 10,081.0 bln, up MNT 1,992bln or 24.6 percent compared with the same period of the previous year, the NPL figure is a quite disappointing, and people and businesses are struggling to settle their loans, and are looking into finding cheaper sources of funding more aggressively than ever during this economic slow-down period.
The inaccessibility to affordable money is a major factor for why some 40 Mongolian companies have requested approximately USD 3 bln in loans from the representative office of the Bank of China in UB since its opening in January 2013. Therefore, it is likely that these businesses considered the interest rates charged by Mongolian banks to be too high, and/or their loan requirements to be too unfavorable.
According to the “Monthly Statistical Bulletin” from the Bank of Mongolia for July 2014, their annual weighted average lending rates were at 19.20% and 13.30% for domestic and foreign currency respectively. Logically thinking, it appears that any business that has lower than a 45-50 percent gross profit margin would eventually fail in the current business environment because of the 20 percent bank lending rate, the 10 percent Mongolian Corporate Income Tax, and the VAT, in addition to massive operational costs including office rental and HR costs unless there is enough cash available from substantial equity investment or retained earnings.
Logic would therefore dictate that one of the potential solutions to drive down bank lending rates to a more business friendly level is to promote market competition in the banking sector by inviting more foreign full-service banks into Mongolia.
As of 2013, Mongolia’s banking sector was accountable for 95% of the country’s finance industry which was, in return, equivalent to 5.8% of total GDP for the year. To date, 13 commercial banks operating in Mongolia and 6 foreign banks have opened their representative offices.
Source: Khan Bank, corporate presentation
Of those 13 banks, two banks are 100% foreign owned (Chinggis Khan Bank and Credit Bank), while four have foreign shareholders:Trade and Development Bank of Mongolia, Khan Bank, National Investment Bank of Mongolia and Transbank (Source: “The Country Report: Mongolia 2014”, OBG).
However, these foreign owned or invested banks are not yet significantly influential to accelerate competition in the banking sector to lower lending rates for small and medium enterprises (SMEs) or individuals. The reasons for this situation probably stem from their inadequate asset base or primary focused on targeted corporate clients matters such as mining, construction or infrastructure sectors. Therefore, Mongolia may need to welcome a larger candidate who can deliver both corporate and personal banking services at affordable level to the country. Fortunately, Mongolia need not look too far for a suitable bank to work with. A viable candidate is located just next to Mongolia in China.As a result of the currently upgraded political and economic ties between China and Mongolia, it has become an evident that Bank of China, which is 68% owned by Government of China and 32% owned by investors, is likely to expand its presence and operations in Mongolia.
There are a number of reasons to predict this. Firstly, the recent State visit by China’s president concluded with a number of business deals and agreements being signed including one for cooperation on building Coal-to-Gas Plant worth USD 30 bln, a Railway and Transit transport agreement, and a Chinese seaport use agreement for Mongolia. Hence, it follows that there will be a potential sharp increase of business cooperation between China and Mongolia in the near future, and, logically, the Bank of China will follow its customers to Mongolia. The “Follow–the-customer” hypothesis is that banks go multinational to better serve the foreign operations of domestic corporate entities.
Secondly, banks in some countries (like Mongolia) may be inefficient (outdated technology) or non-competitively priced. Look at a queue at any of the bank branches around central Ulaanbaatar. Such conditions may attract a potential foreign bank or banks to penetrate these markets by employing newer technology or better marketing tools.
Thirdly, the Bank of China will find it possible to take advantage of diversification and interest rate differentials. Current policy interest rates for the Bank of Mongolia and China’s Central Bank are 12.0 % versus 6.0% respectively.
It can understandably be forecast that the arrival of Bank of China, which is the second largest lender in China overall, and the largest foreign exchange lender, will benefit Mongolia’s SMEs and people by lowering current bank lending rates to a more affordable level. However, the arrival of the Bank of China and other foreign banks for that matter in Mongolia may well be the proverbial double edged sword.
In spite of the possible benefits of having the Bank of China doing business in Mongolia, there is already some concern that foreign banks operating locally would quickly sweep away the local banks because they have the capital, access to cheap funds, and technology that are not available to Mongolian banks.
To be honest, unfortunately, this is one of major principles of the market economy in which we are operating, and the local banks have to accept this and become more competitive themselves. This is why the banks have risk management departments and continuously hire trained professionals in the risk management arena. Additionally, government agencies commissioned to regulate the unfair competition and manage the country specific risks are also in place to regulate banking sector practices.
Further, some may say that China’s involvement in the banking sector may lead to foreign dominance of the banking sector. In point of fact, Mongolian banks are already owned partially by foreigners as illustrated by the table below extracted from the annual reports for 2013 from the Mongolian banks.
Even though a variety of sources have stated that the Bank of China potentially will make possible big projects in Mongolia that local commercial banks cannot finance themselves, this may somehow not be beneficial for Mongolia as the financing of these major projects is likely to generate large public debts in the future. Whereas, once the Bank of China begins operating in retail banking, it will boost the domestic banking sector by bringing healthy competition and any borrower’s default on loans would ultimately be considered as a private (legal) person’s default not the public debt. This situation could be said to be the yin and yang of the inevitable arrival of foreign banks in Mongolia.
One major upside of the Bank of China’s full operation in Mongolia is that it may attract foreign direct investment and foreign trade opportunities since the Bank of China operates in a number of countries through branches and representative offices. Mongolian producers, especially export/import companies and conglomerate entities, can potentially take advantage of the superior experience and expertise of the bank in international payment systems. In theory, a foreign bank coming into a country is expected to increase foreign currency inflow into the country’s economy, which, among other potential benefits, should generate a very positive and calming effect on Mongolia’s current volatile currency exchange rate.
Inhospitality towards, and intolerance of, the presence or involvement of China in Mongolia’s social and economic life has been one of the main themes of the nationalistic rhetoric and is gradually abating since the slowdown of Mongolia’s once double digit economy; once one of the fastest growing economies in the world. Mongolians are becoming more pragmatic in terms of developing the country’s economic and political direction. From this perspective, one may agree that at the end of the day fair competition with multiple participants in the country’s banking sector will be beneficial to both the banks and to the people of Mongolia.
However, these foreign owned or invested banks are not yet significantly influential to accelerate competition in the banking sector to lower lending rates for small and medium enterprises (SMEs) or individuals. The reasons for this situation probably stem from their inadequate asset base or primary focused on targeted corporate clients matters such as mining, construction or infrastructure sectors. Therefore, Mongolia may need to welcome a larger candidate who can deliver both corporate and personal banking services at affordable level to the country. Fortunately, Mongolia need not look too far for a suitable bank to work with. A viable candidate is located just next to Mongolia in China.As a result of the currently upgraded political and economic ties between China and Mongolia, it has become an evident that Bank of China, which is 68% owned by Government of China and 32% owned by investors, is likely to expand its presence and operations in Mongolia.
There are a number of reasons to predict this. Firstly, the recent State visit by China’s president concluded with a number of business deals and agreements being signed including one for cooperation on building Coal-to-Gas Plant worth USD 30 bln, a Railway and Transit transport agreement, and a Chinese seaport use agreement for Mongolia. Hence, it follows that there will be a potential sharp increase of business cooperation between China and Mongolia in the near future, and, logically, the Bank of China will follow its customers to Mongolia. The “Follow–the-customer” hypothesis is that banks go multinational to better serve the foreign operations of domestic corporate entities.
Secondly, banks in some countries (like Mongolia) may be inefficient (outdated technology) or non-competitively priced. Look at a queue at any of the bank branches around central Ulaanbaatar. Such conditions may attract a potential foreign bank or banks to penetrate these markets by employing newer technology or better marketing tools.
Thirdly, the Bank of China will find it possible to take advantage of diversification and interest rate differentials. Current policy interest rates for the Bank of Mongolia and China’s Central Bank are 12.0 % versus 6.0% respectively.
It can understandably be forecast that the arrival of Bank of China, which is the second largest lender in China overall, and the largest foreign exchange lender, will benefit Mongolia’s SMEs and people by lowering current bank lending rates to a more affordable level. However, the arrival of the Bank of China and other foreign banks for that matter in Mongolia may well be the proverbial double edged sword.
In spite of the possible benefits of having the Bank of China doing business in Mongolia, there is already some concern that foreign banks operating locally would quickly sweep away the local banks because they have the capital, access to cheap funds, and technology that are not available to Mongolian banks.
To be honest, unfortunately, this is one of major principles of the market economy in which we are operating, and the local banks have to accept this and become more competitive themselves. This is why the banks have risk management departments and continuously hire trained professionals in the risk management arena. Additionally, government agencies commissioned to regulate the unfair competition and manage the country specific risks are also in place to regulate banking sector practices.
Further, some may say that China’s involvement in the banking sector may lead to foreign dominance of the banking sector. In point of fact, Mongolian banks are already owned partially by foreigners as illustrated by the table below extracted from the annual reports for 2013 from the Mongolian banks.
One major upside of the Bank of China’s full operation in Mongolia is that it may attract foreign direct investment and foreign trade opportunities since the Bank of China operates in a number of countries through branches and representative offices. Mongolian producers, especially export/import companies and conglomerate entities, can potentially take advantage of the superior experience and expertise of the bank in international payment systems. In theory, a foreign bank coming into a country is expected to increase foreign currency inflow into the country’s economy, which, among other potential benefits, should generate a very positive and calming effect on Mongolia’s current volatile currency exchange rate.
Inhospitality towards, and intolerance of, the presence or involvement of China in Mongolia’s social and economic life has been one of the main themes of the nationalistic rhetoric and is gradually abating since the slowdown of Mongolia’s once double digit economy; once one of the fastest growing economies in the world. Mongolians are becoming more pragmatic in terms of developing the country’s economic and political direction. From this perspective, one may agree that at the end of the day fair competition with multiple participants in the country’s banking sector will be beneficial to both the banks and to the people of Mongolia.
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