M.Bold: Mongolian Banks and Insurance Companies Need To Learn Quickly and With Dexterity
Mongolian Economy Magazine: 2011-12-06 15:13
Executive Director of TenGer Financial Group M.Bold earned his B.A. in Economics and is M.A. in International Relations Columbia University in the United States. Bold has worked more than 20 years in the banking sector. He also worked as consultant for the World Bank, the International Monetary Fund (IMF) in Washington D.C., and at the Central Bank of Afghanistan. From 1996 until 2000, Bold was Vice President of the Central Bank of Mongolia and currently acts as a driving force behind a large financial incorporation that includes XacBank, XacLeasing, TenGer Insurance, Horus Nomadic Solutions, XacSecurity, and ÒenGer League Investments. Bold discusses banking institutions, the financial sector, and the monetary policy of Mongolia.
What is the state of finances in Mongolia’s financial sector?
Currently banks dominate our financial sector. Compared to 10 or 20 years ago, banking operations have markedly improved and become healthier. Although it has not reached the international level, it has come close. However, the development of the capital market and insurance sector is relatively weak at this state of infancy.
More than 95 percent of our financial sector is constituted by the banking sector alone. Why capital market and insurance services cannot be developed?
The most important aspect to the development of a capital market and other financial services is people’s knowledge and skills. For instance, our educational system needs to prepare students to work in human resources for insurance companies. The expertise of the team that monitors and inspects those employees also needs to be brought to international standards.
Everything depends on the human factor. Apart from this, Mongolia lacks a legal climate for the development of a capital market. Joint-stock companies do induce trust among investors because they are unfamiliar with international accounting standards, transparency, and financial reports that follow the appropriate regulations. In addition to this, there is not a fast and efficient court system that could fairly resolve business disputes. Only when all of these issues are resolved in a comprehensive manner will capital market and insurance companies be able to thrive.
There is an expectation that the expansion of the mineral resource sector will benefit the financial market. What do you think about foreign mining companies operating in Mongolia, and obtaining their insurance, finance services, and other assistance from abroad?
Because financial institutions cannot subsist without customers, the development of the mining sector will positively impact the financial sector to a certain extent. However, today domestic financial institutions are unable to provide capital to large mining projects implemented within Mongolia. Banks issue only issue small-scale loans. As for domestic insurance companies, they have not yet reached international standards. Therefore, mining projects obtain their banking and insurance services from abroad so they may operate in a speedy manner Mongolian banks and insurance companies need to learn quickly and work with dexterity, Otherwise it is wrong for them to sit and complain.
Foreign investors are becoming greatly interested in Mongolia. Consequently, there is a fear of too much dependence on foreign countries. What is needed for the creation of domestic investors?
Today, Mongolians are poor. Because money is scarce for individuals, households and business entities, they lack resources for additional investments. Only a few mining companies experienced improvements to their financial standing with the opportunities that opened up for investment of new projects and industries. There is a need for a policy that stimulates growth in a number of national companies.
What are TenGer Financial Group’s objectives for expansion? Is there a long-term plan for the issuance of shares on the international market?
In the future, there is no other option than to enter international markets. Today Mongolians lack money, but we want to build roads, electric power stations, and purchase housing. Currently this money is taken from abroad. If we wanted to develop mining projects to profit for ourselves, there would not be enough capital. Therefore, there is no other choice than to accumulate capital from abroad. On the other hand, there is no need to fear this scenario. Americans have obtained loans from China worth USD 1.2 trillion, and USD 900 billion loans from Japan. Even the world’s number one economy has obtained this sort of debt.
However, reports indicate that the resources of the pension fund and insurance companies in Mongolia are sound. Furthermore those are needed to create institutions for domestic investment. If this could be done, then it would be possible to prevent too much reliance on foreign countries.
Turning the pension fund into a long-term investment source is an urgent and important task that needs completion. However, this is not at all a new issue. Other countries have experimented, implemented, and successfully run programs like this for decades. On the other hand, the fact that a program like this has not been implemented in Mongolia creates impediments to the development of the financial market. It is tragic that despite the lack of a long-term investment source current opportunities and resources are not being exploited. Insurance companies lack resources and opportunities.
What is your assessment of the current monetary policy as someone who held was once Vice President of the Central Bank of Mongolia and now works in the private sector?
The Central Bank is given its rights of independence and freedom from political interference from legislation. It is important it utilizes these rights and creates monetary policies. On the other hand, it is not possible to conduct monetary policy alone. It is directly dependent on the policies of finance, taxation and resolutions from Parliament.
Recently, the Central Bank of Mongolia explained that is has tightened its monetary policy because of increasing budgetary expenditures. Do you mean that the decision of politicians to distribute cash handouts affect monetary policy? How will these impact the banking and financial sectors?
Once budgetary expenditures expand, there is no other choice than to tighten the monetary policy. If budgetary expenditures expand while the monetary policy remains weak, then inflation will shoot up. This is a concept written about in textbooks. Tightening the monetary policy means restricting the market. When interest rates increase, the banks start to buy bonds from the Central Bank and decrease the amount of loans issued to business entities. If so, then money that should go to production and services will go to the Central Bank instead. Therefore, instead of flattening its monetary policy, the Central Bank should adopt a different approach. In other words, it needs to enhance the requirements needed for consumer loans, while softening the requirements for loans destined for production and services. For example, if the number of loans issued for meat production decreases, then there will be an increase for the prices of meat, which would result in the growth of inflation.
On the other hand, the distribution of cash handouts needs to be directed towards vulnerable social groups and not to healthy people as is it occurs now, which will bring our country to the brink of a disaster. It makes people incapable of working.
What will be the state of Mongolian financial sector after five years?
There was a prediction that after five years the financial sector in Mongolia would grow 10 times. I think this is a realistic prognosis. I think that there will be greater economic impact after this.
You have said that it is impossible to imagine financial institutions without customers. Then when will financial services be accessible to Mongolians? For example, high interest rates and heavy requirements stand in the way of obtaining loans today.
People actually do not know, but the fact is Mongolia leads the world in the issuance of loans per person. According to a 2006 study conducted by an organization affiliated with the World Bank, our country ranks second in the issuance of micro loans. Therefore, it seems access to loans is not that bad. It is not appropriate for every person to obtain a loan. Other countries do not swim in a pool of loans as well. The most urgent issue to Mongolians is the high interest attached to loans.
Everybody talks about the need to decrease interest to loans. In recent years it seems that despite marginal decreases, there have been no significant results. Why is interest for loans so high in Mongolia?
Firstly, the distribution of cash handouts results in the quick increase of the price commodities and services. This is because Mongolia itself is not a producer. It always imports its products from abroad. Therefore, if the amount of cash increases, then so will the prices of rare products. Then the exchange rate for the tugrug falls. If inflation stands at 15 percent, then MNT 100 will amount to MNT 85. Another way to think about it is bread that originally cost MNT 100 will then cost MNT 115. Then what will happen is interest increases. People who want to deposit money in banks will be required a minimum of 15 percent interest. Nobody would want to lose the value of their money. If the banks do not increase their interests then people start searching for other types of investments, such as cars, immovable assets, equipments, and so on.
Therefore, banks have no other choice than to promise high interests to accumulate capital. Certainty, interest rate will grow higher when it increases its expenditure and profits in issuing loans. This is a situation reminiscent of the devil’s circle. There is an understanding that banks issue high interest loans. However, banks do not issue high interest loans because they wish to do so. It is because their sources of capital come with high interest. Secondly, Mongolians are poor. A total of 2,000 customers who hold savings accounts constitute 40 percent of all savings. However, 90 percent of all customers with savings accounts own the remaining 60 percent. From this one can surely see how poor the state of wealth for Mongolians is. If Mongolians live rich lives with good incomes, then there the real amount of money will increase. That would in turn decrease the rate of loan interest. Anything gains value when it becomes scarce. This is similar to the situation that arises when the price of bread and meat increase if they become scarce. In other words, since the total amount of money is scarce, money’s value is high.
Experts believe high interest rates for savings attracts “hot money” to Mongolia. How risky is this to financial sector?
This is definitely a big risk. When the Central Bank increases its interest rates, the banks follow and increase their interests. Thus, the interest rates to savings also increase. Therefore, people will be interested in depositing their savings into foreign banks for an increased annual interest from 0 to 2 percent at home to 12 to 13 percent in Mongolia.
Of course, foreigners will deposit their money into banks in Mongolia to accrue high profits in the short-term. However, such money is very unstable. It is called “hot money” because there is a risk that this money may disappear at eve a small sign of social and economic instability. In this way, the Central Bank’s decision to raise interest rates with the intention of decreasing the supply of money could actually increase the country’s tugrug supply. If “hot money” arrives, then it may be necessary to exchange dollars accounts into tugrugs on any day. What happens if this money amounts to not several millions but to several billions? Instead of creating tight monetary policy, it could actually result in the supply of tugrugs to the market.
Since we are talking about risks, could you tell us your thoughts on risk management within the banking sector? Recently there has been wariness because of fears the world economy may fall into crisis again. How prepared are banks in Mongolia if this situation should occur?
The risk management of financial institutions has significantly improved in comparison to 10 to 20 years ago. Mongolia’s banking sector has experienced 4 to 5 crises up-close. It seems as though banks have overcome all these crises and have been vaccinated against them pretty well. However, one should not overestimate oneself. Preparation is required. Banks know well what type of measures to adopt in cases of crisis.
In 2008 when the price of copper suddenly fell, Mongolia’s foreign currency reserves were half-emptied; the exchange rate floated, and banks endured hardships. Is there any guarantee that such a situation will not once again be repeated again?
Until 1990 Mongolia was solely dependent upon the price of the copper. When the price of copper increased, the livelihoods of Mongolians improved and declined when the price of copper fell. However, today the situation is rather different. Apart from copper, we have started to extract coal, gold, crude oil, iron and spar. Therefore, it has become more resistant to blows from foreign markets.
On the other hand, this is not a time for relief. Mongolia will attain development only when it brings to the foreground other sectors using the profits generated from mining. Mineral resources will be depleted one day. When that time comes, Mongolians should be capable of growing their economy using their intellectual capacity. Mongolia has a small population; therefore, in order to compete with countries that have a population of several hundred million people, every Mongolian needs to have the ability to work with a good education. Therefore, the most important investment is an investment into intelligence and skills.
You said that Mongolia ranks second in the world in its access to micro loans. Due to the fact XacBank has for quite some time dealt with micro loans you probably know well about the state micro loans in Mongolia.
XacBank started with micro loans. Now this sector compared to other countries has been developed relatively well in Mongolia. Currently all banks issue micro loans. In addition, 150 non-banking financial institutions and 300 savings and credit cooperatives all operate chiefly in the issuance of micro loans. However, in respect to XacBank, now 50 percent of its total loan portfolio is made up of small and medium production loans, while micro loans do not amount to even 20 percent. Apartment loans constitute 20 percent. However, based on our experience establishing an international incorporation of companies that offers micro financing services in 2009, we invested into the Mol Bulak Finance microcredit company of the Kyrgyz Republic. Also, recently TenGer Financial Group signed a Memorandum of Understanding for the establishment of a micro loan company at Urumqi, Xinjiang in the Uighur Autonomous Region of China. This is the first investment made into the financial sector of China coming from Mongolia.
There have been disputes raised in respect to micro loans in countries such as India and Pakistan. It seems that such high interest loans puts pressure and create difficulties for the poor. However, what are the prospects for the micro loans sector in Mongolia?
It has been said that the trees of the mountain are either too long or short. There are currently more than 10 thousand micro loan institutions around the world. Out of these, there are only a small number of companies that have acted wrongly and put themselves as well as their customers under hardship. Also, a situation could arise when they have been greatly affected by political interference. For example, politicians of some countries have urged their people against repaying their loans and instead let the state pay for it. One example of this is Nicaragua. However, it is widely believed that micro loans bring rewards.
Let me repeat again regarding this issue that not everyone needs to obtain loans. Loans do not grow like grass. Loans actually constitute someone else’s savings. These savings should not be given out to everyone. When the banks assumed the responsibility for keeping this money reliably, it needed to find someone capable of transforming loans into employment and then loan to them.