Mongolia: The Microfinance Industry

This paper discusses the microfinance industry in Mongolia. It describes the Mongolian economy and describes the performance of the financial sector:

• Increase in percentage of performing loans reaching the private sector;
• Reduction in non-performing loans;
• Decline in return on assets and equity of banks in comparison to previous years;
• Drop in real lending interest rates;
• Presence of overbanking and overbranching in urban and periurban locations.

The paper presents the characteristics of the microfinance industry including:

• Microfinance clients being primarily served by banks;
• Banks that provide microfinance services enjoying high profitability and growth;
• Micro-lending being mainly for urban areas and primarily for financing trade and consumption;
• Non-bank financial institutions (NBFI) mushrooming - their share in lending is small;
• Several microfinance institutions (MFIs) reaching subsidy independence in a short periods.

The paper describes the financial performance of two leading banks in microfinance including their:

• Loan portfolio;
• Interest income;
• Deposits;
• Profitability;
• Products.

It makes recommendations for state and donors promoting the microfinance industry:

• Establish a domestic rating agency;
• Create a microfinance forum for operators in microfinance;
• Campaign on the merits of savings and prevailing saving instruments;
• Improve the legal, judiciary and enforcement systems to ensure creditors' safety and clients' rights.

The paper mentions two promising financial instruments:

• Financial leasing;
• Index based live stock insurance.

The paper concludes with lessons learnt from the international microfinance experience.