Microfinance in Mongolia
A nation in transition
In the 1990s Mongolia transformed from a centrally planned to a market-driven economy. By 2004 the private sector’s share of GDP had risen to 75 percent and since 2000 the average annual GDP growth rate has been above 5 percent. Not everyone, however, has benefited from this growth. With more than a third of Mongolians living below the poverty line, poverty remains a challenge.
To support its less advantaged population, the Mongolian Government initiated an experimental microfinance programme in 1997 with support from UNDP’s global MicroStart programme. Its success exceeded all expectations and it rapidly developed into a nationwide programme.
- Poverty is still a major challenge in Mongolia, with more than a third of the people living below the poverty line.
- By 2005 there were 17 banks, 126 non-bank financial institutions and 270 cooperative savings and credit associations in Mongolia.
- Rural clients comprise about 47 percent of XacBank’s clients.
Empowerment through microfinance
In the 1990s MicroStart — which has since been absorbed into the UN Capital Development Fund—provided seed money for microfinance programmes, focusing on those that could become self-sufficient. With an initial grant of US$1 million, UNDP — in partnership with the Mongolian Government, several non-governmental organizations and a Mongolian management team — pioneered a microfinance initiative targeting those who had not benefitted from the national economic transformation. Mongolian leadership was central to the initiative’s evolution into the country’s first non-bank financial institution.
In 1999, Mongolia began registering non-bank financial institutions, such as those created through MicroStart. A microcredit regulatory framework and a national policy framework developed over the next years. In 2002 the Mongolian parliament enacted laws prioritising inclusive economic growth, defining the roles and responsibilities of non-bank financial institutions and legalizing savings and loan cooperatives. By 2001, a consortium of these institutions had become XacBank, an independent commercial bank.
The newly opened banking and finance sectors grew quickly and by 2005 there were 17 banks, 126 non-bank financial institutions and 270 cooperative savings and credit associations. Mongolia’s experience demonstrates some of the birth pangs of microfinance programmes. Adequately regulating entrants into the sector has been difficult, as has been ensuring a commercial interest rate that reflects the higher risk of loans while still permitting broad access.
UNDP’s support concluded in 2001 but nationally driven momentum and private sector resources have moved the sector forward. And XacBank, once a UNDP beneficiary, is now an implementation partner.
Making a difference: the transformational impact
There is little doubt that microfinance has transformed lives, both by creating economic opportunities and insulating many Mongolians from the uncertainties of a competitive market economy.
XacBank has made striking progress in becoming self-sustaining and in meeting client and national needs. By May 2010 it had 93,930 loans outstanding, with a dynamically varied customer base. In partnership with the Women’s World Bank, XacBank has developed programmes targeting young women, who comprise one half of its customers. It continues to channel loans to rural areas, which poses a special challenge in a country with a low rural population density. Although rural clients comprise about 47 percent of XacBank’s clients, this represents less than 10.1 percent of the rural population.
XacBank’s growth is observable in several performance indicators. From 2002 to 2010, its assets grew by 26 times, loans increased by 43 times and savings by 25 times. The initiative that started with $1 million in 1998 now has assets of over $450 million.
XacBank's total assets, 2002-2010
Supporting Transformational Change
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Mongolia’s microfinance experience yields several lessons:
Mongolian leadership: From the outset, the microfinance initiative was a joint government and UNDP programme, with support from the Central Bank of Mongolia. The initiative’s main characteristic was strong and visionary Mongolian leadership, which UNDP was proud to support with start-up funding and one international adviser.
Partnerships: The Mongolian and UNDP initiative drew a range of national and international players, including non-governmental organizations. Not only did the programme access a broad base of knowledge and experience, but it ensured allies that would carry the process forward. Broad partnerships facilitated national as well as government ownership.
Strategic analysis of opportunities: The decision to initiate MicroStart reflects a correct assessment of needs and opportunities in Mongolia in the mid- to late-1990s. MicroStart addressed groups that benefited less immediately from the surging economic growth, and it became critical with the economic setback of the 1997 East Asian Crisis. As a UNDP-supported global programme, MicroStart provided access to comparative experiences in other countries.
Timing is important: Mongolia’s emergence from its earlier economic straightjacket into a market environment created opportunities — and a national openness to them — that are difficult to repeat in more stable situations. At a time of rapid change, a relevant initiative stood a good chance of being mainstreamed.
Success breeds success: The development of microcredit benefited from progress in other sectors of Mongolia’s rural economy, and vice versa.
External force majeure: The significance of external factors should not be underestimated. The liberalization of the Mongolian economy was made possible by the dissolution of the Soviet Union. The East Asian Crisis gave impetus to the microfinance programme and the beginning of microcredit in the country. However, the global banking and economic crisis in 2007 precipitated a spike in rural poverty in Mongolia as unemployment rose and household income declined sharply.