Feature story |
||||||||||
| Home > News & events > 2007 feature stories > A Mongolian bank’s triumph | ||||||||||
A Mongolian bank’s triumph |
||||||||||
New EBRD loan for the bank they said couldn’t be saved Seven years ago, international lenders called for Mongolia’s Agricultural Bank (AB) to be closed because it was irreparably damaged. Created in 1991 and state-owned until 2003, AB experienced years of deficits and near-bankruptcy. Its management had little control over the bank: politicians rather than credit officers decided who received loans. AB was neither fair nor effective in meeting the credit needs of Mongolians. The Mongolian government, however, refused to close AB. It was the only bank with branches across the 1.5 million square kilometres of Mongolian territory. It was the only bank able to operate nationally, transferring money, paying pensions and salaries to citizens in far-flung reaches of the Asian nation. To close the bank would have devastated the rural economy. And so the international lenders made reform of the Agricultural Bank a condition of any credit programmes for Mongolia. It was time AB divorced itself from politics. In July 2000, the Mongolian government handed the bank over to a joint American-Mongolian management team. The AB finally had full authority to say “no” whenever politicians tried to exert their influence. Success at last The bank was privatised in 2003 and changed its name to Khan Bank. Next, it changed the common perception that only large companies with government connections could get loans. The bank opened its door to nomadic Mongolian herders, farmers and other micro and small businesses – clients whose only means of borrowing until then had been friends or pawnshops. This was Khan Bank’s culture in 2004 when the EBRD started a two-year micro-finance project with it. The project was funded by the EBRD’s Mongolia Cooperation Fund, a donor fund that allowed the EBRD to operate in Mongolia before it became a country of operations. “Khan Bank had about 400 branches in 2004, 90 per cent of them in rural Mongolia,” says CEO Pete Morrow. “We had experience in dealing with rural clients but knew little about the urban market. With many businesses moving to the cities, the challenge was to make them our customers.” Two consultants (their fees covered by the EBRD) were hired to bring in the expertise needed to build an urban clientele. One of them was Niel Isbrandtsen. “Small urban businesses wanted loans that were easy to arrange, with less paperwork and with terms longer than six months,” Mr Isbrandtsen recalls. “Previously, loans only financed the costs of importing trade goods: businesses wanted longer-term loans so they could buy equipment and start producing their own goods.” As Chikako Kuno of the EBRD’s Small Business Group points out: “After more than a decade in the micro-finance sector in eastern Europe and Central Asia, the first lesson the EBRD has learned and which we teach our local partner banks is to simplify loan applications for small businesses.” Khan Bank followed that advice and in 2004 introduced express micro loans of up to US$ 2,000. Loan approval time was cut to a few hours versus several days. Collateral also became less of an issue: Khan Bank now accepts gers, the traditional Mongolian nomadic tents made of blankets, as collateral, as well as rented market stalls. Loan maturity was extended to one year.
Micro express loans in the market That’s where Dalkhjav Tsendjargal received three loans totalling US$ 1500. “Life has improved,” says the dynamic Dalkhjav. “We used to import coats from China but now we produce them ourselves.” Mr Morrow says it is very rare for micro and small businesses to delay their loan payments. “They can’t risk the relationships with the only bank in their vicinity nor the collateral they’ve pledged, as those tiny stalls they rent in freezing winter markets are all they have to survive.” Demand for loans in Mongolia has grown each year. With Mongolia becoming an EBRD country of operations in 2006, the Bank has approved its second investment in the country – the Mongolian Financial Sector Framework, a facility with nearly €38 million to provide medium-term loans to businesses. Khan Bank will benefit from a €7.5 million loan as well as an €800,000 limit under the Trade Facilitation Programme. The EBRD’s Early Transition Countries fund will cover costs of training the local bankers. “We proved that a state-owned bank can be turned around and privatised,” explains Mr Morrow. Khan Bank hasn’t had an easy job of it, though. Over 800 microfinance institutions compete in providing financial services to Mongolia’s population of around 3 million. Dashdorj Badraa of the Mongolian Financial Regulatory Committee tried to put an end to unregulated credit unions that were misusing customers’ money. In June 2006, a credit union owner stabbed him to death in front of his office. Shortly after the murder, some 22 credit unions went bankrupt, hitting about 10,000 Mongolians with losses of nearly US$ 60 million. “Winning against informal competitors is Khan Bank’s success,” says Mr Morrow. “We brought the money out of the cash economy into the bank. Now small businesses have faith in a handful of reputable banks and are turning their backs on the calamitous informal lending sector.”
By Marjola Xhunga, EBRD communications adviser
|
||||||||||
|
|
||||||||||
| Terms and conditions Sitemap Feedback | ||||||||||
