Abstract
The vast mineral deposits of Mongolia, if properly managed, could make available large budgetary resources, which would help address a wide range of its economic challenges. This report focuses on Mongolia’s selected issues in the mining sector, government employment and wages, and saving and credit cooperatives. The attractiveness of Mongolia’s mining sector has been eroded in recent years with the introduction of the windfall profit tax (WPT). The high wage bill mainly reflects the large size of government employment and the recent rapid real wage increases.
III. Savings and Credit Cooperatives in Mongolia33
A. Introduction
41. Mongolia’s financial system consists of 16 commercial banks and 369 nonbank financial institutions, including 182 licensed savings and credit cooperatives (SCCs), 15 insurance companies, and 35 security companies. The banking sector dominates the financial sector, holding 96 percent of the financial system’s total assets at end-2007.
Financial System Structure, 2004–07
For 2007, newly licensed savings and credit cooperatives.
Financial System Structure, 2004–07
| Dec-04 | Dec-06 | Dec-07 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Assets (billion togrogs) | Percent of total assets | Number | Assets (billion togrogs) | Percent of total assets | Number | Assets (billion togrogs) | Percent of total assets | |||
| Banks | 17 | 892 | 92.2 | 16 | 1,899 | 94.7 | 16 | 3,279 | 95.7 | ||
| Private | 16 | … | … | 16 | 1,899 | 94.7 | 16 | 3,279 | 95.7 | ||
| State-owned | 1 | 57 | 5.9 | 0 | 0 | 0.0 | 0 | 0 | 0.0 | ||
| Nonbank financial institutions | 684 | 76 | 7.8 | 1,096 | 107 | 5.3 | 369 | 147 | 4.3 | ||
| Insurance companies | … | … | … | 19 | 22 | 1.1 | 15 | 28 | 0.8 | ||
| Life | … | … | … | 0 | 0 | 0.0 | 0 | 0 | 0.0 | ||
| Nonlife | 0 | 0 | 0.0 | 19 | 22 | 1.1 | 15 | 28 | 0.8 | ||
| Savings and Credit Cooperatives1/ | 570 | 47 | 4.9 | 955 | 16 | 0.8 | 182 | 36 | 1.0 | ||
| Finance Companies / NBFIs | 114 | 29 | 3.0 | 122 | 69 | 3.4 | 137 | 66 | 1.9 | ||
| Securities firms / Broker firms | 0 | 0 | 0.0 | 0 | 0 | 0.0 | 35 | 16 | 0.5 | ||
| Total financial system | 701 | 968 | 100.0 | 1,112 | 2,006 | 100.0 | 385 | 3,426 | 100.0 | ||
For 2007, newly licensed savings and credit cooperatives.
Financial System Structure, 2004–07
| Dec-04 | Dec-06 | Dec-07 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Number | Assets (billion togrogs) | Percent of total assets | Number | Assets (billion togrogs) | Percent of total assets | Number | Assets (billion togrogs) | Percent of total assets | |||
| Banks | 17 | 892 | 92.2 | 16 | 1,899 | 94.7 | 16 | 3,279 | 95.7 | ||
| Private | 16 | … | … | 16 | 1,899 | 94.7 | 16 | 3,279 | 95.7 | ||
| State-owned | 1 | 57 | 5.9 | 0 | 0 | 0.0 | 0 | 0 | 0.0 | ||
| Nonbank financial institutions | 684 | 76 | 7.8 | 1,096 | 107 | 5.3 | 369 | 147 | 4.3 | ||
| Insurance companies | … | … | … | 19 | 22 | 1.1 | 15 | 28 | 0.8 | ||
| Life | … | … | … | 0 | 0 | 0.0 | 0 | 0 | 0.0 | ||
| Nonlife | 0 | 0 | 0.0 | 19 | 22 | 1.1 | 15 | 28 | 0.8 | ||
| Savings and Credit Cooperatives1/ | 570 | 47 | 4.9 | 955 | 16 | 0.8 | 182 | 36 | 1.0 | ||
| Finance Companies / NBFIs | 114 | 29 | 3.0 | 122 | 69 | 3.4 | 137 | 66 | 1.9 | ||
| Securities firms / Broker firms | 0 | 0 | 0.0 | 0 | 0 | 0.0 | 35 | 16 | 0.5 | ||
| Total financial system | 701 | 968 | 100.0 | 1,112 | 2,006 | 100.0 | 385 | 3,426 | 100.0 | ||
For 2007, newly licensed savings and credit cooperatives.
42. Historically, the SCC sector did not have an adequate regulatory and supervisory framework, and a large number of SCCs failed. This paper will review the developments in the SCC sector since its emergence, the factors leading to the SCC failures in 2005–06, and the government’s actions taken in response to the failure.
B. Developments in the SCC Sector Before the Crisis
43. Mongolia’s SCCs operate under the Cooperative Law, which was established in 1995. However, the original law was designed primarily for agricultural, production, consumer, and marketing cooperatives and was not well suited for the purposes of SCCs. The law was revised in 1998 and amended in 2002 and 2005 to better reflect the requirements of SCCs. The 2002 amendment facilitated a rapid increase in the number of SCCs, and by mid-2006, over 900 SCCs had been established, mostly in Ulaanbaatar.34 Furthermore, more than half of cooperatives registered in the capital city were engaged in savings and credit operations.
Number of Savings and Credit Cooperatives Registered
Citation: IMF Staff Country Reports 2008, 201; 10.5089/9781451826968.002.A003
Source: Financial Regulatory Commission.Number of Savings and Credit Cooperatives Registered
Citation: IMF Staff Country Reports 2008, 201; 10.5089/9781451826968.002.A003
Source: Financial Regulatory Commission.Number of Savings and Credit Cooperatives Registered
Citation: IMF Staff Country Reports 2008, 201; 10.5089/9781451826968.002.A003
Source: Financial Regulatory Commission.44. Mongolia’s first SCCs were established in late 1996 and early 1997 through a project funded by the Asian Development Bank (ADB) with input from some nongovernmental organizations. Another ADB project was launched in 2002 to support the creation of a national network of SCCs throughout the country. However, in light of emerging problems with the SCCs soon after the project initiation, the project was suspended and finally canceled in 2006.35
45. Until the creation of the Financial Regulatory Commission (FRC) in early 2006, SCCs were virtually not regulated and operated under inappropriate regulations and supervision of the tax authority. The Bank of Mongolia (BOM) was responsible for SCC licensing and supervision soon after the passage of the Cooperative Law and authorized establishment of a dozen of cooperatives. In 1998, Parliament lifted the licensing requirement for SCCs and shifted the authority to register SCCs to a tax authority. The 2002 amendment to the Cooperative Law primarily focused on enhancing the regulatory framework for SCCs and partially restored the BOM’s regulatory role. However, the supervisory duty and relevant sanctions remained with the tax authority. To address the lack of a proper legal framework for SCCs, a draft law specific to SCCs (Box III. 1) was drafted in 2005 with ADB assistance but has not yet been passed by Parliament.
C. Failure of SCCs
46. By 2003–04, there were emerging signs of problems with the SCC sector. Many of SCCs breached the media law by aggressively advertising their savings products with very high interest rates. The BOM issued a series of press releases detailing the SCCs’ objectives and operational modalities, rights and duties of members, and potential risks pertaining to the very high interest rates offered.36 The BOM also urged the Ministry of Finance to tighten the sector’s regulation and suspend the issuance of licenses for new SCCs. The BOM issued a regulation requiring that SCCs adhere to certain prudential ratios, and it also carried out inspections in collaboration with the tax authority. The BOM found breaches of prudential ratios, misreporting of financial statements, failures to submit the financial statements to the tax authority as required, and SCCs’ inability to provide even the list of their depositors and members. The findings were submitted to Parliament for further actions. In light of approaching parliamentary elections in mid-2004, however, Parliament did not take any actions.
Draft Law on SCCs
A draft Law on SCCs, submitted for Parliament’s approval in 2007, envisages the following regulatory and supervisory framework for SCCs in Mongolia.
The draft law defines an SCC as a nonprofit legal body with collective management and control that offers savings and credit services to its members to meet their socio-economic and cultural needs. A registered SCC will not be eligible for engagement in savings and credit operations without a license. The FRC will issue a license for up to three years and can terminate the SCC license if the SCC has not started operations for one year after obtaining it. The FRC as a supervisory body for SCCs will establish prudential ratios, including reserve requirements that SCCs must meet.
An SCC can be founded only when the number of founders reaches 25 and more than 30 percent of total assets are provided in cash. Only deposits and savings can be used for funding loans extended only to SCC members. The total amount of loans to one member of an SCC and his/her related parties cannot exceed 10 percent of its capital.
SCCs are prohibited from:
setting up branches and representative offices;
taking a member’s investment in SCC’s equity capital as loan collateral;
obtaining loans and mobilizing other funds from individuals and legal bodies except banks, financial institutions, and common cooperatives to which it is a member;
promoting deposit and lending rates;
organizing lotteries;
issuing collateral and guarantee for obligations of members and third parties;
investing in legal entities except the association and common cooperative of SCCs; and
accepting legal bodies as a member of an SCC.
Source: Ministry of Finance.
47. In 2006, a series of SCC failures was reported, and thousands of depositors lost money. Immediately after its creation to supervise nonbank financial institutions, the FRC embarked on screening the SCC sector, but reports of SCC failures started coming up. The assassination of the new FRC Chairman by a manager of one of the largest SCCs experiencing liquidity problems exacerbated the situation. The FRC reported to Parliament an overall loss to depositors of Tog 57 billion (1.5 percent of GDP or US$48 million) as of mid-2006. As a result, the reputation of SCCs was badly tarnished, resulting in transfers of some of SCC deposits to commercial banks. The report indicates that the failure of SCC management to comply with relevant laws and regulations, lack of knowledge and information on both the depositor’s and management side, and abuses of loopholes in the Cooperatives Law led to such losses.
Losses of 29 failed SCCs
Losses of 29 failed SCCs
| Number of failed SCCs | 29 |
| Number of victims (depositors) | 8,903 |
| Estimated losses | Tog 67.9 billion |
| Loans outstanding | Tog 4.0 billion |
| Worth of sealed assets | Tog 43.0 billion |
Losses of 29 failed SCCs
| Number of failed SCCs | 29 |
| Number of victims (depositors) | 8,903 |
| Estimated losses | Tog 67.9 billion |
| Loans outstanding | Tog 4.0 billion |
| Worth of sealed assets | Tog 43.0 billion |
D. Post-Crisis Situation
48. In light of a large number of SCC member complaints, the FRC has started fixing the regulations for SCCs and issuing new licenses to SCCs. In the absence of appropriate legislation for SCCs, in 2006 the FRC issued a temporary regulation on licensing of SCCs. The FRC also issued various guidelines and regulations to meet its regulatory and supervisory duty and ensured that the entire process of SCC licensing and setting up of a supervisory framework will be transparent and the views of stakeholders be sought. At end- 2007, 182 SCCs with around 22,000 members were licensed, around 100 SCCs were waiting for approval of their applications, and another 50 SCCs had to resubmit their applications with updated information. About 600 SCCs that had been registered with the tax authority but did not apply for licensing by October 1, 2007, as required, and will be dissolved through court procedures in line with the Law on Enforcement of Selected Provisions of the Cooperative Law adopted in 2007.
Newly Licensed Savings and Credit Cooperatives and Membership
Citation: IMF Staff Country Reports 2008, 201; 10.5089/9781451826968.002.A003
Source: Financial Regulatory Commission.Newly Licensed Savings and Credit Cooperatives and Membership
Citation: IMF Staff Country Reports 2008, 201; 10.5089/9781451826968.002.A003
Source: Financial Regulatory Commission.Newly Licensed Savings and Credit Cooperatives and Membership
Citation: IMF Staff Country Reports 2008, 201; 10.5089/9781451826968.002.A003
Source: Financial Regulatory Commission.49. The newly licensed SCCs are predominantly small institutions, but one large SCC dominates the SCC sector with 39 percent of the sector’s share capital and 61½ percent of its profits. Half of the SCCs has 100–500 members and paid-in capital of less than Tog 100 million (US$86,000). The sector’s total assets doubled in 2007, reaching Tog 36 billion (0.8 percent of GDP) at end-2007. About 38 percent of total assets at end- 2007 were cash and deposits placed with commercial banks. The loan portfolio constituted only half of total assets, way below the 70–80 percent threshold set forth by the FRC’s prudential ratios. According to FRC data, the NPL ratio hovered at 6½ percent while loan loss provisions have been built accordingly. The return on equity stood at 29 percent whereas the return on assets recorded 5 percent.
Consolidated Balance Sheet of Savings and Credit Cooperatives as of December 2007
(In millions of togrogs)
Consolidated Balance Sheet of Savings and Credit Cooperatives as of December 2007
(In millions of togrogs)
| Assets | Liabilities and Owners’ Equity | ||||||
|---|---|---|---|---|---|---|---|
| I. | Current assets | 34,082.30 | I. | Liabilities | 28,269.30 | ||
| Cash and deposits | 13,600.20 | Deposits | 25,959.70 | ||||
| Loans | 18,037.50 | Short-term loans | 386.8 | ||||
| Receivables | 1,959.90 | Other short-term liabilities | 1,807.00 | ||||
| Other current assets | 484.7 | Long-term liabilities | 115.8 | ||||
| II. | Non-current assets | 1,545.30 | II. | Owner’s equity | 7,358.20 | ||
| Fixed assets | 1,318.50 | Share capital | 6,513.60 | ||||
| Other non-current assets | 226.8 | Coop members’ property | 844.6 | ||||
| Total assets | 35,627.60 | Total liabilities and equity | 35,627.50 | ||||
Consolidated Balance Sheet of Savings and Credit Cooperatives as of December 2007
(In millions of togrogs)
| Assets | Liabilities and Owners’ Equity | ||||||
|---|---|---|---|---|---|---|---|
| I. | Current assets | 34,082.30 | I. | Liabilities | 28,269.30 | ||
| Cash and deposits | 13,600.20 | Deposits | 25,959.70 | ||||
| Loans | 18,037.50 | Short-term loans | 386.8 | ||||
| Receivables | 1,959.90 | Other short-term liabilities | 1,807.00 | ||||
| Other current assets | 484.7 | Long-term liabilities | 115.8 | ||||
| II. | Non-current assets | 1,545.30 | II. | Owner’s equity | 7,358.20 | ||
| Fixed assets | 1,318.50 | Share capital | 6,513.60 | ||||
| Other non-current assets | 226.8 | Coop members’ property | 844.6 | ||||
| Total assets | 35,627.60 | Total liabilities and equity | 35,627.50 | ||||
50. Amid growing public outcry, the government decided to bail out the depositors at 29 SCCs in April 2007. While relentlessly demanding a bail-out, the depositors insisted that the government was responsible for the losses since it has not supervised the SCCs properly. After much political debate, Parliament approved the law granting the bail-out in August 2007. The loss compensation act provides that the state budget would pay for 50 percent of losses (estimated at Tog 68 billion or 1.5 percent of GDP) incurred to depositors of 29 failed SCCs under the condition that the budget funds would be reimbursed from proceeds of assets seized.37 So far the court has issued its verdicts on 20 SCCs, and it appears that the value of the assets seized is far below the government’s compensation of losses.
Savings and Credit Cooperative Loss Compensation
(As of March 2008)
Savings and Credit Cooperative Loss Compensation
(As of March 2008)
| Compensation law adopted | August 3, 2007 |
| Compensation commenced | October 19, 2007 |
| Total compensation due (pursuant to the law) | Tog 33.0 billion |
| Court decisions issued | 20 SCCs |
| Total compensation due (pursuant to court decisions) | Tog 34.2 billion |
| Compensation paid out | Tog 22.7 billion |
| Cash and net worth of assets pending for recovery | Tog 1.7 billion |
Savings and Credit Cooperative Loss Compensation
(As of March 2008)
| Compensation law adopted | August 3, 2007 |
| Compensation commenced | October 19, 2007 |
| Total compensation due (pursuant to the law) | Tog 33.0 billion |
| Court decisions issued | 20 SCCs |
| Total compensation due (pursuant to court decisions) | Tog 34.2 billion |
| Compensation paid out | Tog 22.7 billion |
| Cash and net worth of assets pending for recovery | Tog 1.7 billion |
E. Concluding Remarks
51. The SCC sector had grown rapidly in recent years without an appropriate supervisory and regulatory framework, which resulted in the failure of over 30 SCCs in 2005–06. Before the creation of the FRC in early 2006, SCCs were largely unregulated and competed with the banking system for deposits by offering very high interest rates. Consequently, over 30 SCCs accounting for more than half of the sector’s total assets failed in 2006. Despite its initial resistance, the government eventually decided to compensate depositors for 50 percent of their losses.
52. Adequate resources need to be provided to the FRC for proper supervision of the nonbank financial sector, and the legal framework for the SCC sector needs to be strengthened. Since its creation, despite the constraints the FRC has made good progress by undertaking several initiatives to improve the legal, regulatory, and supervisory environment for the nonbank sector. With the responsibility to oversee nearly 1,000 institutions, however, the FRC does not have enough resources, including experienced staff, and needs a substantial increase in resources, industry statistics, and training to substantially strengthen its institutional capacity. At the current stage of nonbank financial institutions’ development, it will be important that the government provides adequate budgetary resources to support the FRC’s operations. A law specific to SCCs, drafted in 2006 with ADB assistance, has not been passed yet. Before the passage of this law, it will be important to seek the SCC industry’s views and reflect the FRC’s experience since 2006 in supervising SCCs to ensure proper implementation. Better legal protections are also needed for supervisory staff of the FRC.
References
Asian Development Bank, 2001, Report and Recommendation of the President to the Board of Directors on a Proposed Loan to Mongolia for the Rural Finance Project (Manila: Asian Development Bank).
Asian Development Bank, 2002, The Focal Point for Microfinance, pp. 5-7 (Manila: Asian Development Bank).
Bank of Mongolia, 2007, Monthly Bulletin, December (Ulaanbaatar).
Ministry of Finance, 2007, Draft Law On Savings and Credit Cooperatives (Ulaanbaatar, Mongolia).
Financial Regulatory Commission, 2007, SCC Department’s Operational Report for 2007 (Ulaanbaatar, Mongolia).
Financial Regulatory Commission, 2007, “Note on Consolidated Financial Statements of SCCs for Q3 2007” (Ulaanbaatar, Mongolia).
Parliament of Mongolia, 2007, Law of Mongolia On Compensation for Loss under Reimbursement Condition (Ulaanbaatar).
Parliament Secretariat, 2007, Minutes of the Plenary Session on May 8, 2007, Parliament of Mongolia (Ulaanbaatar).
Parliament Working Group, 2006, Report on Enforcement of SCC Legislation and Circumstances of the SCC Failure, Parliament of Mongolia (Ulaanbaatar).
United Nations Development Fund, 2002, Sub-Sector Review of Micro-Finance of Mongolia, UNDP (Ulaanbaatar).
World Bank, 2008, Stabilizing and Reforming the Financial Sector (Washington) found at www.worldbank.org.
Prepared by Bazarbai Ardak (IMF Resident Representative office in Mongolia) and Byung Kyoon Jang.
The amendment defined the power and responsibilities of the credit committee, members’ meeting, and supervisory board. In addition, it stipulated that an SCC shall bear financial responsibility to its members’ equity capital.
A US$8.7 million Rural Finance Project was to support the establishment of 330 SCCs and SCC associations across the country.
During Parliament’s consideration of the loss compensation law, five more SCCs went bankrupt. The law does not include these five SCCs’ depositors for compensation.
