1. Mongolian Financial Supervision Mechanism
by Zol Ganbat (GMBA student)
Student ID: MA3N0219
December 2nd, 2014
The Ministry of Economic

2. FINANCIAL SUPERVISION: BOM, FSC AND FRC
CONTENT
BRIEF INTRODUCTION TO MONGOLIA
FINANCIAL SECTOR IN MONGOLIA
FINANCIAL SUPERVISION: BOM, FSC AND FRC
CONCLUSION
The Ministry of Economic

3. BRIEF INTRODUCTION TO MONGOLIA
Territory: 1,564,116 square kilometers(The second largest landlocked country)
Ethnicity: Mongolian
Predominant religion: Tibetan Buddhism.
The capital: Ulaanbaatar (urban population is 62% of the total population).
Official language: Mongolian.
Political system: Parliamentary democracy.
Currency: Tugrug (MNT, ₮ ), 1 USD =1, MNT .
Economy: Fast growing economy in the next decade ( ).
Industries: Mining, banking, property, consumer goods.
Population: 2,953,203 (November, 2014.)
Age structure: years: 26.8% (male 404,051/female 388,546)
15-24 years: 18.7% (male 278,912/female 273,167)
25-54 years: 44.5% (male 636,799/female 677,236)
55-64 years: 5.9% (male 80,267/female 94,021)
65 years and over: 4.1% (male 49,314/female 70,877)
Population growth rate: 1.37% (2014)
Gender ratio: male population (49.4%)
female population (50.6%)
- It has one of the world’s lowest population densities at 1.9 persons per square kilometer.
The Ministry of Economic

4. GDP AND NATIONAL DEBT $17 731 875 994 GDP this year (PPP) $6 120
GDP this year per capita (annual $6 912) $
GDP today
$16
GDP today per capita $
Total National Debt (Public Debt Clock)
$4 147
Total National Debt per capita $
National Debt this year $
National Debt today
The Ministry of Economic

5. FINANCIAL SECTOR IN MONGOLIA
14 commercial banks, 245 non-banking financial institutions (NBFI) and about 143 savings and credit cooperatives (SCCs) (3rd quarter of 2013).
The banking sector currently dominates the financial sector.
Main organizations responsible for Financial stability and supervision of Mongolian sector are:
Bank of Mongolia (BOM) - responsible for supervision of banks
Financial Stability Council (jointly established by the Bank of Mongolia, Ministry of Finance (MOF) and Financial Regulatory Commission (FRC) on May, 2007). The mission of the Council is to contribute to a sustainable economic growth by developing a sound and competitive financial infrastructure along with improving financial services in terms of quality and access.
The Financial Regulatory Commission (FRC) - responsible for supervision of all other financial institutions including insurance companies, savings and credit cooperatives and non-banking financial institutions)
Strategy for Supervision:
The objective of the Supervision Department is to reduce financial risk and to increase risk tolerance of the industry.
The banking sector, which dominates the financial sector, underwent several crises in the 1990s. Following those crisis, the Government implemented measures to restructure banks and improve the Bank of Mongolia’s ability to enforce compliance with prudential regulations, and strengthen market discipline and incentives for sound bank management.
Within the framework, a new banking law was approved by the Parliament. The Supervision Department has accomplished preparatory work for establishing arrangements of consolidated supervision, information technology inspection, proper management monitoring and amendments on supervisory regulations.
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6. FINANCIAL SUPERVISION: BANKING SECTOR
The banking sector, which dominates the financial sector, underwent several crises in the 1990s.
Pressures faced by the banking sector during the crisis have further eased. Nevertheless, challenges remain. The banking sector benefited from a faster than expected recovery of the economy as a whole.
There are currently 14 registered commercial banks in Mongolia
The banking sector accounts for 96 percent of total assets of the financial system. The banking system is highly concentrated, with the top 3 banks accounting for about 70 percent of market share, and the top 5 banks accounting for over 86 percent.
Following the severe banking crisis of , the Government implemented measures to restructure ailing banks, privatize major banks, improve the Bank of Mongolia’s ability to enforce compliance with prudential regulations, and strengthen market discipline and incentives for sound bank management.
Three are fully foreign owned, four are partly foreign and partly Mongolian owned, six are fully domestic and one is government owned.
The Ministry of Economic

7. FINANCIAL SUPERVISION: BANKING SECTOR
Bank lending is growing rapidly to both households and corporates.
Access to financial services in Mongolia appears to be relatively high when measured by the demographic penetration of branches.
Loan and deposit penetration is also high.
- About a third of total loans are to households (13 percent are mortgage loans and 15 percent are consumer, pension, and salary loans), which have increased at the staggering pace of 80 percent from 2010 to 2011 (see Figure 1). Corporate loans account for 66 percent of total loans and have increased by more than 70 percent yoy in Large-scale investments in the mining sector have led to increased capital inflows, resulting in cheap external funding for banks and rapid credit expansion.
- Mongolia has one of the highest bank branch penetration rates in the world, with 54 branches per 100,000 adults compared to 12 in Korea, 3 in Vietnam and Russia, and 10 in Azerbaijan. However, due to its large territory, Mongolia’s geographical branch penetration is one of the lowest in the world. It has only 0.67 branches per thousand km2, compared to 7 in Vietnam and Malaysia, and almost 50 in Korea. The low population density makes the provision of traditional banking services outside of the large cities costly.
There are 260 bank loan accounts per 1,000 adults, compared to 197 in Indonesia, 300 in Georgia, and 27 in Cambodia. There are also more than 2,000 deposit accounts per 1,000 adults, compared to 504 in Indonesia and 678 in Azerbaijan.
The Ministry of Economic

8. FINANCIAL SUPERVISION: BANKING SECTOR
The banking system has grown rapidly from a small base, yearly average asset growth of over 30 percent from In 2010, the ratio of total bank assets to GDP was 7 percentage points higher than in 2007.
Figure 2 : Comparative indicators (financial assets to GDP ratio in 2009)
Banking Sector Challenges
 Small size of bank’s capital limits bank’s capacity
 Underdeveloped capital markets and interbank market
 Lack of long term MNT funding source, bank’s maturity gap
 Underdeveloped derivative markets and hedging instruments
 Legal and regulatory framework
e.g. movable assets pledge, non-banking financial services
 Risk management and system investment
The Ministry of Economic

9. FINANCIAL SUPERVISION: BANKING SECTOR
Summary for the Mongolian banking sector as of January, 2011 compiled by Resource Investment Capital:
The minimum capital requirement for commercial banks ordered by the Bank of Mongolia is MNT 8.0 billion ($6.4 million).
In Q3 2012, non-performing loans as percentage of total outstanding loans declined to around 3%, significantly reduced from the previous year.
General levels of NPLs (Non performing loan) were considerably low throughout 2012.
Real interest rates are going up, due to lower inflationary pressure.
Business activities have decreased in Therefore, coping with the potential fundamental weaknesses of the banking sector in Mongolia could be a top priority for the officials in charge.
Deposit Guarantee Law has ended December Hence, consolidation of the industry is inevitable.

10. FINANCIAL SUPERVISION: BANKING SECTOR

11. FINANCIAL SUPERVISION: BANKING SECTOR

12. FINANCIAL SUPERVISION: BANKING SECTOR

13. FINANCIAL SUPERVISION: BANKING SECTOR

14. FINANCIAL SUPERVISION: BOM
Bank of Mongolia ("BOM") is the central bank of Mongolia, operates in accordance with the Constitution of Mongolia, the Law on Central Bank (Bank of Mongolia), and other laws of Mongolia.
Established in June 2nd, 1924 under the resolution of the Government of Mongolia
BOM system includes 17 regional offices in Mongolia, its
representative office in London, England.
The primary function of the BOM:
ensuring the stability of the national currency of Mongolia
to promote balanced and sustained development of the
national economy, through maintaining stability of finance markets
and banking system.
The main functions of the BOM are as follows:
issue of national currency of Mongolia and organization of its
circulation;
formulation and implementation of monetary policy by
regulating money supply in the economy;
acting as depository of the Government of Mongolia
exercising banking regulation and supervision;
organization of interbank payments and settlements;
holding and management of the State’s reserves of foreign currency;
acting as a lender of the last resort for banks and organizing a system of refinancing;
representing Mongolia in other central banks, international banks and other credit institutions where cooperation is maintained between the central banks;
exercising other functions in financial and credit areas within the competence defined by the Law.

15. FINANCIAL SUPERVISION: BOM
According to the Law, the BOM provides following things:
loans to banks to support their liquidity
buys and sells securities in the secondary market
buys and sells foreign currency valuables, precious metals,
sells commemorative coins made of precious and non-precious metals in the domestic and foreign markets,
performs operations of servicing of the Government debt in respect of placement of Government securities, their redemption and interest payments,
maintains accounts of the Government and other government institutions, including accounts of the Ministry of Finance (fiscal agent of the Government of Mongolia), accounts of international organizations
conducts other operations necessary for the performance of its functions.
The charter capital of the BOM is fully owned by the State of Mongolia.
In accordance with the Law, the main task of the BOM Council (Board) is to develop principles of monetary policy and exercise control over implementation of the monetary policy.
BOM Council approves annually the BOM budget of income and expenditure for the next year, approves annual financial statements of the BOM, report on fulfillment of the BOM budget of income and expenditure and distribution of profit t for the reporting year, as well as performs other functions according to its authority defined by the Mongolian legislation.

16. Foreign Investment Legal Framework
The Ministry of Economic

17. FINANC IAL SUPERVISION: FSC
The Financial Stability Council (FSC) was established by joint decree dated May 9th, 2007 by the Central Bank of Mongolia (BoM), Ministry of Finance (MoF) and the Financial Regulatory Committee (FRC).
The primary objectives: safeguarding the financial stability of the markets by determining any kind of financial risks and managing them within the current laws and regulations.
FSC is the first ever body of this nature established in Mongolia.
There is a research unit responsible for studying the solvency related issues in banking and non-bank financial institutions sectors, securities and insurance markets.
The Steering Committee of the Financial Stability Council has regularly scheduled meetings every quarter to assess internal and external factors underlying financial risks and formulate policies to address them.
The Financial Stability Council has been set up in line with international best practices and is keen to co-operate with other international financial and standardization institutions.
Reports on balance sheets and other documents analyzing financial institutions is released in the form of a Financial Stability Report every 6 months.
“THE REGULATION ON FINANCIAL STABILITY COUNSIL” was approved on April 5th, 2010 by FSC.
The purpose of this regulation was to define organizational structure and accountabilities of the Financial Stability Council that been jointly established by the Bank of Mongolia, State authority of finance and economic affair and the Financial Regulatory Commission and hence to set out working relationship of the parties.
Its Steering Committee consists of the Governor of the Central Bank, the Minister of Finance, and the Chairman of the Financial Regulatory Committee.
The research unit regularly discloses its findings to the general public to help individuals and entities make rational financial decisions.
In order to boost the competitiveness of the Mongolian banking and financial sectors in the international markets, the FSC has been introducing best practices in banking, financing, accounting and auditing.
The Ministry of Economic

18. FINANC IAL SUPERVISION: FRC
The Financial Regulatory Commission (FRC) of Mongolia was
established under the Law on the Legal Status of the Financial
Regulatory Commission on January 24th, 2006 and the Parliament
of Mongolia appoints its Chairman and Commissioners.
FRC has been working to create a fair and sound environment for the whole non-banking financial industry.
The establishment of the Commission is the mark of a new financial regulatory system in Mongolia which separates banking and non-bank institutions.
More than 1000 legal entities such as legal entities participating on the securities market, commercial insurance organizations, non-bank financial institutions, and savings and credit cooperatives are regulated by the FRC. -
The Ministry of Economic

19. FINANC IAL SUPERVISION: FRC
Mission: “We aim to ensure nation’s financial market stability.”
The Commission is organized into the following operational units:
The Administration Department
The Insurance Market Department
The Microfinance Department
The Legal Division
The International Cooperation Division
Internal Control Unit
The Financial Reporting, Auditing and Valuation, Assessment Quality Control Department
The Financial Regulatory Commission, the organization, generally, is in charge of the following affairs:
Organize and supervise activities related to the implementation of laws and regulations in relation with financial services
Draft, amend and approve regulations as needed
Grant, terminate, revoke, make changes and approve certifications and specific license for operation of financial services
Supervise and regulate license holders
Establish charges pertaining to license holders
Examine, make decisions, and resolve matters or disputes between license holders and their customers
Establish ethical regulations for companies and supervise the implementation
Maintain the stability and sustainable of the Mongolian financial sector
Protect and promote the rights of consumers and rights of financial depositors
Educate the public and heighten its awareness
Additionally, the Commission acts according to other related provisions of the laws in the financial sector

20. CONCLUSION
Main organizations responsible for Financial stability and supervision of Mongolian financial sector are: Bank of Mongolia (BOM), Financial Stability Council and Financial Regulatory Commission (FRC).
Sustainable development of the financial system will also depend on improvements to the supervisory framework. The bank of Mongolia has a reasonably well developed risky- based approach to bank supervision, given the current stage of banking development. However, there is room for improvement in the implementation of bank supervision, especially the supervision of banks liquidity and operational risk, which will become important as banks become more sophisticated.
The legal and regulatory framework should also be improved.
FRC ‘ supervision non-bank financial institutions and the capital markets is much less developed than bank supervision
FRC needs a substantial increase in resources, more training and better industry statistics to strengthen its performance.
Sustainable development of the financial system will also depend on improvements to the supervisory framework. The bank of Mongolia has a reasonably well developed risky- based approach to bank supervision, given the current stage of banking development. However, there is room for improvement in the implementation of bank supervision, especially the supervision of banks liquidity and operational risk, which will become important as banks become more sophisticated. The legal and regulatory framework should also be improved, especially as regards conducting supervision on a consolidated basis and strengthening the requirements for prior experience and background of bank senior management and board. FRC ‘ supervision non-bank financial institutions and the capital markets is much less developed than bank supervision, reflecting the Commission’s short existence. To strengthen its performance, the FRC needs a substantial increase in resources, more training and better industry statistics. Strengthened legal protections are also needed for both supervisory staff of both the BOM and the FRC.
Banking Sector Challenges
Small size of bank’s capital limits bank’s capacity
 Underdeveloped capital markets and interbank market
 Lack of long term MNT funding source, bank’s maturity gap
 Underdeveloped derivative markets and hedging instruments
 Legal and regulatory framework
e.g. movable assets pledge, non-banking financial services
 Risk management and system investment
 Compliance, AML, KYC
The Ministry of Economic

21. Thank You !