Mongolia: Strengthening the regulatory regime

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Mongolia is tightening regulation of its financial services industry in preparation for an expected wave of foreign direct investment, with reforms improving supervision of the banking sector and outside help sought to enhance oversight of the Mongolian Stock Exchange (MSE).

Reforms of the MSE launched by Prime Minister Sukhbaatar Batbold last year with the aim of developing the capital market are expected to create a proper functioning platform with multiple foreign companies listed by 2014-16, concluded panellists at “Mongolia: Capital Raising & Investment”, a conference held by Mongolian securities firm Frontier Securities in August.

MSE signed a strategic partnership contract with the London Stock Exchange (LSE) in January with the goal of improving the exchange’s technology platform, applicable rules and regulation, and updating its status (public to private). Under the deal, LSE has appointed a management team to oversee the bourse’s development and privatisation and provide trading and monitoring infrastructure.

While the MSE displayed impressive growth in 2010, with the MSE Top 20 Index up 110% year-to-date and the total market capitalisation of its listed companies sitting at around $1bn, analysts at the conference noted legal and regulatory barriers preventing foreign companies from listing, including the need to be Mongolian and subject to Mongolian law and “ambiguity” on certain legislation and regulation.

”If the problematic areas are fixed such that South Gobi Resources can co-list on the MSE, other foreign companies will follow,” said Sarah Armstrong, South Gobi Resources’ chief legal counsel for Asia.

With regard to the stability of the financial system, a report by the IMF in March found that the “authorities are making progress in restructuring the banking sector”. It said that alongside placing two state-owned banks under conservatorship, the government had also tightened prudential regulations on asset classification and loss provisions.

Last December, the IMF praised the government for a revised banking law that it said would “strengthen the regulatory framework”. “Finally, tougher supervision regulations have been issued and are now being enforced. These steps will serve to bolster the banking system and ensure that banks can play their crucial role in fostering development by providing credit to the private sector,” said the IMF.

Meanwhile, in August, the Bank of Korea signed a memorandum of understanding with the Bank of Mongolia to share South Korea’s fiscal policy experience and expand cooperation between the two countries.

These developments in banking are significant given the anticipated inflow of funds into the economy linked to large-scale mining projects under development. For example, the massive Oyu Tolgoi copper and gold mine is set to increase the size of the economy by half when it comes on-stream in 2013, with an expected injection of $7bn over the next few years. Meanwhile, a government decision on development rights for the giant Tavan Tolgoi coal deposit – estimated to hold some 7.5bn tonnes of reserves – is due in October.

The sudden expected growth in national wealth has also led to Ulan Bator studying the models of nations such as Qatar and the UAE, with some 16 global banks also now advising the government, 2point6billion.com, a website devoted to Asian economic matters, reported in March. The government intends to grant citizens shares in a range of state-owned enterprises, as it did with Erdenes-Tavan Tolgoi in June 2011, with these firms then to be privatised via initial public offerings on the MSE.

If the move goes to plan, citizens could stand to reap a windfall, according to the website. “Assuming [mining-related] stocks sold raise the expected amount of value, Mongolia will suddenly become a country where every citizen is a US dollar millionaire,” Chris Devonshire-Ellis wrote in an op-ed piece on the site in March 2011.

Also in March, eight banks and the Mongolian Bankers Association became the shareholders of a newly established Banking and Finance Academy, an independent institution supported by the banking sector that will provide training for loan officers, tellers, executives, and directors to improve and standardise services. There are currently 14 commercial banks, 188 non-bank financial institutions, and about 207 savings and credit cooperatives, according to the central bank.

A major challenge for institutions offering banking services, particularly microfinance, has been the country’s low density and widely dispersed population, with the rural community of 1.6m, half of whom are semi-nomadic herders, rarely given opportunities to access banks. To address this, a 17-member delegation from the Financial Regulatory Commission of Mongolia and the Central Bank of Mongolia in May visited the Philippines’ Central Bank seeking cooperation in developing a coherent legal and regulatory environment to supervise mobile financial service providers.

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