Banking sector constitutes over 90% of the financial sector of Mongolia and is primarily regulated by the Central Bank of Mongolia (“BOM”, also sometimes called “MongolBank”).
Mongolian banking industry has had rather tumultuous history since the adoption of the two-tiered banking system in 1990. Almost 20 banks had to be liquidated in the last 30 years. As recently as in 2019, an AQR of Mongolian commercial banks (conducted as part of a larger IMF-led bailout program during 2017-2020) determined that some of the banks remain undercapitalized. Another recent development was FATF announced Mongolia a “jurisdiction under increased monitoring” for strategic deficiencies in its regime to counter money laundering and terrorist financing (commonly referred to as the “grey list”) in 2019. In October 2020, however, Mongolia has successfully exited the grey list following the FATF’s onsite review in September 2020.
While recapitalization of the banking sector is ongoing, MongolBank is expected to adopt regulations relating to risk-based supervision, capital adequacy and asset impairment. Also, in its efforts to reduce banks’ high interest rates (average annual 18%; average monthly 1,5%) down to monthly 1,0% within 2023 (per the Parliament-adopted “Interest Rate Reduction Strategy”), the Government has announced plans such as legislative reform toward improving legal environment for effective resolution for NPLs, extrajudicial enforcement of collateral, reduction of ownership concentration of commercial banks, making the commercial banks public, development of OTC market etc.
Furthermore, in October 2020 the Mongolian lawmakers have announced their plans to pass a new law which would (i) require all existing commercial banks in Mongolia to become public within 3 years and (ii) cap a single shareholding to 20% of the total shares in a commercial bank within 6 years. If passed in its current form, the bill would likely lead to tectonic changes in the Mongolian banking landscape – currently, all of the thirteen commercial banks in Mongolia are privately held with high levels of ownership concentration. (for further details on the proposed legislative changes, please see our client advisory “Proposed amendments to the banking legislation of Mongolia” under “NEWS”).
Finally, there is a growing anticipation that the Mongolian lawmakers may tackle the issue of allowing foreign banks to access the Mongolian market. Currently, the following foreign banks maintain representative offices in Ulaanbaatar – Bank of China, ICBC, Bank of Tokyo-Mitsubishi and SMBC (ING Bank closed its rep office in Sept 2020). These representative offices, by law, may only provide limited services such as processing loan applications (and passing their recommendations to their head offices) or conducting market research.
The remaining 5% of the financial sector of Mongolia consists of a broad range of financial services – insurance, non-banking financial institutions, brokers, asset managers, investment funds, investment banks (or “underwriters” as called in Mongolia), S&L cooperatives, auditors, asset valuators, finance leases, pawnshops, real estate agents, asset brokers, and currency exchangers. These services are largely regulated by the Financial Regulatory Commission of Mongolia (“FRC”).
In relation to COVID19, the MongolBank has amended the asset classification regulations to allow consumer borrowers to defer loan repayments by 90 days. This deferral, however, does not apply to business loans. In case of business loans, if a business loan has been rescheduled, the bank may freeze such loan’s asset classification until 1 July 2021 – this way, a rescheduled loan’s existing classification will not be downgraded (e.g., from “performing” to “sub-standard” to “doubtful” to “loss” etc.). Similar measures have been implemented by FRC in respect to non-banking financial institutions and S&L cooperatives.
In addition to conventional finance practice, KhanLex have been at the forefront of the fast-emerging practice of “green finance” in Mongolia. “Green finance” generally means any structured financial activity created to ensure a better environmental outcome. KhanLex are proud to have worked on a wide range of “green finance” projects – green housing financing, residential retrofitting, establishment of dedicated green finance corporation, renewables etc.
Banking & Finance have traditionally been KhanLex Partners’ one of the strongest practice areas. Our lawyers have been advising banks and other clients – both domestic and foreign on a wide array of banking & finance matters – ranging from transactions to regulatory to legislative.
Our Banking & Finance practice is headed by Enkhbat Batsukh.