by Zol Ganbat (GMBA student)

Student ID: MA3N0219

December 2nd, 2014

Mongolian Financial Supervision Mechanism

CONTENT

CONCLUSION

FINANCIAL SUPERVISION: BOM, FSC AND FRC

FINANCIAL SECTOR IN MONGOLIA

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 =1,880.00 MNT . Economy: Fast growing economy in the next decade (2010-2020). Industries: Mining, banking, property, consumer goods. Population: 2,953,203 (November, 2014.) Age structure: 0-14 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%)

BRIEF INTRODUCTION TO MONGOLIA

$17 731 875 994 GDP this year (PPP)

$6 120 GDP this year per capita (annual $6 912)

$45 432 158 GDP today

$16 GDP today per capita

$12 014 794 611 Total National Debt (Public Debt Clock)

$4 147 Total National Debt per capita

$1 797 994 611 National Debt this year

$4 606 776 National Debt today

GDP AND NATIONAL DEBT

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.

FINANCIAL SECTOR IN MONGOLIA

The banking sector, which dominates the financial sector, underwent several crises in the 1990s.

Pressures faced by the banking sector during the 2008-2009 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.

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.

FINANCIAL SUPERVISION: BANKING SECTOR

The banking system has grown rapidly from a small base, yearly average asset growth of over 30 percent from 2006-2009. 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)

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 2012. 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 2012. Hence, consolidation of the industry is inevitable.

FINANCIAL SUPERVISION: BANKING SECTOR

FINANCIAL SUPERVISION: BANKING SECTOR

FINANCIAL SUPERVISION: BANKING SECTOR

FINANCIAL SUPERVISION: BANKING SECTOR

FINANCIAL SUPERVISION: BANKING SECTOR

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.

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.

FINANCIAL SUPERVISION: BOM

Foreign Investment Legal Framework

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.

FINANC IAL SUPERVISION: FSC

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.

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

FINANC IAL SUPERVISION: FRC

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.

CONCLUSION