Mongol, once the center of the Asian world during the time of the Mongols, is now a remote country sandwiched between two giant neighbours: China and Russia. From steppe to desert, Mongolia's empty landscape seems to stretch into infinity. It's the most sparsely populated country in the world.

Mongolia's recent transition from a socialist to a democratic state has brought huge benefits - offering fresh opportunities for political and economic advancement. But not everyone has gained in the first decade of the transition. As pointed out in the year 2000 Human Development Report for Mongolia, it is clear that the next stage of transition should involve the moulding of a new kind of state - one that will help Mongolians thrive and prosper in a dynamic market economy.

Microfinance

The immediate outcome of Mongolia’s difficult transition from a command economy to a market driven economy in the early 1990s was the introduction of high levels of poverty, persistent structural unemployment along with a parallel reduction in social services. In order to promote economic growth under these difficult transition conditions, the Government implemented the National Poverty Alleviation Programme (NPAP), which identified microfinance as an essential tool in eradicating poverty. UNCDF thus far, has played a critical role in helping the Government realize its objectives in developing the microfinance sector through the initiation of the MicroStart Mongolia project, which is a part of the global MicroStart Programme.

In consultation with practitioners and donors, the SUM programme, MicroStart, was officially launched in 1997 to build the capacity of local organizations to initiate or expand existing microfinance activities in Mongolia. Critical initial support to launch the MicroStart Mongolia came from the Finnish Government. Given the fact that Mongolia did not have any formal microfinance institutions, the project took a rather different path than that promoted by the model presented in the global programme. Two local Non-governmental organizations (NGOs) were initially selected to participate: the Mongolian Women's Federation and the Liberal Women's Brain Pool. The NGOs formed an organization called X.A.C. (the "Golden Fund for Development"), to serve as the central credit office for lending activities. MicroStart Mongolia - X.A.C. disbursed its first loan in September 1998 and quickly became a pioneer in creating a new structure and a new way to do business in Mongolia. In 2001, XAC merged with Goviin Ehlel Ltd., to become the first socially oriented licensed commercial bank in Mongolia. At present, X.A.C. has expanded its activities to more than 21,700 loans, encompassing a value of more than of US$ 5.2 million - all of which were provided to low-income families. The rate of repayment has been consistently maintained at above 97 per cent.

The Final Evaluation (see menu) of the MicroStart project carried out in July 2001 highlighted the need to expand access of financial services to rural communities, especially remote areas dominated by herder economies. It is estimated that there is a potential demand of more than US$ 80 million in loan funds by low-income and rural populations in Mongolia. The number of households requiring productive and consumer micro-credit is estimated to be as high as 232,000 families whereas the actual number of households currently accessing micro-credit does not exceed 20,000 households and with no more than US$ 7 million in loans outstanding.

In response to this final evaluation, UNCDF and its partners in Mongolia have initiated several steps towards providing rural finance under the MicroStart project. The activities include:

• An Action Research Project that is testing the means and methodologies for the provision of financial services in rural areas;
  
• A specialized financial institution, "Netmon", which has received support from the Central Bank of Mongolia and UNDP to promote Saving Credit Cooperative movement in the country; and
  
• At the request of Parliament, UNCDF/SUM was named as the principal technical advisor to a National Task Force for the development of a Policy on Rural and Microfinance. The policy should be finalized and submitted to Parliament by the end of 2001. At the same time, UNCDF, through its MicroStart programme and with the support of UNDP is also supporting the development of national policies regarding non-bank financial institutions.