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Introduction

Until very recently, the provision of microfinance in Mongolia was characterized by low-performing government and donor led interventions. A project oriented approach was followed, in which disbursal of reimbursable grants (or credit) was the primary aim. Goals such as "institutional sustainability", "customer responsiveness", and of creating a "culture of credit discipline" were not part of the nation's lexicon.

However, over the past four years, microfinance in Mongolia has reached a startling level of national and international prominence as a powerful tool for poverty alleviation, asset accumulation and income generation. Micro-entrepreneurs, low-income households and rural households now dominate the profile of clients of Mongolia's mainstream financial sector. Two of the recent entrants to micro-finance in Mongolia (XacBank and Ag Bank) [The name "Ag Bank" is used throughout this report. This bank is also commonly known as the "Xaan Bank" and as the Agriculture Bank], have rapidly achieved international recognition as "break-through" microfinance institutions. The government of Mongolia has been applauded and held up as a regional example of a transition economy able to create a highly conducive legal and
regulatory environment for the development of the sub-sector.

Based on the tremendous growth in the number of micro-finance providers and the resultant exponential growth in outreach of services, market saturation — with all of its positive and negative results — may be reached within the next few years.

The objective of this paper is to document the development of micro-finance in Mongolia while looking forward at emerging opportunities and threats. Throughout this paper, microfinance is treated as a component, or sub-sector, of the nations' financial sector.

Chapter 1 of this document will provide contextual definitions. Chapter 2 will provide a description of the demand for micro-finance in the country, a description of the beneficiaries of micro- finance and a description of the services required by this market. Chapter 3 will provide an overview of the supply of micro- finance ranging from informal sources to commercial banks. Case studies of some of these more prominent suppliers are provided. Chapter 4 will analyse the legal and regulatory framework for micro- finance, highlighting key areas for potential improvement. This same chapter will include data and trend analysis on interest rates. The fifth and final chapter provides a summary of government and donor policies, coordination and activities in the micro-finance subsector.

The intended audience of this publication ranges from the government, members of
parliament, the donor community, the suppliers of micro-finance and the academic
community in their admirable quest to support the development of the nation through the democratisation of economic development and of financial services. It is hoped that this document will serve as an input toward policy dialogue and as a tool for the design and adaptation of interventions.

This report has been commissioned by the United Nations Development Programme — UNDP — and the Ministry of Social Welfare (MicroStart Project) was prepared by the consultants Ms. Oyunjargal and Ms. Nyamaa. An international advisor, Mr. Robert Cater, provided technical support during the process. The review drew upon a number of resources, including relevant project documents, interviews with key micro- finance providers, governmental institutio ns and donors.

The views and comments expressed herein are those of the authors and do not necessarily represent the official position of UNDP Mongolia or the Government of Mongolia. All errors and omissions are the sole responsibility of the authors. The authors of this report wish to apologise if this report contains inaccuracies and/or inconsistencies. This study has been constrained by a series of factors, including the lack of verifiable information from the NGO sector, inconsistencies in data between different government institutions and Ministries, reticence on the part of several donors and government entities to provide information, and the overwhelming complexity of sorting through the documentation of Mongolia's legal and judicial system. Compounding this situation is the recent exponential growth of the micro-finance sub-sector in Mongolia where, on an almost daily basis, new institutions, products, services and donor projects are entering into the market.