Description

This study evaluates the performance and impact of the Second Financial Sector Program in Mongolia and its associated technical assistance on development of the financial sector. The program loan and the TA were intended to promote the development of a competitive, stable, and broad-based financial system to support enhanced resource mobilization and sustainable economic growth.

Summary of Findings

• Overall, the Program was rated "successful".

• The Program was rated "highly relevant". It was in accordance and consistent with the sector strategies and programs of the Government and ADB. It was a core part of the financial sector reform program that was put together in coordination with the Government, International Development Association, and International Monetary Fund, with ADB playing a lead role.

• The Program was rated "effective". It helped develop an efficiently functioning financial sector for promoting rapid economic development, with the private sector as the engine of growth.

• The Program was rated "efficient". The Program's funds and the counterpart funds were used for the reform process and structural adjustments as planned. The banking system has now been entirely privatized. There were some inefficiencies, however, with respect to delays in complying with conditions for release of the second tranche, which caused a two-year delay in completion of the Program.

• The sustainability of the program outcomes was considered "likely". The Bank of Mongolia has set up a sound regulatory, supervisory, and accounting/auditing framework for the banking system. It is being enforced effectively and the banking system is functioning well. In addition, the Financial Regulatory Commission established in 2005 is in the process of developing the full complement of required legal, regulatory, supervisory, and accounting/auditing frameworks for the nonbank and capital market sectors. This work is progressing satisfactorily with substantial achievements expected by about the middle of 2008.

• The Program's contribution to development of Mongolia's financial sector is rated substantial. It helped Mongolia complete the transformation of its formerly mono-banking system to a two-tier system that is fully privately-owned and efficiently providing the banking services demanded by the general public and investors. However, the performance of both ADB and the executing agency (the Bank of Mongolia) was mixed. ADB's performance was less than satisfactory. While it promptly undertook the design and formulation of the Program to meet the urgent demand, its performance during implementation was inadequate. ADB's supervision was not commensurate with that level of complexity and problems encountered led to delays in implementation and second tranche release, and shortcomings in some TA outputs. Similarly, the performance of the executing agency was mixed, being satisfactory with respect to program loan implementation, but less than satisfactory in TA implementation.

Lessons Identified

• The success of the Program was a result of continued Government commitment and ownership.

• The success in banking sector restructuring was a result of the Government's emphasis on privatization of banks rather than restructuring them under the same government ownership.

• Reform program formulation should not overestimate the capacity and political will of the Government to formulate and implement reforms and new laws, and/or amend existing ones.

• ADB's due diligence should be carried out more carefully. ADB staff and consultants should have collaborated more closely and ensured that necessary procedures were followed in cases where ADB encountered implementation problems.

• The choice of appropriate executing agencies for implementing different components of a program is essential. The agencies directly responsible for handling different components in the existing organizational arrangement should be selected as the executing agencies for those components, rather than having one umbrella executing agency for all components.

• In order to improve ADB's supervision of complex financial sector program loans the supervision budgets, staff skills, and staff incentives in responsible ADB programs should be improved, so as to enable staff to maintain their program supervision roles for longer periods.

Contents

• Executive Summary
• Introduction
• Design and Implementation
• Performance Assessment
• Other Assessments
• Issues, Lessons, and Follow-up Actions
• Appendixes