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Rapid Sector Assessment of the Financial Sector in Mongolia: Transition to a Market Economy Built on Successful Financial Reforms
Completed: 2008

  Introduction

This rapid sector assistance program evaluation report presents an independent evaluation of ADB assistance to the financial sector in Mongolia. The report identifies lessons from past ADB strategies and programs in the sector and provides inputs for preparation of the country assistance program evaluation of Mongolia and for formulation of the next country partnership strategy.

  Summary of Findings

• Bottom-Up Evaluation. The overall rating of ADB’s assistance performance in the financial sector was “successful”. The banking subsector was performing well while the capital markets subsector is lagging behind. The financial sector assistance program for the evaluation period was considered “relevant”, “effective”, “efficient”, and its sustainability “likely”. The assessment covered 3 program loans, 2 project loans, 1 TA loan, 4 project preparatory TA projects, and 21 advisory TA projects. Two completed financial sector program loans have been rated “successful” although there were some inefficiencies with respect to the 2-year delay in the completion of the second program (including the unsuccessful privatization of the stock exchange) and the cancellation of the rural finance loan. The ongoing third program loan is being implemented satisfactorily. Of the 21 advisory TA projects, 18 have been completed with 14 rated “generally successful” and 4 rated “partly satisfactory”. The other 3 advisory TA projects are ongoing and based on the outcomes achieved so far, they have been rated “successful”.
• Top-Down Evaluation. The overall positioning of the financial sector strategies for the evaluation period was assessed “satisfactory”. ADB’s strategies for the financial sector remained relevant and consistent with those of the Government throughout the strategy and program formulation, evaluation, and implementation stages. Likewise, ADB’s performance in the sector was “satisfactory”. A considerable amount of effort and funds were spent in researching, analyzing, formulating, and prescribing policy reforms that were efficient and effective in facilitating the transformation process.
• Key Lesson. The key lesson identified and worthy of replication in future ADB operations in similar situations was that the success of the financial sector strategies and programs was a result of (i) the continued Government commitment and ownership of the programs and the way the programs were formulated and implemented through a combined effort of the Government and the key donors, with ADB playing the lead role; and (ii) the emphasis placed on bank privatization, which allowed a more efficient and effective financial intermediation system to be put in place than would have been possible had they been restructured under the same government ownership.

  Recommendations

A. Recommendations for the Commercial Banking Sector

• Support further banking sector reforms. In order to maintain the stability of the banking system, there will be a need to continue strengthening the regulatory, supervisory, governance, internal control, and accounting/auditing frameworks. It is recommended that ADB support further reforms in the banking sector using its suitable modalities to meet the challenges and opportunities the sector faces.
• Consider equity and loan investments by private sector operations. ADB needs to consider equity and loan investments in some selected banks to help strengthen their operational capacity and systems and induce best international practices. Another opportunity will likely emerge with the Government’s present proposal to open the banking system to undertake nonbank and capital market activities (e.g., fund placement, initial public offerings, and underwriting). It is recommended that ADB look into helping introduce these new products to the banking system.
• Examine the prospects for introducing longer-term deposit and loan instruments and products for SME promotion. ADB can investigate the possibility of using commercial banks for channeling a credit line to meet the gap in the supply of rural finance in the country, particularly for small and medium-sized enterprises.
• Support the rural finance. It is recommended that ADB investigate the possibility of using successful banks to channel a credit line to meet the country’s rural finance supply gap.
• Support development of the housing finance market. ADB needs to examine the possibilities of providing assistance to the new secondary mortgage product through strengthening the legal and regulatory framework, and perhaps providing equity and loan support for the mortgage corporation.

B. Recommendations for the Nonbank and Capital Market Sectors

• Support development of nonbank and capital market sectors. It is recommended that ADB examine suitable modalities to support policy reform and capacity enhancement in terms of human resource and institutional development, covering both the nonbank activities to be undertaken by commercial banks and the work that the new Financial Regulatory Commission needs to undertake for further development of the nonbank and capital market sectors.