Out of 3.5 million citizens of Mongolia, 27.1 percent or 914 thousand people are considered poor with monthly expenditure per person falling below 420 thousand tugriks (NSO 2022). Rapid economic growth is barely benefitting households, leading to a wider income gap among citizens. The economy is still almost entirely dependent on mining while the private sector is devastated by bank interest rates and tax burdens which leads to increased real unemployment and emigration of citizens.
If the current situation of the economy is broken down, the main factor is a few commercial banks suffocating public and state powers directly and indirectly while also loan-sharking the business sector through high interests.
To be precise, in countries where loan interests have reached 20%, conducting any business makes no sense, only making way for underground, illegal businesses and widespread corruption. The companies who could not join the bank mobs see an increase in their financial costs and lays off employees. Since increasing salaries is impossible, competent human resources go abroad and the citizens lose faith in their future, inflicting an irrecuperable loss for a nation.
What is the cause of this situation and what is the solution?
The cause
The Bank of Mongolia policy is behind the shortage of loans and high interest rates. Recently, the Bank of Mongolia announced the decision to keep policy interest rate at 10% and to add 1% each on reserve requirements, making them 11 and 16 percent for domestic and international currency reserves respectively. This decision is exacerbating the loan shortage rather than ensuring monetary stability.
Commercial banks set their savings rates competitively based on the policy rate and sharply raise their loan rates to further increase their profits.
The net profit of the six banks listed on the MSE increased by an average of 50 percent in 2024, reaching a total of 1.7 trillion tugriks. The net profits were as follows (billion tugriks) – Khan bank 640, Golomt 400, TDB 300, Khas 170, State Bank 108, and Bogd 40. The total assets of the banks amounted to 64 trillion tugriks, of which Khan bank has the largest with 20 trillion tugriks, Golomt and TDB with 15 trillion each, the three of them collectively making up 80 percent of the total. Last year, Golomt Bank increased its assets by 34 percent, TDB by 23 percent, and Khan bank by 17 percent.
What else can we call it other than loan-sharking – the fact that commercial banks are making huge profits while the private sector is being pressured by interest rates and going bankrupt? It is not because the Bank of Mongolia and Financial Regulatory Commission are not ignorant to the fact that only banks and their owners’ businesses are growing and developing, while other companies are stuck in debt and unable to grow, but because certain government officials have become servants of the bank owners, just as if they were held hostage by their election expenses.
A grand law was drafted stating that no single owner of a commercial bank could hold more than 20%. However, due to lobbying by bank owners, the passing of this law has been repeatedly delayed for several years. Now, they are even arguing that unless the 20% cap is raised to 34%, foreign investors will not be interested, and the BoM has come to support this idea.
Almost every commercial bank has established its own securities company and is managing its accounts. These banks had their own securities firms to prepare underwriting for their IPO, leading to significantly overpriced shares. As a result, share prices have not even maintained their initial offering value and have dropped considerably. In other countries, commercial bank owners are prohibited from engaging in other businesses or owning securities companies, as it is seen as granting them an unfair advantage.
The Financial Regulatory Commission (FRC) is complacently accepting the fact that these six commercial banks have sold only 5–10% of their shares to the public and are now considered “publicly traded companies”, pulling the wool over the people’s eyes. What’s more, not a single independent representative from the public has been included in any bank’s Board of Directors. The FRC remains completely silent on this issue, keeping the public in the dark.
All of this is a clear reflection of how laws in our country do not apply to the wealthy. Is it not clear that the relevant government agencies are held hostage by commercial banks and, together with them, continue to exploit the people.
The solution
Is it not the time to reform the banking sector to ensure the independence of the BoM, increase competition in the banking sector, reduce loan interest rates, and improve access to finance for entrepreneurs?
It is necessary to reduce the monetary policy interest rate every six months gradually to less than five percent, reduce the required foreign and domestic currency reserves by linking them to the policy interest rate to increase access to credit, tighten other criteria for banks to stop loansharking. It is also needed to restrict the bank owners from having other businesses, and prohibit banks from conducting their own securities business, thereby ensuring a level playing field for companies. It is necessary to urgently implement the law on the public status of banks, instate multi-owners, and develop good corporate governance.
The time has come to implement tax reforms to reduce the tax burden on businesses and improve the efficiency of spending. This could include creating special subsidies and loan guarantees for small and medium-sized businesses, supporting workforce development, and providing tax breaks to companies that pay competitive wages.
We need to diversify the economy by supporting the private sector by investing in agriculture, manufacturing, services, and artificial intelligence, and reducing over-reliance on mining.
In addition to taxes, bureaucracy, corruption, and regulatory burdens are increasing the indirect operational costs for companies. Rapidly advancing e-governance to the point where face-to-face interactions are no longer necessary would help reduce corruption. If the courts do not swiftly resolve the long-pending corruption cases, citizens will lose faith in the restoration of justice.
By implementing just a few of these measures, the economy will recover, private sector productivity will improve, and job opportunities will increase. As a result, people’s living standards will rise, creating conditions for citizens to return to their homeland instead of fleeing abroad.