100 YEARS OF THE MODERN BANKING SYSTEM IN MONGOLIA LKHAGVASUREN BYADRAN, GOVERNOR OF THE BANK OF MONGOLIA

This year marks the centenary of the establishment of the modern banking system in Mongolia. Back in 1924, the Mongolian-Soviet Industrial and Commercial Bank opened its doors and started the development of the modern banking system. But before that, the Great Khans of Mongolia issued gold, silver and bronze coins according to the characteristics of the lands and countries they occupied, and printed the first paper money in the history of the world, which was widely used in trade and commerce. A separate story will be told about the gold and silver coins of the Great Khans and the paper money of Kublai Khan. In this section, let us highlight only the 100-year development path of the modern banking system.

ESTABLISHMENT OF THE NATIONAL BANK AND INTRODUCTION OF THE NATIONAL CURRENCY

In 1921, according to the friendship agreement between Mongolia and Russia, and its additional protocol, Mongolia made and carried out preparations such as issuing national currency based on the loan from the Soviet Union and drafting the national bank charter. By 1924, preparations for the establishment of the bank were basically completed, and on June 2 of the same year, the Industrial and Commercial Bank of Mongolia opened its doors. The bank was usually referred to as "Mongolbank" in official documents.

In 1925, the Industrial and Commercial Bank of Mongolia named the national currency "Tugrik" and put into circulation 1, 2, 5, 10, 25, 50, and 100 MNT denominations. With the introduction of the national currency, it was able to squeeze out the US, Mexican, Chinese, and Russian currencies which dominated the market at the time. Mongolia had a national bank and national currency, and was able to economically strengthen its independence gained in 1921 through the national liberation revolution.

In the early years of the establishment of the Bank of Mongolia, mainly Russian experts worked at the central bank, but from 1931, national personnel were trained, and by 1954, when Russia transferred its ownership to Mongolia, the bank became a 100 percent government-owned State Bank and was reorganized.

During the years of socialism, the General Committee of the State Bank carried out extensive activities, such as granting loans to industrial enterprises, creating cash deposits or the people, and transferring the revenues and expenditures of the state budget. When the modern banking sector was first established, it aimed to form and strengthen the national currency and financial system, but later it played the role of a financial intermediary by withdrawing people's savings and providing long-term and short-term loans and financing for national economy.

THE ESTABLISHMENT OF A TWO-TIER BANKING SYSTEM

Along with Mongolia's transition to a market economy, commercial banks were established to separate commercial activities from the Bank of Mongolia. Subsequently, in 1991, with the approval of the Banking Law by the State Legislature, according to international standards, the country switched to a two-tier banking system. the Central Bank and the commercial bank.

The Central Bank exercised the role of supervising commercial banks, and commercial banks began to provide loans to private enterprises and withdraw and collect people's savings. The Central Bank has been performing the role of "custodian" of economic and financial stability, controlling the activities of commercial banks.

In the first years of the transition to a two-tier banking system, the Bank of Mongolia focused on creating market economy infrastructure, financial market organization, and stable operation of the settlement system. But in 1996, with the approval of the law on Central Bank (the Bank of Mongolia), the work of developing the financial market infrastructure, maintaining economic stability, introducing policy instruments, improving the banking supervision and inspection system, and bringing it closer to international standards has been ongoing.

In 2006, when the policy interest rate was introduced to the market for the first time, inflation targeting monetary policy was implemented according to international standards. Also, in 2018, by amending the law on Central Bank (the Bank of Mongolia), according to international standards, any decisions of the Central Bank were made based on the principle of collective management.

Currently, the Central Bank of Mongolia has strengthened itself as a major research and analysis institution that ensures price stability, manages and enriches foreign currency reserves, maintains financial stability, produces statistics that meet international standards.

BANKING SECTOR REFORM: 2020-2024

As of the end of May 2024, the total assets of Mongolia's banking sector reached 55.7 trillion MNT, liquid assets 51.1 trillion MNT, deposits 22.2 trillion MNT, and loans 30.5 trillion MNT. The total equity capital is 6.3 trillion MNT, and the average equity capital adequacy ratio is 18 percent. As of the end of May 2024, the non-performing loans accounted for 6.2 percent of total loans. These are quantitative indicators that show the banking and financial system and its role in the economy.

At the beginning of the development of the two-tier banking system, many banks went bankrupt and closed their doors due to the lack of training of professional personnel in the banking sector and the lack of smooth monitoring and inspection system for commercial banks by the Central Bank. However, between 2001-2010, the banking sector began to stabilize.

Since 2010, the Bank of Mongolia has taken steps to bring the proper governance and supervision of the banking sector in line with international standards. In 2021, with amendments to the Banking Law, influential banks in the system must be public Joint Stock Companies (JSC), and other banks will be closed JSCs. In this way, an environment has been created for the banking sector of Mongolia to conform to international norms and standards in terms of governance, and to improve the transparency of the banking sector.

In accordance with the law, in 2022, "Bogd Bank" was the first to conduct an Initial Public Offering (IPO) and become a public JSC. In 2023, domestic systematically important banks (D-SIBs) offered their shares to the public and became an open joint-stock company.

By attracting a total of 473 billion MNT funds from the domestic capital market, these banks intensified the capital market activity and took the development of the banking sector to the next level. This is a major reform that will stimulate the development of not only the banking sector, out also the capital market of Mongolia.

It should be noted that major legal changes to attract foreign investment in Mongolia's banking sector were implemented in 2023. In 2023, the Parliament amended the Banking Law and approved the new Investment Banking Law, opening up the legal environment for foreign banks to invest in Mongolia’s banking sector, hold shares, and establish branches and representative offices in Mongolia. Mongolia's banking sector has been open to domestic investors in the past, but soon it has opened the way to attract investment from foreign banks and financial institutions and to enter the international market.

For Mongolia, where the banking sector alone constitutes about 90 percent of the financial sector and acts as the main intermediary in the financial sector, the stability of the banking sector is vital to the sustainable growth of Mongolia's economy. In this sense, the Central Bank continues to improve the regulation of the legal framework and the effectiveness of supervision and inspection in the banking sector.

THE DIGITAL TRANSITION IS IN FULL SWING

The other role of the Bank of Mongolia is the regulator and supervisor of the national payment system. The Central Bank plays the role of middleman in the transactions of citizens and enterprises through the bank, creates an infrastructure for safe, reliable and fast payment and ensures continuous operation.

With the development of technology, payments in the banking sector have become digitized, and people prefer to make payments using smart phone applications and over the Internet rather than using cash or cards, regardless of time or location. The Bank of Mongolia aims to keep up with this electronic transition, and as a regulator of interbank payments, it aims to take the lead in the electronic transition, and in 2009, it started implementing a strategy for the development of the national payment system.

Subsequently, in May 2017, the National Payment System Law was approved by the Parliament and took effect in 2018. As a result, not only banks, but also non-banking financial institutions and fintech companies participate in the payment system and create a legal framework for issuing electronic money.

Mongolia's payment system is now advanced, offering privacy, security, user-friendliness, and speed. Key developments include the "Bank Network," "Automatic Clearing House," "Payment Card Clearing System," "Integrated Trading System of the Central Bank," an internationally accredited data centre, and a Token Verification System. As a result, real-time transactions have grown by 45 percent annually, and payment card transactions by 24 percent over the past five years. Last year, there were 4.3 million payment cards in Mongolia, with 2.2 million actively used.

Last year, the Bank of Mongolia introduced the Token Verification System, allowing citizens to enter their payment card information into their mobile phones and make transactions on their mobile phones without having to read the card. The "Central Bank Trading System" combines the stock exchange and central bank securities trading system. With the transfer of the national payment T card, which is widely used by Mongolians, to the EMV/Chip technology that meets the international standards, the gateway for the free use of the T card internationally has also been opened.

Technology is rapidly changing and evolving in the world. In this sense, the development of the payment system is also focused on being more advanced, fast, safe, reliable and continuous. Another important solution recently implemented by the Bank of Mongolia is real-time mode analysis based on artificial intelligence. We are developing a fully automated system for analysing thousands of transactions per day with the help of artificial intelligence, processing financial reports, news and statistics and receiving them electronically. With the introduction of this system, it will be possible to issue reports with a very small time delay.

FINANCIAL INCLUSION IN THE BANKING SECTOR

The banking sector has been leading economic development for centuries, and has played an important role in ensuring economic and financial stability and improving financial intermediation.  When the Bank of Mongolia was first established in 1924, it had 22 employees, headquartered in the capital city, and opened its doors with one branch in Altanbulag Soum. Today, 16,459 people work in the banking sector, and it provides financial services to citizens and enterprises with 309 bank branches, 1,019 settlement centers, 51 currency exchange points, and 5 representative offices throughout the country.

Considering some statistics of financial access in the banking sector, the number of banks and branches per 10,000 people in Mongolia is 61, which is 4-5 times higher than neighbouring countries such as South Korea, Kazakhstan, and China. 98 percent of Mongolia's adult population has a bank account, and 97 percent use digital payments every day.

The banking industry has reached this point by making its contribution to the development of the country and to the life of every citizen and family, developing and strengthening together.

/Source: “Diplomatic World” magazine/