John P.Finigan: The Mongolian banking sector is at an early stage of its development

Interview with John P.Finigan, CEO of Golomt Bank

-Investment, finance sector is starting to get on its feet now in Mongolia. What’s your opinion on establishing solid foundation for the further development of this sector?

-Investments in Mongolia have been growing quite dramatically over the course of the past decade. Within that decade, Mongolia has only suffered one year of negative growth, which was attributable to exogenous causes that is the global economic, and financial crisis that resulted in global recession.  In the case of Mongolia, it was not an indigenous or a domestically sourced decline. As a consequence, it is rather a misunderstanding to say that the investment process has just started developing. Investment has evolved successfully over the course of most of the past decade, but it is now moving ahead at an exponential rate and that can be expected to continue over the course of the next half decade and probably for even longer if economic precedents in other resource rich extractive based economies can constitute effective models for the pace of growth of Mongolia’s economy.

In order to increase output and to create jobs for Mongolian citizens, we need a favourable combination of 5 essential factors. The first is, to have a monetisable  resource and in that, Mongolian is uniquely blessed with 82 out of the 111 components of the Periodic Table of the Elements  (Mendelev’s Table) found in commercially exploitable quantities.
Secondly, we need capital, something which cannot be found in adequate volumes in Mongolia at this time. This is why Foreign Direct Investment (FDI) increased by 176% in 2010 to reach USD1.57billion.

Thirdly, we need management expertise and once again, that is a factor scenario where the supply in Mongolian is quite constrained and therefore needs to be augmented by marrying FDI flows with foreign technical expertise.
Forthly, we need a workforce and again in Mongolia, the situation is unbalanced in that we have adequate numbers of prospective entrants to the workforce, but they require training and modern technology so that they have the expertise and professional skills to enable them to compete in a globalised economy.
Fifthly, we need markets and here, Mongolia is truly blessed by being located at the epicentre of global growth with immense demand from our huge southern neighbour as well as from other rapidly growing Asian nations and countries beyond.
In 2010 investment or capital formation constituted 40% of GDP with consumption amounting to 68% and net exports of 8% representing the balancing factor.

-How do you see the development and future of the Mongolian stock exchange?

-Prime Minister S. Batbold said at the recent National Symposium on Legal Reform that it is vital that Mongolia develops a viable securities market as an external element to a comprehensive financial system. We are all aware that despite the superficially impressive statistical data relating to its recent dramatic its growth, the MSE lacks the fundamental quality of an exchange in that there is inadequate liquidity  to enable a free flow of willing buyers and sellers in any realistic dealing volume.
Accordingly, it is a very positive step that external resources in the form of management by the London Stock Exchange have been introduced and over the course of the next two to three years we can expect major advances in the role of the MSE with it eventually becoming a viable two-way market. Having myself been involved in a similar exercise in reforming the Doha Securities Market, I recognise that it is a medium term task. But when successful as it was the case of the Doha Securities Market, it leads to the creation of a significant international exchange, and in the case of the Doha Securities Market, the market capitalisation now exceeds USD110 billion, only marginally short of the Qatar’s GDP of USD120 billion.  So I have every confidence that over time the MSE will achieve a similarly successful growth trajectory.

-In order to develop other sectors other than mining what are the considerable points according to your opinion?

-The mining sector is and will remain the locomotive of growth, driving the Mongolian economy forwards. In so doing, it will itself create a considerable degree of diversity within the economy through the multiplier effects of the supply chain and services required to support the primary extractive process.
That will spread across the various industrial sectors including infrastructural development, manufacturing industry, construction, and extend ultimately into the leisure sector. However, mining will remain to a very significant degree the largest component of the nation’s GDP.  Therefore, it is very important that all opportunities be explored to reduce excessive dependence upon what is a highly cyclical industry. To this end, the Government’s objective of beneficiation or added value export is laudable, but it must be remembered that with current low capita per income of less than USD2,500 and a very modest sized population of only 2.75 million people spread across this vast country with its area of 1.55 million km2,the demands of the domestic market will always be modest.  Interference with the fundamental principles of competitive advantage in any industry can create what the economists describe as a immiserating growth or result in effective declines in total output by destroying value.  That is an important issue to be factored into the policy deliberations when addressing prospects for horizontal and vertical industrial diversification.

-Compare to other countries, the current situation of Mongolian banks and financial sectors/banking sectors…

-The Mongolian banking sector is at an early stage of its development with assets of only USD5.5 billion and institutions which are very small when measured in world-scale terms. Nonetheless the banking sector is fundamentally sound, and has successfully disproved many of the scare-making comments which used to be uttered by so called informed parties in the more challenging days of the financial crisis.   The system’s total assets grew having grown by a very impressive 41% in 2010 while Golomt Bank  itself grew by 56% to become by the year end the largest bank in the country. Our banks remain true to their fundamental role of mobilizing resources for development and do not engage in the type ‘casino’ banking  which became the hallmark of so many of the inappropriately named “advanced financial systems” which needed to be rescued by wholesale Government bailout. With non-performing loans in the system now reduced to the 6% level (while Golomt Bank’s own ratio is only 1.5%) now, underlying growth in the economy will see non-performing loans further reduce as a percentage of total loans.  Accordingly, from itscurrent small base, we can expect the continuation of the exponential growth which the banking sector has enjoyed in all but one year over the course of the past decade.

-What is your opinion about the kind of policies the government should enforce in order to support the development of this sector?

-As a guest in Mongolia I am always conscious of the proprietory of seeking to advise your Government as that is the prerogative of the citizens of Mongolia.  Nonetheless, with all due deference, the Government has already led very effectively with the promulgation of the Banking Act 2010 which addresses all critical aspects of the banking industry and for the most part mirrors best international practice. However, as has been emphasized by both President Ts. Elbegdorj and Prime Minister S. Batbold, and other Ministers during the course of the Mongolian Economic Forum and many similar public gatherings and symposiums, Mongolia should avoid the danger of excessive bureaucracy and red tape with the introduction of rules which impede the effective operation of market forces and preserve existing monopolies. Unfortunately, as I believe is shared by our political leaders, there is a sense of disappointment that their encomia to eliminate red tape and bureaucracy are not yet feeding through the system in an effective fashion.
As an example of such an impediment, is notwithstanding the Banking Act having granted a wider range of powers to the Mongolian banks to engage in a broader range of services in support of capital formation and development of financial markets,the Financial Regulatory Commission has recently created a Draft of new regulations vitiate the powers enacted under the Banking Act and only serve to preserve existing inefficient oligopolies while restricting the growth and competitiveness of Mongolia’s leading banks.

-Can you tell more about these impediments?

-The restrictions imposed on the