It's time to reduce interest rates. But...

The Mongolian Economy magazine has interviewed former member of parliament and economist S. Demberel. He is a member of a working group to develop a national strategy to reduce the loan interest rate.

-What is your position on an issue of fixing the maximum interest rate of loan by the government?

-I have provoked to speak about this matter on the political level. Over the past four years, this issue has been touched upon. Social demands for reducing loan interest rates have been emerging. It should be noticed by politicians. Fixing the maximum rate of loan interest and ceasing the usury are two different concepts. But it is interrelated. There are concepts on contrary to the publicly accepted moral norms at some provisions of the Civil Code of Mongolia. In provisions concerning negotiation and contract of the Civil Code, there are concepts such as the expression of the will of the parties, the equitable principle and equality principles of the parties. In view of this, the Civil Law does not contain usury, but there are some contents to prohibit it. Particularly, the law states that loan interest rates shall be set by mutual agreement between the parties. In the next section, the interest rate of pledged loan shall be fixed by mutual agreement between the parties. Briefly, there are two different provisions. The interest rate can be adjusted by the Central Bank through flexible manner.

The maximum interest rate can be set. But there are two approaches such as fixing the interest rate by administrative manner and influencing it by market principles. In view of experiences of other countries, in most cases, the maximum interest rates are not used by the banks. But few countries have been using it. If we see these countries’ loan interest rate on the graph, they would exploit some means such reducing the loan distribution and concentration to the urban areas etc.

Obviously, there would be negative consequences if the maximum interest rate is fixed by the administrative or by enforcing the law. But this is a long-term process; economy should be stabilized and basic conditions of banks should be improved, afterwards, a restructuring should take place. But it should not expect that the loan interest rate will itself spontaneously be reduced. When there is a government, interventions of the state in the economy should be optimal and appropriate. Participation of where and when is a matter and it does not mean that it will not participate. Studies show that the interest rate limit for consumer loan is usually set. For example, in 31 states of the USA, it has fixed the maximum limit on salary loans and its term. Some European countries have set such limits in its non-banking activity. Some countries have banned the lombard (pawnshop).

-Do you mean that it is wrong if the state straightly restricts the maximum level on loans that are granted by commercial banks?

-There is no need to put a restriction on the maximum level of loans by Mongolian commercial banks. This is an inefficient way. But, there are a lot of options to reduce interest rates. First, it should make changes to the related laws. It should insert a definition in the Consumer Protection Law that ‘Service' means services provided to financial consumers. So, making such amendments to the law is just a simple matter of the autumn session of parliament. In 2012, the World Bank carried out a study on the conditions of loan limit in 114 countries, its usury circumstance, credits with a sign of loansharking, protection of financial consumers and responsible borrowing. Also, the European Union has made a decision on financial consumer protection where it prohibits charging fees other than loan interest and allows consumers to withdraw from the loan agreement at any time. One of the biggest problems for mortgage lenders is that they are paying only interest fee, instead of primary loans. This situation has been considered as the violation of the financial consumer rights, therefore, an appropriate coordination should be made on this issue.

The Bank of Mongolia, the Financial Regulatory Commission and the Financial Stability Council can jointly coordinate such problems in Mongolia. The Civil Code of Mongolia specifies the general principles of establishing a loan agreement and its interest rates. It has defined more of the lender's rights in direct and indirect terms. But the borrower’s rights are unclear. Prior to discussion on an issue of fixing the maximum rate of loan interest, it should improve and update applicable laws and regulations.

In Mongolia, pawnshops are not considered as financial institutions. It is important to study whether pawnshops, banks and financial institutions are the means to help vulnerable society to get out of poverty.

-The banking sector itself has begun to talk about reducing interest rates. Now the Central Bank has turned its attention to this matter.

-We have to evaluate one thing. In Mongolian history, the Golomt Bank has developed a strategy to reduce interest rates for the first time and has announced it at the press conference. Afterwards, the Bank of Mongolia has set up a working group to develop a national strategy to reduce the loan interest rate. The working group included representations from the Central Bank and commercial banks and independent researchers. The national strategy to reduce interest rate will be ready in early 2018. It should make a decision on this matter after carefully studying it from many sides. I would like to mention one example. When Japan has reduced its interest rate, the supply of loans has drastically decreased to poor communities in many prefectures.

Banks and non-bank financial institutions would show a specific reaction if the loan interest rate is fixed through administrative method. Even they are now expressing their position that they will react. But there is a possibility to correct the mistakes in this country. So, banks do not need to advocate as ‘It is impossible’. It is important to introduce a financial consumer code as they talk about initiatives such as responsible lending, corporate responsibility and green business. If today’s situation continues, the society could be divided into two, and the reputation of banks would tumble down. This is a reputable business for the bank. Therefore, there is no need to mistreat 15 commercial banks that account for 96 percent of Mongolia's financial market.

It is said that there is a need to lower the savings interest rates. But, I would like to say one thing. Today, there are about 8,000 people with savings account deposited more than MNT 100 million and another 8,000 citizens having savings deposits up to MNT 100 million. The remaining group has savings of MNT 5-20 million. The main depositors are 16,000 people, but around one million of borrowers are on the other side. Whose interests should be protected first?