Microfinance Regulation and Supervision in Mongolia

This paper analyzes the current state of the legal and regulatory environment in Mongolia - its strengths and weaknesses, and possible future options for improvement. The author states that:

• Mongolia has achieved one of the fastest rates of financial penetration in the world in just nine years;
• The success of the “microfinance revolution” in Mongolia cannot be attributed to a specific microfinance enabling environment;
• The country has neither an official definition of microfinance, nor regulations specifically designed to create an enabling environment for it; and
• Microfinance is governed by the same banking and financial laws that govern the mainstream financial system in Mongolia.

The paper provides some information about XacBank and Khan Bank that are the primary providers of microfinance in Mongolia. In conclusion, it states that:

• XacBank and Khan Bank followed international best practices from the start, even though the supervisory bodies did not require it;
• In order to provide long-term sustainable operations, MFIs need to provide fair, transparent, efficient and demand-driven services for their customers;
• Regulators should focus more on consumer protection; and 
• The weaknesses of Mongolian microfinance can be resolved through inclusive financial reforms.

The paper makes the following recommendations for improvement of the microfinance sector:

• Diversification of financial services for the poor;
• Support for access of the poorest through innovations and new legal forms;
• Analysis of fiscal incentives, legal reform, promotion, and education for savings; and 
• The protection and education of all consumers of financial services.