Helping Khan Bank reduce inequality in rural Mongolia with mobile banking
Mongolia is one of the least densely populated countries in the world, with much of the population living in remote rural areas, where many follow a nomadic or herder lifestyle that has not changed for centuries.
The realities of life in Mongolia are harsh, with monthly temperature variations of 45ºC not uncommon and no city or town within a day’s travel for most people. Yet 80% of Mongolians have a bank account, a much higher rate than in countries such as Russia or Kazakhstan.
Digital banking, supported by a widespread mobile telephony network, serves as the backbone of retail banking in Mongolia. The leader in this sector is Khan Bank, which serves 2.4 million of country's 3.1 million inhabitants, having pioneered mobile banking in 2007 and embraced digital banking in 2013.
Reaching out to the rural unbanked
Khan Bank, which has been an FMO client since 2009, delivers banking services to 70% of Mongolian families. It is the country's largest commercial bank with more than 500 branches around the country, and accounts for 25% of sector assets. Khan Bank is also making considerable inroads into the SME and corporate banking segments.
Mongolia relies heavily on commodity exports, and its once fast-growing economy has experienced a slowdown as a result of the decline in commodity prices since 2015. However, providing finance to marginalised consumers and entrepreneurs is a critical element of the mass market banking function, and plays an important role in reducing inequality, one of FMO’s key priorities among the UN Sustainable Development Goals.
At the instigation of the IMF, Mongolia's central bank appointed an independent auditor to review the asset quality of the Mongolian banking sector. The review, which took place in 2017, caused unrest in the sector and reluctance from investors or financiers to support banks before the review ended. However, as FMO and Khan Bank have a longstanding partnership, and FMO was confident that the bank's review would be acceptable, we issued a letter of interest for a loan facility and started the approval and syndication process ahead of the finalization of the review.
With foreign investment in Mongolia shrinking as the mining sector has struggled, the role of Khan Bank in providing funding to the economy has become even more important. We arranged a $120 million loan to the bank, the largest in its history, to help it continue to serve customers in even the most remote parts of the country. The loan also signals FMO’s own commitment to the Mongolian market, and the transaction is expected to pave the way for further funding from other international financial institutions.
How does FMO’s support reduce inequality?
Khan Bank provides financial services to the rural poor, people that would otherwise lack access to banking services. In many cases this includes families involved in the production and sale of agricultural products in extremely remote parts of the country, living in marginal households.
Mongolia lacks large-scale corporate agricultural activity. Khan Bank works predominately with small or micro-enterprises, with 8% of its loan book devoted to agriculture lending or loans to herders. The majority of its activities (67%) involves retail lending to individuals. The bank does not currently track what portion of its retail lending to individuals meets FMO’s classification of microfinance (loans to businesses with an original amount of less than €10,000), but a significant amount of its retail lending is being used for business or other productive means, and thus could be classed as microfinance.
Outside the loan facility provided by FMO, we will also support further initiatives to strengthen Khan Bank’s environmental and social management system as part of a financial sector-wide initiative to upgrade environmental and social standards led by the Mongolian Banking Association. The bank will continue to develop its ability to reach the country's most remote regions, and to upgrade its mobile banking and digital banking capabilities.
The syndicated loan from FMO is also important for the country on a wider level, by demonstrating the ongoing confidence of investors in Mongolia, its economy and society.