Economists and researchers say that by opening the doors of investment banks in Mongolia, enterprises will be able to get low-cost and long-term financing from the public without taking high-interest, short-term loans from commercial banks. They believe that the capital market will develop only if investment or foreign banks actively operate in Mongolia. However, it is doubtful whether the bill on investment banking includes regulations that will create many positive consequences.

On December 28, 2016, 18 members of Parliament, including Minister of Finance B.Javkhlan, D.Khayankhyarvaa, B.Batzorig, Z.Narantuya and B.Undarmaa, initiated the bill on investment banking, which is now being discussed by Parliament.

The draft law has five chapters and 21 articles. Chapter 1 of the bill covers the general basis or legal objectives, scope of application of the law and definition of investment bank, while the second chapter stipulates the direction of operation of investment banks. Chapter 3 provides for the establishment of an investment bank, the requirements for its founder and documents to be prepared, as well as the granting, refusal, registration and cancellation of special licenses. Chapters 4 and 5 include restrictions on banking activities and provide for the system of responsibility.

The bill initiators previously reported that out of 14 operating banks, eight banks have foreign investments, and three of them have foreign bank shareholders, and explained, “Relations regarding the establishment of a foreign bank and the conduct of banking activities in Mongolia are regulated by the Banking Law, Law on Investment, Company Law and Mongol Bank’s license regulations. In accordance with the regulations of Mongol Bank, if financial institutions have been operating for at least one year, they have the right to apply to Mongol Bank and other authorized institutions for conducting banking activities. There are currently no detailed provisions on foreign banks, other than these regulations.”

Therefore, they highlighted the need to allow foreign banks to enter the domestic market for investment purposes only, grant loans necessary for the financing of large projects and programs to legal entities only, execute foreign and domestic settlements, issue loan guarantees, sell and buy securities, and create a legal regulation that prohibits other activities, especially taking deposits from citizens.

The approval of the bill is expected to have the following positive effects on society and economy:

• To introduce new technology. Increasing foreign investment in developing countries will bring human capital and new technologies to the market, and improve the knowledge and skills of personnel.

• To increase competition in the market. An increase in the number of foreign-invested banks will raise the competition in the banking system, thereby growing bank productivity and reducing interest rates.

• To increase the efficiency of loan distribution. When a foreign-invested bank enters the market, the amount of loans granted to related parties will decrease, and loans will be made in the domestic market in accordance with appropriate procedures.

• To promote the development of the domestic financial market. A foreign-invested bank has more experience than domestic banks in using financial derivative instruments and stocks, which will allow them to introduce new financial products to the market.

• To increase the stability of the domestic market. In the long run, as the risk management system of domestic and foreign banks reaches the same level, the amount of non-performing loans will decrease.

• To improve the infrastructure of the financial system. The good practices, know-how, registration, transparency, financial regulation and advisory capabilities of the banking system of developed countries will be localized in the domestic market.

• To increase access to financial products and services. Access to financial services will improve if foreign banks establish more branches and introduce modern online and mobile banking services.

• It has a positive effect in the short term by improving the flow of foreign exchange and increasing capital resources.

Some experts and economists note that if domestic banks only provide consumer loans, interest rates may decrease, and they warn that a country with a small economy like our country should be cautious when establishing an investment bank.

In accordance with the bill, investment banks can provide long-term loans for financing large projects and programs, make external and internal settlements related to borrowers’ current accounts, issue loan guarantees, sell and buy securities, and perform other investment works and services on behalf of clients.

The draft law states that banks that will operate in Mongolia for the purpose of investment cannot operate in the domestic market in any form other than in the direction of investment.

The bill also prohibits attracting financial resources through the savings of citizens and relations with domestic enterprises. It stipulates that “the minimum amount of the authorized capital of the investment bank should not be less than 500 billion MNT”, while “the amount of loans and guarantees provided by investment bank must be at least 100 billion MNT”. However, during the discussion of the bill, the relevant standing committee removed the provision. In particular, former Member of Parliament Z.Narantuya said, “The first proposed bill stipulates that the minimum capital of foreign banks must be at least 100 billion MNT. However, the lawmakers removed the minimum amount of equity capital from the bill. In other words, it eliminated the legal guarantee to bring cheap and large resources to the Mongolian market.”

At the time when the bill was first submitted or in 2016, there were five banks that expressed their desire to operate in Mongolia, despite economic difficulties and credit rating downgrades.

The Parliamentary Standing Committee on Economy discussed whether to postpone the IPO of “influential” domestic banks last May. During its meeting, some members of Parliament said that Mongolia’s banking environment will not improve without the entry of foreign banks. “Except for North Korea and Mongolia, there are hardly any countries without foreign banks. We should use every opportunity to bring in foreign banks,” they expressed.

Many people say that with the introduction of foreign banks into Mongolia, the interest rates will decrease and the competitiveness of domestic banks will raise. On the other hand, there are quite a few people who believe that the introduction of foreign banks will affect the Mongolian economy, finance and national security. Branches of well-capitalized foreign banks provide policy loans. In addition, some people are warning that there is a risk of increasing unemployment in the country and negatively affecting the exchange rate.

For instance, then-Deputy Minister of Finance Kh.Bulgantuya once expressed, “In accordance with the draft law on investment banking, foreign banks will start operating in our country. In this case, we do not rule out that large enterprises will take loans by pledging the licenses of their mining deposits. If they cannot pay the loan, there is a risk that Mongolia’s territory will be taken over by foreigners. It is necessary to calculate and consider all these issues and provide detailed regulations in the bill. Mongolia’s large deposits and land may be put as collateral, and the banking and financial sector may be put at risk. Fund raising through the stock exchange may decrease.”

Former lawmaker Z.Narantuya also commented, “Politicians make many ‘false promises’. An example of this is the investment banking bill. It creates the illusion that if a foreign bank operates in Mongolia, anyone can get a loan with a low interest rate. Six out of 12 commercial banks operating today have foreign investments. For example, Japanese investors own about 56 percent of Khan Bank shares. The average interest rate for consumer loans in the bank is about 22.8 percent. Banks do not provide loans with 35 percent annual interest rate that citizens want. This is because capital invested by individual owners constitutes only about 10 percent of the total capital circulating in banks. The other 90 percent of the financial source is money deposited by domestic depositors and customer institutions. In order to avoid losses, banks set interest rates by adding interest and operational costs, as well as the country’s and the borrower’s business risk. Therefore, the real possibility of providing low-interest loans to citizens has decreased, and domestic banks have a bad reputation.”

She added, “I do not believe that the adoption of the bill on investment banking, which is being discussed by Parliament, will directly reduce the cost of funds for domestic banks. The draft law stipulates that foreign-invested banks will finance projects with a duration of more than two years in the same market as domestic banks. However, the average loan period of banks for production loans is three to five years.”

Previously, our country granted operating licenses to the representative offices of six foreign banks that met legal requirements: Standard Chartered, ING, Bank of China, ICBC, MUFG and SMBC. As of today, the representative offices of Standard Chartered and ING Bank have reportedly ceased operations.

Some economists warn that there is insufficient preparation for foreign banks in Mongolia. Therefore, it is necessary to thoroughly revise the legal regulations based on experts’ opinions and research.