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For more information, visit www.ifc.org SMEs and Women-owned SMEs in Mongolia Market Research Study Content List of Figures ii List of Tables iii Abbreviations iv Executive Summary 1 1 Introduction 7 2 Enabling Environment 9 2.1 Country Profile, Demographics and Administration 9 2.2 Macroeconomic Overview and Recent Developments 9 2.3 The SME Sector 11 2.4 Doing Business in Mongolia 13 2.5 Legal and Regulatory Environment for SMEs 15 2.6 Support Institutions for SMEs and Women Entrepreneurs 19 3 Supply of SME Finance 21 3.1 Overview of the Financial Sector 21 3.1.1 Commercial Banks 21 3.1.2 Non-Bank Financial Institutions 25 3.1.3 Savings and Credit Cooperatives 26 3.2 Programs of International Institutions Targeting SMEs 26 4 Demand Study 29 4.1 Objectives and Methodology of the Demand Study 29 4.2 The Entrepreneur 30 4.3 The Business 31 4.3.1 Business Activities 31 4.3.2 Characteristics of the Business 32 4.4 Challenges for SMEs 35 4.4.1 Start-up 35 4.4.2 Current Challenges and Needs 37 4.5 Access to Finance 40 4.5.1 The Relationship between SMEs and Banks 40 4.5.2 Use of Bank Loans 43 4.5.3 Demand for Bank Loans 47 4.5.4 Usage and Demand for other Banking Products 50 5 Constraints Perceived by SMEs and Women-owned SMEs 53 5.1 Constraints Perceived by SMEs 53 5.2 Constraints Faced Specifically by Women-owned SMEs 55 6 Conclusions and Recommendations 57 References 63 Annex A: List of Persons Interviewed 65 Annex B: Brief Overview of Stakeholder Interviews 66 i List of Figures Figure 1: GDP breakdown by sectors 10 Figure 2: Active enterprise by economic activity 12 Figure 3: SME loan portfolios of commercial banks 22 Figure 4: Development of the NBFI sector 25 Figure 5: Average age of entrepreneurs 30 Figure 6: Education of entrepreneurs 30 Figure 7: Average household size per business type 30 Figure 8: Civil status per business type 30 Figure 9: Business activities 31 Figure 10: Business activities per business type 31 Figure 11: Share of seasonal businesses per business activities and business type 32 Figure 12: Number of employees per business type 32 Figure 13: Number of employees per business activities 33 Figure 14: Age of businesses per business type 33 Figure 15: Yearly turnover per business type 34 Figure 16: Yearly turnover per business activities 34 Figure 17: Turnover of growing and non-growing businesses 34 Figure 18: Business activities of growing enterprises 34 Figure 19: Start-up funding per business type 35 Figure 20: Motivation for business establishment per type of business 36 Figure 21: Motivation for business establishment per region and date of establishment 36 Figure 22: Previous relevant work experience before starting a business 37 Figure 23: Key success factors for business start-up per business type 37 Figure 24: Current business challenges per business type 38 Figure 25: Challenges for female and male entrepreneurs per gender of respondent 38 Figure 26: Attendance and interest in professional trainings 39 Figure 27: Attendance and interest in professional consultancy 39 Figure 28: Market shares as primary business bank of largest banks per business type 40 Figure 29: Market share of largest banks per size of business 41 Figure 30: Reasons of bank preference per gender of respondent 41 Figure 31: Obstacles in bank relationship per gender of respondent 42 Figure 32: Women-specific obstacles in bank relationship per gender of respondent 42 Figure 33: Sources of financial advice per gender of respondent 43 Figure 34: Source of financing of business per business type 43 Figure 35: Share of bank-loan usage per business type 44 Figure 36: Share of bank-loan usage per age of enterprise 44 Figure 37: Obstacles in loan application process 45 Figure 38: Loan amount per business type 45 Figure 39: Loan maturity per business type 45 Figure 40: Share of loans with grace period 46 Figure 41: Interest rates of loans per business type 46 Figure 42: Collateral provided per business type 47 Figure 43: Usage of loan per business type 47 Figure 44: Requested loan amount per business type, business size, and business activity 48 Figure 45: Requested loan maturities per business type and business activities 49 Figure 46: Requested interest rates per business type and business activities 49 ii List of Figures Figure 47: Collateral that could be provided for a loan per business type 50 Figure 48: Foreseen usage of requested loan per business type 50 Figure 49: Usage and interest in banking products for private purposes per gender 51 Figure 50: Usage and interest in banking products for business purposes per gender 51 Figure 51: Usage and interest in banking service delivery channels per gender of respondents 52 List of Tables Table 1: Members of the State Great Khural by gender 9 Table 2: Selected macroeconomic indicators 11 Table 3: SME definition in Mongolia as per SME Law in 2007 11 Table 4: Registered versus active enterprises in Mongolia 12 Table 5: Selected indicators of the Mongolian Banking Sector 21 Table 6: Commercial banks’ branches in and outside Ulaanbaatar 23 Table 7: Banking loan products offered to SMEs 24 Table 8: Sample distribution per gender and city and respondent rate 29 iii Abbreviations ADB Asian Development Bank ATM Automatic Teller Machine EAP East Asian and Pacific BOM Bank of Mongolia BPI Business Plus Initiative BPN Business Professionals Network CEO Chief Executive Officer DBM Development Bank of Mongolia EBRD European Bank for Reconstruction and Development EU European Union FDI Foreign Direct Investment FI Finance Institution FRC Financial Regulatory Commission FS Frankfurt School of Finance & Management FX Foreign Exchange GDP Gross Domestic Product HO Head Office IFC International Finance Corporation IFI International Finance Institution IMF International Monetary Fund IRIM Independent Research Institute of Mongolia IT Information Technology JICA Japan International Cooperation Agency MBA Mongolian Bankers Association MCA Millennium Challenge Account MFI Micro Finance Institution MIS Management Information System MNCCI Mongolian National Chamber of Commerce and Industry MNT Mongolian Tugrik MOL Ministry of Labor MONES Mongolian Women’s Fund MSME Micro, Small and Medium Enterprises NCAV National Center Against Violence NBFI Non-Bank Financial Institution NCGE National Committee on Gender Equality NGO Non-Governmental Organization NPL Non-Performing Loans NSO National Statistical Office of Mongolia OT Oyu Tolgoi copper mine PPP Purchasing Power Parity SCC Savings and Credit Cooperative SME Small- and Medium-Sized Enterprise STCR Secured Transactions and Collateral Registry Program TA Technical Assistance UB Ulaanbaatar UNDP United Nations Development Program US United States USAID United States Agency for International Development USD United States Dollars (1 USD=1,800 MNT conversion rate is used in this paper for ease of calculations) VAT Value Added Tax WE Women Entrepreneur WIN Women in Business Program iv Executive Summary The World Bank Group has been active in The market research was carried out by a Mongolia since 1991 and has invested in many team of international and local consultants projects across a variety of sectors. International in May-July 2014. It started with the desk Finance Corporation (IFC) is a member of the review of the literature related to the topic. World Bank Group and is the largest global Two sets of questionnaires were developed development institution focusing exclusively for the assessment of the supply and demand on the private sector. IFC has been active in regarding financial products as well as services Mongolia for more than two decades and has for SMEs and women-owned SMEs. To assess provided equity, loans and trade financing, the environment that SMEs operate in and the as well as advisory services to companies, availability and scope of financial and non- financial institutions and regulatory authorities. financial services provided to them, interviews Supporting growth and competitiveness of were conducted with various stakeholders small and medium enterprises (SMEs) is central engaged in SME finance and gender-related and to IFC’s strategy in Mongolia. The future IFC regulatory issues (Annex A). Additionally, a programs in Mongolia will also prioritize survey among men- and women-owned SMEs women-owned SMEs in order to address some was conducted with the representative sample of the obstacles that women entrepreneurs face of 240 interviews in three cities (Ulaanbaatar, accessing finance. Erdenet, Darkhan). Through this survey, more information on the entrepreneurs and their IFC wishes to compile data on both male- and businesses could be obtained and challenges, female-owned enterprises in Mongolia in order constraints and opportunities could be explored, to better understand the business characteristics in particular regarding access to financial and of SMEs, the profile of the entrepreneurs, non-financial services. their relations with financial institutions, the challenges they face, and their expectations Definition of SMEs and Women-owned for the future. For this purpose, IFC has SMEs commissioned the Frankfurt School of Finance Despite the introduction of a national SME & Management (FS) and the Independent definition in 2007, this definition is not widely Research Institute of Mongolia (IRIM) to used by industry stakeholders. The National conduct market research focusing on the Statistical Office of Mongolia (NSO) uses a enabling environment, and supply and demand different employee-number categorization in prospects for SMEs, with particular focus on collecting its annual business register data. women-owned businesses. The study is expected Commercial banks either do not segment their to provide guidance to IFC in the design and clients or use their own segmentation criteria in implementation of their SME Banking and terms of employee number and annual turnover. Women in Business Programs for Mongolia. 1 A revision of the SME definition seems to be The country suffers from harsh geographical necessary. Industry stakeholders are of the conditions exacerbated by poor infrastructure opinion that the current national definition is far and limited transportation, causing economic too broad regarding the employment size and activities and most businesses to be based outdated in terms of annual turnover because of in Ulaanbaatar. This works against an equal an about 55% depreciation of the Mongolian distribution of the national income. In addition, Tugrik (MNT) since the enactment of the SME poorly designed regulations, bureaucratic Law. burdens, and lack of incentive schemes for business registry encourage informality in There is currently no definition for women- Mongolia, making quantitative analysis difficult. owned enterprises generally accepted by governmental or financial institutions. Supply Perspective Gender-disaggregated data on SME clients at The strengthening of SMEs is crucial to commercial banks is currently not available achieve broad-based and sustainable growth in either. However, according to the managers Mongolia. Nevertheless, SMEs are constrained of several commercial banks and non-bank by a number of problems, among which access financial institutions, the share of female- to finance is identified as one of the most owned businesses in the sector is significant, difficult barriers to growth and development. approaching nearly 60% of micro-scale, family, As far as the banking sector is concerned, loans and sole-entrepreneur-owned businesses. This provided by commercial banks tend to be short- observation of industry stakeholders differs term, expensive and require very high collateral. significantly from the findings of the Mongolia Enterprise Survey 2013 recently completed by Collateral requirements are particularly the World Bank, which shows the percentage of constraining for SMEs since commercial banks firms with female ownership at 38.9%.1 usually ask for immovable property due to the non-existence of a central registry of movable Enabling Environment assets. Weaknesses in the legal framework for The stability of the macroeconomic environment enforcement mechanisms also force banks to is important for businesses of all segments, avoid accepting the pledge of movable property. including SMEs. After posting high growth rates Securing repayment in a case of competing in the last decade, Mongolia entered a more claims can be very difficult, especially when volatile economic period that was immediately real-time information on priority pledges is not reflected in the deterioration in the business available. As a result, the market for providing sentiment. The government’s action plan to bank finance against movable collateral is stabilize the environment produced satisfactory almost non-existent in Mongolia. results in the last two years and also boosted Secured transactions reform has been on agenda entrepreneurship, as illustrated by the roughly of the Mongolian government since 2006. IFC 35% increase in the number of registered also provided support in the finalization of the and active enterprises from 2010 to 2013. draft bill as part of its Secured Transactions Nevertheless, poor corporate governance, gaps and Collateral Registries (STCR) Program, and inconsistencies in the regulatory framework, which covers Mongolia as well as 27 other and lack of adequate support mechanisms in countries worldwide as of November 2013. IFC Mongolia, remain key restraining factors that has offered additional help to the government hamper the development of both male- and with the establishment of the pledge registry female-owned SMEs. The pressure is especially and is waiting for an official invitation by strong at the smallest end of SMEs with a the government as well as for its decision on considerable portion of micro-enterprises strategy before taking further steps.2 ceasing activities shortly after being established. Enterprise Survey (2013). 1 2 IFC has vast experience in the establishment of online collateral registries for movable assets worldwide (China, Ghana, Mexico, Vietnam, Afghanistan, etc.). 2 Although bank lending has posted high growth the Ministry of Food and Agriculture entitled rates in recent years, this growth stemmed from “Wool, Cashmere, Sewing Lines, Greenhouse increased exposure in construction companies and Intensive Farming Projects”, the share of and real estate developers, as well as individuals. women-owned businesses has been estimated at Household lending in particular picked up 60%. in 2013 with the introduction of the housing In the absence of bank financing that reaches development program by the government out to all client segments, SMEs in Mongolia through commercial banks. As a result, while seek funding outside of the banking sector. Non- corporate and individual loans reached 47% bank financial institutions (NBFIs) and savings and 37% of the total loan book respectively, and credit cooperatives (SCCs) are alternative SME loans remained at 16% revealing a low sources that SMEs often pursue, especially when level of commercial-bank penetration in this in need of short-term or start-up financing. segment. NBFIs, however, cannot fully meet the SMEs’ Lending to SMEs is perceived as risky by demand for finance due to their limited funding commercial banks because of this segment’s low capacities. capitalization and lack of immovable assets. In this situation, the government of Mongolia This is also partly due to the lack of capacity at often intervenes in the sector through a number commercial banks in implementing cash-flow- of SME support programs that provide lending based lending mechanisms. The situation is at below-market rates through commercial exacerbated by the ineffectiveness of the existing banks as well as business advisory trainings credit-information system, which covers less through public bodies. Nevertheless, apart from than 15% of all enterprises in Mongolia.3 the recently established Credit Guarantee Fund, Lending to women is generally perceived by the programs launched so far by the government the banks as more risky than lending to men, do not tackle the issue of collateral, which is of as women more often lack assets that can be utmost importance to SMEs in accessing finance. provided as collateral. At the same time, both Additionally, in the long term, such programs commercial banks and NBFIs say that loan with subsidized lending rates may lead to the repayment rates by women are higher than distortion of market mechanisms in the banking those of men. Financial institutions are either sector. not aware of or not convinced that women- Demand Perspective owned SMEs are a distinct business segment or at least a significant market opportunity. One The information concerning the size of the of the reasons for this lack of awareness can be SME sector in Mongolia is difficult to obtain the reluctance of financial institutions to collect from official sources. The statistics on SMEs gender-disaggregated data on SMEs. This makes are limited and unreliable. The NSO does not it difficult to estimate the share and analyze the produce data exclusively on SMEs. The statistics profitability of women-owned SMEs in the total declared by the NSO cover all business entities SME portfolio. Collecting and analyzing gender- in Mongolia, including large companies and are disaggregated data, however, could be the first not in alignment with the official definition of step to recognizing women-owned SMEs as an SME Law. underserved yet profitable client segment. The Mongolia Enterprise Survey 2013 recently Nevertheless, in some lending programs, such completed by the World Bank represents as the one implemented jointly by selected one of the latest sources of information on banks, the Development Bank of Mongolia, characteristics of and obstacles experienced the Ministry of Economic Development, and by private-sector enterprises in Mongolia. For 3 Doing Business (2014). 3 this survey, business owners and top managers members. Even if a woman is not an owner, she of 360 firms were interviewed from December nevertheless takes an active part in key business 2012 through July 2013. decisions. Most of the SMEs and women-owned SMEs Another factor that has played a role in the surveyed for the present study indicated high- high social status of women in Mongolia is the level use of banking services and familiarity with equality in education and social rights granted most of available financial and non-financial to women during the communist era from 1924 services offered by various financial institutions. to 1990. The communist culture, however, The level of loan penetration is high as more promoted the clear separation of responsibilities, than 60% of all businesses in the survey had assigning women the role of mother and a loan for business purposes. Most of the housewife rather than entrepreneur. After the businesses, irrespective of the gender of their collapse of the communist system, Mongolia owner, had the successful experience of applying witnessed a rise in women’s social status as for and obtaining a loan for business purposes many of women started their own businesses (of 84% who applied for a loan, 88% were and now perform the same jobs men do. successful). This study revealed that the issues confronting The majority of the SMEs (95%) are interested women entrepreneurs do not differ considerably in obtaining a loan in the future, mostly for the from those confronting male entrepreneurs in purchase of equipment and machinery as well terms of doing business and access to finance. as to cover working capital needs, preferably Certain gender differences however come to on conditions of a grace period (three to six the fore when the social role of women is months) and for a longer period of time than is considered. currently available. Women are perceived to be the primary Banking is still very dependent on branch visits caretaker of household chores and the children. with a high share of entrepreneurs visiting a The men surveyed generally recognized this branch at least weekly. Still, modern banking additional burden; female survey respondents technologies like internet banking and especially specifically referred to family and household mobile banking (with a weekly usage rate of responsibilities as their most important 57%) are also becoming ever more popular. challenge, which limits their time for networking or participating in training, etc. Gender-specific Differences The legal framework provides women equal Social and cultural aspects should be considered rights in inheritance, land use and ownership of when analyzing the business profile of SMEs the property. However, industry stakeholders are through a gender lens. Mongolian culture of the opinion that women entrepreneurs usually exhibits collectivistic cultural characteristics: it possess less movable and immovable assets. is family-oriented with a strong cultural identity Therefore, there is a pervasive belief that women and cohesiveness. It has been largely influenced face greater difficulties fulfilling collateral by the nomadic way of life: breeding livestock, requirements than men do. The findings of this living in “Gers” and moving form pasture to study, however, show that this does not hold pasture. Women have been participating in all true, although both men and women perceive activities related to this way of life as well as in collateral requirements as the greatest challenge taking decisions about family businesses. in applying for a loan. Today, family ties still play a significant role. These and potentially other factors, our study Many of the businesses are established as finds, are responsible for the fact that women’s family businesses or with the support of family businesses are typically smaller, demonstrate 4 lower turnover rates and have fewer employees. maintaining family-oriented public facilities. In general, women are more likely to employ These are just a few ways for the government women. to encourage family-friendly policies in business and public life in general. Prevalence of Family-owned Businesses Recommendations As mentioned above, Mongolian culture is a The present study reveals important features family-oriented, collectivistic culture, heavily of SMEs in Mongolia and provides insights influenced by the nomadic way of life. As our into gender implications for SME banking. observations during the interviews have shown, It also suggests some recommendations for a significant number of businesses operate as International Finance Institutions (IFIs), family businesses, revealing that more than governmental/regulatory authorities, financial 45% of the businesses in the sample are family- Institutions and SME development/support owned. institutions. In Mongolia, the decision about the potential Thus, against the backdrop of an environment owner of a property is usually made jointly where assessing the credibility of SMEs is a within the family and the decision is not challenge for banks, regulatory authorities necessarily based on the gender of the owner. are advised to enhance the existing credit Other issues such as employment status of information system by which SMEs are the potential owner are also considered. The currently not widely covered. Providing tax possibility of taking a bank loan is higher for the incentives in the leasing law would facilitate the employed, therefore they are preferred by the development of the leasing industry. Adequate family to be the owner of the property and to legal framework for pledging receivables would pledge collateral to the bank. encourage the development of factoring. Both As usually more women work informally can be important instruments of financing for compared to men, women might also be SMEs. sacrificing their property ownership right in The high penetration of technology in people’s favor of their husbands in order to access daily lives creates a suitable environment for finance as a family. Hence, despite the existence the introduction of contract financing and of an equal treatment of men and women by law on-line factoring as complementary financing with regards to property ownership, incentives mechanisms. Chambers of commerce and for business registry should be promoted to banks are, for instance, advised to cooperate encourage women to take ownership of family in the establishment of supply-chain finance property. mechanisms. Furthermore, introduction of family-friendly Enactment of the draft bill on the pledge workplace and government policies could help of movable properties and the introduction women to balance work and family life and of a registration procedure setting out the would benefit all business development, family full process should be given priority. It stability, community and society. Tax breaks and would increase banks’ lending to the SME subsidies can be used to encourage businesses segment. Above all, regulatory authorities are and other entities to adopt family-friendly recommended to coordinate the efforts of all policies (maintaining an on-site child care center, the institutions and NGOs involved in capacity for instance, or for subsidizing employees’ child building for SMEs and women entrepreneurs. care costs). Public funding can be provided for family-friendly interventions and services such To address the issue of SMEs being perceived as family literacy programs, women programs as risky by commercial banks, IFIs can consider and long-term elder-care services as well as for incorporating risk-sharing mechanisms into their 5 investment programs for Mongolia. This would the field of SME finance as well as through alleviate the banks’ discomfort in lending to programs targeting exclusively women SMEs. On the other hand, designing financing entrepreneurs. The latter should promote programs exclusively for Women Entrepreneurs women entrepreneurs to the banks as an (WEs) would increase the banks’ awareness attractive market segment in particular though about women-owned SMEs as a distinct gender awareness raising events (invite women segment. Financial institutions are advised entrepreneurs, promote collecting gender- to develop internal capacity to move from disaggregated data) and/or loan-dedicated collateral-based to cash-flow-based lending. programs (design of women-entrepreneur product packages, etc.). Capacity building In collaboration with SME support institutions, should be further provided to banks and SME they are also encouraged to organize SME support centers in terms of development of networking and information-sharing events as high-quality training courses on most requested well as trainings to address the key challenges topics like financial management, marketing and that both male and female-owned SMEs face in sales, etc., as well as business advisory services terms of their internal capacity, especially at the (legal issues, taxation, loan application). start-up phase. Considering the geographical conditions and poor infrastructure in rural SME support institutions are advised to Mongolia, seminars and capacity-building cooperate more strongly with banks in training activities should be offered in a format suitable and business advisory services, to expand for remote learning. Thus the content of those trainings to rural areas and to improve their can be transferred to e-learning platforms and quality, as well as to organize information proposed to SMEs in online modules. campaigns about land registry and property rights that reach out to women entrepreneurs. International financial institutions should further support capacity building at banks in 6 1. Introduction Mongolia has posted impressive growth over breeding), which traditionally enabled women the past decade, driven primarily by extensive to contribute to the household income and investment in mining and large infrastructure participate in economic life. Influenced by the projects. The recent growth has been boosted in Mongolian nomadic way of life, on the one particular by fiscal and monetary programs led hand, and communist educational policies and by the government. To realize its full economic the post-communist era of freedom, on the potential, the country still needs to make the other hand, Mongolian culture and history has growth sustainable in order to develop its influenced women’s entrepreneurial motivations economy, to become less vulnerable to external and social status.6 shocks, and to decrease income disparity. This Given the social and historical context in can only be achieved if growth is broad-based Mongolia, many women are today engaged in across various sectors and business segments, business life, a fact also shown by the World ranging from large corporations to micro, small Bank’s estimate on women’s participation and medium enterprises (SMEs).4 in the workforce: 57% as of 2013.7 In rural Although SMEs make up nearly 98% of all areas, women are actively involved in day-to- enterprises in Mongolia (about 80% of which day family business issues and in making key are microenterprises), their contribution to GDP decisions about, for example, buying equipment, remains low at 25%.5 This raises the question selling or buying livestock, or moving to a of what measures can be taken to address the different location. Furthermore, in urban areas, specific needs of Mongolian SMEs in order to many women have become active entrepreneurs improve their performance and accordingly engaged in manufacturing, tourism, and trade, their contribution to economic development. etc. Undertaking efforts to support SMEs in Recognizing the importance of SMEs’ and general and women-owned enterprises in women-owned SMEs’ contribution to the particular in realizing their growth potential is economy, international organizations and crucial, especially in developing and transition regulatory authorities are keen on improving the countries. Prior to the boom of the last decades, regulatory and operating environment for SMEs, the Mongolian economy was centered on as well as access to funding and non-financial agriculture (mainly herding and livestock services, which can pose major impediments to 4 According to the official definition (see Table 3), SMEs include micro entrepreneurs (small companies are companies with less than 19 employees). To be in alignment with this definition, the abbreviation “SME” and not “MSME” is used in this paper. 5 World Bank (2012). See also Ganbold (2008), Lkhagvasuren and Xuexi (2014). 6 Aramand (2011). 7 World Bank (2013). 7 their development. To be able to design tailored address some of the demand-side obstacles to support, a comprehensive view across the SME achieve greater access to financial services for market from several perspectives – enabling women entrepreneurs. environment, the supply and demand sides of Road Map of the Study financial services – is crucial. This highlights the need to capture the quantitative and qualitative Chapter 1 summarizes the scope of the study data on both male- and female-owned SMEs to and outlines its key objectives. It explains be able to better understand the financial and the rationale for collecting data on SMEs in non-financial constraints that can be addressed Mongolia in general and women-owned SMEs at policy, financial sector, and market levels. in particular. It also provides recommendations for integrating the insights form the study into The rationale for this research is thus to collect the on-the-ground practice of SME banking, as and analyze the data from public (government, well as potential interventions on the regulatory available literature) and private (business and policy level. women’s organizations, local and international research institutions, financial institutions) Chapter 2 begins with the analysis of the sources, incorporating the findings from a general macroeconomic context and provides survey conducted with a representative sample an overview of the SME sector in Mongolia. of men- and women-owned enterprises. Based The chapter analyzes the latest trends in on the information collected through desk development of the business environment and and field research, this study highlights the the legal framework relevant for SMEs and key trends, challenges and opportunities for women-owned SMEs. SME development across the three perspectives outlined above: enabling environment, supply Chapter 3 examines the aspect of supply in provided to SMEs, and demand for and ability financial and non-financial products and services to access finance. The study further explores currently offered to SMEs by commercial specific constraints faced by women-owned banks and non-bank financial institutions. It businesses. The knowledge obtained from also reviews the support provided to SMEs by analysis of the research target groups by gender international financial institutions. will help to better cater to their needs in the Chapter 4 provides detailed overview of the future. findings of the demand study, explores the The market research on SMEs and women- features of SMEs, their relationships with banks owned SMEs in Mongolia was conducted by and NBFIs as well as aspects of current use of Frankfurt School of Finance & Management bank loans. The chapter further analyzes the (FS) and Independent Research Institute of usage and demand for other banking products Mongolia (IRIM) from May to July 2014. and services by SMEs. The research was commissioned by the Chapter 5 summarizes the key constraints faced International Finance Corporation (IFC), a by the SMEs and female-owned SMEs revealed member of the World Bank Group. The IFC in the interviews with stakeholders and the face- intends to implement a SME Banking Program to-face interviews with business owners. in Mongolia, supported by specific advisory Chapter 6 uses the findings to draw conclusions services to increase SMEs’ access to finance. The and recommendations on possible measures future IFC program in Mongolia will also focus to address the challenges of SMEs and on women-owned SMEs and will leverage IFC’s women-owned SMEs specifically at different investment and advisory services. It will also stakeholder levels: governmental and regulatory cooperate with women organizations and other authorities, international finance institutions, stakeholders (business women associations, financial institutions and SME development business development service providers, etc.) to organizations. 8 2. Enabling Environment 2.1 Country Profile, Demographics and The prime minister is the head of the Administration government. All legislative power is granted to the State Great Khural, Mongolia’s unicameral Mongolia is a land-locked country between parliament, which has 76 members elected by China and Russia in Central Asia and covers a public vote for a term of four years. vast area of 1.56 million square kilometers. As of 2014, its population of 2.9 million (48.7% The revised election law, passed in 2012, males, 51.3% females)8 makes Mongolia one of contains many new regulations, including the the world’s least densely populated countries. introduction of proportional representation Mongolia has 794,100 households, of which for 28 of the 76 seats. It also specifies that a 64% are urban and 36% rural.9 About 81,700 minimum of 20% of the candidates nominated households, or 10% of all households in the and approved would have to be women. country, are headed by females.10 However, no quota on the number of female parliamentarians has been introduced so far. As Mongolia is administratively divided into 21 of 2012, 17% of all parliament members are aimags and the capital city of Ulaanbaatar. women, quadruple the women’s share in 2008 Ulaanbaatar is an independent municipality (Table 1). and is not part of a province. The aimags are sub-divided into soums; and soums into baghs. 2.2 Macroeconomic Overview and Recent The capital city is divided into districts; and Developments districts are divided into khoroos. Ulaanbaatar In recent years, Mongolia has been one of the is the political and economic hub of Mongolia most rapidly expanding economies in the world. hosting 46% of the population. Rural areas are The main drivers of this economic growth have considerably less developed and dominated by been development of the mining industry and agriculture, in particular livestock. investments in large infrastructure projects. Table 1: Members of the State Great Khural by gender 2004 2008 2012 Female 5 3 11 Male 71 73 65 Female Members as a % in Total 7% 4% 17% 8 National Statistical Office (NSO), 2013. 9 The NSO describes urban population as people residing in Ulaanbaatar city, aimag centers and towns. The rural population includes population reside in soum centers and further rural areas. 10 A mother headed household refers to a single mother who with legitimated children (biological or adopted in/out of a marriage) whereas other parent is not determined legally, or was died, or missed, or has no legal capacity, or whose parental rights have been limited with a court decision. 9 Figure 1: GDP breakdown by sectors Note: sum may not add up to 100% due to rounding. Source: National Statistical Office 2013, authors’ calculations. The country’s rich mineral deposits, as well as year (from USD 4.4 billion in 2012 to USD 2.3 growing foreign and local investments to the billion in 2013, see Table 2). The trade deficit mining sector, have transformed Mongolia’s fell due to subdued domestic demand, foreign economy from one traditionally dependent reserves decreased. The Mongolian Tugrik on herding and agriculture into a booming (MNT) depreciated by 20% against the USD. industrial economy. In addition, the slowdown in growth in China curbed demand for coal, Mongolia’s biggest Mongolia is richly endowed with natural export product. resources such as coal, copper, fluorite, gold, iron ore, and lead, etc. The share of the mining The Mongolian government reacted by sector in Gross Domestic Product (GDP) has increasing fiscal spending, in particular of large been increasing with the commodity prices in investment projects. Most of the funding was the world market for the past 15 years, reaching raised through the issuance of Chinggis Bonds in 18% as of 2013 (Figure 1). Mineral GDP November 2012, which was off-budget spending registered 20.7% growth in 2013 and 27.3% in for the government that not only increased the first quarter of 2014. government debt but also pushed up the fiscal deficit ratio to 10.9% of GDP in 2012, 6% Another driver of growth has been real estate higher than in 2011. development and construction due to the increase in housing demand and infrastructure Other measures were taken by the Central spending. Agriculture and trade also accounted Bank of Mongolia (BOM), introducing a Price for a major share in GDP in 2013, with 14% Stabilization Program to combat the slowing and 11% respectively. economy. The program, which primarily consisted of monetary easing measures and In 2013, global money fled emerging economies. increased liquidity in the financial sector by Mineral prices declined and Mongolia’s MNT 3 trillion (close to 20% of GDP), has been mining industry slumped. The second phase carried out through the following actions: development of the Oyu Tolgoi (OT) copper mine was halted due to disagreement between • Provision of subsidized financing of MNT the stakeholders.11 As a result of these 718 billion for selected industries through developments, foreign direct investment (FDI) commercial banks in order to address supply to Mongolia decreased to half of the previous side constraints. The operations of OT mine have been re launched in the second half of 2013. 11 10 Table 2: Selected macroeconomic indicators 2010 2011 2012 2013 2014 (f) GDP, current prices (USD mln)* 6,197 8,761 10,322 11,516 12,057 Real GDP Growth (y.o.y.)* 6.4% 17.5% 12.4% 11.7% 12.9% GDP per capita, by PPP (USD)* 3,985 4,721 5,298 5,885 6,631 GDP per capita, Atlas method (USD)** 1,900 2,340 3,160 n/a n/a Poverty headcount, national poverty line** 38.7% 33.7% 27.4% n/a n/a Unemployment rate (% of total labor force)* 9.9% 7.7% 8.2% 10.4% 8.7% Inflation rate, end of period* 14.3% 9.4% 14.2% 12.3% 13.3% Net government lending/borrowing (% of GDP)* 0.5% -4.8% -10.8% -10.1% -7.6% Current Account Balance (% of GDP)* -15.0% -31.5% -32.6% -27.9% -22.1% FDI Inflow (% of GDP)* 25.2% 53.1% 43.0% 18.5% 10.5% Exchange rate, end of period (MNT/USD)*** 1,257 1,396 1,392 1,659 1,824 Note: f=forecast. Sum may not add up to 100% due to rounding. Source:*IMF, **World Bank, ***IFC’s Economic Outlook Report • Liquidity injection of MNT 900 billion to 2.3 The SME Sector commercial banks in the form of one-year SMEs make up 98% of all enterprises deposits to support the economy. in Mongolia (about 80% of which are • Introduction of a construction and housing microenterprises). They contribute 25% to development program including a MNT GDP and employ 52% of the workforce.13 The 1,200 billion subsidized mortgage loan SME Law adopted in July 2007 was aimed at (with 8% p.a.) for households and MNT improving the consistency and effectiveness of 430 billion for construction companies to be government support programs; it provided a disbursed via commercial banks. definition for SMEs in Mongolia for the first time. These actions hold GDP growth in double digits, but nevertheless growth dropped from 12.4% in According to the law, SMEs are defined as 2012 to 11.7% in 2013 (Table 2). The Chinggis legally registered business entities with 199 or Bonds are due in 2017 and 2022 and will have fewer employees and with an annual turnover to be repaid by the central government, which of up to MNT 1.5 billion (USD 833,000). The is a source of concern for some investors. SME Law also differentiates between sectors Considering the huge direct spending by the in terms of number of employees and annual government, the fiscal deficit is likely to stay turnover for a company to be considered as above 10% of GDP as is the case with the small or medium enterprise (Table 3). inflation rate.12 Table 3: SME definition in Mongolia as per SME Law in 2007 Enterprise Category Sector Number of Employees Annual Turnover in MNT Small All sectors ≤ 19 employees ≤ MNT 250 mln Services ≤ 49 employees ≤ MNT 1.0 bln Medium Wholesale ≤ 149 employees ≤ MNT 1.5 bln Retail / Manufacturing ≤ 199 employees ≤ MNT 1.5 bln 12 World Bank (2014). World Bank (2012). 13 11 Nevertheless, it is observed that the SME establishments of which 54,929 were active definition introduced in 2007 is not widely (Table 4). Of all enterprises, 63% are located in used by industry stakeholders. For instance, Ulaanbaatar. It is worth noting that although the commercial banks widely use their own number of registered enterprises increased by segmentation criteria based on annual turnover nearly 35% from 2010 to 2013, the percentage and/or loan size. Even the National Statistical of active ones remained the same at 55%. It is Office of Mongolia (NSO) uses a different also observed that the share of active enterprises employee number categorization in collecting out of the registered ones increased for all its yearly business register data.14 categories, except for the smallest segment with up to nine employees constituting 90% of total The NSO does not produce data exclusively on registered businesses. This fact might indicate SMEs. The statistics declared by the NSO cover that enterprises with less than ten employees all business entities in Mongolia, including large face severe challenges for growth. companies. In addition, NSO does not provide a breakdown for companies employing more than According to the NSO, 38% of active enterprises 50 employees. Therefore, this category includes are engaged in wholesale and retail trade, repair not only SMEs, but also large corporations with of vehicles and household goods, 17% in real a higher number of staff. estate and construction business and 17% other businesses (Figure 2). As of 2013, there were 99,603 registered Table 4: Registered versus active enterprises in Mongolia 2010 2013 Change in % of active Registered Active % Registered Active % 1-9 employees 66,062 34,844 53% 90,270 46,347 51% -2% 10-19 employees 3,816 2,741 72% 4,300 3,789 88% 16% 20-49 employees 2,568 2,186 85% 3,192 2,990 94% 9% >50 employees 1,349 1,180 87% 1,841 1,803 98% 11% Total 73,795 40,951 55% 99,603 54,929 55% 0% Source: National Statistical Office (2013), author’s calculations Figure 2: Active enterprise by economic activity Note: Sum may not add up to 100% due to rounding. Source: NSO (2013), authors’ calculations The NSO categorized into four groups per number of employees: 1-9; 10-19; 20-49 and above 50 employees. However, NSO does not link this segmen- 14 tation to enterprise size (i.e. NSO does not classify them into micro, small, medium-sized and large enterprises). 12 There is no definition for women-owned and institutional framework within which enterprises generally accepted by governmental SMEs operate. Mongolia ranked 76th among or financial institutions. NSO indicates that 189 countries in Doing Business 2014 report, when running its yearly survey on enterprises’ an improvement of four ranks compared to registry status, it differentiates between male- the 2013 report. The report recognized three and female-owned enterprises. However, no regulatory reforms that contributed to the gender-disaggregated data was available upon improvement of the business environment from request. Therefore, it is not possible to identify June 2012 to June 2013: (i) starting a business; the share of women-owned SMEs in the total (ii) dealing with construction permits; and (iii) number of registered or active businesses. Still, getting electricity. Despite improvement, the the Enterprise Survey of 201315 found that latter remains one of the most problematic 38.9% of firms in Mongolia have a female indicators for enterprises in Mongolia,18 along participation in ownership and that 36.6% with trading across borders and issues of employ a female top manager. While these resolving insolvency. figures are lower than for East Asian countries According to new regulations, the requirements like China, they are higher than for other to have company statutes and charters notarized former Soviet countries like Russia (28.5%), and to register the new company with the Kazakhstan (28.3) or Azerbaijan (4.1%).16 local tax office were eliminated. Furthermore, According to the stakeholder observations, a the requirement for a technical review of large number of small businesses and home- the building plans by the state for low- and based one-person entrepreneurs are working medium-risk construction projects was removed, informally. In particular, during the start-up which made dealing with construction permits phase (first two years), it is common for the less complex. In addition, Mongolia made businesses to remain informal in order to avoid obtaining electricity easier by increasing the tax issues and to get registered at the tax office efficiency of the utility’s internal processes, only if the business is expected to be profitable. enforcing time limits at different stages of the Businesses engaged in production and trade of connection process, and eliminating the fees for hand-made wooden items (furniture, trinkets, testing the installation.19 etc.) as well as meat, leather, and cashmere The country ranks poorly in trading across products are more likely to remain informal.17 borders mainly due to its geographical isolation, Based on the observations of stakeholders distance from markets and underdeveloped interviewed, nearly 60% of the entrepreneurs infrastructure, especially in rural areas. The engaged in informal activities are women. quality of overall infrastructure is very poor, Hence, the share of women entrepreneurs can which makes domestic and international be assumed to be higher in the informal sector transportation a major challenge. Various than in the formal sector. Due to lack of internal sources indicate that only about 10% of capacity, lack of adequate support as well as approximately 50,000 km of roads in Mongolia other constraints analyzed in more detail below, are paved, a majority of which are roads leading it is more common for women than for men to out of the capital city Ulaanbaatar. Roads are remain in the informal sector. also impacted negatively by extreme weather conditions characterized by high temperature 2.4 Doing Business in Mongolia fluctuations in winter and summer, which An environment conducive to SME development impairs road quality and shortens the period of requires established economic, physical, legal operational work on the roads. 15 Enterprise Survey (2013). 16 Ibid. A typical informal business is “suitcase trading,” characterized with purchasing consumer goods from neighbouring countries and selling them locally. 17 18 Mongolia has improved its country ranking in “getting electricity” indicator of Doing Business Survey (moved from 171st in 2013 to 162nd in 2014) by increasing the efficiency of the utility’s internal processes, enforcing time limits at different stages of the connection process and eliminating the fees for testing the installation. The country however still underperforms in terms of number of procedures, time required (in days) and connection cost (% of per capita income) an entrepreneur must fulfill to get connected to the electricity. 19 Doing Business (2014). 13 Restricted access to energy sources, especially in share of active registered small enterprises (51%, rural Mongolia, is frequently cited as another up to nine employees as per NSO categorization, problematic area for businesses. Although there see Table 4). Businesses also suffer from poor has been some improvement in recent years, enforcement mechanisms and lengthy legal the country’s coal-power heat-supply system proceedings. For instance, in case of a default, remains in poor condition. It is unable to meet the value of property can be an issue of dispute the basic supply requirements of industrial and between the debtor and the creditor, leading to commercial enterprises, as well as that of the court proceedings. Court procedure may take urban population. Power-system losses remain a long time as a consensus between parties is high and power cuts are frequent, interrupting required on the selling value of the property manufacturing processes. under hypothec, for the property to be sold. Naturally, this is relevant not for SMEs only, but Resolving insolvency remains one of the worst also for banks that face similar problems while among doing business indicators, standing at dealing with property taken from clients in case 133 in the ranking of 189 economies, worse of default. than the regional average (108), China (78) and Russia (55).20 In the context of supporting Interviews with different stakeholders and the viable and efficient businesses, insolvency system demand side analysis indicate that a significant reforms are important; however they have not portion of SMEs also suffer from shortage of so far contributed to significant change. skilled workforce. This is especially surprising for a country with a literacy rate as high as Apart from the indicators mentioned above, 98%. One reason for this discrepancy is the interviews with key stakeholders and SMEs decreasing enrollment ratios and decreasing revealed further constraints. The high level quality of education during Mongolia’s of bureaucracy is one of the most widely transition period between 1991 and 1998, a cited factors responsible for impeding a more result of the lack of funding for schools as well conducive environment for doing business. as high dropout rates. Gross enrollment ratios Interviewed stakeholders also point out a dropped to 84% in primary schools and to 65% general perception of government officials in secondary schools by 1995 (which were 98% as lacking adequate skills and up-to-date in primary schools, 85% in secondary schools information required to satisfactorily perform before 1991).21 High dropouts were especially their tasks. Some stakeholders also think that observed in rural areas where many schools they are not service-minded and helpful to closed and among boys who had to dropout in entrepreneurs. This stakeholders’ perception order to support the families in income-earning about government officials seems to be shared activities, such as herding.22 As a result, between by SMEs as well, as nearly 37% of all male 1991 and 2004, the quality of education and 44% all female respondents indicated declined as did the percentage of population “government policy” to be the current challenge reaching tertiary education - exactly at a time to their business. when the transition to a market economy called Although business registry is not a major for highly skilled human resources.23 issue as far as the time to register a business The current situation seems to be putting is concerned, closing a business can be significant constraints not only on SMEs, burdensome as the process requires the but also for large corporations operating in inspection of tax authorities, who usually Mongolia. Some international institutions act slowly. Difficulties pertaining to closing a have initiated programs to address the issue business might be a reason for a relatively low 20 Doing Business (2014), p. 91. 21 ADB (2008) 22 Leading to a dropout rate among boys of almost 70%, see Yembuu and Munkh-Erdene (2006). 23 In 2002, the Ministry of Education, Culture and Science mobilized additional funds to rehabilitate schools and dormitories in remote areas. Only after 2004, the dropout rates started to recover gradually after hitting 28%, 15%, and 11% for grade 1, grade 3 and grade 8 respectively. See http://www.unicef. org/mongolia/children_2579.html 14 of “low quality” experience across different • Broadening of the personal liability of sectors of activity. For instance, the Quality governing persons. Supplier Development Center and the Quality • Introduction of administrative sanctions for Management Program launched by USAID are non-compliance. examples of these programs. • Stricter corporate governance rules. 2.5 Legal and Regulatory Environment for SMEs • Abolition of minimum capital requirements for companies. There are a number of laws in Mongolia regulating the operational environment for The revised Company Law will be binding for SMEs. The legal status of business entities was all companies operating within the territory of first stipulated in the Civil Code of Mongolia Mongolia, without regard to their ownership, (adopted in January 2002), Article 33,24 which the size of their property, the amount of their differentiates between types of legal persons production, or their internal organization. based on establishment purpose. According to it, legal persons can either be “for-profit” The SME Law: The SME Law adopted in or “non-profit” legal entities. While for-profit 2007 authorizes the government to undertake legal persons can be established in the form of targeted interventions in the SME sector, partnership or company (Joint Stock or Limited such as provision of funds at below market Liability Company), non-profit legal persons rates. However, international experience can be established in the form of an association, shows that this measure can lead to weaker foundation or cooperative. financial discipline at the SMEs and is not to the benefit of the SMEs and the national Some laws have a direct impact on the business economy in the long run. It is worth noting that environment for SMEs and some others like the interventions of the government remained the recently introduced Law on Investment unnoticed by the SMEs: around 40% of (2013) seem to be of greater relevance for large enterprises surveyed for this study still perceive corporate companies and/or foreign investors. the lack of adequate government policy as a Still, SMEs are indirectly impacted by changes in challenge for their business. the business environment for large corporations as they are usually important buyers for In addition, the SME definition introduced by SMEs. The following provides an overview this law is unfit for the current environment (too of legislation directly and indirectly affecting broad in terms of employment size and outdated SMEs: in terms of annual turnover due to 55% depreciation in MNT since the enactment of Company Law (revised): On 6 October 2011, the SME Law). Many interviewed stakeholders the parliament of Mongolia adopted significant indicated that a revision of the current SME revisions to the Company Law of Mongolia. definition is necessary. The revised Company Law came into effect on 21 November 2011. The aim of revising the law Law on Investment: In October 2013, the State was to bring the corporate governance standards Great Khural, Mongolia’s parliament, ratified a in Mongolia closer in line with those in more new investment law with the aim of altering the developed jurisdictions. The revised law required investment landscape and economic slowdown all companies to amend their charters before 1 in Mongolia. Under the new Investment Law, July 2012 in order to reflect the changes. The which replaced the former Law on Foreign key features of the revised Company Law are:25 Investment, any domestic or foreign investor 24 Based on the translation of the Civil Code by the FRC. Business Council of Mongolia (2012). 25 15 may invest in any industry or sector without any on Land defines three different forms of land limitation or government approval (exception: tenure:27 requirement of approval by the newly • Land ownership: The right to exercise established Invest Mongolia Agency in the case legitimate control over and to dispose of of foreign state-owned enterprises investing in land. more than 33% of stake in an entity in mining, communication or financial sectors). The law • Land possession: The right to use the land also stipulates that both foreign and domestic him/herself or sub-lease to others. Pursuant investors can take advantage of certain tax and to the Land Law, Mongolian citizens and non-tax benefits. Mongolia’s opening up to entities can have the right to possess land foreign investment and entry of international for up to 60 years, to sub-lease, to transfer companies would make competition stronger with the approval of the land authority, or and might have an adverse effect on SMEs in to pledge it as collateral. The state, as the the short run. However, in the long run, this is owner of the land, may grant possession expected to push inefficient/unproductive local rights over plots of lands only to Mongolian firms to improve their methods of production citizens and domestic companies. Foreign and management, increase their productivity, citizens and entities cannot obtain possession and adopt innovative technologies. rights over land in Mongolia. Law on Credit Guarantee Fund: A law on • Land use: The right to utilize the land in establishing a Credit Guarantee Fund (CGF), accordance with the contract made with a non-profit legal entity, was adopted by the the land owner (Mongolian state, citizens Mongolian parliament in March 2012. CGF’s or entities) or the holder of land possession mission is to support the development of rights. SMEs and start-ups, especially those facing problems in meeting collateral requirements In most countries, real estate usually includes imposed by commercial banks. Although official both the land and the building built on this establishment of CGF took place in 2012, real land. Nevertheless, real estate ownership is activities were started in 2013 with the issuance considerably different in Mongolia and the of first guarantees on 1 June 2013. Operating term “immovable property” essentially refers not longer than a year, CGF still enjoys a 0% to buildings and houses. Land is owned by NPL rate. the government, whereas the title to the land belongs to an individual holding possession Therefore, there are concerns in the financial rights. The building on top of the land may sector that the CGF may soon turn into a be owned by the land possessor but can also “bad debt center”, unless revisions explicitly be owned by a third person. Further, the stipulating the case of non-repayment are individual with the rights to use the land may introduced. be different than the land possessor. Because of this peculiarity of Mongolia, the precise legal Law on Land: The Law on Land should be definition for the ownership of immovable interpreted within the constitutional rule, which property is termed as “floating freehold.”28 stipulates that all land in Mongolia is owned by It signifies that the property owners hold a the state. The only exception to this rule is that freehold over the property, but not over the land the state may allocate certain types of private on which it is built. ownership to Mongolians only.26 It came into force in 1994 and was revised in 2002. The Law 26 With the revision of the Law on Land in 2002, Mongolian citizens have for the first time endorsed private land ownership. Oxford Business Group (2012). 27 28 Jones Lang Lasalle (2013). 16 Therefore, land ownership is not subject to suggested amendments to the Law on Income pledging. Although it is legally possible to Tax are:32 pledge the land use (building on top) and land • 90% of the amount of tax paid shall be paid possession (land title) separately, commercial back to those legal entities whose annual banks usually require the immovable property income does not exceed MNT 1.5 billion on a land to be pledged together with the land (USD 830,000). title, mostly due to deficiencies in the cadastral survey system and practical and legal problems • The new amendment does not apply associated with the seizure of it in cases of loan to the legal entities operating in the default. following sectors: mining, minerals, petroleum products import, oil export, Law of Mongolia on Registration of Immovable communications, alcoholic beverages and Property:29 This law states that ownership cigarettes production or distribution. of immovable property and the rights and responsibilities associated with ownership, Draft Bill on Pledge of Movable Properties arise only on registration of the property at (under discussion): To address the issue of banks Immovable Property Registration Offices (which not accepting movable property as collateral, the are located in aimag centers and in the capital, Mongolian Bankers Association (MBA), the IFC Ulaanbaatar). All transfers and collateralization and the European Bank for Reconstruction and of immovable property must be registered at an Development (EBRD) initiated the much needed Immovable Property Registration Office. Secured Transactions Reform in Mongolia to create a legal framework that will ensure secure Draft Bill on Tax Exemptions for SMEs (under lending backed by movable collateral. discussion):30 In February 2014, the government initiated amendments to the Law on Value Secured Transactions Reform involves the Added Tax (VAT), which was adopted in 1998 creation of a nationwide registry for equipment, and has not been amended since. The aims of accounts receivable, inventory and other types the amendments are to support SMEs in line of movable collateral. The registry will provide with government’s strategic action plan for real-time information on priority interests 2012-2016. The suggested amendments to the against competing claims on the same collateral. Law on VAT are the following:31 As SMEs will be able to use more of their assets as collateral, the reform can contribute • Increase of the VAT payer threshold to MNT to increased access to finance. The initiative is 50 million (USD 28,000) from its current funded and implemented by the European Union level of MNT 10 million (USD 5,500). (EU), the Swiss State Secretariat for Economic • For private individuals or small-scale legal Affairs, the EBRD and IFC. entities willing to be registered as VAT The EBRD’s Legal Transition Team contributed payers, the threshold will remain MNT 10 to the reform through a technical assistance million (USD 5,500). program by advising the Ministry of Justice on The Ministry of Finance estimates that by the draft secured transactions law and other increasing the threshold amount of the VAT, important legal changes required. With respect around 50% of tax payers and SMEs will be to implementation, IFC is contributing to the exempted from providing VAT tax returns. The initiative through technical assistance regarding draft bill also proposes an amendment to the setting up the registry and training lenders on Law on Income Tax for economic entities. The best practices for movable collateral lending.33 29 MAD Research (2013). 30 Information obtained through www.mongolia-briefing.com. Unlike many other countries applying a varying VAT rates for different type of products and services, Mongolia has a fixed VAT rate of 10%. 31 32 Fehrbach (2014). 33 EBRD (2012). 17 In March 2014, IFC signed a cooperation a score of 0.72 (0 represents inequality and 1 agreement with Mongolia’s Ministry of Justice represents equality). Mongolia ranked 1st and to establish a proper legal framework for 2nd on “Health and Survival” and “Economic secured transactions through a new pledge law, Participation” sub-indexes, whereas it to develop an online registry, and to work with underperformed in the “Political Empowerment” the MBA to raise awareness and train industry component of the overall score. To address the professionals.34 latter issue, the Mongolian parliament adopted the Law on Promotion of Gender Equality in A draft Bill on Pledge of Movable Properties February 2011. The aim of the law is to ensure was already on the agenda of the cabinet of the equal participation of women and men ministers. As a result of these consultations in all political, legal, economic, cultural, and and technical assistance efforts provided by social spheres. The law prohibits any form of international institutions, the bill has been discrimination in these spheres and in family developed further by the Ministry of Justice relations. The law also states that gender-based to cover non-material properties. On June violence and sexual harassment are forms of 2014, the Ministry of Justice stated that the gender-based discrimination. cabinet decided to submit the Bill on Pledge of Movable and Non-Material Properties to The National Committee on Gender Equality the parliament. All kinds of stocks, shares, (NCGE) was subsequently established to designs of products, trademark, creative works be in charge of the daily activities of the of sciences and arts, in addition to movable implementation of the law. The NCGE is chaired properties, can be subject to pledge. As to when by the prime minister and works through sub- the movable property pledge will take effect in councils in 16 ministries in Mongolia. It has Mongolia, this is subject to the introduction of a sub-committees in Ulaanbaatar’s nine districts registration procedure that sets out the process and 21 aimag centers. The mid-term strategy for such registration. This would be a significant and action plan on implementation of the law milestone in Mongolia’s legal framework for was launched in 2013 for a period covering lending to SMEs. 2013-2016. The NCGE also initiated the submission of a Draft Bill on Labor Relations Legal and Regulatory Environment Related to to align women’s employment conditions with Gender Equality benchmarks set by the Promotion of Gender Gender equality in legal framework matters Equality Law. for women’s economic opportunities, including Various other laws, such as the Mongolian access to finance and entrepreneurial activities. constitution, labor law, criminal code, civil code, The Women, Business and the Law (2014)35, and family law, contain provisions to promote prepared by the World Bank, points out that gender equality. Despite these provisions, the those countries that were formerly under lack of enforcement mechanisms prevents full communist influence resulted in fewer gender implementation in some problem areas like differences in their legal systems. This is also the domestic violence. According to the 2010 U.S. case for Mongolia, where national laws do not State Department Report on Human Rights differentiate between men and women. Practices, there are 40 women’s rights service According to the Global Gender Gap Report and advocacy groups in Mongolia dealing with of the World Economic Forum,36 in 2013 issues of maternal and child health, domestic Mongolia ranked 33 out of 136 countries with violence, and equal opportunity. In practice, 34 IFC (2014). 35 Women, Business and the Law 2014 measures restrictions on women’s employment and entrepreneurship as well as incentives for women’s employ ment in 143 economies. 36 The global gender gap index benchmarks national gender gaps on economic, political, education and health-based criteria and provides country rank ings that allow for effective comparison across regions and income groups and over time. 18 however, domestic violence is still reported to Status of Industries, Law on Science and be a serious problem for women in Mongolia. Technology and the Law on Credit Guarantee The parliament adopted a Domestic Violence Fund enacted in this period. Other programs Law in May 2004. Nevertheless, the law on launched by MOL were the SME support domestic violence is deemed insufficient because program and SME support fund, providing of lack of deterrent measures, inadequate victim training through public bodies and loans at protection, and the lack of legislation that would below-market rates through commercial banks. specifically prohibit spousal rape.37 Furthermore, international agencies and NGOs Right to property ownership is a crucial factor provide various kinds of support to Mongolian in accessing to finance and SME development. SMEs and initiated a series of programs Under constitutional law, the civil code and the combining capacity building activities and Law on Land, women and men in Mongolia financial support. Some of the support programs have equal rights to access to land and they are are listed below (see also Annex B): treated equally as far as inheritance of movable SME Development Center of Capital City and immovable property is concerned. The operates as a government body for the provision family code also stipulates that all property of financial and non-financial services to the and savings, acquired by the spouses during the SMEs located in Ulaanbaatar. The center’s marriage shall be deemed the common joint activities fall under the mayor’s office, which ownership of spouses. However, the common can run programs independently of the central public practice is to have the immovable government, but has to comply with general property title issued under the household head’s regulations. The center has nine branches in name, which is traditionally a man. each of the sub-districts in Ulaanbaatar and 2.6 Support Institutions for SMEs and organizes trainings and mobilizes concessional Women Entrepreneurs funding for SMEs. Mongolia has recognized the potential of The Mongolian National Chamber of SMEs and has established several programs Commerce and Industry (MNCCI) is one of to support SMEs in the terms of funding and Mongolia’s leading NGOs.38 Currently, MNCCI capacity building. The Ministry of Labor (MOL) has expanded to include 3000 members (1000 assumes the overall regulatory role. The SME in Ulaanbaatar) and be represented by 20 Development Department unit at the MOL subsidiary branches in the countryside, hence is the only department authorized by law to reaching out across the country. MNCCI’s undertake the regulatory changes relevant for foremost support to SMEs is in the field of SMEs. information dissemination, preparation of business plans, organization of trainings and On behalf of the government, the MOL so far networking events as well as facilitation of has initiated two large-scale national programs business advisory services through experts. for the development of SMEs. While the first program implemented between 1999-2004 Business Professionals Network (BPN) prioritized issues related to infrastructure, was established by the Swiss Agency for the second program, launched in 2006 Development and Cooperation to support and accomplished in 2012, focused upon Mongolian craftsmen (most of whom own enhancement of the legal and policy framework, start-ups) on their way to become businesses in particular the law on SMEs, Law on Legal through trainings, seminars and coaching. BPN 37 The National Center Against Violence (NCAV) estimated that in 2010 one in three women was a victim of domestic violence. Rural populations face the worst domestic violence rates due to a lack of shelters and funding for services and public belief that domestic violence is a private family matter. http://www.stopvaw.org/ 38 The Mongolian National Chamber of Commerce and Industry was founded on July 1, 1960 as the “Chamber of Commerce”. Since 1990, MNCCI estab- lished itself as a Mongolia’s leading NGO devoted to the development of trade and investment in Mongolia’s business community. 19 has recently been registered as an NBFI and also through a number of NGOs that exclusively provides funding, but the size and scope of its address problems faced by women. One of these funding is very limited. institutions is the Mongolian Women’s Fund. SME support institutions in Mongolia usually Mongolian Women’s Fund (MONES) is do not differentiate between male and female engaged in raising funds to be disbursed as entrepreneurs at the program level and women grants to women involved in small-handicrafts are eligible to apply for capacity-building manufacturing. Given the scope of its activities measures implemented by those institutions. and target group, MONES can be categorized as Women-only support programs are provided an NGO supporting micro, women-entrepreneur start-ups.39 39 Detailed information on activities performed by different NGOs and SME support institutions (only the ones who could have been interviewed) can be found in Annex B. 20 3. Supply of SME Finance 3.1 Overview of the Financial Sector 3.1.1 Commercial Banks The financial sector of Mongolia is a two- There are currently 13 commercial banks in tier system, comprising the Bank of Mongolia Mongolia (one public and twelve privately (BOM) acting as the central bank on the first owned). The largest five banks (Khan Bank, tier and commercial banks, NBFIs, and SCCs on Trade and Development Bank, Golomt Bank, the second tier. XacBank, State Bank) make up around 90% of the total deposits and 85% of the total loans Mongolia’s financial sector is dominated in the system. The 14th bank in Mongolia is by banks; NBFIs and credit and savings the Development Bank of Mongolia (DBM) cooperatives only hold a fraction of sector’s established by the government. The DBM, assets. The BOM and Financial Regulatory officially opened in May 2011, has a broad Commission (FRC) are responsible for financial development mandate and is expected to focus stability and supervision of the financial on infrastructure and social housing projects. It sector in Mongolia. The BOM is responsible is independent of the BOM and supervised by for supervision of banks, while the FRC is the Ministry of Finance. responsible for supervision of other financial institutions including NBFIs, SCCs, insurance companies, and securities firms. Table 5: Selected indicators of the Mongolian Banking Sector % in % in % in Total Total Total Indicator 2012 Assets 2013 Assets 2014/Q1 Assets Asset Size 11,992 100% 20,884 100% 20,708 100% Loans Outstanding 6,941 57.9% 10,716 51.3% 11,332 54.7% SME Loans N.A. 1,805 8.6% 1,853 8.9% Loans for Individuals (Mortgages included) N.A. 3,804 18.2% 4,166 20.1% Total Deposits 4,886 40.7% 6,355 30.4% 7,150 34.5% Government Deposits 933 7.8% 1,186 5.7% 1,535 7.4% Equity 986 8.2% 1,381 6.6% 1,537 7.4% NPL 293 4.2% 564 5.3% 593 5.2% Loan to Deposit Ratio 99% 169% 158% Note: All figures in billion MNT. Source: Bank of Mongolia, authors’ calculations 21 The banking sector was highly affected by the and was more visible at the household and financial crisis during 2008 and 2009, leading corporation level. Household lending especially to problems in recoverability of loans and a picked up in 2013 with the introduction of significant increase in impairment provision the housing development program by the rates. The high level of inflation resulted in government comprising a MNT 1,200 billion negative real interest rates on local currency subsidized mortgage lending (with 8% p.a.) deposits. The fourth largest bank at that via commercial banks. About 45% of total time, Anod Bank, was taken under BOM individual loans are mortgage loans, most conservatorship and public confidence in the of which disbursed within the government’s banking sector has bottomed. housing development program. To stop withdrawal of deposits from banks and As a result, while corporate and individual loans to restore public trust, the government issued reached 47% and 37% of the total loan book a blanket deposit guarantee on all commercial respectively, SME loans remained at 16% (about bank deposits in November 2008, which has 1800 billion MNT) revealing a low level of phased into a limited deposit insurance scheme commercial-bank penetration (Figure 3). in January 2013. With the enactment of the Law As of the first quarter 2014, there are 1,455 on Insurance for Bank Deposits, only a portion commercial bank branches across Mongolia, of up to MNT 20 million of all deposits (around 29% of which are located in Ulaanbaatar. USD 11,000) is currently covered. According to Khan Bank and Savings Bank have 73% of the EBRD country assessment report in 2013, all branches countrywide and also have a this provision implies full coverage for over significant presence in rural areas. Most of their 99% of individual depositors, and coverage of branches are located outside Ulaanbaatar (Table 6). 20% to 30% of total bank deposits.40 Access to financial services in Mongolia Since 2009, the banking sector has consolidated appears to be relatively high when measured and stabilized, and bank lending has grown by the demographic penetration of branches. rapidly in the last few years. However, the According to the IMF,41 Mongolia has one of growth in lending has not been broad based Figure 3: SME loan portfolios of commercial banks Note: Percentages on right figure as of 2012. Source: Left: Bank of Mongolia, data as of 2014 Q1. Right: IMF Financial Access Survey (2009-2012) 40 EBRD (2013a). 41 IMF Financial Access Survey 2012. 22 Table 6: Commercial banks’ branches in and outside Ulaanbaatar Bank Number of branches in UB Number of branches in aimags Khan Bank 98 432 Golomt Bank 63 41 Trade and Development Bank 35 13 State Bank 93 438 XacBank 51 53 Chinggis Khan Bank 1 1 Ulaanbaatar City Bank 25 0 Capitron Bank 13 16 Transport and Development Bank 1 0 Credit Bank 1 0 Capital Bank 33 32 Erel Bank 7 2 National Investment Bank 4 2 Total 425 1,030 Source: Bank of Mongolia, data as of 2014 Q1 the highest bank-branch penetration rates in to financial market development and economic the world, with 69 branches per 100,000 adults growth during the past years, the importance of compared to 38 in Russia, seven in China, 1.6 borrowing has also increased. in the Kyrgyz Republic, and ten in Azerbaijan. Mongolian banks predominantly offer loans, However, due to its large territory, Mongolia’s deposit and savings products, and some trade geographical branch penetration is one of the financing (for instance foreign trade collection lowest in the world. It has only 0.9 branches per services, letter of credit, and export and import thousand km2, compared to three in Russia, nine support loans jointly offered by Export/Import in China, eight in the Kyrgyz Republic, and ten Banks of other countries) to SMEs. in Azerbaijan. There is no factoring, and leasing is usually The low population density makes the provision offered via commercial banks’ subsidiaries. of traditional banking services outside of the But leasing industry can still be considered large cities costly. Loan and deposit penetration underdeveloped given its size and the scope of is high as well. There are 302 bank loan the financing provided. Insurance services are accounts per 1,000 adults, compared to 489 in delivered at bank branches in collaboration Georgia and 34 in Cambodia. There are also with a range of insurance companies. Overdraft more than 3,829 deposit accounts per 1,000 facilities, which can be initiated for clients with adults, compared to 1,074 in Georgia and 145 an existing credit line, are not available. Start- in Cambodia.42 While some of the high number up finance is very rare and banks refrain from of deposit accounts can be explained by people extending finance to enterprises lacking credit using multiple accounts with different banks (see histories and business experience. The table below), a high and increasing deposit to GDP below summarizes the loan products offered to ratio (67% in 2012, 60% in 2011)43 indicate a SMEs.44 strong saving culture in Mongolia. However, due 42 Ibid, figures as of 2012. 43 In Georgia this indicator reached 26% in 2012, in Cambodia 36%. 44 The table was compiled by the authors by combining the data from the questionnaires filled out by several banks. 23 Table 7: Banking loan products offered to SMEs Average interest Average Maximum Collateral requirement rate per month maturity maturity Micro and small business 1.5 - 2.5% 12 months 48 months loans Immovable property and, Working capital loans 1.5 - 2.5% 24 months 24 months to a lesser extent, movable Investment loans 1.5 - 2.5% 36 months 60 months property Credit line 1.5% - 2.5% 24 months 24 months Savings, salary, and immov- Business credit cards 2.0 - 3.0% 24 months 24 months able property Leased equipment and Leasing 1.5 – 2.0% 24 months 60 months additional collateral Source: based on the questionnaires filled out by some interviewed banks The infrastructure for electronic payments Commercial banks do not currently collect is growing fast, but remains underdeveloped gender-disaggregated data at the institution outside Ulaanbaatar. About 70% of the level. However, there are some banks that have population in urban areas uses ATMs as the collected such data on specific programs. For main channel for withdrawals, compared to only instance, the data collected by one of the large 30% in rural areas. New technologies, such as commercial banks in the Wool, Cashmere, internet banking but especially mobile banking, Sewing lines, Green House and Intensive are growing fast, given the rapid increase in Farming Projects, implemented jointly with the mobile phone users.45 Smart banking services, Development Bank of Mongolia, the Ministry such as accessing bank services via iPhone, of Economic Development and the Ministry of Android or Blackberry, have also grown rapidly Food and Agriculture, shows that about 60% as smart phones are increasingly replacing of all loan beneficiaries have been women. ordinary mobile phones. Smart phone users Nevertheless, it is still difficult to estimate the can easily access their accounts, check their overall share of women-owned SMEs given balance, conduct interbank and inter-account the lack of gender-disaggregated data at the transactions, and realize foreign currency industry/institution level. transactions and bill payments. Interviews at commercial banks revealed that Some banks, especially the ones with a larger women are not perceived by the banks as a market share, have also initiated a number of distinct segment with specific needs. The banks non-financial services to SMEs46. The most do not disaggregate their SME client data widely known of these services are: based on gender. The Management Information Systems (MIS) in banks are also not suitable • Sponsorships to annual gatherings, for gender-disaggregated data and need to be conferences, and trade fairs organized upgraded through further investments. by various sectors that help industry representatives in networking. Some banks interviewed stated that they are currently negotiating internally about • Initiating training, information sharing the development of their own definition for and networking events for some selected women-owned SME. For instance, one bank industries. mentioned that it has recently prioritized women • Providing business advisory services. entrepreneurs as a distinct segment. A women- owned company is defined as a company with • Organizing financial literacy trainings, also the women holding at least 25% of the company in rural areas. 45 World Bank (2012). 46 More information on non-financial services offered by the banks can be found in Annex B. 24 shares, or having women at the CEO position. industry players. Interviews conducted during In general, commercial banks do not have this research revealed that larger NBFIs are specific products/services exclusively offered concerned that establishment of many small to women-owned SMEs. However, women- NBFIs with limited resources and no tangible owned businesses are offered the same range activities might have a negative impact on the of products and services, including trainings, whole industry. It is important to note that provided to all SME clients. despite the rapid increase in number of NBFIs, their share in financial system in Mongolia 3.1.2 Non-Bank Financial Institutions remains marginal (2% of total assets, Figure 4). The NBFIs provide a variety of financial services To address that potential threat, important such as loans, payment guarantee, currency market players are pushing the FRC to increase exchange, money transfer, remittances, factoring, the minimum required capital of an NBFI leasing, short-term investment, trust funds, from MNT 400 million to MNT one billion. and electronic payments. However, all NBFIs The minimum capital requirement of MNT do not necessarily provide the full range of 400 million was agreed five years ago and is services. Services to be delivered by each NBFI now outdated due to depreciation of the local are determined according to the type of license currency in the last two years. However, FRC granted by the FRC. has so far not given any signal that it might act The number of NBFIs in Mongolia is increasing accordingly. rapidly. According to the figures provided by According to FRC statistics, most NBFIs are Mongolian Non-Banking Financial Institutions located in the vicinity of Ulaanbaatar and Association, there are 303 NBFIs as of May only 35 of them are in rural areas. The sector’s 2014, of which 40 were established after aggregate loan portfolio as of 2014 Q1 is MNT December 2013. The number of companies 245 billion (~USD 136 million) extended to a granted an NBFI license is expected to increase total of 288,000 clients; the average loan per further as it is very easy in Mongolia to become client is MNT 850,000 (less than USD 500).47 accredited as an NBFI. This surprising rate of Interviews with two of the ten largest NBFIs, expansion in the number of market players however, revealed that the average loan size for creates some concerns, especially for prominent Figure 4: Development of the NBFI sector Source: Mongolian NBFI Association, Bank of Mongolia, researchers’ calculations 47 Information received during the interview with FRC. 25 the industry leaders is approximately MNT 20 with the exception of vehicle loans. Although million (~ USD 11,000). While FRC statistics there is no supporting statistics because of the points to 4.5% (as of 2014 Q1) aggregate NPL unavailability of a central register for movable for the NBFI sector, some prominent NBFIs with assets, stakeholders stated that nearly 70% of a larger average loan amount per client state vehicles in Mongolia belonged to men and that that bad loans take up around 7% to 8% in men usually pledge their car as collateral. their portfolios. 3.1.3 Savings and Credit Cooperatives NBFI loans have a maturity of up to two years According to FRC, there are close to 200 SCCs with average interest rates ranging from 3.5% to in Mongolia having an asset size of about USD 4% per month, almost the double of the interest 40 million in total. Regarding their asset size, rates charged by banks. Industry observers SCCs have less than 0.5% share in Mongolia’s indicate that despite the much higher interest financial sector. There are 58 cooperatives in rates charged by NBFIs, they are sometimes Ulaanbaatar, constituting 75% of total assets at preferred by borrowers over banks because SCCs. In other words, the majority of SCCs are of quicker and more efficient loan decision in rural areas, but their scale is almost negligible processes and looser collateral requirements. in the Mongolian financial system. Whereas banks very seldom accept movable property as collateral and mostly in combination SCCs serve about 27,000 customers, most of with immovable property, NBFIs offer loans which are low-income rural households. Similar backed by movable property. to NBFIs, SCCs are licensed, regulated, and supervised by the FRC. The services provided Funding is a big challenge for NBFIs as their by SCCs are: loans (only to members), payment access to special funds provided by international guarantee, currency exchange, remittances, or governmental organizations is limited. factoring, leasing, short-term investment, trust Borrowing from commercial banks comes at funds, and electronic payments. According to a cost and it is not always guaranteed because the Mongolian Confederation of Credit Unions, of banks’ reluctance to lend to NBFIs. By law, most members of SCCs are women. SCCs clients NBFIs are not authorized to collect deposits, mostly work in the informal sector and have no but their “trust services” can be considered as a capacity to borrow at banks or NBFIs. by-product for customer deposits, and abides by law. A “trust contract” is an agreement between 3.2 Programs of International Institutions an NBFI and an investor about a fixed amount Targeting SMEs investment into the NBFI for at least one year. The NBFI usually pays the investor a set amount International Finance Corporation (IFC): IFC of interest, typically monthly, with a return of provides equity, loans, and trade financing capital at the end of the investment term. These to Mongolian banks to help them increase trust agreements carry a higher return than bank capital and boost lending to SMEs. It supports deposits, but are beyond the scope of the deposit the development of Mongolian industries by insurance scheme adopted for bank deposits. directly investing in companies with high growth potential, or reaching out to SMEs through Similar to the banking sector, with only a loans made available to commercial banks. IFC few exceptions (Net Capital, VisionFund further provides advisory services to companies, Mongolia), NBFIs in general also do not collect banks and governmental institutions. Advice gender-disaggregated data on SME borrowers. provided by IFC ranges from best governance Interviews with some selected NBFIs revealed practices, international social and environmental that close to 60% of their clients are women, standards, regulatory environment and legal 26 reforms to banking services, such as trade, SME owned manufacturing and service companies and housing finance, mobile banking, etc. in the following sectors: cashmere and wool production, construction materials and IFC continues to pursue new investment pharmaceuticals, agribusinesses, property opportunities, mostly for SMEs involved in development and tourism.50 agribusiness, logistics, retail, building materials, and manufacturing. Together with the EBRD, Japan International Cooperation Agency IFC invested USD 7.5 million in the first (JICA): The JICA, financed by the Japanese Mongolian private equity fund for small and state, expanded to Mongolia in 1990. Since medium businesses.48 Going forward, IFC seeks then, Japan has been one of the most important to make strategic investments in insurance, donors to Mongolia. In April 2012, a new investment banking, and leasing. program was approved by the government of Japan. JICA’s activities in Mongolia can be Asian Development Bank (ADB): Since grouped in three categories: Mongolia joined the ADB in 1991, ADB has been Mongolia’s largest source of multilateral • Sustainable Development of the Mining official development assistance. From 1991 Sector: works on the master planning level to 2013, Mongolia received 56 loans totaling and aims at improving productivity and USD 1,084.6 million, 171 technical assistance efficiency in the Mongolian mining sector. projects amounting to USD 100.6 million, 12 • Enhancement of Ulaanbaatar as an urban concessional Asian Development Fund grants center: aims at improving the infrastructure for USD 172.2 million, and 17 Japan Fund for and focuses on urban planning as well as Poverty Reduction grants (USD 33.9 million). management. The ongoing portfolio, as of 2014, consists of 14 loans (USD 393.9 million), ten grants (USD • Assisting Inclusive Growth (within which 146.3 million), and technical assistance in 22 the SME activities fall): with the aim of projects (USD 23.6 million)49. increasing employment opportunities and meeting basic human needs. European Bank for Reconstruction and Development (EBRD): Mongolia became an Activities in the third category of operation EBRD country of operation in October 2006. comprise training and capacity building Prior to 2006, the bank’s activities in Mongolia activities to SMEs as well as funding. An were limited to technical assistance programs important program introduced by JICA in funded by donors. From 2006 to 2012, the 2006 is the Two-Step Loan Project for SMEs bank signed 52 projects in Mongolia including Development and Environmental Protection. debt, mezzanine, equity finance and trade The aim of the program is to provide long-term finance guarantee facilities for an aggregate funding through Mongolian commercial banks amount of EUR 690 million. During the same to SMEs. In the Two-Step Loan Program, the period, the bank committed EUR 14.6 million Japanese government provides a concessional in technical cooperation programs through its loan to the Central Bank of Mongolia, which Legal Transition Program, Enterprise Growth extends it to commercial banks to be on-lent to Program, Business Advisory Services and other SMEs. In the two phases of the program, USD programs. 13 million and USD 50 million respectively have so far been disbursed to final beneficiaries.51 According to EBRD’s strategy, the bank will continue to provide support to privately 48 Information gathered from IFC’s website, Mongolia country page; http://www.ifc.org/wps/wcm/connect/region__ext_content/regions/east+a- sia+and+the+pacific/countries/ifc+in+mongolia 49 ADB (2014). 50 EBRD (2013b). 51 Detailed information about JICA’s and USAID’s activities in Mongolia can be found in Annex B. 27 United States Agency for International • Quality Supplier Development Center Development (USAID): USAID initiated the providing support to SMEs by linking Business Plus Initiative (BPI) in Mongolia, which them with buyers through a contract-based is a finance and capacity-building program relation. composed of two sub-initiatives both aiming • Quality Management Program providing at improving quality standards at SMEs and in high-level professional trainings to SMEs the general business environment in Mongolia. delivered by international trainers. These two sub-initiatives are: 28 4. Demand Study 4.1 Objectives and Methodology of the allocation. Then the random sampling from Demand Study database based on excel-based software was applied to each stratum. The face-to- A demand survey to analyze the profile of face interviews were with randomly chosen entrepreneurs and their businesses as well as entrepreneurs, who were contacted by phone the demand for financial and non-financial to arrange the interview or visited on-site. In services was carried out in June-July 2014. In cases where the selected companies were not total 240 interviews were conducted with 121 reachable, refused to participate, or were out of female entrepreneurs (target group) and 119 operation, the nearest company within a radius male entrepreneurs (control group) in three of 50 m was contacted. All interviews were cities of Mongolia (Table 8). The key criteria for conducted by professional researchers and in the target/control group for the interviews were Mongolian. The questionnaire consisted of 68 the share of the ownership and distribution of questions. management responsibilities in the business. The respondents had to be either majority owner The following analysis of the dataset starts of an SME (more than 50% share) or had to with profiling the entrepreneurs and the own a share of 20-50% and have management businesses. Afterwards, the start-up phase and responsibilities at the same time. The definition current challenges are analyzed before access of SMEs assumed for this study is based on the to finance and the relationships to banks are World Bank SME definition.52 further examined. In particular the current use of financial services and the demand for loans A sampling approach was used in order to and expectations and caveats of banks are identify survey respondents using a stratified of interest. Of special interest are differences method of sampling.53 The sample population between men and women-owned SMEs as (database of 45,000 registered SMEs) was well as between SMEs in Ulaanbaatar and in stratified by gender and city of business Darkhan and Erdenet. Table 8: Sample distribution per gender and city and respondent rate Ulaanbaatar Darkhan Erdenet Total Male 62 30 29 121 Female 58 30 31 119 Respondent Rate 53% 24% 45% 44% Note: The respondent rate is weighed by type of respondent selection and conducted interviews. 52 The World Bank SME definition includes the following criteria: number of employees, total assets and total annual sales. For the purposes of this study we used the criterion “number of employees”: (i) microenterprises < 10 employees, (ii) small enterprises 10 < 50 employees, and (ii) medium enterprise 50 < 300 employees. 53 Stratification is the process of grouping members of the population into relatively homogeneous subgroups before sampling. 29 4.2 The Entrepreneur The typical entrepreneur in Mongolia is work, most likely as an employee in another 43-years-old, has a university degree, is married, company; but in 36% of the cases he or she and lives together with his/her spouse, one works in the same company. In most of these young child and one other person, usually cases (78%), the company is managed by both an older child. Female entrepreneurs are on partners and critical business decisions are average 46-years-old (Figure 5), older than made together, regardless of formal ownership.55 male entrepreneurs (41-years-old). There is no Hence 23% of the companies of this sample can difference in educational status. In total, 76% be classified as family businesses. 56 of Mongolian entrepreneurs have a university degree and 10% have technical or vocational Family businesses have, with 4.4 members, the education (Figure 6). largest household and, with 1.2, also the most (young) children (Figure 7). Enterprises that are Most entrepreneurs are married or in a owned and managed solely by women have the partnership: 83% of women, 80% of men.54 smallest household size, with 3.6 members. One The spouse of the entrepreneur will usually also reason for the smaller household size might be Figure 5: Average age of entrepreneurs Figure 6: Education of entrepreneurs Figure 7: Average household size per business type Figure 8: Education of entrepreneurs 54 In Mongolia a registered partnership is a legal civil status with rights and duties similar to a marriage. 55 Of the remaining 15 companies, 14 are classified as man-owned and operated, and one as woman-owned and operated. 56 In the following analysis, the companies are classified as man-owned (41% of the sample), woman-owned (36%) and family business (23%). 30 that 25% of women entrepreneurs in the sample correlates with the evidence from different are divorced/separated or widowed (Figure 8). countries that indicate that women prefer to While these women will naturally manage their start their business in sectors where women businesses by themselves, there are also married employment is concentrated. The majority of women entrepreneurs who make their own businesses (77%) sell their products or services decisions and run their business without their directly to end-customers; only 11% sell their spouse’s involvement. This suggests that women products or services to retailers or wholesalers. entrepreneurs are to a high degree independent The remaining businesses supply industry (6%) in managing their businesses. or the public sector (5%). 4.3 The Business A high share of businesses is engaged in seasonal activities.58 In agriculture and mining, the share 4.3.1 Business Activities is above 50%; in production and construction Mongolian SMEs are typically engaged in a it is more than 40% (Figure 11). Retail trade variety of business activities. Of the sample and services are less often seasonal: this applies enterprises, 25% are engaged in two or more to 22% and 31% of the businesses, respectively. sectors. This is the case for 40% of family- In accordance with business activities, women- owned and 17% of women-owned businesses.57 owned enterprises are the least often engaged in Of total business activities, the services sector seasonal business activities (26%) compared to dominates with a share of 47% (Figure 9), men-owned (34%) and family businesses (43%) followed by trade (wholesale and retail: (Figure 11). Following the assumption that non- 22%) and production (16%). Women-owned seasonal businesses are associated with less risk businesses are more often engaged in services for the creditor, it can be concluded that women- and trade and less often in production and owned businesses seem to be more risk-averse other sectors (in particular construction) than compared to other types of businesses. men-owned businesses (Figure 10). This finding Figure 9: Business activities Figure 10: Business activities per business type 57 On average, an enterprise is engaged in 1.3 different sectors, with family businesses being engaged in 1.4 sectors and woman-owned SMEs in 1.2 sectors. 58 An enterprise is classified as active in a seasonal business if it has more than double as many employees during the season than during non-season. 31 Figure 11: Share of seasonal businesses per business activities and business type Note: Multiple answers allowed: 240 respondents named 309 business activities. Figures are shares of all business activities. A business was classified as seasonal if it has twice as many employees in season as non-season. 4.3.2 Characteristics of the Business category of SMEs61 according to the definition assumed for this study based on the World Bank In accordance with the sampling methodology SME definition. Women-owned businesses are and the law,59 87% of the businesses are on average smaller than men-owned businesses registered as a limited liability company (LLC). with family businesses being in the middle For 10% of the companies, the owner is fully (Figure 12). However, women-owned businesses liable, whereas only five companies in the employ more women (other than themselves): sample are registered as an association and one 52% of their employees are women, compared as a cooperative.60 No company was registered to 32% of men-owned enterprises. Also family as a joint stock company as this legal form is businesses employ more women other than more common for corporations. the owner or spouse, but tend to release them The average number of employees of SMEs in during non-season. The average woman-owned the sample is 7.5 employees in season and 4.5 in business employed 13% more employees during non-season. Thus, 76% of the enterprises in the last year (man-owned: 20%, family business: sample fall in the category of micro enterprises 15% in 2013). (one to nine employees) and 24% in the Figure 12: Number of employees per business type 59 To be eligible for this survey, businesses had to be registered. Businesses can either register as Limited Liability Company (LLC), association, cooperation, sole entrepreneur with liability, or Joint Stock Company. 60 By law a company can be registered as an association if it has at least five persons as owners and as a cooperative if at least nine persons are owners. 61 These figures differ from the official numbers from Table 3. The reason is that numbers of employees fluctuate during the year. For this sample, number of employees during the season has been used. 32 Figure 13: Number of employees per business activities Note: Multiple answers allowed: 240 respondents named 309 business activities. Figures are shares of all business activities. The sector with the most employees on average been on average no new employees engaged is construction, followed by production and during the period of last year. agriculture (Figure 13). Retail trade has the Most companies were established before the lowest number of employees. However, every financial and economic crisis in 2009. Of second employee is a woman. The service sector men-owned companies, 57% are older than also employs a high share of women (52%), five years, whereas 60% of women-owned whereas in wholesale trade (35%) and mining companies are of the same age (Figure 14). (17%) the figures are lowest. Family businesses tend to be even older with a Growing sectors in number of new employees share of 73% being established before 2009. The are in particular construction (+23%) and number of enterprises that have been founded in production (+18%), followed by retail trade the last two years (start-ups) is considered low (+16%) and services (+17%). Due to the high (12.5%, taking into account that the economy number of businesses engaged in the services has experienced growth rates of above 10% p.a. sector, services generate in absolute number the during the same period. most new employment. In mining there have Figure 14: Age of businesses per business type 33 Engaging a lower number in employees, women- Figure 15: Yearly turnover per business type owned businesses are also smaller in terms of turnover: 63% of these had a turnover of less than MNT 50 million in 2013, while the same figure was reported by 45% of men-owned and 42% of family businesses (Figure 15). Further, women-owned businesses are also less present in the middle segment and with companies with more than MNT 500 million in turnover. Family businesses are more often represented by companies with a turnover of MNT 50 to 250 million. Similarly, companies active in construction have the overall highest turnover (Figure 16), followed by production – in both sectors men-owned businesses and family businesses are more represented. Businesses active in the trade and services sectors, where Figure 16: Yearly turnover per business women are more often active, typically have a activities smaller turnover. In the sample 31% of all businesses can be classified as growing.62 Businesses that grew during the last twelve months in terms of employing new people also had a higher turnover than businesses that did not employ new personnel (Figure 17). Growing businesses in the sample already have a higher turnover than average and can increase it further. They are more often found in production and construction and less often in trade related activities (Figure 18). Of men-owned businesses, 36% are on a growth path, but also 25% of women-owned businesses are growing faster Figure 18: Business activities of growing than the average women-owned company. enterprises Figure 17: Turnover of growing and non-growing businesses Note: Multiple answers allowed: 240 respondents named 309 business activities. Figures are shares of all business activities. A business is classified as growing if it employed two or more new Note: A business is classified as growing if it employed two or more employees in 2013. new employees in 2013. 62 Here a growing business is defined as a business which employed at least two new employees within the last twelve months. 34 Businesses were further asked how they foresee programs play no significant role in start-up their turnover to develop during the next two finance. years. Overall entrepreneurs are optimistic with Motivation for the establishment of a more than 50% stating that their turnover will business per type of business is shown in increase. Female entrepreneurs are slightly less Figure 20. While “to have a successful career/ optimistic than male entrepreneurs and a higher to fulfil own aspirations” and “to become share foresees a decrease (13% compared to 5% independent/autonomous” were the most in case of male entrepreneurs) in turnover. The often mentioned answers by male respondents, most promising sector is construction with 67% the prospect of creating a job and earning of enterprises foreseeing growth, followed by money were important motivations for female services with 54%. Most pessimistic is the trade entrepreneurs as well as for family businesses. sector with about every fifth enterprise expecting Hence, becoming an entrepreneur is for a decrease in turnover. female entrepreneurs more often an issue of 4.4 Challenges for SMEs necessity rather than a choice. This might be the case especially for the divorced/separated or 4.4.1 Start-up widowed women entrepreneurs. As Mongolia is a country that has run a free- Also interesting are the differences in motivation market system for less than 25 years, the between the cities and the date of the business’s majority of businesses have been established establishment. In Darkhan and, to a lesser by the current owners; only a negligible extent, in Erdenet, the main motivation for number have been bought or inherited. To starting a business is the perspective of a finance the business establishment from the successful career, while in Ulaanbaatar it is the ground, entrepreneurs mostly use their own objective of creating a job for him- or herself or family savings (Figure 19). Very few start- (Figure 21). This suggests that the employment ups obtained financing from banks. Gender- situation in Ulaanbaatar is worse than in other specific differences in terms of sources of cities, possibly due to migration. Furthermore, start-up financing are marginal, with women entrepreneurs who established their business in entrepreneurs demonstrating slightly higher use 2009 or after more often state that they became of bank and third-party loans as a source of entrepreneurs to have a job and earn money, financing. Banks often avoid financing start-ups compared to businesses that were established because of higher risk and it is very likely that before 2009. While migration might also play a those entrepreneurs who obtained a loan could role here, this finding suggests that the general offer private real estate for collateral. NBFIs, labor market situation has worsened and more credit cooperatives, NGOs, and government people have to start a business to make a living. Figure 19: Start-up funding per business type Note: Multiple answers allowed. 35 Figure 20: Motivation for business establishment per type of business Figure 21: Motivation for business establishment per region and date of establishment When starting a business, women entrepreneurs Respondents were asked about perceived typically have more previous relevant work key success factors in establishing their experience than men entrepreneurs. While business during the start-up phase. While male most women (51%) have worked more than entrepreneurs said that it was their previous five years in another company before founding work experience, female entrepreneurs said their own, this figure is lower for men (41%). they worked hard and, to some extent, received At the same time, 37% of men and 23% of family support (Figure 23). While male women respondents reported one to five years entrepreneurs also benefited from networks of previous work experience (Figure 22 shows (28%), this factor was less relevant for female breakdown per years of experience). The higher entrepreneurs (14%). Sufficient access to capital share of women with significant experience was not relevant for either category, indicating partially reflects the age difference between that access to finance during start-up is a women and men entrepreneurs (Figure 5). challenge rather than a success factor. 36 Figure 22: Previous relevant work experience before starting a business Note: Multiple answers allowed. Figure 23: Key success factors for business start-up per business type Note: Multiple answers allowed. 4.4.2 Current Challenges and Needs challenges would rather apply to men, women, or equally. Overall, 62% of the respondents said Access to capital is the main obstacle enterprises that women face more or harder obstacles in currently face (Figure 24). This is true for start- doing business than men, while 32% say that ups as well as for all other types of businesses, there is no difference. although male entrepreneurs said that more often than female or family businesses (48%, Female respondents in general said more often 38%, 39%, respectively). Other constraints are than men that they face specific challenges, and in particular governmental policies and taxes, men acknowledge this (Figure 25). In particular, whereas it is not only the tax rate but also family and household responsibilities are cumbersome procedures. Female entrepreneurs perceived as limiting factors to 76% of female more often respond that high rents and general entrepreneurs. The second main constraint costs of doing business (raw materials, labor, is gaining acceptance from colleagues and etc.) are too high. While it can be assumed that customers. Limited access to networking female entrepreneurs are more cost sensitive, this opportunities was also specifically mentioned finding might also relate to a lack of financial as a constraint applying more often to female management knowledge. than to male entrepreneurs (29% as noted by men and 28% by women themselves). Gender-specific challenges were further Moreover, access to land and governmental examined by asking the respondents if these 37 Figure 24: Current business challenges per business type Note: Multiple answers allowed. Figure 25: Challenges for female and male entrepreneurs per gender of respondent support programs, and lack of management specialized trainings like logistics, HR, or experience was mentioned, although most technical ones, and are also less interested in female entrepreneurs recognize these constraints attending those. However, as women tend to applying to both genders. manage smaller enterprises and businesses in the services sector, these trainings seem to be less Although a wide variety of trainings are relevant for them. offered by several institutions, attendance is generally low for both genders. The most The most demanded trainings for both genders attractive training, attended by 34% of female are marketing and sales, legal, and cost entrepreneurs, was financing (Figure 26). management. The higher demand of women Although women have attended trainings on than men for cost management and legal issues cost management, accounting, or marketing, trainings reflect the business challenges currently roughly as often as men, they less often attended faced by women (Figure 24). Furthermore, 38 Figure 26: Attendance and interest in professional trainings demand for trainings in financing and women are more open to pay at least a portion accounting is still high and better access to them of the costs for high-quality trainings. can significantly improve business performance. Figures on attendance or interest in advisory About half of the respondents paid at least a services for businesses show a similar pattern. portion of the total costs for trainings provided Overall, however, the level of use of advisory to them. However, female respondents (54%) services is relatively low (Figure 27). The share paid more often for them than men did (48%). of entrepreneurs not interested in contracting This is surprising, as more women (29%) professional advisors is high, possibly due to than men (25%) are members of associations high expected or real costs. Still, with about or networking groups, of which many (60%) 50% of entrepreneurs interested in cost- organize such trainings. It might be the case management advice and 45% in financial that female entrepreneurs lack time to apply for advisory services, the demand for business free trainings or are not informed about such advisory services seems quite high. possibilities. However, it might also be that Figure 27: Attendance and interest in professional consultancy 39 4.5 Access to Finance monobank63 for household savings in the Soviet era. TDB and especially Golomt Bank have a 4.5.1 The Relationship between SMEs substantially higher share in the SME market and Banks than among micro enterprises. Some differences In general, the use of banking services is very in market shares also exist between the cities high in Mongolia: 95% of male respondents with TDB being especially strong in Darkhan, and 99% of female respondents use at least State Bank in Erdenet and Khan and XacBank in some bank services. The bank most frequently Ulaanbaatar. referred to as the primary business bank is While most SMEs in the sample have a primary Khan Bank followed by TDB, Golomt and business bank (97%), a significant number of XacBank (Figure 28). While TDB and Golomt respondents (85%) use more than one bank have a higher share of men-owned businesses, for different purposes. Of male entrepreneurs XacBank’s services are more frequently used by 57% use a second or even a third bank for women-owned enterprises, as well as by family their business banking and 28% use another businesses. XacBank might be preferred by bank for private banking purposes. For female female entrepreneurs because of its historical entrepreneurs it is 52% and 34%, respectively. background as a microfinance institution (MFI) serving female clients and its social mission to The use of services from multiple banks can be reduce poverty. Another reason could however explained by high competition between banks. be the better service offered by XacBank. As Another reason is that interbank transfers can shown below (Figure 30), good service was take a few days, so that entrepreneurs choose the second most important reason for bank to have accounts at several banks to simplify preference by female entrepreneurs. Moreover, transactions with suppliers and customers. In XacBank clients most frequently stated “good order to have better access to their funds, the service” as a reason for bank preference. customers often make use of the services of the branches of several banks, as the branch Differences also exist between microenterprises network of the banks in Mongolia is not equally and SMEs. Khan Bank, XacBank and also State extensive. Golomt and TDB are often chosen Bank are popular among microenterprises as the secondary but not primary business (Figure 29), which is possibly because of bank. State bank services are used by 31% of historical background of XacBank as an respondents for private banking and 10% for MFI, as mentioned above, and Khan Bank as business banking.64 the former State Bank of Mongolia, in fact a Figure 28: Market shares as primary business bank of largest banks per business type 63 Monobank is a term used for a bank in a centrally planned economy like the one of the former Soviet Union, where a single state bank (Gosbank) com- bined the roles of a central bank and a commercial bank. 64 The government pays out pensions or other benefits through State Bank. Thus many people have an account there. 40 Figure 29: Market share of largest banks per size of business As the Figure 30 shows, the differences related The high share of Khan Bank clients can be to preference of a particular bank between explained by its branch network, the largest male and female customers are not significant; across Mongolia. Convenient location is however, female customers appreciate good often cited as the factor most appreciated by service and quicker response more often than the respondents (77%). For the customers of men. This has obviously to do with the gender XacBank (48%) and Golomt Bank (42%), on role of women for whom building up and the other hand, good service is more important maintaining relationship is the key factor in than other factors. XacBank is also chosen social interaction. Combining these findings because of its preferable terms and conditions with the ones from above, it can be concluded (45%); TDB’s reputation was the determining that women appreciate a friendly and good factor for it as choice of bank. service as well as the provision of adequate Most women entrepreneurs are completely information, business support, and simple and satisfied with their bank. The most complaints, understandable products, for example banking if there are any at all, are unsatisfactory packages. Thus, women entrepreneurs tend to product features like interest rates or collateral favor the relationship banking model over the requirements but also soft factors like poor transaction banking model. Figure 30: Reasons of bank preference per gender of respondent 41 business support and adequate information. Lack of collateral is considered by about 40% Men, on the other hand, are less satisfied of all respondents as being a harder constraint with their bank, in particular with collateral for women than it is for men, which confirms requirements (Figure 31). stakeholder perceptions of a disadvantaged position for women in terms of property rights As for women, specific obstacles in banking, for assets. more than 60% of male and female respondents state that women are hesitant to approach a While more than 40% of men believe that in bank (Figure 32). This might be partly explained women-owned businesses the spouse makes the by the feeling of more than 20% of women critical financial decisions, only 20% of women entrepreneurs that they are treated differently respondents agree with this statement. Indeed, than men by banks. As mentioned above, the other figures of this sample show that it is only perceptions of many of the stakeholders confirm in 3% of women-owned enterprises that the that women SMEs, but also all SMEs in general, spouse makes financial decisions. are perceived as a risky segment by the banks. Figure 31: Obstacles in bank relationship per gender of respondent Note: Multiple answers allowed. Figure 32: Women-specific obstacles in bank relationship per gender of respondent 42 Figure 33: Sources of financial advice per gender of respondent Note: Multiple answers allowed. Financial advice is an important feature in (Figure 27). The main sources of financial the relationship between financial institutions advice are professional media like newspapers, and entrepreneurs, in particular women, as TV shows or magazines, as well as relatives mentioned above. However, only 26% of male and friends. While the proportion of male entrepreneurs and 20% of female entrepreneurs entrepreneurs receiving some kind of financial receive advice from banks, and no respondents advice is with 74% quite high, almost 40% receive advice from NBFIs or credit cooperatives of women entrepreneurs do not receive any (Figure 33). This creates opportunity for the financial advice. banks to differentiate themselves from the 4.5.2 Use of Bank Loans competition by offering non-financial services even more extensively. Most of the current financing needs of surveyed enterprises are covered by retained profits; and Also low is the proportion of entrepreneurs women in particular use this conservative source using external consultants or accountants, (Figure 34). More than 50% of the businesses which is in compliance with the low numbers also use bank loans, whereas no significant of entrepreneurs receiving advice on accounting Figure 34: Source of financing of business per business type Note: Multiple answers allowed. 43 difference can be observed between men and The fact that start-up businesses attain financing women. NBFIs have a share of about 2%, in less often from banks is illustrated in Figure line with their share in the financial sector. 36 and in line with other research on this Other sources of financing are friends or family topic from other countries. While 65% of the members, as well as informal money lenders. companies at the start-up stage applied for a loan, only 45% received one. In general, the Most entrepreneurs of this sample have tried to more mature a business becomes, the more often obtain a loan (84%). Of those who tried, most it applies for loans and has the loan approved. were successful (88%). Women entrepreneurs This pattern suggests that banks prefer working tried to obtain a loan more often than men with established businesses and regard young entrepreneurs, but less often than family businesses as too risky. However, businesses businesses (Figure 35). However, while most of established more than ten years ago finance the men who tried to get a loan were successful, themselves more often through retained profit, women entrepreneurs and family businesses and thus have less need of external sources of were more often rejected. The main reasons funding. stated were lack of collateral and problems in providing financial documents. On the other As mentioned above, the loan application hand, family businesses use loans more regularly, process is perceived as complicated and full of with 72% of family businesses in the sample caveats. Only 15% of the respondents say that currently or recently have a loan outstanding. they faced no significant problems. Difficulties Although men apply for loans less often, more in providing collateral are the most often-faced than half (53%) have or recently have had obstacle. Further, the collateral often does not a loan outstanding. As for women-owned allow borrowing the envisaged loan amount enterprises, this figure is slightly less (49%). because banks tend to value land and other This suggests that while women apply for a loan property pledged as collateral far below the at least once, they do not use loans frequently market price due to legal and practical problems and prefer to finance growth through own associated with seizure and reselling in the case funds. This can, however, also imply that their of loan default. It might be that men face this experience with loan application and repayment problem more often than women or family was less successful or less pleasant, so that they businesses because they tend to ask for larger decide not to approach banks for loans again. loan amounts, as it is shown below, or simply Figure 35: Share of bank-loan usage per Figure 36: Share of bank-loan usage per business type age of enterprise 44 because they have the collateral to be pledged million. Interestingly, 9% of women-owned more often than women do. businesses get loan amounts of more than MNT 200 million, while only 4% of men- Women more often than men complained about owned companies obtain such large loans. The difficulties in presenting financial documents figures show that women entrepreneurs get loan and the slow processing of loan applications. amounts in the middle range of MNT 40 to 200 This might again suggest that women are more million less often than men. This finding implies sensitive towards service quality and might lack that either banks grant women smaller amounts financial knowledge. than they applied for, or the women themselves The disbursed loan amounts vary widely request smaller loans because they run smaller between men- and women-owned businesses. businesses, or both could be the case. While men most often get loan amounts of more A similar pattern is observed in terms of loan than MNT 40 million, the majority of women maturities. Because smaller loans can be repaid entrepreneurs get loans of less than MNT 20 more quickly, most women receive loans for Figure 37: Obstacles in loan application process Note: Multiple answers allowed. Figure 38: Loan amount per business type Figure 39 Loan maturity per business type 45 less than 24 months. At the same time, men- All banks typically ask for immovable collateral owned businesses, and even more often family for loan amounts exceeding MNT 10 million. businesses, get loans for more than three years. Accordingly, 80% of women-owned enterprises, 90% of men-owned enterprises, and 90% of In accordance with larger loan amounts and family businesses provide their private house or longer maturities, but also with a higher share another building as collateral (Figure 42). The of seasonal businesses, men-owned enterprises remaining share of respondents provide their are more often granted grace periods than business site as collateral. Banks tend to prefer women-owned businesses (Figure 40). Interest to pledge private real estate instead of business rates charged by the banks vary from 1.5% to real estate, probably because of the higher 2% per month and are thus in accordance with immaterial value. Other collateral types like the official rates charged by the main banks cars or accounts receivable are also provided, for typical loans (Figure 41). However, while but only to a limited extent. Movable collateral most women pay interest rates similar to those is usually only accepted in combination with regularly offered (47%), men more often get immovable property. However, as women lower rates. But a higher share of men also generally request smaller loans, they could pay rates of above 2%. Because women get provide cars, accounts receivable, or personal smaller loan amounts, which are typically more belongings like jewelry as movable collateral expensive to administer, it is reasonable that for such smaller loans. Guarantors, although in their average interest rate is a bit higher than general accepted by banks to increase the loan for men. Hence, the interest rates mentioned amount above the otherwise granted amount, by the respondents seem to reflect the typical are seldom used. rates charged for different business sizes and loan characteristics. However, it might be that Most loans were used for multiple purposes women are in some circumstances priced higher by all groups; however, women tend to use than men, for instance because lending to a loan more often for only one purpose. women entrepreneurs is ceteris paribus regarded This might be explained by the smaller loan as riskier than lending to men.65 amounts or the intention of women to focus Figure 40: Share of loans with Figure 41: Interest rates of loans grace period per business type 65 Indeed, the correlations show that smaller loan amounts are priced higher as well as loans of longer maturity. A correlation between interest rate and gender is not observed. 46 Figure 42: Collateral provided per business type Note: Multiple answers allowed. Figure 43: Usage of loan per business type Note: Multiple answers allowed. upon a single planned investment. Most loans immediate expenses. Research and development were used for working capital needs and/or of products, marketing activities or energy- for investments into machinery or equipment, efficiency investments were practically not made but less often for larger investments like real at all. The low share of borrowers who repaid estate. Family businesses more often undertake debts with a new loan is very low, suggesting an larger investments and less often use it for overall low share of over-indebtedness. immediate needs. Women more often than 4.5.3 Demand for Bank Loans men used the money for their own or family needs as well as to purchase inventories in cash The loan demand is high and exceeds supply. instead of deferred payment. This might indicate When asked about the interest in future loan, that some women needed the loan to cover 95% of men entrepreneurs, 93% of women 47 Figure 44: Requested loan amount per business type, business size, and business activity entrepreneurs, and 96% of family businesses consideration the roughly 55,000 enterprises expressed their wish to obtain one. Most and applies to the shares of women- (38.9%) entrepreneurs ask for loans in MNT (94%), and men-owned enterprises (61.1%) as of total while 6% would like to get a loan in USD. enterprises estimated by the Enterprise Survey The average loan amount requested is MNT (2013). It also includes the share of women 315 million (USD 175 000). Men-owned and (93%) and men (95%) interested in obtaining a family businesses ask for considerably larger loan. Of this loan demand, 24% or MNT 2,165 loan amounts than women-owned businesses billion or USD 1.2 billion accounts for demand (Figure 44). Further, micro-enterprises ask for from women entrepreneurs. an average loan amount of about MNT 200 The entrepreneurs surveyed ask for longer million, whereas SMEs ask for three times the maturities than typically offered by the banks. amount (MNT 600 million). The largest capital Only 20-25% of the entrepreneurs would like needs are demonstrated by businesses active in loans with durations of less than one year, and construction and production, while businesses 42-58% with a maturity of more than five years. active in trade would like smaller amounts. This implies that less working capital but more The total loan demand for all enterprises in this investment loans are demanded. Whereas men- survey is about MNT 72 billion. However, some owned and family businesses have investment enterprises ask for unrealistic loan amounts. plans that would need more than five-year Correcting for outliers,66 a more accurate financing, women more often foresee repayment average demanded loan amount per enterprise within three to five years. interested in loan is MNT 161 million67 and the Grace periods can help make long-term and total medium-term loan demand of enterprises large investments more affordable. Grace in this sample would be MNT 34.4 billion. periods are requested by 71% of entrepreneurs. The total additional loan demand of all About half of all respondents would like to have Mongolian SMEs is estimated at MNT 9,022 a grace period of up to six months and 29% billion (USD 5 billion).68 This takes into for more than six months. As for the sectors, 66 A total of 31 enterprises asked for loans that are much higher than their turnover. These have been corrected by applying a medium-term loan demand of three times the turnover. 67 By business types, the average loan amount requested by men-owned businesses after correction is MNT 208 million, by women-owned businesses - MNT 111 million, and for family businesses MNT 158 million. By gender, men ask for MNT 216.4 million, women for MNT 106.5 million. 68 The additional loan demand by women-owned SMEs is calculated as follows: 55,000 enterprises*38.9% of which are women *93% interested in obtaining a loan*106.5 million average loan requested=MNT 2,125 billion. The additional loan demand by men-owned SME average loan demand: 55,000*61.1%*95%*MNT 216.4 million average loan requested =MNT 6,897 billion. Total additional loan demand is MNT 9,022 billion (USD 5 billion). 48 it is in particular production that needs long- Most entrepreneurs could provide some kind term financing while services and construction of collateral for a loan. Private houses or other more often ask for short-term loans of up to 24 real estate can be provided by more than 80% months. of the respondents (Figure 47). Furthermore, the business site, machinery or equipment, and With more than 70% asking for loans with an cars, can be provided by more than 10% of the interest rate of less than 1% per month and respondents. Guarantees by individuals or a 90% asking for loans priced with less than group cannot be provided regularly. Women are 1.5% per month, the vast majority would like not less capable of providing collateral than men to borrow at considerably lower rates than the or family businesses. banks offer (Figure 46 and 41). While loans of less than a 1% interest rate per month probably Most entrepreneurs would use the loan cannot be offered under current circumstances, for medium-term investment purposes like every decreased digit will help to decrease the equipment or machinery but less often for credit gap. Figure 45: Requested loan maturities per business type and business activities Figure 46: Requested interest rates per business type and business activities 49 Figure 47: Collateral that could be provided for a loan per business type Note: Multiple answers allowed. Figure 48: Foreseen usage of requested loan per business type Note: Multiple answers allowed. long-term investments into real estate or these other products are limited to current and refurbishment (Figure 48). While this is also true savings accounts, term deposits, and insurance. for women, women would use a loan more often The latter two are used by only about half for working capital than men-owned or family of the respondents (Figure 49). The various businesses and less often for investments. In loan products requested were only used by comparison to usage of current loans, research some respondents. Thus, it has to be assumed and development is more often on the agenda. In that the respondents did not fully understand total, most loans would be used for productive the differences since a larger proportion gave purposes and a very small proportion for details about their current loans. In particular, personal/family needs or to repay old debts. respondents were interested in overdraft facilities and private credit cards. 4.5.4 Usage and Demand for Other Banking Products When asked about business banking products, respondents reported low use of private banking Besides loans, other banking services are also products. This indicates that private banking frequently used by entrepreneurs, both male and accounts are often used for business purposes female. However, regarding private banking, 50 Figure 49: Usage & interest in banking products for private purposes per gender of respondents Figure 50: Usage & interest in banking products for business purposes per gender of respondents or the same account is used for both purposes. branches as well as complaints about overloaded In the case that entrepreneurs use a separate branches and long waiting time. account, most (91% of women, 96% of men) Mobile banking is very popular in Mongolia use it as current account; 20% of women and with 57% weekly usage by male as well as 22% of men use a commercial loan line (Figure female respondents. This is considerably higher 50). than internet banking usage, and of those Mongolian banks offer different delivery who do not frequently use internet or mobile channels, and customers tend to use them banking, more are interested in using mobile frequently. However, the branch remains the banking. The interest in profiles of banks in central contact point and most customers tend social media is also quite high. Still, online to go at least once a month, if not weekly and or mobile banking services are mostly used some even daily (Figure 51). This explains the for complementary services like checking the importance of convenient locations of bank account balance, less for money transfer69 and 69 Most mobile banking services only offer money transfer between bank accounts of the same bank and are thus less useful for payments. 51 cannot yet replace the visit to the bank branch. of credit cards, usage of point of sales (POS) Direct promotion of banking products, in other is also low with less than 50% using it at least countries important especially for insurances monthly. Gender-specific differences are only or investment products, are neither regularly observed in internet banking and bank’s social used nor of greater interest for entrepreneurs, media usage, confirming that personal service is although this might save considerable time. of greater importance for female than for male Furthermore, with relatively low distribution entrepreneurs. Figure 51: Usage and interest in banking service delivery channels per gender of respondents 52 5. Constraints Perceived by SMEs and Women-owned SMEs As mentioned in the introduction to this study, of awareness about the potential of women the key objective of this research has been to entrepreneurs as a profitable market segment. explore the constraints and opportunities that 5.1 Constraints Perceived by SMEs SMEs in Mongolia face in accessing financial and non-financial products and services, Despite recent efforts by various stakeholders, obstacles in doing business associated with there are several factors that constrain the the economic situation, legal and operational development of SMEs in Mongolia. Below are framework. A special focus while conducting the most frequently mentioned obstacles for interviews with stakeholders and male and business development cited by the respondents female entrepreneurs themselves was put on of the survey, as well as those highlighted by the specific constraints faced by women-owned various stakeholders. businesses. Access to Finance: Problems experienced by In the following, we outline some constraints SMEs in accessing finance have been revealed in this research identified separately for SMEs a recent survey conducted by the MNCCI, with and women-owned SMEs through interviews only around 30% of the SMEs in Mongolia with key stakeholders in the sector and a survey found to have ever benefited from a government- of male and female respondents. It should funded SME loan program. The same survey by however be noted that this separation is done MNCCI revealed that accessing loans funded on purpose to reveal whether any gender- by the banks themselves is considered even specific implications can be derived from general more difficult by SMEs. The World Bank’s findings. Enterprise Survey 2013 shows similar results with access to finance being the most important As described in the conclusions below, however, constraint reported by Mongolian companies. most of the stakeholders as well as the evidence More than 30% of firms in Mongolia perceive of the quantitative data obtained rather prove access to finance as the biggest problem to their that women-owned SMEs represent a sizeable operations (higher than the average of 17% in market segment, not necessarily explicitly the EAP region).70 distinct from men-owned SME segment. The gender-biased perceptions by the stakeholders, The survey undertaken for this paper has shown in particular financial institutions, are not that difficulties in accessing finance have been necessarily based on experience with women- raised by 47% of male and 36% of female owned SMEs, but often on conjectures and lack entrepreneurs as the challenge currently critical 70 World Bank Financial Sector Assessment Program. Development Module Mongolia, Access to Finance Technical Note, June 2012. 53 for development of their businesses. In general, Unsuitable loan conditions: Nearly one third lack of collateral and difficulties in pledging of all men- and women-owned SMEs indicated collateral, as well as short loan maturities and that high fees charged by banks are a problem high interest rates and fees, are main factors for them. The survey conducted by the MNCCI limiting access to finance. among its members revealed similar findings with SMEs complaining about loan conditions On the other hand, loan demand is high among being highly inflexible given their needs. This SMEs. It is estimated that 95% of the enterprises argument is mostly related to high interest rates, in Mongolia demand for loans in the medium- fees and commissions charged, as well as short term. Total loan demand is estimated at USD 5 loan maturities. Monthly interest rate charged billion of which USD 1.2 billion is demanded by by commercial banks fall within the range of women-owned enterprises. 1.5% to 2.5%, the lower end is usually applied Lack/insufficiency of collateral: With very few to large corporations. Monthly interest rates exceptions, the Mongolian banking system at NBFIs can be as high as 3.5% to 4%, as is based on collateral-based lending and NBFIs do not have access to governmental SME commercial banks are strictly implementing it support programs and mostly fund themselves by asking for immovable property as collateral. via commercial banks. Nevertheless, SMEs often Because of a missing central property register prefer borrowing at NBFIs because of their for property, banks accept movable collateral shorter loan processing time and more flexible only for very small loan amounts (< MNT 10 collateral requirements. million) or in addition to immovable collateral High taxes: SMEs also complain about the high to avoid the multiple use of the same collateral taxes they face in running their business. Some for several loans. Further, banks tend to value 40% of men-owned and 43% of women-owned collateral far below market value, mostly enterprises find the prevailing tax rates too high because collecting property is difficult and to profitably run their operations. Regulatory time-consuming due to complicated jurisdiction authorities are aware of their complaint on related to resolving disputes. Unlike banks, taxation and formulated a draft bill on tax NBFIs also accept movable property as exemptions for SMEs, which is still under collateral on a contractual basis, however, at discussion in parliament. the cost of significantly higher interest rates. Difficulties in presenting collateral have been Government policy: SMEs perceive the mentioned by 63% of male-owned and 48% of current government policy to be an obstacle female-owned enterprises in the survey as the for them. In other words, SMEs believe that most important problem they face during the there is no government policy committed loan application process. to the development of SMEs. This may be justified by the fact that government-led SME However, this study did not reveal that women support programs are too small in size and far face more severe challenges with providing from meeting the demand of SMEs. Further, collateral then men, as most of the research many entrepreneurs might not be aware of suggests. We believe this finding can be justified existing support programs. Additionally, the by the fact that most of the key business funds dedicated to SMEs might be channeled decisions are taken by men and women together. to other client segments able to meet banks’ As stakeholder interviews revealed, the decision requirements, especially on collateral. While on whether men or women apply for a loan 37% of male entrepreneurs see government often depends on availability of valid documents policy as an obstacle to their business, this for immovable property and the employment ratio increases to 44% in the case of women status of family members. Typically, property is entrepreneurs. It can be concluded that women- registered in the name of the male spouse. owned SMEs are more sensitive to the lack of supportive government policy. 54 Long processing time at banks: Lending Some SMEs are aware of the capacity problems procedures at banks is perceived cumbersome they face, as 26% of male and 36% of female and time-consuming by SMEs, with 26% respondents acknowledged that they faced of men-owned and 38% of women-owned difficulties in preparing financial documents enterprises complaining about it in the demand while applying for a bank loan. Women survey. Commercial banks themselves admit entrepreneurs seem to be suffering more from that loan approval can take from two weeks to it, highlighting the need for financial literacy one month. SMEs are thus forced to search for trainings for women-owned SMEs being more alternative, and often more expensive, funding explicit than their male counterparts. sources. For example, despite interest rates 5.2 Constraints Faced Specifically by of 3.5 to 4.0% per month, NBFIs are often Women-owned SMEs approached because of faster loan processing and loan disbursement. Women-owned businesses share many barriers with those owned by men, e.g. access to High costs of doing business, including high finance, high taxes, and complex governmental rents: In general, SMEs in Mongolia are of the procedures. Commenting on the results of the opinion that they are constrained by high costs, demand survey and findings from interviews including high rental costs: 29% of male and with industry stakeholders, additional 37% of female entrepreneurs think that the constraints faced by women-owned SMEs are overall cost of running their business poses them the following: a challenge to run their operations profitably. Lack of networking opportunities: Industry Lack of skilled workforce: The NSO reports stakeholders are of the opinion that one of that the literacy rate in Mongolia is quite high: the most important constraints Mongolian nearly 98% of Mongolian citizens are literate. women face in doing business is the lack of However, there seems to be a mismatch between networking opportunities. While it is mostly the skills demanded by employers and skills men who come together in the evenings for possessed by employees, as 17% of men-owned socializing and to exchange business-related and 13% of women-owned enterprises raise information and ideas, women are more often the issue of unskilled staff as an obstacle. One tending to children, the elderly, and general reason might be that during times of transition, household duties. As a consequence, women many young people who constitute now the usually are disadvantaged as far as networking labor force, in particular male, dropped out of opportunities are concerned. This is of particular school and/or did not get tertiary education. importance given that small enterprises that are Some stakeholders also relate the problem to the a part of a supply chain have higher chances entrepreneurial spirit of Mongolians, suggesting to grow and sustain their activities if taking that people above average skills find it more advantage of networking opportunities. attractive to become an entrepreneur than working for the financial benefit of others. The survey however revealed that women- entrepreneurs in the survey tend not to perceive Lack of capacity at SMEs: Besides external this constraint as specifically applicable to them. factors, SMEs themselves acknowledge Only 28% of women-owned SMEs compared responsibility for the limited outreach of SME to 29% of men-owned enterprises think that finance in Mongolia. They usually suffer from limited access to networking opportunities can lack of capacity in preparing a sound business indeed be a challenge in the case of women- plan and satisfactory cash-flow projections. entrepreneurs, while 58% of survey respondents They neither have thorough understanding in each gender perceive the issue as being a of the market they operate in; nor can they major challenge for men. closely follow the technological developments, or changes in supply and demand conditions. 55 Perception of women by financial institutions: restricting themselves in running their business Financial institutions in Mongolia generally effectively. This is also reflected in responses of perceive SMEs as a high-risk segment. Although the women, 60% of which acknowledge that nearly all institutions interviewed indicated they are hesitant to approach a bank, most that loan repayment rates are higher in the probably because they lack financial knowledge case of women entrepreneurs, this perception and/or are insecure about dealing with financial of women-owned businesses does not change issues. the fact that they are typically characterized as Combining work and family responsibilities: having insufficient assets and low capitalization. Women entrepreneurs consider family and They are thus considered more risky compared household responsibilities to be one of the to men with a larger business and/or more factors that limit the development of their collateral. Along with the typically smaller size businesses. That family and household of the business, this might explain why women responsibilities are more challenging for women entrepreneurs are granted smaller loan amounts than for men entrepreneurs has been stated by on which they then have to pay higher interest 76% of female respondents and 47% of male rates. respondents. Women are the primary caregiver The demand-side analysis revealed that 36% for children and elderly family members as well of women entrepreneurs find it difficult to as responsible for household chores, and work present financial documents requested by banks longer hours72. They thus also have limited at the loan application process, which was time to involve themselves in business-related also confirmed during some interviews with activities such as networking and training stakeholders.71 This might partly be explained opportunities. Although childcare services exist, by the general lack of financial knowledge, kindergartens - especially in outer districts of especially among women entrepreneurs. Ulaanbaatar - tend to be overcrowded. Further, Although it cannot be generalized, some women for families that do not have the chance to entrepreneurs may also lack autonomy to enroll their young children in kindergartens, interact with financial institutions or conduct the burden of childcare usually falls on the financial transactions on their own also shoulders of the mother. 71 To present financial documents means that business documentation is not satisfactory as well as that women entrepreneurs have more difficulties in writing a business plan. 72 UNICEF calculated that Mongolian women on average work 44 minutes a day longer than men. There are also several reports referring to UNDP find- ings highlighting Mongolian women spending as much as 25 hours a week on household chores in addition to their responsibilities at work. 56 6. Conclusions and Recommendations Access to finance is crucial for SME interested in reaching beyond to the new, riskier development, not only in Mongolia but also in sectors like SMEs. other developing economies. SMEs in Mongolia, However, Mongolian SMEs themselves are be it male- or female-owned enterprises, face a also responsible for the financial sector’s lack number of impediments, including difficulties of interest. They are usually weak in capacity, in accessing finance, the high cost of financing face difficulties in preparing business plans and running a business, and insufficient support and cash-flow projections, and cannot conduct mechanisms. market research on their own. While several Problems related to access to finance stem governmental support programs as well as other mainly from collateral requirements of financial initiatives have started to offer trainings or institutions and the non-existence of a central advisory services at discounted prices or on a registry for movable properties. Commercial cost-sharing basis, these programs lack scale and banks in particular are perceived as exercising often quality, and are not sufficiently accessible high and strict collateral requirements. for entrepreneurs. Borrowing from NBFIs comes at a higher cost Although women-owned SMEs mostly and is also, in most cases, not collateral-free. experience similar problems faced by their One of the reasons for difficulties in accessing male counterparts, they perceive themselves finance experienced by SMEs is the general more constrained in operating their business reluctance of commercial banks to serve given household and family responsibilities. the SME sector. While some banks recently Time constraints are, in particular, affecting discovered the SME segment as a replacement business size and growth potential though lack for a declining corporate sector (in particular of capacity to attend trainings and to network. mining), the banking sector in the country has Furthermore, although access to land and not yet felt significant margin squeeze. The equal property rights are in general stipulated central bank’s policy easing has improved banks’ by law, Mongolian women are often unable to liquidity. Apart from policy-rate reductions and enter contracts in their own name. They do not fiscal spending, the government also provided control and possess an equal share of assets or liquidity to the banking system, to be on-lent property within marriage because of several to targeted industries. As a result, in 2013 relevant reasons: the traditional perception of bank assets grew rapidly by 74% and loans their social role and a lack of awareness about by 54%. Large banks in particular benefited their property and land ownership rights. from the easing of monetary policy owing While Mongolia’s SME sector faces challenges to their stronger franchise network. In other that limit its growth, it has considerable words, banks are still operating successfully in potential. Despite significant challenges in access their accustomed environment and are not yet 57 to finance and other issues, most of the SMEs • Provide long-term financing in MNT: Most are positive about the development of their SMEs need longer-term financing in the businesses in the future. One third of the SMEs local currency. Limited long-term financing surveyed in this study have grown at a swift in MNT and limited hedging opportunities pace in the recent past. Moreover, 55% of these translate into SME loans of short maturity entrepreneurs expect their business to grow in and/or high interest rates. Due to access the next two years, whereas only 28% believe to better hedging conditions and access to that the business will experience no changes. financing at lower interest rates, IFIs could provide long-term credit lines in MNT to Moreover, the demand for SME loans is commercial banks in Mongolia with better estimated at USD 5 billion, of which USD 1.2 conditions passed on to SMEs. billion is demanded by women entrepreneurs. Considering the current SME loan portfolio of • Design loan programs exclusively for women the banking sector of USD 1 billion, it can be entrepreneurs (WEs): There is definitely an concluded that there is a significant unmet loan interest in and economic necessity of loan demand that could be covered by banks in the programs targeting WEs in order to increase future. their overall access to finance73. Such loan programs introduced at commercial banks Based on the findings of the survey, the authors should be accompanied by TA in order to formulated a number of recommendations for help partner banks realize the “business different stakeholders engaged in development case” for women entrepreneurs. Obviously, of SMEs and women-owned businesses in the commitment of the banks as well as Mongolia. readiness to invest in development of own Recommendations for International institutional capacities should be given. Financial Institutions The TA measures to be implemented together with the banks could include the • Increase Technical Assistance (TA) to components of developing the gender- commercial banks in the field of SME related measuring indicators to track the finance: SMEs in Mongolia face a domestic performance of women clients, as well as banking system that lacks the capacity to establishing networking platforms for WEs, assess their creditworthiness, and hence etc. Smaller awareness-raising programs is unable to lend significantly to SMEs. could be offered in advance to TA measures Banks should be supported in acquiring as a pilot to identify the most committed FIs SME lending capacity not only to facilitate and promote the WE program. lending to this customer segment, but also to develop awareness of future downscaling • Capacity building to banks and SME at banks. As argued by some stakeholders, support centers in provision of trainings ideally the capacity building should precede and advisory services: One of the major making funds available for commercial obstacles for SME development is access banks. to non-financial services such as trainings and business advisory services. These • Establish a risk-sharing mechanism with include financial as well as vocational and commercial banks: Future loan programs business management-related topics like targeting SMEs can be structured in a way logistics or marketing. While some IFIs to include a risk-sharing mechanism between have their own initiatives, more dedicated the IFIs and beneficiary banks. For example, support could be provided in cooperation IFIs can share the risk with the bank on a with banks, governmental support centers, portion of the banks’ SME portfolio. and private initiatives. Targeting women 73 Most of the banks interviewed indicated their interest in similar programs should those be available. 58 entrepreneurs in particular is recommended interpret the situation of women and men in as they might benefit significantly from a particular sector. such services. Those initiatives should also • Enhance the existing credit information facilitate the cooperation between banks and system: Mongolia is lagging behind SME support centers like SME incubators. most countries in emerging Europe and Although some banks, like Golomt and Central Asia in terms of legal framework Kapital Bank, cooperate with those and economic efficiency of its credit providers, a lot more can be done to build reporting system.74 In addition, according up mutual trust between banks and SME to Doing Business (2014), only 13,309 support initiatives. Thus, joint networking enterprises (13.4% of registered enterprises events and trainings on client financial in Mongolia) are covered by the credit education, for instance, could be supported information system. Therefore, the related by IFIs. infrastructure of the credit information Recommendations for Governmental/ system should be upgraded for a more Regulatory Authorities: effective use of it, especially in assessing SMEs. • Incentivize the business registry: SMEs that are not registered at the tax authority are • Enhance regulation on bankruptcy and frequent in Mongolia. Businesses that are simplify the collateral collection process: In not registered have no access to loans and the event of bankruptcy, or in the case of a limited access to governmental support dispute between the bank and the borrower programs and other support initiatives. about loan conditions, the borrower can While the process of business registration take advantage of the complicated process has been simplified during the past years, and make it difficult and drawn-out for businesses still perceive the process as the banks to collect the collateral. Banks cumbersome and/or are not informed incorporate this possibility and value about the changes. The government is collateral significantly below market recommended to organize an information value, resulting in lower loan amounts campaign about business registration and or in rejection of the client. The current offer incentives for business registration. regulations should be revised and for Additionally, IFIs could be approached by movable collateral simplified enforcement the government for specific support in the mechanisms should be considered. frame of targeted programs similar to IFC’s • Facilitate factoring and leasing practices: Secured Transactions and Collateral Registry To overcome the obstacle of collateral, Program. authorities can encourage leasing and • Enforce collection of gender-disaggregated factoring by: (i) providing VAT tax incentives data: Statistical information is necessary in the leasing law for the leased equipment; in order to understand the real situation (ii) reviewing the legal framework governing of women. Most gender-disaggregated contracts between parties; (iii) setting up a statistics on social, economic and legal framework and enforcing environment business indicators are currently lacking for the collection of receivables. in Mongolia. The governmental agencies • Establish a credit guarantee fund for responsible for collecting national data or WEs: Although a credit guarantee fund conducting surveys should formulate their has recently been established, there is no questionnaires in such a way that data can information as to the share of women- be disaggregated by gender in order to better 74 Isakova et al. (2012). 59 owned SMEs that have benefited from it. recommended to take efforts to coordinate A CGF serving exclusively women-owned actions and exchange information between SMEs can be initiated to address the issue all of these institutions and NGOs involved of lack of collateral, which is the most in capacity building with SMEs and women important obstacle for WEs obtaining a entrepreneurs. loan. Recommendations for Financial • Extend the network of SME Development Institutions: Center and Business Incubation Centers: • Develop internal capacity to implement These centers, which provide training and cash-flow-based lending: Cash-flow lending capacity building services for SMEs, exist is a suitable strategy to lend to SMEs at low only in Ulaanbaatar. Their expansion beyond risk even without full securitization. FIs the capital city, as well as the opening of should consider implementing a cash-flow- more of such centers in Ulaanbaatar, can based approach by organizing workshops to create a valuable source of information and internally promote SME lending. Through networking for SMEs. TA, FIs could receive trainings and advisory • Improve childcare facilities: According services from international SME experts on to Member of Parliament Ms. Luvsan how to set up a cash-flow-based lending Erdenechimeg, kindergartens in the outer mechanism within their institutions. districts of Ulaanbaatar are over-crowded.75 • Adopt risk-adjusted pricing models: Banks Only half of the children in the regional above all can find ways to incorporate the districts have places in public kindergartens. perceived high risk of financing SMEs by Women are thus often forced to stay at developing a multiple-pricing strategy and home. Therefore, childcare facilities that can charge a higher price to companies that currently suffer from a lack of funding and they perceive to be more risky, rather than over-crowding, particularly in Ulaanbaatar, avoiding the risk. Over time, the banks will need to be improved in order to increase build up a “corporate memory” as well as the participation of Mongolian women in a track record for the SME segment. They business life. will also benefit from a higher return than • Increase coordination among public and they are used to earn with the corporate and SME support institutions: In Mongolia, commercial segments. there are a number of institutions/ • Make use of the credit guarantee fund and committees/support organizations in other insurance products: Activities of charge of regulation of the financial sector the Credit Guarantee Fund in Mongolia (Bank of Mongolia, Financial Regulatory started only last year and its portfolio is still Commission, Mongolian Bankers nascent. Banks and NBFIs can make better Association), promotion of gender equality use of this resource in lending to SMEs (National Committee on Gender Equality), that do not meet collateral requirements. and development of SMEs (Ministry of In collaboration with insurance companies, Labor, Mongolian National Chamber of banks can also develop special lending Commerce and Industry, SME Business products for small enterprises. For example, Incubation Centers, SME Development financing herders is perceived to be risky Center of Capital City, Credit Guarantee due to unpredictable natural conditions, Fund). Therefore, effective coordination drought, and high animal mortality rates. among all these stakeholders is crucial for The government of Mongolia and the World well-planned and comprehensive SME Bank have already initiated an index-based finance schemes. Regulatory authorities are insurance program based on livestock 75 Tolson (2012). 60 mortality rates by species and soums. to analyze the profitability of women-owned The pilot project proved to be successful SMEs in the total SME portfolio. Collecting and some banks already offer discounted and analyzing gender-disaggregated data, loans to herders who insure their animals. however, could be the first step on the way Nevertheless, in practice, these insured to grasping women-owned SMEs as an herder loans are still not implemented by underserved yet profitable client segment. many financial institutions and can be Recommendations for SME explored by the whole sector. Development/Support Institutions: • Offer trainings to SMEs on business • Provide an office space for start-ups: planning and loan application: SMEs in A public area can be reserved at SME Mongolia usually lack capacity to prepare development/incubation centers for joint use a sound business plan and satisfactory of entrepreneurs/start-up business owners cash-flow projections. They also have no that do not have the capacity of opening up thorough understanding of the market they an office or refraining from it due to high operate in; nor can they closely follow the rents. changes in supply and demand conditions. Even those who possess that capacity are • Upgrade and expand the scope of trainings often not able to demonstrate it to the provided to SMEs / E-learning: SME creditors. Therefore, financial institutions development institutions already provide a could offer (or expand) trainings on business set of trainings to SME applicants. However, plan writing to their customers and potential these trainings usually do not focus on sector customers either on their own or through specific and technical issues. Also trainings cooperation with SME support institutions. on marketing and sales, cost management, Certain banks like Khan Bank and Golomt legal and tax issues are in demand and Bank already practice those trainings but could be provided by such institutions. could expand their outreach. SME development/support institutions are advised to develop seminars and trainings in • Offer networking opportunities for SMEs, a format suitable for remote learning with women-owned SMEs in particular: Some the help of the government and/or donor financial institutions are already engaged in organizations. Thus the content of those can sponsoring or organizing networking events be transferred to e-learning platforms and for enterprises in their priority sectors. Such proposed to SMEs in online modules. activities can be expanded to target WEs disadvantaged in networking. • Forge partnerships with banks in supporting SMEs: SME development/support • Collect and analyze gender-disaggregated institutions can establish partnerships with data on SMEs: As the research reveal, most banks for provision of trainings, advisory of the banks and FIs do not collect gender- services and organization of networking disaggregated data and/or do not analyze events targeting SMEs, hence lowering the it in a systematic way. This represents a cost of such services for either partner. Some challenge for them partly on technical initiatives already exist (for instance, SME reasons (MIS) and would cost an extra effort Business Incubation Center of Chingeltei to collect the data manually. Additionally, District in Ulaanbaatar cooperates with apart from several NBFIs, which are obliged Golomt bank and Kapital Bank), these to report gender-disaggregated data to partnerships should be facilitated. SME their investors and shareholders, banks and development centers should proactively seek NBFIs generally do not see a rationale for cooperation opportunities with banks. collecting this data, which makes it difficult 61 • Establish supply chains: Chambers of in Mongolia is still perceived to be Commerce, for instance, can form supply complicated. It is also common that, due chains among its members, monitor the to time constraints, women refrain from relations between the various parties visiting the registry office to obtain the through the supply chain, perform certificate of land possession. In other words, quality control checks at different levels, bureaucracy associated with the land registry and can finally link them to a financing process is also impeding women in accessing institution to get finance. Supply-chain property ownership. Additionally, women finance mechanisms can be promoted as an are often not aware of or do not value their alternative to factoring, which is currently ownership and property rights. Concrete does not exist in Mongolia. efforts could be made to raise awareness about their property and land ownership • Organize informational campaigns about rights. SME development institutions can land registry / property rights that also provide educational sessions/informational reach out to women: Despite the revisions campaigns on the subject directed at women. in the Land Law, land possession process 62 References ADB (2008). Mongolia: Education Sector. EBRD (2013b). 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Ulaanbaatar. http://www.mn.undp. for All Global Monitoring Report Literacy org/content/dam/mongolia/Publications/ for Life. UNESCO. http://unesdoc.unesco.org/ NHDReports/NHDR_report_english_2011_last. images/0014/001462/146207e.pdf pdf World Bank (2012). Access to Finance Technical Note. Financial Sector Assessment Program, Development Module Mongolia. Washington, D.C. 64 Annex A: List of Persons Interviewed Governmental / Regulatory Bodies Name & Surname Institution & Position Tel. E-mail Ms. Ariuntugs Erdenesambuu Mongolian NBFIs Association – Executive Director +976 9999 8770 ariuntugs@bbsb.mn Mr. Orkhontamir Tserendorj Financial Regulatory Commission of Mongolia – +976 261662 orkhontamir@frc.mn Director, Risk Evaluation and Research Division Ms. Bolormaa Mashlai National Committee on Gender Equality - +976 51 246876 bolormaa@gender.gov.mn Secretary and Head of Secretariat Mr. Enkhtur Nyamaa Ministry of Labour, SME Development +976 62 263026 enkhtur@mol.gov.mn Department - Officer Mr. Bayarmagnai Baasans- Mongolian Bankers Association – Manager, +976 11 323581 bayarmagnai@mba.mn uren Information and Partnership Mr. Borkhuu Gotovsuren The Bank of Mongolia, Supervision Department – +976 11 323435 borkhuu@mongolbank.mn Senior Supervisor Ms. Erdenesan Eldev-Ochir National Statistical Office of Mongolia – Director, +976 51 263152 erdenesan@nso.mn Macro Economic Statistics Department Ms. Amarjargal Tsogtbayar National Statistical Office of Mongolia – Officer, +976 51 261560 amarjargal@nso.mn Macro Economic Statistics Department International Financial Institutions / Finance Programs Mr. Batmunkh Batbold IFC – Project Manager, Access to Finance Project, +976 7007 8287 bbatbold@ifc.org Mongolia Mr. Efrain Laureano, Ph.D. USAID, Business Plus Initiative – Chief of Party +976 11 321375 elaureano@bpi-chemonics.biz Mr. Mauricio Moscoso USAID, Business Plus Initiative – Private Sector +976 11 321375 mmoscoso@bpi-chemonics.biz Advisor Mr. Bayarmagnai Jigjidsuren USAID, Quality Center Development Center- +976 11 321375 bayarmagnai@qsdc.mn Executive Director Mr. Arai Junichi JICA – Project Formulation Adviser +976 11 312393 Aria.junichi@jica.go.jp Mr. Eric Guetschoff European Bank for Reconstruction and +976-11-317974 GuetschE@ebrd.com Development, Senior Advisor, Project: Support to SME Development in Mongolia SME Development/Support Institutions Ms. Dolgormaa Nasanjargal Mongolian Chamber of Commerce and Industry, +976 11 314000 dolgormaa@mongolchamber.mn Head of SME & Local Chambers Promotion Div. Mr. Enkhtaivan Sosorbaram SME Business Incubation Center, Chingeltei +976 11 358009 chd_bit@yahoo.com District - CEO Ms. Odgerel Baldanjav SME Development Center of Capital City – +976 11 318517 od5_erhes@yahoo.com Chairwoman Mr. Davaajav M. Credit Guarantee Fund of Mongolia - Lawyer +976 7011 0057 davaajav@lgf.mn Financial Sector Representatives Mr. Randolph S. Koppa Trade & Development Bank- President +976 11 318970 r.koppa@tdbm.mn Ms. Delgerjargal M. Trade & Development Bank – Account Manager, +976 11 319943 m.delgerjargal@tdbm.mn International Banking Department Mr. Norihiko Kato Khan Bank – CEO +976 11 332331 norihiko.k@khanbank.com Mr. Ganbaatar Jambal XacBank – President +976 11 318185 ganbaatar.j@xacbank.mn Ms. Bolormaa Luvsandorj Golomt Bank – Chief Investment Officer, +976 7011 7676 bolormaa_l@golomtbank.com Executive Vice President /1400 Ms. Byambasuren Ulambayar Golomt Bank – Senior Officer, Credit Division SME +976 7011 7676 byambasuren_u@golomtbank.com Department /1322 Mr. Sundii Dorjrentsen Net Capital, Chairman of BoD +976 7011 0033 sundii@netcapital.mn Mr. Altanzul Zorigt Transcapital – CEO +976 11 332255 zul@transcapital.mn Ms. Battsetseg T. Mongolian Confederation of Credit Unions +976 9913 4458 tbattsetseg@gmail.com NGOs Ms. Erdenechimeg Badrakh MONES, Mongolian Women’s Fund – Executive +976 7711 9991 chimgee@mones.org.mn Director Ms. Ankhmaa Shijirbaatar Business Professionals Network – Program +976 77 113309 info@bpn.mn Manager Mongolia Legal firm Ms. Enkhtsetseg Nergui Anand Advocates, Professional Law Firm – Senior +976 11 329442 enkhtsetseg@anand-advocates.mn Lawyer 65 Annex B: Brief Overview of Stakeholder Interviews Banks mainly on the following sectors: wholesale and retail trade, construction, mining, transportation Khan Bank: Khan Bank was established in and agriculture. Khan Bank branches are 1991 as the Agricultural Cooperative Bank in granted a loan approval authority of up to connection with the dissolution of the State MNT 100 million (USD 55,000). Loan requests Bank of Mongolia. The bank inherited most exceeding this amount have to be approved by of the assets and businesses of the state bank the head office sub-credit committee and then to in rural Mongolia. In 2003, the bank was the head office credit committee. A typical loan successfully privatized. Today, the bank operates application is processed within 2-3 weeks. with 500 branches. It is the largest branch network across Mongolia with about 100 Khan Bank does not collect gender branches in UB and more than 400 branches in disaggregated data, but the CEO shared rural Mongolia. It has an office in every aimag his observation that there are many female capital (21 aimags) and soum centers (circa 20 customers at the managerial level of an soums in each aimag). The bank is organized institution and/or owning/managing a business. in three regional directorates: the east, the Mongolian women’s engagement in the tertiary west and the UB regional directorate. Through education is also higher than that of men (70% his extensive network, Khan Bank provides of students are female). Another observation is comprehensive banking services to individuals, that families often own several businesses, which SMEs and corporate customers. often forces the bank to compile up to three financial statements. The bank provides services and facilities to about 1.8 million customers, including SMEs. The bank operates three SME centers in In 2013, Khan Bank’s total assets increased Ulaanbaatar focusing on lending to SMEs. No by 72% and reached MNT 4.8 trillion (USD retail activities are offered in those business 2.7 billion). Total loans grew by 42% to reach centers. Khan Bank also set up a Business MNT 2.5 trillion (USD 1.4 billion). Programs Incubator Center with the mission of increasing implemented by the Central Bank of Mongolia capacity of SME business owners. In 2013, the through commercial banks (i.e. government bank organized about 20 training seminars mortgage loan program) had an impact in for SMEs and around 350 entrepreneurs were this growth. The bank currently has USD 170 trained free of charge through these seminars. million outstanding with various IFIs (IFC, EBRD, JICA). The bank’s market share in Two major obstacles in SME lending were banking sector total assets, loans, deposits is mentioned during the interview. First, movable 25%, 23% and 29%, respectively. In addition, collateral cannot be used because of a missing 40% of all bank branches across the country movable assets registration system. So far, belong to Khan Bank.76 movable collateral is only used on a contractual basis for small amounts and to well-known About 50% of the loan portfolio is distributed customers or as additional collateral to to legal entities, of which 60% is to SMEs and immovable collateral. Second, SMEs lack the 40% to corporates. Legal entities are defined capacity to produce proper financial statements as SME if the turnover does not exceed MNT and do not use auditors’ services. Khan Bank 1 billion. SME lending is considered as the less reviews tax reports, however, these do not risky business compared with lending to the necessarily give the real picture of the enterprise. mining sector, with the current NPL being 1%- It was further noted that land only is not 2%. Khan Bank’s loan portfolio concentrates 76 Khan Bank Annual Report 2013. 66 considered as reliable collateral. It is pledged in Branches have up to MNT 100,000 loan combination with the buildings on it. approval authority. Loan requests exceeding that amount come to the head office sub-credit Khan Bank perceives the following issues committee that is held three times a week and in need of improvement for the Mongolian having a credit approval authority of up to banking system: MNT 350,000. Any loan above this amount • Establishment of a check-clearing house. is subject to approval of the central credit committee. TDB is also engaged in financial • Establishment of a movable assets registry leasing activities via TDB Leasing and has so system. far leased equipment to companies in mining, construction and cashmere production with a • Development of the hedging mechanisms. supplier buy-back guarantee. Trade and Development Bank: Trade and Golomt Bank: Golomt Bank was established Development Bank (TDB) was established in 1995 as a wholly owned subsidiary of Bodi in 1990 and has become a leading bank in International L.L.C., one of the major players in Mongolia especially in corporate banking and Mongolian social and economic arena. Principal trade finance. TDB’s corporate clientele are activities of Golomt Bank include: savings, loan mostly engaged in the mining, foreign trade, services, card services, guarantees and letter of construction and manufacturing sectors. Clients credit, money transfer, sales, purchase, deposit are served through 47 branches with most of and trading of foreign currencies/precious them located in urban areas and Ulaanbaatar metals, foreign settlement, issuance and trading (35). of securities, financial leasing service and other As of April 2014, TDB’s asset size reached USD financial services not restricted under the 2.8 billion of which 52% are loans. The number legislation and other activities accepted by the of corporate customers (including SME clients) Central Bank, as well as other governmental reached 26,700 with a total outstanding loan agencies. portfolio of USD 1.1 billion. In terms of assets, Golomt Bank posted an The bank does not have a clear SME definition; increase of 48% in 2013 and the bank’s total SME clients are segmented by loan size. Due assets reached MNT 3.7 trillion (USD 2.1 to this, the management admits that there may billion), 60% of which is loans. The bank be some large corporate clients in their loan operates with about 100 branches in Mongolia, portfolio that have benefited from an SME- of which around 60 are located in UB. Golomt focused loan program as many corporate clients is present in most of the aimag centers. are sometimes in need of a smaller loan (small SME lending is for Golomt Bank a strategic expansions, equipment investment, etc.) and business and is currently improved by can be funded via loan programs designated the introduction of new products and the for SMEs. TDB does not collect gender- declaration of 2014 as the “SME support year.” disaggregated data, but the management has Golomt Bank defines enterprises as SME when observed that women’s presence in managerial the asset size is 150 million to 3 billion MNT roles is quite visible. and sales between 300 million and 5 billion TDB management mentioned that the average MNT. Enterprises with assets or sales below loan maturity is around 18 months apart from are served through the retail department, larger the project loans with a special funding scheme companies are classified as corporate finance (KfW and JICA project loans are offered). clients. The main challenge mentioned in the Further, SME loans are estimated to be typically context of SME lending and, in particular, within the 300,000 to 600,000 USD range. lending to women-owned SMEs is shortage of 67 collateral. Credit guarantees or loan insurance are female. The share of female loans in the total were referred to as possible solution for the loan portfolio is about 60%. It is observed that banks to lower interest rates as well as to men have on average larger businesses. Female increase loan to value ratio. clients are perceived as less risky, as they are more responsible in terms of loan repayment Although the corporate decision has currently and loan use. The interest rate charged by not been taken, the bank’s management is Transcapital is slightly more than 2%, whereas considering an internal definition for women- 3% is reported as an average interest rate per owned businesses. These are entities where month for the non-bank financial sector. Along women owners hold at least 25% of the with the individual lending, Transcapital offers company shares and at the same time manage group loans. However, the share of group loans the company. The bank is also willing to does not exceed 25% of the total portfolio. upgrade its MIS system to collect gender- disaggregated data, which is currently not Transcapital observes that it gets more difficult available. for microenterprises to borrow from banks, whereas banks increased their efforts in Other highlights of the interview conducted with targeting SMEs due to the lower performance Golomt Bank concerning SMEs and women- of the mining and other corporate sector owned SMEs were: businesses. Accordingly, there is a concern that  Traditionally and culturally Mongolian the banks would decrease their lending to NBFIs women are strong and dominant; they in the future. prefer to be engaged in business life Net Capital: Net Capital is established in 2008 either as an employee or entrepreneur. and currently employs 60 staff members. The  However, men are usually more NBFI has five branches across the country and informed about government programs serves around 10,000 clients. It is considered to and trainings as women lack networking be one of the leading NBFIs, taking the 3rd or 4th opportunities. position in the sector per asset size.  Women-owned/run businesses create Net Capital provides business loans, lower NPLs as men sometimes take risks consumption loans, leasing and trust services. beyond their capacities. The average loan size is MNT 4 million. The loan portfolio currently comprises 3,500 loans Non-Bank Financial Institutions outstanding. The interest rate charged is 3.5% to 4% per month; however, lower rates are Transcapital: Transcapital was established in offered to repeat clients. Most clients (about 2001. As of today, it operates through eleven 70%) are men. Net Capital accepts vehicles as branches, serving about 14,000 clients. To collateral which are usually owned by men. The serve clients’ financial needs, the company is CEO interviewed mentioned the risk of over providing micro and small businesses with indebtedness, since due to the absence of the loans along with various consumption loans. registry of moveable assets, vehicles can be used It mostly provides services in Ulaanbaatar and as double collateral. Several comments raised other urban areas. Expansion to the rural areas by Transcapital, Net Capital, and the Non-Bank (currently two branched) is not considered due Financial Institutions Association: to high competition. • The number of NBFIs in Mongolia is The average loan size is 3.5 million MNT increasing very fast (a fact also confirmed (excluding micro businesses it is MNT 8 by the Mongolian Non-Bank Financial million). Besides immovable collateral, Institutions Association). As of today, the household appliances, jewelry and movable total number of NBFIs is around 300 and it property are accepted. Most clients (about 70%) continues to increase. 68 • This rapid increase may create problems in CGF currently has a guarantorship agreement the future as so many very small NBFIs with with eight banks and three NBFs. Total no tangible activity have been established guarantee portfolio issued to five commercial recently. banks has been MNT 3.7 billion (~USD 2 million) as of 2014, with 58% of this volume • Larger NBFIs are pushing the FRC to realized by Golomt Bank. Some 75% of the increase the minimum required capital to guarantees are issued for companies located in establish an NBFI from MNT 400 million Ulaanbaatar and nearly 70% of guarantees are to MNT 1 billion. MNT 400 million issued for companies engaged in manufacturing. minimum capital requirement was agreed CGF does not ask any type of collateral from five years ago and it is now outdated due to guarantee beneficiaries. depreciation of the local currency in the last two years. As though the CGF currently enjoys a 0% NPL rate, the interviewee at the CGF also admits that • The sector’s average loan tenor is twelve there is no specific clause in the law regulating months with an average monthly interest the CGF as far as potential non-repayments are rate of 3.5-4% per month. concerned. • There is no gender-disaggregated data on SME Development Center of Capital City: The the sector, but observations reveal that center operates as a government body for the close to 60% of clients are women with the provision of financial and non-financial services exception of car loans. Female clients are to the SMEs located in Ulaanbaatar. Its activities much more disciplined in repayments. fall under the UB’s mayor’s office, which can run • Loan processing time is rather short programs independently from but complying compared to banks and disbursements are with those of the central government. The center usually done within one to two days; has nine branches in each of the sub-districts in UB. It was established in 2011 and operates • Around 40% of NBFI clients do not have a since 2012, offering trainings and advisory registered business. services. SME Development/Support Institutions The center has conducted own research to identify the challenges SMEs in UB city are The Credit Guarantee Fund of Mongolia: The currently facing, as well as to reveal some Mongolian Credit Guarantee Fund is a public information on their profile. 3,025 SMEs in non-profit financial institution established on the last two years were covered under this 6 November 2012 under the provisions of the survey. The major findings of the survey can be Law of Credit Guarantee Fund. Its mission is summarized as follows: to help develop SMEs and start-ups, especially those that face problems in meeting collateral • Access to finance is a key obstacle. SMEs requirements imposed by the commercial banks. stated that commercial banks always ask for Although establishment took place in 2012, immovable property as collateral. Even if they the real activities picked up in 2013 with the can provide it, banks value their collateral much lower than its market value. Other problems in issuance on the first guarantee on 1 June 2013. access to finance are lack of documents and lack The Guarantee Committee at CGF in charge of of financial history. issuance of guarantees is composed of: • Lack of capacity at SMEs is an obstacle, including lack of business skills, information, • the executive director of CGF; training, as well as a suitable workforce. • the Ministry of Labor representatives; • Around 62% of the SMEs/entrepreneurs who • the representative from each of the three participated in the survey were women. commercial banks (Khan Bank, XacBank, Golomt Bank). 69 • Many businesses also operate as family high interest rate, the center is taking such businesses where it is common that the wife has an initiative to overcome this problem. decision-making authority. And MNT 5 billion of which (~USD  • About half of the enterprises are well run, 2.8 million), is to be disbursed via five whereas the other half has larger problems. In commercial banks with +5% interest particular, within the last twelve months more margin. (Additional funding up to MNT businesses closed then than in previous years. 30 billion (~USD 17 million) is intended • About 25% of the businesses are successful for this component through time). businesses. SME Business Incubation Center, Chingeltei • About 10% of the businesses formalized District: The SME business incubator was within the first two years of operation. The low established in 2011 and started its operations in formalization rate can be explained by lack of 2012 in the Chingeltei district of Ulaanbaatar. capacity of SMEs to register and the difficulty in The center operates in this district with around handling tax declarations afterwards. 150,000 people in four branches, providing • Nearly 25% of the total sample does not have a training and business advisory services to mainly stable and regular business activity. Operations start-up, small and family-owned businesses and tend to be irregular and/or seasonal, 85% of households. survey respondents have one to nine employees. The center conducts its own research among the Based on the findings of the research, the beneficiaries of its services. The recent report mayor’s office took the following initiatives, revealed the following challenges for (start-up) some of which will be implemented by the SME SMEs: Development Center of the Capital City: • High costs of renting a workplace: most of • Initiated a training and capacity-building the businesses conduct some work-related program for SMEs in each of the nine individual activities at home; sub-district SME development centers. Trainings covered topics like how to write a business plan, • Lack of workforce: salaries that business practical business environment, production owners pay to their workers are low management, accounting and financial literacy. compared to other sectors; The SME development center cooperates with Golomt Bank on financial literacy trainings. • Access to finance: most of the businesses • So far 1,362 SMEs/entrepreneurs have been need financing to cover working-capital trained via this program, out of which, 791 have needs and expand their business. Without already prepared a business plan. About 80% of credit history those businesses are excluded the beneficiaries were women. from banking services; • The cost of this training is around MNT 200,000 • Distribution of products, marketing and for each applicant. The center was providing sales: businesses lack or are unaware of these trainings for free, but a small contribution distribution channels, and face difficulties by the entrepreneur (MNT 30,000) has recently with marketing and promotion of their been introduced, products. Attempts are being made to • MNT 20.2 billion (~USD 11 million) of organize points of sale; concessional funding (with 1% p.a. interest rate) • Lack of networking opportunities: is allocated for SMEs; businesses lack opportunity, time and space MNT 15.2 billion of which (~USD  for networking and information-sharing. 8.5 million) will be channeled through • High taxes are often the reason for start-up cooperatives. As Savings & Union businesses not to register. Tax requirements Cooperatives are known to charge a very are often not clear to entrepreneurs. 70 The ultimate goal of the incubation center is to • Government-loan programs not reaching out formalize businesses. So far, however, the rate of SMEs. the successful registrations has been low (10% of all 700 beneficiaries received their tax book in Nevertheless, the CoC is of the opinion that 2013). In total, there were 1,500 beneficiaries of SMEs are also responsible for this unsatisfactory the services in two years of operations. status of finance. SMEs in Mongolia usually suffer from lack of capacity in preparing a The typical women businesses are tailoring/ sound business plan and satisfactory cash-flow sewing, food production, and production of projections. They also do not have a thorough leather souvenirs, whereas men are engaged in understanding of the market they operate in; construction, and furniture-making. neither can they closely follow the technological developments, nor changes in supply and It has been observed that it usually takes about demand conditions. Even for those that have a two years from start-up to maturity stage of better understanding of these issues, they usually the business development. Not many businesses are unable to demonstrate their knowledge reach this stage after two years. Many lack to creditors. They are also not financially capacity and the necessary financing to survive. disciplined and can get simultaneous loans Trainings provided by the SME incubation exceeding their real needs, which is always a center are financed through the district budget. concern for commercial banks and NBFIs. Cooperation experience with the banks has so In addition to previously mentioned problem far been rather modest (Kapital Bank, Golomt areas, SMEs in rural areas face challenges, such Bank). It has been noted that banks often do as: not trust to the incubator centers. They should become more proactive since both parties would • Small market size; benefit from such cooperation. • Weak purchasing power; Chamber of Commerce: The Chamber of Commerce (CoC) is not a direct source of • Restricted access to energy sources; statistics on SMEs. However, it conducts • Poor infrastructure (poor road conditions, market surveys to reveal the challenging difficult transportation). areas for SMEs with the aim of relating these challenges to the regulatory bodies. The surveys CoC also sees limited capacity of public conducted through the members of the CoC employees in charge of implementing the SME revealed that only 30% of SMEs have benefited programs as a bottleneck for the development of from government-funded programs. It also the SME segment. highlighted the following challenges for SMEs: Business Plus Initiative (USAID) is a finance and • Low access to finance, mainly due to lack/ capacity-building program funded by USAID insufficiency of collateral. and implemented by Chemonics, addressing the issues of trade facilitation, taxes, construction • Inflexible loan conditions, including high permissions, and business registration. So interest rate and low loan maturity. far, the project has addressed these issues • Lack of Interest at commercial banks for successfully. However, two issues remain critical: SMEs. registration of movable assets and a functioning credit-information bureau. Access to finance • Lending procedure at banks is cumbersome is not addressed by the project. Insolvency and time-consuming. and enforcement procedures remain weak and archaic in Mongolia, and need improvement. • Lack of coordination among public They will be in the focus of the program in the institutions. future. 71 BPI in the course of its activities has set up a TA and financial support are selected based on number of institutions (to institutionalize tits three criteria: 1) their sales with support of the efforts in training and capacity building. The program should increase by 5 USD per invested examples are: 1 USD; 2) they should be registered and have a contract with the buyer of the products. To Banking and Finance Academy (BFA) provides avoid the issue of double accounting, the cash banking related training, owned by the banks flow is analyzed; 3) risk sharing, the company now, established five years ago. should be able to contribute to investment Corporate Governance Development Centre (program does not finance working capital (CGDC) – the diagnostic and rating toolkit needs). The decision is made on a case-by-case on corporate governance was developed and basis as per internal rating (a least 75 out of distributed to more than 500 companies- 100 points). The amount of the fund approved beneficiaries (in available in English and by USAID is 450 thousand USD. Currently 14 Mongolian). projects are in the pipeline. The procedures are however still at the fine-tuning stage (checklists Quality Supplier Development Centre (QSDC) developed). The team consists of two advisors, – was initiated to address the issue of quality in one senior advisor and one senior trainer will be production, provision of services, value chain, employed in the future. and capacity (how to help companies grow and meet specific demands). The mechanism Trainings provided by the project: quality of support to individual businesses (SMEs) is management training program; food safety buyer or contract-based (transaction-based). management system; hazard analysis and critical This means that the institution identifies control point; six sigma training (for senior what large buyers of the SME are specifically management); etc. In 1,5 years, more than 300 looking for, what are the buyer’s standards and participants representing 100 companies have requirements. Based on it, the financial support benefitted from the trainings. Participants pay and advisory is provided to an SME. It is also full price ranging from 200 to 400 thousand possible to initiate the project by contacting MNT. It was noted that trainings provided are the supplier or the third party involved in the of high level with certified international trainers. contract or relationship between supplier and Japan International Cooperation Agency (JICA): buyer. Japan’s Official Development Assistance (ODA) The QSDC is the first non-grant type of an expanded to Mongolia in 1990. In April 2012, a initiative at USAID as it intends to function as a new program was approved by the government revolving fund in the future. The SMEs that can of Japan. JICA’s activities in Mongolia can be be provided with TA and financial support are grouped in three categories: selected based on three criteria: 1. Sustainable Development of the Mining 1) The incremental sales increase should be USD Sector: works on the master-planning level 5 per each USD 1 invested. and aims at improving productivity and efficiency in the Mongolian mining sector. 2) Companies should be registered. 2. Enhancement of UB as an Urban Center: 3) Companies should be able to contribute to aims at improving the infrastructure and the investment – risk sharing mechanism focuses on urban planning as well as (program does not finance working capital management. needs). 3. Assisting Inclusive Growth: (including The QSDC is the first initiative (2013) based SME activities) with the aim of increasing not on grants (as previous USAID programs) employment opportunities and meeting basic but intends to function as a revolving fund in human needs. the future. The SMEs that can be provided with 72 Activities in the third category of operation can Business Professionals Network: Business be summarized as follows: Professionals Network (BPN) is a non- governmental organization and foundation JICA organizes capacity development programs based in Bern, Switzerland, currently active in for SMEs consisting of a six-week training Kyrgyzstan, Rwanda, Benin, Nicaragua and course conducted over six months (one week Mongolia. BPN’s office in Mongolia opened training each month). The total cost of the up two years ago to support the Mongolian’s training is born by the participants (MNT craftsmen (most of which are start-ups) on 600,000 fee charged for the training). In the their road to becoming businessmen through last 12 years, around 700 people attended these trainings, seminars and coaching, as well as trainings representing about 300 SMEs. through funding, albeit to a lesser extent. JICA also introduced the Two-Step Loan Project Enterprises enrolled with BPN’s capacity for SMEs Development and Environmental building program can be registered or Protection in Mongolia in 2006. The aim of unregistered enterprises. Nevertheless, BPN the program is to provide long-term funding also encourages them to get registered. PBN’s through Mongolian commercial banks to activities are centered in the capital city and SMEs. The objectives of this assistance also only entrepreneurs based within the 100 km include the promotion of environmental periphery of UB can take part in their program. preservation measures, which is an area of Program lasts for four years and covers the concern for Mongolia. In this program, Japanese following areas in 4-5 days training courses; government provides a concessional loan to the business administration, financial management, Central Bank of Mongolia and the Central Bank marketing and leadership. Trainees cover about of Mongolia extends this loan to commercial one-third of the total training cost. banks to be on-lent to SMEs. In the two phases of the program, USD 13 million and USD 50 The program can continue with or without the million respectively have so far been disbursed credits support by the BPN. If the applicant is to final beneficiaries. found eligible for financing, a loan up to USD 20,000 can be extended with two to three years JICA does not have a women-entrepreneur- maturity and 1% monthly interest rate. BPN specific program, but WEs can also apply as recently has received its license as an NBFI. long as they qualify for the program and the Despite the detailed analysis of the entrepreneur on-lending banks’ lending criteria. The program and the project, funding provided by BNP is not also requires applying SMEs to submit an free of collateral Environmental Impact Assessment Report, the cost of which is covered by the government PBN applies certain selection criteria to office. identify beneficiaries for its program. The most important criterion, the business has to JICA is not involved in any direct lending have potential to develop. Since the start of activities with commercial banks and/or final activities in Mongolia, BPN received hundreds beneficiaries and can only support the sector of applications, 40-50 of which are selected via governmental institutions. Another activity to enroll in the training program. Only ten of JICA within ODA has been the grant aid entrepreneurs have been granted a loan. provided through the Ministry of Economic Development. The program was based on grants BPN does not have a gender-disaggregated data, to SMEs. Nevertheless, the Japanese government but the program manager for Mongolia said decided to stop the grant component of the that 57% of the program participants in 2013 program as the World Bank now classifies were women. This rate is 42% thus far in 2014. Mongolia as a middle-income developing economy. 73 Governmental Bodies / Regulatory Legal Company Institutions Anand Advocates: Anand Advocates is Ministry of Labor: The Ministry of Labor recognized as one of the leading professional (MoL) assumes the overall regulatory role for law firms in Mongolia. The company operates nationwide SMEs. The SME Development since 2003 and provides services in all areas Department at the MoL is the only department of Mongolian law as well as international authorized by law to undertake regulatory commercial and business law with over 20 changes and make arrangements for SMEs. qualified lawyers. The firm’s practice areas are: The Mongolian government has thus far implemented two national programs for the • Banking & Finance, development of SMEs: • Corporate and M&A, • First program implemented between 1999- • Natural Resources & Energy, 2004 prioritizing the issues related to • Tax Advisory Services, infrastructure of SMEs; • Litigation and Bankruptcy, • The second program between 2006-2012 • Real Estate. focusing on enhancement of the legal and Below are the issues highlighted by Anand policy framework such as the enactment of Advocates regarding the business enabling the Law on SMEs, Law on Legal Status of environment and finance sector in Mongolia. Industries, Law on Science and Technology and the Law on Credit Guarantee Fund, etc. • The Law on the Credit Guarantee Fund (CGF) was enacted in February 2012 and The responsible governmental authorities are the Credit Guarantee Fund of Mongolia continuing their discussions on a third program. started operations in 2013. Nevertheless, the The five targeted goals of the new program can existing law does not specify the collection be categorized as follows: procedures for the CGF in case of a default. • Creation of product marketing and selling • Business registry is not a major concern for opportunities for SMEs; enterprises as far as the time to register a • Cluster development; business is concerned. Nevertheless, registry office employees lack the knowledge and • Capacity building at the SMEs; information demanded by the entrepreneurs. • Capacity building for the MoL staff at UB They are also not very service-minded; city center and aimag centers; • Closing a business requires the inspection by • Ensure harmonization between the laws. tax authorities, who usually act slowly; Two international institutions are active cooperating partners to MoL: JICA (in the field • Registry of movable property remains an of capacity development) and EBRD (concerning obstacle, especially for SMEs and the draft legal advisory). A sizeable portion of SMEs in bill on the pledging the movable property Mongolia are unregistered. The MoL is also should be discussed and finalized as soon as working on developing an incentive system to possible; encourage SMEs to register. • In case of default, the value of property can MoL is not directly in charge of collecting data be an issue of dispute between the borrower on SMEs in Mongolia. SME data is rather and the creditor. The court procedure may collected by two other sources: National take very long as consensus between parties Statistical Office and the Tax Office. MoL on the selling value of the property under admits that there is currently no gender hypothec is required for the property to be disaggregated data on SMEs. sold. 74 IFC Batmunkh Batbold, Operations Officer MCS Plaza Building, 4th Floor 4 Seoul Street 14250 Ulaanbaatar Tel: (976) 7007 8280 Fax: (976) 7007 8285 ifc.org/eastasia