Mongolia: SMEs take centre stage
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Central Asia

Mongolia: SMEs take centre stage

For too long, Mongolia has depended heavily on the resources sector, but banks such as TransBank are making an important push to lend to small and medium-sized enterprises.

By William Pesek


Otgonbayar Munkhtogoo doesn’t need government data, charts or analysts’ reports to know that Mongolia is on a rollercoaster. The chief executive of TransBank only has to look out of his office window high above Ulaanbaatar.

Down below, in the middle of the National Amusement Park, sits the sprawling network of loops, drops and double corkscrews of a real rollercoaster that serves as Otgonbayar’s daily metaphor for the epic thrills and spills his nation’s economy tends to produce.

“Yes, ups and downs are what Mongolia is known for,” he tells Asiamoney. “We are working to have more ups than downs.”

In the case of TransBank, that means pivoting towards small and medium-sized enterprises keen on creating jobs and economic energy from the ground up, rather than just serving Mongolia’s bigger corporations.

TransBank is not among the nation’s biggest banks, ranking ninth out of 13 institutions in scale. With total assets of about $193 million, it is dwarfed by Khan Bank’s $3.6 billion or Trade and Development Bank’s $2.8 billion. 

That, however, leaves considerable room to expand in a $13 billion economy growing better than 6%.

TransBank is one of Mongolia’s fastest-growing institutions at a time when the IMF is scrutinizing the financial sector. A key demand the Fund made when handing a $5.5 billion bailout to Ulaanbaatar in 2017 was stronger bank balance sheets. TransBank boasts the nation’s highest capital adequacy ratio of 21% and the highest net profit per employee. Its tally of non-performing loans, at 4.9%, is less than half the 10.5% national average.

In the year ahead, TransBank wants to enter the ranks of the systemically important financial players. In that sense, it’s an apt microcosm of where Mongolia hopes to venture in global economic circles.

TransBank plans to get there with an aggressive expansion in SME lending.

The SME sector has long been crucial in Mongolia’s development. The government says that there are 67,000 such operations, employing about 57% of the nation’s workforce. But those roughly 800,000 workers contribute just 17% of the nation’s annual gross domestic product.

Misplaced government incentives explain the disparity. The primacy of the mining sector leaves SMEs on the losing side of policy priorities. Up to 90% of SMEs still don’t have ready access to finance through banks, which dominate Mongolia’s finance system, according to the Asian Development Bank. 

In Mongolia, SME development offers a viable option for private-sector-led growth that reduces poverty and creates jobs in rural and urban areas - World Bank

When public officials try to lend a hand, controversy is often not far behind. 

Such was the case in 2009, when the government expanded its Small and Medium Enterprises Development Fund. Unfortunately all too many of its soft lending and concessional loans at 3% interest were made to SMEs connected to prominent politicians and their families, according to local and regional media reports.

In November 2018, prime minister Ukhnaa Khurelsukh survived a no-confidence vote over alleged embezzlement of SME funds involving parliamentarians. It was initiated by members of his Mongolian People’s Party after protests in the capital over the scandal. It is thanks to mismanagement and corruption in such funds that many SMEs are starved of capital.

In April 2019, the government rolled out another effort to support SMEs until 2022. It’s a key part of Mongolia’s scheme to diversify growth engines away from resources and mining. 

Yet here, too, the push seems more aspirational than substantive.

Ulaanbaatar touted a two-stage programme. One, setting aside new funds to support SMEs. Two, becoming more open to SMEs receiving foreign loans and aid. 

What’s missing, though, are clear dollar amounts or details to show that the funds won’t be squandered by corruption. The overall vision seems rather modest: raising SMEs’ GDP contribution to 21% and creating 30,000 jobs. This is hardly a bold play to recalibrate growth drivers.

If anything, Mongolia has become more vulnerable to global headwinds since 2009, the year Rio Tinto won a three-decade-long monopoly to develop the enormous Oyu Tolgoi copper and gold mine. The deal angered a majority of Mongolia’s three million people because the nation’s considerable resource wealth was not widely shared.

Within two years, the influx in Oyu Tolgoi-related investment propelled GDP growth to 17%. Wages across the economy didn’t surge, fomenting broad anger. Discontent flared up anew when plunging commodity prices led to layoffs and wage declines.

In early 2019, in the biting January cold, more than 20,000 people took to Sukhbaatar Square in central Ulaanbaatar to protest over inequality and worsening air pollution.

Increasing the role of SMEs is vital to confronting these and other hot-button issues, particularly with the approach of an election in June 2020.

“Across the world, small and medium-sized enterprises are important generators of jobs and income, and often drive innovation and growth,” the World Bank said in a report published in August. “In Mongolia, too, SME development offers a viable option for private-sector-led growth that reduces poverty and creates jobs in rural and urban areas. 

“SMEs are also vital for diversification of the Mongolian economy and for enhancing its competitiveness. However, many microenterprises face barriers to productivity and to generating decent employment.”

Economic efficiency is an important issue for economies susceptible to the resource curse. It’s perhaps no coincidence that the deeper miners dig into Mongolia’s underground treasures, the more ground the country has lost in the World Bank’s annual Ease of doing business report. 

Mongolia currently ranks 81st out 190 economies, whereas it ranked 58th in 2009, when the real gold rush began.


Otgonbayar points to this backsliding, and says it’s not clear the government is sufficiently focused as the election approaches.

“The budget is certainly being discussed – lots of expenditures to come,” he says. “There’s less talk, however, about making Mongolia more competitive in the world.”

That is putting the onus on bankers. TransBank lacks the scale of Mongolia’s biggest, and its bigger rivals might seem better positioned to corner the SME market.

Khan Bank and State Bank, for example, have wide branch networks and deep relationships in retail banking. 

TDB is the top corporate lender, while Golomt Bank is strong in corporate and retail. XacBank is a big player in small business lending and microfinance.


Otgonbayar Munkhtogoo,
CEO of TransBank

What makes TransBank interesting, though, is its clear determination to propel Mongolia’s transition from frontier market to developing one while also expanding the bank’s footprint. It’s a vision Otgonbayar brought to the office with the rollercoaster view in 2016, when he became chief executive.

Otgonbayar, 42, earned an MBA at the University of Northern Virginia. In the early 2000s he managed a transport project for the World Bank and later one for the ADB. 

He has done stints at the ministry of roads, transportation and tourism, Mongol Post Bank and Golomt. For a time, he served as a top adviser to a member of parliament.

In 2016, Otgonbayar was hired to run TransBank just as its ownership structure transferred to new shareholders led by Temuujin Munkhbat of United Investment Partners. At the time, TransBank also passed the central bank’s asset quality review, several months before the IMF’s rescue squad arrived.

TransBank’s enviable liquidity position is a nice thing to have, given recent events. Mongolia’s inclusion on the Financial Action Task Force’s grey list has only added to the already daunting pressures on the economy.

As if the trade war slamming China, Mongolia’s main customer, and the need to meet the IMF’s targets weren’t challenges enough, the banking sector is now under global scrutiny to redouble efforts to fight money laundering and terror financing.


With its enviable capital adequacy position, TransBank is staying focused on its SME mission, one that Otgonbayar admits is a work in progress. The goal is for TransBank’s portfolio to be 80% loans to SMEs, up from about 44% as of the third quarter of 2019.

Between October 2018 and September 2019, his team lent to stand-out SMEs in nine industries, ranging from trade and transportation to hotels and construction. But two of the biggest growth areas are microlending to consumer services and electricity entrepreneurs.

This latter push is aimed at playing a positive role in reducing the pollution darkening the skies over Ulaanbaatar, where about 46% of the population resides. 

The coal debris billowing out of giant smokestacks situated around the capital can completely blot out the mountains in the distance. It wafts through the gleaming skyscrapers downtown and the blocky, Soviet-area apartment complexes on the city’s edge.

In January 2018, Ulaanbaatar attracted the attention of international aid organizations when its reported levels of PM2.5 (or tiny and harmful) particles rose to 133 times the World Health Organization’s recommended maximum.

The problem isn’t just the city’s football field-sized power plants but the dense colonies of tent (or ger) communities that surround it. All too many families living in gers use the rawest, dirtiest coal for heating purposes. These ger districts house more than 60% of Ulaanbaatar’s population.

Our economy is rather small, and disposable income is rather small. But there are also lots of aspiring entrepreneurs looking for partners - Otgonbayar Munkhtogoo

In recent years, WHO has recorded alarming spikes in pollution-related ailments: respiratory infections, lung cancer and strokes, as well as developmental problems for infants and young children. 

In May, the government moved to curb coal burning. As it struggles to enforce it, bankers smell opportunity.

The plan is “to provide services that are environmentally friendly, less carbon emitting,” Otgonbayar notes. 

His team is busy conducting environmental and social impact assessments to know where TransBank should aim its lending programme.

At present, SMEs committed to reducing Mongolia’s air and water pollution comprise about 7% of TransBank loans. Four recent clients in particular are worth noting: Mine Haulage, Trans-Asian Road, TDGV KO and Advanced Mining Operation of Mongolia. 

All, with TransBank’s help, went from small to medium-sized – and are hopefully on the way to even bigger things.

The idea is not just to target non-resource companies, but those demonstrating a determination to clean up their own industrial act. Given Ulaanbaatar’s foul air, sustainable lending transcends the typical corporate social responsibility considerations. That explains why banks, in many cases, are outpacing government efforts to reduce carbon emissions.

As Norihiko Kato, chief executive of Golomt Bank, puts it, his management team “hopes and aims to be an active influencer to other financial institutions, not only in Mongolia, but also throughout Asia.” 

This may sound like a marketing slogan, but lending to low-carbon SMEs has caught the attention of Khan Bank, TDB and Kato’s institution.

That’s particularly true over at Arig Bank, where CSR permeates just about everything the 22-year-old institution does. It’s one of Mongolia’s oldest banks, founded the same year as TransBank, with myriad branches in the nation’s main cities.

Along with recycling just about everything the staff consumes and powering most locations via solar panels, Arig is devoting more and more of its loan portfolio to sustainable SMEs. 

While altruism has its place, says Naranbaatar Radnaa, Arig’s acting chief executive, the bank’s focus “is predicated upon our strong belief that a sustainable business is one that generates long-term value for our stakeholders, including our customers, employees, investors, community and regulators.”


It would be grand, of course, if regulators did more to support SMEs. Such incentives are becoming ever more important in Asia as economies scramble to produce the next tech unicorn.

“Our economy is rather small, and disposable income is rather small,” says TransBank’s Otgonbayar. “But there are also lots of aspiring entrepreneurs looking for partners.”

To woo those 20-something would-be disruptors, TransBank is rapidly raising its game as a business incubator to support innovators on their way up the value chain. It is developing new digital and online loan products, with a particular focus on payments and settlement.

TransBank is working on green loans and other financing projects to increase the ratio of solar and wind to Mongolia’s energy mix. More and more the microloans that TransBank doles out will be done online, increasing efficiency and speed, and reducing overheads at its headquarters in the swanky Shangri-La Centre.

Female entrepreneurs are also a particular target, Otgonbayar says. From October 2018 to September 2019, 31.7% of TransBank’s loans went to SMEs led by women. 

The rationale is that companies and entire economies that best utilize their female workforce tend to be the most productive, innovative and egalitarian. 

Words to live by at TransBank, where 68% of staff are women, including 12 of the senior managers.

XacBank also is prioritizing loans to female entrepreneurs. In fact, the team headed by chief executive Tsevegjav Gumenjav found that women have markedly lower default rates than men, and tend to be a good source of bank deposits.

The state headed by president Battulga Khaltmaa should be following the banks’ lead when it comes to empowering women, but Mongolia has lost considerable ground over the last decade: it ranks 58th on the World Economic Forum’s global gender gap index, versus 22nd in 2009.

Granted, Ulaanbaatar still fares comparatively well in the global league tables. For all the backsliding, it is still besting China (in 103rd place) by a wide margin. The same with Vietnam (which ranks 77th), Japan (110th) and South Korea (115th). Even so, levelling the gender playing field, particularly among SMEs, might pay big dividends for the entire nation.


Mongolia presents quite the economic paradox. Even though the economy is dominated by mining exports, SMEs are its lifeblood. Thanks to misplaced government priorities, though, it’s difficult for SMEs to find the capital needed to evolve into larger enterprises of scale and influence.

One can hope that diversifying the economy away from smokestack industries will be a focal point in the coming election. It is also a way to increase the government’s tax revenues.

The banks’ efforts to target SMEs should pull more small-scale and family-based businesses, including kiosks and small vendors, into the real economy.

“These and other microenterprises in Mongolia,” the World Bank warns, “end up in the informal economy, where low incomes and poor working conditions prevail and lack of enforcement of legal and social protections contributes to low productivity.” 

This tendency, the World Bank concludes, “is particularly high among rural youth, of whom over 90% work in the informal economy. These conditions limit the potential for self-employment to reduce poverty and improve social mobility.”

Altering the warped incentives and runaway corruption that often afflict resource-rich nations requires bold action at the top of the political food chain. 

In the meantime, it’s comforting to see institutions such as TransBank taking the lead in recalibrating national growth engines to reduce poverty and protect the environment, all while turning a healthy profit. As win-wins go, lending to Mongolia Inc.’s SME sector should be a no-brainer. 

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