Lkhagvasuren Byadran: The banking system of Mongolia is strengthening

Interview with the Governor of the Bank of Mongolia, Lkhagvasuren B., about the origin, development, and strengthening of the banking system, the role and contribution of the Central Bank, and electronic financial services.

-It is the 100th anniversary of the establishment and strengthening of the modern banking system in Mongolia. How would you define the role and contribution of the banking sector in the economic development of Mongolia?

-Over the past century, Mongolia's banking sector has evolved to meet international standards, significantly enhancing its role in the economy and making a valuable contribution to the country's development. The Industrial and Commercial Bank of Mongolia, now the Bank of Mongolia, was established in 1924. A year later, the national currency, the tugrik, was introduced-a pivotal milestone in our history. This marked the beginning of a robust monetary system that supported Mongolia's economic and social development through internal financing.

From 1924 to 1991, the Bank of Mongolia single-handedly shaped financial intermediation and the financial system, acting as the primary financial market intermediary. However, since the introduction of the two-tier banking system in 1991, the Bank of Mongolia has played a crucial role in the rapid development of the banking and financial system. Initially, the Bank of Mongolia had 22 employees and a branch in Altanbulag soum. By the end of 2023, the bank employs 16,459 people, operates 303 branches, 1,019 settlement centers, 51 currency exchange points, and 5 representative offices. Over its 100-year history, the Bank of Mongolia has adopted and localized best practices from around the world, enhancing rapid internal and external payments, maintaining price stability, managing foreign currency reserves, ensuring financial stability, producing internationally standardized quantitative data, and conducting thorough research and analysis.

Today, the Bank of Mongolia functions as a state institution, issuing bank, determines the monetary policy, banking industry regulator, financial intermediary, foreign exchange reserve manager, Treasury "wealth custodian," financial education provider, and loan and financial database manager. It plays an integral role in all sectors of society. Over the past 33 years, the banking sector has been a pioneer in services and technology, reaching international development standards and becoming a key pillar of Mongolia's economy. The banking industry's journey has not always been smooth, but it has now reached a level where it supports sustainable and inclusive economic growth and green development.

-What role do the regional branches and divisions of the Bank of Mongolia play in regional development? How will it evolve in the future?

-The public is well informed of the monetary policy guidelines, successfully implementing the policies and measures, and making a significant contribution to the issuance of money for transactions by the rural regional branches and divisions of the Bank of Mongolia. The function and importance of regional branches and divisions is to detect and take corrective action on commercial bank risks in implementing policies to support local social, and economic development, and farming, and to provide professional and methodological recommendations to commercial banks and focus on preventing and mitigating potential risks.

Referring to the last example, about 25% of all 26,000 household borrowers participating in the housing mortgage program buy and live in regional areas. Since last September, the Bank of Mongolia has been implementing measures to provide loans with equal access to the regional areas and Ulaanbaatar city to increase regional loans. As a result, about 50% of the total loans granted this year, or 303.2 billion MNT has been disbursed to 3,000 households, and were given to local communities. Of this, about 58%, or 175.8 billion MNT loans of 1700 households are loans with a 3% interest rate. To ensure the implementation of the law on mitigating the adverse effects of climate change on traditional livestock husbandry approved by the Parliament in April 2024, the Bank of Mongolia cooperated with the Ministry of Food, Agriculture, and Light Industry, the Ministry of Finance, the Credit Guarantee Fund, and commercial banks concluded the loan financing agreement for agricultural cooperative, also known as farmer's co-op's was established. The lending process has been escalating for more than a month since the signing of the contract, and so far, an investment loan of 160.5 billion MNT has been granted to 4,538 farmers of 1,326 cooperatives.

-Mongolia's currency has a rich history and dates back to ancient times. The currency of Chinggis Khan's era and the Yuan Dynasty have a proud history. However, it is true that we Mongolians do not know much about the history of modern currency. We think you have an interesting story to tell.

-Yes, we do indeed have a rich history of payment instruments and currencies. Coins were minted and used in trade and commerce from the time of the first powerful Asian nomadic empires Hunnu, followed by the Tureg and Uighurs. Chinggis Khaan and his successors established the Great Mongolian Empire and introduced gold, silver, bronze coins, and paper currency into the circulation of the economy.

Later, after the victory of the People's Revolution and the establishment of the Bank of Mongolia, at the third Congress of the Mongolian People's Revolution Party in August 1924, it was decided that "It is desirable to issue currency with silver guarantee." The resolution of the first meeting of the Mongolian People's Republic noted that the use of foreign currency is harmful to the country's economy and emphasized the importance of creating a national currency.

Subsequently, on February 22, 1925, the People's Government issued a historic resolution on "Monetary Reform". Accordingly, in 1925, the Ministry of Finance, with the support of the Mongolian Trade and Industry Bank, established the Monetary Reform Commission, which was responsible for putting national currency into circulation and developing monetary and credit policies. Thus, it has been 99 years since the first 200 and 100 MNT were put into circulation on December 9, 1925. The national currency "tugrug" has successfully served in all stages of the country's economic development, and has been performing the role of cash flow, means of payment, cost measure, the basic unit of savings, and international money.

In 1260, after Khubilai Khaan became king of the Mongol Empire in Shangdu (the Yuan Dynasty's summer capital), he issued a new paper currency backed by silver to replace the current means of payment, which marked the beginning of the unified money issue. Khubilai Khaan established the Great Yuan Dynasty of Mongolia (1271-1368) and declared his own paper money as the only legal tender and abolished all other metal coins.

-How many Governors have led the Central Bank in these 100 years? As for you, you started your career at the Bank of Mongolia and worked in the banking and finance industry for about 30 years. Now, on the occasion of the 100th anniversary, you are returning to the Bank of Mongolia and working as the Governor. How do you feel about this?

-The 100-year development of the Bank of Mongolia and the banking sector can be broadly divided into three periods: the establishment of the Mongolian-Soviet Bank of Industry and Commerce, the development of the Republic of Mongolia's self-owned bank, and the transition to a two-tier banking system. I am currently the 20th Governor of the Central Bank. In the early years (1924-1931), the Bank of Mongolia was managed by Russian specialists due to the lack of specialists in our country. In 1931, S. Dovchin became the first Mongolian chairman and served until 1939. From then until 1991, the bank was managed by seven individuals: Yu. Tsedenbal, T. Baldan, G. Baljid, L. Lkhamsuren, P. Tumur, D. Danzan, and G. Khuderchuluun. Since 1991, when N. Jargalsaikhan was appointed as the first Governor of the Bank of Mongolia, the position has been held by D. Molomjamts, J. Unenbat, O. Chuluunbat, A. Batsukh, N. Bayartsaikhan, L. Purevdorj, and N. Zoljargal.

My career is deeply intertwined with the Central Bank and the banking and financial sector. After graduating from the National University of Mongolia, I began my career as a researcher at the Economic Research Institution of Science under the State Planning Commission. I, then joined the Bank of Mongolia, working across various departments that shape policy decisions. I also served as a financial sector consultant for East Asia and Pacific countries at the World Bank in Washington, USA, gaining valuable experience. Upon returning to the Bank of Mongolia, I contributed to state monetary policy and the banking sector's development. I contributed to the establishment of the Corporation of Deposit Insurance and served as its Founder and first CEO. I later returned to the Bank of Mongolia, eventually becoming the Deputy Governor and the Governor. During my tenure, I oversaw the implementation of the "Extended Financing Program," expedited Mongolia's exit from FATF's "Grey List," and managed monetary policy during the pandemic and geopolitical tensions. Today, economic indicators have improved and recovered positively.

We at the Bank of Mongolia and the banking industry are proud to celebrate the 100th anniversary of modern banking in Mongolia. In addition to addressing economic challenges, we focused on reform policies to stabilize the banking system. As a result, systemically important banks have gained public ownership, improved governance, established a legal framework for foreign banks to enter the domestic market, and implemented reforms to advance the banking sector.

-The period of your working in the Mongolian banking sector coincides with the period of transfer to the Mongolian market system. How to determine the 30-year development of Mongolian commercial banks?

-Briefly summing up the past 33 years of the history of the banking industry, it was a period of rapid development both for banks and for the legal regulation of the banking sector. In 1990, Mongolia switched to a two-tier banking system, and the first commercial banks were established. With the establishment of commercial banks, there was a major systemic change in the banking sector, and the Central Bank assumed a major role in regulating and supervising the activities of commercial banks. The Central Bank immediately started working on developing a legal framework for the banking sector and banking supervision. In April 1991, the Law on Banking was passed, and in 1996 the Law on Central Bank that regulates Central Bank activities. With the adoption of these laws, the legal framework for the banking sector was established. During the economic transition period, many banks were established, but due to a lack of expertise, the banking sector faced difficulties between 1994 and 1996.

A period of relative stability in the banking sector began in 2000 thanks to the improvement of the legal framework. Bank liquidity, capital adequacy, and credit quality have improved, the number of qualified personnel in the banking sector has increased, and banks' operations have solidified. Since 2010, the activities of the banking sector have expanded and developed, the scale and scope of commercial bank operations have expanded, and new technologies have been introduced. It can be said that our banking sector has maintained pace with global developments.

The stability of the banking sector was further strengthened by creating a deposit insurance system, which is one of the main pillars of a stable banking sector. The prudential requirements for banking operations, the requirements for good governance, risk management, and bank supervision and enforcement measures for insolvent banks were established in line with good international practices and with consideration of our country's specific characteristics. The banking supervision framework has been updated to comply with Basel banking standards and riskbased supervision and macroprudential policy tools have been introduced.

Despite the improvement of the legal framework of the banking sector and the banking supervision in accordance with international standards, some banks became insolvent and liquidated, mostly due to poor governance. These events and lessons set the stage for the implementation of the next reform in the banking sector. The Bank of Mongolia implemented the medium-term reform program of the banking sector with the main goal of reducing the concentration of ownership in banks starting in 2020. This change can be called the "revolution" in the banking sector. As a result, all systematically important banks of Mongolia, namely, Khan Bank, Trade and Development Bank, Golomt Bank, Khas Bank, and the State Bank have successfully become joint-stock companies in 2023. This reform has become a remarkable event for the long-term stability of Mongolia's banking and financial sector, as well as for economic and social development that will stimulate the development of the stock market.

-The central bank of the country is the face of the country. It is also true for our Central Bank. Highly qualified employees who are educated in foreign and domestic universities work in the Bank. How do you see the future of the workforce?

-The central bank implements the state monetary policy. The human resources activities of the Bank of Mongolia have been organized within the human resources policy and legal framework like other central banks of the world. In the past, the Bank of Mongolia has organized human resource planning efficiently in accordance with the organization's activities and has paid more attention to the training of qualified workforce in the field of banking and finance. In the preparation of human resources, selection was made from applicants who graduated from not only Mongolian, but also from well-known international universities, and we support our employees to attend master's and doctorate degrees at international universities. Regular attention is paid to re-training and improving the skills and knowledge of employees, such as attending foreign training courses of the Central Bank of other countries and international banks and financial institutions. We follow a policy of continuous development of knowledge and skills of employees and train professional personnel.

Permanent employment of employees is to implement a systematic policy in the field that employees who have graduated from universities share the knowledge learned from others and transfer and rotate them to units to acquire all kinds of skills, today the Central Bank has internationally trained and well-qualified staff. The average length of service of all employees of the Bank of Mongolia is 25 years, which is the first clear indication that they have matured and started to work firmly in their jobs. We are working in parallel with the improvement of communication, based on joint labor activities of representatives of the young, middle, and senior generations, and having the knowledge, education, and skills of the employees of the Bank of Mongolia.

Our staff, who have gained experience during their tenure at the Bank of Mongolia, are highly skilled, and have improved their professional education. Our employees receive job offers from well-known domestic and international organizations. The Bank of Mongolia provides opportunities for transfers to prestigious institutions. For example, our former employees assumed management-level positions at prestigious institutions such as the United Nations, International Monetary Fund, World Bank, Asian Development Bank, Central Bank of New Zealand, Amazon Company, Ministry of Economic Development, Ministry of Finance, Oyu Tolgoi, and other banks.

In the future, the Bank of Mongolia will continue to identify the future needs of the organization's employees and implement the traditional methods and tools of the central bank within the framework of the corresponding programs. We plan the operation and organizational structure of the Bank of Mongolia, adopt a comprehensive action program, and introduce the latest changes in human resources using digital transformation and artificial intelligence.

-Can you say that the past 100 years are 100 years in which the policies, operations, security, and financial stability of the Bank of Mongolia have been firmly strengthened?

-Yes, over the past 100 years, the activities of the Bank of Mongolia and the banking system have significantly strengthened. The Bank of Mongolia has been a pioneer of development, continuously modernizing its activities to align with social and economic progress. This is an ongoing process. Today, the Bank of Mongolia has localized best practices and scientific achievements from modern central banks, adapting them to our country's unique characteristics. When the Bank of Mongolia was first established, its goals were to organize monetary flow, eliminate foreign loan sharks, and introduce the national currency. Today, it ensures price and financial stability and introduces the necessary infrastructure and tools.

The legal environment for the central bank's policies and operations evolves to meet social and economic development needs, continuously enhancing financial market infrastructure and policy tools. These efforts aim to protect and strengthen financial stability while effectively implementing the Central Bank's policies and activities.

-Technological development of Mongolia's banking and financial sector ranks high in the world. Artificial intelligence is becoming the defining point of the development trends of all industries around the world. So, what measures are Mongolian banks taking in the field of artificial intelligence?

-The banking and financial sector has been delivering products and services based on modern electronic technology that meet the needs and requirements of its customers. Today, the field of payment and settlement is nearly completely digitalized in Mongolia. This was clear even though the Covid-19 pandemic strict lockdown did not disrupt our transactions. Analysis system models and methods necessary for the implementation of policies aimed at meeting these main goals are being developed and used in a way that reflects the progress of economic and financial sciences. Not only the banks, the Treasury Department of the Ministry of Finance, and the Securities Depository Center were connected to the unified network of the clearing center of the Bank of Mongolia, but now non-banking financial institutions and fintech companies have joined it. As a result, citizens, businesses, and enterprises are making payments 24/7 using channels such as payment cards, the internet, mobile banking, QR codes, and applications, regardless of time and location.

The Bank of Mongolia has successfully introduced the RTGS system, Automatic Clearing House System, Payment Card Clearing System, Integrated Central Bank Trading System, International TIER II accredited data center, and Token Verification Systems that are all in line with international standards and solutions. In June of last year, the Bank of Mongolia was named the winner of "The Pioneer" award from the "Fintech RegTech Global Awards" selected by the Central Banking Institute. This award was previously received by the Financial Regulatory Commission of Great Britain in 2022, the Central Bank of Thailand in 2021, the Central Bank of France in 2019, and the Bank of Canada in 2018. Beginning in 2016, the Bank of Mongolia has implemented the "Payment System Modernization" project in the main areas of infrastructure, legal framework, equipment, and payment system software. The award was given because the development of this high-frequency digital data and reports collection system from banks has become a benchmark for central banks around the world. The installation and development of this system was carried out in cooperation with the national company "Novelsoft".

As a result, over the past five years, the number of real-time transactions has grown by an average of 45 percent per year, and the number of payment card transactions by 24 percent. According to reports, there are 4.3 million cardholders in our country as of last year, and 2.2 million are actively using them.

In the future, it will be possible to analyze this large amount of data needed for the development of financial services in real-time using artificial intelligence, calculate the risks that may arise, and take measures in advance with optimal solutions that do not have a negative impact on the economy. Fully automated system that can receive all financial reports, news, and statistics electronically and process it with the help of artificial intelligence has been developed and tested. As a result of this system, it is possible to issue reports and news with very little time delay.

-The Bank of Mongolia is embarking on a new century, leaving behind the previous one. What is the focus of the new century?

-One of the directions of monetary policy in 2024 is to facilitate the establishment of foreign bank branches in the domestic financial market, enhancing financial inclusion and ensuring stable growth of the banking sector. Foreign banks and financial institutions entering the domestic market may have positive effects such as increasing foreign funding and capital sources, increasing competition in the banking and financial sector, improving efficiency, and stimulating the development of the domestic financial market. Relevant regulations have been drafted and approved under the Law on Specialized Investment Bank. I would like to emphasize that the Bank of Mongolia is paying more attention to creating an opportunity for foreign banks to establish their branches in the domestic market.

Starting in 2024, we are implementing a new strategy aimed at enhancing public financial literacy and economic knowledge. While there has been progress in people's understanding of basic financial products and services, there remains a significant gap in economic and financial knowledge, particularly in inflation, interest rates, and financial risks. Therefore, in addition to fostering a foundation in economic and financial literacy, we are committed to equipping individuals and households with knowledge about potential financial risks and challenges. For instance, we are actively involved in initiatives to prevent financial fraud and protect the interests of financial consumers. This involves regular public awareness campaigns, informative sessions, and outreach efforts to educate and empower the community.

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