Rural finance in Mongolia

1. Rural finance in Mongolia Presentation at EastAgri Annual Meeting, Berlin Pamela Eser, MED Director May 5, 2006

2. Introduction • Overview of Mercy Corps and our microfinance programs in the region • Innovations in rural finance from Mongolia • Mercy Corps: Additional cash collateral • XacBank: Franchising savings and credit cooperatives

3. Charting a Healthy, Vibrant Civil Society The Center: goal/outcome, possible with foundation of a healthy civil society The Three Principles: behavior that characterizes a functioning civil society The Actors:key players -- the dynamic inter-relationship among these three sectors provides a foundation for positive social change The Outer Ring:environment in which a healthy, vibrant civil society thrives Respect for Human Rights Political Development Established Rule of Law Vibrant Civic Sector Economic Opportunity Participation Government Business Secure, Productive and Just Communities Peaceful Change Accountability Civic Organizations

4. Overview of Mercy Corps MFI Affiliates in C&EE and NISData as of 31 March 2006

5. Rural finance in Mongolia Mongolia Country Setting • 2003 GDP per capita $601 • Most sparsely populated country (2.5 MM) in the world, population densities from 0.2-0.6 people per square km in the Gobi region • Main exports: gold, copper, cashmere, textiles, hides and meat • Limited infrastructure, few paved roads and electricity only in cities, most towns (aimag centers) and some villages (soum centers) • 57% of Gobi families specialize in livestock: mostly sheep and goats, trading cashmere, wool, milk and meat. Lack technical and business management skills and access to information • Challenging climatic conditions: nearly 40% of the livestock perished during the drought and harsh winters of 1999-2002

6. Rural finance in Mongolia Mercy Corps in Mongolia • Program begins in 1999 with the USAID-funded "Gobi Initiative” – a primary focus on herder group formation and improving animal stock and cashmere production. • Gobi Initiative micro-lending activity merges in 2001 with UNDP “Microstart” project to form a commercial bank - “XacBank” • Second phase of Gobi Initiative begins in 2004 – focus shifts to supporting herder groups (now cooperatives) diversifying their business activities away from an exclusive focus on cashmere into dairy/meat production, food processing, rural tourism, etc • "Rural Agribusiness Support Program" funded by the U.S. Department of Agriculture, begins in May 2004 – primary focus on linking producers and processors and rural businesses and commercial financial institutions

7. Rural finance in Mongolia

8. Rural finance in Mongolia Problem statement: Mercy Corps provides training and one-on-one technical assistance to herder and non herder-owned businesses, helping them to expand and diversify these businesses, yet clients can not easily access the financing needed to invest in new equipment, production inputs, and working capital. This is particularly true for herders who can not meet the collateral requirements of banks since they own no land, have no permanent living structure, and traditionally have only animals which banks assess at 30% of market value. Response: Additional cash collateral

9. Rural finance in Mongolia Additional cash collateral – How it works: • Mercy Corps assists clients with the development of formal business plans that include financial investment needs • Clients share business plans with banks and negotiate possible loan terms and conditions • Banks conduct normal underwriting, value the client collateral, and then make a formal loan offer • Clients choose the bank, based on loan terms, service, etc • Mercy Corps deposits amount equal to the difference between the loan amount and value of the client collateral into an interest-bearing account at the bank’s head office • In the event of default, bank first recovers value of ‘hard’ collateral from client and then recovers deficit, if any, from Mercy Corps cash collateral account

10. Rural finance in Mongolia Additional cash collateral – Results to date: • MOUs concluded with five commercial banks • 313 loans have been issued totaling $800K, with 66% cash collateral • % of cash collateral is decreasing as businesses grow their assets (March 2006 loans issued with 53% cash collateral) • More than 40% of clients had never rec’d a commercial loan before • 40% of current bank clients feel they could obtain future loans w/out MC financial assistance • Banks requesting/receiving MC training on business plan analysis • Competition for clients increasing bank outreach efforts and reducing loan interest rates by an average of 0.5% per month (2.5% to 2.0%) • Banks beginning to offer formal lines of credit to best clients in rural areas

11. Rural finance in Mongolia Lessons learned: Work with the banks’ existing loan products and policies and procedures - don’t subsidize Play the facilitator role -TA to clients on how to create a business plan and approach a bank PLUS educating banks on the value of business planning and cash flow-based lending

12. Rural finance in Mongolia Problem statement: XacBank wants to deepen its outreach in rural areas. Due to the size of the country and small population in rural areas, it is not cost effective to open branches. Response: XacBank Franchising for Saving and Credit Cooperatives

13. Rural finance in Mongolia Franchising model - how it works: • Financial support XacBank (Franchisor) Savings & Credit Coop’s (franchisee) • Training & Consulting • Technical Assistance • Financial services • Training • Social activities Members

14. Rural finance in Mongolia XacBank S&CC Franchising - Results to Date

15. Rural finance in Mongolia Lessons learned: • Effective in reaching rural remote communities • Increases competition for the monopoly commercial bank, which has decreased interest rates • Cooperatives strengthened, profits remain in region • XacBank trademark is attracting members

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