Khan Bank of Mongolia
SME Lending
Presented by J. Peter Morrow, CEO
World Bank Workshop on SME Finance
Dar-es-Salaam, Tanzania
June 26-27, 2007
Mongolia
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Population of 2.8 MM of which over 1 MN live in Ulaanbaatar
GDP per capita $1,000
Financial Sector
– 16 banks
– 116 Non Banking Financial Institutions
– 845 credit cooperatives
– 22 insurance companies
Main economic sectors
– Agriculture
20% of GDP
– Mining
30%
– Services and other 50%
Khan Bank History
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1924 to 1990 - State Bank of Mongolia
Soviet style monobank
1991 - Agricultural Bank of Mongolia created
1999 - Placed in Receivership
2000 - DAI* Management Contract with Government
2003 - Successful privatization with H.S. Investment Company
of Japan winning international bid process
2003 - DAI* retained to manage bank
* Development Alternatives Inc.
Khan Bank: Current Ownership
H.S. Investment Company*
Tavan Bogd Trade Company
IFC
Development Alternatives Inc.
J. Peter Morrow
53.1%
35.4%
9.1%
2.2%
0.3%
* 100% subsidiary of Sawada Holdings Co. Ltd.
Khan Bank Today
May 2007
•
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Total Number of Branches
Ulaanbaatar Branches
Rural Branches
On-Line Branches
Number of Employees
Depositors
Borrowers
Households served
440
51
389
241
2,953
1,357,406
262,981
68%
July 2000
269
2
267
0
803
Financial Performance
(000 USD)
2006
2005
2004
2003
2002
2001
2001
Loans
205,139
110,037
67,059
44,599
22,216
9,037
181
Deposit
260,236
150,254
108,150
65,178
40,620
22,112
11,755
Total
Equity
29,899
14,312
10,589
6,733
3,195
1,524
(452)
After tax
Profit
10,292
3,807
2,552
1,656
1,671
802
(310)
ROA
4.40%
2.64%
2.62%
2.79%
4.91%
4.50%
(2.69%)
ROE
57..3%
36.58%
38.77%
42.39%
52.30%
51.50%
-
79%
72%
62%
68%
54%
40%
2%
Loans/
Deposits
Business Strategy
General
• To be leading provider of financial services in Mongolia
SME
• To deliver full range of loan, depository and advisory services
• To develop new loan products and services as legal and regulatory
environment evolves e.g. leasing, asset-based lending and insurance
products
• To source additional capital for more developed SMEs through Khan
Bank securities company linkage with domestic and international
investors
Branch Network
Ulaanbaatar Branches - 51 (was 2)
 City with over 1 million residents
 Reasonable infrastructure
Aimag Branches – 21 (no change) with 35 sub-branches (was 0)
 Regional towns with 20-30,000 residents
 Reasonable infrastructure
Rural Branches – 333 (was 246)
 Villages with 300-1000 residents
 Very remote being 50-150 km. to next village
 Very poor with $60 average monthly income
 Limited infrastructure with only dirt road access
 100 branches still without electricity (was 189 in 2000)
Loans: Outstandings
(000 USD)
2006
2005
2004
2003
2002
2001
2000
-
Corporate
Number
Amount
42
16,766
14
2,307
-
-
-
-
SME
Number
Amount
20,303
71,168
19,338
48,567
16,753
37,213
14,462
26,830
11,212
12,769
9,296
6,421
Consumer
Number
Amount
160,669
61,780
124,989
32,011
100,266
19,425
88,233
12,632
70,290
6,871
21,974
1,758
Agriculture
Number
Amount
53,701
55,425
33,240
27,153
13,676
10,420
6,265
5,137
3,096
2,575
1,349
859
TOTAL
Number
Amount
234,715
205,139
177,581
110,038
130,695
67,058
108,960
44,599
84,598
22,215
32,619
9,038
367
181
367
181
Loans: Disbursements
(000 USD)
TOTAL
2006
2005
2004
2003
2002
2001
2000
-
Corporate
Number
Amount
148
30,271
126
27,262
22
3,009
-
-
-
-
SME
Number
Amount
174,372
351,422
31,690
88,750
33,968
89,970
31,412
75,510
30,582
58,044
28,748
34,801
17,600
4,160
Consumer
Number
Amount
2,200,615
340,022
621,458
131,035
486,011
84,880
407,561
57,655
358,641
41,176
310,662
24,227
16,282
1,049
Agriculture
Number
Amount
224,875
180,856
100,574
93,124
67,133
48,466
30,002
20,582
16,920
11,719
9,449
6,520
797
445
TOTAL
Number
Amount
2,600,010
902,571
753,848
340,171
587,134
226,325
468,975
153,747
406,143
110,939
348,859
65,548
34,679
5,654
372
187
372
187
Credit Experience: PAR
Agricultural
2006
0.42%
4.11%
0.93%
0.77%
2005
0.00%
5.63%
1.12%
0.83%
2004
0.00%
6.57%
1.77%
2.19%
2003
0.00%
2.10%
1.27%
1.77%
2002
0.00%
0.75%
0.58%
1.19%
Bank PAR
1.95%
3.02%
4.50%
1.83%
0.75%
Corporate
SME
Consumer
Credit Experience:
SME PAR: UB & Rural
2006
2005
2004
2003
2002
UB SME
6.34% 11.90% 13.81%
2.73%
1.92%
Rural SME
2.56%
2.58%
3.05%
1.90%
0.70%
Bank SME
4.11%
5.63%
6.57%
2.10%
0.75%
Bank PAR
1.95%
3.02%
4.50%
1.83%
0.75%
SME Loans: Strategy
 Started
lending in 2000
 Picked one simple, safe pilot product
 Established policies and procedures
 Provided intensive training
 Introduced systematically to branches
 Instituted intensive monitoring
SME Loans: First Product
 Small Trader Loans
up to $ 5,000
 Established businesses
 Focused on inventory financing rather than
fixed asset financing
 Short term
 150% secured by all types of collateral
including real estate
SME Loans: Approval
Process
•
Visit business
 Verify inventory/security
 Verify cash flow
 Visit home
 Loan officer certifies as to integrity of
borrower
 Loan Committee approves
Subsequent SME & Other
Loan Products
– Salary Loans
 2002 – Pensioner Loans
 2002 – Herder Loans
 2002 – Business Term loans
 2003 – Agricultural Loans
 2004 – Mortgage Loans
 2004 – Leasing Loans (Consumer Finance)
 2005 – Corporate Loans
 2001
SME: Other Services
 SME
Incubator established 2006
 Deposit services
 Transfer services
 Collection services
 Payment including payroll services
 Internet banking (just started)
 SMS banking (about to roll out)
Policy Environment
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Government support has always been there but focus on
SME development has increased significantly
Agreements with various donor organizations to provide
term funding (although subsidized programs effectively
distort banking system)
Government moving (slowly) to correct deficiencies in legal
and regulatory environment
Recent changes in tax law should encourage transparency
and more efficient corporate structures
Technical Assistance

Khan Bank received TA from various entities during initial
turnaround:
– USAID
– EBRD
– Independent consultants
•
Khan Bank still uses TA but at our expense and on very
specific facets of business:
• Insurance study (independent outside consultant)
• Credit training for SME lenders (DAI)
• Review of internal processes & procedures (Bevington)
Key Lessons - 1
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Run as a business not a project
 Experienced & independent management
 Transparency
 Ability to say NO… Structure, Authority
Key Lessons 2
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Product design
Training
Branding – Public Image
Understanding Costs
Change Management
Khan Bank of Mongolia
Thank You for Listening