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International and Mongolian Partners Promote Good Governance in Mongolia’s Banking Sector

Ulaanbaatar, Mongolia, September 18, 2014 —IFC, a member of the World Bank Group, FMO (the Netherlands Development Finance Company), the Bank of Mongolia, and the Mongolian Bankers Association are working together to improve corporate-governance practices in Mongolian banks, which will help attract investors and contribute to the country’s economic growth in the long run.
Related-party lending is a potential threat to Mongolia’s banking sector and can result in bad governance and regulatory oversight, which pose risks for the sustainable development of banks. At a conference held today, regulators, commercial banks, and international banking and corporate-governance experts discussed possible solutions for conflicts of interest arising from related-party lending among banks and ways to benefit from international best practices.
“This conference is a timely effort to raise local banks’ awareness and understanding of risk management especially when Mongolia is facing balance-of-payments difficulties,” said Batshugar Enkhbayar, Deputy Governor of the Bank of Mongolia. “Lessons shared by experts from FMO and IFC on conflicts of interest and related-party lending will help our bank improve our policies and operation and increase transparency, which will ultimately help create a fair and competitive business environment.”
“The main objective of banks is to create long-term value for shareholders,” said Bold Magvan, President of the Mongolian Bankers Association. “Good corporate governance, including transparent policies on related-party lending and the mitigation of conflicts of interest, can serve this primary purpose and also attract human and financial capital.”
Studies have shown that investors have greater confidence in companies with good corporate governance and markets that are backed by a sound legal and regulatory regime. IFC and FMO will collaborate with the central and commercial banks to develop a set of standards for related-party lending in the next 12 months and help them adopt international practices. This is expected to facilitate an open discussion between the public and the private sectors and lead to improvements on existing regulations.
“Related lending and other conflicts of interest pose a huge threat to the development of a banking sector – not only in Mongolia but also in other countries FMO is operating in,” said Linda Broekhuizen, Chief Investment Officer and member of the Management Board of FMO. “Yet, there is relatively little guidance on how best to identify and mitigate an existing conflict. FMO and its partners want to step into this void and have thus initiated a project that will ultimately provide banking professionals with concrete guidance on conflict situations.”
IFC has been supporting Mongolia’s efforts to improve corporate governance since 2009, including the recent introduction of the Mongolian Corporate Governance Code – developed in partnership with the Financial Regulatory Commission – to enhance the performance and competitiveness of Mongolian companies. According to IFC’s 2013 Mongolian Corporate Governance Scorecard, firms with better corporate-governance practices achieved higher levels of profitability with a return on equity of 15.8 percent, while those with the poorest governance practices had a negative return on equity of -61.2 percent.  
“As an investor, we have seen firsthand the ill effects that poor governance practices and in particular related-party transactions can have on banks’ health and investor confidence,” said IFC Resident Representative in Mongolia Tuyen Nguyen. “We are committed to working with domestic and international partners to help Mongolian banks improve their corporate governance. This will improve their ability to raise capital from investors and expand lending for the benefit of the Mongolian economy.”
About IFC
IFC, a member of the World Bank Group, is the largest global development institution focused exclusively on the private sector. Working with private enterprises in about 100 countries, we use our capital, expertise, and influence to help eliminate extreme poverty and boost shared prosperity. In FY14, we provided more than $22 billion in financing to improve lives in developing countries and tackle the most urgent challenges of development. For more information, visit www.ifc.org .
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About FMO
FMO (the Netherlands Development Finance Company) is the Dutch development bank. FMO supports sustainable private sector growth in developing and emerging markets by investing in ambitious entrepreneurs. FMO believes a strong private sector leads to economic and social development, empowering people to employ their skills and improve their quality of life. FMO focuses on three sectors that have high development impact: financial institutions, energy, and agribusiness, food & water. With an investment portfolio of EUR 6.3 billion, FMO is one of the largest European bilateral private sector development banks. www.fmo.nl
About MBA
The Mongolian Bankers Association is a self-regulated professional association that was established in 2000. With over 20 members, the association integrates all 13 commercial banks, the development bank, 4 financial and non-financial banking institutions, and 3 foreign bank representative offices. The association’s vision is to lead the banking and financial sector in support of the sustainable development and equitable economic growth of Mongolia. For more information, visit www.mba.mn .
About the Bank of Mongolia
As the Central Bank, the Bank of Mongolia (BoM) ensures the stability of the national currency – Togrog. Within this main objective, the BoM promotes balanced and sustained development of the national economy, through maintaining the stability of money, financial markets, and the banking system. In order to implement its objectives, the BoM conducts activities such as issuing currencies in circulation, formulation and implementation of monetary policy, acting as the Government’s fiscal intermediary, supervision of banking activities, organization of inter-bank payments and settlements, and management of the official foreign exchange reserves.