Mongolia’s current banking sector has been fundamentally cemented to the point where it now plays the main role in the financial sector. Banks currently supply the majority of private sector, business, and citizen demand. The amount of the sector’s active assets has increased regularly over the past decade, last year reaching 119 percent of Mongolia’s GDP—near equivalent to the international average.
Year-to-year loan amounts have been on the rise in general, despite a temporary decrease in 2009 after the financial crisis. According to statistics by the Bank of Mongolia, loan growth has been around 40 percent a year since 2004. As of the first half of this year, the total loan amount has reached MNT 12.4 trillion.
Yet the statistics also show Mongolia’s banking sector to be fast approaching market saturation, in terms of the aforementioned indicators, the number of banks per citizen, and the number of bank clients and card holders.
Clearly there are too many banks in such a small market. Over the past years, four banks have dominated, comprising 77 percent of total market share as of 2013. An analysis of this issue reveals that the individual banks are differentiated only in terms of their access to corporations or citizens. But in terms of their strategic play and position in the market, there is little difference between each bank.
The saturation of any business sector means that its growth percentage is reduced, expansion is insubstantial, and potential organic growth is slight. For the banking sector, it is doubtful that its loan issuance percentage can maintain 40 percent growth. As a result of the sector’s current focus and outdated loan requirements, new borrowers are unlikely to be created.
Given the condition of loan saturation and lessened growth, banks’ must rely on a more competitive strategy. If a bank could determine the appropriate strategy and take advantage of market opportunities, it would enjoy a greater likelihood of continuing its growth successfully into the future.
What strategy do banks need to use?
As the market becomes saturated, banks need to come up with an answer on how to expand their business. On the one hand, expansion can be achieved by increasing a conventional product, service, or service customers. But expansion can be similarly achieved by introducing a new product or business line to the market.
To increase the conventional product and service customers, and expand the market and partners’ circles, banks will have to reach out to companies that were unable to receive loans in the past, or they will have to increase the credit ability of their existing clients. Expansion aimed at increasing credit ability can include mitigation of risk, formation of financial history and deposit, improvement of governance, and so on.
The banking sector might be seen as privileged—without competition in the financial sector—but in reality, this not the case. Most companies have a rational financial structure, and reduce their financial risks by having funds from two sources: loan and investment. Companies would find it hard to expand or run their operations cost-effectively by using only loan sources. If a company can attract increased investment, then its potential to receive loans can be increased to the same extent.
At this moment, most businesses in Mongolia are subject to bank loans. The main constraint of continuously receiving loans is in the insufficiency of their deposit assets—a company’s assets that are deposited in a bank when receiving a loan—and of their own assets. For citizens, loans for consumption, apartment purchasing, or small businesses comprise the majority of loans that are issued. In the future, property deposit registration and citizen loan history are expected to play larger roles in increasing the opportunity to receive a loan.
Banks also must adopt a new strategy to introduce new products and services. In addition to loans, many businesses need opportunities such as direct investment, bonds, leasing, and short-term financing, to name a few. In order to expand a bank’s market volume, a new type of service such as office leasing has to be actively sought out to supply their clients’ financial demand. The corporate bond market likewise should be developed in the future. This includes the introduction of products and services other than loans. For example, Mongolia’s commercial banks have already expanded into selling insurance products throughout the sector.
To introduce a new business line, there are a number prospects, including evolving into a custodian bank or investment bank, investment consulting services, underwriting, and so on. A legal setting for the formation of such institutions is already established in Mongolia. Banks additionally have the opportunity to specialise in areas such as mining, infrastructure finance, construction, agriculture, and trade.
The market demand has developed rapidly in Mongolia to the point where there are signs that the banking sector is approaching market saturation. To survive among the competition and to continue to expand business into the future, Mongolia’s banks must face the necessity of formulating and applying new strategies.
SOURCE: Mongolian Economy