POvErTy rEdUCTION SCALING UP LOCAL INNOvATIONS ... Reduction...This case study describes a successful transformation of Mongolia’s XacBank from a non-bank financial institution to

Institutional Transformation—Story of XacBank of Mongolia

SNAPSHOT OF THE XACBANK OF MONGOLIAThe XacBank of Mongolia has successfully transitioned from a microfinance/non-bank financial institution to the fourth largest commercial bank in Mongolia. The keys to this success include:

• Well-coordinatedsupportfromdevelopmentpartners,ledbyUNDP,includingtheprovisionofseedfundsandnecessarytechnicalinputs.

• Capitalizationonexistinghumanresourcesbysystematicallyinvestingincapacitiesofnationalexpertsandstaff.

• Forgingofstrongpartnershipsbybringingtogetherkeystakeholdersfrom rural communities, non-governmental and civil societyorganizations,privatesectorandgovernment.

• Continuous innovation and improvement—XacBank introduces anewrangeofserviceseveryyear.

• Implementationofasociallyandenvironmentallyresponsiblebusinessmodel promoted among the Mongolian private sector—XacBankrecentlyestablishedanEco-Unit,providessubsidizedloansto‘green’businessesandpromotessustainablepracticessuchasenergyefficiency.

SCALING UP SUCCESSTransferringtheXacBank’ssolutionstoothercountrieswould require the following:

• Feasibilityassessment:theidentificationofatleastonemedium-sizedbankwillingtoadoptXacBank’ssociallyandenvironmentally responsiblebusinessmodel.

• Nationalexpertsandleaderswillingtosupportsuchan institutional transformation.

• The adoption of new business processes andproductsthatsupportyouthand‘green’businesses.

• Legislative and regulatory frameworks that arefavorabletothebankingandbusinessdevelopmentsectors,particularlyinthepromotionofmicro-loansandSMEdevelopment.

The related costs of the above activities will varydependingonthecountrycontext.

POvErTy rEdUCTION SCALING UP LOCAL INNOvATIONS FOr TrANSFOrMATIONAL CHANGE

In Partnership with Special Unit for South-South Cooperation

Institutional Transformation —Story of XacBank of Mongolia2

FOrEWOrdScalinguplocaldevelopmentinnovationsiskeytoachievingsustainableandequitabledevelopment,especiallywhentheseinnovationsaredrivenbynationalandlocalgovernmentsandactors.Inordertobestsupportcountriestoscaleupprovenlocalsuccessesandachievetransformationalchanges,theUNDPPovertyPracticeoftheBureauforDevelopmentPolicy(BDP)workstobuildasolidknowledgebaseandtouncoversystematicallytheenablingenvironmentanddriversforscalingup.Inthiscontext,togetherwiththeSpecialUnitforSouth-SouthCooperationwehavejointlyinitiatedaseriesofcasestudiesof“scaledup”developmentcases.Learningfromthesecountrycases,weaimtoidentifykeypolicy,institutionalandpoliticalenablersanddriversforasuccessfulscalingupprocess,andtoinspiredevelopmentpartnerstotransforminnovationsintosustainabledevelopmentresults.

Thesecasesdemonstratehowcountries,rangingfrommiddleincomecountries(suchasChina,CostaRicaandMexico)tolowincomeandleastdevelopedcountries(suchasMongoliaandNepal),wereabletodrivetheseprocesses.Theirsuccess,builtonleadershipandvision,wasmainlyrelyingontheirownresourcesandhumancapacities.Eachcountrystoryshowcasesadifferentdevelopmentchallengeandresponse—theMexicostorydescribesthenationalcashtransferschemetoaddressinequalitiesandvulnerabilities,andtheChinacaseshowcasesanagriculturalextensionprogrammethatspurredruralentrepreneurship.TheCostaRicastudyaddressesanemploymentcreationeffortthroughbiodiversitypreservationandeco-tourism,andtheNepalstorydescribesthenationalinitiativetosupplysmallscaleenergytosupportruralemploymentandbasicservicesdeliveryduringandintheaftermathofconflict.Finally,theMongoliacaseoutlinesthesuccessfultransformationofMongolia’sXacBankfromanon-bankfinancialinstitutiontoacommercialbank,anditsascendanceasaleaderinprovidinginnovativeandsociallyresponsibleservicestoMongoliancitizens.

Each story identifies key principles, approaches, elements andmethodologies that could ultimately contributetoanswering thequestion,how is itpossible to scaleupapilot/seed initiative toachieve largerandsustainabledevelopmentimpact?Itdescribestheprocessofscalingup,capturingthekeymilestonesintheevolutionofthescalingup,anddistillingthemaindriversforsuccesssuchasthepoliticalvisionandcommitment,internalandexternal‘catalysts,’andpolitical,financialandpolicyenablers,aswellasinstitutionalarrangementsandhumancapacities.ThefindingsofthecasestudieswillbefurtherutilizedintheUNDPguidancenoteonscalinguplocaldevelopmentinnovationsforpovertyreduction,aswellastheongoingUNDPeffortsofstrengtheninganintegratedapproachforlocaldevelopment.

Everycountrycasepresentedintheseriesalsodemonstrateshoweachinnovationhasspurred,orbearsthepotentialtospur,asoundSouth-Southcollaborationandlearningplatform,andinsomecases,South-Northknowledgeexchange.ASouth-SouthcapacityandknowledgeexchangeinitiativewillfollowthewidedisseminationofthecasestudiesduringtheupcomingSouth-SouthExpo.

ThepartnershipexpressesitssinceregratitudetotheUNDPSpecialUnitforSouth-SouthCooperation(SU-SSC)andMr.YipingZhou,DirectorofSU-SSC,fortheirstrongsupporttothisinitiative.Withouttheirvisionandcommitment,thisworkwouldnothavematerialized.Wealsogratefullyacknowledgecountryofficesthathavefacilitatedthiswork,peerreviewerswhohelpedimprovethequalityofthecasestudies,andauthorsofeachcountrycase.Theircontributionsareacknowledgedineachcasestudy.Lastly,inadditiontofacilitatingthisinitiative,UNDPPovertyGroupcolleagueshavealsocompiledandeditedallthecasestudies.

Selim Jahan Director,PovertyPractice

BureauforDevelopmentPolicy UnitedNationsDevelopmentProgramme


SummaryThis case study describes a successful transformation of Mongolia’s XacBankfrom a non-bank financial institution to a commercial bank, and its ascendance as aleader in providing innovative and sociallyresponsible services toMongolian citizens.The XacBank story demonstrates how an internationally renowned microfinance lending approach has been adopted toMongolia’s specific dynamics during thetransition period, and how the experiencepavedthewaytoexpandingnationalmicro-finance services to the poor. It reflects onthesuccessofanational institutionstrivingto bring to consumers cutting edge socially transformativeproductsandservices.

TheXacBankexperienceenabledthenascentmicrofinancesectorinMongoliatogrowandexpandas theMongolianeconomymovedawayfromthecentrallyplannedtoamarketeconomyduringthe1990s.Today,themicrofinancesectorhasgrownextensivelyintermsofitsoutreachandcoverage,withmostcommercialbanksinthecountryofferingmicroandmedium-sizedcredits.XacBankalsobecameknownasoneofthe‘bestpractices’inmicrofinanceindevelopingcountries.ThecomparativesuccessofXacBankwasmainlyduetobringingonboardtalentednationalstaff,creatinginnovativeoperationalproceduresandmanagement,layingthegroundforsustainabilityandnationalownershipfrominceptionoftheinitiative,andbuildingstrongcollaborationandsupportfromtheUnitedNationsDevelopmentProgramme(UNDP)andother stakeholders, including national and international non-governmentalorganizations(NGOs).

Despite the concerted efforts that have been made by thegovernment and development partners to improve thelivelihoodsofthepoorandvulnerablecitizen,andsteadygrossdomesticproduct(GDP)growthoverthepastdecade,povertylevelshaveonlydeclinedby3.4percentduring2002 to2008(from30.3percent to26.9percent),and thegapbetween therichandpoormarkedly increased(TheMDGsImplementation,Third National Report, 2009). Environmental degradation hasbecomeoneofthemostcriticaldevelopmentchallengesfacingMongolia.Atthis junctureoftheirdevelopment,Mongoliahasbeenprovidedwithauniqueopportunitytotransformdividendsfrom the recently launched large scalemining operations to

a sustainable, resilient and equitable growth for all. Nationalinstitutions,bothprivateandpublic,includingXacBank,arekeyplayers inpromoting‘green’andcarbonneutraldevelopment,andprovidingdecentemploymentopportunitiestoMongoliancitizens.

Context: Mongolia’s development trendsMongolia isa landlockedcountryborderingChinaandRussia,andisdependentonextractiveindustries(mainlycopper,goldandcoal).Ithasoneofthelowestpopulationdensitiesaroundtheworld,with2.8millioninhabitantsinalandof1.6millionsquarekilometres.TheaverageGDP1growthrateduring2000to2010hasbeengrowing5percentannually(WorldBank2010,seegraph1).TheGDPgrowthismostlydrivenbyservices(45.1percent),2 industry,mainlyminingofcopper,coal,goldandotherpreciousmetals(36.8percent),andagriculture(18.1percent)(MongoliaNHDR2011). In2010,OyuTolgoi, oneof the largestgoldandcopperdepositsintheworld,withanestimatedminelifeof40years,andTavanTolgoi,oneofthelargestcokingcoaldeposits,which has the capacity to produce about 30 million tons ofcoalannuallyoverthenext30years,becameoperational,thusdrastically changing the economic outlook of Mongolia in the

1 GDPgrowthonanannualbasisadjustedforinflationandexpressedasapercent.

2 PercentageofGDPbysector.

Graph 1. real Gross National Income (GNI) per capita, Mongolia, 1985–2010

Source: NHDR 2011, from the World Bank, 2010, World Development Report 2010.


medium term.3Theaverageinflationrateremainedbetween9to11percentanditreached13percentin2010(NDIC2010;NSO2010).Mongoliaranked110thoutof169countriesinthe2011HumanDevelopmentIndex(HDR2011).

Despite the substantial progressmade towards achieving theMillenniumDevelopment Goals (MDGs),Mongolia still needsrigorousandtargetedinterventionstomeetsomeofthegoals,especially in MDG 1 (halving poverty and achieving decentemployment),MDG 7 (ensuring environmental sustainability)

3 www.mongolia-investment.com/tavan-tolgoi and icmc-mongolia.net/oyu-tolgoi-investment-agreement

andMDG3(promotinggenderequalityatthedecision-makinglevel) (MDG Implementation,ThirdNational Report, 2009). Asof 2010, 39.2 percent of the populationwas livingbelow thenationalpovertyline(NSO2010).Incomeinequality,asmeasuredby gini coefficient has increased from 32 percent in 2002 to36.6percent in2008 (MongoliaNHDR2011).Accordingto themulti-dimensionalpoverty indicator,about15.8percentoftheMongolianpopulationislivinginmultidimensionalpoverty,withhealthandlivingstandardsdimensionshavingmorepronouncednegativetrends(MongoliaNHDR2011).Morethan52percentofMongolia’spoorhouseholdsaretheworkingpoor(NSO2010).

In2007to2008, theruralpovertywas46.6percentcomparedto urban poverty at 26.9 percent (see graph 2). In the early1990s,afterthecollapseofthecommandeconomy,mostofthemigrationwastowards livestockproductiondueto largescaleprivatization.Sincethelate1990stheinternalmigrationhasbeenreversedtourbanareas,mainlytothecapitalcityUlaanbaatar,causingenormousstrainsontheinfrastructureandenvironment.Eventhough“‘povertyismainlyconcentratedinruralareas,urbanpoorhouseholdsfacemultiplevulnerabilities“(NHDR2011).

Over thepastdecade,Mongoliahasbeenexperiencingadverseeffectsfromclimatechange.Morethan80percentofthecountry’sland area is classified as highly vulnerable, and thus poseschallenges to diversification of employment opportunities and

Graph 2: Poverty Trends in Mongolia

Source: Third National Report – MDG Implementation, 2009.

Table 1. Country Profile Mongolia, comparison to Europe and Central Asia (2009)Indicators Mongolia ECA

Demography

Urbanpopulation(%) 57.5 64

Health

Lifeexpectancyatbirth 62 69

Mortalityrate(


further exacerbates food insecurity (Batima,2005andNHDR2011).InAsia,Mongoliahasthehighestproportionofpeoplelivingondegradedlands(NHDR2011).AirpollutioninUlaanbaatarcity, especially in winter months, sometimesexceedssafelimitsposedbytheWorldHealthOrganization (WHO), thereby contributingto higher incidence of respiratory illnesses,especiallyamongchildren(NHDR2011).

Thus,Mongolia’sfuturedevelopmentdependson a careful balance of environmentalmitigationandadaptationanddiversificationofemploymentsources,withaspecialfocusondecent‘green’jobs.ThestoryofXacBankbelowis presented in light of this socio-economicbackground.

development of the Microfinance sector in Mongolia: Establishment of XacBankIn1997, as theAsianfinancial crisis revealed thevulnerabilityoftheMongolianeconomy,UNDPalongwiththeUnitedStatesAgency for International Development (USAID), Mercy Corpsandotherdevelopmentorganizationsinitiatedapartnershiptopromote thefinancial sector inMongolia.TheMicroStartpilotprojectdocumentwassignedinJune1997withaninitialUS$1milliongrantinvestedbyUNDP.TheprojectbecameoperationalinAugust1998. Itwas institutionalized inOctober1999as sixparticipatingMongolianNGOs,MongolianWomen’sFederation(MWF), theOpen Society Forum (OSF), LiberalWomen’s BrainPool (LEOS), Rotary Club of Ulaanbaatar, Local GovernanceDevelopment Fund (LGDF) and theMongolian Association ofRuralCooperatives,consolidatedunderMicroStart,createdthefirstregisteredNon-BankFinancialInstitution(NBFI).TheseNGOsweregrant investorswhoassisted in theestablishmentof theX.A.Cfund(GoldenFundforDevelopment).Frominception,theprojectgrewdynamicallyandcontinuouslywiththesupportofUNDP inthedesignand implementationof theproject (Heyn,2001).

Through1998to2001XAC,renamedtoXacBank,wasrunningasizeableoperation,disbursingatotalof18,237loanswithanestimatedworthofUS$4.2million.Ithad4,000activeclientsanddistributedonaverage1000loanspermonth.XacBankachieveda“break-even”pointafteronlyninemonthofoperationanditwasregardedasoneofthe“successstories”ofdevelopmentactivityinMongolia(Heyn,2001).Theaveragesizeofeachmicro-loanwas

aboutUS$141benefitingmostlyherders,micro/smallbusinesses,publicandprivateenterprises.

In 2001, the Mongolian Parliament passed the EmploymentPromotionLawthatemphasizedtheneedtopromotejobcreationamong the vulnerable groups. XacBank began targeting thevulnerablenon-poor,whowerejustabovethepovertyline,andincreasedtheloanlimitforsmallandmediumenterprises(SMEs).Othermicrocreditinstitutions,suchastheCreditMongoliaNBFI,NetMonandothers, followedshortlyandbeganofferingmorediversifiedfinancialproductswiththegoalofexpandingSMEs’access to savings and credit (Griffin, 2003). Some commercialbanksalsostartedtoenterthemicrofinancemarketinMongolia.Today,thenumberofNBFIsreached177andSavingsandCreditCooperativesto212,andsomeNGOsandgovernmentprojectsalsoprovidemicrofinanceservices(seetable2).4

Thelevelofpenetrationofmicrofinanceloanswasestimatedat72percentofallhouseholds(Microfinanceandfinancialsectordiagnostics study, 2009). In 2008, theKhanBankofMongoliawasrankedfirst inEasternEuropeandCentralAsia intermsofoutreach,whileXacBankwasthirdintermsofmarketpenetration.With such high penetration rates, themicrofinancemarket isclosetosaturation,andthemainactorsofthesectorsarenowservicing…theSMEmarket.Thiscanexplaintherelativelyhighaverageloanamount,aboveUS$1,000’(PlanetRating,2011).

4 TheservicesofferedbytheSavingsandCreditCooperativesarelimitedtosavingsandloansonly,whereasNBFIsalsoofferpaymentservices,remittances,foreignexchangeand,uponauthorizationfromtheBankofMongolia,financialleasing.

Table 2. Microfinance Sector in Mongolia (2011)

MFI Portfolio in US$ millions %Active

borrowers %Average

loan (US$)

KhanBank1 416.6 70.5 311,196 72.8 1,339

XacBank1 137.1 23.2 73,121 17.1 1,875

MDF2 29.4 5.0 35,548 8.3 807

CreditMongol3 4.2 0.7 1,524 0.4 2,765

TFS3 2.0 0.3 2,941 0.7 698

VisionFund4 1.9 0.3 3,391 0.8 689

Total 591.2 100.0 427,721 100.0 1,382

Source: PlanetRating 2011; 1 Mix Market, Dec. 09; 2 MDF data Mar. 10; 3 Mix Market Dec. 08; 4 Vision Fund data, Dec. 09.


Key Features of XacBank OperationsThe TenGer Financial Group (TFG) was established after themergerofXACandGoviinEkhlelin2001,whichownsXacBank,XacLeasing,XacSecurity,TenGerSolutionsandTenGerInsurance.Asof2011,XacBankbecamethefourthlargestcommercialbankinMongolia,withover85branchesservingover249,628clients(seebox2). It continues to serveurbanand rural low incomecitizensandmicroentrepreneurs-about23.9percentofitsclientsstillreceiveloansunderUS$300,while70percentreceiveloansunderUS$2,500(seebox2).

XacBankhasasignificantoutreach,reaching38.7adultsoutof1,000.52.6percentofitsclienteleresideinruralareasandover58percentoftheclientsarewomen.However,only1.7percentof the clients can provide collateral (PlanetRating, 2011).Themajorityofmicro-loansareusedfortradeandconsumption,withabout10percentofloansusedtosupportmicro-scaleproduction(SeeGraph3). In2008, thebankstartedacollateral freemicroloanservicetargetingfinanciallymarginalizedperi-urbancitizens(XacBank2008).

The XacBank had a strong orientation towards under-servedgroups, but due to the growth of the microfinance sectorin Mongolia, it now focuses more on serving SME clients(PlanetRating,2011). It stillmaintains itsoriginalmicrofinanceoutreach through partnershipwith other institutions such as

Box 1. Chronology of XacBank Establishment1997 – The first GlobalMicrocredit Summit held in NewYork; MicroStart programme launched by UNDP SpecialUnitforMicrofinance;UNDPapprovedMicroStartMongoliaprojectamong20pilotcountries;Mongolia’sfirstNationalMicrocreditSummitheld;andthesigningceremonyoftheUS$1millionMicroStart Project Agreement between theGovernmentofMongoliaandUNDP;

1998 –ACDI/VOCA,anAmericanmicrofinanceconsultingNGO, is contracted, and MicroStart Mongolia projectbecomesoperational; theMicroStartAdvisoryCommitteeisestablishedtofosterpublic-privatepartnershipsforthesustainabilityoftheMicroStartinitiativeandhelditsfirsttwomeetings;

1999 –Over 1,000 loans a total ofUS$150,000disbursedwithanaverageloansizeofUS$141;theBankofMongoliaapprovesnewregulationonnon-bankfinancialinstitutionsincollaborationwithX.A.C;X.A.C.istransformedintothefirstnon-bankfinancial company jointlyownedbyNGOs,XAC(GoldenFundforDevelopment);

2001 – XAC merged with USAID funded Goviin Ekhlel(GobiStart) LLC to form XacBank;TenGer Financial Groupwas created by XAC and Goviin Ekhlel; TenGer FinancialGroupsbecameaparentcompanyofXacBank,XacSecurity,XacLeasing,TengerSolutionsandTengerInsurance;

2006 – XacBank became the first commercial bank in Mongolia, rated by Moody’s (international credit ratingagency);

2007 –XacBankjoinedtheUnitedNationsGlobalCompact;

2009 –XacBankandTenGerFinancialGroupacquired30.5%ofsharecapitalofMolBulakFinanceLLC.ofKyrgyzstanaftertheirsuccessfulpilotinternationalinvestmentmadeduringtheprevioustwoyearsfrom2007to2008;

Present –Themain shareholders of theTenGer FinancialGroupareEmployeeInvestmentTrustCapitalManagement(25 percent), Blue Orchard (16.6 percent), Triodos(15percent),MercyCorps(13.67percent),IFC(13.55percent)andtheEuropeanBankforReconstructionandDevelopment(10percent).

XacBankreceivednumerouslocalandinternationalawardssince2004,includingFinancialTransparencyAwardin2004,2005and2006andtheSocialPerformanceAward in2008(TheWorldBankledConsultativeGrouptoAssistthePoor);BestCorporateGovernanceAwardin2006,BestCorporateSocialResponsibilityAwardin2006,2007and2008;OneofTopTenBusinessEntityAward in2009;andtheExcellencyinGreenDevelopmentAwardin2009(MongolianNationalChamberofCommerceandIndustry/MNCCI).

Graph 3: XacBank’s micro loan portfolio by purpose

Source: Third National Report – MDG Implementation, 2009.


WomenAssociationofMongolia,andthroughitsfranchisesystemwithruralSavingandCreditCooperatives(SCCs).AsofDecember2009, about 8,735 clients of XacBank, or 11.9 percent of thetotalnumberofclients,wereservedthroughthesepartnerships(PlanetRating,2011).AccordingtoPlanetRating,anindependentrating agency, there is no data available to accurately assessXacBank’soutreachtothemostvulnerablegroups.

XacBank’smaingoal is to contribute to employment creationbyfinancingmicrobusinessesandSMEs-itprovidesloansfromUS$729toUS$3,644,withalowerinterestrate(about15percent,compared to the national lending average at 22 percent) tocompaniesandindividualsthataimtocreatejobs(PlanetRating,2011).XacBankalsocollaborateswithMongolia’sMinistryofSocialWelfareandLabourtocreateandincreasejobpositionsthroughtheIncomeGenerationFundthatprovidesloansatinterestratesbetween0and1.25percent.Asof2010,about3,025jobswereexpected to be createdbyborrowerswho received the fund.However, theoverallcontributionofXacBanktowardspovertyreduction and employment generation is difficult to assess,echoingthelargerdebatesonwhetherornotmicrofinanceliftsthepooroutofpoverty(seebox3).

Box 3. Microfinance and the PoorSince the mid1980s, microfinance began to capture theglobal attention of many development practitioner as apowerfultooltoalleviatethepooroutofpoverty.Thetermmicrofinancereferstoafullrangeoffinancialservicesandproducts that are accessible to low-income individuals.This includes not only credit services, but also savings,insurance, andmoney transfer.Many studieshave lookedcloselyatquestionssuchas-doesmicrofinancereallyhelpthepoor?Are storiesofmicrocredit institutionsoversold?Unfortunately, there isno simpleanswer to this. Even theConsultativeGrouptoAssistthePoor(CGAP)claimsthat”itseemsanhonestsummaryof theevidencetosay thatwesimplydonotknowyetwhethermicrocreditorotherformsofmicrofinancearehelpingto liftmillionsoutofpoverty”(Rosenberg2010:3).Nevertheless,CollinsandMorduch(2009)madeacompellingcasebasedonannualfinanicaldiariesofmicrocreditpartricipants that themajor income insecurityliesnotintheamountoftheloan,butintheirregularityofthe incomesources.Microfinanceservices largelyhelpthepoortosmooththeirconsumptionandpayfornecessitiessuchashealthandeducation,andpreventthemfromfallingintothehandsoftheinformalfinancialmecahnisms.TheMIXMarket’s10-yeartime-seriesdataonhundredsofMicrofianceInsitutions(MFI)showedthatthevastmajorityofhouseholdsmaintainedhighrepaymentrates,at99.3centsofrepaymentfor every dollar on a six-month loan. Such high levels ofrepayment indicatethatthepoormicrofinanceconsumersvaluethe‘palliative’utilityofmicrofinancewithoutindebtingthem. Like any social programme in primary educationorhealth,microfinance,ifdoneright,needsdecadesbeforeitsimpactcanbetrackedonhumandevelopment.

Source: Rosenberg, Richard, 2010 and MIX Market, 2009)

Box 2. XacBank Profile (2011)

Financial Services

a Credit Services: 71,276borrowers

• Individualloans(98.3%),Grouploans(1.7%)• Averageoutstandingloansize:US$2,979

(142.1%ofGDPpercapita)• Averagedisbursedloansize:US$2,307(110.1%

ofGDPpercapita)• AverageEffectiveInterestRate:22%

a Savings Services:175,485savers

• CurrentAccounts:77,132savers(24.6%ofdeposits,44.0%ofclients)

• SavingsAccounts:84,131savers(22.1%ofdeposits,47.9%ofclients)

• TermDeposits:14,222clients(53.2%ofdeposits,8.15%ofclients)

r Micro insurance Services

• InsuranceServicesavailablethroughTenGerinsuranceLLC(property&movableassets)

a Money Transfer Services

• InternetBanking,AMARMobileBanking(M-Banking),WesternUnion

Non Financial Services

Awareness raising

Training

Services

Business Development a

r r

Education,Health& BasicServices a a

r

WomenEmpowerment

r r r

Democracy&HumanRights

r r r

Environment a r a

Source: PlanetRating, XacBank, 2011.


Scaling Up of XacBank: Key Enablers and Innovations

Enablersvision of Social responsibility.XacBank’svisionistobecomea leadingsocially responsiblefinancial institution inMongolia,spearheadinginnovativeproductsandservices.Ithasaso-calledtriple bottom line mission, which include a) contribution tosocio-economic development; b)maintenance of a premiumcustomer service, usage of ICT and innovative technologies,and establishment of effective partnerships, and c) provisionof inclusiveandvalueaddingfinancial services to thecitizens(XacBank,2008).

XacBankstrivestointroducenewproducts,whilestrengtheningitscurrentpartnershipsandservices. Itscurrent loanportfolioconsistsofbusinessloans;agriculturalloans;consumptionloans;andotherloans(wholesale,depositbacked,apartmentpledged,mortgageandleasing). Its innovativesavingsproductsinclude

FutureMillionaire — child longtermsavings;AgeGracefully —long term savings; Xac palace — housing deposit;Treasure —timedeposit(pay-insallowed);Wealthy — timedeposit(payinsnotallowed);Sprinkle — timedeposit (interestwithdrawable);andAspire — Savingsforgirls.ThetotalnumberofactiveFutureMillionairesavingdepositsreachedover80thousandandvolumereachedUS$24million.

Empowering Women. XacBank’s success and nationalrecognition isdue to itswomenclients,whoconstitutenearly60percentofborrowers.Atthehouseholdlevel,womenareinchargeofhouseholdfinances,oftenleadingfamilybusinesses,and micro-and- small enterprises. Due to migration, manyruralhouseholdsareheadedbywomen.Thus, theyconstitutean important client base for XacBank. XacBank signed theWomen’sWorldBanking (WWB)network’s pledge, to‘supportthe empowerment of low-income women as entrepreneurs,leaders and partners for change.’ In addition to its regularwomenclientele,inpartnershipwiththeWoman’sAssociationofMongolia,thebankhasbeenprovidinggrouploanstovulnerableruralwomensince2007,inadditiontoindividualloans.

Investing in Future Generations. In2008XacBank,began tostrategically influence the financial behaviour of the younggeneration inMongolia.With 33 percent of the bank’s clientcomprisingyouthbetweentheagesof18and35,thebankhadastrongincentivetoimprovefinancialliteracyandresponsibilityof current and future clients. As a recipient of the IncomeGenerationFundof theMinistryofSocialWelfareandLabour,the Bank is promoting entrepreneurship among the youngpopulationbyprovidingfinancialsupport,trainingandservices.Businesssupportandfinancialeducationtotheyoutharemeanstonotonlyestablishingperpetualclientloyalty,butalsocreatingasociallyandfinanciallyresponsiblenextgeneration(XacBank2009).Since2008,XacBankhasbeenprovidingfinancialliteracytrainings to girls and boys between the ages of 14 and 18,successfullyreachingouttochildreninmorethan130schools(CreditRating,2011).Itplanstoreachoutchildrenbetweentheagesof8and13,andextendthefinancialeducationservicestomore schools.

responsible Corporate Governance. XacBank introduced corporate governance policies and practices, including a fulldisclosureofitsbusinesspractices,regularconsultationamongstakeholders, and rigorous internal and external monitoringsystems. Although a regular business practice in advancedeconomies, the business practice introduced by XacBank hasbecome a flagship of responsible corporate governance for

Box 4. Client’s Profile: Ms. Tsetsegdelger, ‘The Art of Survival’ *

Ms.Tsetsegdelger is fromBulganprovince, situated in thenortherntipofMongolia.Ms.Tsestegdelgerisconsidereda‘janeofalltrades’,andhasatruetalentfordiversification.Herbusinesses rangefromtheproductionofcottonshoppingbags, a chicken farm, a vegetable greenhouse, firewood,flowerpots, and fruit tree orchard. She developed awiderangeofbusinessesinordertokeepherselfandherfamilyemployedallyeararound.Followingaseriesofmisfortunes,includingagraveillnessofherdaughter,Ms.Tsetsegdelgerlost her job as an accountant, and had to start from thebottom.ShereceivedtrainingfromlocalNGOsonvegetableharvesting, andwith a series of soft loans fromXacBank,ranging fromUS$83-US$1,667, shewasable to invest inagreenhouse, a chicken coop, and fruit tree orchard.Withtheseinitiatives,Ms.Tsetsegdelgerwasabletoprovideherfamilywithnutritiousmeals.Shesays’,“Ibelievethatforlowincome families, theyneed toventure intomany typesofbusinesses…[Inadditiontoloans]therewasalsoalotofhardworkanddeterminationthathelpedmebecomesuccessful,Iwaspreparedtodoanything.AllIknewwasthatIneededajobtosurviveandlookaftermyfamily.”

* The client’s profile is an extract from Saha et al., Portraits ofChange:Exploring thechangingpeople,natureandeconomicsof Mongolia, to be published in 2012, quoted her with thepermissionofXacBank.


Box 5. XacBank’s South-South Learning Experience

Investment in Mol Bulak Finance, the Kyrgyz Republic In2009,XacBankundertookitsfirstpilotinternationalinvestmentinMolBulakFinance(MBF)CompanyintheKyrgyzRepublic,fordisseminationandreplicationofitssuccessfulmicrofinanceinstitutionalmodel,aspartofitsregionalexpansionstrategyunderitsparentcompany — TenGerFinancialGroup.Thekeyfocusofthispracticesharinginitiativewasonthedevelopmentandmarketintroductionofarangeofinnovativeproductsandinclusiveservicestopeoplewithlimitedaccesstofinance,andthedevelopmentof thenationalstaffcapacityofMBF,especially in theareasofbusinessplanning, riskmanagement,financeandaccounting,corporategovernance,andmicrocreditmanagement.Thepartnershiphelpedtransferthefinancial technologydevelopedbyXacBankoverthepast10yearstoasmall,nascentmicrofinanceinstitutionthatwasoperatinginalargemarketwiththepotentialtogrow,andwhichhasahugedemandformicroandsmallcreditservicesfromthepopulation.Thispracticalknowledgesharingandon-sitebusinesslearningexperienceincludedafieldlevelappointmentofXacBankstaffasachieffinancialofficerinthelocalcompany.Theendresultwasemergenceofastronganddevelopedorganizationwithmorecapablestaffmembersinjustone-year’stimeframe,withseventimesincreaseinassets,expandednationalmarketoutreach,andthepartnershipwitharangeofreputablemicrofinanceinvestorsandinternationalpartnersforfurtherinstitutionalgrowth.

Greenfield Microfinance International Expansion into ChinaAfterthereviewofcurrentgoals,TenGerFinancialgrouphasmadeinroadsintoChina.Presently,aprocessisunderwaytoplan,registeranddevelopamicrocreditcompanyinChina’sXinjiang-UighurAutonomousRegion.DiscussionswithpotentialChinesepartnersandinternationalco-investorshavebeenfruitfulleadingtoastrongnetworkofpartners,resultinginestablishingafirstgreen-fieldmicrocreditcompany—TianRong(i.e.TengerFinance),includingjointequityfinancingandplannedtechnicalassistancefromtheInternationalFinanceCorporation(IFC)aswellasabusinesspartnershipwithtworeputablelocalChineseco-investors.


Mongolia, useful to other transition economies. Responsibleboard,timelyandaccuratedisclosureandtransparency,strongexecutivemanagementteamandwelltrainedstaffweremajorelementsofinternalforcesofsuccess.(XacBank2001,2003,2009)

Smart Partnerships.Runningapartnershipisadelicateoperationrequiringindividualswhocanunderstandandworkwithdifferentorganizations and at the same time manage their demands(OECD,2006).XacBankhassucceededincreatingasustainableandprofitablebusinesswithcontinuedsocialmandatethroughits successfulpartnershipswith thegovernment, internationalorganizations,suchasUNDP,EBRD,IFC,NGOsandmanyprivateentities.XacBankalsocreatedapartnershipwithseveralmediaandbroadcastinginstitutions,includingtheMongolianNationalBroadcastingforthepublicoutreachonfinancialeducation,andwithprivatecompaniessuchasPetrovis,thepetroleumimportingcorporation,onfosteringgreendevelopment.

InnovationsMobile Banking, Communications Outreach and Technical Support.In2009,XacBankintroducedamobilebankingsystemcalledAMAR(‘Easy’ inMongolian)toservicethepoorclientelemainlyinruralareas.Asof2010,thetotalnumberofAMARclientsreached about 60,000.Thismobile banking system has beenexpandingwiththereliableandgrowingconnectionofmobilephonesinruralareas.XacBankalsoestablishedpartnershipswithmajormobilenetworksinthecountry,inordertoreachnomadichouseholdsandcommunities living invery remoteareas. It isanticipatedbytheBank’smanagementthatmorethanhalfofthecountry’spopulationcouldbereachedbyAMARbyend2012.Marketingandtechnical/agriculturalextensionsupportfortheagriculturalclientsisalsoconductedbytheAMARsystem.

XacBankrecentlylaunchedtheMicrofinanceCentre,inordertoadvocatetheusageofloansforproductiveactivities.Thecentrecreatedaknowledgeforumandaninternationalpartnershiptocreate top expertise onmicrofinance inMongolia.The centrealsohostedaTVrealityshowentitled‘Life isAlwaysBeautiful’.UsingtheTVshow,thebankprovidedloanstoextremelypoorcandidates,providedskillsdevelopmenttrainingstohelpdevelopsmallbusinesses.Thecentrealsoprovidedtrainingsonfinancialliteracy for adults and youths.

Eco-Products. In2009,XacBankcreatedEco-ProductUnit,andbecamethefirstbank inMongolia tohavedevelopedenergy-savinglendingproducts(PlanetRating,2011).Thisunitworksinpartnershipwith several otherfinancial institutions, including

Microenergy Credits (MEC) to purchase the carbon emissionsreductionsgeneratedthroughenergysavings,andthemoneyis thenused toexpand theproject.Todate, about4,000eco-friendlyloanshavebeenprovided,forproductssuchasefficientcookingstoves,solarhomesystems,housinginsulationblanketsetc(PlanetRating,2011).XacBankalsointroducedaneconomic,environmentalandsocialperformancereportingsystemundertheGlobalReportingInitiative(GRI).Thesystemallowsthebanktocontinuouslytracktheimpactof itsclients’businessactivityontheenvironment,andencourageutilizationofsocialservicesand‘green’technologiesbyclients.Asanaddedincentive,clientswhohavebeenwithXacBankformorethan180daysandwhofulfillmorethan50percentoftheindicatorsreceiveaninterestratediscountontheirmicroloans(XacBank2009).XacBankisalsocollaboratingwithTheDutchDevelopment Bank and FMOonaCleanEnergyProjectandwithUNDPontheBuildingEnergyEfficiencyProject.

Capacity development of Mongolian Microcredit Institutions. XacBankparticipatesinauniqueapproachtodevelopingmoreinclusiveaccesstofinancialservicesbytheruralpoorandlow-income families through franchising 75 Saving and CreditCooperatives(SCCs),endorsedunderacooperationagreementwith the Financial Regulatory Commission (FRC). The bankhas been providing institutional capacity development andtechnicalassistanceinmodules-businessplanning,accounting,programme software and credit risk management. Based onitsown institutional risk ratingof theseSCCs,XacBank furtherprovidesatasubsidizedrate,theso-called‘whole-sale’loansforfurther re-lending to local communities in most remote rural areas.

South-South Learning and Sharing. XacBank and TenGerFinancial Group professional staff have been continuouslyengagedinmicrofinanceadvisoryandconsultingservicessince2008,andhavebeencontributingtodevelopingmicrofinancecapacities inAsia,CentralEurope,CIScountries,LatinAmericaandAfrica.MFIsofothercountriessendtheirstafftobetrainedatXacBankandTenGerFinancialGroup.ExamplesofsuchexchangeincludeRussia,Kyrgyzstan,Tajikistan,Kazakhstan,China,Uganda,Bosnia, Cambodia, El-Salvador, Timor-Leste, and Pakistan.The international learning and sharing initiatives are seen ascomplementarytothemainactivitiesofXacBank,andgohandinhandwithstrengtheningofservicesinMongolia.Inordertosuccessfullyexchangeexperiences,theTenGergrouphasbuiltanefficientteamofdedicatedprofessionals(TenGerFinancialGroup,2009).


ConclusionDespitethegovernmentpoliciesandreformstowardsreducingpoverty,includingcreationofalegalandinstitutionalframeworkanda favourableenablingenvironment for thegrowthof themicro finance sector, poverty, both urban and rural, has notdeclinedsignificantlyinthepastdecade,andruralpovertyhaseven increased. Access to finance alone cannot bring lastingpoverty reducing impact. The multidimensional nature ofpovertyandvulnerability inMongolia,especially its increasedvulnerabilitytoclimatechangeandenvironmentaldegradation,requiresconcertedandintegratedeffortsfromthegovernment,public and private institutions and civil society organizationsacrossavarietyofsectors-economicandfinancial,environmentaland social.

The country’sGDP is poised to at least double in the comingyears,mainlyduetotheexploitationof thetwoof theworld’slargest mining deposits, Oyu tolgoi (copper and gold) andTavanTolgoi (coking coal).The real test forMongolia’s futuresustainability is its ability to translate the mining dividendsinto economicdiversification, and createdecent employmentopportunitiesforitspoorandvulnerablecitizens.TheMongolian

Governmenthaspledged to invest thegains in infrastructuredevelopmentprojects,whichinturnmayimprovethelinkagesbetweenproducersandmarkets/consumers,andmarketaccessforruralbusinesses.Thegovernmentisalsotakingstepstowardsdecentralized service delivery, which may solve the currentproblemofover-populationinUlaanbaatarcity,duetotheunder-developmentinruralareasandinternalmigration.

Theway forward forexpanding inclusivefinance is tosupporttheexistingmicrofinanceplatforms, introductionof innovativeproductsandservicesbynationalinstitutions,aswasinthecaseof XacBank, and financing of SMEs and promotion of public-privatepartnerships fordevelopment.Theseefforts shouldbecomplementedbyothereffortsaimedatimprovingcapabilitiesofallMongoliancitizens,coupledwithclimatechangemitigationandadaptation initiatives.Theonlywaytoavoid‘the resourcecurse’ for Mongolia is to invest in sustainable and resilientdevelopmentforthefuturegenerations.

For more information: www.undp.org/poverty United Nations development Programme OneUnitedNationsPlaza•NewYork,NY10017USA12

November 2011

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AcknowledgementsThis case study was developed by Tuya Altangerel of UNDP,PovertyGroup,withcontributionsfromNaziaHabib-Mintz,andNerguiDorj.InvaluablecommentsandadvicewereprovidedbyMaleyeDiopp,UNDPCapacityDevelopmentGroup,DojinsurenJambal, UNDP Mongolia country office, Tur-Od Lkhagvajav,XacBank,XiaojunGraceWangandChanmiKim,UNDP,PovertyGroup,andFarzandAli.SinceregratitudetoShamsBanihaniforcopyeditingthereport.

Photocredits:XacBank,Mongolia.

POvErTy rEdUCTION SCALING UP LOCAL INNOvATIONS ... Reduction...This case study describes a successful transformation of Mongolia’s XacBank from a non-bank financial institution to

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