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 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 1924 to State Bank of Mongolia Soviet style monobank Agricultural Bank of Mongolia created Placed in Receivership DAI* Management Contract with Government Successful privatization with H.S. Investment Company of Japan winning international bid process DAI* retained to manage bank * Development Alternatives Inc.
Khan Bank: Current Ownership H.S. Investment Company* 53.1% Tavan Bogd Trade Company 35.4% IFC 9.1% Development Alternatives Inc. 2.2% J. Peter Morrow 0.3% * 100% subsidiary of Sawada Holdings Co. Ltd.
Khan Bank Today May 2007 July 2000 Total Number of Branches Ulaanbaatar Branches 51 2 Rural Branches On-Line Branches Number of Employees 2, Depositors 1,357,406 Borrowers 262,981 Households served 68%
Financial Performance (000 USD) Loans205,139110,03767,05944,59922,2169, Deposit260,236150,254108,15065,17840,62022,11211,755 Total Equity 29,89914,31210,5896,7333,1951,524(452) After tax Profit 10,2923,8072,5521,6561,671802(310) ROA4.40%2.64%2.62%2.79%4.91%4.50%(2.69%) ROE57..3%36.58%38.77%42.39%52.30%51.50%- Loans/ Deposits 79%72%62%68%54%40%2%
Business Strategy 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 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 residents Very remote being 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) Loans: Outstandings (000 USD)
Loans: Disbursements (000 USD)
Credit Experience: PAR Corporate0.42%0.00% SME4.11%5.63%6.57%2.10%0.75% Consumer 0.93%1.12%1.77%1.27%0.58% Agricultural 0.77%0.83%2.19%1.77%1.19% Bank PAR1.95%3.02%4.50%1.83%0.75%
Credit Experience: SME PAR: UB & Rural UB SME6.34%11.90%13.81%2.73%1.92% Rural SME2.56%2.58%3.05%1.90%0.70% Bank SME4.11%5.63%6.57%2.10%0.75% Bank PAR1.95%3.02%4.50%1.83%0.75%
SME Loans: Strategy 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 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 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 Subsequent SME & Other Loan Products 2001 – 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
SME: Other Services 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 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 Run as a business not a project Experienced & independent management Transparency Ability to say NO… Structure, Authority
Key Lessons 2 Product design Training Branding – Public Image Understanding Costs Change Management
Khan Bank of Mongolia Thank You for Listening