For years, the only thing harsher than Mongolia's winters was the country's business climate. But spring may be on its way for Mongolian entrepreneurs.
Powering the thaw are efforts by the government and NGOs to improve access to credit for small businesses through the use of information communications technology (ICT) and collateral guarantees.
A decade ago, starting a business in Mongolia was no easy task. An aversion to risk meant that banks simply weren't extending loans to small businesses, usually because they lacked the necessary collateral. According to Jennifer Butz, Mercy Corps' country director in Mongolia, "The lack of access to collateral denied or delayed small business investment, which in turn denied or delayed economic development."
On top of poor access to credit, businesses and banks both faced huge transaction costs in the world's least densely populated nation—Mongolia's three million inhabitants are spread across a country that is roughly equal in size to Western Europe.
But over the last six months, the government of Mongolia has taken extraordinary steps to support business development. In December 2011, the government approved new e-money regulations that pave the way for the expansion of mobile baking services. Just a few months later, in February, Parliament also passed the Law on Credit Guarantee, creating a fund to provide struggling small businesses with the collateral necessary to secure commercial loans.
The recent legislation represents an unprecedented opportunity for both small businesses and the development community, including Global Envision's parent organization, international development agency Mercy Corps.
For 13 years, Mercy Corps has been working to spur economic development in Mongolia from the ground up by giving small businesses and entrepreneurs the tools they need to succeed. Seeing a lack of financial services for rural small businesses, the NGO joined in 2001 with the UN Development Program (UNDP) to co-found XacBank, Mongolia's first commercial bank focused on financing rural enterprises.
To overcome collateral concerns, Mercy Corps also introduced a 'loan guarantee mechanism,' to help businesses gain access to loans by extending collateral guarantees. Since 2005, the program has provided 2,641 rural businesses across Mongolia with $7.6 million in loans to support business growth and development. In general, XacBank serves as the provider of commercial loans under the loan guarantee mechanism.
"The difference between Mongolia in 2005 and now is incomprehensible," said Butz.
The loan guarantee mechanism program currently has a 98.8 percent repayment rate, with many loan recipients graduating to direct relationships with banks. Still, Butz argues:
Banks need to take more risks, because as Mongolia becomes a middle income country, there has to be a maturation of the market.
Until banks decide to loosen restrictions on lending to small businesses, she says, "there will always need to be an organization providing collateral assistance." The new Law on Credit Guarantee and the establishment of a Credit Guarantee Fund, which provides collateral of up to 60 percent on a loan of MNT 20 million (about $15,000), represent a first step toward making such assistance sustainable long term. But Mercy Corps will still have a role to play as the fund grows and can serve entrepreneurs nation-wide, particularly those in less accessible rural areas.
The new e-money regulations also promise to strengthen rural business development.
There certainly is market potential. As of this year, mobile phone penetration in the country has reached an astonishing 90 percent of the population. Remarks Butz:
It's not uncommon to see a herdsman, hundreds of kilometers from the capital, texting on horseback.
According to Butz, the future of economic development in Mongolia lies in information communications technology (ICT). All 329 county seats are now connected to the Internet through a fiber optic cable, and with mobile phone use on the rise, technology is reducing transaction costs and creating new opportunities for rural businesses.
ICT will also be important for Mercy Corps as the organization looks to expand its programming. From using SMS technology to disseminate market information to developing webinars and e-learning systems for rural entrepreneurs, technology is changing the way Mercy Corps approaches rural development. For example, the organization plans to use technology to increase its outreach and eliminate costly rural offices in a country where poor infrastructure and low population density make it difficult to maintain a rural presence.
Despite the promising legislative developments, government remains focused on funding urban development, leaving rural communities to suffer from a lack of investment. Mercy Corps is quick to note that there is still work to be done. "Mercy Corps' attention to the rural areas has always been a counterbalance to growth centered around the capital, Ulaanbaatar, and has helped to support inclusive growth," says Butz. "We're more relevant now than ever."