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Document of
The World Bank
Report No: ICR00001956
IMPLEMENTATION COMPLETION AND RESULTS REPORT
(IDA-40880)
ON A
CREDIT
IN THE AMOUNT OF SDR 6.99 MILLION
(US$ 10.57 MILLION EQUIVALENT)
TO
MONGOLIA
FOR A
SECOND PRIVATE SECTOR DEVELOPMENT CREDIT PROJECT
October 25, 2011
Financial and Private Sector Development Department
East Asia and Pacific Region
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CURRENCY EQUIVALENTS
Currency Unit = Togrog
Exchange Rate at ICR, October 8, 2011
Togrog 1,282 = US$ 1
US$ 1.56 = SDR 1
Exchange Rate at Loan Closing, April 30, 2011 Togrog 1,260 = US$ 1
US$ 1.62 = SDR 1
Exchange Rate at Appraisal, May 30, 2005
Togrog 1,188 = US$ 1
US$ 1.51 = SDR 1
FISCAL YEAR
January 1 – December 31
ABBREVIATIONS AND ACRONYMS
BOM Bank of Mongolia
CAS Country Assistance Strategy
CWG Counterpart Working Group
DCA Development Credit Agreement
EA Environmental Assessment
EGPRS Economic Growth and Poverty Reduction Strategy
FIL Financial Intermediation Loan
FM Financial Monitoring
FMR Financial Monitoring Report
FNS Financial Network Services
FSAC Financial Sector Adjustment Credit
GB Golomt Bank
GOM Government of Mongolia
IAS International Accounting Standards
ICR Implementation Completion and Results Report
IDA International Development Association
IFC International Finance Corporation
IPSAS International Public Sector Accounting Standards
JBIC Japan Bank for International Cooperation
LOC Line of Credit
MIS Management Information System
MNE Ministry of Nature and Environment
MNT Mongolian Togrog
MOF Ministry of Finance
MOU Memorandum of Understanding
NGO Non-Governmental Organization
NPLs Non-Performing Loans
OECD Organization for Economic Cooperation and Development
OED Operations Evaluation Department
PFIs Participating Financial Intermediaries
PIU Project Implementation Unit
PMU Project Management Unit
PRGF Poverty Reduction and Growth Program
PSDC Private Sector Development Credit Project
QAG Quality Assurance Group
SAs Special Accounts
SMEs Small- and Medium-sized Enterprises
SPID Sector Policy and Investment Department
TA Technical Assistance
TDB Trade and Development Bank
ZB Zoos Bank
SBM State Bank of Mongolia
Vice President: James W. Adams
Country Director: Klaus Rohland
Sector Manager: Hormoz Aghdaey
Project Team Leader: Alexander Pankov
ICR Team Leader: Wei Zhang
MONGOLIA
Second Private Sector Development Credit Project
CONTENTS
Data Sheet
A. Basic Information
B. Key Dates
C. Ratings Summary
D. Sector and Theme Codes
E. Bank Staff
F. Results Framework Analysis
G. Ratings of Project Performance in ISRs
H. Restructuring
I. Disbursement Graph
1. Project Context, Development Objectives and Design ............................................... 1
2. Key Factors Affecting Implementation and Outcomes .............................................. 7
3. Assessment of Outcomes .......................................................................................... 14
4. Assessment of Risk to Development Outcome ......................................................... 19
5. Assessment of Bank and Borrower Performance ..................................................... 20
6. Lessons Learned ....................................................................................................... 22
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 24
Annex 1. Project Costs and Financing .......................................................................... 25
Annex 2. Outputs by Component ................................................................................. 26
Annex 3. Economic and Financial Analysis ................................................................. 32
Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 33
Annex 5. Beneficiary Survey Results ........................................................................... 35
Annex 6. Stakeholder Workshop Report and Results ................................................... 37
Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 38
Annex 8. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 49
Annex 9. List of Supporting Documents ...................................................................... 50
MAP
A. Basic Information
Country: Mongolia Project Name: Private Sector
Development Credit II
Project ID: P088992 L/C/TF Number(s): IDA-40880
ICR Date: 05/17/2011 ICR Type: Core ICR
Lending Instrument: FIL Borrower: MONGOLIA
Original Total
Commitment: SDR 7.0M Disbursed Amount: SDR 6.7M
Revised Amount: SDR 7.0M
Environmental Category: FI
Implementing Agencies:
Ministry of Finance, Bank of Mongolia, PFIs
Cofinanciers and Other External Partners: N/A
B. Key Dates
Process Date Process Original Date Revised / Actual
Date(s)
Concept Review: 03/18/2005 Effectiveness: 02/07/2006 02/07/2006
Appraisal: 04/19/2005 Restructuring(s):
10/18/2007
03/04/2009
04/28/2010
01/06/2011
Approval: 06/28/2005 Mid-term Review: 09/01/2008 11/24/2008
Closing: 04/30/2010 04/30/2011
C. Ratings Summary
C.1 Performance Rating by ICR
Outcomes: S
Risk to Development Outcome: Modest to Low
Bank Performance: S
Borrower Performance: S
C.2 Detailed Ratings of Bank and Borrower Performance (by ICR)
Bank Ratings Borrower Ratings
Quality at Entry: S Government: S
Quality of Supervision: S Implementing
Agency/Agencies: MS
Overall Bank
Performance: S
Overall Borrower
Performance: S
C.3 Quality at Entry and Implementation Performance Indicators
Implementation
Performance Indicators
QAG Assessments
(if any) Rating
Potential Problem Project
at any time (Yes/No): No
Quality at Entry
(QEA): Satisfactory
Problem Project at any
time (Yes/No): No
Quality of
Supervision (QSA): Moderately Satisfactory
DO rating before
Closing/Inactive status: Satisfactory
D. Sector and Theme Codes
Original Actual
Sector Code (as % of total Bank financing)
Banking 18 18
Central Government administration 2 2
General finance sector 30 30
Micro- and SME finance 50 50
Theme Code (as % of total Bank financing)
Other financial and private sector development 25 25
Regulation and competition policy 25 25
Small and medium enterprise support 50 50
E. Bank Staff
Positions At ICR At Approval
Vice President: James W. Adams Jemal-ud-din Kassum
Country Director: Klaus Rohland David R. Dollar
Sector Director: Tunc Uyanik Khalid A. Mirza
Project Team Leader: Alexander Pankov Xiaofeng Hua
ICR Team Leader: Alexander Pankov, Wei Zhang
ICR Primary Author: Hiran Herat
F. Results Framework Analysis
Project Development Objectives (from Project Appraisal Document)
The project aims to continue to support the efforts of the Mongolian Government and
commercial banks to develop the intermediate-term lending market for Mongolia’s
private sector. This development objective will be achieved through: (i) increased
longer-term funding for viable capital investment projects; (ii) strengthened institutional
capacity in identified high priority areas of Participating Financial Intermediaries (PFIs);
and (iii) improved enforcement of prudential regulation and supervision by the BOM.
Revised Project Development Objectives (as approved by original approving authority)
(a) PDO Indicator(s)
Indicator Baseline Value
Original Target
Values (from
approval
documents)
Formally
Revised
Target
Values
Actual Value
Achieved at
Completion or
Target Years
Indicator 1: Increased term lending by PFIs funding to viable borrowers; and
quality of term loans equal to or better than that of overall portfolio.
Longer-term lending
(>1yr) financed by PFIs
own funding accounted
for less than 5% of total
portfolio.
Date: 31-Dec-2004
The longer term
lending (total
portfolio)(>1
year) in PFIs
increased from
MNT 251.6
million (for all 4
banks) in 2005 to
MNT 3,555
million by April
2011, and
accounted for
roughly 20% of
the total
outstanding loans
among 4 PFIs on
an average.
Sub-loan
borrowers are
private businesses
in diversified
sectors:
agribusiness,
construction,
private education,
pharmaceutical,
telecom service,
retail services,
hospitality, food
and beverage, and
textile (cashmere).
Sub-loan portfolio
under the project
has only one non-
performing loan
among the 36 sub-
Indicator Baseline Value
Original Target
Values (from
approval
documents)
Formally
Revised
Target
Values
Actual Value
Achieved at
Completion or
Target Years
loans (i.e. 97.5%
performing)1
underwritten,
which is better
than the overall
portfolio of PFIs
during the same
period.
30-April-2011
Indicator 2: Institutional capacity of PFIs strengthened in key areas supported by
the Project.
Capacity for risk-based
lending was weak, and
an effective framework
for financial risk and
internal control was just
adopted or yet to be
adopted.
Date: 31-Dec-2004
Sub-loan
evaluation focus
shifted
toward more risk
analysis, and a
risks and control
framework
adopted by PFIs.
Extension of
services to more
remote locations.
New operational
risks manuals
developed and
staff trained.
Date:
30-April 2011
Indicator 3: Institutional capacity of BOM strengthened in key areas supported by
the Project.
Capacity for risk-based
banking supervision
was weak, and basic
skill/expertise
development needed
for cross-border and
consolidated
supervision.
Date: 31-Dec-2004
Risk-based
method of bank
supervision
used and
routine
consolidated
supervision
carried out.
Date:
1 See Annex 2 for details.
Indicator Baseline Value
Original Target
Values (from
approval
documents)
Formally
Revised
Target
Values
Actual Value
Achieved at
Completion or
Target Years
30-April 2011
(b) Intermediate Outcome Indicator(s)
Indicator Baseline Value
Original Target
Values (from
approval
documents)
Formally
Revised
Target Values
Actual Value
Achieved at
Completion or
Target Years
Indicator 1:
PSD – An increased number of private companies benefited from the
Project, improved access to new sectors/markets/business activities,
and/or increased sales/jobs/technology upgrading.
Lack of multi-year loan
for capital investments
was a main constraint
to technological
upgrading and entry
into new markets.
Date:
31-Dec-2004
35 private
enterprises
received the sub-
loans under the
project;2 more
than 50% of the
funding was used
for upgrading
technology,
expanding
business and
creating new jobs.
Date:
30-April-2011
Indicator 2:
PFIs-Improved loan portfolio diversification, policies and procedures
for risk management developed/adopted; core banking system
integrated/enhanced, and staff trained per medium-term program.
Loans concentrate in
trade and
manufacturing;
effective policies and
procedures for risk
management were
missing or incomplete,
old and new systems
co-existed, and no
medium-term HRD
program. Date:
31-Dec-2004
Loan portfolio
better distributed,
in non-
manufacturing
sectors (incl.
telecom service,
tourism and
hospitality,
education,
agribusiness);
Risk management
policies
and procedures
established; and
Staff training
more systematic
with semi-annual
and annual HR
development
2 A total of 36 subloans were issued to 35 subloan borrowers under the project.
plans.
Date:
30-April-2011
Indicator 3:
BOM - A training coordinator position created and filled; supervisors
trained per medium-term program; and knowledge learned
effectively transferred.
Training at Supervision
Dept. suffered from
lack of coordination
and strategic planning.
Date:
31-Dec-2004
Training better
coordinated and
delivered
according to a
sound
medium-term
human resources
development
program
Date:
30-April 2011
G. Ratings of Project Performance in ISRs
No. Date ISR
Archived DO IP
Actual
Disbursements
(USD millions)
1 12/21/2005 Satisfactory Satisfactory 0.00
2 08/03/2006 Satisfactory Satisfactory 0.00
3 01/23/2008 Satisfactory Moderately Satisfactory 3.53
4 02/26/2009 Moderately Satisfactory Moderately Satisfactory 5.94
5 06/30/2010 Moderately Satisfactory Moderately Satisfactory 8.93
6 06/28/2011 Satisfactory Satisfactory 10.28
H. Restructuring (if any)
Restructuring
Date(s)
Board
Approved
PDO Change
ISR Ratings at
Restructuring
Amount
Disbursed at
Restructuring
in USD
millions
Reason for Restructuring &
Key Changes Made DO IP
10/18/2007 S MS 2.87
Amended DCA to add two more
PFIs – Golomt Bank and Khan
Bank.
03/04/2009 MS MS 5.94
Amended DCA to support
BOM’s capacity to address the
banking crisis as a timely
response to the crisis situation
04/28/2010 MS MS 8.39
Extended the project
implementation to April 30,
2011 from April 30, 2010 to
allow for orderly completion of
project activities delayed by the
banking crisis
Restructuring
Date(s)
Board
Approved
PDO Change
ISR Ratings at
Restructuring
Amount
Disbursed at
Restructuring
in USD
millions
Reason for Restructuring &
Key Changes Made DO IP
01/06/2011 MS MS 9.59
Reallocation of funds and
replacement of Zoos Bank by
State Bank of Mongolia as
participating bank
I. Disbursement Profile
1
1. Project Context, Development Objectives and Design
1.1 Context at Appraisal
1. Country and Sector Background. Mongolia started the transition from a planned
to a market-based economy in 1991-1992, and its economic performance in the following
years was rated better than a number of transitioning economies in Central Asia and
Eastern Europe. By the mid-2000s, the challenge was to consolidate the political and
economic transition and achieve a sustainable high growth rate, so as to reduce poverty
and improve people’s livelihoods.
2. The private sector was a main driving force behind Mongolia’s growth. From
accounting for less than one percent in 1990, the private sector in 2005 contributed about
eighty percent of the country’s GDP (US$1.2 billion). However, most of the private
enterprises were small firms or individual entrepreneurs engaged in basic agriculture
activities, with little value-added and lacking access to markets and modern technology.
3. High interest rates (over 23 percent in real terms), limited access to finance, and
lack of capital investment finance were among the top concerns of Mongolia’s private
businesses, according to various surveys and public consultations by the government,
local non-governmental organizations (NGOs) and donors, including a World Bank-
sponsored Investment Climate Assessment. Over 95 percent of loans extended by
Mongolian banks had less than a 12-month maturity. This was partially due to the short-
term nature of the banks’ funding sources (mostly domestic deposits at that time), but
weak institutional capacity of banks also played a role. The Mongolian commercial
banking system was still in its early stage of development, with most of the banks having
been in business for less than 10 years, and usually established by entrepreneurs who did
not have any prior commercial banking experience. The few that had been operating for
longer had been set up on the foundation of the old Soviet-type mono-bank.
4. Rationale for World Bank Assistance. In 2000-2004, the Mongolian authorities
requested the Bank to provide funding and technical assistance for the preparation and
implementation of the first Private Sector Development Credit (PSDC I) Project to: (i)
promote private sector development by increasing the availability of commercial bank
term loans to private enterprises; (ii) increase the institutional capacity of participating
banks by strengthening their financial intermediation functions and resource allocation
capabilities, and (iii) increase the institutional capacity of the BOM through improving its
bank supervision functions. The PSDC I Project was successfully completed in August
2004, and the Bank’s Implementation Completion Report (ICR, Report No. 31419) found
the outcome of the project satisfactory, as evidenced by job creation, increased revenues
and new products of the private sector borrowers, and a strengthened bank supervision
capacity of the BOM.
5. Nevertheless, there was still a long way to go to develop the intermediate-term
lending market in Mongolia. Therefore, the authorities requested that the Bank prepare a
2
follow-up operation that would maintain the design and focus of its successful
predecessor PSDC I. Continuous Bank involvement and funding support with the same
instrument through the proposed PSDC II was expected to ensure that: (i) Mongolia’s
nascent intermediate lending market would continue to evolve in accordance with market
economy principles; and (ii) the institutional capacity-building gains in terms of lending
and bank supervision would be further developed.
1.2 Original Project Development Objectives (PDO) and Key Indicators (As
approved)
6. The objective of the Second Private Sector Development Credit (PSDC II) Project
was to continue to support the Mongolian Government’s and commercial banks’ efforts
to develop the intermediate-term lending market for Mongolia’s private sector through:
(i) increased longer-term funding for viable capital investment projects, and quality of
term loans equal to or better than that of overall portfolio; (ii) strengthened institutional
capacity in identified high-priority areas of Participating Financial Intermediaries (PFIs);
and (iii) strengthened institutional capacity of Bank of Mongolia (BOM) in key areas
supported by the project.
7. In order to measure progress, the project employed the following key outcome
indicators: (i) increased intermediate-term (longer than one year) lending financed by
PFIs to commercially, technically and financially viable borrowers/projects; (ii) quality
of intermediate-loan portfolio equal or better than that of overall PFI portfolio; and (iii)
institutional capacity of PFIs and the BOM strengthened in key areas supported by the
Project.
1.3 Revised PDO (as approved by original approving authority) and Key Indicators,
and reasons/justification
8. The PDO and key indicators were not revised.
1.4 Main Beneficiaries
(Original and revised, briefly describe the "primary target group" identified in the PAD
and as captured in the PDO, as well as any other individuals and organizations expected
to benefit from the Project)
9. The main beneficiaries of the project were the private small and medium
enterprises (SMEs) in Mongolia. In addition, the participating commercial banks, the
BOM and the Ministry of Finance (MOF) benefited from technical assistance provided
under the project on credit risks management, new product development, and
management information system (MIS) and financial sector regulation and supervision
respectively.
3
1.5 Original Components (As approved)
10. The project had three main components: Component 1–Line of Credit;
Component 2–Technical Assistance (TA) Programs; and Component 3–Project
Implementation Support.
11. Component 1: Line of Credit (original IDA credit allocation of US$9.45
million).
The lack of access to longer-term financing imposed severe limits to the growth potential
of the private sector in Mongolia. In order to overcome this hurdle, the Line of Credit
(LOC) under PSDC II was structured to serve the capital investment needs of sub-
borrowers through the eligible PFIs, without distorting the local credit market. The LOC
represented by far the largest component of the project.
12. Under this component, the MOF entered into Subsidiary Loan Agreements with
the eligible PFIs. The maturity of a subsidiary loan corresponded to that of the PFI sub-
loan it financed (from one to seven years at a market-based cost of funding). PFIs’ mark-
ups and consequently the final interest charged on the part of private sector borrowers
followed the market practice for the most of the time. Subsidiary loans were
denominated either in U.S. Dollars or Togrog. Although there was no eligibility criteria
related to firm size, sector, or geographic location, the main beneficiaries of the LOC
were expected to be small- and medium-sized privately-owned enterprises, given the
agreed limits on sub-loan size and single-borrower exposure. These limits were to help
PFIs to diversify credit risk and increase the number of firms benefiting from the project
financing.
13. Sub-loans were to finance the cost of equipment, civil works (except housing),
technical assistance, services and leasing arrangements. They could also finance
incremental permanent working capital, although PFIs were expected to finance the
working capital needs of the sub-project in accordance with its loan and liquidity
management policies. PFIs were also encouraged to co-finance a portion of a sub-loan.
In addition, there was a Negative List which covered activities that PSDC II would not
finance.
14. The initial set of PFIs at appraisal included the three local commercial banks that
had already successfully participated in the first project, namely Golomt Bank (GB),
Trade and Development Bank (TDB) and Zoos Bank (ZB). However, GB was excluded
at negotiations, per the Government’s request due to the bank’s off-balance-sheet
problem at the time. It became a PFI in October 2007. In addition, Khan Bank joined the
project in October 2007.
15. Under both PSDC I and II Projects, PFIs were selected according to the eligibility
criteria (listed in Table 1), which were developed based on the World Bank’s OP8.30
requirements and BOM’s prudential regulations.
4
Table 1: Eligibility Criteria for Participating Financial Intermediaries
Compliance Other Financial Issues Credit Culture
Prudential regulations
Risk weighted capital
adequacy (10%)
Single borrower
exposure (<20%)
Connected party lending
(<5%)
Loan provisioning
adequacy
Foreign exchange
exposure (+/- for single
currency open position
and +/- 40% for
consolidated open
position)
Banking Law
Tax Law
Size
Portfolio quality
IAS-based audited financial
statements for the last three
years
Profitability
Asset/liability management
Shareholder influence
MIS
Credit policies
Credit procedures
Credit function structure
and staffing
Management quality
16. Component 2: Technical Assistance Programs. (Original IDA allocation:
US$700,000)
This component was developed to (i) strengthen the Central Bank’s institutional capacity
for bank supervision, and (ii) enhance the PFIs’ capacity to conduct banking operations in
a prudent and efficient manner. Originally, the beneficiaries of this component included
the BOM, TDB, Zoos Bank (ZB). Paragraphs 17 to 19 below present a summary of the
specific TA programs for each beneficiary.
17. TA for Bank of Mongolia (BOM): The technical assistance program at the BOM was designed to provide training and
consulting services to the Supervision Department in the following key areas:
(i) Financial and consolidated supervision;
(ii) Credit, market, operational and inherent risk assessment; and
(iii) Policy analysis.
18. TDB TA program: The bank’s goal was to enhance the quality of the personnel and
services to an international level. Staff training has been integrated into TDB’s own
development strategy. The priority areas identified at the project appraisal for PSDC II
support included:
(i) Consultant services for developing a standardized credit analysis process and risk-
based internal audit procedures;
5
(ii) Staff training activities with top priority in the areas of credit analysis and risk
assessment, loan monitoring and structuring, cost-accounting, and risk-based
internal audit; and
(iii) Customization of the FNS system, to enhance its functionality and meet the
requirements of treasury operations and internal audit.
19. ZB TA program. At the time of appraisal Zoos Bank was a medium-sized bank
with rapidly growing assets and branch network. Between 2003 and 2005, the workforce of
the bank grew faster than that of operating income, weakening the bank’s earning capability
and operating efficiency. While the priority areas that needed PSDC II support were similar
to those of TDB, the first and foremost challenge for the bank was to enhance the policies,
procedures and techniques for credit analysis and risk assessment, as well as financial control
and risk-based internal audits. The bank did well for the sub-loan portfolio, but appeared to
have failed to apply the same risk management principles while rapidly expanding its general
assets, and was put under receivership by the BOM in November 2009 (see Box 1 for details).
The main causes of Zoos Bank’s bankruptcy were beyond the project’s control.
20. Component 3: Project Implementation Support (Original IDA allocation:
US$180,000).
Component 3 supported the government’s efforts to better manage, monitor and evaluate
project implementation. It helped finance the cost of: (i) a local consultant to be engaged
by the MOF as the project coordinator; (ii) staff training and workshops; (iii) annual
project audits; and (iv) incremental operating expenses for limited project office supplies,
project document translation and printing, and communication.
1.6 Revised Components
21. Component 2 had two revisions during project implementation.
22. The first restructuring was undertaken in March 2009 in response to the need to
urgently provide TA to the authorities for coping with a severe banking crisis that
affected Mongolia following the global economic downturn in late 2008. 3
Specifically,
funds were reallocated from Component 1 to Component 2 (US$1 million) to support the
BOM in conducting (i) an urgent assessment of a failed bank (Anod Bank, not a PFI of
the project) and later (ii) a number of diagnostics of systemically-important Mongolian
banks. In addition, the Ministry of Finance became eligible for TA under Component 2,
aimed at improving its capacity to design and implement financial sector stability
measures.
23. The second restructuring took place in late 2010 when MOF and BOM had
completed the reassignment of assets and liabilities of the failed Zoos Bank, which went
bankrupt in November 2009 (see Box 1 below), and transferred the performing assets,
including the sub-loan portfolio under the project, to the newly established State Bank of
3 Project Restructuring Paper, March 9, 2009
6
Mongolia. For the purpose of the project, the State Bank was considered as a successor
institution to Zoos Bank, and assumed the associated rights and responsibilities.4 A new
TA program was developed for the State Bank of Mongolia, with a focus on IT system
improvement and development.
Box 1: Replacing Zoos Bank by the State Bank of Mongolia as the Project PFI
The Zoos Bank JSC (ZB), a commercial bank established under Mongolia’s Banking Law of
September 2, 1993, became an eligible financial intermediary to participate in the Project and
signed the Project Implementation Agreement with the Association on September 8, 2005, and a
Subsidiary Loan Agreement with Government of Mongolia on January 20, 2006.
The Zoos Bank’s financial situation deteriorated dramatically in 2009 due to the fast credit
growth and business expansion between 2005 and 2008, which resulted in increasing Non
Performing Loans (NPL) and decreasing capital adequacy, as well as the overall impacts of the
economic downturn in Mongolia on banking sector in general. Zoos Bank was not able to raise
the needed capital to meet the BOM Capital Adequacy requirement and became insolvent and,
eventually, on November 20, 2009, was set under receivership pursuant to Bank of Mongolia’s
Order No. 650. In accordance with Order No. 650, the ZB Receivership was entrusted with the
restructuring of the Zoos Bank and/or its compulsory liquidation. Through Mongolia’s Prime
Minister Resolution No. 348, dated November 19, 2009 and the Minister of Finance’s Resolution
No. 259, dated November 23, 2009, Mongolia established the State Bank of Mongolia (SBM), a
state-owned bank with an initial capital of eight billion Togrog (MNT 8,000,000,000).
Under the request of the Government of Mongolia, the World Bank, ZB Receivership and SBM
entered into an Agreement on January 13, 2011 to assign and transfer to the SBM all of Zoos
Bank's rights, interests, titles and obligations under the Project Agreement provided that: (i) the
assignment is not deemed a novation; and (ii) SBM undertakes and succeeds the Zoos Bank in all
its obligations under the Project Agreement, originated as of September 8, 2005 onward.
Source: “Assignment and Assumption Agreement for the Second Private Sector Development
Project between International Development Association and Zoos Bank Receivership and State
Bank of Mongolia,” January 13, 2011.
1.7 Other significant changes
24. The project was extended once beyond the original closing date of April 30, 2010
to April 30, 2011. The extension was requested by the government in April 2010 in light
of the temporary slow-down in the pace of project implementation during 2009 and early
2010, when Mongolia was impacted by the global financial crisis (See Section 2.2 on
Impact of global financial crisis).
4 Project Restructuring Paper, December 22, 2011
7
2. Key Factors Affecting Implementation and Outcomes
2.1 Project Preparation, Design and Quality at Entry
(including whether lessons of earlier operations were taken into account, risks and their
mitigations identified, and adequacy of participatory processes, as applicable)
25. There was no “Quality at Entry” review carried out for this repeater project. This
ICR found the Quality at Entry to be Satisfactory.
26. The project’s preparation, design and quality took into consideration the main
findings of an Operations Evaluation Department (OED) internal review of Bank lending
for line of credit operations, the lessons learned under the PSDC I Project, and the
reviews/assessments on the main constraints to private sector development in Mongolia
prepared by the government, local NGOs, the Bank and other donors. In particular, the
following factors were taken into account in project design:
(i) Consistency with Bank and Government priorities. The project’s main
objective of alleviating the shortage of long-term financing for SMEs was
fully consistent with the government’s emphasis on developing a vibrant
private sector and with the World Bank’s FY05-FY08 Country Assistance
Strategy (CAS Report No. 28419-MOG).
(ii) Incorporation of lessons learnt in PSDC I, especially when it came to
designing the LOC Component. Important lessons incorporated in the
project included: (a) a stable macroeconomic and banking environment,
and an improved regulatory framework, which were prerequisites for the
success of a Bank-financed line of credit operation; and (b) government
on-lending arrangements, including the on-lending rate, had to be market-
based, to avoid market distortion. 5
(iii) Clarity of eligibility criteria. While carrying out the selection of eligible
PFIs, it was vital for the success of a LOC program to adhere to the
following principles: (a) a line of credit program should have no non-
commercial criteria for the eligibility of sub-borrowers/sub-projects; and
(b) clear eligibility criteria should be set up and maintained for PFIs, based
on the Basel Core Principles.
(iv) Role of technical assistance program. The inclusion of parallel technical
assistance programs for PFIs, BOM, and MOF capacity-building were
needed, and were targeted to address the critical skill gaps and key system
weaknesses.
5 The on-lending rate of a dollar-denominated subsidiary loan was set at LIBOR for six-month U.S dollar
deposits + 1 percent. The on-lending rate of a Togrog subsidiary loan was the average rate for Togrog
demand deposits.
8
(v) Close monitoring of the financial position and performance of PFIs and
the progress of sub-projects was critical, given the rapidly changing
economic environment. This required an appropriate level of supervision
effort.
2.2 Implementation
(Including any project changes/restructuring, mid-term review, Project at Risk status,
and actions taken, as applicable)
27. The overall results of project implementation are considered satisfactory at the
time of project completion, with approximately 98 percent of the credit proceeds
disbursed. At the same time, the pace and quality of implementation varied over the
lifetime of the project, with some issues encountered due to changes in government
policies, the negative impact of the global financial market crisis of 2008-2009 on
Mongolia’s economy, the natural disasters in 2009 and 2010, and competition from other
donors’ programs that provided term lending to the private sector at a subsidized rate
during the same period.
28. Impact of Government policy changes. In 2007, contrary to the Credit
Agreement and agreed policies and procedures, the authorities initiated a Memorandum
of Understanding (MOU) between the PFIs and the MOF to limit interest rate margin on
sub-loans. Besides being an obvious distortion to competition in the banking sector, the
MOU also had a negative impact on the willingness of PFIs to extend sub-loans to PFIs.
Based on discussions between the Bank team and MOF during project supervision, the
MOF agreed to annul the MOU in March 2008, clearing the way for PFIs to once again
price loans based on the risk profile of the project and the sub-borrower at prevailing
market rates.
29. Impact of the global financial crisis. Mongolia, like many transition economies,
was particularly hard hit by the global financial crisis. Starting in early 2008, Mongolia’s
budget revenues were significantly reduced due to a sharp reduction in the world market
price of the economy’s main revenue-generating commodities, which led to contracting
economic growth, impaired foreign trade balance and currency devaluation. This in turn
brought about a systemic instability in the banking sector, with a large outflow of
deposits and rising NPLs, causing two medium-sized banks (including Zoos Bank) to go
into bankruptcy, and other banks to face a severe shortage of liquidity and capital.
Project implementation progressed well and was rated Satisfactory until February 2008,
when it was downgraded to Moderately Satisfactory in view of the uncertainty in
macroeconomic stability, which had a negative impact on the line of credit operations.
The OP8.30 guidelines require that the Line of Credit operations should be reviewed
when the country’s macroeconomic conditions become unstable. The Government of
Mongolia requested urgent assistance from the donor community to help stabilize the
banking system. The WB response included amending, in March 2009, the Development
Credit Agreement (DCA) for PSDC II in order to support the BOM’s urgent TA needs.
In particular, a reallocation of US$1 million was made from the credit line component
9
(Component 1) to the BOM technical assistance sub-component for financing in-depth
diagnostic assessments of ten Mongolian banks. The purpose of the assessment was to
provide the BOM with a solid analytical foundation in order to design the supervisory
strategies for the entire system, as well as for specific institutions. In addition, the MOF
became eligible for TA aimed at improving its capacity to act as a financial sector
regulator.
30. Since late 2009 there had been signs of economic recovery, and by mid-2010
Mongolia was clearly in a new boom phase of economic cycle. The conditions of the
external markets for Mongolia’s exports had improved, and major mining concessions
awarded to international consortia resulted in renewed capital inflows. The liquidity
situation in the banking sector had improved, and positive growth resumed for both
deposits and loans. In particular, there was renewed interest by PFIs and private
enterprises in the longer-term investment funding offered by the credit line component of
the project. In response to the borrower’s request, the economic recovery and improved
credit risk management among PFIs, the DCA was amended again in April 2010, and the
closing date for the project was extended by one year to April 30, 2011, to allow for the
orderly completion of the ongoing and planned activities towards the achievement of the
project development objectives.
31. In late 2010 the Ministry of Finance requested that the DCA once again be
amended to replace Zoos Bank, which was one of the original PFIs under the project, but
went insolvent in late 2009 and was put under receivership by BOM, with the newly-
created State Bank of Mongolia (see Section 1.6, Box 1 above). In addition, to better
align the usage of the remaining credit proceeds with the evolving TA needs and
priorities of the PFIs, the authorities requested a number of reallocations between
disbursement categories.
32. Impact of natural disasters. Severe snow storms in the winter of 2009 and 2010
had a significant negative impact on private sector enterprises in sectors such as
agriculture, animal husbandry and the textile industries, in particular. For example, many
small-scale cashmere producers faced a sharp increase in the raw material price for
consecutive years, while facing a decreasing demand from OECD countries as these
countries went through an economic downturn as well. The uncertainties in the
macroeconomic conditions and the market prospects for specific sectors affected by the
natural disasters resulted in a delay of approval of several sub-loan applications.
33. Impact of other donors’ and government’s programs on term lending. During
project implementation, some donor and government agencies started LoC operations
which used the same group of commercial banks as the financial intermediaries. These
programs also provided term lending (up to 10 years) to the private sector (some are
sector-specific) but at a heavily-subsidized interest rate, which were more appealing to
the target beneficiaries. The project was affected negatively in terms of the number of
sub-loan applications when these new donor programs were introduced into the market.
In 2010, the government introduced a subsidized term-lending program for agriculture
sector enterprises and used the same PFIs. There was some stretch of the PFIs’ resources
10
in managing these programs while their own business expanded considerably during the
same period.
Results of the Quality Assurance Group (QAG) findings:
34. The project was reviewed by the QAG in late 20086, about two years into project
implementation. The QAG panel’s ratings were as follows: (i) The Likelihood of
Achieving DO rated as Moderately Satisfactory; (ii) Quality of Design rated as
Satisfactory; (iii) Quality of Implementation and Quality of Bank Supervision rated as
Moderately Satisfactory; and (iv) Bank Supervision of Fiduciary/Safeguard Aspects was
rated Unsatisfactory.
35. The unsatisfactory rating of the Fiduciary/Safeguard Aspects by the QAG panel
was due to: (i) No evidence of a procurement specialist participating in supervision
missions; (ii) Until 2007, there was no expenditure plan to enable a comparison of actual
with budgeted expenditures provided for in the reporting, thus limiting the possibility of
adequate financial management (FM) supervision; and (iii) No FM supervision
arrangements were set out in the FM assessment in the PAD. In the remaining
implementation period, the project team took into account the comments made by the
panel to enhance the quality of supervision and to fully achieve the PDOs.
36. The project was never considered “at risk” during implementation.
2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization
37. Overall, the main outcome indicators were closely monitored and evaluated based
on the standard reporting forms and through continuous supervision.
38. The project had included a set of outcomes and results indicators that were
developed based on the experience with the first PSDC and the good practice for WB
LOC operations. The framework was further enhanced during supervision by adding
additional indicators to better assess the developmental impact.
39. The original indicators included in the PAD covered the PFIs’ continuous
eligibility, sub-loan portfolio quality, business improvement, and on-the-ground results of
the TA program. During implementation, BOM provided quarterly reports on the PFIs’
continuous eligibility. The PFIs were required to provide quarterly updates on sub-loan
portfolio and sub-project profiles, and Project Management Unit/ Counterpart Working
Group (PMU/CWG) provided annual reports on project implementation. Training plans were
reviewed semi-annually. PMU played a central role in collecting relevant data on a regular
basis and compiling quarterly project status reports.
6 Quality Assessment of Lending Portfolio for MN-Private Sector Development Credit (P088992),
December 12, 2008
11
40. For LOC supervision, the project adopted a two-tier review process for sub-loans
over US$300,000 and for the first 2 new sub-loans each year to ensure quality, i.e. the Bank’s
no-objection was required after the PFI completed its internal credit review. The approach
was adopted based on the learning from PSDC I, when low consistency in credit risk review
was found among the PFIs. The Bank supervision focused its effort on helping to standardize
the credit review procedures and applications in the first two years of the project. During
implementation, this approach was found to be useful in ensuring the quality of sub-loans
(only one default among 36 sub-loans extended under the project). However, such a two-tier
process required substantial resources of the Bank’s supervision team and the PFIs’ credit
review process.
41. Results of M&E efforts and reports were used by MOF PMU and Bank
supervision to follow project implementation and achievements, and take corrective
measurements, when needed.
2.4 Safeguard and Fiduciary Compliance
(Focusing on issues and their resolution, as applicable)
42. An Environmental Impact Assessment (EIA) screening was required for all sub-
loans under the PSDC II Project by the relevant authorities of the Ministry of Nature,
Environment and Tourism or the local environmental departments in accordance with the
project category set forth in the EIA legislation. The screening lead to either conditional
approval or a further detailed EIA by a licensed EIA private consultant. The EIA
consultant of the PSDC II Project reviewed both the EIA screening and the detailed
reports to check whether the proposed project met the legal requirements of both the
Mongolian Government and the World Bank’s environmental safeguard policies. A
standardized EIA review report was forwarded and integrated into the Bank’s overall
review process. The PFIs were required to maintain an environmental checklist form to
monitor the environmental compliance of each sub-loan. During the implementation of
the PSDC II, an EIA consultant had provided training on EIA procedures for relevant
staff of the PFIs and undertook a series of site visits to the projects for supervision.
Overall, all sub-loans under PSDC II were in compliance with Mongolian and the Bank’s
safeguard policies.
43. The fiduciary aspects of the project (FM and procurement) were deemed
Unsatisfactory at the initial stages of the project, when procurement and disbursement
were slower than planned. Based on comments received from the QAG (see Section 2.2),
the Bank team took action to rectify some of the issues encountered. Thereafter the
fiduciary aspects were rated Satisfactory throughout project implementation. The FM
reports were submitted on time and no major issues were encountered. Project audits
were submitted on time as well and were unqualified, with no serious issues reported, nor
any internal control weaknesses disclosed. The procurement plans were updated
regularly and no major procurement issues were encountered.
12
2.5 Post-completion Operation/Next Phase
(Including transition arrangement to post-completion operation of investments financed
by present operation, Operation & Maintenance arrangements, sustaining reforms and
institutional capacity, and next phase/follow-up operation, if applicable)
44. PSDC II was designed to enable participants to continue the activities
independent of the Project on a commercial basis as the Mongolian financial institutions
expand longer-term financing to the private sector, and this has been achieved.
45. One critical lesson learned by commercial banks during the financial crisis
was the need to diversify their portfolio. During the PSDC II, most PFIs had endured
the impact of the financial crisis and adjusted their strategy to look for more business
opportunities, including lending to private sector, especially SMEs. Three PFIs reported
in the project survey that their SME portfolio performance was much stronger than the
larger corporate account portfolio during the economic downturn; as SME borrowers
tended to try their best to repay on time or even pre-pay in order to maintain a good credit
history, even in hard times. The management of all three active PFIs also had identified
the SME market segment as having great potential and announced plans to expand the
share of credit going to this market in the future.
46. At the same time, it should be recognized that the larger post-project agenda
remains in improving access to term financing to SMEs in terms of quality and
range of products, geographical distribution, and cost. Access to credit on reasonable
terms and longer maturities is an important prerequisite for growth of the SME sector,
which forms a backbone of any well-diversified modern economy. The recent survey
data and focused interviews suggest that Mongolian banks remain constrained in
providing term finance to the SME sector due to their current funding structure, which
relies largely on short-term deposits and lacks access to other funding sources with longer
maturities (only a few banks have access to international capital markets to raise funds).
47. Recognizing the large unfinished agenda, the MOF, BOM and the PFIs all
requested that the Bank continues to support the deepening of financial
intermediation in Mongolia. In particular, the Bank was asked to consider follow-up
activities to PSDC II aimed at further improving access to finance for SMEs in Mongolia.
As in other financial systems at a similar stage of development where the banking sector
dominates the financial system and the local government bond market and capital
markets are not sufficiently developed, the lines of credit from IFIs remain an essential
instrument to address this market failure.
48. With the improved credit risk management capacity, and improving macro-
conditions, as well as increasing demand from SMEs, a new risk sharing model
between commercial banks and government for expanding term-lending to SMEs
can also be considered in the future . For example, the commercial banks could be
encouraged to extend more long-term credit to private sector clients by sharing the credit
risk with the government through a credit risk guarantee program.
13
49. In addition to providing the longer term financing, the Bank’s follow-up
assistance should also seek to address fundamental weaknesses in the regulatory and
institutional framework that negatively affect SME access to credit in Mongolia.
50. The following areas of assistance can be considered:
Collateral Registries. One of the key factors in appraising the credit risk is the
quality of collateral. However even if a client is able to provide collateral, the
issue in Mongolia is that the registries for fixed collateral are not well-organized
or secure, and are using paper-based technology. There are no registries for
movable collateral, so movable collateral is typically not accepted. This is a
problem, since most SMEs are actually better able to offer movable collateral.
Future assistance could seek to address the constraints in institutional
infrastructure for fixed and, especially, movable collateral through designing the
adequate regulations, data formats and technical/IT solutions, and providing
financing for equipment and IT, and TA to help with implementation.
Credit Information Registries, which facilitate credit risk management, reduce the
appraisal cost and help create “reputational collateral” for good clients. BOM
already has a rather basic public credit registry which is used in the supervision
process. At the same time, a number of banks are in the process of establishing a
privately-owned credit information bureau, with the respective legislation
expected to be discussed by Parliament in the near future.
Banks’ Credit Appraisal Capacity. When making credit decisions, banks in
Mongolia mostly rely on collateral. Very few have introduced appraisal
techniques used in more developed banking markets, based on scoring systems
and analysis of clients’ financial condition and market perspectives.
51. Diversifying funding structure of the commercial banks. A fundamental
change of funding structure of commercial banks in Mongolia is needed in the longer run
to expand the term-lending opportunities for the private sector. This change could be
facilitated by deeper integration of Mongolia into the global and regional financial system
through organic growth of domestic banks and attraction of reputable foreign-owned
banks. At the same time, local currency bond market and overall capital market
development should be put on the agenda in order to diversify the risks concentrated in
the banking sector, provide the necessary liquidity to commercial banks to continue
expanding credit to private sector, and to provide direct financing to private sector firms.
14
3. Assessment of Outcomes
3.1 Relevance of Objectives, Design and Implementation
(to current country and global priorities, and Bank assistance strategy)
52. The objective, design and implementation of the project remain highly
relevant with regard to Mongolia’s development objectives supported by the World
Bank. The FY05-FY08 Mongolia CAS focused on five sets of development challenges:
(i) Ensuring macroeconomic stability and public sector effectiveness; (ii) Supporting
production and exports and improving the environment for private sector-led
development; (iii) Enhancing regional and rural development and environmentally
sustainable development; (iv) Fostering sustainable human development; and (v)
Promoting good governance and implementing and monitoring the strategy. The project’s
focus on private sector development was directly relevant to the second challenge and
indirectly helped to address the first and third challenges as well.
53. Improving access to finance for the private sector (particularly SMEs) and
broadening access to financial services for both the corporate sector and the population at
large remain the key development priorities both globally and for Mongolia in particular.
There is a strong consensus among the relevant Mongolian stakeholders that access to
credit and financial services by the private sector should be among the priority areas for
WB assistance going forward. Continued progress in both areas is critical for
maintaining the reasonably diversified structure of Mongolia’s economy, for balanced
regional development, and for employment generation.
3.2 Achievement of Project Development Objectives
(Including brief discussion of causal linkages between outputs and outcomes, with details
on outputs in Annex 2)
54. The project has met its original development objective and therefore is rated
Satisfactory. Overall, the main outcome indicators were closely monitored and evaluated
based on the standard reporting and through supervision: (i) increased term financing
(longer than one year) by PFIs to commercially, technically and financially viable
borrowers/projects; (ii) quality of term lending portfolio equal or better than that of the
overall portfolio; and (iii) institutional capacity of PFIs and the BoM strengthened in key
areas supported by the project. The term lending (total outstanding portfolio) increased
from MNT 251.6 million (for all 4 banks) in 2005 to MNT 3,555 million by April 2011.
The quality of the term lending portfolio (as measured by non-performing loans ratio)
also decreased dramatically for all three out of four banks between 2005 and April 2011.
BOM’s Supervision Department has received strong technical assistance to be more
responsive during financial crises. PFIs were able to develop more new services and
products (such as card and e-banking) and expand their business to other regions with
strengthened credit risk management capacity and an improved IT system.
15
55. The assessment is based on the results of the Project Outcome Indicators (POIs)
as follows:
56. POI 1: Increasing intermediate-term (longer than one year) lending financed
by PFIs to commercially, technically and financially viable borrowers/projects. By the
end of the project there were four PFIs (TBD, GB, State Bank–replacing Zoos Bank, and
Khan Bank) that joined Project implementation. A total amount of US$8.3 million (out
of an allocation of US$8.45 million) was disbursed for 36 distinct sub-projects, which are
estimated to have generated at least 578 new jobs directly. In addition to the direct job
creation as a result of the sub-projects, the indirect positive impact on feeder industries to
support the requirements of the new sub-projects (raw materials, equipment, and labor)
helped create a number of additional jobs, which unfortunately cannot be precisely
quantified. Furthermore the financing provided under the project helped preserve a large
number of jobs that would have been otherwise lost had the beneficiary enterprises
lacked access to term finance during the period of economic downturn.
57. The sub-projects financed a diverse group of private businesses engaged in non-
mining and non-manufacturing sectors, including pharmaceutical production, medical
services, food industry, leather and garment industries, recreational services,
telecommunications services, and private education among other industries.
58. Finally, and perhaps most importantly, the project helped to firmly establish term-
lending products to SMEs as a distinct and viable business line amidst severe shortages of
longer-term (>12 months) funding sources and fluctuating public confidence in the
banking sector. According to the data collected from four PFIs, they were able to
increase intermediate lending from MNT 251 million in 2005 to MNT 3,555 million by
the first quarter of 2011.
59. POI 2: Improving the quality of term loan portfolio equal or better than that of
overall PFI portfolio. The PFIs improved the quality of their term lending portfolios
over the life of the project with continued decreasing NPL ratios: (i) TBD from 7.2
percent in 2005 to 5.1 percent in 2011; (ii) Golomt Bank from 7.2 percent in 2005 to 1.8
percent in 2011; (iii) Zoos/State Bank from a high of 10.9 percent in 2009 before Zoos
Bank was put under receivership (Zoos Bank went into liquidation in 2009, see Section
1.6 and Box 1) to 1.5 percent for the State Bank in the first quarter of 2011; and (iv)
Khan Bank from 8 percent in 2009 to 3.4 percent in 2011. The sub-loan portfolio under
the project has only one non-performing loan out of the 36 sub-loans (i.e. average NPL
ratio at about 2.5 percent).
60. POI 3: Strengthening the institutional capacity of PFIs and the capacity of the
BOM for bank supervision. The technical assistance component also contributed to
visible progress in capacity-building for BOM, the PFIs, and the MOF as follows:
61. The BOM TA component covered two groups of activities, namely: (i) special
external assessments of banks, and resolution of failed banks; (ii) Staff training of BOM’s
Banking Supervision Department. In 2009–2010, the BOM commissioned to reputable
international firms the special assessment of commercial banks. The final assessment
16
results were used for designing bank-specific supervisory action plans by the BOM. In
addition, BOM financed an audit of Anod Bank that was placed in receivership in late
2008.
62. The staff training program in BOM was based on focused objectives and well-
developed training plans which were periodically updated. The domestic and foreign
training covered banking supervision, financial regulatory processes, implementation of
Basel II principles, corporate governance, financial sector stability, liquidity risk
management, crisis preparedness program, and resolution of problem banks. The training
received by the BOM staff helped develop and implement new regulations such as
consolidated supervision, internal audit and corporate governance. In addition, stress
testing methods and techniques were incorporated into off-site surveillance activities. A
total of 74 BOM officials took part in the 37 training activities provided by BIS, regional
central bankers’ training facilities, and international commercial banks.
63. TA to PFIs: The PFIs used the TA for improving capacity in credit risk
management, operational risk management, card business management and IT systems
development. The PFIs’ management was directly involved in the selection of training
activities based on their business development needs. Participating staff reported that the
training helped them enhance their skills and performance, and they were able to be more
effective in developing new procedures and products (e.g. operational risk management
procedures, new fee policy, etc). At the same time, the PFIs also reported that the project
substantially contributed to an improvement in public confidence in Mongolia’s banking
sector, and of private business’s ability to present sound business plans and credit
applications. However, due to the fast-changing business environment for commercial
banks in Mongolia, the capacity-building needs of PFIs also changed during the
implementation of the project. The project adopted a flexible approach in accommodating
these changing needs. It has been observed that during the credit boom between 2007
and 2009, all PFIs slowed down the implementation of TA, as they could not allocate
time for their staff to receive training. Nonetheless, implementation of TA sped up when
the commercial banks were hit by the effects of the global financial crisis and actively
updated their training plans to focus more on risk management and new product
development. The TA to PFIs also covered procurement of new equipment.
64. The following are a summary of the TA activities provided to the PFIs:
TDB TA Program. The staff training and staff learning program in TDB was
built into career development plans, conducted effectively with focused objectives
and well-developed training plans. With PSDC II funding, TDB focused its staff
training on operational risk management between 2008–March 2010, and card
business management and IT development between April 2010 and March 2011.
A total of 37 staff participated in 28 overseas training activities. The staff who
participated in these trainings later contributed to the development of new
operational risk management procedures, new fee policy, IT system upgrading
and new products.
17
Golomt TA Component consisted of a staff training program, system upgrading
and advisory services. The staff training program in Golomt Bank was conducted
effectively with focused objectives and well-developed training plans. With the
PSDC II funding Golomt Bank focused its staff training on credit and operational
risk management, advanced auditing and financial management. A total of 62
staff participated in 13 local and international training activities. Under the
consultancy service, an international consultant was engaged to develop a bank
operational manual. Golomt also used the TA fund to procure 25 banknote
checking and counting machines, 35 passbook and document printers and 7
Queuing systems for its branches.
Zoos Bank/ State Bank TA Component. Originally the TA to Zoos Bank
covered a staff training program and system upgrading support. Up to its
bankruptcy in November 2009, Zoos Bank had utilized 23 percent of the IDA
credit funding allocated to its staff training program. After the State Bank of
Mongolia was assigned to assume the obligations and rights of Zoos Bank in late
2010, the State Bank utilized the remaining TA fund for its IT system
development and IT staff training according to the approved procurement plan of
goods and staff training plan. A total of 123 staff from the Zoos Bank
participated in 7 training programs. State Bank trained 2 system administrators
and programmers to enhance their knowledge of network security and procured
network security equipment for branches.
65. The training for MOF staff consisted of 11 customized overseas trainings and
domestic workshops covering different topics in financial and banking sector
development, attended by a total of 57 participants. Participating MOF officials
evaluated the training programs as highly relevant to their work in terms of improving
their knowledge and enhancing their capacity for policy analysis, development and
implementation.
3.3 Efficiency
(Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms,
least cost, and comparisons; and Financial Rate of Return)
N/A
3.4 Justification of Overall Outcome Rating
(Combining relevance, achievement of PDOs, and efficiency)
Rating: Satisfactory
66. The project achieved its project development objective of supporting the
Mongolian Government’s and commercial banks’ efforts to develop the intermediate-
term lending market for Mongolia's private sector, and to improve prudential regulation
and supervision capacity by the BOM. The project had additional positive effects such as
improved environmental management practices, capacity building, and a demonstration
effect to provide term financing to the private sector.
18
3.5 Overarching Themes, Other Outcomes and Impacts
(If any, where not previously covered or to amplify discussion above)
(a) Poverty Impacts, Gender Aspects, and Social Development
The project’s impact on poverty was positive insofar as it helped 35 private enterprises,
and an even larger number of other enterprises in the same value chain in the non-mining
sector to grow and create/maintain employment. Although as recognized at appraisal, it
is difficult to measure the benefits to the population in general, the benefits will accrue
indirectly. Enterprises that accessed credit were able to invest, and thus grow and create
(directly and indirectly) employment (at least 578 new jobs were directly created through
the sub-projects and at least 20 percent of these jobs went to women) by expanding their
production or services. Among the sub-loan borrowers, about 20 percent were women.
The project also supported new business development in Mongolia: private education,
agribusiness, pharmaceutical, tourism and hospitality, and telecom services. The
technical assistance program to the PFIs is expected to provide better banking services
and better management of the financial institutions that will ultimately benefit their
customers. The financial sector professionals (including government officials and
bankers in PFIs) have started to assume more responsibilities in their respective jobs with
the skills and knowledge gained from training or from participating in the project.
(b) Institutional Change/Strengthening
(Particularly with reference to impacts on longer-term capacity and institutional
development)
67. The TA provided to MOF, BOM and the PFIs helped strengthen the capacity of
these institutions, for better banking regulation and supervision, improved credit risk
management capacity, enhanced credit risk analysis and portfolio management (see 3.2
above). The TA programs were developed based on the periodically updated needs
assessment of human resource management and training needs. The assistance focused
on system upgrading for internal control and audit, and prioritized training activities as
part of systematic medium-term training programs aimed at enhancing corporate business
planning and development, and human resources management for more efficient delivery
of services. However, BOM has yet to improve its enforcement of banking laws and
regulations.
3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops
(Optional for Core ICR, required for ILI, details in annexes)
68. The World Bank conducted a survey of PFIs and sub-borrowers at the closure of
the project. The survey questionnaire was sent to PFIs and to all 35 sub-borrowers under
the project,7 and consisted of three parts: general information on the company; questions
7 The 36 sub-loans under the project were underwritten to 35 sub-borrowers, of whom one borrower was
given two subloans.
19
on the effect of the performance of the PFI and the World Bank project; and a policy
question on the remaining challenges in the private sector development environment in
Mongolia.
69. The sub-borrowers found that the project provided the most effective support in
the following areas: improvement in business planning, corporate strategy formulation
and implementation, improvement in procurement efficiency and quality, as well as
improved sales and exports.
70. PFIs rated the following areas as substantial contribution of the project to their
operations: strengthened lending policies and procedures, improved credit underwriting
practices, improved credit administration, improvement in overall quality of loan
portfolio and risk profile of the bank, improved risk management practices, and improved
access to foreign commercial funding.
71. The survey results are included in Annex 5.
4. Assessment of Risk to Development Outcome
Rating: Modest to Low.
72. The risk for development outcome is considered Modest to Low. As noted, under
the credit line component, funds were almost fully disbursed (98%) and the quality of the
sub-loan portfolio was highly satisfactory with only one sub-loan in default at the closing
date. The PFIs have expanded their long-term credits to private sector from MNT 251.6
million (for all four banks) in 2005 to MNT 3,555 million by April 2011. All PFIs have
identified private enterprises as potential valuable clients and have allocated more
resources to develop new products and services for these clients. SME lending
departments were established in two of the four PFIs with specific business strategies
targeted at SMEs. Many project managers and credit officers trained during the Project
implementation have also been promoted to senior management positions in the PFIs,
and they have demonstrated during the project implementation professional enthusiasm
and confidence in this new business segment. Therefore, it is highly likely that the PFIs
will continue to expand credits to private sector after the closing of the project.
73. On the TA aspect, all PFIs, the BOM and MOF effectively carried out the agreed
programs and are committed to continuously improve their operating capacity through
more systemic human resources development plans.
20
5. Assessment of Bank and Borrower Performance
(relating to design, implementation and outcome issues)
5.1 Bank Performance
(a) Bank Performance in Ensuring Quality at Entry (i.e., performance through lending phase)
Rating: Satisfactory
74. The Bank responded in a timely manner to the need of the Mongolian economy
by designing and implementing this follow-up project to assist the financial and private
sectors. The Bank also incorporated lessons learnt from the earlier operations to
streamline the implementation of PSDC II and developed strong supervision for
implementation, including the two-tiered sub-loan application review procedure,
environmental impact assessment for all sub-loans to assist the PFIs in standardizing their
credit risk review process. Although the cost of this approach was high, under the
specific circumstance of banking sector practice in Mongolia and the expected learning
through this process, the approach was appropriate to ensure the achievement of the
designed project objectives.
(b) Quality of Supervision (Including of fiduciary and safeguards policies)
Rating: Satisfactory
75. Project supervision was Satisfactory. Supervision missions were carried out at
least twice a year. The Bank team had a high degree of continuity, with the original TTL
joining the task team throughout the project implementation in 2009 at the time of severe
banking crisis. The QAG in late 2008 rated Bank supervision “Moderately Satisfactory”
based on low disbursement of the Credit in the first 2 years of implementation. The
project team took into account the comments made by the panel to enhance the quality of
supervision. The Bank team was responsive to Government of Mongolia (GoM) requests
throughout project implementation, and demonstrated flexibility and understanding in the
use of project resources. As and when required the Bank assisted the counterparts to
amend the Credit Agreement as demanded by the changing external environment and
evolving country needs. Lastly, the Bank’s supervision has had demonstration effects of
best practices for BOM/MOF/ PFIs.
(c) Justification of Rating for Overall Bank Performance
Rating: Satisfactory
76. Based on the above timely response to the needs of the borrower, and the close
supervision of the project, the overall Bank performance in ensuring quality at entry and
quality of supervision is rated as Satisfactory.
21
5.2 Borrower Performance
(a) Government Performance
Rating: Satisfactory
77. The government’s performance as the borrower was Satisfactory. The
government played an active role in the preparation of the project. The close
collaboration demonstrated by the borrower with the Bank during implementation was a
primary factor in the overall success of the project. As discussed in Section 2.2, there was
an implementation delay in the first two years of the project, when MOF limited the
interest rate margin on sub-loans. MOF took corrective action upon discussion with the
Bank supervision team to annul this decision, which allowed the PFIs to once again price
loans based on risk profiles of the proposed projects and sub-borrowers at prevailing
market rates. Another important factor leading to the successful implementation of this
project was the willingness of the government to utilize credit funds to procure technical
expertise lacking in-country.
(b) Implementing Agency or Agencies Performance
Rating: Moderately Satisfactory
78. The performance of the PIU was Satisfactory. The CWG was established to
provide required management of the implementation work of the project and was headed
by the Director General of the Financial and Economic Policy Department of the MOF.
The Project Implementation Unit (PIU) Office was staffed with a qualified Project
Coordinator, who oversaw the project’s activities, including coordination between the
IDA, MOF, BOM and PFIs, conducted project monitoring, auditing, financial
management and accounting and reporting functions.
79. The relevant departments in the MOF and the BOM provided efficient monitoring
and reporting, allowing for better management and implementation of the project in
accordance with standard WB procedures.
80. PFIs performance was rated Moderately Satisfactory at this ICR. The failure of
Zoos Bank during project implementation had a negative impact on Component I.
Golomt Bank was prevented from continuing to underwrite sub-loans in late 2010 due to
non-compliance with BOM’s regulation till early 2011. However, as other PFIs
continued with Component I in 2010 and 2011 after the macroeconomic conditions
improved, 98 percent of the allocated funds for Component I were disbursed at the
closing of the project. All PFIs have improved their credit risk assessment procedures and
standardized the credit review criteria to a large extent.
(c) Justification of Rating for Overall Borrower Performance
Rating: Satisfactory
22
81. Based on the above, the overall borrower performance is rated as Satisfactory at
this ICR, considering that the borrower completed the project by and large successfully in
a challenging environment, especially given the weaknesses of Mongolia's financial
sector. The participating PFIs, except Zoos Bank, implemented their activities
successfully. The overall project rating was upgraded in the last ISR at the closing of the
project from Moderately Satisfactory to Satisfactory mainly based on the fact that PFIs
accelerated the pace of implementation over the last nine months to the project closing
date, as the negative impact of the 2008-2009 banking crisis (which caused the
downgrade to MS in the first place) wore off. Specifically, the PFIs resumed lending
under Line of Credit component and completed procurement of pending TA packages.
The transfer of PFI responsibilities from the failed Zoos Bank to the State Bank was
relatively seamless, and there was no spike in NPLs in LOC component. The main forces
driving Zoos Bank into bankruptcy were beyond the scope of the project. While training
provided to BOM under the project before the global crisis on its own could not prevent
the failure of Zoos Bank, the timely action taken by the BOM and the borrower in
reallocating available project resources to address the crisis situation was another factor
for the satisfactory rating.
6. Lessons Learned
(Both Project-specific and of wide general application)
82. The following lessons can be learned from implementation of PSDC II:
83. Capacity of staff at the PFIs (to review and approve sub-loan applications) is
crucial for the efficient and smooth implementation of a line of credit operation. At the
initial stages, project implementation progress was slow due to the long processing time
for potential projects to get approval. In order to get financing approval for the project, it
took an average of three months to discuss a project proposal by the loan committee at
the commercial banks and the World Bank. The Bank reviewed all 36 sub-project
proposals. The reason was the inconsistent quality of the sub-loan applications and in
some cases weak capacity at the PFIs. Most of the staff trained under the first project had
left and joined private sector firms, as the demand for their services was quite high.
Additional staff was trained under the second project; however it took time for the trained
staff to become effective. As a result there were delays in the review and approval
process. Early training of staff at the PFIs at all relevant branches should be a priority
task in designing future lines of credit operations.
84. Carefully designed information requirements may minimize compliance costs
as well as serving the capacity-building objectives to help ensure successful
implementation. Eligibility constraints and reporting requirements that go beyond PFIs’
existing requirements (environmental, procurement, etc.) increase the transaction cost for
sub-loans under the project and can lead to slow implementation. It would be ideal to
improve PFIs’ existing credit appraisal practices and simplify requirements for smaller
sub-loans/borrowers through TA prior to the line of credit operation. The costs incurred
by these requirements sometimes may make it relatively more attractive for PFIs to lend
loan funds to larger customers with greater loan sizes. It should be noted however, that
23
while PFIs (and sub-borrowers) may sometimes find these requirements to be
burdensome, they do contribute to capacity-building in PFIs and sub-borrowers.
85. Making TA available for capacity-building of SMEs could have been arranged.
In addition to term finance, the SME sector would benefit from capacity-building, market
information and firm-specific TA which could assist the SMEs to prepare better sub-loan
applications, and support other SME business development services that typically the
LOC operation would not finance (e.g., on-the-job training, marketing and pricing
strategy, obtaining the required quality certification, etc). This approach was discussed
with the government during the appraisal of the first PSDC to set up such a matching
fund to support interested SMEs to improve the quality of their business proposals for
sub-loans, but the government was reluctant to co-finance such a fund at the time due to
limited resource available at the time. As the project was prepared and appraised as a
repeater operating in a relatively short time, the idea was not discussed again. Following
the positive experience from WB projects in other regions, this assistance could be
provided in the form of matching grants for SMEs when similar projects are developed in
the future.
86. Continued training needs identification is critical to ensure the effectiveness of
TA. PFIs and BOM staff had benefited from various donor-sponsored training programs
over the years. However, the link between training activities and the organization’s
mission, mandate and business strategy was rather weak. In all these organizations,
systematic training in conformity with human resource management strategy had yet to
be adopted. Learning from this lesson, a medium-term training program had been
developed for each implementing agency, which identified the critical training areas and
prioritized the sequencing of training, so that the more high-risk and critical areas were
addressed first.
87. Close monitoring of the macroeconomic conditions of the borrower’s country is
critical to the completion of a line of credit operation. Necessary resources should be
allocated to both the Bank supervision and borrower’s PIU.
88. High degree of borrower ownership of the project aids the successful
implementation of the project. This was demonstrated by the close collaboration of the
borrower with the Bank in project implementation (e.g. amending the DCA to suit the
changing circumstances, e.g. financial crisis in 2009) and utilizing technical assistance
funds to procure expertise lacking in-country.
89. Continuity of project team and qualified project coordinator in PMU contribute
to the success of a project. The Bank team that prepared this project joined project
supervision through most of the project life, and thus was able to respond to the changing
external environment and demands from the borrower quickly and effectively. The
project also benefited tremendously from the professional management support of the
Project Coordinator in the PMU, who is a seasoned banker in Mongolia and familiar with
the banking sector and the operational issues of PFIs. She played a critical role in
advising the PFIs in project implementation and identifying the issues during
24
implementation. It is highly recommended that a project coordinator with the same
qualification should be required for any future line of credit operations in Mongolia.
7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners
(a) Borrower/implementing agencies
90. The Ministry of Finance emphasizes that IDA played important role in the project
preparation and implementation period. The MOF’s assessment of the overall
performance of the project is Moderately Satisfactory mainly due to the failure of Zoos
Bank during the project implementation, though MOF recognizes that it was related to
the insufficient oversight of the supervisor.
91. The Ministry of Finance rated Satisfactory for the line of credit component of the
project and strongly believes that it is very important to continue similar projects in
Mongolia to promote development of the private sector through the provision of term
lending for financing capital investment projects, to support creation of new jobs by
private sector, diversification of loan portfolio of PFIs and development of small and
medium enterprises.
92. Detailed comments by MOF are attached in Annex 7.
(b) Cofinanciers
NA
(c) Other partners and stakeholders (e.g. NGOs/private sector/civil society)
NA
25
Annex 1. Project Costs and Financing
(a) Project Cost by Component (in USD million equivalent)
Components
Appraisal
Estimate (USD
millions)
Actual/Latest
Estimate (USD
millions)
Component 1 - Line of Credit 9.45 8.29
Component 2 - TA programs 0.70 1.81
Component 3 - Project
implementation support 0.18 0.26
Total Baseline Cost 10.33 10.36
Physical Contingencies
0.00
0.00
Price Contingencies
0.24
0.00
Total Project Costs 10.57 10.36
Front-end fee PPF 0.00 0.00
Front-end fee IBRD 0.00 0.00
Total Financing Required 10.57 10.36
(b) Financing
Source of Funds Type of
Cofinancing
Appraisal
Estimate
(USD
millions)
Actual/Late
st Estimate
(USD
millions)
Borrower
In kind, staff
time, co-
financing of
line of credit
5.15 2.83
International Development
Association (IDA)
Line of
credit,
consultants
and goods
10.57 10.36
26
Annex 2. Outputs by Component
Component 1: Line of Credit
1. IDA fund disbursed for sub-loans at April 30, 2011 was US$8.29 million out of a
total of US$8.45 million. A total of 36 sub-loans valued at US$11.12 million were
underwritten by the four PFIs, of which IDA funded US$8.29 million and GoM funded
US$2.83 million (using the revolving fund under Project I). Table 1 shows the details of
sub-loan disbursement between 2006 and April 2011.
Table 1: Sub-loan Summary
CY # of
Loans
Volume of Loans
(US$)
IDA Funded (US$) Average Loan Size
(US$)
2006 6 1,228.275 1,044,034 204,712
2007 7 1,556,724 1,323,215 222,389
2008 9 3,216,981 2,319.386 357,442
2009 8 2,953,357 2,066,650 369,044
2010 2 812,728 568,910 406,364
2011 4 1,355,173 970,185 278,124
Total 36 11,123,238 8,292,380 308.979
2. With Khan Bank and Golomt Bank joining the program in 2008, there was a
sharp increase of sub-loans portfolio (106 percent) in 2008. However due to the
worsening economic conditions in 2009, the volumes of the sub-loans dropped. Many
Mongolian banks suspended their lending to private sector in early 2009 in light of the
overall economic downturn and hiking default rate on short-term loans (non-IDA
funded). Participating commercial banks under the project started to resume lending to
the private sector in 2010 while competing fiercely to attract deposits at the same time.
The 1-year deposit rate for MNT was reported to have reached 14 percent by some banks
in 2010. The details of sub-loans by the PFIs can be found in Table 2.
Table 2: Sub-loans by PFIs
PFIs Sub-loans extended
Number In USD In MNT Total in
USD
Average
Loan Size
TDB 20 4,305,000 3,248,212,430 6,841,782 342,089
Zoos/State 7 526,600 1,565,977,000 1,861,298 265,900
Golomt 3 600,000 910,000,000 1,244,546 414,849
Khan 6 57,000 1,514,400,000 1,175,613 195,935
Total 36 5,488,600 7,238,589,430 11,123,239 308,979
27
3. The following were some of the salient features of the sub-loans under the
project:
The average loan size of the sub-loans was around US$308,979 with the cap of
sub-loan size of US$600,000 for each loan. The average loan size for each PFI’s
individual PSDC II portfolio varied from US$196,000 for Khan Bank to
US$415,000 for Golomt Bank.
The sub-loans has been used to fund facility expansion and purchasing of
new equipment for manufacturing or services. About 67 percent of sub-loans
were used for the expansion or renovation of existing facilities, and 33 percent for
purchasing of new equipment and technology.
Sub-borrowers are engaged in diverse businesses: from small textile
workshops and cashmere manufacturers to private schools, from agribusiness to
telecom service providers, from pharmaceutical factories to furniture makers.
The terms of the sub-loans were between 2 to7 years. With 4-7-year loans
accounting for more than 70 percent of the total portfolio and 6-7-year loans
accounting for 30 percent of the total portfolio (Table 3). In comparison, the
maximum term that these PFIs offer to the private sector is no longer than 3 years
when using their own funding sources.
Interest rates charged: In practice, the PFIs used the base rates for deposits
issued by BOM semi-annually (Table 4) as reference rates and charged an average
of 9 percent margin on the MNT denominated sub-loans and 5 percent margin on
USD denominated sub-loans. Comparatively, the rate charged to the PSDC II
sub-loans had been kept lower than that of the other private sector loans issued by
these PFIs using their own funding over the same periods, although the latter are
usually of shorter terms (< 3 years typically).
Job creation: Based on the reports from the PFIs, 578 new jobs were created by
the sub-loan borrowers between 2005- April, 2011, among whom at least 20
percent were taken by women. Table 5 shows details of jobs created through each
sub-loan under PSDC II. However this does not take into consideration jobs
created as a result of the construction of facilities, production of raw materials and
goods associated with feeder industries financed by the sub-loans.
Table 3: Sub-loan Duration
Sub-loan Duration
(months)
# of Sub-loans % of Total
Sub-loans
24-36 2 06
37-48 8 22
49-60 14 43
61-72 0 00
73-84 11 31
28
Table 4: Base Rate of Interest Issued by BOM
CY MNT
Loans (%)
US$ Loans (%)
2006 7 6.10
June 30. 2007 8 6.37
December 31, 2007 5.90 6.39
June 30, 2008 5.85 5.98
December 31, 2008 5.75 4.05
June 30, 2009 6 4.14
December 31, 2009 5.54 2.56
June 30, 2010 5.10 2.10
December 31, 2010 7.40 1.60
June 30, 2011 6.8 1.52
Table 5: Job Creation by Each PFI
Name of Bank Total # of New
Jobs Created
% of Women
Among the New
Jobs
TDB 304 53
Golomt Bank 44 39
Zoos Bank/State
Bank
103 n.a
Khan Bank 227 39
Total 578 131+
Performance of the Sub-loans
4. As of project closing (April 30, 2011), all 36 sub-loans except one are performing.
The loan officers in all PFIs interviewed all expressed confidence over the performance
of the existing performing sub-loans in the next two years in light of the gradual recovery
of the economy and business activities in private sector. The only non-performing loan
under PSDC II was the one underwritten by Zoos Bank in 2006. Due to the bankruptcy
of Zoos Bank in late 2009, the original documents of this sub-loan have been transferred
to the State Bank, and the sub-borrower has not been able to repay the interest on time
since 2009.
Table 6: Non-performing loan ratio of PFIs’ total outstanding loans
Name of
Bank
2005 2006 2007 2008 2009 2010 Q1 2011
TDB 7.20% 4.40% 2.00% 1.50% 5.40% 4.10% 5.10%
Golomt
Bank
7.20% 6.70% 4.50% 3.50% 4.20% 2.10% 1.80%
Zoos Bank/ 4.80% 4.50% 3.70% 2.90% 10.90%
29
State Bank 2.50% 1.50%
Khan Bank 2.90% 2.10% 1.50% 2.60% 8.00% 4.50% 3.40%
5. The compliance of the required credit risk assessment was high for the sub-loans
under PSDC II. According to the sub-loan records, all sub-loan borrowers had more than
a three-year banking relationship with the PFIs before they applied to the PSDC II sub-
loans, and have a track record of credit history and high credit rating with PSIs. Besides
the internal credit review and approval in PFIs, all the sub-loans in the current portfolio
obtained prior approval from the World Bank as well. However some PFIs complained
about the long review process and some delays caused during the project. JICA’s SME
loan project was mentioned often as a major competitor to the PSDCII Project by PFIs.
Component 2: Technical Assistance
6. BOM TA Component: This component financed two groups of activities,
namely: (i) BOM seconded special assessments of banks; and (ii) Staff training of
BOM’s Banking Supervision Department. The bank special assessments were added to
the project following the failure of Anod Bank at the beginning of the 2008–2009
banking crisis. The purpose was to provide the BOM with solid data in order to plan the
bank restructuring program. Starting in late 2009, the BOM had engaged three
international auditing firms to carry out portfolio reviews of 10 banks in three groups.
All the reviews (called special assessments) had been completed and used by BOM in
designing bank-specific supervisory action plans. The staff training program in BOM
was conducted effectively with focused objectives and well-developed training plans. A
total of 77 staff participated in the training programs, which comprised of 37 overseas
activities. The training covered banking supervision, financial regulatory processes,
Basel II, corporate governance, stress testing and internal audit. The training helped
BOM staff develop new regulations such as consolidated supervision, internal audit and
corporate governance. In addition, stress testing methods and techniques were
incorporated into off-site surveillance activities. The BOM sent most of its supervisors to
attend overseas training offered by reputable banking supervision and training institutions
on banking supervision, financial stability and risk management. The BOM was able to
utilize its membership in international and regional organizations to reduce the costs of
training while maintaining quality. The BOM considers the TA received under the
project as excellent. The capacity of banking supervision department of BOM was
enhanced during the project and this component is rated Satisfactory by the client.
7. TDB TA Component: This component consisted of a staff training program, an
upgrade of the risk management system, and consulting services. TDB management had
a clear strategy for staff training and the staff learning program was built into career
development plans. With PSDC2 funding TDB focused its staff training on operational
risk management between 2008 and March 2010 and on card business management and
IT development between April 2010 and December 2010. TDB management was
directly involved in the selection of training activities based on their business
development needs, and the staff who participated in the training found the training
helped them to enhance their skills and performance, and they were able to be more
30
effective in developing new procedures (e.g. operational risk management procedures,
new fee policy, etc). TDB also used PSDCII funding to upgrade its card security system.
The management of TDB highly appreciated the support and found that TDB further
strengthened its market position as the largest card issuer in Mongolia. Further
improvement in network security and risk management was found necessary, and TDB is
prepared to invest its own funds for future upgrading. TDB management rated this
component Highly Satisfactory.
8. Golomt TA Component: Golomt Bank TA component included a staff training
program and a system upgrading activity. The systems upgrade has been completed. The
bank’s operational manual was also developed as a part of this TA. A training plan for
2011 has been implemented and about 91 percent of allocate funds utilized. Golomt
management rated this component Satisfactory.
9. Zoos Bank/State Bank of Mongolia TA Component: Up to its bankruptcy in
November 2009, Zoos Bank had utilized 23 percent of the IDA credit funding allocated
to its staff training program. After Zoos Bank’s failure, the MOF informed the World
Bank of its intension to transfer Zoos Bank’s obligations and rights under the PSDC2
Project to the State Bank of Mongolia. The Assignment and Assumption Agreement with
the State Bank and Zoos Bank Receivership under BOM was signed on February 14,
2011. The State Bank utilized some of the remaining funds under this component for IT
system development and training.
Component 3: Project Implementation Support
10. Under this component, funding was made available to better manage, monitor and
evaluate project implementation. Financing was provided to: (i) Engage the Project
Coordinator; (ii) Provide MOF staff training and workshops; (iii) Conduct the annual
project audits; and (iv) For incremental operating expenses for limited project office
supplies, project document translation and printing, and communication.
11. MOF TA Component: The topics selected under MOF training activities
covered a wide range and were highly relevant to MOF’s mandates. Both management
and officials who organized and participated in these training activities found the
training/study tours were of high quality and had improved their knowledge of the
relevant issues and helped enhance their capacity in policy analysis and in some cases,
policy development and implementation.
12. Financial Risk and Deposit Insurance: Mongolia, like most countries, was
influenced by the negative impacts of global financial crisis, which created a systemic
instability in the banking sector. Therefore, it was exceptionally important for the
Ministry of Finance to have professionals who could participate in the supervision of
banks, conduct periodic and special examinations of banks within the Central Bank of
Mongolia and advise the managers about the current condition of banks, possible risks
and measures to address them for the purposes of determining the costs of systemic crises
31
of the banking sector. The training provided under the project greatly assisted the MOF
staff to address the issues mentioned above.
13. Financial sector stability. Trainings related to financial sector stability, financial
policy and foreign exchange contributed to building-up of capacity in addressing the
financial and economic crisis that was affecting the private sector, with a shortage of
available funds and increasing non-performing loans.
14. Commodities trading. Training programs related to commodities trading were
important from the point of view of gaining deeper knowledge in raising funds and
obtaining capital from different resources including international capital markets, that are
new and non-traditional for Mongolia
15. MOF official rated this component Satisfactory. It is encouraging to learn that
most of these MOF officials who participated in these trainings are now working in the
financial sector and some in critical positions to develop financial sector strategy, policy
and regulation.
32
Annex 3. Economic and Financial Analysis
(Including assumptions in the analysis)
N/A
33
Annex 4. Bank Lending and Implementation Support/Supervision Processes
(a) Task Team members
Names Title Unit Responsibility/
Specialty
Lending
Xiaofeng Hua Senior Financial Sector
Specialist EASFP TTL
Thang-Long Ton Economist EASPR Country
Economist
Bold Magvan Consultant EASFP Project
Preparation
Robert A. Liu Senior Financial Sector
Specialist OPD
Financial Sector
Review
Paulo De Sa Lead Operations Officer
LCCSC Operations
R. Golpakrishnan Consultant (procurement) EAPCO Procurement
Haixia Li Financial Management Specialist EACCF FM assessment
Carlos Escudero Ricardo Lead Counsel LEGEA Legal Counsel
Martin Serrano Consultant (legal counsel) LEGEA
Legal Counsel
Laura A. Mitchell Team Assistant EASFP Project
management
Supervision/ICR
R. I. Gopalkrishnan Consultant FPDFI Banking Sector
Review
Xiaofeng Hua Senior Financial Sector Spec. AFTFE TTL
Sameer Goyal Senior Financial Sector Spec. EASFP TTL
Haixia Li Senior Financial Management
Specialist EAPFM FM Supervision
Lhagvasuren Ochir Operations Officer EACMF Operations
Alexander Pankov Senior Private Sector
Development EASFP
TTL (since
7/2010)
Jinan Shi Senior Procurement Specialist EAPPR Procurement
Gerelgua Tserendagva Procurement Specialist EAPPR Procurement
Caroline Cheng Financial Analyst CTRLN Disbursement
Byambadorj Jachivlamdan Consultant, EIA specialist EASFP
Environmental
assessment
consultant
Morio Miyazaki Consultant, Banking specialist EASFP Sub-loan
application review
Tunc Tahsin Uyanik Sector Manager EASFP Sector Manager
34
Wei Zhang Financial Sector Specialist EASFP Supervision and
ICR
Hiran Herat Consultant EASFP ICR
Aira Htenas Economist EASFP ICR
Michael Figueroa Information Assistant EASFP
Project
management
support
(b) Staff Time and Cost (to update)
Stage of Project Cycle
Staff Time and Cost (Bank Budget Only)
No. of staff weeks
USD Thousands (including
travel and consultant
costs)
Lending
FY05 99.67
FY06 0.10
FY07 0.20
FY08 0.00
Total: 99.97
Supervision/ICR
FY05 0.00
FY06 81
FY07 50
FY08 60
FY09 10.98 75
FY10 12.59 75
FY11 21.65 88
FY12 8 30
Total: 459
35
Annex 5. Beneficiary Survey Results
1. The World Bank conducted a survey of sub-borrowers at the closure of the project.
The survey questionnaire was sent directly to all 35 sub-borrowers of the participating
PFIs, and consisted of three parts: general information on the company; questions on the
effect of the performance of the PFI and the World Bank project; and a policy question
on the remaining challenges in the private sector development environment in Mongolia.
Of the 35 questionnaires sent, 23 sub-borrowers responded, for a response rate of 66
percent.
2. Almost all respondents rated as good the project’s contribution to the
improvement of the financial position and performance of their firm. Specifically, 96
percent of respondents recorded an increase in sales; 86 percent an increase in exports; 86
percent in identifying and attracting potential foreign investment; 87 percent in improved
formulation and implementation of corporate strategy; and 87 percent in better marketing
and export promotion. In addition, according to 96 percent of respondents the project
helped them on better capital investment planning.
3. The top three remaining problems in the private sector development environment
in Mongolia are bureaucratic procedures and red tape (95 percent of respondents
identified it as such), laws and regulations (89 percent), and financial sector instability
(also 89 percent). Half of the respondents rated the project’s contribution to improvement
in procurement efficiency and quality as “very good,” and to increase of sales as “good.”
4. A survey questionnaire was sent by the World Bank also to the PFIs, namely
Trade and Development Bank, State Bank, Khan Bank, and Golomt Bank, at the same
time. The questionnaire collected data on the PFIs’ performance as a result of
participation in the World Bank project, as well as other measures on the contribution of
the project to the overall economic development of the country, and a policy question on
the remaining challenges in the banking sector development environment in Mongolia.
Of the four questionnaires sent, four PFIs responded, for a response rate of 100 percent.
5. Three of the four participating PFIs rated the project’s contribution to their
financial position and performance as substantial or relevant in the following areas:
strengthened lending policies and procedures, improved credit underwriting practices,
improved credit administration, improvement in overall quality of loan portfolio and risk
profile of the bank, improved risk management practices, and improved access to foreign
commercial funding. The same PFIs also recognized an improvement in the quality of
their portfolio under PSDC II compared with the quality of the overall portfolio of their
bank based on the BOM loan classification regulation.8
8 Khan Bank rated the portfolio quality as “equivalent.”
36
6. The survey of the PFIs revealed a variety of remaining problems in the banking
sector environment in Mongolia, ranging from uncertainties in the macroeconomic
outlook, unexpected changes in government (and BOM’s) rules, laws and policies, weak
enforcement of relevant law and regulations, lack of non-judicial methodologies for
repossession and disposal of collateral to limited bankable clients, lack of adequate
market information and analytical capacity, and lack of steady longer-term funding.
37
Annex 6. Stakeholder Workshop Report and Results
(If any)
N/A
38
Annex 7. Summary of Borrower's ICR and/or Comments on Draft ICR
Comments on Draft ICR by Mr. B. Batbayar, Head of CWG, PSDC -II, Director
General Financial and Economic Policy Department, MOF, October 19, 2011
1. Ministry of Finance’s assessment of the overall performance of the project
remains as Moderately Satisfactory. The overall performance assessment relies on a
variety of information sources, including the implementation and supervision of
Subsidiary Loan Agreements, as well as Sub-loan Agreements established under the
Development Credit Agreement for the Second Private Sector Development Project
entered into with International Development Association; collection of repayments of
subsidiary loans of the Participating Financial Institutions and sub-loans of the
Investment Enterprises, including non-performing loans ratio; overall financial
performance of Participating Financial Institutions; sub-loan portfolio quality; and
comments and evaluation results made by the Internal Auditing, Monitoring and
Evaluation Department of the Ministry of Finance on the project’s implementation
according to the “Regulation on Monitoring and Evaluation of Projects Financed by
Development Partners under Portfolio of Minister for Finance.”
2. The Category 1 for the Sub-loans under Part A was the most successful
component of the project, as it has supported creation of new jobs by the private sector,
diversification of the Participating Financial Institutions’ loan portfolio and development
of small and medium enterprises operating in non-traditional sectors such as private
schooling and agribusinesses. Sub-loans allowed several small and medium enterprises
operating in traditional industries like woolen textiles to make investments in
technological upgrading 36 sub-loans totaling of US$11.1 million, from which US$8.3
million by IDA funds have been underwritten by the four Participating Financial
Institutions, as well as 540 new jobs being created by the sub-loan borrowers between
2006-2011.
3. Dramatic deterioration of the Zoos Bank’s financial situation, its insolvency
issues combined with a non-performing sub-loan by Tsagaan-Zalaa Agvet have had the
main negative influence on the overall performance of the project, with the Tsagaan-
Zalaa Agvet loan being transferred to the receiver of the Central Bank of Mongolia.
4. However, we do understand that this was also related to insufficient oversight by
supervisors.
5. Let me note that the Ministry of Finance strongly believes that it is very important
to continue similar projects in Mongolia, as they support creation of new jobs by private
sector, diversification of loans’ portfolio and development of small and medium
enterprises.
39
6. Also, the technical assistance component was advantageous for us in many ways.
We are looking forward to continue to train our staff in customized overseas trainings,
seminars and workshops. There are several topics that are necessary for our staff to be
trained on; namely conducting, analyzing and reporting of different risk assessments of
financial institutions, especially banks, sovereign wealth funds, the nexus of fiscal and
monetary policy, the diagnosis approach and many others. It is important for the
Ministry of Finance to procure some office equipment with funds from the project for the
purposes of supporting the functional activity of the Ministry. This kind of technical
support is important for ensuring smooth operation and maintaining technical processes
of the department as well as providing suitable working conditions for and improving
performance and productivity of the staff.
Summary of Borrower’s ICR
SECOND PRIVATE SECTOR DEVELOPMENT CREDIT PROJECT
(4088-MOG)
PROJECT COMPLETION BRIEF SUMMARY REPORT
(As of August 30, 2011)
The objective of the Second Private Sector Development Credit (PSDCII) is to assist in
promotion of private and financial sector development and reinforcing the institutional
capacity of the banking sector.
IDA has extended credit of SDR 6,991,000–equivalent of US$10.57 million at approval–
to the Government of Mongolia with terms of 40 year maturity, 10 year grace period for
principal repayment 0.75 percent service fee and 0.5 percent commitment fee.
The project consists of three components, which are Line of Credit, Technical Assistance
credit and project implementation support.
The line of credit for US$9.45 million, reduced by US$1.2 million after reallocation,
additional up to US$4.0 million from the Government Revolving Fund, is the main
component of PSDCII. Under this component, eligible Participating Financial Institutions
(PFIs) borrow from the Ministry of Finance (MOF) in the form of subsidiary loans with a
maturity from two to seven years to finance sub-loans to eligible sub-borrowers.
The US$940 thousand, which was increased after reallocation up to US$2,040 thousand
is for Technical Assistance Credit (TA) component, to support PFIs’ and the Bank of
Mongolia’s (BOM) institutional capacity development through consultants’ services,
system upgrading and staff training.
40
Here IDA credit allocation of US$1,200 thousand–after reallocation–is for Bank of
Mongolia (BOM) TA Program, US$300 thousand is for Trade & Development Bank
(TDB) TA Program, US$300 thousand for Zoos/State Bank and US$240 thousand for
Golomt Bank TA Program.
The US$280 thousand–after reallocation–is for Project Implementation Support
component to support government’s efforts to better manage, monitor and evaluate
project implementation. Here included training activities for the MOF/Counterpart
Working Group (CWG).
As of August 30, 2011, 98.1 percent of allocated IDA funds have been disbursed.
IDA FUND ALLOCATION and DISBURSEMENTS BY ACTIVITIES
Cate-
gory
Components IDA Fund Allocated Actual Disbursement Data
In SDR In USD at
approval
IDA GOM Total
1 Sub-loans 5 440 000 8 250 000 8 292 380.84 2 830
858.00
11 123
238.84
2 Goods 335 000 510 000 428 160.31 39 222.89 467 383.20
3 Consultants
services
771 000 1 137 000 1 077 629.37 8 112.74 1 085 742.11
4 Staff training 430 000 650 000 553 548.57 - 553 548.57
5 IOE 15 000 23 000 15 166.70 7 050.46 22 217.16
Total 6 991 000 10 570 000 10 366
885.79
2 885
244.09
13 252
129.88
I. Line of Credit Component
Total 36 sub-loans totaling US$11,12 million had been approved by IDA and
underwritten by four PFIs, of which IDA funded US$8.29 million and GoM funded
US$2.83 million. The disbursement information on sub-loans as of August 30. 2011, is
outlined in Attachment 1.
The credit has supported capital investment needs of the aforementioned 36 sub-loans in
sectors such as manufacturing industry (12); food production and agribusiness (7);
pharmaceutical production (4); construction material production (2); education-health
service (5); and various services (6), such as internet-telecom, food-hotel, printing,
tourism and others. Around 580 new jobs have been created by these sub-projects.
Participating
Banks
Sub-loans extended
Number In USD In MNT Total in USD
TDB 20 4 305 000 3 248 212 430 6 841 781.64
Zoos/State 7 526 600 1 565 977 000 1 861 297.88
Golomt 3 600 000 910 000 000 1 244 546.36
Khan 6 57 000 1 514 400 000 1 175 612.96
Total 36 5 488 600 7 238 589 430 11 123 238.84
41
The line of credit has two windows of a foreign currency and a local currency, which
reflect the final borrowers' credit demand. The pricing structure for the principal amount
withdrawn and outstanding of a subsidiary loan are different, based on sub-lending
currency.
Current arrangements for US$-denominated sub-lending interest is based as originally
provided in the Development Credit Agreement, Schedule 5, Section II, paragraph 4,
where annual rate of interest equal to the London inter-bank offered rate (LIBOR) for six
months deposits plus 1 percent margin in dollars. This rate is reviewed every six months,
to reflect changes in the LIBOR.
Current arrangements for MNT-denominated sub-lending interest is based as originally
provided in the Development Credit Agreement, Schedule 5, Section II, paragraph 3,
where interest charged to PFIs is equal to average interest rate on demand deposits for
previous 12 months of Mongolian commercial banks.
MOF base rates for Sub-loans:
However, pricing formula is advantageous to the PFIs having no limit to the margin
charged to final sub- borrowers.
As of August 30, 2011, PFIs have repaid US$1,650 thousand and MNT 2,339.5 million
to the Repayment Fund Accounts, opened at the Bank of Mongolia, all the principal re-
payments are made in accordance with the repayment schedules, agreed in Supplementary
Contracts between PFIs and the Ministry of Finance for each sub-loan. Several sub-
borrowers have fully prepaid the principal in advance. There is no penalty for prepayment
of principal in Subsidiary Loan Agreement between MOF and PFI and even in Credit
Agreement between PFI and sub-borrower.
As of the end of August 2011, all 36 subsidiary loans except one are performing. The
only non-performing loan under PSDC II was the one to the Tsagaan zalaa Agvet LLC,
42
underwritten by Zoos Bank in 2006, but according to the Assignment and Assumption
Agreement its obligations transferred to the successor, the State Bank, who is repaying
principal and interest on time.
The outcome achieved:
Number of private companies benefited from the project increased.
PFIs have improved loan portfolio diversification.
Sub-borrowers have improved access to new sectors, markets and new business activities by expanding production and service capacities, by
constructing new facilities and renovating existing facilities, expanding their
business by installation of new machineries and upgrading new technologies.
They have increased their production and profit.
More than 578 new jobs were created. Quality of sub-loan portfolio better than that overall PFI portfolio, where non-
performing loan (NPL) of PFIs is average 2.9 percent, and whole banking system’s average is 5.6 percent, while 98 percent of sub-loans under PSDCII are performing, except one.
II. Technical Assistance Credit Component
The PSDCII Project had a large component of technical assistance for the Institutional
capacity building of the PFIs and Supervision Department of the Bank of Mongolia.
Speed of utilization of this source was much slower than expected due to the changes of
PFIs ownership, strategy and bankruptcy of the Zoos Bank, which replacement by the
newly established the State Bank. For example, there was planned to upgrade systems in
customization of the FNS system in Treasury operations, which not used today.
However, lately TA component was implemented successfully.
BOM TA component: This component financed two groups of activities, namely:
(i) Anod Bank audit and special assessments of banks.
(ii) Staff training of BOM’s Banking Supervision Department.
Due to the Anod Bank failure and the world economic and financial crisis 2008-2009
additional funding of US$1 million was allocated to BOM TA for the purposes of Anod
Bank audit and special assessment of banks. Bank of Mongolia contracted international
audit firms to conduct audit of the Anod Bank and carry out portfolio review of 10 banks
in three groups. The final evaluation and reports were used for designing bank-specific
supervisory action plans by the BOM. For this purpose disbursed total funds of US$946
thousand.
The staff training program in BOM was conducted effectively with focused objectives
and well developed training plans. Total 74 participants took part in the 37 training
activities and disbursed US$134 thousand.
43
The training covered banking supervision, financial regulatory processes, Basel II,
corporate governance, policies for financial sector stability, liquidity risk management,
crisis preparedness program, resolution of problem bank, post–crisis policy and organized
study tours to Europe on deposit insurance and to Korea on credit information bureau
framework and structure.
BOM TA Component Fund Allocation and Disbursements
Categ-
ory
Component
s
IDA Fund Allocated Actual Disbursement Data in USD
In SDR In USD at
approval
IDA GOM Total
3 (e) Consultant
services
680 000 1 000 000 946 055.79 946 055.79
4 ( c ) Staff
training
131 000 200 000 134 109.55 134 109.55
Total 811 000 1 200 000 1 080
165.34
1 080 165.34
The capacity of the banking supervision of the BOM was enhanced as result of the TA
programs.
TDB TA Component: This component consisted of a staff training program and
upgrading card security system. Funds for consultancy services were reallocated to goods
at their request.
The staff training and staff learning program in TDB was built into career development
plans, conducted effectively with focused objectives and well developed training plans.
With the PSDCII funding, TDB focused its staff training on operational risk management
between 2008-March 2010, and card business management and IT development between
April 2010 and March 2011.
Total 37 staff has participated in 28 overseas training activities and disbursed US$145,3
thousand. The staff training helped to enhance the participants’ skills and performance
and they became able to develop new procedures; for example, operational risk
management procedure, new fee policy, etc. Participants were conducting presentations
for their department staff.
Fund for goods were fully disbursed on procurement of credit card service expansion,
licenses and equipment for card issuance, acceptance and security system, which
strengthened its market position as the largest card business player in Mongolia.
44
TDB TA Component Fund Allocation and Disbursements
Cate-
gory
Components IDA Fund Allocated Actual Disbursement Data in USD
In SDR In USD at
Approval
IDA GOM Total
2 (a) Goods 100 000 150 000 136 500 13 500 150 000
4 (a) Staff training 99 000 150 000 145 302.43 145 302.43
Total 199 000 300 000 281 802.43 13 500 295 302.43
Golomt TA Component: This component consisted of a staff training program and
upgrading system and consultancy services.
The staff training program in Golomt Bank was conducted effectively with focused
objectives and well developed training plans. With the PSDC II funding Golomt Bank
focused its staff training on credit and operational risk management, advanced auditing
and financial management. Total 62 staff has participated in 13 local and international
training activities and has disbursed US$72,9 thousand. The staff training helped to
enhance the participants’ skills and performance.
Under the consultancy services in Golomt Bank, the Christopher Sargent Associates of
the UK has delivered bank operational manual and was disbursed US$41,5 thousand.
Fund for goods were disbursed for procurement of 25 Isniper banknote checking and
counting machines, 35 Wincore Nixdorf Printer passbook and document printers and
seven Queuing systems and was disbursed US$117,8 thousand.
They have contributed to delivering efficient and professional services for bank clients.
Golomt Bank TA Component Fund Allocation and Disbursements
Cate-
gory
Components IDA Fund Allocated Actual Disbursement Data in USD
In SDR In USD at
Approval
IDA GOM Total
2 ( c ) Goods 79 000 120 000 105 170.23 12 686.89 117 857.12
3 (d) Consultants
services
26 000 40,000 41 476.12 41 476.12
4 (e) Staff training 52 000 80 000 72 939.68 72 939.68
Total 157 000 240 000 219 586.03 12 686.89 232 272.92
Zoos/State Bank TA Component: This component consisted of a staff training program
and upgrading system.
45
Up to its bankruptcy in November 2009, Zoos Bank had utilized US$29.1 thousand for
staff training. After Zoos Bank’s failure the newly established State Bank applied to the
MOF to utilize the unused TA fund. The MOF has informed the World Bank.
As result Assignment and Assumption Agreement with the State Bank and Zoos Bank
receivership under BOM, failed Zoos Bank’s obligations and rights under PSDC II were
transferred to the State Bank. Thus State Bank utilized the remaining TA fund for its IT
system development and IT staff training according the approved Procurement Plan of
Goods and Staff Training plan.
Funds for goods were disbursed for supply of fiber channel storage area network, data
archiving, network security equipment, which were installed at Disaster Recovery Site
and was disbursed US$199,5 thousand.
As result capacity of data storage has increased, data processing speed has enhanced,
security and confidentiality have improved.
According to the staff training plans, approved by the IDA, total 123 staff from the Zoos
Bank, participated in seven training programs, of which two were abroad and five in
Mongolia, and disbursed US$29,1 thousand.
In addition to that State Bank’s System Administrator and Programmer attended Koenig
training on IT, enhanced their knowledge to ensure software confidentiality, security and
improve reliability of the bank network system. Total US$45.7 thousand was disbursed
for training.
Zoos/State bank TA Component Fund Allocation and Disbursements
Cate-
gory
Component
s
IDA Fund Allocated Actual Disbursement Data in USD
In SDR In USD at
Approval
IDA GOM Total
2 (b) Goods 156 000 240 000 186 490.08 13 036 199 526.08
4 (b) Staff
training
43 000 60 000 45 718.15 45 718.15
Total 199 000 300 000 232 208.23 13 036 245 244.23
III. Project Implementation Support
The Project Implementation Unit (PIU) Office staffed with a Project Coordinator, who
oversaw the project’s activities, including coordination between the IDA, MOF, BOM
and PFIs, conducted project monitoring, auditing, financial management and accounting
and reporting functions.
Counterpart Working Group (CWG) was established to provide required management to
the implementation work of the project and was headed by the Director General of the
Financial and Economic Policy Department of the MOF.
46
Financing was provided to: (1) engage the Project Coordinator; (2) provide MOF staff
training; (3) conduct the annual project audits; and (4) for incremental operating
expenses related project coordination costs, including office rent, internet/email
communications, accounting software program and stationary to support day-to-day
activities of the Project Implementation Unit (PIU). Amendments were made to DCA,
namely, percentage of IDA Fund financing for Project Coordinator and audit, changed
from 96 percent to 100 percent and also included project office rent to the IOE.
Project Implementation Support TA Component Fund Allocation and Disbursements
Cate-
gory
Components IDA Fund Allocated Actual Disbursement Data in USD
In SDR In USD at
Approval
IDA GOM Total
3 C
(ii)
Project
coordinator
48 000 72 000 69 776 7 699 77 475.00
3 C
(i)
Project aidit 17 000 25 000 20 321.46 413.74 20 735.20
4 C Staff training
CWG/MOF
105 000 160 000 155 478.76 - 155 478.76
5 IOE 15 000 23 000 15 166.70 7 050.46 22 217.16
Total 185 000 280 000 260 742.92 15 163.20 275906.12
MOF TA Component: The topics of MOF training activities covered a wide range and
were highly relevant to MOF’s mandates. Mongolia, like most countries, has been
influenced by the negative impacts of global financial crisis. Due to that fact,
US$100,000 were reallocated to the MOF TA component.
Ministry of Finance selected overseas trainings based on the focus of its policy and
strategy development tasks. Ministry of Finance has conducted reassessment of the
proposed trainings for its staff considering the need and relationship of these training
activities against Ministry of Finance’s institutional capacity priorities in the context of
the framework of the Second Private Sector Development Project. As a result, some
amendments and revisions to the training schedule were made, emphasizing more the
programs for banking and financial sector stability and decreasing concentration of
trainings related to commodities trading. The Ministry of Finance organized 11
customized overseas trainings and a domestic workshop covering different topics in
economy, financial and banking sector for 57 participants, out of which 21 participants
were from the Ministry of Finance and has disbursed US$155.5 thousand.
Training activities and training/study tours were of high quality and had improved the
participants’ knowledge of the relevant issues and helped enhance their capacity in policy
analysis and in some policy development and implementation.
47
Project Reporting and Project Management
The Financial Management Reports (FMRs and IIRs) prepared and submitted to the Bank
on a quarterly and semiannual basis. When new PFIs began participate in the project,
according to the FMA’s due diligence report, Financial Management Manual developed
by Project Coordinator, and amended which was reviewed and approved by the Bank.
Audit for PSDCII Project for FY2006 was conducted by Itgel Audit Co., LLC and for
FY2007 by Niislel Audit Co., LLC for FY2008 by Ulaanbaatar Audit Co., LLC and for
FY2009 by Niislel Audit Co., LLC and FY 2010 and 2011 by Dalaivan Audit Co., LLC.
Audit reports for financial statements along with management letter have been submitted
to the World Bank on time and accepted appropriately.
It was noted in “The WB’s financial management implementation support and
supervision report” issued on the 24 January, 2011:
“PSDCII’s PMU is maintaining computerized accounts on cash basis in a timely and
accurate manner using “Info-system” accounting software. All the financial records,
including financial statements, ledgers, contracts, supporting documents and withdrawal
applications were systematically maintained by the PMU”.
The following Amendments to the Development Credit Agreement have resolved
outstanding issues and contributed to the successful completion of the project, namely:
Joining of new PFIs, as Golomt Bank and Khan Bank to the project on 27
November, 2007 has created more competition in the term lending market and
there was a sharp increase of sub-loans portfolio in 2008.
The Amendment made in to the DCA on 22 April, 2008, in funding percentage
of Subsidiary Loans to 70 percent out of the Credit allocated, 30 percent out of
the proceeds of the Revolving Fund, instead of 85/15, has supported more
usage of GoM Revolving Fund. Also decided to finance PMU Office from
Incremental operating expenses.
Extension of closing date by 12 months until 30 April, 2011.
Reallocation of US$1 million for BOM Consultants services on 12 March,
2009 has contributed in designing bank specific supervisory action plan by
BoM on base of carried out portfolio review of 10 banks in three groups by
international auditing firms following the world economic and banking crisis.
According to Amendments to DCA on 28 January 2011 has made the State
Bank became successor of failed Zoos Bank.
Reallocated each US$100,000 for training MOF and BOM
Reallocated US$75,000 for TDB from consultancy to goods.
Grace period was stipulated as 31 Aug, 2011.
Was signed Assignment and Assumption Agreement between IDA, ZB
Receivership and State Bank on 13 Jan, 2011, as a result the State Bank has
become successor of the failed Zoos Bank and utilized remaining TA fund.
48
Conclusion
The development objectives of PSDCII have been achieved and project has contributed to
Mongolia’s financial sector capacity building and increased availability of longer-term
financing for small-and-medium-sized enterprises.
Ministry of Finance’s assessment of the overall performance of the project is moderately
satisfactory. The overall performance assessment relies on a variety of information
sources including the implementation, supervision and audit of the project under
Development Credit Agreement for the Second Private Sector Development Project
entered into with International Development Association; extension of subsidiary loans
to the Investment Enterprises through the Participating Financial Institutions including
non-performing loans ratio; overall financial performance of Participating Financial
Institutions; sub-loan portfolio quality; and comments and evaluation results made by the
Internal Auditing, Monitoring and Evaluation Department of the Ministry of Finance on
project’s implementation according to the “Regulation on Monitoring and Evaluation of
Projects Financed by Development Partners under Portfolio of Minister for Finance.”
Ministry of Finance strongly believes that it is very important to continue similar projects
in Mongolia to promote development of private sector through the provision of term
lending for financing capital investment projects, to support creation of new jobs by
private sector, diversification of loan portfolio of PFIs and development of small and
medium enterprises.
Ministry of Finance wants to emphasize that IDA played important role in the project
preparation and implementation period.
*The IDA Credit Disbursement, Sub-loans Disbursement Status Report and Project
Completion Financial Management Reports as of 30 August 2011 are enclosed herewith.
**The Project Completion Reports on Sub-loans and on TA Program as of 30 August
2011, submitted by PFIs are enclosed herewith.
49
Annex 8. Comments of Co-financiers and Other Partners/Stakeholders
N/A
50
Annex 9. List of Supporting Documents
1. Project Completion Review – Mongolia Financial Capacity Development Project,
March 2010 (ICR No.: 00001346).
2. Quality Assessment of the Lending Portfolio (QALP), September 2008.
3. Second Private Sector Development Credit Project (PSDC II) Project Appraisal
Document, Report No: 32067-MN, June 2005.
4. Private Sector Development Project (PSDC I) Implementation Completion Report,
Report No: 31419, February 2005.
5. Memorandum of the President of the International Development Association to
the Executive Directors on a Country Assistance Strategy of the World Bank
Group for Mongolia, Report No: 28419-MOG, April 2004.
6. Private Sector Development Project (PSDC I) Project Appraisal Document,
Report No: 18964-MOG, May 1999.
7. Project Supervision Aides Memoire, ISRs, FMRs, and various other documents.
8. Completed Questionnaires of Survey of Sub-Borrowers, July 2011.
9. Completed Questionnaires of Survey of Participating Financial Intermediaries
(PFIs), July 2011.
10. Financial Reports for Implementing Agencies and PFIs.
11. Financial Management Assessment and Procurement Assessment Reports.
12. Operations Manual.
51
MAP
