Institutional Innovation in Rural Institutional Innovation in Rural
FinanceFinance of Mongoliaof Mongolia
Rural Finance Company ModelRural Finance Company Model
Research study presented at the Rural Finance Research Conference
by Nergui Sandagjav
Rome, Italy
March 2007
24/9/2008
The questions examined in the research study
� Why the Rural Finance Company Model was designed?
� What are the specifics and core principles of the Rural Finance Company (RFC) Model?
� What are the challenges of piloting the RFC Model?
� What is the impact of the RFC on rural community?
� What are achievements of the piloting RFCs?
� How is the replicability of the model in rural villages of Mongolia and in other countries?
34/9/2008
Methods of the Research
� Literature review of Rural Finance Institutional Models
� Desk review of model design documents and governance, operational, financial systems of the RFC.
� Semi-Annual and Annual reports of RFCs.
� Field visits to the RFCs, and meetings with local communities, clients of the RFC
� Interview with the Technical Assistance Provider
44/9/2008
Main findings
� The RFC is the best model to attract the private capital into microfinance
• The recent achievement of piloting RFC proved that the RFC will be operationally and financially sustainable in a long run.
� Technical assistance project played a vital role in establishingthe RFCs.
� The RFC made a significant impact on the rural community.
� Interest rate decline� Better customer service� Better outreach to rural low income people
� The Model can be replicable in rural villages of Mongolia and other countries.
54/9/2008
Background information of Mongolia
� 2005 GDP per capita $1900 ( estimated)� Lowest density country in the world. Population
densities from 0.2-0.6 people per square km in the Gobi region. Approximately 45% of the total population live in rural areas.
� Poor infrastructure, no access to paved roads in rural areas, some rural villages (soum ) have no access to electricity
� Challenging climatic conditions: nearly 40% of the livestock perished during the drought and harsh winters of 1999-2002
64/9/2008
Microfinance Development in Mongolia
� Started late in comparison to other South Asian countries ( in mid 90s)
� Within a short period of time the Mongolian microfinance industry internalized very successfully the policies, principles and procedures that characterize the ‘new school’ of microfinance
� Many MFIs have been established in the last decade. However, most of them operate only in urban populated areas.
� The low density and a geographically scattered rural population, requires a special approach to deliver professional financial services to the remote rural areas.
74/9/2008
The Rural Finance Company
(RFC) Model� The RFC model is designed by
Achid Finance Company, Mongolia
� The RFC model is piloted in two rural villages in 2005-2006 and piloting is going on successfully
� The uniqueness of the model is a mobilization of the private capital into the rural finance sector
� RFC is owned by local community and established with pure private capital
� Technical Assistance Project provided professional services to the RFCs for its start-up operation
84/9/2008
The specific features of the RFC model
� Mobilization of private capital/investment options
� Professional Technical Assistance for its start-up operation
� Good governance of community owned MFI
� Community participation
� Professional Supervision and internal control system
� Free of donor involvement and pressure
� Free of Political influence
� Diversification of ownership concentration
94/9/2008
Methods of private capital mobilization
� Shares of RFC. Nominal value of a share is to be low enough to attract as many local residents as possible.
� Social/strategic investors invest the initial injections of capital by buying shares of the company in order to keep the financial operation liquid at the beginning stages
104/9/2008
Comparative advantages of the RFC Model
from other existing MFIs in Mongolia
� Banks: Centralized management system. Expensive top down business approach.
� Cooperative: conflict of interest, mission drift. Limited possibility to attract outside investors. Limited outreach
� Non Bank Financial Institution; privately owned by one company or person, no community involvement
� Informal Sector: Illegal and lack of potential.
� Decentralized management system, governance ruled by locals, decisions made by locals
� Professional financial management, provide services to everyone not limited to only its members, Profit-driven-common interest
� Owned by local community, community interest and participation.
� Officially supervised, built human resource capacity
114/9/2008
Stakeholders of RFC
Competitors
Partners
Regulators
Staff
Clients
Local Government
Localcommunity
Shareholdersinvestors
RURAL FINANCE
COMPANY
124/9/2008
Organizational Structure of Rural Finance Company
Shareholders meeting
Board of Directors
Internal auditor
Loan Approval Committee
Executive Director
Accountant Loan officer Group Loan coordinator
134/9/2008
Impact on rural community
� Access to flexible, demand driven financial services with lower cost and risk.
� Opportunity to use their excess capital for an investment and sustainable return on their investment
� Knowledge and experience in managing RFC.
� Less dependence from external financial institutions and informal lenders.
� Improvements in money circulation, purchasing powers
� Better products and services with lower interest rates
� Increased participation of rural community in micro-finance
144/9/2008
Technical Assistance Package
� Capacity building trainings for governance units and staff of RFC in a classroom and in a process oriented manner.
� Professional assistance in managing privately owned professional financial institutions
� Professional Assistance in developing financial products, policies and operational systems
154/9/2008
Piloting Rural Finance
Companies
Khaan Bank Khaan Bank with nationwide network with centralized decision making. Franchising model of XAC bank
Competition
No electricity, no mobile phone, no running water
Mobile phone, 24 hours electricity, no running water
Infrastructure
Livestock Agriculture (livestock & crop)
Main economic sector
240 км from nearest market center
160 км from nearest market center
Remoteness
About 4000 and 800 households
About 6000, and 1200 households
Population
Gobi regionHangai regionRegion
Second company Bayantsagaan
soum
First company
Tarialan soum
Indicator
164/9/2008
Partnerships
� ADRA Mongolia – non collateralized group loan
� Mongol Daatgal - Index based livestock insurance
� Local government – PR activities
� Leasing companies
174/9/2008
Challenges in piloting the RFC Model
� Remoteness and poor infrastructure
� Lack of human resources
� Difficulty to register RFC as a legal entity with many of shareholders
� Recent bankrupts and low reputation of the SCUs
184/9/2008
Achievements of the RFC in the first year of its operation � The RFC reached the break-even point within
first year of its operation. This is a biggest step toward sustainability.
� The RFC licensed as an official financial institution and operated as a company.
� The RFC earned a community reputation.
� 40% of total shares hold by rural local community members.
194/9/2008
Institutional challenges
� Not allowed to mobilize deposit from public according to the regulatory framework of Mongolia
� Dependent on competing banks. All operational transactions need to be done only through banks. RFCs are not allowed to do money transfers.
204/9/2008
The localization indicators of RFC model and realization of the plan as Dec, 2006
54%70%>50Percentage of women clients
8%8%>15%Active clients of RFC as a percentage of total economically active population of the soum
89%80%>80%Local representation on Board
12,7%17,8%<20%Share concentration
39,7%33,1%>=10%Local share in the equity
The second RFC
The first RFC
Planned for the
first year Indicators
214/9/2008
Sustainability Indicators of the RFC model and
performance of the RFC as Dec 2006
4%7%>5%Adjusted pre-tax AROE
0%0%<5%Portfolio at Risk ( 30 days)
2%5%>1%Adjusted pre-tax AROA
195%205%>60%Operational Self-sufficiency
139%155%>50%Financial Self-sufficiency
The second
RFC
The first RFCPlanned for the first
year
Indicators
224/9/2008
Operational indicators of the RFC model and its performance as Dec, 2006 in US$( Exchange rate US$1=1170)
The second
RFC
The first RFC
Planned for the first
year
Indicators
84%93%>50%Retention rate
99%100%95%Repayment rate
57,14476,61515,000Total amount of loans outstanding
$468$346300Average loan size
122210>50 Number of active borrowers
234/9/2008
Conclusion
The Rural Finance Company Model is one of the most promising models to stimulate the local investors to invest in rural finance.
The most of successful MFIs initially received a public investment and started their operation with donor support. The RFC is an icebreaking case in the rural finance of Mongolia in starting the microfinance activity with pure private capital.
244/9/2008
Board Meeting of Hugjil BadrahRFC
254/9/2008
Loan Approval Committee Meeting
264/9/2008
Founders and Shareholders of RFC named “Buint-Manlai”
274/9/2008
Shareholders meeting
284/9/2008
The very first client of RFC in Bayantsgaan soum
294/9/2008
Camel race for the opening of the RFC
304/9/2008
Thank you very much for your attention.
If you are interested to know more about the RFC Model you can contact with Achid
Finance CompanyTelephone: 976-11-312840, Fax:976-11-317999
[email protected]@yahoo.com,