Mongolia to regulate bank ownership

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The government is in the process of drafting a new bill for dispersed ownership of banks to improve corporate governance, reported a source from Mongol Bank.

By restricting shareholders from owning more than 20 percent of a commercial bank, the new bill aims to improve banking governance, stop unbiased decision-making, reduce risks such as conflict of interest, and ensure stable operations of banks. The adoption of this bill would mean that each bank operating in Mongolia will be required to have a minimum of five shareholders and no shareholder would be able to make arbitrary decisions for the bank. With at least five shareholders, operations and decisions will be under strict supervision and will likely strengthen banking governance, according to an expert. However, we can’t leave out the possibility that Cabinet and Parliament could change the maximum amount of shares a bank shareholder can hold during the review process.

At present, there are 13 active commercial banks in Mongolia, and in most cases, more than 60 percent of their shares are held by less than three individuals or entities. For example, businessman D.Erdenebileg owns 65 percent Trade and Development Bank and 99.99 percent of Ulaanbaatar City Bank, while owner of Mongol Mass Media Group D.Bayasgalan holds 87 percent of Golomt Bank, and the Deposit Insurance Corporation holds 63.5 percent of State Bank.

Mongol Bank stated, “The majority shareholders of banks are using their stakes to take full control of the management and decision-making. The monitoring and supervision for this is very weak. We’re viewing that the roles and structures of the board and executive management have been lost.”

In light of this, the authorities are working to increase and diversify the composition of boards at commercial banks to ensure unbiased decisions are made while upholding the interests of all stakeholders.

Studies indicate that more than 50 countries, including China and Canada, prohibit either individuals and corporations from holding more than a given fraction of a bank’s shares or require that large shareholders be reviewed by the government or the central bank. The median and modal restriction among countries in the World Bank database is 20 percent

China limits the share of a single foreign investor in a Chinese bank to 20 percent, and will treat the entire bank as “foreign” if more than 25 percent is in non-Chinese hands. This has sparked complaints from other countries who said China did not agree limits on foreign ownership when it joined the World Trade Organisation in 2001. In Singapore, a single shareholder requires permission of the minister in charge of the central bank to increase shareholdings in a local bank at five percent, 12 percent and 20 percent thresholds. As long as the government allows, foreign banks and other entities can own 100 percent of a Singaporean bank. On the other hand, South Korea allows a financial player to hold up to 10 percent stake in a bank without approval and can become the majority stakeholder in a bank, while a non-financial player must not own over nine percent.

Mongol Bank believes a 20 percent stake limit in a bank is adequate to maintain stability between ownership and management structure. It further explained that if stake concentration is higher than 20 percent, the blockholder (owner of large block of shares) would have too much control and influence in banking operations, thus resulting mostly negative impacts. This is the main reason a 20 percent limit was proposed in the new bill.

XasBank is already meeting this requirement. The bank has 13 shareholders and its largest shareholder, Mongolyn Alt Corporation, owns 20 percent, while other shareholders own between 0.09 and 17.17 percent respectively.

Contrary to Mongol Bank’s prediction, legal restrictions on the concentration of banks’ ownership can have drawbacks. It can affect the value of bank shares, as well as competition in the loans market, according to a study titled “Ownership Concentration and Competition in Banking Markets” by Bank of Canada’s employees Alexandra Lai and Raphael Solomon.

“In almost all of our simulations, a rule restricting ownership concentration to no more than 20 percent leads to two outcomes. In the first, blockholders never exist; in the second, blockholders exist but do not monitor and never gain control. Since we do not calibrate the model (this would require good estimates of the demand for loans, agency costs, and monitoring costs), it is difficult to say whether restricting ownership to 20 percent is excessive. But our results indicate that restrictions on bank shareholding can discourage monitoring, thus reducing competitiveness in the loans market,” the authors concluded in their paper. 

The authors acknowledged that the study is not calibrated to the data of any particular country, and that they didn’t directly evaluate any particular country’s shareholding rule. Nevertheless, it wouldn’t hurt to be wary of these consequences and make regulations accordingly.

Policy in place to make banks publicly traded

Besides the new bill on dispersed ownership of banks, Mongol Bank mentioned that it is upholding a policy aimed to make banks open joint stock companies.

“In truth, shareholders will consider their profit first, but the boards of banks function to protect borrowed funds from risks besides trying to raise profit. Making banks into joint stock companies has a huge advantage of helping to balance these two interests,” Mongol Bank told Unuudur.

This policy would also reduce ownership concentration at banks and promote banks to heighten transparency under the Mongolian Stock Exchange’s regulation. This means that the central bank will not be the sole supervisor of banks operating in Mongolia.

“If a bank’s operations deteriorate, its share prices will drop and alert managers and executives to improve their performance. In other words, shareholders will start to indirectly monitor banking operations,” said an economist.

Mongol Bank agrees with this. It views that having banks controlled by both the state and public will allow them to engage in less risky operations and ensure unbiased decisions are made by a group of people. Having a bank operate as joint stock company is proven to have positive influence on banking governance. Austria, Germany, Hungary, Norway and Sweden legalized banks to be joint stock companies. In the law, these countries specify limits on shareholders of a bank, their stake limit, distribution of information, the party which monitors banking operations, and organization of meetings.

Head of the Legal Policy Department of Mongol Bank B.Erdenekhuyag stated, “By turning into openly-traded companies, banks will get the opportunity to release additional shares, raise money on the stock market, and enhance their financial capacity within a short period of time. In a way, this will raise the number of ordinary shares of banks’ Tier I equity in conformity with international standards. The higher the Tier I equity, the better the credibility and rating of the bank.”

He added that this process will allow banks to gain other source of capital for operations as well as raise profits with less risks.

The banking sector is an important pillar of the Mongolian financial sector. Imposing limits on ownerships of banks could turn out to be a healthy option for strengthening banking governance and boosting their capacity provided that lawmakers thoroughly research this area and pass regulations suitable for the Mongolian banking sector. With alleviated monitoring at banks, the public will no longer have to fear about their corresponding bank going bankrupt suddenly. Many people lost their trust in banks and have been exercising more prudence in selecting a bank especially after the unexpected shutdown of Capital Bank last year.

Experts said the new bill on dispersed ownership of banks has high chances of getting approved since it can bring positive impacts to both the banking sector and economy.

Owners of banks in Mongolia

Dulguun Bayarsaikhan

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