What’s stopping privatization of State Bank?
- By Khantushig B -
- Apr 05,2021
Former authorities of the State Bank are currently serving one to three years in prison for corruption. Former General Di- rector of State Bank D.Bayarsaikhan and other officials were found guilty for illegally giving out loans worth 20 billion MNT to a Chinese company, Xinjiang Xinfan. The law enforcement proved that the State Bank gave out loan to the company despite the company failing to meet the requirement for the loan.
There were rumors that the 20 billion MNT loan taken by the Chinese company was spent for the presidential election. But a rumor is a rumor, not a fact until it is proven. Some were suspicious as the people accused were reportedly close to the Mongolian People’s Party. The bank man- aged to issue a 20 billion MNT to the company at the speed of light without any due diligence. Many staff at the bank had reportedly worked for many months without bonuses until the bank “cleared” the balance.
In 2018, the year law enforcement started investigating officials of the State Bank, the bank had a profit of 1 billion MNT. On the other hand, in 2017, the bank had made 12.3 billion MNT in profit. Illegal actions of the bank’s managers were the reason for the sink in profit.
Many have no doubts the illegal actions of the bank managers were politically influenced. This is said to be the perfect example of how higher- ups act by their own accord if the state has a bank of its own. Mongolians remember the time ruling party politicians wasted 14 billion MNT of Saving Bank, with some of them sentenced for it. That’s why many economists say that have a state-owned commercial bank is wrong. It’s pretty obvious that if the bank is privatized in a fair manner, it could be beneficial to society and economy. However, politicians see it the other way. Especially when a radical party is ruling, they are not likely to privatize state property.
“For a riskless future” is the inspiring motto belonging to the State Bank. But the 20 billion MNT loan illegally given was a big example of a risky future. It seems like they came up with the motto as the state won’t let the bank go bankrupt in any level of crisis. Other private banks see the motto and its activity as a declaration of its unfair advantage over other banks. There is no visible and logical reason for the state to run a commercial bank and compete with other private banks. Mongol Bank filed requests that say, “The State Bank must be privatized”, to the Ministry of Finance several times.
The State Bank was established by collecting good assets of insolvent banks for many years. This policy is called “bridge bank” and its main purpose is to run failed banks with support of the government or the central bank until a buyer can be found. However, the bridge bank is now a business contender with its name referring to its inherent advantage.
Mongol Bank recently petition to make amendments to the Law on Banking to reform the Mongolian banking system and Parliament approved. The main policy of the reform is to make banks shareholding companies. This means an individual or a group can’t own more than 20 per- cent of any bank. In other words, banks will be owned many shareholders to prevent arbitrary decisions and actions that can potentially hurt public interests. We hoped for a privatization of the State Bank as part of the reform. However, some parts of the law says that banks established with a special purpose and those that are state- owned will not be subject to the same regulation as private banks. This means the State Bank won’t be privatized or become a shareholding company because it was initially funded by the Ministry of Finance and Deposit Insurance Corporation.
It’s still uncertain why the State Bank is exempted from reform and will not be privatized. According to the law, owners of other banks are obliged to sell 20 percent of ownership to the public. The question is, why is the state not interested in lowering its share in a commercial bank? The government has a chance to privatize or make public the State Bank, raise money and still keep 20 percent.
Several small banks are not “feeling well”. Is it possible that the government is “hoping” to absorb other banks to the State bank? If a small bank goes insolvent, it’s now possible to extract its good assets to a state-owned bank, the State Bank. This gives the State Bank an unique and unfair advantage to expand and make acquisition through government decision. This means that what was initially conceived as a bridge bank is now a means to take over private assets.
Some 36.52 percent of the State Bank is owned by the Ministry of Finance while Deposit Insurance Corporation owns 63.48 percent. On the website of the State Bank, it says, “Mongolia managed to create a legal environment to establish Deposit Insurance Corporation, which operates to protect interests of saving owners thanks to the Law on Deposit Insurance of Banks approved by Parliament on January 10, 2013.” Deposit Insurance Corporation is a state-owned, nonprofit legal entity which provides insurance. This organization owns most of the State Bank shares and is running a business. So we can see that this description of the corporation isn’t valid.
The State Bank was first established with in- vestment of 133 billion MNT. In other words, this money was issued by the government. Currently, the bank has 303 billion MNT in property. Total assets of the bank reached 3.48 trillion MNT. The State Bank reported 20.2 billion MNT in profit in 2019 and in 2020 they earned 30.6 billion MNT.
Even though the government refuses to privatize or even lower its ownership in the bank, they have duty to make the State Bank a shareholding company. If the State Bank start selling its shares, private companies will be able to monitor them. However, the government has been stubbornly refusing to do privatize the State Bank for years and the stated reason is not good enough. The bank must be privatized for the sake of fair- ness and public interest.