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In Mongolia: where a ger guarantees a loan |
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Many banks prefer clients who can pledge rock-solid ‘immovables’ -- brick-and-mortar homes, for example – as collateral which the bank can claim when borrowers do not repay their loans. But what if the immovable is, in fact, move-able? What if it is made of wool and wood, and could be picked up and carted off in the middle of the night by a debtor on the run? Mongolia’s highly-successful XacBank accepts gers – traditional nomadic homes made of blankets – as pledges for loans it makes to micro-business clients. XacBank’s experience is proof of the micro-finance credo that poor people make the most reliable borrowers, and that in assessing a client’s ability to repay, it’s far more important for a bank to evaluate reputation and ideas than it is to demand valuable collateral. This ethos is the basis of the EBRD’s micro-finance programme, through which it recently loaned $5 million to XacBank, the EBRD’s first-ever project in Mongolia. Do or die Elbegzaya Sersenjav is an example of how XacBank’s unconventional banking is helping to build the economy in this central Asian country. Four years ago, after Mrs Sersenjav was widowed, she moved with her daughter to Ulaanbaatar, Mongolia’s capital. She was convinced that the only way to survive, let alone to see her daughter through university, was to start a small business. “But I wondered who would lend me money to start a business if all I had was a ger?” recalls Mrs Sersenjav. In 2003, she knocked on the door of XacBank. Her ger and home appliances were pledged against a $200 loan so she could launch her business selling scarves and gloves in the city’s open air market. Two other loans followed, each time double the previous amount, each loan increasing her profit. “I don’t know why XacBank trusted me when I had just a ger and a few home appliances,” says Mrs Sersenjav, “but if it hadn’t, I would have had no choice but to die.” Microfinance at heart Nearly three-quarters of XacBank’s clients live in gers. Explains Magvan Bold, XacBank’s President: “We started with a social mission - to provide credit to micro and small businesses - and have become their most trusted partner.” XacBank got its start in 1998 as a United Nations Development Programme ‘MicroStart’ project, with an initial $1 million to lend to poor people with business ideas. Mongolia was still in the wild early years of its post-communist transformation. Private businesses were emerging and needed capital but it was in short supply. Interest rates went as high as 10 per cent per month. People would line up in shifts to receive loan applications; often crowds would break down bank doors to get in to apply for loans. Not surprisingly, there were three banking crises in the 1990s. While things have stabilised somewhat, the financial sector remains chaotic, with 22 credit unions going bang in 2006. In contrast, XacBank is a rock of stability despite – or perhaps because of – its focus on the poor. Loans overdue for over 30 days amount to less than one per cent of XacBank’s portfolio. “This is a bank that has taken microfinance to heart, believing that micro and small businesses can make serious growth possible. It has done so in the belief that only by being profitable, it will also be sustainable,” says EBRD Small Business banker, Oksana Pak. Growth brings new investment Thanks to interest income and investment from its founders, Mercy Corps and local NGOs, as well as support from Triodos Fund, Fair Share Fund, ShoreCap International and MicroVest, XacBank’s capital has grown to $10 million with total assets of $78.7 million in 2006. XacBank’s brand name is well known in microfinance worldwide. In nine years it has grown from 50 to 55,000 clients, with 90 per cent of loans made to small businesses. The only XacBank statistic to have fallen since 1998 is the interest rate it charges, now at two per cent per month. XacBank remains focused on micro finance, particularly in rural markets. In October 2006, Mongolia became the EBRD’s newest country of operations, an occasion marked by the $5 million loan signed with XacBank. It will be used to finance micro and small businesses, particularly in rural areas where the poorest people live with little access to credit. Explains XacBank’s President: “The EBRD loan means more than just capital for XacBank. We will gain from the Bank’s expertise in promoting transition from command to market economies. EBRD funding represents a strong new channel of European finance for us.”
By Marjola Xhunga, EBRD Communications Adviser
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