Mongolia is not the end of the world - but you can see it from there."
With these encouraging words, John Walker, president of the Financial Services Volunteer Corps, and Tim Frost, the corps' program director, invited the Soviet-American Banking Law Working Group to field five volunteers as the kick-off team for the corps' Mongolian Banking and Finance Training Project.
Originally scheduled to start in Ulan Bator, elevation 4,000 feet, in October, a deferment to February had us running for our long johns, down parkas, and Patagonia catalogues. February temperatures range from plus 10 to minus 40 degrees Fahrenheit.
As in the former republics of the late Soviet empire, Mongolia's banking system is coming in from the cold. Prior to 1990, there was only one bank, the Bank of Mongolia, providing all nationwide banking functions in a command economy.
In addition to managing the government's debt and issuing currency, this one bank dealt almost exclusively with state enterprises in a command economy, essentially balancing the national accounts.
There was no payment system, no intermediation of deposits into housing or commercial ventures, and no form of consumer banking as we know it. Mongolia was then and continues to be essentially a cash economy.
Today, a two-tier system has been established. The old Bank of Mangolia has become the Central Bank. There are now 11 commercial banks, four of the largest being spinoffs of the old Bank of Mongolia. Most of these commercial banks are joint stock companies still government controlled through companies in the process of being privatized.
Mongolia's banking law gives commercial banks broad powers, barring them only from production, insurance, and land development activities. Licensing would appear to be straight-forward.
Hyperinflation has thrown into a cocked hat the minimum capital requirement of 50 milion tugriks (about $140,000 at the 350-to-1 exchange rate), resulting in proposed legislation for an increase to 150 million tugriks, which would cause compliance problems for several banks. No provision has yet been made for foreign bank ownership or branches.
Good News, Bad News
The good news, is that all the Mongolian commercial banks have been initially profitable through continued strong (demand for short-term credit (the only kind available) on the part of corporations in the process of privatization, cheap government funding from the Central Bank, and a high rate of inflation.
Some banks are actually paying dividends semiannually. Deposits, including some personal savings accounts, are being attracted at competitive interest rates.
Float is tremendous, since poor internal communications and the absence of a payment system mean that transferring funds can take two months. And the legal and corporate framework is progressing as Mongolia moves from being a centralized command economy to a more market-oriented economy.
The bad news is that a legal and business infrastructure, let alone an understanding of the basics of commercial contract law and lending, is a long way from where it must be in order to support creditworthy lending. Bank facilities are rudimentary, reliable financial information is not available, and financial concepts are not well understood.
Moreover, transactions still require substantial paper shuffling and rubber stamping, and periodic limitations on cash withdrawals as an anti-inflationary measure have eroded public confidence in the banks and led to cash hoarding and dollar-based activities among small businesses outside the banking system.
Finally, bank capital at the minimum levels, even as augmented by paper profits, is woefully inadequate to support real growth in a hyperinflationary environment.
On top of this, there is a severe shortage of skilled bankers, which brings me to the Financial Services Volunteer Corps.
A private, nonprofit organization, it has provided technical assistance from the United States since 1990 to support the economic transformation in emerging market economies.
For a year, the corps' Richard Currie, a Mongoliaphile and former U.S. banker, has focused on Mongolia's banking needs and opportunities, building on the corps'experience in assisting the conceptualization and development of a voucher privatization program and stock exchange.
He offered 30 managers with basic English skills the opportunity to participate in the corps' training project.
Our Soviet-American Banking Law Working Group volunteers were drafted by the corps to give the Mongolian bankers the first wave of basic training in banking in a market economy with a series of interactive presentations.
Organized as a group of American volunteer bankers, academics, and lawyers in 1991 to assist the Russians in developing a business and commercial law infrastructure to underpin a banking system, banking law volunteers have prepared a 182-page book on banking basics that includes a 34-page glossary.
A high point of our program was a Socratic discussion of financial statements led by Dick Howe of Sullivan & Cromwell, who put a simple blank balance sheet and income statement on the blackboard, asked the Mongolians what kind of business they would like to discuss, and then filled in the blanks.
We were impressed with how quickly the Mongolians arrived at the right analysis and judgment regarding the "bankability" of various hypothetical borrowers. From the questions and the intensity of our discussions, we could tell that the corps has identified a group of future leaders who are clearly enthusiastic and eager to learn and make progress - realistically.
For American bankers, the lesson of the Mongolian training project is that we have a valuable export in technical assistance. One hopes the payoff will be the development of a safe and sound Mongolian banking system that facilitates a successful transition to a functioning market economy and friendly trading partner.
While it may be too early to make a case for opening representative offices or branches in Mongolia, American bankers should keep an eye on developments there. It may become a prototype for fast-track development of banking systems in other emerging economies.
Curiously, Mongolia was once before a microcosm for an important banking lesson. At its peak, Genghis Khan's empire stretched from the Pacific across Asia all the way, to Hungary, introducing the concept of paper money inherited from the Sung dynasty, which had collapsed in ruinous inflation.
So, too, did the finances of the great khans ultimately collapse. There is hope that today's Mongolia may offer a more positive example for development of a workable banking system in emerging market economies.