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?

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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

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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.

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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

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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.

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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

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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

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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

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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

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Stakeholders of RFC

Competitors

Partners

Regulators

Staff

Clients

Local Government

Localcommunity

Shareholdersinvestors

RURAL FINANCE

COMPANY

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Organizational Structure of Rural Finance Company

Shareholders meeting

Board of Directors

Internal auditor

Loan Approval Committee

Executive Director

Accountant Loan officer Group Loan coordinator

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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

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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

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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

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Partnerships

� ADRA Mongolia – non collateralized group loan

� Mongol Daatgal - Index based livestock insurance

� Local government – PR activities

� Leasing companies

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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

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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.

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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.

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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

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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

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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

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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.

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Board Meeting of Hugjil BadrahRFC

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Loan Approval Committee Meeting

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Founders and Shareholders of RFC named “Buint-Manlai”

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Shareholders meeting

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The very first client of RFC in Bayantsgaan soum

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Camel race for the opening of the RFC

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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

achid@achidfinance.orgsandagnergui@yahoo.com,