ASIAN DEVELOPMENT BANK PPA: MON 26450

PROJECT PERFORMANCE AUDIT REPORT

ON THE

EMPLOYMENT GENERATION PROJECT (Loan 1290-MON [SF])

IN

MONGOLIA

September 2002

CURRENCY EQUIVALENTS

Currency Unit – togrog (MNT)

At Appraisal (September 1993)

At Project Completion (August 1999)

At Operations Evaluation(May 2002)

MNT1.00 = $0.00257 $0.000974 $0.000905 $1.00 = MNT389 MNT1,027 MNT1,104 $1.00 = SDR1.3863 SDR1.3698 SDR1.2686

ABBREVIATIONS

ADB – Asian Development Bank BOM – Bank of Mongolia ITI – Investment and Technological Innovation MOFE Ministry of Finance and Economy MSE – micro and small enterprise MSWL – Ministry of Social Welfare and Labor NGO – nongovernment organization OEM – Operations Evaluation Mission PCB – participating commercial bank PCR – project completion report PMU – project management unit PPAR – project performance audit report SCC – savings and credit cooperative SDR – special drawing rights TA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government ends on 31 December. (ii) In this report, “$” refers to US dollars.

Operations Evaluation Department, PE-601

CONTENTS Page BASIC DATA ii EXECUTIVE SUMMARY iii TYPICAL SUBBORROWERS vi I. BACKGROUND 1

A. Rationale 1 B. Formulation 1 C. Objectives and Scope 1 D. Cost, Financing, and Executing Arrangements 2 E. Completion and Self-Evaluation 3 F. Operations Evaluation 3

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4

A. Formulation and Design 4 B. Achievement of Outputs 5 C. Cost and Scheduling 6 D. Procurement and Construction 6 E. Organization and Management 7

III. ACHIEVEMENT OF PROJECT PURPOSE 8

A. Operational Performance 8 B. Performance of the Operating Entity 8 C. Financial and Economic Reevaluation 11 D. Sustainability 11

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 12

A. Socioeconomic Impact 12 B. Environmental Impact 13 C. Impact on Institutions and Policy 13 D. Overall Assessment 14 E. Overall Project Rating 15 F. Assessment of ADB and Borrower Performance 15

V. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 16

A. Key Issues for the Future 16 B. Lessons Learned 17 C. Follow-Up Actions 17

APPENDIXES 1. Project Framework 18 2. Participating Commercial Bank Lending 21 3. Savings and Credit Cooperative Profiles 23 4. Financial Statements of Participating Commercial Banks 24 5. Representative Micro and Small Enterprises Income Statement 28 6. Saving and Credit Cooperative Income Statement 30 7. Summary of Beneficiary Survey Results 31

BASIC DATA Loan 1290-MON(SF): Employment Generation Project

Project Preparation/Institution Building TA No.

TA Project Name Type Person-Months

Amount ($)

Approval Date

1840 Employment Generation PPTA 5 100,000 8 January 19932020 Institutional Enhancement

for Employment Generation ADTA 45 598,000 16 December 1993

KEY PROJECT DATA ($ million)

As per ADB Loan Documents

Actual

ADB Loan Amount/Utilization1 3.0 3.1 ADB Loan Amount/Cancellation 0.0

KEY DATES Expected Actual Appraisal 8–21 September 1993Loan Negotiations 10–12 November 1993Board Approval 16 December 1993Loan Agreement 25 February 1994Loan Effectiveness 27 May 1994 11 May 1994Project Completion 30 June 1997 31 August 1999Loan Closing 31 December 1997 29 September 1999Months (effectiveness to completion) 37 64 BORROWER Government of Mongolia EXECUTING AGENCY Ministry of Social Welfare and Labor2 MISSION DATA Type of Mission No. of Missions Person-Days Fact-Finding 1 61 Appraisal 1 70 Inception 1 24 Project Administration

Review 4 127 Special Project Administration 3 49 Project Completion 1 36 Operations Evaluation3 1 42

ADTA = advisory technical assistance, PPTA = project preparatory technical assistance, TA = technical assistance. 1 The loan amount at the time of approval and loan closing was equivalent to SDR2,154,000. 2 Previously named as Ministry of Population Policy and Labor at appraisal and Ministry of Health and Social Welfare

at the time of project completion report. 3 The Operations Evaluation Mission comprised M. Ozaki (Evaluation Specialist/Mission Leader), R. Bird

(International Consultant), and B. Oyunbileg (Domestic Consultant).

EXECUTIVE SUMMARY

Since the end of seven decades of a centrally planned socialist economy in 1990, Mongolia has taken various macroeconomic stabilization and reform measures. A negative result of the transition was the contraction of the Mongolian economy and reduced ability of the Government to fund social programs, which led to the emergence of absolute poverty and open unemployment. In August 1992, the Government requested assistance from the Asian Development Bank (ADB) for preparing and financing a project to reduce poverty and unemployment. The ADB loan of $3 million with an attached advisory technical assistance (TA) grant of $598,000 was approved in December 1993.

The primary objective of the Project was to support the Government’s poverty reduction efforts through the creation of employment and income opportunities for the employable poor by providing credits to micro and small enterprises (MSEs). The Project was to finance, through commercial banks, the establishment or expansion of businesses by individuals or companies. At least 4,000 subloans were to be made for a variety of small-scale production activities, services, and trading. It was expected that employment for 8,100 people would be retained and new employment for at least 1,900 people would be generated by the end of 1997 as a result of the Project. At least 30% of subloans were to be given to women. The Executing Agency was the Ministry of Social Welfare and Labor (MSWL).

The loan of SDR2.15 million ($3.0 million equivalent) from ADB’s Special Funds resources was made available through an imprest account with the Bank of Mongolia (BOM), in which the loan proceeds were deposited and from which the local currency equivalent was disbursed to the participating commercial banks (PCBs) for onlending to MSE subborrowers. Loan disbursements by BOM to the PCBs were in the form of special time deposit accounts. Upon their maturity, the PCBs were to repay BOM the principal amount deposited plus interest earned. Subloan repayments and interest earnings of the time deposits were to form part of a revolving fund to be operated by BOM for making further subloans for the duration of the Project. Following a recommendation by the TA consultants, in June 1997 ADB approved a reallocation of about $60,000 to finance the establishment of five pilot savings and credit cooperatives (SCCs) to expand project outreach more directly to low-income groups. The ADB loan was fully disbursed in September 1999.

The quantitative target for employment generation was not fully achieved. As of

September 1999, 5,360 jobs had been generated or retained (54% of the appraisal target) as a result of onlending through the PCBs. From 1994 to 1998, 569 subloans amounting to MNT2.6 billion were disbursed by the PCBs, attaining 14% of the appraisal target of 4,000 subloans. The under-achievement was attributable to the limited outreach to MSEs by the PCBs because of the weak institutional capability of the latter. Before new credit guidelines became effective in 1997, most PCB loan officers lacked a clear understanding of loan appraisal and project analysis, including cash flow analysis, to assess the debt-servicing capability of MSEs. The PCBs were not suitable as micro and small credit lenders. Such lending requires targeted outreach, as well as underwriting criteria and monitoring tailored for MSEs. All PCBs were closed before the end of 1999 due to insolvency.

While the onlending through the PCBs was well below the target level, the five pilot SCCs established in 1997 became the first financial institutions servicing microenterprises and were successful in reaching out to low-income borrowers because of their closely-knit membership and small collateral requirement. In 2001, they had 937 members and an outstanding loan portfolio of MNT575 million. The majority of members were women and low-

iv

income groups. Since the Project introduced the concept, SCCs have multiplied, and there are currently about 150 of them in Ulaanbaatar. The SCCs are operating on cooperative principles: members pay capital to SCCs and become their shareholders and owners, with each member having the right to one vote; policies and services have to be agreed upon by the members, and the members vote to select management; the members also may deposit money with SCCs. While SCCs are filling a vacuum for microfinance services in Mongolia, they are not subject to banking regulations or legislation. Considering they are functioning as de facto banks (i.e., taking deposits and making loans), a regulatory framework for SCC supervision is required to assure their legitimacy and to prevent the possible collapse of their operations.

The socioeconomic assessment of the Operations Evaluation Mission (OEM) shows that

almost half of the PCB subborrowers were well-established small or medium enterprises rather than the originally intended microenterprises. This is because the project design called for strict subborrower eligibility criteria to increase the repayment rate, such as more than 3 years of existing business operations and sound financial history. The eligibility criteria practically excluded microenterprises with limited assets and no credit history. SCCs, whose members run microenterprises without employees or are operated by family members, are a more suitable vehicle for providing loans to start-up microenterprises.

The attached TA aimed to improve the managerial capabilities of MSWL, PCBs, and nongovernment organizations (NGOs) with respect to market-based lending to MSEs in the private sector. During project implementation, 86 training courses on computer skills, banking, business planning, bookkeeping, and cooperative management were provided for the staff of MSWL’s Project Management Unit, PCBs, NGOs, and subborrowers. The training was regarded as useful as those skills were indispensable for commercial business operations and staff of the organizations and subborrowers had little exposure to those subjects previously. The TA is assessed as successful by the OEM.

The OEM considers that the Project’s rationale to generate and retain jobs through the development of MSEs was relevant, although the project formulation should have been more rigorous in its institutional analysis, as the PCBs’ financial viability and microfinance operational capabilities were unproven. Employment generation through the PCB onlending was lower than the appraisal target. Although SCCs, which multiplied after the Project, are considered to be effective in employment retention and generation among low-income people, the employment generation impact of the five pilot SCCs created under the Project was small. In this regard, the Project is assessed less efficacious. In terms of the number of PCB subloans, the Project was inefficient. The five SCCs were cost efficient, but their contribution to appraisal lending targets was small. The Project is assessed less efficient. The PCB onlending operations became unsustainable due the collapse of the PCBs. Repaid subloan proceeds are now relent by BOM to four new commercial banks for further onlending to MSEs. The Project’s concept of microfinance to MSEs thus continues; however, the sustainability of the revolving fund itself depends on the viability of the four commercial banks and requires further monitoring. The SCCs established under the Project have been operating over 5 years with little external financial assistance and are expected to be self-sufficient and sustainable. Overall, the Project’s sustainability is assessed as likely. The attached TA provided the staff of MSWL, NGOs, and subborrowers with necessary skills for commercial-based credit and business operation, although the credit guidelines developed under the TA failed to devise an effective implementation modality to reach the low-income target people. The flexible project implementation arrangements and reorientation of the project design by the TA were successful. The SCC concept resulted in successful financial intermediaries for the low-income people in line with the project objective. Overall, the Project’s institutional development impact was

v

significant. Based on this assessment, the Project’s rating is partly successful, just below the threshold to successful. Key lessons learned from the Project are the need for (i) differentiating lending to microenterprises from that to small and medium enterprises, and tailoring project objectives and design accordingly; and (ii) more prudent institutional assessment of performance and technical capabilities of financial intermediaries. Issues identified relate to the conflict for microfinance institutions between financial viability and outreach to the poor. Microlending to those who do not have access to regular commercial banking services requires special lending modalities. Loan products, and disbursement and repayment mechanisms should be designed according to the needs of the poor. This involves appropriate loan amounts, loan terms, collateral requirements or substitutes, and possibly, compulsory savings or group contribution requirements. Microfinance projects targeting the poor should ensure that the designated financial intermediaries have incentives and capabilities to implement such loan operations. If no such intermediaries exist, the creation of an alternative microfinance institution should be considered. Financial viability and outreach pose a dilemma. Financial institutions should be able to cover all their costs, mobilize their own resources, protect their funds against erosion from inflation and nonrepayment of loans, and make a profit to finance their expansion. Given the high cost of administering large numbers of small loans, financial institutions tend to provide bigger loans to better-off clients. However, financial viability and outreach can be achieved together through various measures including removal of interest rate ceilings, savings mobilization, lending through joint-liability groups, and self-sustaining branch operations. It is important for microfinance projects to use financially sound, self-reliant institutions as intermediaries. Feasibility studies need to ensure preconditions exist for such institutions, such as a favorable financial sector climate, effective demand for microlending, and commitment to profitability and sustainability in microfinance operations.

vi

TYPICAL SUBBORROWERS

Khatan Suikh Impex (Food Processing)

Monos Pharma (Pharmaceutical Factory)

I. BACKGROUND A. Rationale 1. Since the end of seven decades of centrally planned socialist economy in 1990, Mongolia has introduced political reforms, holding two parliamentary elections and one presidential election. In 1990–1991, macroeconomic stabilization and reform measures were taken by liberalizing prices and trade, privatization, unifying the exchange rate, improving monetary management, and addressing the fiscal deficit. A comprehensive policy framework was agreed upon with the International Monetary Fund and the World Bank in June 1993, in the context of an enhanced structural adjustment facility, which was to provide the medium-term macroeconomic framework to achieve stabilization and growth. A negative side of the transition was the contraction of the Mongolian economy and the reduced ability of the Government to fund social programs, which led to the emergence of absolute poverty and open unemployment. Unemployment, as a result of the downsizing and rationalization of the public sector, became a political issue. The Government adopted policies to support the social security system and a special assistance program for vulnerable groups, and provide credit for the promotion of micro and small enterprises (MSEs). In 1990, the Government introduced banking regulations that allowed the establishment of commercial banks. By April 1993, 13 commercial banks were operating. However, MSEs were largely excluded from commercial loan services because the central bank, Bank of Mongolia (BOM), imposed credit ceilings due to the country’s liquidity crisis, and lending to state-owned enterprises was given priority. During an Asian Development Bank (ADB) mission to formulate a country operational strategy for Mongolia,1 the Government reiterated the continuing need to reduce poverty and unemployment and to strengthen the enabling environment for the nascent private sector. B. Formulation 2. In August 1992, the Government requested assistance from ADB for preparing and financing a project to reduce poverty and unemployment. A small-scale technical assistance (TA) was approved in January 1993 to prepare such a project.2 The TA study was completed in June 1993 and a fact-finding mission visited Mongolia in July–August 1993 to reconfirm the consultants’ findings and to discuss the proposed project with the Government. Following appraisal in September 1993, loan negotiations between ADB and government representatives were held in Manila in November 1993. The ADB loan of $3 million with an attached advisory TA3 was approved in December 1993. The Executing Agency was the Ministry of Social Welfare and Labor (MSWL).4 C. Objectives and Scope 3. The objective of the Project was to support the Government’s poverty reduction efforts through the creation of employment and income opportunities for the employable poor by providing credits for MSEs.

1 The first country operational strategy for Mongolia was issued in June 1994. 2 TA 1840-MON: Employment Generation Project, for $100,000, approved on 8 January 1993. 3 TA 2020-MON: Institutional Enhancement for Employment Generation, for $598,000, approved on 16 December

1993. 4 Known as Ministry of Population Policy and Labor at appraisal and Ministry of Health and Social Welfare at the time

of project completion.

2

4. The scope of the Project consisted of commercial bank loans to individuals as well as to companies, including cooperatives, to establish or expand businesses. The ADB loan was made to BOM that relent its proceeds to participating commercial banks (PCBs),5 to make subloans to target MSEs. The subloan repayment proceeds and interest payments from the PCBs to BOM were to form a revolving fund for further sublending. The Project was to finance a range of MSEs including labor-intensive cottage and handicraft industries, small-scale trading, and various services. The target beneficiaries were to be the low-income people or people who had been adversely affected by the transitional economy (e.g., single headed households, workers laid off from state-owned companies, retirees, and school dropouts). At least 30% of subloans were expected to be given to women. 5. At least 4,000 subloans were to be made through the PCBs. It was expected that employment for 8,100 people would be retained and new employment for at least 1,900 people would be generated until the end of 1997. At least 95% of subloan businesses were expected to be profitable. The project framework is given in Appendix 1. 6. Through the attached TA, the Project aimed to improve the managerial capabilities of MSWL, PCBs, and nongovernment organizations (NGOs) with respect to market-based lending to MSEs. The expected outputs of the TA were 10 skill development training courses for microentrepreneurs; and training of trainers for 10 NGO staff, 6 PCB staff, and 2 MSWL staff by end 1995. The TA was also to develop a management information system and benefit monitoring and evaluation activities to monitor implementation progress, review the onlending operation, and assess the project impact on the target subborrowers. D. Cost, Financing, and Executing Arrangements 7. ADB provided a loan of SDR2.15 million or $3.0 million equivalent from its Special Fund resources for the credit line for MSEs. The loan bore the standard Asian Development Fund terms of a service charge of 1% per annum and a maturity of 40 years including a grace period of 10 years. 8. The ADB loan was made through an imprest account with BOM, in which the loan proceeds were deposited and from which the local currency equivalent was disbursed to the PCBs for onlending to subborrowers. Loan disbursements by BOM to the PCBs were in the form of special time deposit accounts opened by BOM for the PCBs. Upon the maturity of these accounts, the PCBs were to repay BOM the principal amount deposited plus interest earned. The monthly interest rate was to be 1% lower than the monthly base rate, which was equivalent to the average quoted rate of the five largest commercial banks6 on their deposit accounts. Subloan repayments and interest earning of the special time deposits were to form a revolving fund to be operated by BOM for making further subloans for the duration of the Project. 9. The PCBs were to onlend the loan proceeds to eligible subborrowers at interest rates equal to the market lending rate charged by the concerned PCB on similar loans to MSEs. The size of individual subloans was not to exceed $5,000 equivalent. The maturity of subloans was to be based on subborrowers’ cash flows, but not to exceed 1 year.

5 The originally identified participating commercial banks at appraisal were Ardyn Bank, Investment and

Technological Innovation Bank, and Mongol Horshoo Bank. After the merger and closure of Ardyn/Mongol Horshoo Bank (para. 10), Agricultural Bank (Tolgoit Branch) and Bayanbogd Bank joined the Project.

6 The five largest commercial banks at appraisal in September 1993 were Agricultural Bank, Ardyn Bank, Investment and Technological Innovation Bank, Mongolian Insurance Bank, and State Bank (International).

3

E. Completion and Self-Evaluation 10. The project completion report (PCR), circulated to the Board in June 2000, rated the Project partly successful7 in relation to its quantitative target of employment generation. The PCR stated that there was an attainment of 54% of the overall job target (existing and additional) and 82% of the additional job target. From 1994 to 1998, a total of 567 subloans amounting to MNT2.6 billion were disbursed by the PCBs, falling short of the appraisal target of 4,000 subloans. The PCR attributed the small number of subloans to (i) reluctance of the PCBs to grant small-size loans due to high transaction costs, (ii) weak financial management of the PCBs, (iii) credit extension ceilings due to tight money control by BOM, and (iv) inappropriate credit guidelines prepared by the advisory TA consultants. The PCR noted that, by the time of the PCR mission, all five PCBs had been closed. Two of them, Ardyn Bank and Mongol Horshoo Bank, were merged in 1994 and this newly merged bank was closed in 1996. After the closure of Ardyn/Mongol Horshoo Bank, Agricultural Bank (Tolgoit Branch) and Bayanbogd Bank joined the Project. In 1999, Agricultural Bank and one of the original PCBs—Investment and Technological Innovation (ITI) Bank—were placed under the receivership of BOM due to insolvency. Agricultural Bank remained open but invited an international management team for restructuring and during the process, several branches were closed including Tolgoit Branch. ITI Bank was subsequently closed in December 1999. Bayanbogd Bank could not meet the new capital requirement and its license was revoked by BOM in 1999. 11. The majority of the subborrowers were engaged in food processing and retail trading, accounting for 50% of the total number. Subloan sizes ranged from MNT3.6 million to MNT9.9 million. Repayment performance was initially low, 37% in 1995; however, this improved to 95% in 1998. The majority of the subborrowers were first time borrowers. About 10% of the subloans were repeat loans. 12. The PCR noted that the loan covenant requiring that the interest rate of subloans be equal to the current lending rate was not complied with. The actual sublending rate under the Project was 3.5% to 4.5% per month, while normal lending rates of the PCBs were 5% to 8% per month. The PCR did not explain this discrepancy. Financial internal rates of return for three representative MSEs were calculated, indicating 38%, 53%, and 9% for a restaurant, dairy product manufacturer, and retail store, respectively.8 The PCR concluded that the TA consultants had generally performed well, and the training under the attached TA greatly increased the capacity of PCBs and NGOs. F. Operations Evaluation 13. This project performance audit report (PPAR) reviews the PCR’s findings on project performance, outputs, and impacts, as well as lending modalities of BOM loans to the PCBs and PCB subloans to the beneficiaries to assess the relevance of the project design and efficacy in terms of the outreach to the poor. The PPAR analyzes selected performance indicators of the PCBs’ onlending operations to assess portfolio quality and financial viability. It discusses efficiency and sustainability of representative beneficiary MSEs based on their rates of return on equity. The employment generation impact is measured by reviewing a group of representative MSEs. The PPAR is based on the findings of the Operations Evaluation Mission (OEM) taking

7 At the time of PCR preparation, there was a three-category rating system: generally successful, partly successful,

and unsuccessful. 8 The number and diversified activities of the MSEs funded under the Project did not allow meaningful calculation of

the overall financial or economic internal rate of return.

4

into account a review of the appraisal report, PCR, discussions with MSWL, saving and credit cooperatives (SCCs), participating NGOs, and subborrowers. Copies of the draft PPAR were provided to the Government and ADB staff concerned for review, and their comments were considered when finalizing the PPAR.

II. PLANNING AND IMPLEMENTATION PERFORMANCE A. Formulation and Design 14. The project concept of the credit service to MSEs was based on the TA study’s (footnote 2) conclusion that the creation of microbusiness would be the major source of job creation in Mongolia in the short run, whereas restructuring and privatization of the large-scale industries would take longer. The TA study outlined a modality of the credit services through commercial banks and proposed to involve NGOs in mobilizing poor target subborrowers who were otherwise excluded from regular commercial banking services. The study recommended that (i) the fund should be planned and managed to strengthen the existing commercial banking system, (ii) interest rates should be positive and real, and (iii) the subloans should be priced to make the onlending operations financially viable. The modality using existing commercial banks as financial intermediaries was based on the study’s findings that the banks had experience in MSE loans; at the time of project formulation, there were no alternative intermediaries capable of providing financial services to MSEs. 15. The TA study’s recommendations were valid and incorporated in the original project design. However, the TA study’s institutional analysis of the PCBs’ financial health and sustainability was weak. None of the PCBs met all four prudential ratio requirements set by BOM.9 The TA study identified institutional problems of the PCBs such as incomplete accounting systems, negative interest rates on deposits, and high loan delinquency. These were indicative of the PCBs’ low financial self-sufficiency. The study did not analyze long-term financial viability of the Project’s proposed subloan operations. The risk of using the existing Mongolian commercial banks was addressed at various stages during the project preparation. The project preparatory TA review mission stated in its back-to-office report that “Given the weaknesses of the banking system, the absence of experienced NGOs and general institutional weaknesses in Mongolia, it is likely that a TA will need to accompany the Employment Generation Loan.” The project design relied too much on the attached TA helping the PCBs acquire skills necessary for commercial based operations. To transform the semi-state-owned Mongolian commercial banks10 into effective commercial financial intermediaries required new financial tools and disciplines including appropriate loan product pricing, and portfolio risk, asset, and liability management. The project design should have considered an alternative implementation arrangement with focus on financially viable products and monitoring systems. 16. To enhance the PCBs’ outreach to low-income subborrowers, the Project included NGOs as implementing agencies to identify potential subborrowers. There were four participating NGOs.11 The PCBs were to pay the NGOs a service fee set at 2% of the amount of the subloan made to the borrowers introduced by the NGOs. The NGO involvement had some impact on the outreach, but it did not significantly improve the achievement of the number of subloans. By the end of 1998, the NGOs had referred 233 approved subloans or 41% of the 9 Equity/total assets, loan assets/deposits, deposits/loans, and equity/deposits. 10 In 1993, except for Agricultural Bank, which was state-owned, the PCBs had been privatized; however, the majority

of equity owners were state-owned enterprises. 11 Liberal Women’s Brain Pool, Mongolian Employers’ Association, Mongolian Women’s Federation, and the Union of

Production and Service Cooperatives.

5

total number of subloans and 32% of the portfolio. The limited outreach by the NGOs was attributed to their inexperience in screening creditworthy subborrowers. 17. The project design set the maximum subloan amount at $5,000 equivalent and average subloan size was expected to be $1,500 equivalent to ensure subloans would be directed to low-income people. However, the subloan amount ceiling caused a shortfall in terms of the total subloan amount against appraisal target as the PCBs’ outreach to small borrowers through NGOs was not highly effective. In March 1996, implementation was behind schedule, with 44% of the ADB loan disbursement and 22% of the subloan disbursement compared to the elapsed loan period of 54%. Following a request from the Government in March 1996, ADB approved an increase in the subloan limit from $5,000 to $15,000 equivalent for successful repeat subborrowers. In 1997, the onlending volume increased by 79%. 18. During implementation, a microfinance specialist fielded under the attached TA recommended the establishment of SCCs as an alternative microfinance institution to expand subloan outreach. In March 1997, ADB approved the establishment of five pilot SCCs that was not included in the original project design, and the loan closing date was extended from 31 December 1997 to 31 December 1998 to facilitate this component. The Project provided orientation training for SCCs to the participating NGOs, developed SCC operational guidelines, and made a recommendation for a new cooperative law. The ADB loan was used for the training and guideline preparation, but not for the credit capital for the SCCs that was provided by their members. ADB further approved the extension of loan closing to 31 August 1999 to conduct an audit of financial statements for PCB and SCC components. The final subloan disbursements from the PCBs to subborrowers were in December 1998. B. Achievement of Outputs 19. The project framework in Appendix 1 compares appraisal targets with actual achievements. The OEM verified that a total of 569 subloans were made by the end of 1998 to 436 business entities and individuals, only 14% of the appraisal target of 4,000 subloans. The average subloan size was MNT4.5 million, significantly higher than the target of MNT1.7 million. Taking the average loan size as a proxy for subborrower income level, it appears that the PCBs directed more loans to the small and medium enterprises than to the poor groups as intended. The number of women among subborrowers was estimated at 47% of the total subborrowers, above the target of 30%. Details of the PCB’s onlending are in Appendix 2. 20. The key reason for the Project’s shortfall in achieving the target number of subloans was the PCBs’ lack of institutional incentives to be effective financial intermediaries. At the time of the Project, commercial lending operations were new to the PCBs. Previous operations had been based on loan allocations for state enterprises mandated by the Government. Loan officers were not capable of loan assessment and risk analysis. Many of their largest clients were nonviable or loss-incurring state-owned enterprises that failed to service their debts. The PCBs were not suitable as micro and small credit lenders. Such lending requires targeted outreach, underwriting criteria, and monitoring tailored for MSEs. 21. While the number of subloans through the PCBs was much lower than expected, the SCCs established under the TA pilot scheme were successful in reaching low-income borrowers and became the first microfinance institutions in Mongolia. In line with the recommendation of

6

the TA consultant, the four participating NGOs formed SCCs.12 The SCCs are operating based on cooperative principles: members pay capital to SCCs and become their shareholders and owners with each member having the right to one vote; policies and services have to be agreed upon by the members and the members vote to select management, and the members also may deposit money with SCCs. The SCCs provide loans to individuals and enterprises but not groups. While SCCs are filling the vacuum for microfinance services in Mogolia, they are not subject to banking regulations or legislation. Considering that they are functioning as de facto banks (i.e., taking deposits and making loans), a regulatory framework for SCC supervision is required to assure SCCs’ long-term accountability.13 The five pilot SCCs, which had a total of 325 members and loans outstanding of MNT244 million in 1999, grew to 937 members and loans outstanding of MNT575 million in 2001. The majority of members are women. The average loan size was MNT1.5 million in 2001. The SCCs impose no restrictions on the use of the loans, but members mostly use the loans for working capital for their business, education, and household consumption during draughts. The SCCs have been successful in reaching out to small borrowers because of the closely-knit membership and small collateral requirement. The SCC profiles are in Appendix 3. C. Cost and Scheduling 22. At completion, the total project cost amounted to $3.1 million. The difference between the appraisal and actual loan amounts was due to the depreciation of the United States dollar against the special drawing rights. In June 1997, ADB approved the reallocation of about $60,000 to finance the SCC establishment (para. 18). The reallocated amount for the SCCs was utilized for consulting services ($31,000), domestic training ($11,000), and communications ($18,000). 23. The ADB loan was fully disbursed on 29 September 1999, more than 5 years after it became effective on 11 May 1994, and almost 2 years later than the originally envisaged closing date of 31 December 1997. D. Procurement and Construction 24. The procurement of goods (one vehicle and office equipment) and training services was undertaken according to ADB’s Guidelines for Procurement through international shopping because the amount of the contract was not large enough to attract suppliers through the international competitive bidding process. Procurement was undertaken satisfactorily. 25. International consulting services under the attached TA consisted of a project adviser (12 person-months), management information specialist (6 person-months), and microfinance specialist (3 person-months); domestic consulting services included the PCB coordinator (23 person-months), NGO coordinator (43 person-months), and a benefit monitoring and evaluation specialist (24 person-months). The OEM assessed the consultants’ outputs as generally satisfactory except for the output of the benefit monitoring and evaluation specialist. 12 Liberal Women’s Brain Pool established MONCORD; Mongolian Women’s Federation sponsored Gunji-Ank; Union

of Production and Service Cooperatives sponsored Soyombotulga and Tsetsegtuya; and individuals of the Project Management Unit started Credit Mongolia Cooperative.

13 As of May 2002, the Ministry of Finance and Economy established a supervisory unit for nonbank financial institutions including SCCs and new legislation for nonbank financial institutions has been proposed.

7

E. Organization and Management 26. A project management unit (PMU) was established under MSWL in May 1994 to (i) set up eligibility criteria for subborrowers; (ii) monitor the PCBs’ lending operations; (iii) coordinate NGO activities; (iv) conduct training courses under the attached TA for staff from MSWL, PCBs, NGOs, and subborrowers; (v) assist BOM in auditing PCB accounts; and (vi) monitor subborrower impacts through a management information system. A senior MSWL official was appointed as the PMU director. 27. The PMU’s independent project implementation capability was weak. Its staff from MSWL had little experience in MSE loan operations; in effect, the Project was implemented by the TA consultants. The PMU director changed frequently, with three directors during the implementation period. As a result, the PMU management lacked cohesiveness. Six loan covenants were not complied with during the Project. The covenant that MSWL would monitor subborrower impacts through benefit monitoring and evaluation activities incorporated in a management information system was not complied with because the system developed by the TA consultant had no compatibility with the one that the PMU had used previously, and neither training nor demonstration was provided for use of the new system. The covenant requiring the PCB subloan interest rate to be equal to the current lending rates charged by the PCBs on similar loans was not complied with until 1997 (para. 33). The Project’s monthly nominal sublending rates were about 3% lower than the market rates. The covenant specifying that the PCBs would pay a fee to the participating NGOs for their services in introducing MSE subborrowers to the PCBs was not fully complied with. The PCBs paid to the NGOs only 65% of the outstanding fees. The covenant that a revolving fund would be used to finance further loans was not complied with during the implementation period as the fund in the BOM special time deposit account was used only for bridge financing of subloans while waiting for ADB’s disbursement. The covenant that subborrowers would be encouraged to save through built-in savings and capital buildup schemes was not complied with. The credit guidelines developed by the TA consultants included a clause that subborrowers had to deposit 5% of their subloan borrowing amount in a non-interest-earning savings account with the PCBs. However, the savings requirement was another form of collateral to minimize the default risk rather than to build the subborrowers’ asset base. Because subborrowers were asked to deposit in non-interest-earning accounts, the PCBs could not mobilize savings. The loan disbursement from BOM to the PCBs was made through the special time deposit account opened at BOM, based on the PCBs’ withdrawal applications. The disbursement arrangement was efficient. BOM released funds to the PCBs normally within 10 working days upon the receipt of the PCBs’ applications. Audited financial statements were not submitted by the PMU until ADB approved the reallocation of loan proceeds in 1998 to finance the engagement of private auditors to conduct an audit of financial statements for both credit and noncredit components. 28. ADB conducted one inception, four review, and three special project administration missions. ADB performance was satisfactory in carrying out required supervision and responding to the Project’s problems as requested. For example, ADB addressed the low repayment rates in a special project administration mission in November 1996, which resulted in new credit guidelines and an improvement in the repayment rate (para. 45). ADB’s approval for establishing the pilot SCCs showed its flexibility in the project implementation, which led to the creation of effective microfinance institutions. However, ADB should have been more rigorous in analyzing the institutional capabilities of the PCBs, as their financial viability was unproven. ADB should have devised an appropriate operational modality in the project design to ensure sustainable microlending service to MSEs and incorporated in the attached TA necessary support to strengthen the financial health of the PCBs.

8

III. ACHIEVEMENT OF PROJECT PURPOSE A. Operational Performance 29. The OEM measured the Project’s operational performance against its objective, namely the number of jobs retained or generated as a result of the Project. The impact on employment and income generation through the PCBs sublending was limited. At the completion of the Project, 5,360 jobs had been retained or generated (3,804 retained and 1,556 generated) through the PCB subloans, attaining 54% of the appraisal target of 10,000. The shortfall was due to the PCBs’ weak institutional capability in subloan administration. Before the Project’s new guidelines became effective in 1997, most PCB loan officers lacked a clear understanding of loan appraisal and project analysis, such as cash flow analysis focusing on the debt-servicing capabilities of MSEs. There was also a lack of sufficient supporting documents such as collateral verification and valuation or MSE’s project analysis. PCB staff had no methods to detect over-optimistic financial projections, much less conduct any sensitivity analysis. 30. The pilot SCCs became the first financial institutions providing savings and credit opportunities to microenterprises in Mongolia. By the end of 2001, the five SCCs provided 937 loans to their members. The majority of members of the five SCCs engage in microenterprises such as small trading, bakery, sewing service, and food processing. The members fall into the lower income group. The average income of the interviewed SCC members was estimated at MNT11,000 per person per month compared to the official poverty line of MNT17,600 per person per month in Ulaanbaatar in 1999. Such members would not have had access to credit services without the SCCs because, before the Project, there were no financial institutions providing microlending services. Since the first SCC was established under the Project in 1997, SCCs have multiplied, and, there are currently about 150 of them in Ulaanbaatar. Although insufficient information is available to determine how many of these SCCs can be attributed directly to the Project, considering that the Project introduced the structured SCC operational guidelines for the first time in Mongolia and other externally supported microfinance service started only in late 1998, the Project’s contribution to development and expansion of SCCs was significant. B. Performance of the Operating Entity 31. The total cumulative repayment rate of the PCB subloans is estimated between 80% and 94% (Table 1) because information on outstanding subloans for two PCBs (Bayanbogd and ITI) as of May 2002 is not available. As of December 1998, Bayanbogd and ITI Bank had 58 outstanding subloans (current and past due) totaling MNT357 million and the above range indicates the worst and best case collection scenarios. For the other two PCBs (Agriculture Bank and Ardyn Bank), 33 subloans totaling MNT110 million remain uncollected. Based on the actual collection rate of Agricultural Bank and Ardyn Bank, the most probable collection rate for the overall Project is estimated at slightly over 90%.

9

Table 1: Participating Commercial Bank Subloan Repayment Rate (MNT million)

PCB

Total Amount

Disbursed during the

Project

Current Subloans

as of December

1998

Number

of Current

Subloans

Past Due Subloans

as of December

1998

Number of Past

Due Subloans

Overall Recovery Rate

(%) Ardyn 374 0 0 30 9a 92ITI 662 20 2 57 28b 88–91Bayanbogd 516 280 28 0 0 45–100Agricultural 1,005 0 0 80 24a 92 Total 2,557 300 30 167 61 80–94

ITI = Investment and Technological Innovation, PCB = participating commercial bank a Uncollected as of May 2002. b Assumed unrecoverable due to the elapsed time of more than 1 year as of December 1998. Source: Operations Evaluation Mission estimates. 32. At the end of 1995, over 80% of the subloan portfolio was past due, as shown in Figure 1. There was an improvement in 1996, but delinquency was high again in 1997. By the end of 1997, the portfolio delinquency fell below 20% as a result of new credit guidelines developed under the attached TA (para. 45).

Figure 1: Participating Commercial Bank Project Portfolio Performance

Source: Operations Evaluation Mission estimates.

0102030405060708090

100

MonthDeliquency Rate (at risk) Recovery Rate (cumulative)

10

0

10

20

30

40

50

60

1993 1994 1995 1996 1997 1998 1999Year

% Nonperforming Loans to Total Loans

33. The monthly subloan interest rates set by the PCBs were lower than the market interest rates until 1997. The nominal interest rates ranged from 2.7% to 7.9% during 1994–1997,14 while the market rates for the same period reported by BOM ranged from 3.8% to 10.9%. In 1998, the interest rate slightly exceeded the market rate: 4.1% for the Project and 3.8% for the market rate. The sublending term was short. The average loan maturity was 9 months in 1994 and dropped to 6 months in 1995. The shortened maturity was in response to the tightening of credit policies in 1995 due to the high delinquency rates. The average maturity increased to 8 months for the remaining project period. 34. In terms of overall financial performance of the PCBs (Appendix 4), banks were loosely regulated until the mid-90s and operated with a modest amount of capital. Before 1996, loan classification such as current, past due, and loss had not been done. This situation prevented early warning analysis of a potential bank failure. Inadequate lending and credit administration skills and the economic downturn led to non-performing loans and the ultimate failure of the PCBs. Figure 2 provides the share of cumulative nonperforming loans in the four PCBs’ total loan portfolio during the project period.

Figure 2: Participating Commercial Bank Percentage of Nonperforming Loans to Total Loans (Project and non-Project)

Source: Operations Evaluation Mission estimates. 35. Ardyn Bank began experiencing operating losses in the second quarter of 1995 and failed to meet its capital adequacy ratio in the third quarter. Past due and nonperforming loans totaled 33% in the first quarter of 1996 and grew to 63% by the end of that year. Ardyn Bank was closed in December 1996. ITI Bank’s capital adequacy fell below the minimum requirement

14 The annual inflation rates during the Project were: 66.3% in 1994; 53.1% in 1995; 44.6% in 1996; 20.5% in 1997;

and 6.0% in 1998.

11

of 10% in the first quarter of 1995. Nonperforming loans rose from 6% in the first quarter of 1996 to 46% in the fourth quarter and ITI Bank reported an operating loss for the year. Nonperforming loans continued to increase; and ITI Bank never regained profitability until its closure in 1999. Agricultural Bank experienced operating losses and failed to meet the capital adequacy ratio in 1995. It never regained profitability during the project period. Bayanbogd Bank was a small bank with a loan portfolio of MNT271 million when it enrolled in the Project as a PCB. BOM increased the capital requirements for commercial banks to MNT1.5 billion, effective in December 1999. Bayanbogd Bank, with a capitalization of MNT408 million, failed to meet the new requirement and its license for accepting deposits was revoked.

C. Financial and Economic Reevaluation 36. The number and variety of MSEs funded under the Project did not readily allow calculation of an overall economic internal rate of return. Instead, the OEM calculated the rates of return on equity for two existing MSEs (construction and trading) based on their income statements (Appendix 5). The calculation was conducted in 2001 constant prices and under the with and without the project scenarios. The calculation was done for 20 years starting from the year when the MSEs received subloans. The projections of the net income from 2002 onwards were based on their assumptions that the net income would increase by 9% each year for the construction company, and 2% for the trading company. On this basis, the rates of return on equity are 33% and 43%. The results are robust because an assumption that there would be no business growth does not change them significantly.

D. Sustainability 37. The sustainability of the Project was assessed based on the financial viability of the three types of operating entities: the PCBs, SCCs, and subborrower MSEs. Project sublending ceased in December 1998 and the remaining PCBs were closed before the end of 1999. Onlending operations through the PCBs thus became unsustainable. The loan covenant that the subloan repayment proceeds and interest payments from the PCBs to BOM be utilized as the revolving fund for further sublending was not complied with during the project period. However, in February 2002, after the Project’s completion, BOM started to relend the outstanding balance of MNT2.2 billion to four new commercial banks15 for further onlending to MSEs. The Project’s concept of credit services to MSEs thus continues; however, the operational viability of the revolving fund itself depends on the sustainability of the four commercial banks16 and requires further monitoring. Their financial viability is expected to be robust at least in the medium-term. Two of the four banks, Transport Development Bank and Golomt Bank, are the largest stated-owned and private bank (respectively) in terms of total assets. The recent Mongolia Country Assistance Program Evaluation Mission reported that, since the second half of 2001, there has been strong loan growth throughout the banking system and banks are focusing on lending to small businesses and individuals with reported repayment rates of over 98%. However, the long-term viability of their credit operations remains uncertain because the same mission reported that there is still need for improvements in account and financial management, credit risk decision-making and portfolio management in the banking sector. 15 Erel Bank, Golomt Bank, Transport Development Bank, and Zoos Bank. 16 Although SCCs are suitable microfinance institutions to low-income people, BOM does not involve them in

onlending through the revolving fund because they are unregulated.

12

38. The five SCCs have been operating over 5 years with little external financial assistance and are financially viable. Their repayment rates have been over 90% since their start. Their operational self-sufficiency ratios (Table 2) indicate that two SCCs are fully self-sufficient, or profitable. They cover both nonfinancial costs such as rent and staff salaries and financial costs to obtain credit capitals with revenues of interest and fees. The other three SCCs are operationally efficient. They can cover 86%–100% of direct operational costs such as salaries and administrative costs from credit operating incomes. Based on calculation of the operating cost ratio, which is an indication of the efficiency of the lending operations, the SCCs, except for Tsetsegtuya, are generally cost efficient considering that successful microfinance institutions tend to have operational cost ratios below 20%. The SCCs’ income statements are in Appendix 6.

Table 2: Financial Viability Ratios of the Savings and Credit Cooperatives for 2001 (%)

Ratio CMC MONCORDa Tsetsegtuya Soyombotulga Gunji-anh Operational Self-Sufficiencyb 100.2 136.4 89.7 92.3 81.8

Operational Self-Sufficiency Excluding Financing Cost

100.2

215.1

96.4

103.4

86.2

Operating Cost Ratioc 20.1 18.6 8.7 19.3 21.7

CMC = Credit Mongolia Cooperative. a ‘MONCORD’ is the formal name of the cooperative, not abbreviation. b Operating income/(operating costs + financing costs + loan loss provisions). c Total operating cost/total loan amount disbursed. Source: Operations Evaluation Mission estimates. 39. As of May 2002, out of 436 business entities that received subloans under the Project, 38% or 167 enterprises were still operating as registered enterprises. The overall survival rate of the subborrower MSEs is expected to be higher than 38%, as only registered entities are traceable and no information is available on MSEs that are operating as nonregistered (informal sector) businesses. The rates of return on equity and profit levels of the two representative MSEs indicate their high sustainability (para 36).

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A. Socioeconomic Impact 40. The Project’s socioeconomic impact assessment is based on the subloan outreach and the change in income level of subborrowers before and after receiving subloans. The credit guidelines defined the target subborrowers as (i) microenterprises such as sole proprietorship including individuals and cooperatives with no minimum capital requirements, and (ii) small businesses such as limited liability companies with a minimum capital requirement of MNT500,000. Out of the 569 project subloans, 46% were in excess of $5,000 equivalent, and it is believed that those subloans were directed more towards small-and-medium enterprises than toward microenterprises. The PCB subborrower profiles resulting from an OEM-sponsored survey (Appendix 7) reveal that sample subborrowers were well-established enterprises with at least two employees and an average of MNT3 million net income in 1997 before receiving the

13

project subloans. The outreach to microenterprises was limited because the project design, especially the credit guidelines, was tailored more for loans for small and medium enterprises. The guidelines’ subborrower eligibility criteria—existing businesses for more than 3 years, sound financial history, and 100% collateralization of the value of the subloan amount—practically excluded microenterprises with small assets and no credit history. 41. Based on the survey, it is estimated that there was an income increase of 70% among the PCB subborrowers after taking the subloans. The survey respondents also replied that, on average, 12 jobs were generated after they took subloans due to expansion of businesses. Their income increase and business expansion were attributed not only to the project subloans but also to other factors, including loans provided by other commercial banks. However, the subborrowers stated that PCB subloans under the Project were one of the few credit services available for MSEs at that time. 42. Compared to the PCB subborrowers, SCC members are microenterprises without employees or those that are operated by family members. According to the survey, after receiving the loans from the SCCs, the SCC members’ net income increased by 80%. However, the SCC members’ average net income level is smaller than the PCB subborrowers’ income level: average net income in 2001 among the surveyed SCC members was MNT1.6 million compared with MNT5 million for the PCB subborrowers surveyed. Because of the small size of SCC members’ businesses, the impact on additional job creation due to their business expansion after receiving loans was less significant. It is estimated that 0.8 jobs were generated after the SCC member enterprise received the loan as compared with 12 jobs created by a PCB subborrower enterprise. SCCs are providing microfinance services to low-income people who otherwise have limited access to regular commercial banking services.17 The overall amount of employment retained or generated through the Project’s SCC creation is difficult to determine as not all the existing SCCs can be attributed to the Project.

B. Environmental Impact 43. Since the Project involved small-scale economic activities such as retail trading, food processing, and services, it had minimal environmental impact.

C. Impact on Institutions and Policy 44. The attached TA aimed to improve the institutional capabilities of MSWL, PCBs, and NGOs for market-based lending to microenterprises in the private sector. The TA is considered successful in terms of facilitating commercial-based business and loan operations. During the Project, 86 training courses on computer skills, banking, business planning, bookkeeping, and cooperative management were provided for the staff of MSWL, PCBs, NGOs, and for subborrowers. The training was regarded as useful because those skills were indispensable for commercial business operations and staff and subborrowers had little exposure to those subjects previously. The TA taught the PCB staff methodologies for loan screening, asset assessment, and cash flow projection, in which the staff had little experience before the Project. The Project facilitated training for NGOs on how to operate SCCs, and training of trainers for business development for microenterprises. As a result of the training, the NGOs became able to establish the SCCs. 17 X.A.C. (the “Golden Fund for Development” in Mongolian) Bank, which was established in 1999 under United

Nations Development Programme MicroStart-Mongolia Project, is providing microfinance services.

14

45. However, the TA lacked the institutional development for microfinance operations such as devising loan products, collateral requirements, and repayment mechanisms suitable for microenterprise subborrowers. The TA consultant developed new credit guidelines in 1995 to improve the PCBs’ subloan repayment rate. The cumulative subloan repayment rate was around 50% at the end of 1995 due to the PCBs’ ineffective loan screening and collection operations. The new guidelines introduced stricter lending procedures such as rigorous business plan screening and an approval system by the loan committee. The new guidelines became effective in January 1997, and at the end of the year the overall repayment rate was about 90%. However, the credit guidelines focus on low risk subloans and the higher repayment rate had an adverse impact on the outreach. As the result of the stricter guidelines, potential microenterprise subborrowers were crowded out. The credit guidelines could have devised other measures to improve the repayment rate while maintaining the outreach to low-income people, such as adjusting repayment frequency to a subborrower’s cash flow patterns, expanding a client base through group lending, or improving loan officers’ efficiency in monitoring.

D. Overall Assessment 46. Relevance. The Project’s concept to reduce poverty through credit services to MSEs was relevant as the emerging MSEs had little opportunity to obtain capital. The implementation arrangements described in the appraisal report—subloan interest rate being consistent with market rates, subloan maturity based on subborrowers’ cash flows, and NGO involvement in expanding outreach—were appropriate for establishing sustainable microfinance operations. The Project’s institutional arrangement of sublending through the PCBs was viewed as unavoidable because there were no alternative nonbank financial institutions at the time of appraisal. However, the institutional analysis of PCBs’ overall financial health, PCBs’ experience in MSE lending, and NGOs’ capabilities in MSE mobilization could have been more rigorous. The PCBs were unable to meet all four prudential ratios required by BOM. The PCBs did not devise ways to reduce the transaction costs for the poor to expand their outreach. The NGOs were at a nascent stage and not experienced enough in mobilization of microenterprise subborrowers. The project credit guidelines were effective in improving repayment rates but targeted the more established small and medium enterprises by setting strict eligibility criteria. By contrast, the SCCs became microfinance institutions in line with the project objective. The SCC concept was highly relevant considering SCCs were filling unmet credit demands by poorer members of the society. Considering these factors, the Project is assessed as relevant. 47. Efficacy. The Project’s achievement of the immediate objective of employment generation was limited, attaining 54% of the overall appraisal target. Insufficient data is available to determine the employment generation impact by SCCs. The five pilot SCCs created under the Project had 937 members in 2001 who benefited from SCC credits in terms of employment generation or retention. On balance, the Project is less efficacious. 48. Efficiency. The Project’s achievement in terms of the number of subloans was low. The PCBs on average made 114 subloans per year; to meet the target, an average of 800 subloans per year was required. Except 1995, the subloan repayment rates were over 80%. The repayment proceeds and interest rate payments from the PCBs to BOM are now utilized as a revolving fund to generate further subloans to MSEs, but the actual lending volume of the revolving fund has not yet been reported. The five SCCs created under the Project are cost efficient and have high lending volumes though not at the level originally targeted for the Project. Overall, the Project is considered less efficient.

15

49. Sustainability. Sustainability of the revolving fund depends on the viability of the four commercial banks that are now providing subloans to MSEs. In the medium-term, the revolving fund operation is expected to be sustainable as profitable credit operations in the banking sector have been reported to grow since 2001. For the longer-term sustainability, further financial system development is required in the Mongolian banking sector. The SCCs have been growing with little external financial assistance and are financially viable. The Ministry of Finance and Economy (MOFE)’s supervisory unit for nonbank financial institutions and new cooperative legislation are expected to enhance their long-term accountability. The SCC concept has been further developed in a recent ADB microfinance operation in Mongolia18 that supports institutional building of savings and credit unions in rural areas. This reflects the lesson from the Project that existing commercial banks could not meet the demands for rural financial services. Overall, the Project’s sustainability is assessed as likely. 50. Institutional Development. The training provided under the attached TA benefited the staff of MSWL, PCBs, NGOs, and subborrowers by providing necessary technical skills in business planning, and cooperative operations to which staff and beneficiaries had not been exposed during the planned economy. The Project suffered from the collapse of the PCBs and disrupted operations of the PMU, which were caused by factors largely external to the Project, including the prolonged banking crisis and frequent change of the Government. The reorientation of the Project by the attached TA demonstrated the effectiveness of flexible implementation. The SCC pilot scheme had a multiplying effect and SCCs became mainstream microfinance institutions in Mongolia. The operational guidelines for SCC developed under the TA were translated into Mongolian and are used not only for the project SCCs but also other independent SCCs created after the Project. Establishing prudential regulation and supervision systems for SCCs is now urgently required to assure their legitimacy and accountability. The Project’s institutional development impact was significant.

E. Overall Project Rating 51. Based on the above assessment, the overall rating for the Project is partly successful, just below the threshold between successful and partly successful.19 Although the TA’s reorientation of the Project and the pilot SCCs were successful in creating financial intermediaries for low-income people, the sublending through the PCBs did not achieve the appraisal target. The reorientation and establishment of alternative intermediaries should have been done at a much earlier stage.

F. Assessment of ADB and Borrower Performance 52. ADB was responsive to requests of the PMUs for addressing the low repayment rate and changing the subloan ceiling to expand lending. ADB’s flexibility in extending the implementation period to facilitate the SCC establishment allowed lending to lower-income groups, in line with the project objective. ADB’s performance was short of highly satisfactory because its assessment of the PCBs’ institutional capability in microlending should have been more prudent and the weakness in the project design in reaching the poor through microlending should have been corrected earlier. The implementation performance of MSWL was partly satisfactory. The PMU operation was disrupted by frequent changes in its director, and some loan covenants were not complied with. 18 Loan 1848-MON(SF): Rural Finance Project, for $8.7 million, approved on 25 October 2001. 19 Based on the current four-category rating system (highly successful, successful, partly successful, and

unsuccessful).

16

V. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS

A. Key Issues for the Future 53. Outreach to the Poor. The onlending through the PCBs was less effective in reaching the originally intended poor beneficiaries because the project design had little focus on incentives and institutional capabilities of the commercial banks for tailoring subloans to the target group. Microlending to those who do not have access to regular commercial banking services requires special lending modalities. Loan products, disbursement, and repayment mechanisms need to be designed according to the demands of the poor. This involves establishing appropriate loan amounts, loan terms, collateral requirements or substitutes, and possibly, compulsory savings or group contribution requirements. For example, loan repayment for the poor needs to be based on the cash flow patterns of borrowers or small and frequent installments to avoid large sum of repayment at one time. Loan purpose should be flexible because the poor have many unmet needs and the fungibility of money cannot prevent the loan being used for other than designated purposes. The poor often have very few assets and traditional collateral such as land or property is not available. Alternative collateral or collateral substitutes should be developed such as group guarantees, compulsory savings, or contributions. 54. An SCC type of financial intermediary has been proven to be effective in reaching the poor not only in this Project but also in other countries, provided that such intermediaries are legitimate and properly regulated under prudential regulations. In the case of Mongolia, SCCs are not yet regulated, and introducing prudential regulations is urgently necessary to enhance their long-term accountability. 55. Financial Viability versus Outreach. Given the high unit cost of administering small loans, financial institutions tend to provide bigger loans to wealthier clients. The Project’s attempt to improve the PCBs’ financial performance and repayment rate led to stricter subborrower screening, resulting in crowding out the originally intended microenterprise beneficiaries. This suggests that financial institutions’ viability and outreach may be mutually exclusive. However, financial viability and outreach can be achieved together. To maximize their outreach, institutions must be financially sustainable. They must be able to cover all their costs, mobilize their own resources, protect their funds against erosion from inflation and nonrepayment of loans, and make a profit to finance their expansion. The successful microfinance institutions operating today20 have achieved financial viability and outreach through various measures such as removal of interest rate ceilings, savings mobilization, lending through joint-liability groups, and self-sustaining branch operations. It is important for microfinance projects to use financially sound, self-reliant institutions as intermediaries. Feasibility studies need to ensure that certain preconditions exist for such institutions, such as favorable financial sector climate, effective demand for microlending, and commitment to profitability and sustainability in microfinance operations.

20 Examples of such microfinance institutions include the Bank for Agriculture and Agricultural Cooperatives in

Thailand, Bank Rakyat Indonesia, and Association for Social Advancement in Bangladesh.

17

B. Lessons Learned 56. Key lessons learned from the Project are the need for (i) differentiating lending to microenterprises from that to small and medium enterprises, and tailoring project objectives and design accordingly; and (ii) more prudent institutional assessment of the performance and technical capabilities of the financial intermediaries such as PCBs. 57. The Project’s subborrowers were more skewed toward small and medium enterprises than toward microenterprises and the PCBs’ loan administration was tailored more for the former. The PCBs’ were not provided with skills for microenterprise credit criteria, underwriting, loan administration, and monitoring. The feasibility study conducted under the project preparatory TA (footnote 2) noted that the PCBs were lending to microenterprises; however, further analysis of the loan administration and credit criteria might have helped predict the weakness in the PCBs’ capacity to generate an adequate volume of microenterprises loans to the targeted subborrowers. The feasibility study was not thorough in analyzing microcredit delivery capabilities of the existing institutions. The study focused on utilizing the existing commercial banks, which were financially weak and ultimately failed. The fragile conditions of those banks were widely known. Alternative lending institutions should have been discussed at an earlier stage.

C. Follow-Up Actions 58. BOM should keep a separate account record for the remaining funds from the Project at the special time deposit account, which are now being relent to the commercial banks for MSE subloans. BOM should immediately develop a monitoring system to ensure that the funds are directed towards MSEs at market lending terms and the subloan program is operated on self-sustaining basis. 59. The OEM recognizes that MOFE has established a supervisory unit for nonbank financial institutions and proposed a new cooperative law (footnote 15 and para. 49); however, further technical improvement is suggested for the unit to be fully operational. It is recommended that, by the first quarter of 2003, MOFE strengthen the unit by improving staff’s technical competency and establishing a management information system of prudential monitoring for nonbank financial institutions.

PROJECT FRAMEWORK

Narrative Summary

Measurable Indicators

Project Completion Report

Project Performance Audit Report

. Goal: Reduce poverty by mitigating

adverse socioeconomic impacts of structural adjustments and transformation of the economy on the poor

Increased income for over 10,000 persons

Objective: Create and sustain

employment and income opportunities for the employable poor and women in Ulaanbaatar City

- At least 10,000 jobs were

retained and generated in existing and new businesses financed by subloans until end-1997.

- At least 95% of subprojects are profitable.

- At least 30% of jobs created and subloans given under the Project benefit women.

- As of 30 September 1999,

5,360 jobs were retained or generated (3,804 jobs retained and 1,556 new jobs created).

- 97% of subprojects were profitable.

- 47% of jobs created under the Project benefited women.

- As of 30 September 1999,

5,360 jobs were retained or generated (3,804 jobs retained and 1,556 jobs created).

Outputs:

1) Establishment of an efficient,

effective, and sustainable program of financial and non-financial services to support new and existing private micro and small enterprises in Ulaanbaatar.

- At least 4,000 loan

applications for loans smaller than $5,000 (in togrog equivalent) were approved until end-1997.

- At least 70% of businesses are in operation 3 years after subloan approval.

- 567 subloans (later revised

to 569) were made under the Project.

- 96% of businesses funded under the Project were operational 3 years after subloan approval.

- By the end of 1998, 569

subloans were made through the participating commercial banks (PCBs).

- By the end of December 2001, loans were made to at least 937 savings and credit cooperative members.

- As of 9 February 1999, 309 subloans or 54% of the total subloans made through PCBs were for $5,000 equivalent or less.

Narrative Summary

Measurable Indicators

Project Completion Report

Project Performance Audit Report

- As of 9 February 1999,

34% of the total subborrowers or 167 enterprises were operating as registered business entities.

2) Improvement in institutional,

managerial, and technical capabilities of the Ministry of Social Welfare and Labor (MSWL), PCBs, and non-government organizations (NGOs) with respect to market-based lending to microenterprises in the private sector

- At least 10 skill

development training courses for microentrepreneurs are conducted per annum.

- Ten NGO staff, six PCB staff, and two MSWL staff participated in training of trainers programs by end 1995.

- No. of training courses

provided: 19 (1995); 34 (1996); 25 (1997); 8 (1998) for a total of 86 over 4 years.

- No. of staff trained in Training of Trainers programs by the end of 1995: 31 (NGO); 13 (PCBs); 12 (MSWL)

- From 1994 to 1998, 86

skill development training courses on the subjects of: computer, accounting, business planning, banking and vegetable farming were provided to staff of MSWL, PCBs, NGOs, and to subborrowers.

3) Development of project

management and coordination arrangements

- Project office is staffed in

MWSL in first quarter 1994.

- Collaborative arrangement and networking among MWSL, PCBs, and NGOs are formalized before project inception.

- Subloan collection rate is at least 90% of due and payable throughout project implementation.

- Organization, policies, and procedures of PCBs follow proposed structures.

- Project Management Unit

was established in May 1994.

- Memorandum of understanding between Bank of Mongolia, PCBs, and NGOs were developed in 1994.

- Subloan collection rates were: 100% in 1994; 50.6% in 1995; 84.8% in 1996; 91.3% in 1997; and 94.7% in 1998.

- Organization, policies, and procedures of PCBs were followed; however, PCBs failed to provide service charges to NGOs for introducing members to PCBs.

Narrative Summary

Measurable Indicators

Project Completion Report

Project Performance Audit Report

Activities 1. Establish Project Management

Unit. 2. Recruit project advisor. 3. Procure office equipment and

vehicle. 4. Collect benchmark information

based on loan applications with PCBs and verify them with the assistance of NGOs.

5. Release loan funds according to micro-credit demand to PCBs.

6. Recruit domestic consultants. 7. Develop curricula and training

modules and conduct training courses (i) for training of trainers in MSWL, the PCBs, and NGOs; and (ii) for social preparation of subborrowers.

8. Commence subproject lending. 9. Establish benefit monitoring

and evaluation system and conduct regular surveys.

10. Hold regular meetings of steering committee, review and analyze quarterly Management Information System and progress reports, and suggest required measures if necessary.

11. Periodically review interest rates and suggest alternations if required.

12. Conduct joint annual review of project progress and incorporate modifications.

13. Conduct impact study and prepare project completion report upon project completion.

Input/Resources Project Budget ($’000) Provision of Credit 3,000

(Appendix 2 of the project completion report summarizes the Project’s achievements against the proposed activities at appraisal.)

Project Cost (actual) ($’000) Provision of Credit 3,024 Institutional Support 61 Total 3,085

Source: Employment Generation Project appraisal report, project completion report, and Operations Evaluation Mission.

Ardyn ITI Subtotal Ardyn ITI Subtotal Ardyn ITI Subtotal Ardyn ITI Bayanbogd Agricultural Subtotal

88 29 117 0 35 35 71 33 104 0 40 19 49 108

89 29 118 0 37 37 81 44 125 0 51 26 56 133

1 0 1 0 2 2 10 11 21 0 11 7 7 25

170,800 55,500 226,300 0 68,500 68,500 203,600 98,100 301,700 0 420,080 160,000 229,500 809,580

170,800 55,500 226,300 96,584 79,889 176,473 36,469 83,013 119,482 30,362 378,537 112,000 165,799 686,698

1,919 1,914 1,918 0 1,851 1,851 2,514 2,230 2,414 0 8,237 6,154 4,098 6,087

0 0 0 0 0 0 4 3 7 0 40 26 40 106

4,169 4,157 4,166 0 4,022 4,022 4,455 3,951 4,278 0 10,334 7,720 5,141 7,637

100.0 100.0 100.0 43.5 60.5 50.6 90.3 75.5 84.8 91.9 97.7 100.0 93.9 91.3

0.0 0.0 0.0 100.0 61.3 82.5 100.0 65.6 76.1 100.0 20.8 0.0 84.0 17.9

7.7 7.9 7.8 — 6.4 6.4 2.7 3.2 2.9 — 4 2.7 2.8 3.4

— — 10.9 — — 7.8 — — 6.6 — — — — 5.7

1994 409.45 1995 460.33 1996 564.23 1997 797.10

Appendix 2 21

Item

a MNT/$ annual average exchange rate (Bank of Mongolia):

Collection rateb (%)

Delinquency ratec (%)

Weighted Average Project Monthly Interest Rate (%)

Weighted Average Market Monthly Interest Rate (%)

ITI = Investment and Technological Innovation.— = not available.

b Cumulative on total disbursements.c On the outstanding loans (portfolio at risk).

1994 1995 1996 1997

PARTICIPATING COMMERCIAL BANK LENDING

Number of subborrowers

Number of loans

Number of repeated loans

Amount of loans (MNT '000)Loan amount outstanding (MNT '000)Average loan size (MNT '000)

Number of loans over $5,000 equivalent

Average loan sizea ($)

Source: Operations Evaluation Mission estimates.

Item Ardyn ITI Bayanbogd Agricultural Subtotal Ardyn ITI Bayanbogd Agricultural Total

Number of subborrowers 0 0 12 60 72 159 137 31 109 436

Number of loans 0 2 35 119 156 170 163 61 175 569

Number of repeated loans 0 2 23 59 84 11 26 30 66 133Amount of loans (MNT '000) 0 20,000 356,000 775,500 1,151,500 374,400 662,180 516,000 1,005,000 2,557,580Loan amount outstanding (MNT '000) 30,362 77,248 280,000 371,019 758,629 30,362 77,248 280,000 79,599 467,209

Average loan size (MNT '000) 0 10,000 10,171 6,517 7,381 2,202 4,062 8,459 5,743 4,495

Number of loans over $5,000 equivalent 0 2 35 110 147 4 45 68 150 260

Average loan sizee ($) 0 11,788 11,990 7,682 8,701 4,305 6,097 10,170 6,869 6,328

Collection ratef (%) 91.9 91.3 100.0 95.2 94.7 91.9 — — 92.1 79.5 - 93.5 g

Delinquency rateh (%) 100 74.1 0.0 13.0 17.9 100.0 — — 100.0 —

Weighted Average Project Monthly Interest Rate (%) — 4 4 4.4 4.1 5 4.5 3.3 4 4.1

Weighted Average Market Monthly Interest Rate (%) — — — — 3.8 — — — — —

— = not available.d Since the actual subloan lending ceased by the end of 1998, figures for May 2002 are cummulative data for 1994-1998 except for the project monthly interest rate. The dollar amount for May 2002 is based on the weighted average exchange rate of cumulative loans by each PCB.

rate can not be calculated. The portfolio collection rate is stated as a range considering the worst and best case collection scenario of Bayanbogd Bank and Investment and Technological Innovation Bank. Based on the actual collection rate of Agricultural and Ardyn Bank, the most probable collection rate is slightly over 90%.

f Cumulative on total disbursements.

h On the outstanding loans (portfolio at risk).

g Portolio information for Bayanbogd and Investment and Technological Innovation Bank as of May 2002 was not available. Therefore the actual overall portfolio collection rate and current deliquency

PARTICIPATING COMMERCIAL BANK LENDING (cont'd.)

1998 848.35

1998 May 2002d

e MNT/$ annual average exchange rate (Bank of Mongolia):

22 Appendix 2

Item 1999 2000 2001 1999 2000 2001 1999 2000 2001 1999 2000 2001 1999 2000 2001

Membership (no.) 40 46 58 83 200 555 54 108 116 115 129 161 33 40 47

Member characteristics (no.)

19 women; 21 men

21 women; 25 men

16 women; 42 men All women

140 women; 60 men

389 women; 166 men

39 women; 15 men

87 women; 21 men

93 women; 23 men

56 women; 59 men

90 women; 39 men

113 women; 48 men

30 women; 3 men

32 women; 8 men

38 women; 9 men

Entry fee (one time)c 0.0 0.0 0.0 2,000.0 0.0 0.0 1,000.0 1,000.0 1,000.0 2,000.0 2,000.0 2,000.0 3,000.0 3,000.0 4,000.0

Monthly membership feec 1,000.0 3,000.0 3,000.0 500.0 1,100.0 1,100.0 0.0 0.0 0.0 2,000.0 2,000.0 2,000.0 0.0 0.0 0.0

Total assets 5.3 9.9 28.6 25.6 97.5 290.5 11.7 — — 131.9 102.3 74.9 — 4.7 6.9

Capital 5.3 6.7 13.2 9.8 27.3 59.2 7.2 13.3 8.0 94.8 23.5 40.4 2.1 3.3 4.8

Loans 12.7 17.8 46.5 24.5 93.5 247.2 87.3 118.7 111.3 117.4 — 162.7 2.4 4.5 6.9

Savings — 3.2 15.2 13.9 55.5 171.0 1.1 7.8 9.5 2.2 67.3 21.0 0.1 1.4 2.1

Loan interest rate (%, monthly) 6.0 6.0 6.0 5.0 4.0-4.8 3.0-4.8 8.0 6.0 5.5 6.5 6.0 5.5 5.0 5.0 5.0

Savings interest rate (%, monthly) — 2.0-2.5 2.0-2.5 2.0 1.0-2.0 0.5-1.8 2.2 2.2 2.0 3.0 1.5-2.0 1.5-1.8 2.5 2.5 2.5

Average loan size 0.5 0.9 1.6 1.3 1.3 1.4 2.0 2.0 2.0 2.5 2.0 2.0 0.25 0.5 0.5

Maximum loan amount 2.0 1.6 11.0 3.7 5.4 6.6 15.0 2.5 2.5 10.0 3.5 3.5 0.5 1.0 1.0

Loan maturity (months) 1-3 1-6 1-10 3-6 3-6 3-12 1-3 3-6 3-6 3-6 3-6 3-6 3-12 3-6 3-6

Collateral requirements Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Loan collection rate (%) 100.0 100.0 98.0 100.0 99.0 97.0 98.0 90.0 91.0 90.0 90.0-94.0 90.0-94.0 100.0 85.0-90.0 85.0-90.0

— = not available. CMC = Credit Mongolia Cooperative.a Figures in MNT million, except as indicatedb MONCORD is the formal name of the cooperative, not abbreviationc Figure in MNT.

MONCORDb

Year Year Year

SAVINGS AND CREDIT COOPERATIVE PROFILESa

Appendix 3 23

Source: Operations Evaluation Mission estimates.

Tsetsegtuya SoyombotulgaCMCYear Year

Guji -Anh

24 Appendix 4

Item 1993 1994 1995 1996

1. Paid-up capital 814.2 1,641.8 1,314.0 1,611.92. Capital 1,729.4 3,510.0 3,000.4 (13,612.4)3. Total risk-weighted assets 10,859.1 28,717.4 36,512.7 44,291.54. Capital/total assets (%) 15.9 12.2 8.2 (30.7)5. Liquid assets 3,396.9 7,954.2 10,939.6 4,430.96. Liabilities 9,947.6 30,647.0 42,541.2 48,923.47. Liquid/deposits (%) 34.1 26.0 25.7 9.18. Liquid assets (–) or (+) (1,606.3) (2,437.7) (40,572.1) 4,375.39. Outstanding loans 8,302.0 23,160.0 26,089.1 24,359.0 a. current 7,157.9 19,549.0 19,422.7 9,077.7 b. past due 1,144.1 3,584.1 6,062.5 3,733.3 c. substandard — — — 1,216.2 d. doubtful — — 603.9 2,691.6 e. loss — 26.9 — 7,640.210. Directed loans — — — 3,340.611. Interest on directed loans — — — 1,087.312. Provisions for loan losses 83.0 258.2 556.8 9,418.213. Provisioning — 859.6 970.9 10,316.914. Provisioning (-) or (+ ) (83.0) 601.4 414.1 898.715. Profit or loss 2,048.9 2,218.8 (1,205.9) (16,566.1)16. Shortage of capital (100.5) 797.6 2,476.5 20,256.1

— = not available.Note: Ardyn Bank ceased operations in 1996.Source: Bank of Mongolia.

FINANCIAL STATEMENTS OF PARTICIPATING COMMERCIAL BANKS

Table A4.1: Ardyn Bank(MNT million)

Item 1993 1994 1995 1996 1997 1998 1999

1. Paid -up capital 670.0 1,327.5 1,386.3 1,497.0 3,306.2 3,360.2 3,360.22. Capital 1,538.1 2,567.3 3,460.6 212.8 2,788.0 (8,601.9) (5,212.0)3. Total risk-weighted assets 9,518.3 16,608.1 20,845.9 21,680.7 18,783.1 15,823.2 14,400.04. Capital/total assets (%) 16.2 15.5 16.6 1.0 14.8 54.4 (36.2)5. Liquid assets 7,029.8 7,451.0 13,308.3 9,428.5 20,834.2 611.4 1,636.86. Liabilities 11,790.6 16,785.8 25,456.3 25,903.3 38,760.9 26,772.5 25,677.97. Liquid/deposits (%) 59.6 44.4 52.3 36.4 53.8 2.3 6.38. Liquid assets (–) or (+) (4,907.5) (4,429.6) 2,395.5 (4,765.9) (13,857.2) 4,207.6 2,985.39. Outstanding loans 6,590.5 11,407.4 14,841.0 15,242.8 13,130.2 24,912.0 23,055.4 a. current 5,997.4 10,667.2 14,055.7 8,215.4 7,125.6 6,760.8 7,815.8 b. past due 593.1 649.8 700.9 1,673.6 2,429.9 904.1 2,881.9 c. substandard — — — 1,457.0 764.9 2,127.5 737.8 d. doubtful — — 84.4 2,002.0 1,239.5 6,654.5 3,919.4 e. loss — 90.4 — 1,894.8 1,570.3 8,465.1 7,700.510. Directed loans — — — — — — —11. Interest on directed loans — — — — — — —12. Provisions for loan losses 65.9 203.6 189.8 3,358.9 2,476.8 12,400.9 9,951.613. Provisioning — 409.7 329.2 1,806.8 2,093.7 8,069.6 2,333.914. Provisioning (–) or (+ ) (65.9) 206.1 139.4 (1,552.1) (383.1) (4,331.3) (7,617.7)15. Profit or loss 1,133.3 (295.3) 222.0 248.6 109.6 (7,641.5) (749.7)16. Shortage of capital (110.4) (76.1) (333.7) 3,039.3 (534.0) 10,500.7 6,940.0

— = not available.Note: Figures are as of September 1999. Investment and Technological Innovation Bank was closed in December 1999. Source: Bank of Mongolia.

Table A4.2: Investment and Technological Innovation Bank(MNT million)

Appendix 4 25

Item 1993 1994 1995 1996 1997 1998 1999

1. Paid-up capital 73.5 106.9 401.9 403.7 403.7 403.7 403.72. Capital 74.5 107.1 398.2 404.2 411.0 423.7 408.33. Total risk-weighted assets 85.7 124.1 435.9 408.1 453.0 549.1 610.94. Capital/total assets (%) 86.9 86.3 91.4 99.0 90.7 77.1 68.95. Liquid assets 6.0 19.2 15.0 35.9 362.8 390.0 101.26. Liabilities 7.7 23.1 28.9 18.0 171.3 515.4 278.97. Liquid/deposits (%) 77.9 83.1 51.9 199.4 211.7 75.7 34.38. Liquid assets (–) or (+) (4.6) (15.0) (26.2) (32.7) (332.0) (297.2) (51.0)9. Outstanding loans 81.0 89.0 365.9 231.5 284.3 387.5 441.5 a. current 81.0 89.0 365.9 195.8 275.6 379.0 432.9 b. past due — — — 0.1 — — — c. substandard — — — 17.8 — — — d. doubtful — — — 9.6 — — — e. loss — — — 8.2 8.7 8.5 8.610. Directed loans — — — — — — —11. Interest on directed loans — — — — — — —12. Provisions for loan losses 0.8 0.9 3.7 19.4 11.5 12.3 12.913. Provisioning — — — 15.8 16.6 16.6 16.614. Provisioning (–) or (+ ) (0.8) (0.9) (3.7) (3.6) 5.1 4.3 3.715. Profit or loss 74.4 13.0 20.1 5.5 7.5 20.0 4.016. Shortage of capital (61.6) (88.5) (332.8) (343.0) (356.6) (357.8) (347.5)

— = not available.Note: Figures are as of 30 September 1999. Bayanbogd Bank was closed in December 1999.Source: Bank of Mongolia.

Table A4.3: Bayanbogd Bank(MNT million)

26 Appendix 4

Item 1993 1994 1995 1996 1997 1998 1999

1. Paid-up capital 344.9 444.2 465.2 488.8 702.8 834.9 —2. Capital 670.0 1,077.6 (395.0) (2,574.7) (2,066.9) (3,996.8) (3,254.8)3. Total risk-weighted assets 8,533.0 9,504.3 11,252.9 8,567.5 4,441.3 1,091.8 4,097.94. Capital/total assets (%) 7.9 11.3 (3.5) (30.1) (46.5) (366.1) (79.4)5. Liquid assets 1,012.0 1,473.0 745.2 1,945.2 2,443.9 1,711.2 2,505.16. Liabilities 7,886.0 9,380.7 10,610.5 13,209.1 11,361.6 11,220.7 9,843.77. Liquid/deposits (%) 12.8 15.7 7.0 14.7 21.5 15.3 25.48. Liquid assets (–) or (+) 407.5 215.5 (10,476.4) 432.4 (398.8) 308.6 (733.2)9. Outstanding loans 6,390.9 5,070.9 7,955.2 3,717.5 3,407.3 4,341.4 6,184.8 a. current 5,263.5 3,957.5 5,076.3 1,270.2 1,233.9 1,559.9 658.0 b. past due 1,127.4 997.4 794.3 767.2 481.4 802.5 2,763.4 c. substandard — — — 242.4 217.6 108.4 233.3 d. doubtful — — 2,084.6 691.1 583.1 260.0 144.6 e. loss — 116.0 — 746.6 891.3 1,610.6 2,300.910. Directed loans — — — — — — —11. Interest on directed loans — — — — — — —12. Provisions for loan losses 63.9 165.5 1,101.0 1,173.1 1,254.4 1,791.3 2,403.213. Provisioning — 201.3 229.4 1,707.7 1,423.4 1,853.4 2,508.014. Provisioning (–) or (+ ) (63.9) 35.8 (871.6) 534.6 169.0 62.1 104.715. Profit or loss 110.9 64.8 (856.3) (3,311.3) (3,063.0) (5,066.6) (6,773.8)16. Shortage of capital 610.0 348.0 2,082.9 3,859.8 2,599.9 4,127.8 (325.5)

— = not available.Source: Bank of Mongolia.

Table A4.4: Agricultural Bank(MNT million)

Appendix 4 27

1995 1996 1997 1998 1999 2000 2001

1. Gross sales/income 108,601 84,526 110,201 94,799 199,914 546,395 300,1992. Cost of goods/services 96,013 73,886 101,799 49,670 109,744 368,098 170,3893. Net sales operating expenses 12,588 10,640 8,401 45,129 90,170 178,297 129,8104. Salaries 2,882 3,895 — 2,300 4,192 16,699 21,6955. Rent — — — — 580 9,446 2,5316. Utilities 3,153 — — 7,773 14,786 12,770 11,2447. Advertising — — — — 212 345 16,8738. Insurance 663 766 — 437 834 3,340 4,3399. Depreciation 327 2,824 — 3,225 4,273 7,139 6,89010. Other expenses 3,525 — — 17,270 35,264 81,825 45,41211. Total operating expenses 10,550 7,485 — 31,005 60,140 131,563 108,98512. Income before interest and

taxes 2,038 3,154 8,401 14,125 30,030 46,734 20,82513. Interest expense 224 1,150 — 4,420 25,735 20,473 12,41414. Income tax 304 525 1,260 1,456 644 3,939 1,26215. Net income 1,510 1,480 7,141 8,249 3,650 22,322 7,149

Source: Bayar's Construction.

REPRESENTATIVE MICRO AND SMALL ENTERPRISES INCOME STATEMENT

(MNT'000)Table A5.1: Bayar's Construction

Notes: The financial statement formats are inconsistent during the reported period. The financial statements for 1995-1997 are unaudited statements

28 Appendix 5

— = not applicable or not available.

and for 1998-2001 are audited statements.

Item

Appendix 5 29

1997 1998 1999 2000 2001

1. Gross sales/income 100,000 110,000 130,000 140,000 140,0002. Cost of goods/services 62,400 63,700 72,600 73,700 67,0003. Net sales/income 37,600 46,300 57,400 66,300 73,0004. Salaries 14,000 18,000 20,400 24,000 26,0005. Rent — — — — —6. Utilities 4,600 5,000 5,000 6,400 6,4007. Advertising 300 300 400 300 4008. Insurance 4,100 4,000 4,000 4,600 6,2009. Depreciation 2,100 2,600 3,000 3,000 3,00010. Other expenses 6,100 7,000 8,600 8,000 9,00011. Total operating expenses 31,200 36,900 41,400 46,300 51,00012. Income before interest and

taxes 6,400 9,400 16,000 20,000 22,00013. Interest expense 2,400 4,80014. Income tax 1,600 2,100 5,700 8,000 9,80015. Net income 4,800 4,900 5,500 12,000 12,200

a Unaudited financial statements.Source: Hereglee Impex Company.

Table A5.2 : Hereglee Impex Companya

(MNT'000)

— = not applicable.

Item

Item 2000 2001 2000 2001 2000 2001 2000 2001 2000 2001

1. Sales/interest income 2,778 10,508 33,829 114,917 9,834 18,972 29,552 42,603 1,978 1,8822. Cost services/interest expense — — 7,731 30,803 860 2,215 18,440 4,949 1173. Net sales/interest income 2,778 10,508 26,098 84,115 8,975 16,757 11,112 37,655 1,978 1,7654. Salaries 280 2,305 — — 885 1,390 1,404 1,326 788 7015. Rent 720 — — — 1,267 2,400 30 24,474 — —6. Utilities 157 1,776 — — 389 — 758 776 — —7. Advertising 60 118 — — — 873 331 — — —8. Insurance — 670 — — — 264 330 120 148 —9. Depreciation 95 278 — — — 121 1,255 — — 30910. Other expenses 290 4,416 — — 3,601 4,618 4,852 4,746 650 48411. Total operating expenses 1,602 9,563 14,059 46,020 6,142 9,665 8,959 31,441 1,586 1,49412. Income before interest and

Taxes 1,176 945 12,039 38,095 2,832 7,092 2,152 6,214 392 27213. Income tax 164 142 2,083 6,364 479 1,396 327 1,068 120 9614. Net income 1,012 803 9,956 31,731 2,353 5,696 1,825 5,146 272 175

Source: Income statements of the Savings and Credit Cooperatives for 2000 and 2001. Tsetsegtuya, and Soyombotulga are from audited financial statements and for MONCORD and Gunji-Anh are unaudited financial statements.

30 Appendix 6

— = not applicable or not available.CMC = Credit Mongolia Cooperative.

Year Year Year Year Year

(MNT'000)SAVINGS AND CREDIT COOPERATIVE INCOME STATEMENT

CMC Gunji-AnhSoyombotulgaMONCORD Tsetsegtuya

Note: Because there is no standard requirement for financial reporting of savings and credit cooperatives (SCCs), the SCCs' financial statements are inconsistent. The data for CMC,

Appendix 7 31

Beneficiary ProfileParticipating Commercial

Bank SubborrowersSavings and Credit Cooperative

Members

1. Gender 70% female; 30% male 56% female; 44% male

2. Average Age 52 47

3. Types of BusinessConstruction; Food Processing;Gas Station; Pharmacy; Printing Shop

Grocery Store; Stationary Store; Agriculture; Restaurant; Sewing; Hairdresser; Pawnbroker

4. Range of No. of Employees (before receiving the loan) 2 - 23 0 - 3

5. Range of No. of Employees (in 2001) 5 - 48 0 - 8

6. Average Loan Amount Received (MNT million) 4.4 2

7. Purpose of Loan Purchase of Equipment and Raw Materials Purchase of Raw Materials

8. Range of Net Income before Receiving the Loan (MNT million)

0.4 - 4.8a 0.3 - 1.9b

9. Range of Net Income in 2001 (MNT million) 3.5 -12.2 0.4 - 5.1

a Figures are as of December 1997.b Figures are as of December 2000.

SUMMARY OF BENEFICIARY SURVEY RESULTS

Source: Operations Evaluation Mission estimates.

Note: The Beneficiary Survey was conducted by the Operations Evaluation Mission in May 2002 on 10 existing subborrower enterprises funded through the participating commercial banks and 55 S avings and Credit Cooperative members.