The banking sector needs improved governance and stronger oversight

The focus in the recent second Economic Policy Forum organised by the World Bank Mongolia Representative office in Ulaanbaatar was on difficulties that the Central Bank is facing, their causes and ways to overcome them. A most interesting presentation was made by Mr. J.Unenbat, a former President of the Central Bank who now heads the Banking and Finance Faculty of the Finance and Economic Institute. The full text of his speech is given below.

The current situation in the banking sector of Mongolia can be aptly compared to a breezeless winter evening in Ulaanbaatar, when there is an air of foreboding, a hint that a strong wind can destroy much that stands tall and erect. Similarly, banks perceived to be strong and secure can prove to be as vulnerable as those apparently weak and small. To have a clearer idea of the real financial strength of banks and to make sure that the stronger among them do not stumble, we need to drastically improve the quality of oversight and also increase its frequency. This exercise has to be complemented by independent international audit of all banks.
Unfortunately, it appears that Central Bank measures on implementation of the Banking Law are tentative and not quite straightforward. This misleads and confuses observers, leading to rumour and speculation, and adding to the uncertainty in people’s mind that causes more losses to both banks and ordinary tax payers.
There is a positive aspect of the crisis we are passing through. It has revealed the areas where there is need for rectification and reform. The problem areas have been identified and this offers us a golden opportunity to begin mending them without delay.

And now I would like to talk about some governance issues that directly or indirectly hinder development of the financial sector.


1. Responsibility

Most internal difficulties in the banking sector are ultimately traceable to the standard of their corporate governance. The gest deficiency is a lack of  responsibility in the entire system that is now followed. At the moment, major stakeholders and boards of directors of banks have no compunction to serve the interests of shareholders, and, in a further extension of this principle, the executive management is not responsible to the board of directors. Our failure to adopt this simple principle of accountability has led to people who have caused huge losses to individuals and also to the state to evade any punishment. Indeed, not merely are they not held responsible, they also appear to be allowed to enjoy gains from their various acts of omission and commission.

The most effective way to escape responsibility is to serve the interests of those in  political power in return for protection, or, even better, to become oneself a politician. We have to put an end to the inappropriate practice that allows any profits to be claimed by private individuals while the losses are passed on to the public.

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