By Antonio Graceffo, & Munkh-Orchlon Lkhagvadorj
Household debt in Mongolia is equal to around 22% of GDP. The majority of Mongolian adults are in debt and many are using non-bank financing. This includes pawn shops, animal loans, pension loans, credit from loan sharks, and other types of non-traditional credit. Many of these loans are short-term and have very high interest rates. A lot of Mongolians basically roll over their debts, living loan to loan.
Of the 3.3mn people living in Mongolia, around half, or 1,644,423, owe money to nonbank financial institutions (NBFIs). This means that around 84% of the adult population have outstanding loans from NBFIs. The average loan taken out is about $500 per customer, which is more than the average wage of $405 per month. But many citizens have multiple loans outstanding from different sources. That means the average indebtedness is much higher.
Additionally, about a quarter of the loans have a maturity of less than one month. That exacerbates the cycle of debt, with people borrowing and repaying loans on a rolling basis. The bad loan percentage among Mongolian NBFIs is 7.3%, compared to 1.2% for traditional banks in the US. About 71.4% of these loans are personal-use loans, thus they are not necessarily being used to invest in a business that will generate future income and break the debt cycle.
Pawn shops are extremely common in Mongolia. In Ulaanbaatar, the capital, nearly every shopping block has at least one. Interest rates run up to 6% per month, and if a borrower is late on a payment, the collateral is sold at auction.
Black lending or loan sharking is another form of non-traditional lending, with interest rates standing at roughly 1% per day. Usually, the loan is taken in the morning and repaid in the evening.
In the new economy, there are cash-borrowing apps that do not require collateral. Small loans of around $14 to $20 can be given to nearly anyone with a job. Failure to repay the loan results in a blacklisting and an inability to borrow in the future.
A more sophisticated scheme is Pocket.mn (see above), a cash app that promises loans of $14 to $10,000 for periods of 14 or 30 days. The app itself charges a fee of up to 1% and no interest. However, the app matches borrowers with lenders, and the lenders can charge whatever interest rate the law allows.
NBFIs and some pawn shops give loans that use animals or cars as collateral. The lender takes the title, but the borrower can keep the animal/s or car during the loan period. They only have to give up the animal/s or car if they default.
Nearly anything can be collateralised in Mongolia. Phone numbers with the number 9 or 8 are considered lucky and are the most expensive. Desirable phone numbers, starting with 9911, 9909, or 8811 can be used as collateral for loans of up to $14,300.
In addition to NFBIs, Mongolians also borrow from traditional banks. Pension loans, which account for more than 8% of all bank loans, can be for as much as 24 months of income and have interest rates as high as 16.8%.
Mongolian society can be broadly divided into two: rural and urban. Roughly 30% of rural dwellers live below the poverty line. Nonbank lending is heavily skewed toward rural areas, where the average loan is roughly double the loan taken on by a city dweller.
Roughly 25% of the population are nomadic herders. Their animals of course can be used as collateral for bank loans. Banks also offer herder loans, specifically used to finance herding operations. Outstanding herder loans total $768,707,901.88, with interest rates as high as 21.6%. Herding families receive very little cash income over the course of a year, and much of the cash that they do earn must be put towards loan repayment. When a winter is particularly harsh, the herder must borrow to buy fodder for their animals.
Each year, herders generally take loans in the autumn when their children start school or university. Usually, the children live in the ger (a yurt tent-house) with their parents during summer, but go to live with relatives or in a dormitory in the city during the academic year. Education costs roughly $1,000 per child per year, and that’s a lot of money for a herding family. Another cash demand comes from weddings, which are generally held in the autumn.
As herders do not have a monthly wage, loan repayment is coordinated with income, which is largely derived from the sale of meat and cashmere. Cashmere is sold in the spring and meat sales start in July when the animals have fattened up in the months after the long winter. The biggest meat sales, however, are in December when the meat can be frozen by leaving it outdoors. As a consequence, herders make most of their loan payments during this season.
The eligibility for a herder loan is based on the number of animals a family owns. At the nation’s leading bank, Khan Bank, herders with 1,000 or more sheep can borrow up to $8,660, while those with fewer than 1,000 can only borrow $5,760. To qualify, the borrower must have experience herding and must be registered in the Mongol bank livestock count or have a letter from the Soum (district) or Aimag (province) head of government. They must not have herding loans outstanding at other institutions.
Having the animals insured, while not a requirement, makes a herder more creditworthy. The same is true of herder loan risk insurance, as well as life insurance on the borrower. Another requirement is that the herder must live near a bank branch or payment centre. In a country with a population density of only two people per square kilometre, just getting to a bank to make payments can be problematic.
Another requirement is that the herder must have a history of making cash-based sales or have the capability of doing so in the future. Herders with subsistence numbers of animals may not qualify for a loan.
A large number of Mongolian households are living paycheck to paycheck or season to season. They take loans to survive, but because interest payments take up most of their cash income, they have to take another loan to meet expenses. The situation is most extreme among herders who, in addition to dealing with debt, have an extremely unpredictable income that’s dependent on the weather, disease and fluctuating meat prices.
Antonio Graceffo, PhD, China-MBA, is an economist and China analyst. He has spent over 20 years living in Asia, including seven years in China, two and a half in Taiwan and three in Mongolia. He conducted post-doctoral studies in international trade at the School of Economics, Shanghai University, and holds a PhD. from Shanghai University of Sport, and a China-MBA from Shanghai Jiaotong University. Antonio is the author of seven books about Asia, with focused on the Chinese economy. For the past 10 years, he has been reporting on the Chinese economy, the US-China trade war, investment, geopolitics and defence. In recent years, he has written a diverse range of articles on Mongolian economics and society.
This article originally appeared in BNE InteliNews on June 30, 2023
