employment generation project (loan 1290-mon[sf])

7/31/2019 Employment Generation Project (Loan 1290-MON[SF])

1/39

ASIAN DEVELOPMENT BANK PPA: MON 26450

PROJECT PERFORMANCE AUDIT REPORT

ON THE

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

IN

MONGOLIA

September 2002


2/39

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 BankBOM Bank of Mongolia

ITI Investment and Technological InnovationMOFE Ministry of Finance and EconomyMSE micro and small enterpriseMSWL Ministry of Social Welfare and LaborNGO nongovernment organizationOEM Operations Evaluation MissionPCB participating commercial bankPCR project completion reportPMU project management unitPPAR project performance audit reportSCC savings and credit cooperativeSDR 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


3/39

CONTENTSPage

BASIC DATA iiEXECUTIVE SUMMARY iiiTYPICAL SUBBORROWERS vi

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

II. PLANNING AND IMPLEMENTATION PERFORMANCE 4A. Formulation and Design 4B. Achievement of Outputs 5

C. Cost and Scheduling 6D. Procurement and Construction 6E. Organization and Management 7

III. ACHIEVEMENT OF PROJECT PURPOSE 8A. Operational Performance 8B. Performance of the Operating Entity 8C. Financial and Economic Reevaluation 11D. Sustainability 11

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS 12A. Socioeconomic Impact 12

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

V. ISSUES, LESSONS, AND FOLLOW-UP ACTIONS 16A. Key Issues for the Future 16B. Lessons Learned 17C. Follow-Up Actions 17

APPENDIXES

1. Project Framework 182. Participating Commercial Bank Lending 213. Savings and Credit Cooperative Profiles 234. Financial Statements of Participating Commercial Banks 245. Representative Micro and Small Enterprises Income Statement 286. Saving and Credit Cooperative Income Statement 307. Summary of Beneficiary Survey Results 31


4/39

BASIC DATALoan 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 GenerationADTA 45 598,000 16 December 1993

KEY PROJECT DATA ($ million)As per ADB Loan

DocumentsActual

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

KEY DATES Expected ActualAppraisal 821 September 1993

Loan Negotiations 1012 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 DATAType of Mission No. of Missions Person-DaysFact-Finding 1 61Appraisal 1 70Inception 1 24Project Administration

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

2Previously named as Ministry of Population Policy and Labor at appraisal and Ministry of Health and Social Welfareat the time of project completion report.

3The Operations Evaluation Mission comprised M. Ozaki (Evaluation Specialist/Mission Leader), R. Bird(International Consultant), and B. Oyunbileg (Domestic Consultant).


5/39

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 negativeresult of the transition was the contraction of the Mongolian economy and reduced ability of theGovernment to fund social programs, which led to the emergence of absolute poverty and open

unemployment. In August 1992, the Government requested assistance from the AsianDevelopment Bank (ADB) for preparing and financing a project to reduce poverty andunemployment. 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 Governments poverty reductionefforts through the creation of employment and income opportunities for the employable poor byproviding credits to micro and small enterprises (MSEs). The Project was to finance, throughcommercial 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 andnew 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 wasthe Ministry of Social Welfare and Labor (MSWL).

The loan of SDR2.15 million ($3.0 million equivalent) from ADBs Special Fundsresources was made available through an imprest account with the Bank of Mongolia (BOM), inwhich the loan proceeds were deposited and from which the local currency equivalent wasdisbursed 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 interestearned. Subloan repayments and interest earnings of the time deposits were to form part of arevolving fund to be operated by BOM for making further subloans for the duration of theProject. 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 creditcooperatives (SCCs) to expand project outreach more directly to low-income groups. The ADBloan was fully disbursed in September 1999.

The quantitative target for employment generation was not fully achieved. As ofSeptember 1999, 5,360 jobs had been generated or retained (54% of the appraisal target) as aresult of onlending through the PCBs. From 1994 to 1998, 569 subloans amounting to MNT2.6billion were disbursed by the PCBs, attaining 14% of the appraisal target of 4,000 subloans. Theunder-achievement was attributable to the limited outreach to MSEs by the PCBs because ofthe weak institutional capability of the latter. Before new credit guidelines became effective in1997, most PCB loan officers lacked a clear understanding of loan appraisal and projectanalysis, 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 targetedoutreach, as well as underwriting criteria and monitoring tailored for MSEs. All PCBs wereclosed before the end of 1999 due to insolvency.

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


6/39

iv

income groups. Since the Project introduced the concept, SCCs have multiplied, and there arecurrently 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 memberhaving the right to one vote; policies and services have to be agreed upon by the members, andthe 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 requiredto assure their legitimacy and to prevent the possible collapse of their operations.

The socioeconomic assessment of the Operations Evaluation Mission (OEM) shows thatalmost half of the PCB subborrowers were well-established small or medium enterprises ratherthan the originally intended microenterprises. This is because the project design called for strictsubborrower eligibility criteria to increase the repayment rate, such as more than 3 years ofexisting business operations and sound financial history. The eligibility criteria practicallyexcluded microenterprises with limited assets and no credit history. SCCs, whose members runmicroenterprises without employees or are operated by family members, are a more suitablevehicle for providing loans to start-up microenterprises.

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

The OEM considers that the Projects rationale to generate and retain jobs through thedevelopment of MSEs was relevant, although the project formulation should have been more

rigorous in its institutional analysis, as the PCBs financial viability and microfinance operationalcapabilities were unproven. Employment generation through the PCB onlending was lower thanthe appraisal target. Although SCCs, which multiplied after the Project, are considered to beeffective in employment retention and generation among low-income people, the employmentgeneration impact of the five pilot SCCs created under the Project was small. In this regard, theProject is assessed less efficacious. In terms of the number of PCB subloans, the Project wasinefficient. The five SCCs were cost efficient, but their contribution to appraisal lending targetswas small. The Project is assessed less efficient. The PCB onlending operations becameunsustainable due the collapse of the PCBs. Repaid subloan proceeds are now relent by BOMto four new commercial banks for further onlending to MSEs. The Projects concept ofmicrofinance to MSEs thus continues; however, the sustainability of the revolving fund itselfdepends 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 externalfinancial assistance and are expected to be self-sufficient and sustainable. Overall, the Projectssustainability is assessed as likely. The attached TA provided the staff of MSWL, NGOs, andsubborrowers with necessary skills for commercial-based credit and business operation,although the credit guidelines developed under the TA failed to devise an effectiveimplementation modality to reach the low-income target people. The flexible projectimplementation 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 inline with the project objective. Overall, the Projects institutional development impact was


7/39

v

significant. Based on this assessment, the Projects rating is partly successful, just below thethreshold to successful.

Key lessons learned from the Project are the need for (i) differentiating lending tomicroenterprises from that to small and medium enterprises, and tailoring project objectives anddesign accordingly; and (ii) more prudent institutional assessment of performance and technical

capabilities of financial intermediaries. Issues identified relate to the conflict for microfinanceinstitutions between financial viability and outreach to the poor. Microlending to those who donot have access to regular commercial banking services requires special lending modalities.Loan products, and disbursement and repayment mechanisms should be designed according tothe needs of the poor. This involves appropriate loan amounts, loan terms, collateralrequirements or substitutes, and possibly, compulsory savings or group contributionrequirements. Microfinance projects targeting the poor should ensure that the designatedfinancial intermediaries have incentives and capabilities to implement such loan operations. Ifno such intermediaries exist, the creation of an alternative microfinance institution should beconsidered.

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 frominflation and nonrepayment of loans, and make a profit to finance their expansion. Given thehigh cost of administering large numbers of small loans, financial institutions tend to providebigger loans to better-off clients. However, financial viability and outreach can be achievedtogether through various measures including removal of interest rate ceilings, savingsmobilization, lending through joint-liability groups, and self-sustaining branch operations. It isimportant for microfinance projects to use financially sound, self-reliant institutions asintermediaries. Feasibility studies need to ensure preconditions exist for such institutions, suchas a favorable financial sector climate, effective demand for microlending, and commitment toprofitability and sustainability in microfinance operations.


8/39

vi

TYPICAL SUBBORROWERS

Khatan Suikh Impex (Food Processing)

Monos Pharma (Pharmaceutical Factory)


9/39

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 19901991, macroeconomic stabilization and reform measures weretaken by liberalizing prices and trade, privatization, unifying the exchange rate, improvingmonetary management, and addressing the fiscal deficit. A comprehensive policy frameworkwas agreed upon with the International Monetary Fund and the World Bank in June 1993, in thecontext of an enhanced structural adjustment facility, which was to provide the medium-termmacroeconomic framework to achieve stabilization and growth. A negative side of the transitionwas the contraction of the Mongolian economy and the reduced ability of the Government tofund 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 apolitical issue. The Government adopted policies to support the social security system and aspecial assistance program for vulnerable groups, and provide credit for the promotion of microand small enterprises (MSEs). In 1990, the Government introduced banking regulations that

allowed the establishment of commercial banks. By April 1993, 13 commercial banks wereoperating. However, MSEs were largely excluded from commercial loan services because thecentral bank, Bank of Mongolia (BOM), imposed credit ceilings due to the countrys liquiditycrisis, and lending to state-owned enterprises was given priority. During an Asian DevelopmentBank (ADB) mission to formulate a country operational strategy for Mongolia,1 the Governmentreiterated the continuing need to reduce poverty and unemployment and to strengthen theenabling environment for the nascent private sector.

B. Formulation

2. In August 1992, the Government requested assistance from ADB for preparing andfinancing 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 inJune 1993 and a fact-finding mission visited Mongolia in JulyAugust 1993 to reconfirm theconsultants findings and to discuss the proposed project with the Government. Followingappraisal in September 1993, loan negotiations between ADB and government representativeswere held in Manila in November 1993. The ADB loan of $3 million with an attached advisoryTA3 was approved in December 1993. The Executing Agency was the Ministry of Social Welfareand Labor (MSWL).4

C. Objectives and Scope

3. The objective of the Project was to support the Governments poverty reduction effortsthrough the creation of employment and income opportunities for the employable poor by

providing credits for MSEs.

1The first country operational strategy for Mongolia was issued in June 1994.

2TA 1840-MON: Employment Generation Project,for $100,000, approved on 8 January 1993.

3TA 2020-MON: Institutional Enhancement for Employment Generation, for $598,000, approved on 16 December1993.

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

of project completion.


10/39

2

4. The scope of the Project consisted of commercial bank loans to individuals as well as tocompanies, including cooperatives, to establish or expand businesses. The ADB loan was madeto BOM that relent its proceeds to participating commercial banks (PCBs),5 to make subloans totarget MSEs. The subloan repayment proceeds and interest payments from the PCBs to BOMwere to form a revolving fund for further sublending. The Project was to finance a range ofMSEs 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 hadbeen adversely affected by the transitional economy (e.g., single headed households, workerslaid off from state-owned companies, retirees, and school dropouts). At least 30% of subloanswere expected to be given to women.

5. At least 4,000 subloans were to be made through the PCBs. It was expected thatemployment for 8,100 people would be retained and new employment for at least 1,900 peoplewould be generated until the end of 1997. At least 95% of subloan businesses were expected tobe profitable. The project framework is given in Appendix 1.

6. Through the attached TA, the Project aimed to improve the managerial capabilities ofMSWL, 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 formicroentrepreneurs; and training of trainers for 10 NGO staff, 6 PCB staff, and 2 MSWL staff byend 1995. The TA was also to develop a management information system and benefitmonitoring and evaluation activities to monitor implementation progress, review the onlendingoperation, 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 Fundresources for the credit line for MSEs. The loan bore the standard Asian Development Fundterms of a service charge of 1% per annum and a maturity of 40 years including a grace periodof 10 years.

8. The ADB loan was made through an imprest account with BOM, in which the loanproceeds were deposited and from which the local currency equivalent was disbursed to thePCBs for onlending to subborrowers. Loan disbursements by BOM to the PCBs were in theform of special time deposit accounts opened by BOM for the PCBs. Upon the maturity of theseaccounts, 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 equivalentto 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 revolvingfund 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. Thesize of individual subloans was not to exceed $5,000 equivalent. The maturity of subloans wasto 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 HorshooBank (para. 10), Agricultural Bank (Tolgoit Branch) and Bayanbogd Bank joined the Project.

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


11/39

3

E. Completion and Self-Evaluation

10. The project completion report (PCR), circulated to the Board in June 2000, rated theProject partly successful7 in relation to its quantitative target of employment generation. ThePCR stated that there was an attainment of 54% of the overall job target (existing andadditional) 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 of4,000 subloans. The PCR attributed the small number of subloans to (i) reluctance of the PCBsto grant small-size loans due to high transaction costs, (ii) weak financial management of thePCBs, (iii) credit extension ceilings due to tight money control by BOM, and (iv) inappropriatecredit guidelines prepared by the advisory TA consultants. The PCR noted that, by the time ofthe PCR mission, all five PCBs had been closed. Two of them, Ardyn Bank and MongolHorshoo Bank, were merged in 1994 and this newly merged bank was closed in 1996. After theclosure of Ardyn/Mongol Horshoo Bank, Agricultural Bank (Tolgoit Branch) and BayanbogdBank joined the Project. In 1999, Agricultural Bank and one of the original PCBsInvestmentand Technological Innovation (ITI) Bankwere placed under the receivership of BOM due toinsolvency. Agricultural Bank remained open but invited an international management team forrestructuring 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 newcapital 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 MNT9.9million. 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 subloanswere repeat loans.

12. The PCR noted that the loan covenant requiring that the interest rate of subloans beequal to the current lending rate was not complied with. The actual sublending rate under theProject 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 threerepresentative MSEs were calculated, indicating 38%, 53%, and 9% for a restaurant, dairyproduct manufacturer, and retail store, respectively.8 The PCR concluded that the TAconsultants had generally performed well, and the training under the attached TA greatlyincreased the capacity of PCBs and NGOs.

F. Operations Evaluation

13. This project performance audit report (PPAR) reviews the PCRs findings on projectperformance, outputs, and impacts, as well as lending modalities of BOM loans to the PCBs andPCB subloans to the beneficiaries to assess the relevance of the project design and efficacy interms 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 discussesefficiency and sustainability of representative beneficiary MSEs based on their rates of return onequity. The employment generation impact is measured by reviewing a group of representativeMSEs. 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 ofthe overall financial or economic internal rate of return.


12/39

4

into account a review of the appraisal report, PCR, discussions with MSWL, saving and creditcooperatives (SCCs), participating NGOs, and subborrowers. Copies of the draft PPAR wereprovided to the Government and ADB staff concerned for review, and their comments wereconsidered 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 studys (footnote2) conclusion that the creation of microbusiness would be the major source of job creation inMongolia in the short run, whereas restructuring and privatization of the large-scale industrieswould take longer. The TA study outlined a modality of the credit services through commercialbanks and proposed to involve NGOs in mobilizing poor target subborrowers who wereotherwise excluded from regular commercial banking services. The study recommended that(i) the fund should be planned and managed to strengthen the existing commercial bankingsystem, (ii) interest rates should be positive and real, and (iii) the subloans should be priced tomake the onlending operations financially viable. The modality using existing commercial banks

as financial intermediaries was based on the studys findings that the banks had experience inMSE loans; at the time of project formulation, there were no alternative intermediaries capableof providing financial services to MSEs.

15. The TA studys recommendations were valid and incorporated in the original projectdesign. However, the TA studys institutional analysis of the PCBs financial health andsustainability was weak. None of the PCBs met all four prudential ratio requirements set byBOM.9 The TA study identified institutional problems of the PCBs such as incompleteaccounting systems, negative interest rates on deposits, and high loan delinquency. These wereindicative of the PCBs low financial self-sufficiency. The study did not analyze long-termfinancial viability of the Projects proposed subloan operations. The risk of using the existingMongolian 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 theweaknesses of the banking system, the absence of experienced NGOs and general institutionalweaknesses in Mongolia, it is likely that a TA will need to accompany the EmploymentGeneration Loan. The project design relied too much on the attached TA helping the PCBsacquire skills necessary for commercial based operations. To transform the semi-state-ownedMongolian commercial banks10 into effective commercial financial intermediaries required newfinancial tools and disciplines including appropriate loan product pricing, and portfolio risk,asset, and liability management. The project design should have considered an alternativeimplementation arrangement with focus on financially viable products and monitoring systems.

16. To enhance the PCBs outreach to low-income subborrowers, the Project includedNGOs 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 ofthe subloan made to the borrowers introduced by the NGOs. The NGO involvement had someimpact on the outreach, but it did not significantly improve the achievement of the number ofsubloans. 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.

10In 1993, except for Agricultural Bank, which was state-owned, the PCBs had been privatized; however, the majorityof equity owners were state-owned enterprises.

11Liberal Womens Brain Pool, Mongolian Employers Association, Mongolian Womens Federation, and the Union ofProduction and Service Cooperatives.


13/39

5

total number of subloans and 32% of the portfolio. The limited outreach by the NGOs wasattributed to their inexperience in screening creditworthy subborrowers.

17. The project design set the maximum subloan amount at $5,000 equivalent and averagesubloan size was expected to be $1,500 equivalent to ensure subloans would be directed tolow-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 throughNGOs 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 elapsedloan period of 54%. Following a request from the Government in March 1996, ADB approved anincrease in the subloan limit from $5,000 to $15,000 equivalent for successful repeatsubborrowers. In 1997, the onlending volume increased by 79%.

18. During implementation, a microfinance specialist fielded under the attached TArecommended the establishment of SCCs as an alternative microfinance institution to expandsubloan outreach. In March 1997, ADB approved the establishment of five pilot SCCs that wasnot included in the original project design, and the loan closing date was extended from31 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 thetraining and guideline preparation, but not for the credit capital for the SCCs that was providedby their members. ADB further approved the extension of loan closing to 31 August 1999 toconduct an audit of financial statements for PCB and SCC components. The final subloandisbursements from the PCBs to subborrowers were in December 1998.

B. Achievement of Outputs

19. The project framework in Appendix 1 compares appraisal targets with actualachievements. The OEM verified that a total of 569 subloans were made by the end of 1998 to436 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 PCBsdirected 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 PCBs onlending are in Appendix 2.

20. The key reason for the Projects shortfall in achieving the target number of subloans wasthe PCBs lack of institutional incentives to be effective financial intermediaries. At the time ofthe Project, commercial lending operations were new to the PCBs. Previous operations hadbeen based on loan allocations for state enterprises mandated by the Government. Loanofficers were not capable of loan assessment and risk analysis. Many of their largest clientswere 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 targetedoutreach, underwriting criteria, and monitoring tailored for MSEs.

21. While the number of subloans through the PCBs was much lower than expected, theSCCs established under the TA pilot scheme were successful in reaching low-income borrowersand became the first microfinance institutions in Mongolia. In line with the recommendation of


14/39

6

the TA consultant, the four participating NGOs formed SCCs.12 The SCCs are operating basedon cooperative principles: members pay capital to SCCs and become their shareholders andowners with each member having the right to one vote; policies and services have to be agreedupon by the members and the members vote to select management, and the members alsomay deposit money with SCCs. The SCCs provide loans to individuals and enterprises but notgroups. 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 factobanks (i.e., taking deposits and making loans), a regulatory framework for SCC supervision isrequired to assure SCCs long-term accountability.13 The five pilot SCCs, which had a total of325 members and loans outstanding of MNT244 million in 1999, grew to 937 members andloans outstanding of MNT575 million in 2001. The majority of members are women. Theaverage loan size was MNT1.5 million in 2001. The SCCs impose no restrictions on the use ofthe 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 outto 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 betweenthe appraisal and actual loan amounts was due to the depreciation of the United States dollaragainst 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 wasutilized 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 itbecame effective on 11 May 1994, and almost 2 years later than the originally envisagedclosing date of 31 December 1997.

D. Procurement and Construction

24. The procurement of goods (one vehicle and office equipment) and training services wasundertaken according to ADBs Guidelines for Procurement through international shoppingbecause the amount of the contract was not large enough to attract suppliers through theinternational 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 microfinancespecialist (3 person-months); domestic consulting services included the PCB coordinator (23person-months), NGO coordinator (43 person-months), and a benefit monitoring and evaluationspecialist (24 person-months). The OEM assessed the consultants outputs as generally

satisfactory except for the output of the benefit monitoring and evaluation specialist.

12Liberal Womens Brain Pool established MONCORD; Mongolian Womens Federation sponsored Gunji-Ank; Unionof Production and Service Cooperatives sponsored Soyombotulga and Tsetsegtuya; and individuals of the ProjectManagement Unit started Credit Mongolia Cooperative.

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


15/39

7

E. Organization and Management

26. A project management unit (PMU) was established under MSWL in May 1994 to (i) setup eligibility criteria for subborrowers; (ii) monitor the PCBs lending operations; (iii) coordinateNGO 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 wasappointed as the PMU director.

27. The PMUs independent project implementation capability was weak. Its staff fromMSWL had little experience in MSE loan operations; in effect, the Project was implemented bythe TA consultants. The PMU director changed frequently, with three directors during theimplementation period. As a result, the PMU management lacked cohesiveness. Six loancovenants were not complied with during the Project. The covenant that MSWL would monitorsubborrower impacts through benefit monitoring and evaluation activities incorporated in amanagement information system was not complied with because the system developed by theTA consultant had no compatibility with the one that the PMU had used previously, and neithertraining 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 onsimilar loans was not complied with until 1997 (para. 33). The Projects monthly nominalsublending rates were about 3% lower than the market rates. The covenant specifying that thePCBs would pay a fee to the participating NGOs for their services in introducing MSEsubborrowers to the PCBs was not fully complied with. The PCBs paid to the NGOs only 65% ofthe outstanding fees. The covenant that a revolving fund would be used to finance further loanswas not complied with during the implementation period as the fund in the BOM special timedeposit account was used only for bridge financing of subloans while waiting for ADBsdisbursement. The covenant that subborrowers would be encouraged to save through built-insavings and capital buildup schemes was not complied with. The credit guidelines developed bythe TA consultants included a clause that subborrowers had to deposit 5% of their subloanborrowing 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 tobuild the subborrowers asset base. Because subborrowers were asked to deposit in non-interest-earning accounts, the PCBs could not mobilize savings. The loan disbursement fromBOM to the PCBs was made through the special time deposit account opened at BOM, basedon the PCBs withdrawal applications. The disbursement arrangement was efficient. BOMreleased funds to the PCBs normally within 10 working days upon the receipt of the PCBsapplications. Audited financial statements were not submitted by the PMU until ADB approvedthe reallocation of loan proceeds in 1998 to finance the engagement of private auditors toconduct an audit of financial statements for both credit and noncredit components.

28. ADB conducted one inception, four review, and three special project administrationmissions. ADB performance was satisfactory in carrying out required supervision and

responding to the Projects problems as requested. For example, ADB addressed the lowrepayment rates in a special project administration mission in November 1996, which resulted innew credit guidelines and an improvement in the repayment rate (para. 45). ADBs approval forestablishing the pilot SCCs showed its flexibility in the project implementation, which led to thecreation of effective microfinance institutions. However, ADB should have been more rigorous inanalyzing the institutional capabilities of the PCBs, as their financial viability was unproven. ADBshould have devised an appropriate operational modality in the project design to ensuresustainable microlending service to MSEs and incorporated in the attached TA necessarysupport to strengthen the financial health of the PCBs.


16/39

8

III. ACHIEVEMENT OF PROJECT PURPOSE

A. Operational Performance

29. The OEM measured the Projects operational performance against its objective, namelythe 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 theProject, 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 wasdue to the PCBs weak institutional capability in subloan administration. Before the Projectsnew guidelines became effective in 1997, most PCB loan officers lacked a clear understandingof loan appraisal and project analysis, such as cash flow analysis focusing on the debt-servicingcapabilities of MSEs. There was also a lack of sufficient supporting documents such ascollateral verification and valuation or MSEs project analysis. PCB staff had no methods todetect over-optimistic financial projections, much less conduct any sensitivity analysis.

30. The pilot SCCs became the first financial institutions providing savings and creditopportunities 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 microenterprisessuch as small trading, bakery, sewing service, and food processing. The members fall into thelower income group. The average income of the interviewed SCC members was estimated atMNT11,000 per person per month compared to the official poverty line of MNT17,600 perperson per month in Ulaanbaatar in 1999. Such members would not have had access to creditservices without the SCCs because, before the Project, there were no financial institutionsproviding 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. Althoughinsufficient information is available to determine how many of these SCCs can be attributeddirectly to the Project, considering that the Project introduced the structured SCC operationalguidelines for the first time in Mongolia and other externally supported microfinance servicestarted only in late 1998, the Projects 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% and94% (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 58outstanding subloans (current and past due) totaling MNT357 million and the above rangeindicates the worst and best case collection scenarios. For the other two PCBs (AgricultureBank and Ardyn Bank), 33 subloans totaling MNT110 million remain uncollected. Based on theactual collection rate of Agricultural Bank and Ardyn Bank, the most probable collection rate forthe overall Project is estimated at slightly over 90%.


17/39

9

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

PCB

Total AmountDisbursed

during theProject

CurrentSubloans

as of

December1998

Numberof

CurrentSubloans

Past DueSubloans

as of

December1998

Numberof Past

DueSubloans

Overall

Recovery Rate(%)

Ardyn 374 0 0 30 9a

92ITI 662 20 2 57 28

b8891

Bayanbogd 516 280 28 0 0 45100Agricultural 1,005 0 0 80 24

a92

Total 2,557 300 30 167 61 8094

ITI = Investment and Technological Innovation, PCB = participating commercial banka

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 inFigure 1. There was an improvement in 1996, but delinquency was high again in 1997. By theend of 1997, the portfolio delinquency fell below 20% as a result of new credit guidelinesdeveloped under the attached TA (para. 45).

Figure 1: Participating Commercial Bank Project Portfolio Performance

Source: Operations Evaluation Mission estimates.

0

10

20

30

40

50

60

70

8090

100

Month

Deliquency Rate (at risk) Recovery Rate (cumulative)


18/39

10

0

10

20

30

40

50

60

1993 1994 1995 1996 1997 1998 1999

Year

% Nonperforming Loans to Total Loans

33. The monthly subloan interest rates set by the PCBs were lower than the market interestrates until 1997. The nominal interest rates ranged from 2.7% to 7.9% during 19941997, 14while the market rates for the same period reported by BOM ranged from 3.8% to 10.9%. In1998, the interest rate slightly exceeded the market rate: 4.1% for the Project and 3.8% for themarket rate. The sublending term was short. The average loan maturity was 9 months in 1994and 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 8months for the remaining project period.

34. In terms of overall financial performance of the PCBs (Appendix 4), banks were looselyregulated until the mid-90s and operated with a modest amount of capital. Before 1996, loanclassification such as current, past due, and loss had not been done. This situation preventedearly warning analysis of a potential bank failure. Inadequate lending and credit administrationskills and the economic downturn led to non-performing loans and the ultimate failure of thePCBs. Figure 2 provides the share of cumulative nonperforming loans in the four PCBs totalloan portfolio during the project period.

Figure 2: Participating Commercial Bank Percentage of Nonperforming

Loans to Total Loans (Project and non-Project)


35. Ardyn Bank began experiencing operating losses in the second quarter of 1995 andfailed to meet its capital adequacy ratio in the third quarter. Past due and nonperforming loanstotaled 33% in the first quarter of 1996 and grew to 63% by the end of that year. Ardyn Bankwas closed in December 1996. ITI Banks capital adequacy fell below the minimum requirement

14The 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.


19/39

11

of 10% in the first quarter of 1995. Nonperforming loans rose from 6% in the first quarter of 1996to 46% in the fourth quarter and ITI Bank reported an operating loss for the year. Nonperformingloans 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 in1995. It never regained profitability during the project period. Bayanbogd Bank was a small bankwith 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 requirementand 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 allowcalculation of an overall economic internal rate of return. Instead, the OEM calculated the ratesof return on equity for two existing MSEs (construction and trading) based on their incomestatements (Appendix 5). The calculation was conducted in 2001 constant prices and under thewith and without the project scenarios. The calculation was done for 20 years starting from theyear 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 theconstruction company, and 2% for the trading company. On this basis, the rates of return onequity are 33% and 43%. The results are robust because an assumption that there would be nobusiness growth does not change them significantly.

D. Sustainability

37. The sustainability of the Project was assessed based on the financial viability of thethree types of operating entities: the PCBs, SCCs, and subborrower MSEs. Project sublendingceased 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 thesubloan repayment proceeds and interest payments from the PCBs to BOM be utilized as therevolving fund for further sublending was not complied with during the project period. However,in February 2002, after the Projects completion, BOM started to relend the outstanding balanceof MNT2.2 billion to four new commercial banks15 for further onlending to MSEs. The Projectsconcept of credit services to MSEs thus continues; however, the operational viability of therevolving fund itself depends on the sustainability of the four commercial banks16 and requiresfurther 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 CountryAssistance Program Evaluation Mission reported that, since the second half of 2001, there hasbeen strong loan growth throughout the banking system and banks are focusing on lending tosmall businesses and individuals with reported repayment rates of over 98%. However, thelong-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, creditrisk decision-making and portfolio management in the banking sector.

15Erel Bank, Golomt Bank, Transport Development Bank, and Zoos Bank.

16Although SCCs are suitable microfinance institutions to low-income people, BOM does not involve them inonlending through the revolving fund because they are unregulated.


20/39

12

38. The five SCCs have been operating over 5 years with little external financial assistanceand are financially viable. Their repayment rates have been over 90% since their start. Theiroperational self-sufficiency ratios (Table 2) indicate that two SCCs are fully self-sufficient, orprofitable. They cover both nonfinancial costs such as rent and staff salaries and financial coststo obtain credit capitals with revenues of interest and fees. The other three SCCs areoperationally 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 operatingcost ratio, which is an indication of the efficiency of the lending operations, the SCCs, except forTsetsegtuya, are generally cost efficient considering that successful microfinance institutionstend to have operational cost ratios below 20%. The SCCs income statements are inAppendix 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-SufficiencyExcluding 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 ofthe subborrower MSEs is expected to be higher than 38%, as only registered entities aretraceable and no information is available on MSEs that are operating as nonregistered (informalsector) businesses. The rates of return on equity and profit levels of the two representativeMSEs indicate their high sustainability (para 36).

IV. ACHIEVEMENT OF OTHER DEVELOPMENT IMPACTS

A. Socioeconomic Impact

40. The Projects socioeconomic impact assessment is based on the subloan outreach and

the change in income level of subborrowers before and after receiving subloans. The creditguidelines defined the target subborrowers as (i) microenterprises such as sole proprietorshipincluding individuals and cooperatives with no minimum capital requirements, and (ii) smallbusinesses such as limited liability companies with a minimum capital requirement ofMNT500,000. Out of the 569 project subloans, 46% were in excess of $5,000 equivalent, and itis believed that those subloans were directed more towards small-and-medium enterprises thantoward microenterprises. The PCB subborrower profiles resulting from an OEM-sponsoredsurvey (Appendix 7) reveal that sample subborrowers were well-established enterprises with atleast two employees and an average of MNT3 million net income in 1997 before receiving the


21/39

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 criteriaexisting businesses for more than 3 years,sound financial history, and 100% collateralization of the value of the subloan amountpractically 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% amongthe PCB subborrowers after taking the subloans. The survey respondents also replied that, onaverage, 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 subloansbut also to other factors, including loans provided by other commercial banks. However, thesubborrowers stated that PCB subloans under the Project were one of the few credit servicesavailable for MSEs at that time.

42. Compared to the PCB subborrowers, SCC members are microenterprises withoutemployees or those that are operated by family members. According to the survey, afterreceiving 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 millioncompared with MNT5 million for the PCB subborrowers surveyed. Because of the small size ofSCC members businesses, the impact on additional job creation due to their businessexpansion after receiving loans was less significant. It is estimated that 0.8 jobs were generatedafter the SCC member enterprise received the loan as compared with 12 jobs created by a PCBsubborrower enterprise. SCCs are providing microfinance services to low-income people whootherwise have limited access to regular commercial banking services.17 The overall amount ofemployment retained or generated through the Projects SCC creation is difficult to determine asnot 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, foodprocessing, 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, andNGOs for market-based lending to microenterprises in the private sector. The TA is consideredsuccessful in terms of facilitating commercial-based business and loan operations. During theProject, 86 training courses on computer skills, banking, business planning, bookkeeping, andcooperative management were provided for the staff of MSWL, PCBs, NGOs, and forsubborrowers. The training was regarded as useful because those skills were indispensable forcommercial business operations and staff and subborrowers had little exposure to those

subjects previously. The TA taught the PCB staff methodologies for loan screening, assetassessment, 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 forbusiness development for microenterprises. As a result of the training, the NGOs became ableto establish the SCCs.

17 X.A.C. (the Golden Fund for Development in Mongolian) Bank, which was established in 1999 under UnitedNations Development Programme MicroStart-Mongolia Project, is providing microfinance services.


22/39

14

45. However, the TA lacked the institutional development for microfinance operations suchas devising loan products, collateral requirements, and repayment mechanisms suitable formicroenterprise subborrowers. The TA consultant developed new credit guidelines in 1995 toimprove the PCBs subloan repayment rate. The cumulative subloan repayment rate wasaround 50% at the end of 1995 due to the PCBs ineffective loan screening and collectionoperations. The new guidelines introduced stricter lending procedures such as rigorous

business plan screening and an approval system by the loan committee. The new guidelinesbecame effective in January 1997, and at the end of the year the overall repayment rate wasabout 90%. However, the credit guidelines focus on low risk subloans and the higher repaymentrate had an adverse impact on the outreach. As the result of the stricter guidelines, potentialmicroenterprise subborrowers were crowded out. The credit guidelines could have devisedother measures to improve the repayment rate while maintaining the outreach to low-incomepeople, such as adjusting repayment frequency to a subborrowers cash flow patterns,expanding a client base through group lending, or improving loan officers efficiency inmonitoring.

D. Overall Assessment

46. Relevance. The Projects concept to reduce poverty through credit services to MSEswas relevant as the emerging MSEs had little opportunity to obtain capital. The implementationarrangements described in the appraisal reportsubloan interest rate being consistent withmarket rates, subloan maturity based on subborrowers cash flows, and NGO involvement inexpanding outreachwere appropriate for establishing sustainable microfinance operations.The Projects institutional arrangement of sublending through the PCBs was viewed asunavoidable because there were no alternative nonbank financial institutions at the time ofappraisal. However, the institutional analysis of PCBs overall financial health, PCBs experiencein 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 notdevise ways to reduce the transaction costs for the poor to expand their outreach. The NGOswere at a nascent stage and not experienced enough in mobilization of microenterprise

subborrowers. The project credit guidelines were effective in improving repayment rates buttargeted 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. TheSCC concept was highly relevant considering SCCs were filling unmet credit demands bypoorer members of the society. Considering these factors, the Project is assessed as relevant.

47. Efficacy. The Projects achievement of the immediate objective of employmentgeneration was limited, attaining 54% of the overall appraisal target. Insufficient data is availableto determine the employment generation impact by SCCs. The five pilot SCCs created underthe Project had 937 members in 2001 who benefited from SCC credits in terms of employmentgeneration or retention. On balance, the Project is less efficacious.

48. Efficiency. The Projects achievement in terms of the number of subloans was low. ThePCBs on average made 114 subloans per year; to meet the target, an average of 800 subloansper year was required. Except 1995, the subloan repayment rates were over 80%. Therepayment proceeds and interest rate payments from the PCBs to BOM are now utilized as arevolving fund to generate further subloans to MSEs, but the actual lending volume of therevolving fund has not yet been reported. The five SCCs created under the Project are costefficient and have high lending volumes though not at the level originally targeted for theProject. Overall, the Project is considered less efficient.


23/39

15

49. Sustainability. Sustainability of the revolving fund depends on the viability of the fourcommercial banks that are now providing subloans to MSEs. In the medium-term, the revolvingfund operation is expected to be sustainable as profitable credit operations in the banking sectorhave been reported to grow since 2001. For the longer-term sustainability, further financialsystem development is required in the Mongolian banking sector. The SCCs have been growingwith little external financial assistance and are financially viable. The Ministry of Finance and

Economy (MOFE)s supervisory unit for nonbank financial institutions and new cooperativelegislation are expected to enhance their long-term accountability. The SCC concept has beenfurther developed in a recent ADB microfinance operation in Mongolia18 that supportsinstitutional building of savings and credit unions in rural areas. This reflects the lesson from theProject that existing commercial banks could not meet the demands for rural financial services.Overall, the Projects sustainability is assessed as likely.

50. Institutional Development. The training provided under the attached TA benefited thestaff of MSWL, PCBs, NGOs, and subborrowers by providing necessary technical skills inbusiness planning, and cooperative operations to which staff and beneficiaries had not beenexposed during the planned economy. The Project suffered from the collapse of the PCBs anddisrupted 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. Thereorientation of the Project by the attached TA demonstrated the effectiveness of flexibleimplementation. The SCC pilot scheme had a multiplying effect and SCCs became mainstreammicrofinance institutions in Mongolia. The operational guidelines for SCC developed under theTA were translated into Mongolian and are used not only for the project SCCs but also otherindependent SCCs created after the Project. Establishing prudential regulation and supervisionsystems for SCCs is now urgently required to assure their legitimacy and accountability. TheProjects 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 TAsreorientation of the Project and the pilot SCCs were successful in creating financialintermediaries for low-income people, the sublending through the PCBs did not achieve theappraisal target. The reorientation and establishment of alternative intermediaries should havebeen 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 andchanging the subloan ceiling to expand lending. ADBs flexibility in extending theimplementation period to facilitate the SCC establishment allowed lending to lower-incomegroups, in line with the project objective. ADBs performance was short of highly satisfactory

because its assessment of the PCBs institutional capability in microlending should have beenmore prudent and the weakness in the project design in reaching the poor through microlendingshould have been corrected earlier. The implementation performance of MSWL was partlysatisfactory. The PMU operation was disrupted by frequent changes in its director, and someloan covenants were not complied with.

18Loan 1848-MON(SF): Rural Finance Project,for $8.7 million, approved on 25 October 2001.

19Based on the current four-category rating system (highly successful, successful, partly successful, andunsuccessful).


24/39

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 onincentives and institutional capabilities of the commercial banks for tailoring subloans to thetarget group. Microlending to those who do not have access to regular commercial bankingservices requires special lending modalities. Loan products, disbursement, and repaymentmechanisms need to be designed according to the demands of the poor. This involvesestablishing appropriate loan amounts, loan terms, collateral requirements or substitutes, andpossibly, compulsory savings or group contribution requirements. For example, loan repaymentfor the poor needs to be based on the cash flow patterns of borrowers or small and frequentinstallments to avoid large sum of repayment at one time. Loan purpose should be flexiblebecause the poor have many unmet needs and the fungibility of money cannot prevent the loanbeing used for other than designated purposes. The poor often have very few assets andtraditional collateral such as land or property is not available. Alternative collateral or collateralsubstitutes should be developed such as group guarantees, compulsory savings, orcontributions.

54. An SCC type of financial intermediary has been proven to be effective in reaching thepoor not only in this Project but also in other countries, provided that such intermediaries arelegitimate and properly regulated under prudential regulations. In the case of Mongolia, SCCsare not yet regulated, and introducing prudential regulations is urgently necessary to enhancetheir long-term accountability.

55. Financial Viability versus Outreach. Given the high unit cost of administering smallloans, financial institutions tend to provide bigger loans to wealthier clients. The Projectsattempt to improve the PCBs financial performance and repayment rate led to strictersubborrower screening, resulting in crowding out the originally intended microenterprisebeneficiaries. This suggests that financial institutions viability and outreach may be mutuallyexclusive. However, financial viability and outreach can be achieved together. To maximize theiroutreach, 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 andnonrepayment of loans, and make a profit to finance their expansion. The successfulmicrofinance institutions operating today20 have achieved financial viability and outreachthrough various measures such as removal of interest rate ceilings, savings mobilization,lending through joint-liability groups, and self-sustaining branch operations. It is important formicrofinance projects to use financially sound, self-reliant institutions as intermediaries.Feasibility studies need to ensure that certain preconditions exist for such institutions, such asfavorable financial sector climate, effective demand for microlending, and commitment toprofitability and sustainability in microfinance operations.

20Examples of such microfinance institutions include the Bank for Agriculture and Agricultural Cooperatives inThailand, Bank Rakyat Indonesia, and Association for Social Advancement in Bangladesh.


25/39

17

B. Lessons Learned

56. Key lessons learned from the Project are the need for (i) differentiating lending tomicroenterprises from that to small and medium enterprises, and tailoring project objectives anddesign accordingly; and (ii) more prudent institutional assessment of the performance andtechnical capabilities of the financial intermediaries such as PCBs.

57. The Projects subborrowers were more skewed toward small and medium enterprisesthan toward microenterprises and the PCBs loan administration was tailored more for theformer. The PCBs were not provided with skills for microenterprise credit criteria, underwriting,loan administration, and monitoring. The feasibility study conducted under the projectpreparatory 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 theweakness in the PCBs capacity to generate an adequate volume of microenterprises loans tothe targeted subborrowers. The feasibility study was not thorough in analyzing microcreditdelivery capabilities of the existing institutions. The study focused on utilizing the existingcommercial banks, which were financially weak and ultimately failed. The fragile conditions ofthose 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 atthe special time deposit account, which are now being relent to the commercial banks for MSEsubloans. BOM should immediately develop a monitoring system to ensure that the funds aredirected 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 nonbankfinancial 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 isrecommended that, by the first quarter of 2003, MOFE strengthen the unit by improving staffstechnical competency and establishing a management information system of prudentialmonitoring for nonbank financial institutions.


26/39

PROJECT FRAMEWORK

Narrative Summary Measurable Indicators Project Completion Report

Goal: Reduce poverty by mitigatingadverse socioeconomic impactsof structural adjustments andtransformation of the economy on

the poor

Increased income for over10,000 persons

Objective: Create and sustainemployment and incomeopportunities for theemployable poor and womenin Ulaanbaatar City

- At least 10,000 jobs wereretained and generated inexisting and newbusinesses financed bysubloans until end-1997.

- At least 95% ofsubprojects are profitable.

- At least 30% of jobscreated and subloansgiven under the Project

benefit women.

- As of 30 September 1999,5,360 jobs were retained orgenerated (3,804 jobsretained and 1,556 newjobs created).

- 97% of subprojects wereprofitable.

- 47% of jobs created underthe Project benefitedwomen.

Outputs:

1) Establishment of an efficient,effective, and sustainableprogram of financial and non-financial services to support newand existing private micro andsmall enterprises in Ulaanbaatar.

- At least 4,000 loanapplications for loanssmaller than $5,000 (intogrog equivalent) wereapproved until end-1997.

- At least 70% of businessesare in operation 3 yearsafter subloan approval.

- 567 subloans(later revised

to 569) were made underthe Project.

- 96% of businesses fundedunder the Project wereoperational 3 years aftersubloan approval.


27/39

Narrative Summary Measurable Indicators Project Completion Report

2) Improvement in institutional,managerial, and technicalcapabilities of the Ministry ofSocial Welfare and Labor(MSWL), PCBs, and non-government organizations(NGOs) with respect to market-based lending tomicroenterprises in the privatesector

- At least 10 skilldevelopment trainingcourses formicroentrepreneurs areconducted per annum.

- Ten NGO staff, six PCBstaff, and two MSWL staffparticipated in training oftrainers programs by end1995.

- No. of training coursesprovided: 19 (1995); 34(1996); 25 (1997); 8 (1998)for a total of 86 over 4years.

- No. of staff trained inTraining of Trainersprograms by the end of1995: 31 (NGO); 13(PCBs); 12 (MSWL)

3) Development of projectmanagement and coordinationarrangements

- Project office is staffed inMWSL in first quarter1994.

- Collaborative arrangementand networking amongMWSL, PCBs, and NGOsare formalized beforeproject inception.

- Subloan collection rate isat least 90% of due andpayable throughout projectimplementation.

-Organization, policies, andprocedures of PCBs followproposed structures.


28/39

Narrative Summary Measurable Indicators Project Completion ReportActivities

1. Establish Project ManagementUnit.

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

vehicle.4. Collect benchmark information

based on loan applications withPCBs and verify them with theassistance of NGOs.

5. Release loan funds accordingto micro-credit demand toPCBs.

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

modules and conduct trainingcourses (i) for training oftrainers in MSWL, the PCBs,and NGOs; and (ii) for socialpreparation of subborrowers.

8. Commence subproject lending.9. Establish benefit monitoringand evaluation system andconduct regular surveys.

10. Hold regular meetings ofsteering committee, review andanalyze quarterly ManagementInformation System andprogress reports, and suggestrequired measures ifnecessary.

11. Periodically review interestrates and suggest alternationsif required.

12. Conduct joint annual review ofproject progress andincorporate modifications.

13. Conduct impact study andprepare project completionreport upon project completion.

Input/Resources

Project Budget ($000)

Provision of Credit 3,000

(Appendix 2 of the projectcompletion report summarizesthe Projects achievementsagainst the proposed activities atappraisal.)

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


29/39

Ardyn ITI Subtotal Ardyn ITI Subtotal Ardyn ITI Subtotal Ardyn ITI B

88 29 117 0 35 35 71 33 104 0 40

89 29 118 0 37 37 81 44 125 0 51

1 0 1 0 2 2 10 11 21 0 11

170,800 55,500 226,300 0 68,500 68,500 203,600 98,100 301,700 0 420,080

170,800 55,500 226,300 96,584 79,889 176,473 36,469 83,013 119,482 30,362 378,537

1,919 1,914 1,918 0 1,851 1,851 2,514 2,230 2,414 0 8,237

0 0 0 0 0 0 4 3 7 0 40

4,169 4,157 4,166 0 4,022 4,022 4,455 3,951 4,278 0 10,334

100.0 100.0 100.0 43.5 60.5 50.6 90.3 75.5 84.8 91.9 97.7

0.0 0.0 0.0 100.0 61.3 82.5 100.0 65.6 76.1 100.0 20.8

7.7 7.9 7.8 6.4 6.4 2.7 3.2 2.9 4

10.9 7.8 6.6

1994 409.45

1995 460.33

1996 564.23

1997 797.10

Item

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

Collection rateb

(%)

Delinquency ratec

(%)

Weighted Average ProjectMonthly Interest Rate (%)

Weighted Average MarketMonthly Interest Rate (%)

ITI = Investment and Technological Innovation.

= not available.

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

1994 1995 1996

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 $5,000equivalent

Average loan sizea

($)



30/39

Item Ardyn ITI Bayanbogd Agricultural Subtotal Ardyn ITI Bayanbogd

Number of subborrowers 0 0 12 60 72 159 137 3

Number of loans 0 2 35 119 156 170 163 6

Number of repeated loans 0 2 23 59 84 11 26 3

Amount of loans(MNT '000) 0 20,000 356,000 775,500 1,151,500 374,400 662,180 516,00

Loan amount outstanding(MNT '000) 30,362 77,248 280,000 371,019 758,629 30,362 77,248 280,00

Average loan size(MNT '000) 0 10,000 10,171 6,517 7,381 2,202 4,062 8,45

Number of loans over$5,000 equivalent 0 2 35 110 147 4 45 6

Average loan sizee

($) 0 11,788 11,990 7,682 8,701 4,305 6,097 10,17

Collection ratef (%) 91.9 91.3 100.0 95.2 94.7 91.9

Delinquency rateh (%) 100 74.1 0.0 13.0 17.9 100.0

Weighted Average ProjectMonthly Interest Rate (%) 4 4 4.4 4.1 5 4.5 3

Weighted Average MarketMonthly 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.

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 Investm

Bank. Based on the actual collection rate of Agricultural and Ardyn Bank, the most probable collection rate is slightly over 90%.

fCumulative on total disbursements.

hOn the outstanding loans (portfolio at risk).

gPortolio information for Bayanbogd and Investment and Technological Innovation Bank as of May 2002 was not available. Therefore the actual overall portfolio colle

PARTICIPATING COMMERCIAL BANK LENDING (cont'd.)

1998 848.35

1998 May 200

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


31/39

Item 1999 2000 2001 1999 2000 2001 1999 2000 2001 1999 2000 200

Membership (no.) 40 46 58 83 200 555 54 108 116 115 129 16

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 wo48 m

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 2,00

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 2,00

Total assets 5.3 9.9 28.6 25.6 97.5 290.5 11.7 131.9 102.3 74

Capital 5.3 6.7 13.2 9.8 27.3 59.2 7.2 13.3 8.0 94.8 23.5 40

Loans 12.7 17.8 46.5 24.5 93.5 247.2 87.3 118.7 111.3 117.4 162

Savings 3.2 15.2 13.9 55.5 171.0 1.1 7.8 9.5 2.2 67.3 21

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

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-

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.

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

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-

Collateral requirements Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Ye

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-

= 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

SAVINGS AND CREDIT COOPERATIVE PROFILESa


Tsetsegtuya SoyombotulgaCMC

Year Year


32/39

24 Appendix 4

Item 1993 1994 1995 1996

1. Paid-up capital 814.2 1,641.8 1,314.0 1,611.9

2. 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 44,291.5

4. Capital/total assets (%) 15.9 12.2 8.2 (30.7)

5. Liquid assets 3,396.9 7,954.2 10,939.6 4,430.9

6. Liabilities 9,947.6 30,647.0 42,541.2 48,923.4

7. Liquid/deposits (%) 34.1 26.0 25.7 9.1

8. Liquid assets () or (+) (1,606.3) (2,437.7) (40,572.1) 4,375.3

9. 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 7,640.2

10. Directed loans 3,340.6

11. Interest on directed loans 1,087.3

12. Provisions for loan losses 83.0 258.2 556.8 9,418.2

13. Provisioning 859.6 970.9 10,316.9

14. Provisioning (-) or (+ ) (83.0) 601.4 414.1 898.7

15. 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)


33/39

Item 1993 1994 1995 1996 1997

1. Paid -up capital 670.0 1,327.5 1,386.3 1,497.0 3,306.2 32. Capital 1,538.1 2,567.3 3,460.6 212.8 2,788.0 (8

3. Total risk-weighted assets 9,518.3 16,608.1 20,845.9 21,680.7 18,783.1 15

4. Capital/total assets (%) 16.2 15.5 16.6 1.0 14.8

5. Liquid assets 7,029.8 7,451.0 13,308.3 9,428.5 20,834.2

6. Liabilities 11,790.6 16,785.8 25,456.3 25,903.3 38,760.9 26

7. Liquid/deposits (%) 59.6 44.4 52.3 36.4 53.8

8. Liquid assets () or (+) (4,907.5) (4,429.6) 2,395.5 (4,765.9) (13,857.2) 4

9. Outstanding loans 6,590.5 11,407.4 14,841.0 15,242.8 13,130.2 24

a. current 5,997.4 10,667.2 14,055.7 8,215.4 7,125.6 6

b. past due 593.1 649.8 700.9 1,673.6 2,429.9

c. substandard 1,457.0 764.9 2

d. doubtful 84.4 2,002.0 1,239.5 6

e. loss 90.4 1,894.8 1,570.3 8

10. 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

13. Provisioning 409.7 329.2 1,806.8 2,093.7 8

14. Provisioning () or (+ ) (65.9) 206.1 139.4 (1,552.1) (383.1) (4

15. Profit or loss 1,133.3 (295.3) 222.0 248.6 109.6 (7

16. Shortage of capital (110.4) (76.1) (333.7) 3,039.3 (534.0) 10

= 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)


34/39

Item 1993 1994 1995 1996 1997 199

1. Paid-up capital 73.5 106.9 401.9 403.7 403.7 4032. Capital 74.5 107.1 398.2 404.2 411.0 423

3. Total risk-weighted assets 85.7 124.1 435.9 408.1 453.0 549

4. Capital/total assets (%) 86.9 86.3 91.4 99.0 90.7 77

5. Liquid assets 6.0 19.2 15.0 35.9 362.8 390

6. Liabilities 7.7 23.1 28.9 18.0 171.3 515

7. Liquid/deposits (%) 77.9 83.1 51.9 199.4 211.7 75

8. Liquid assets () or (+) (4.6) (15.0) (26.2) (32.7) (332.0) (297

9. Outstanding loans 81.0 89.0 365.9 231.5 284.3 387

a. current 81.0 89.0 365.9 195.8 275.6 379

b. past due 0.1 c. substandard 17.8

d. doubtful 9.6

e. loss 8.2 8.7 8

10. Directed loans

11. Interest on directed loans

12. Provisions for loan losses 0.8 0.9 3.7 19.4 11.5 12

13. Provisioning 15.8 16.6 16

14. Provisioning () or (+ ) (0.8) (0.9) (3.7) (3.6) 5.1 4

15. Profit or loss 74.4 13.0 20.1 5.5 7.5 20

16. Shortage of capital (61.6) (88.5) (332.8) (343.0) (356.6) (357

= 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)


35/39

Item 1993 1994 1995 1996 1997

1. Paid-up capital 344.9 444.2 465.2 488.8 702.8

2. Capital 670.0 1,077.6 (395.0) (2,574.7) (2,066.9)

3. Total risk-weighted assets 8,533.0 9,504.3 11,252.9 8,567.5 4,441.3

4. Capital/total assets (%) 7.9 11.3 (3.5) (30.1) (46.5)

5. Liquid assets 1,012.0 1,473.0 745.2 1,945.2 2,443.9

6. Liabilities 7,886.0 9,380.7 10,610.5 13,209.1 11,361.6

7. Liquid/deposits (%) 12.8 15.7 7.0 14.7 21.5

8. Liquid assets () or (+) 407.5 215.5 (10,476.4) 432.4 (398.8)

9. Outstanding loans 6,390.9 5,070.9 7,955.2 3,717.5 3,407.3

a. current 5,263.5 3,957.5 5,076.3 1,270.2 1,233.9b. past due 1,127.4 997.4 794.3 767.2 481.4

c. substandard 242.4 217.6

d. doubtful 2,084.6 691.1 583.1

e. loss 116.0 746.6 891.3

10. Directed