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Document Type

Case Study

Abstract

Mongolia’s transition away from the monobank system in the 1990s did not occur smoothly, with inherited, non-performing loans from the monobank period causing significant instability and insolvency in the banking sector. These inherited portfolios, in conjunction with risky lending by the newly formed banking sector, led to the insolvency of People’s Bank (also known as Ardyn Bank), and Insurance Bank, which together held approximately 35% of total assets in the banking system. From 1996 to 1997, the Mongolian government, with the technical and financial support of the World Bank and the Asian Development Bank, formed the Mongolian Asset Recovery Agency (MARA) to remove nonperforming loans from the banking sector as well as to liquidate the People’s and Insurance Banks. MARA attempted to achieve this through the purchase of nonperforming loans in exchange for interest-bearing government bonds. MARA’s stated goal was to recover 90% of the nonperforming loans, as well as to create a more normalized financial culture of fulfilling contractual debt obligations. Initially, MARA intended to be functional for a three-year period, but further insolvency crises required MARA to stay open longer than three years. By 2000, MARA had recovered only 14% of the initial $35 million in assets that it seized in 1997 from the two liquidated banks that sparked the need for MARA.

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