Mongolia has a population of 2.66 million. Ethnic Mongols account for about 85 percent of the population; minority groups include Kazakhs, Buryats, and Chinese. In many regards, Mongolia may be considered a “city state,” as 40 percent of the population lives in the capital city of Ulaanbaatar, where about 60 percent of gross domestic product (GDP) is generated. Poverty is higher in rural areas, especially in the western regions, and there are indications that the poverty gap continues to widen. After the breakdown of the communist regimes in Eastern Europe in late 1989, Mongolia saw its own Democratic Revolution in early 1990, which led to a multiparty system, a new constitution (in 1992), and the transition to a market economy. The financial sector of Mongolia is a two-tier system, comprising the Bank of Mongolia (i.e., the central bank) on one tier, and commercial banks, nonbank financial institutions, and credit and savings cooperatives on the second tier. With one small exception, there is no deposit insurance. The capital adequacy ratio has been 14 and 24 percent since 1999, which is 1.8–3 times higher than the international standard of 8 percent set by the Basel Committee. The central bank law expressly prohibits the government from setting interest rate controls on loans. Mongolian law allows for mortgages and other loan instruments backed by securitized collateral. However, rudimentary systems for determining titles and liens and collecting debts make lending based on local collateral risky. Banks frequently complain that onerous foreclosure rules are barely workable and unfair to creditors.

In the course of the last ten years the Mongolian microfinance industry has experienced rapid growth and the largest MFIs have generated profits. Taking into account the very low population density of rural Mongolia, a nomadic population, a harsh climate, the seasonality of demand for financial services, high covariance risk, and very poor rural physical infrastructure, the achievements of these MFIs is impressive. Khan Bank, and the Mongol Post Bank dominate the microlending market in terms of the number and volume of loans outstanding. In terms of depth of outreach, however, the NBFIs Vision Fund and Trans Capital are the leaders. Contrary to microfinance methodologies used in other countries, the majority of loans in the microfinance sector are individual collateralized loans with terms of 12 months. There are no licensed apex banks in Mongolia. There is, however, a government-led wholesale lending institution, the Micro Finance Development Fund (MDF).