CEO of Mongolian Bankers Association J.Unenbat addresses proposed interest rate ceiling
The Mongolian Bankers Association (MBA) published a statement in opposition to the proposed interest rate ceiling about to be discussed in Parliament, saying that it would “significantly damage investment and business environment”. CEO of MBA J.Unenbat addressed the issue in an interview.
MBA released a statement regarding the proposed interest rate ceiling. Why do you believe that capping interest rates is not an ideal solution?
Our economy is a developing one. Therefore, demand is relatively high. However, savings, which is the main source of the loans provided by banks, is still low. As a result, due to this issue, both the interest rate on loans and the interest rate for savings is high.
Of course, there are many factors in the macro economy that affect the interest rate of loans and savings. The main reason is that the demand for loans is high while the supply for it is low and that is the reason why interest rates are so high.
If the government enforces an interest rate ceiling, they will be further depleting an already depleted supply. For instance, the demand and supply ratio of meat is at 5,000 MNT to 6,000 MNT. If the government says that the price of meat should not exceed 4,000 MNT, the supply of meat will undoubtedly decrease.
Can you elaborate on what you said about depleting loans?
The reason why the supply of loans will decrease is that banks will look to provide loans to more reliable customers if an interest rate ceiling is established. Equal access to loans will decrease as a result. Financial access for risky ventures such as small-to-medium enterprises will undoubtedly decrease. Therefore, those who want to set an interest rate ceiling must understand that decreasing the price will decrease the supply.
Most would agree that Mongolia needs to decrease its interest rates. Therefore, what measures do you propose that will be more effective compared to the interest rate ceiling?
Research has shown that such a measure to set a ceiling on interest rates does not have adequate results in the long-term and in fact would carry negative consequences. For instance, the types of loans offered will decrease, access to loans will worsen, and the risk of the over centralization of loans to large debtors will increase. In addition, such a measure will increase and support the hidden economy.
There is the example of China, who enacted a similar measure to set an interest rate ceiling saw the creation of a shadow banking system. Unregulated banks that operated outside the regular Chinese banking system caused the Chinese government to cease its interest rate ceiling.
Instead of enforcing administrative action in order to decrease interest rates, the government must focus on influencing the major factors that determine interest rates through its policy. Mongolia has a chance to decrease interest rates by ensuring stability in the macro economy, having a sound fiscal and monetary policy, improving the capacity of the economy, and increasing its credit rating.
In addition, savings need to increase domestically. If the aforementioned actions are taken, the interest rate will decrease sustainably.
There are many who criticize banks saying that they are getting rich off of interest rates. What percentage of interest rates turn into actual profit for a bank?
The margin between the interest rate of loans and the interest rate of savings is about three percent. This three percent encompasses all of the bank’s operational costs, loan risks, and its profit. A bank’s profit is relatively low compared to its assets. Especially in a time of economic crisis, profit decreases. The reason is that a bank’s operations are inevitably intertwined with the performance of major economic sectors.
Even commercial banks know that there is a need to decrease interest rates. The most important thing is to do it correctly and in a way that is both sustainable and beneficial for the long run.
The term “usury”, the practice of making unethical or immoral monetary loans that unfairly enrich the lender, has been used a lot. Efforts to combat against usury have gained traction. What does this mean?
I don’t fully understand if those combating usury are saying that there should be no interest rate. In a market economy, a lender receives an interest for a loan it provides. But the interest must not be too high otherwise it will bring risks.
Therefore, it depends on exactly in what capacity the term usury is being used and in what way.
Will allowing foreign banks to enter Mongolia decrease interest rates?
Any foreign bank that enters into the Mongolian market will provide loans with the same interest rate that the market sets. It is a fairytale told by politicians that allowing foreign banks into the market will decrease interest rates. But this only applies if that bank is working for a profit.