Future of SME lending
In the last week or so, Mongolian social media has been flooded with news and responses to the small to medium enterprise (SME) lending controversy. The controversy surrounds several key politicians who have allegedly misused their power to funnel billions of MNT in SME financing to companies owned by family members of close associates. This has understandably caused public outcry and calls for resignation. Simultaneously, the reform on the mechanisms of SME lending has been brought into the spotlight.
On the political side of the issue, several of the politicians in question have inadvertently admitted that family members have received SME loans but denied any special privilege. One politician in particular, MP Ya.Sodbaatar, the recently appointed Minister of Roads and Transportation, admitted when questioned by media that his wife and her friends started a business and their company received a loan. This was confirmed by SME Development Fund official Sh.Sugar, who said that the company in question, Epato Anarvaan, did receive a loan.
...Several of the politicians in question have inadvertently admitted that family members have received SME loans but denied any special privilege...
What has been done in terms of abuse of power and misappropriation of state funds is for the Independent Authority Against Corruption and the Administrative Courts to decide. Currently, we know that several close associates of key politicians received SME loans but any abuse of power or other allegations must be concluded by an investigation. What we can conclude is that the SME lending mechanism is clearly flawed to a worrying degree. It is non-transparent and the exact details regarding selection are hazy at best. It leaves ample room for shady backdoor dealings and is an open source for misappropriation of state funds.
Small and medium-sized enterprises reportedly make up 98 percent of all enterprises in Mongolia, accounting for a large segment of the economy. However, according to the Asian Development Bank Institute (ADBI), SMEs have not been able to fully grow to their potential due to a lack of funding. More than 30 percent of SMEs cite lack of access to finance as the foremost constraint to their business. Only 10 percent of nearly 37,000 Mongolian SMEs have access to financing by commercial banks. SMEs are crucial to not only Mongolia’s economy but is the backbone of nearly all Asian economies. On average, 98 percent of all enterprises in Asia are SMEs, employing 66 percent of the national labor force and 38 percent of GDP.
As a result, any political interference quits the lifeline and prevents the growth of any enterprises with potential. This is adequate reason to argue for the SME Development Fund to enjoy more autonomy and separation from the political apparatus. If the allegations are proven to be true, the fact that MPs can pull strings to approve SME loans to whoever they please is alarming.
In light of the controversy, many have taken to social media to propose that SME lending become more transparent by making it public. Some have proposed that SME lending be organized in the same format the reality television show “Shark Tank” is. The TV show, launched in 2009 in the US and adopted into a Mongolian version in 2017, features several judges who are successful businessmen and businesswomen in their sectors to judge proposals by participants. At the end, the judges or the sharks choose whether to invest in a business or not.
The thinking behind implementing this format is that it will make it a lot more transparent and fair on who receives funding. Proponents of this idea hope for a more official, but less costlier version in terms of entertainment value. While the idea is innovative, there are some potential drawbacks. Issues such as the selection of the judges and the participants will likely be problematic.
Looking at the previous system for SME lending, the SME Development Fund provided 745.5 billion MNT in lending from 2009 to 2016. The majority of the lending was used to increase operating capital and purchase new equipment. According to the Ministry of Food, Agriculture, and Light Industry in 2017, the revenue of SMEs that received the loans rose by 20 to 30 percent. However, this figure was not audited and the credibility of the statement is questionable due to current circumstances.
In similar fashion, Mongol Bank and the Development Bank of Mongolia struggled with political interference and sabotage for as long as its existence. Only with the IMF program and legislative reform, these two government apparatuses seem to have regained some semblance of autonomy. In light of the controversies with the SME funding, the same needs to happen with the SME Development Fund. Even eccentric ideas such as reformatting SME lending into a reality television shows should be entertained. But at the end of the day, any issues concerning the government and its services all leads to good governance and elimination of corruption.