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The Politics of the Mortgage Market in Mongolia

ucsadul29 January 2016

This is the third blog post in a series about debt and loans.

 

In the beginning of December 2015, news headlines declared that commercial banks would stop providing housing mortgages at a favourable 8 % interest rate. The “8 % interest housing mortgage” (8 huviin oron suutsny zeel) is a nation-wide programme initiated and implemented by the government through commercial banks.  The government started the programme in 2013 as a means to increase the affordability and accessibility of apartments for urban residents, particularly young families and those living in the ger districts.  The news of the repeal was shocking for many because it froze people’s ability to acquire apartments while also signalling a wider crisis in the national financial system.

Social demand for housing

A friend of mine, B, was planning to sell his flat to his friend in order to buy a larger flat from a different friend. The friend who was planning to buy B’s flat was about to receive a bank-approved mortgage.  Because he was very certain to get a loan from the bank, and since the selling and buying arrangements were between friends, they decided to exchange apartments before getting all the paperwork finalised.  B moved into his friend’s flat while his friend who had the mortgage approved moved into his former flat. A few days afterwards they all heard the news  that banks would no longer be offering mortgages with 8% interest rates. All of them went into a panic and they sought advice from friend who works in the banking industry to find out whether the repeal was a temporary or a permanent policy decision.  They asked two friends, one working  in the Khan Bank and another working in the State Bank (Toriin Bank), and both assured based on internal bank information that the repeal would not last long.

There is a widespread belief that mortgages allow people who live in ger districts to purchase apartments with low-interest loans, thereby decreasing air pollution in the whole city. However, this does not seem to be the main trigger.  The economist Batsuuri, for example, has claimed that people living in ger areas are not the major purchasers of apartments. So while such programmes appear to address social problems, they are also a business opportunity for others.

Monopoly of mortgage market

According to the employee at the State Bank, the bank is the most important, largest, and dominant bank constituting part of Mongolia’s financial system. There are no other major institutions that compete with banks in the whole financial system in Mongolia. Moreover, in the bank, the major financial activity is mortgage loans. According to him, banks cannot function without mortgages. Consequently, stopping the 8% mortgage program might further cause collapse in the ‘financial system’ (sankhuugiin togtoltsoo), because people would not be able to afford to purchase apartments at higher interest rates. Not only him, but many other professionals working in Mongolian banks were very certain that the repeal would not last long for the sake of the sustainability of the financial system.

As I am not an expert on banking and financial systems, I am not in a position to comment in detail here. However this repeal creates an impression that commercial banks profit from mortgage loans and are protected by the existing financial system and high social demand for housing. It is in fact a consequence of the capitalist system brought up in Mongolia since the 1990s that exploits debtors and protect creditors.  Bank monopoly was one of the two major arguments the constitution court developed and it became a trigger for the association of banks to decide to repeal the 8% mortgage loan scheme.

In fact the repeal of the 8% mortgage was not an immediate decision. Before it was publicly revealed in the news there was a discussion that occurred in the constitutional court. Civilians D. Yanjinkhorloo and B. Enkhbayar made complaints against some articles in the law regarding bank and non-bank financial service centres (NBFS) mortgage agreements. The complaints address how contracts based on the existing law regulates real estate (flat, house and land) mortgage does not permit civilians to go to court in the case when they are not able to pay loans and dispossesses mortgage property without having judicial decision.

The constitutional court discussed the case, concluding that some articles in the law of real estate mortgage violated a clause in the constitution regarding rights to possess real estate. According to the constitution, any cases of dispossession of real estate property should go through a court decision. Therefore, the constitutional court meeting announced that the law of real estate mortgage violates basic human rights, as declared in the constitution. The constitutional court asked parliament to amend the law and fix the violation. This decision was made on the 9th of December. It required the Association of Commercial Banks to react quickly, indefinitely stopping such mortgages. The constitutional court also raised other issues why the law around mortgages needed to be amended. The court considered that bank and NBFS loans and mortgages violated articles in the law against unfair competition. 17 commercial banks and NBFS dominate loan and mortgage services in Mongolia, by occupying more than the 1/3rd of the mortgage market. According to the law against unfair competition, article 5.1., defines any case of sales and services of more than 1/3rd of the market to be dominating it and, therefore, should be stopped.

For example, commercial banks gain profit from the interest gained on mortgages. As MP S. Ganbaatar puts it in his numerous public talks and parliament speeches: ‘dogs get fat when zud comes’ (zud bolohod nohoi zoolno), – i.e. dogs get fat when there has been a severely cold winter from feeding on the carcasses of dead livestock.  This alludes to the profits banks are making when normal people are suffering, and is a reason why he comments that all banks should be called ‘pawn shops’ (lombard).[1]  It is indeed noticeable that many Mongolian and foreign business people, including some politicians, have opened banks or NBFS in Mongolia.

Political immunity of mortgage business

The above-mentioned friend who works in a bank further explained that a well-known national company, Bodi International, owns a certain percentage of shares of Golomt Bank. Lu. Bold who is the founder and owner of this company is also an MP and a minister. A news article from 2010 revealed some of the owners of this bank, but many are not known.

The banker further revealed that a very large national company, the Tavan Bogd Group, and other foreign companies, such as ‘Savada Holdings’ from Japan, are owners of the Khan Bank (the latter owns the largest portion at 53%).  Another article from 2014 refers to bank owners as usurers (mongo huulegchi). The same term was used in the early 20th century to identify Chinese and Manchu high-interest money-lenders. The article reveals that ‘Global Investment and Development’ owns the largest share of 65 % of the Trade and Development Bank. The article speculates that the ex-President N. Enkhbayar and MP J.Battulga, who owns the ‘Jenko’ company, also have shares in the bank. These are the largest three banks in Mongolia.

It is not only professionals working in the banking sector and journalists who try to find out who are the owners of these large banks  and accuse them of being usurers. Many others in fact have the same opinion. Around the time when I was conducting field research in Dundgovi aimag, Batbayar, a young man who worked in Turkey, told me about Islamic Banks that allow loans with no interest. Batbayar, suggested that this is what Mongolia currently needs if the state is truly attempting to support housing and small- and middle-range enterprises, rather than allowing commercial banks to ‘spin money’.

As we can see mortgages are highly politicised and are not simply economic or social, especially at the moment when Mongolia is only a few months away from the next parliamentary elections in June. As Kh. Batsuuri states: ‘mortgage problem is becoming an advantage for rulers near the election’.  Alongside amendments to the Mortgage Law, ruling Democratic Party leaders have decreased mortgage interest rates from 8 % to 5 %. Not long after, in the start of January 2016, this news received favourable comments from the public in the media. Some even openly declared that they would now vote for the Democratic Party, while others commented that this is rather a temporary ‘electioneering show’ (songuuliin show).

5percent

Source: http://www.hunnu.mn/content/75214.htm

 

Absence of long-term policy making

On the 19th of January 2016, after about a month since the 8% mortgage loan was stopped, the Parliament of Mongolia approved an amendment to the Mortgage Law (Ul khodlokh ed khorongiin baritsaany tukhai khuuli). The amendment in article 27.1 now enables owners to have the right to issue permission to the mortgagee in cases when the mortgagees change ownership. This is not the only amendment. Interest rates have also decreased from 8 to 5 %, bringing possible future risk to the economy at large. As some economists, such as  Kh. Batsuuri and J. Ganbaatar (PhD candidate at the American University)[2] explain, the mortgage loan should have financially supported itself without becoming a burden to the national economy if it had worked according to the original plan. Indeed, considering the current weak economic situation in Mongolia, Kh. Batsuuri questions whether the 3 % decrease in mortgage interest rates actually puts more pressure on Mongolia’s economy. According to his elaboration, the 8 % interest rate influenced the current economic crisis. For instance, the Mongolian government had to print more national currency in order to supply mortgage loans, which brought 13 % inflation, plus the price of flats dramatically increased.

The same critique has also been made by another economist, de Facto Jargalsaikhan. In his latest post he comments that ‘the technology to print more currency to develop the country is vigorously increasing in Mongolia’. Maybe there are many more economist who consider the 5 % interest mortgage a serious threat to the already weak national economy. It will possibly bring with it more currency printing, more inflation, more cheap mining deals, and more external debt, in addition to the existing more than 20 billion USD debt.

Enkhbold

Speaker of Parliament Z. Enkhbold explains “why mortgage was stopped and what should be done”. Speaker of Parliament Z. Enkhbold explains “why mortgage was stopped and what should be done”. Source: http://economy.news.mn/content/232023.shtml

 

Enkhbold 2

Speaker of Parliament Z. Enkhbold explains “why mortgage is crucial”. Source: http://sodon.mn/news/16035

 

According to the media, the decreasing interest rate of mortgages and their availability again, serves to satisfy those wanting to purchase an apartment, construction companies struggling to sell apartments, and commercial banks who make massive profits from mortgage interest rates. Passing this policy does not serve the potential damages that it might incur on the national economy. The only agent that consistently profits and is safely protected, by society, politics and the economy, are the commercial banks, owned by foreign investors and Mongolia’s oligarchs. They are indeed safely protected, firstly by the social demand for housing, and secondly by political decisions that meet public demands in order to receive more votes for the up-coming election, and thirdly the unstoppable financial system dominated and monopolized with loans.

The question that remains is; what was the politics behind changes to mortgages? Why were they stopped? Was it because of the constitutional court decision regarding the violation of basic human rights and monopolisation in the national economy? Or, was it actually the outcome of a genuine fight against the politically-empowered dominant business for the sake of fair competition? Or, further, was it in fact due to the political conflicts between large business owners and their political allies? Is the 5 % interest mortgage another short-term political play to gain support prior to elections? In this fractious political climate, who is actually taking care of  the long-term interests of the national economy?

5 and 8 percent

Mongolian banks teetering on the edge, with 5 and 8% mortgages crashing.  Source: http://www.trends.mn/n/4709 (Original source: Modkraft)

 

 

[1] See also: https://www.facebook.com/ganbaatar.sainkhuu/videos/1089739141060523/?theater

https://www.facebook.com/ganbaatar.sainkhuu/videos/1089540537747050/?theater

For soyoljson lombard “culturalised pawn shops” also see http://www.fact.mn/204265.html

 

[2] Rebecca Empson and D. Bumochir’s skype interview with Ganbaatar Jambal, January 2016.

 

Living on Loans

ucsawat22 January 2016

This is the second blog post in a series about debt and loans.

 

Because of its history with debt, Mongolian culture contains sayings on its negative moral implications. The saying mentioned in Rebecca Empson’s blog entry, ‘Өргүй бол баян, өвчингүй бол жаргал’ (‘To be without debt is to be rich, to be without illness is to be happy), alludes to the widespread indebtedness of Mongolians to Qing-era traders in the 18th and 19th centuries. The contemporary Mongolian word for ‘loan’, zeel, also originated from this period and is derived from the Chinese word for ‘loan with interest’ (jiè) (Wheeler 2004: 232). Yet, the definition (and moral associations) of zeel has changed considerably historically. During the Socialist-era, for example, prohibition of individual property made formal indebtedness difficult. Instead, this era saw the proliferation of lending, borrowing and trading between family members, friendship groups and acquaintances, which were also called zeel. Utilizing networks (tanil tal) to acquire goods and services was a commonplace occurrence (Sneath 2012: 459).

The multiple meanings of zeel

Mongolians are once again deeply in debt, but the meaning of the word zeel (‘loan’) has expanded to adapt to the vagaries of this contemporary economy. At its core, a zeel indicates an exchange of money or goods that has a (sometimes indefinitely) delayed reimbursement. Contrary to Western understandings, zeel does not (predominantly) imply an economic transaction between two parties. In fact, similar to the network-building of the Soviet era, Mongolians are simultaneously involved in over a dozen ‘loans’ in diverse forms like money, dairy products, animals, clothing, and building materials to the bank, their neighbours, their friends, their school, the local kindergarten, etc.

Take the example of Degee, a 31-year-old woman with her own bakery business in the town of Halh-Gol in eastern Mongolia (population roughly 1,687).[i] Like most local small-business owners, Degee took out two currency loans—from the government and from a commercial bank—to finance both her daily expenses (хэрэгцээтэй) and profit-oriented endeavours (үлдэцтэй). Currency turnover is low, she says, so she also engages in a plethora of informal zeel in order to keep her business going in an economically beleaguered community. For example, local government workers, despite having stable jobs, are frequently paid late depending on when the government has money. During this period, many of these workers come to her to get a zeel of goods until their money comes in.[ii] Even the local kindergarten does so, by getting bread and food stuffs from her for the children three times a week to be paid back at the end of the month.

Degee account notebook

Degee’s account keeping in an old notebook in her bakery.

 

In fact, while talking with Degee in her shop, a herder entered her store. The herder gave Degee dried curds (aarts), in return for a zeel of baked goods she had received—i.e. for having taken bread a few weeks before with a delayed payment. Because of the pastoralist cycle, most herders receive cash during spring, when they can sell the first goods (i.e. wool) produced by their herd that year. Thus, the herder gave her dairy products in order to placate Degee until the herder could pay back the full worth of the baked goods. In addition, the herder left more dried curds at Degee’s bakery, for a third-party woman to pick-up at her convenience. This third lady was a trader, and had brought clothing from China and given them to the herder. The curds, left at the bakery, were a (partial) repayment, like an interest, for this zeel of the clothing.

Degee account notebook2

The messiness of records is emblematic of the messiness of loan networks. Here, Degee lists people in various categories like ‘hospital’ and ‘kindergarten’ and the amount they owe next to them. In the middle is ‘захиргаа’, i.e. government administration. See also Empson 2014.

 

In this way, the bakery functioned as a shadow repository for wealth to the commercial banks. Degee complained about monthly bank loan interest payments, not because she couldn’t pay them, but they kept her customers from having money to use at her store. In the struggling economy, most earned currency was given to commercial banks as loan payments, leaving little leftover for food stuffs. Yet, a business is more forgiving of late payments than a bank, and thus the bakery and its patrons were enmeshed in a web of loans of various goods, services and IOUs. These messy (sometimes multidirectional) economic exchanges, often intermeshed with currency from banks (or pawnshops), are the current manifestation of zeel (‘loan’) networks in Mongolia.

The Morality of Loans

Consequently, in Mongolia, being in debt is a normalcy. Everyone has a loan, said Degee, after I asked if loans were shameful. According to her, even individuals with steady jobs (like government workers) are paid so sparingly that they need to take out a (bank or individual) loan for any ‘larger’ purpose or occurrence—i.e. a car for the family, a television or medical expenses. Thus, with a steady job as collateral, these families frequently pay interest for a few months, establish good credit with the bank, and extend the loan. With this extended bank loan money, they pay off Degee. In this way, the conclusion of a bank loan gets pushed off into the distant, unseen future. Economic necessity thus breeds the continuation and repeated reopening of bank, pawnshop and interpersonal loans.

Amar, a 28-year-old trouser trader on Ulaanbaatar’s biggest outside market, Narantuul, has a story that corroborates Degee’s narrative. Although Amar works freelance, his wife is employed by the state as a policewoman. Due to vagaries in his earnings, Amar’s wife took out a loan with her steady employment as collateral, in order to pay for their daughter’s kindergarten and her return to university. He lamented that bank loans on the basis of employment (цалингийн зээл) were the most difficult to negotiate, because the salary was too low—stable enough to get a loan, but never enough to pay the loan back fully. Thus, government employee families (like his) became dependent on bank loans for their moderate living standard (as a supplement to their salary). Loans are only morally negative when you can’t pay them back, he says, but even then the requirements and social circumstances can be too difficult. Thus, Amar continues, ‘the failure to pay back a loan is 30 percent the person’s fault and 70 percent society’s fault’.

Narantuul

The chaos and competition of Narantuul, Mongolia’s largest informal market, sinks many traders into informal and formal debt.

 

Consequently, the moral connotation associated with loans and debt is changing. Although older generations might regard a formal loan as a sign of character failing (as a vestige of Socialism), younger generations engage with the concept differently. Informal market traders like Amar are exposed to daily vagaries and irregularities in income. For them, the inability to pay back a loan looks like a failed dream (and not a reflection of their moral character)—an attempt to expand a business that went bust in a faltering economy. Within this narrative, the locus of control lies outside of the individual and is instead dependent on the whims of government, banks and the economy. To others, debt is shameful when it destroys social relationships—reflecting the trust embedded in interpersonal loans. Yet as the economy continues to fluctuate, debt increasingly normalizes as a feature of everyday life, removing much of its stigma.

Trader of household goods Narantuul

A trader of household goods in her container (контейнер) stall on Narantuul. She frequently gives ‘loans’ of goods to neighboring stalls when they run out of product for the day so they can continue business.

 

The Sociality of Loans

As previously mentioned, loans in Mongolia involve a diverse network of exchange, obligation and transaction between multiple actors, both official and unofficial. Because of the historical prevalence of sharing between kinship groups in Mongolia, anthropologists have referred to these material flows between people as social ‘enactions’—“These sorts of transmissions are so common and expected that they can be seen as materialisations of the social relations themselves, a result of expectations and obligations generated by kinship and friendship connections” (Sneath 2012: 459). Prior to the switch to a market economy, sharing, loaning and borrowing amongst people was common and expressed in terms of duty, favours and obligations between friends and family (459). These material exchanges still exist, yet are increasingly monetized in the interest of profit.

Take the following example of exchange amongst a group of friends: Person A uses a BMW that is owned by their parents. Person B, their friend, has an old Range Rover and wishes to sell it. Unable to find a buyer, Person B brings his car to a pawn shop and pawns it. They both have a friend, Person C, who has a new Range Rover, but now dislikes its fuel consumption. Person B tells Person A about Person C’s problem, who then passes the BMW through Person B to Person C. Person B thus exchanges the BMW to Person C for the new Range Rover. Person B then takes the new Range Rover and sells it to Person D in exchange for money and a Japanese car. All the while, Person B continually pays Person A a small sum of money as a form of interest until they can fully pay off their ‘loan’ for the BMW (which is actually legally owed to Person A’s parents).

Similar to Degee’s small business, kinship and friendship networks increasingly become zeel networks financed through a diverse system of bank loans, barter, pawnshops and trade. Although these exchanges between friends are still frequently couched in terms of ‘favours’ and ‘help’ (тусламж), these favours more and more come with a price. As with this example regarding the BMW, loans of goods or money between friends now commonly involve interest (to make ‘it worth it’, as one informant said), which was unheard of during the Soviet era. Additionally, in the absence of capital to meet their needs, individuals can lease, loan, sell or borrow their family member’s property or take a bank loan out using a family member’s collateral (давхар зээл). In this way, Person A could sell or loan out their parent’s car without repercussion. Thus, in light of the struggling economy, familial and friendship networks take on a new dimension as means for increased capital access (these networks also act as collateral in pawnshop loans—see previous blogpost).

The Monetisation of Trust

The zeel networks were historically based on trust within a small community. For example, Jagaa, a 34-year-old jacket trader on the informal market in Choibalsan, frequently lends and borrows goods and money from the girls on her trading floor. Because of their close working proximity to one another, which results in intertwined friendship networks, the girls will frequently give each other money when in need—i.e. when one of them can’t pay back their bank loan payment that month. Jagaa says that she ‘trusts people’ (хүнд итгэдэг) and thus will unreservedly give out loans of products and money to acquaintances sent by friends. This form of trust in zeel exchange is not uncommon on Mongolia’s contemporary markets—Zola, a 21-year-old, whose family works on Narantuul, explained that once a customer became a regular, ‘trusted customer’ (найдвартай харалцагч), her family will freely send goods to that customer on request to be paid back at leisure. In this way, zeel networks on informal markets, within friends and family have historically been based on trust within a community.

Loaning money at Narantuul

Women (and men) who work in the same section of a market frequently ‘loan’ each other money or goods or will sell goods for each other when one is absent/ill. In this way, they build trust networks amongst each other. The sign reads: “All bank cards accepted here”.

 

However, as the language of loans shifts from favour to self-interest, so too does trust shift from individual to institution. In the past, formal zeel transactions between people were settled through verbal contracts (амаар хийсэн аман гэрээ), based on communal trust and expectation of obligation fulfilment. Yet, as Jagaa mentioned in our interview, most Mongolians now have an example of the failure of that trust—of being ‘used’ through a zeel and then abandoned (ашиглуулаад л өнгөрдөг). Stories abound of friends being jilted through the lack of a business contract; individuals changing their phone numbers after getting a personal loan; or giving a zeel to a classmate who just disappeared. Promises and informal contracts, unfortunately, do not stand up well in the court of law. Verbal contracts are thus increasingly seen as risky (эрсдэлтэй). In this way, the legal-backing of bank loans gradually become more desirable where interpersonal loans might have been more popular in the past.

The current relationship between trust and commerce institutions (as a buffer for risk) was explained to me as follows: In zeel exchange between close relatives/friends, no interest is taken, but small ‘gifts’ of money are given. In zeel exchange between friends and acquaintances, an interest is taken. In zeel exchanges between strangers, a notarized contract is required. Thus, as the social distance widens, so too does the reliance on institutionalized methods of commerce (see also previous blogpost).

Jagaa and goods

Jagaa hidden among all her coats at the market.

 

Surviving the Economic ‘Hangover’

Between 2011 and 2015, the GDP growth of the Mongolian economy dropped from 12 to 3 percent. This precipitous decline was recently described by Enkhbold, head of both Parliament and the Democratic Party, as the economic ‘hangover’ after the party (шартдаг үйл явц).[iii] In a beleaguered economy, zeel, in all their various instantiations, become instrumental to everyday economic survival. Far from the individual, strictly institutional monetary exchange envisioned by Western economic policies and bank initiatives, the definition of and implementation of zeel in Mongolia encompasses a wide range of barter, borrowing, exchanging, transferring, giving, pawning, and payment between friends, family, acquaintances, banks, pawnshops and group networks. The boundaries between official, unofficial, trust, obligation, self-interest and profit blur, as neither old forms of trust networks, nor new pecuniary institutions are without risk.

Consequently, whereas others might live from hand to mouth, Mongolians increasingly live from ‘loan to loan’ (зээлээс зээлийн хооронд явдаг), as their social needs are met through the continual opening, fulfilment or extension of diverse forms of zeel to one another. Within this framework, the goal of a loan is not necessarily eventual completion, nor is debt necessarily seen as a sign of character failing. Moreover, as one sum herder stated, getting a loan was like going with the times (Орчин үеээ дагаж өөрчлөгдөж байгаа учраас зээл ч гэсэн авж байна). Loans represent one’s engagement in the negotiation of personal needs through societal relationships, as well as the accrual of money through market turnover and continual payment. Consequently, as the fluctuations of the market economy impact everyday decisions, even the historical practice of kinship and friendship obligation become defined through the language of market, exchange, profit and interest.

 

References:

Empson, Rebecca 2014 An Economy of Temporary Possession (available on-line: http://www.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player.aspx?id=2461)

Sneath, David 2012 The ‘age of the market’ and the regime of debt: the role of credit in the transformation of pastoral Mongolia, Social Anthropology/Anthropologie Sociale (2012) 20, 4 458–473.

Wheeler, Alan 2004 Moralities of the Mongolian ‘Market’: A Genealogy of Trade Relations and the Zah Zeel, Inner Asia (2004) 6: 215-38

 

[i] http://khalkhgol.dd.gov.mn/мастер-төлөвлөгөө

[ii] In her 2014 public lecture “An Economy of Temporary Possession”, Empson notes that locals do not refer to these exchanges as ‘loans’, but occasionally as ‘milk money’. However, in Empson’s example, locals were engaging in barter where no money was exchanged. Degee, in contrast, always used money as a base and never accepted full payment in goods. Thus, she continued to use the language of ‘loan’, thus indicating her conceptual linkage between currency and loan giving. The recording is available at: http://www.lse.ac.uk/newsAndMedia/videoAndAudio/channels/publicLecturesAndEvents/player.aspx?id=2461

[iii] http://dnn.mn/з-энхболд-уих-ипотекийн-найман-хувийн-зээлийн-асуудлыг-энэ-сардаа-шийдвэрлэнэ/