SEF XAC-Microstart Mongolia

completed

XAC, the largest microfinance institution in Mongolia, has operated for almost three years providing financial services to micro-entrepreneurs across the country. As of April 2001, XAC serves about 4,000 clients, and has an outstanding portfolio of about US$1.0 million equivalent. Since commencing operation, XAC has maintained a very high portfolio quality, reached operational profitability, and built a solid reputation in Mongolia. XAC''s total assets are currently about US$ 1.5 million equivalent. Total equity is about US$ 338,000 equivalent, with UNDP funding of about US$ 720,000 equivalent (booked as liabilities) to be converted into equity over the next year. Starting in 2000, IFC obtained technical assistance funding from the Dutch government to hire microfinance consultants. The program is still ongoing. XAC has approached other potential technical and financial partners, and has secured the involvement of the government of Finland, CGAP, Triodos Bank, and Shorebank, and other entities.Through the proposed investment, IFC will contribute to the development of XAC into a commercially-sustainable microfinance institution, with the possibility to expand into a microfinance bank. IFC will provide additional financing to expand XAC''s lending operations. IFC would furnish ongoing advice to XAC management in developing its strategy and business plan both through informal IFC staff involvement, and through additional technical support for which IFC is currently seeking funding.The project provides several development benefits, including increasing the availability of credit to the informal and SME sector and facilitating rural development. In Mongolia, the informal sector (including microenterprise businesses and agricultural activity) plays a significant role in the economy, potentially accounting for over 30% of GNP according to a 1998 World Bank study. However, there is little formal financing available to the sector and many areas of the country have limited access to credit or savings. XAC is one of a very limited number of finanical institutions to serve the microfinance sector, although competition is increasing. The extension of XAC''s branch network into rural locations will provide important financial services and in turn contribute to rural development. The success of XAC will promote the development of the a commercially sustainable microfinance industry.Part of IFC''s role in the project is as a lender, since long-term finance for XAC''s expansion is not available in the domestic market. IFC will also be a provider of technical assistance, which it plans to provide in coordination with CGAP and the World Bank SME group. IFC has also worked with the other stakeholders in the project (Triodos, Shorebank) on previous microfinance initiatives. IFC will ensure that XAC adopts an appropriate environmental plan.