Government of Japan

MONGOLIA LEASING INDUSTRY SURVEY

Ulaanbaatar - 2008

IFC MONGOLIA LEASING DEVELOPMENT PROJECT

Mongolia Leasing Industry Survey, 2008. Annex 1: Main Indicators of Mongolian Leasing Industry

This publication may not be copied partly or in full without prior written permission of copyright owner. This publication has been prepared for guidance only and is not intended to be exclusive. Despite the fact that this publication has been compiled with the highest care it should be used neither as a substitute for legal advice nor as a basis for adoption of business decisions. Views expressed in this publication are those of its authors and do not necessarily reflect the views of IFC, IBRD, or the Government of the country supporting the implementation of the IFC Mongolia Leasing Development Project.

© 2008 International Finance Corporation Pennsylvania Avenue NW, 2121 United States of America Member of the World Bank Group

Mongolia Leasing Industry Survey, 2008

ACKNOWLEDGEMENTS IFC would like to thank the leasing providers who participated in the survey. We believe that the survey will be useful to all market players, policy makers, investors, financial institution, and will help leasing providers compare themselves with others, while also identifying opportunities for growth. IFC would like to thank Solo Center Co. Ltd (Mongolia) and Ms. Hongorzul Dari, PhD, a former Mongolia Leasing Development Project Financial Specialist, for their participation in this project: IFC engaged Solo Center Co. Ltd to distribute the survey questionnaires and collect responses, and Ms Hongorzul Dari to analyze data and draft this report. IFC would also like to thank the government of Japan, who financed this study.

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Mongolia Leasing Industry Survey, 2008

TABLE OF CONTENTS

EXECUTIVE SUMMARY .............................................................................................. 6 SECTION ONE: MACROECONOMIC SITUATION................................................. 8 1.1 General Overview ......................................................................................................... 8 1.2 Financial Sector ............................................................................................................ 8 SECTION TWO: LEASING INDUSTRY OVERVIEW............................................ 10 2.1 Leasing Industry.......................................................................................................... 10 2.2 Providers of Leasing ................................................................................................... 14 2.2.1 Banks............................................................................................................ 14 2.2.2 Suppliers of Equipment and Machinery....................................................... 16 2.2.3 Independent Leasing Companies and NBFIs............................................... 17 2.2.4 Other Lease Providers ................................................................................. 19 2.3 Sources of Financing................................................................................................... 20 2.4 Overdue Payments ...................................................................................................... 20 2.5 Main Barriers to Leasing Development ...................................................................... 21 2.6 Conclusion .................................................................................................................. 21 SECTION THREE: LEGAL FRAMEWORK FOR LEASING ................................ 22 3.1 General Overview ....................................................................................................... 22 3.1.1 Legal Environment Awareness .................................................................... 23 3.1.2 Dealing with courts...................................................................................... 24 3.2 Accounting and Taxation of Financial Leasing .......................................................... 24 3.3 Constraints for Further Development ......................................................................... 25 3.4 Conclusion .................................................................................................................. 26

Annex 1. Main Indicators of Mongolian Leasing Industry, 2003-2007, by category of lease providers .......................................................................................... 28 Annex 2. Survey Methodology......................................................................................... 29 Annex 3. Survey Questionnaire........................................................................................ 30

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Mongolia Leasing Industry Survey, 2008

LIST OF TABLES Table 1.1. Main Ratios of Mongolian Financial Sector, %, 2000 - 2006 ........................... 9 Table 1.2. Lease Providers by Categories, 2003-2007 ..................................................... 11 Table 1.3. Key Ratios for the Mongolian Leasing Industry, 2003 - 2007 ........................ 13 Table 2.1. Average Lease Conditions by Banks, 2003-2007............................................ 15 Table 2.2. Average Lease Conditions by Equipment Suppliers, 2003-2007 .................... 17 Table 2.3. Average Lease Conditions by Leasing Companies and NBFIs, 2007............. 19 Table 2.4. Average Lease Conditions by Other Lease Providers, 2006-2007 .................. 19 Table 2.5. Sources of Financing, 2004-2007 .................................................................... 20

LIST OF CHARTS Chart 1. GDP growth, % .............................................................................................. 8 Chart 2. Number of Lease Providers, 2003 – 2007...................................................... 11 Chart 3. Outstanding Lease Portfolio by Lease Providers 2007.................................. 12 Chart 4. Total Lease Portfolio 2007, by sector ............................................................ 13 Chart 5. Total Lease Portfolio 2007, by type of lessors............................................... 14 Chart 6. Total Lease Portfolio of Banks 2007 ............................................................. 15 Chart 7. Total Lease Portfolio of Equipment Suppliers 2007...................................... 16 Chart 8. Total Lease Portfolio of Independent Leasing Companies 2007 ................... 18 Chart 9. Total Lease Portfolio of NBFI 2007 .............................................................. 18 Chart 9. Leases > 90 Days Overdue 2003 - 2007 ........................................................ 20 Chart 10. Key Barriers to Leasing Development 2008................................................ 21

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Mongolia Leasing Industry Survey, 2008

EXECUTIVE SUMMARY The Mongolian leasing industry has shown signs of positive growth over the past two years. Macroeconomic stability and growth, coupled with important legislative initiatives, have encouraged foreign and domestic investment in the sector. The IFC Mongolia Leasing Development Project, with support by the Japanese government and IFC trust funds, played a key role in spurring this growth by lobbying for important legislative changes, including the Law on Financial Leasing (passed in June 2006), conducting training and consultations for leasing companies, and raising awareness about leasing in general. Since the project closed in September 2006, however, no comprehensive market survey has been conducted to measure this growth. IFC, therefore, endeavored to measure exactly how much the leasing industry has grown as a result of the legislative reform and project activities. The survey was conducted in April 2008. Respondents were asked to give financial activity data as of December 31, 2007. Forty-eight lessors were included in the survey sample, representing 100 percent of the leasing services providers in Mongolia. Various methods of collecting information were used in the preparation of this analysis, including polling leasing companies in person, as well as interviews with government officials and other market participants. The survey shows significant positive development of the leasing industry in Mongolia. • • • • • • The total volume in new leases reached almost $90 million in 2007, more than double the volume in 2006, and over eight times the leasing volume in 2005. The leasing industry has been growing rapidly, reaching a total volume in the outstanding leasing portfolio of over $80 million in 2007, almost three times the leasing portfolio in 2006 and a seven-fold increase over the leasing portfolio in 2005. The number of lease providers almost quadrupled -- from 13 in 2005 to 48 in 2007 – reflecting the positive changes in the legal environment for leasing industry in Mongolia. The main lessors are banks and equipments suppliers, constituting the bulk of the portfolio. The market is diversified, though cars, consumer items, and mining equipment still make up a large percentage of the portfolio. The share of leasing as a percentage of Gross Domestic Product (1.6 percent in 2007) and in the total loans provided by the banks (3 percent in 2007) has been increasing over the last years, showing that leasing is becoming one of the important sources of financing. The repayment rate was high for all lease providers, well over 90 percent. The sector has stabilized to some degree as indicated by the more favorable terms offered – longer term durations and lower interest rates.

• •

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Mongolia Leasing Industry Survey, 2008

However, there is still room for further improvement in legislation like resolving contradictions between various legal acts, providing more favorable conditions in taxation, and clarifying vague provisions. In addition, current funding sources are extremely limited, with only 15% of lease financing coming from external creditors. Growth prospects, then, continue to be hampered by the enabling environment and the lack of alternative sources of financing.

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Mongolia Leasing Industry Survey, 2008

SECTION ONE: MACROECONOMIC SITUATION 1.1 General Overview Mongolia has made significant progress in achieving macroeconomic stability and implementing fundamental structural reforms since its transition to democracy and a market-based system in the early 90s. The Mongolian economy has been growing steadily in the last years from 5.6 percent GDP growth in 2003 to 9.9 percent in 2007, with a peak of 10.7 percent in 2004. This growth can be attributed to sustained favorable weather conditions, livestock increases, higher prices of gold and copper in the world market, expansion in transportation and telecommunications, and greater capital inflows. Chart 1 GDP growth, %
12 8 4 0 2003 2004 2005 2006 2007 2008* 2008* - estimated growth 10.7 7.3 5.6 8.5 9.9 10.1

%

Source: National Statistics Office, Statistical Yearbook, 2007

In 2007, over 4,000 foreign companies from 80 countries were registered in Mongolia. Total Foreign Direct Investments (FDI) reached about $2.15 billion, with accounting oil and mining sectors almost half of it (49.4 percent), trade and catering 17.7 percent, banking and financial services 14.9 percent, light industry 8.2 percent, construction and construction material production 6.5 percent and other sectors 3.3 percent. China and Canada were the largest investors providing about 40 percent and 13 percent of the total FDI respectively. 1.2 Financial Sector The Mongolian financial sector has continuously improved over recent years, owing to the strengthening and sharp growth of the economy, increase in the price of main export products on the world market and an increase in the profits of business companies. In 2006, financial intermediation has deepened and concerted efforts have been made to achieve economic growth, due the improving situation, mentioned above, and to the intensification of deposit and credit activity among banks.

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Mongolia Leasing Industry Survey, 2008

The deposits of households, companies and other institutions have steadily increased in 2006. In particular, the total amount of savings and time deposits increased by 48.2 percent, or $275.2 million, reaching $812.4 million. This is an indication of the restoration of public confidence in the banking system. The increase of 42.4 percent or $74.5 million in the capital of banks was a result of the following factors: first, banks increased their capital to $6.8 million in compliance with the minimum statutory capital requirement; second, the profit of the banking system reached $25.5 million for the first time in the banking sector’s history. The increase in equity has resulted in an increase in a total amount of banking sector assets of 46 percent, or $620.4 million. Consequently, the total assets of the banking sector reached 2.3 trillion dollars. As the assets of the banking sector have risen, loans and finance to the private sector have increased steadily. For example, banks granted $54.5 million in loans to less than 1,700 customers in 2000. By 2006, total outstanding loans reached $1.2 billion and 43.7 percent of the banks had foreign investors. As a result, in 2006 financial sector indicators were expanded and the deepening of financial intermediation was continued. The ratio of loans to GDP increased by 4.5 percent, the ratio of deposits to GDP by 3.9 percent and money velocity increased by 0.13 percent from the previous year demonstrating the effect of stabilization.

Table 1.1. Main Ratios of Mongolian Financial Sector, %, 2000 - 2006
2000 Loans/GDP Deposits/GDP Loans outstanding (billion tugrugs) 6.6 9.1 66.8 2001 12.1 12.1 135.1 2002 18.7 17.6 231.4 2003 29.9 24.6 442.1 2004 31.2 26.6 606.8 2005 34.1 27.5 859.9 2006 38.6 31.4 1223.3

Source: Bank of Mongolia, Annual report 2006

In 2007 the financial sector in Mongolia comprised of 16 commercial banks, 150 nonbank financial institutions (NBFIs), and about 500 savings and credit cooperatives.

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Mongolia Leasing Industry Survey, 2008

SECTION TWO: LEASING INDUSTRY OVERVIEW 2.1 Leasing Industry Leasing in Mongolia started to develop actively in 2006. There were a number of actions undertaken by the Mongolian government and the donor community to support this development. Since the mid 1990s awareness has been growing in Mongolia that the introduction of financial leasing would be advantageous for the country’s economic development and that there is demand for a term financing instrument that is asset based and does not rely on collateral exclusively. There was a strong demand for financial leasing, demonstrated by the fact that, despite the lack of favorable environment for leasing and proper legislation, many financial institutions and even vendors and producers of equipment were offering lease products (or asset-based financing). In order to meet this demand, the Mongolian government, with IFC assistance, implemented a series of initiatives to introduce leasing: in 1997 the first survey on leasing was conducted; in 1998 several ministries and private sector representatives drafted the first leasing law and tried to get it adopted by the Parliament. However, elections resulting in a new government halted the progress. In 1999 IFC helped to establish the Mongolian Leasing Association; and in 2001 IFC funded a technical assistance mission to review the conditions of the leasing market, analyze legal, tax, accounting, and regulatory aspects of leasing in Mongolia and updated the draft leasing law. In July 2004 the IFC Mongolia Leasing Development Project commenced to continue previous IFC’s initiatives, reinvigorate discussions on new leasing legislation, and complete this process by helping the leasing legislation get passed in summer 2006. The new law on financial leasing and the amendments to the tax and bank legislation were expected to have significant impact on the development of the leasing industry. With adoption of the new Law on Financial Leasing on June 22, 2006, leasing became much more attractive for investors, both foreign and domestic. The law gives a definition of financial leasing that discriminates clearly between financial leasing and renting, property leasing and other types of contracts mentioned in the Civil Code. Mongolia also amended its tax legislation -- the Corporate Income Tax Law and the Value Added Tax Law, approved in June 29, 2006, and enacted in January 1, 2007 -- to create favorable tax treatment for leasing and encourage investment in fixed assets. As of December 2007, there are 48 lessors operating in Mongolia, as identified during the survey. Of these, 11 are the largest Mongolian banks, two are independent leasing companies formed by banks, eight are non-bank financial institutions, 15 are suppliers of equipment and transport vehicles, and 12 are manufacturers and suppliers of other types of products. As compared to 2005, the number of lessors doubled in 2006, and further increased in 2007.

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Mongolia Leasing Industry Survey, 2008

Chart 2
Number of Lease Providers, 2003 - 2007
60

48
40

27
20

11 3
0 2003 2004

13

2005

2006

2007

Table 1.2. Lease Providers by Categories, 2003-2007
2003 Banks Independent leasing companies Non-bank financial institutions Suppliers of equipment and machinery Other types of lease providers (manufacturers, suppliers of product other than equipment) Total 1 2004 4 1 1 5 2005 7 1 1 4 2006 9 1 2 8 7 3 11 13 27 2007 11 2 8 15 12 48

2

The leasing industry has been growing rapidly, reaching a total volume in the outstanding leasing portfolio of over $80 million in 2007, almost three times the leasing portfolio in 2006 and a seven-fold increase over the leasing portfolio in 2005. The main lessors are banks and equipments suppliers, constituting the bulk of the entire portfolio. (See Annex 1). The total volume in new leases reached almost $90 million in 2007, more than double the volume in 2006, and over eight times the leasing volume in 2005.

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Mongolia Leasing Industry Survey, 2008

Chart 3

Outstanding Lease Portfolio by Lease Providers 2007 ($ millions)
100.0 2003 80.0 56.8 2004 2005 2006 2007 80.2 1.9 6.4 11.0 Total 28.0 0.0 0.2 0.3 0.7 1.1 Leasing companies NBFI's 0.1 Other

Lease Volume

60.0

40.0 19.5 20.4 1.9 4.9 6.2 7.3

20.0 0.1 1.3 4.5

0.0

Banks

Suppliers of equipment

The leasing portfolio in Mongolia by sector is quite diversified and includes cars (41.4 percent), consumer items (23.8 percent), mining (23.6 percent); with equipment for trade1 (4.6 percent), construction equipment (1.5 percent), agricultural equipment (0.9 percent), freight vehicles (0.9 percent), medical equipment (0.3 percent), and others (3.0 percent) making up smaller parts of the portfolio. Due to the high demand for cars and relatively well developed insurance and registration system for cars, this segment accounts for the largest percentage of the lease portfolio, followed by consumer items. As all lessors have a limited budget and face issues with funding, most of them except equipment suppliers offer financial leasing for consumer items with value of less than $1,000. Thus it is clear that financing equipment for small and medium enterprises still face problems accessing leasing regardless of the sector. In 2003 the share of leasing was only a tiny portion (1.1 percent) of machinery and equipment import; leasing now comprises over one-fifth of machinery and equipment imports (10.3 percent in 2006 and 22.8 percent in 2007) demonstrating a significant growth.

1

Equipment for trade includes refrigerators, shelves, electronic weights, etc.

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0.5 1.7

Mongolia Leasing Industry Survey, 2008

Chart 4
Total Lease Portfolio 2007 by sector
Other 3.0%

Mining equipment 23.6% Equipment for trade 4.6%

Cars 41.4%

Medical equipment 0.3%

Construction equipment 1.5%

Freight vehicles 0.9% Agricultural equipment 0.9%

Consumer items 23.8%

The share of leasing as a percentage of Gross Domestic Product (GDP) and in the total loans provided by the banks has been increasing over the last years, showing that leasing is becoming one of the important sources of financing. The percentage of leasing in GDP increased from 0.1 percent in 2003 to 1.6 percent in 2007, reflecting the positive impact of the new legislation. Mongolia compares favorably with countries with well-established leasing industries, where leasing typically comprises 1-2 percent of GDP, and with its neighbors Russia and China, where leasing comprised 1.17 percent and 0.2 percent respectfully in 20062. Table 1.3. Key Ratios for the Mongolian Leasing Industry, 2003 - 2007
2003 2004 2005 2006 2007 82,764 80.21 3.0 1.6 22.8 Number of outstanding lease deals 366 6,039 17,851 38,018 Value of outstanding lease portfolio ($ millions) 1.93 6.35 10.96 28.0 Leasing/Loan (%) 0.5 1.2 1.5 2.7 Leasing/GDP (%) 0.1 0.4 0.5 1.0 Leasing/Import of machinery (%) 1.1 3.2 4.3 10.3 Sources: Rows 1 - 2: IFC Leasing market surveys, 2004-2008; Rows 3 - 4: Bank of Mongolia, Annual report 2006; Row 5: National Statistics Office, Statistical Yearbook, 2007.

2

World Leasing Yearbook 2008, Euromoney Yearbooks.

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Mongolia Leasing Industry Survey, 2008

Chart 5
Total Lease Portfolio 2007 by type of lessors (as % of total volume)

Banks 70.8%

Suppliers of equipment and machinery 25.4%

Other types of lease providers 2.2%

NBFIs 0.2%

Leasing companies 1.4%

According to the survey, 70.8 percent of the total outstanding lease portfolio for both consumer items and business equipment was financed by banks in 2007 followed by suppliers of equipment (25.4 percent), and other types of lease providers such as manufacturers and suppliers of products other than equipment (2.2 percent). The other types of lease providers are mostly new players in the leasing market that started leasing activity after the legal environment changed. The structure of the total lease portfolio by the type of lessors has changed since 2005 when the share of equipment suppliers (56.9 percent) prevailed over the banks (40.2 percent) in value terms. However, in terms of the number of leasing transactions, banks have been financing 98-99 percent during the last five years. The value of these transactions tends to be lower than the expensive equipment leased by the suppliers. 2.2 Providers of Leasing 2.2.1 Banks The survey showed that 11 out of 16 Mongolian banks offer financial leasing services in comparison with only seven banks in 2005. Most of the banks have changed the product name to “financial leasing”, which was called “a leasing loan” before the new legislation was enacted. All 11 banks have made their leasing conditions more favorable to their clients by increasing lease terms, reducing interest rates, and attempting to support small businesses rather than consumer items. However, over 85 percent of leases offered by banks still derive from consumer items and private cars, which indicates that the structure of bank leasing by type of equipment remains unchanged.

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Mongolia Leasing Industry Survey, 2008

Chart 6
Total Lease Portfolio of Banks 2007 by equipment type
Manufacturing equipment 0.5% Equipment for trade 5.8% Construction equipment 0.4%

Mining equipment 0.9% Other 5.0%

Consumer items 34.8% Cars 51.4% Telecommunication 0.2% Freight vehicles 1.1%

Table 2.1. Average Lease Conditions by Banks, 2003-2007
2003 Number of banks engaged in leasing Average duration of lease agreements (months) Down payment, % Interest rate, % Average number of leasing deals Main currency of lease transactions 1 6 20-30% 2.3-3.0% 28 MNT 2004 4 6 20-30% 2.3-3.0% 536 MNT 2005 7 9 10-50% 2.3-3.0% 1604 MNT 2006 9 14 0-50% 2.1-2.5% 3396 MNT 2007 11 18 0-50% 1.3-2.0% 7364 MNT

The average period of leases increased from six months in 2003 to 18 months in 2007, indicating that the leasing market has become more stable and that lessors are able to take more risks. Likewise, interest rates declined from 2.3-3.0 percent in 2003 to 1.3-2.0 percent in 2007, indicating stability in the market and allowing leases to become more affordable for lessees. Over 90 percent of the leasing deals with banks were in the local currency, Mongolian tugrugs (MNT).

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Mongolia Leasing Industry Survey, 2008

2.2.2 Suppliers of Equipment and Machinery The number of equipment and machinery suppliers providing leasing services has grown from four in 2005 to 15 in 2007. Their lease portfolio consists mainly of mining equipment (88.5 percent) followed by cars (5.1 percent), construction (4.6 percent) equipment, and agricultural equipment (1.8 percent).

Chart 7
Total Lease Portfolio of Equipment Suppliers 2007 by equipment type
Mining equipment 88.5%

Agricultural equipment 1.8% Cars 5.1%

Construction equipment 4.6%

In 2007 the total value of 471 new lease transactions financed by the suppliers was $15.9 million with the current outstanding portfolio of $20.4 million (438 lease deals). This represents a more than seven-fold increase in the total value of new lease transactions and almost three-fold increase in the outstanding portfolio in comparison to 2006. Equipment and machinery suppliers offer longer lease period and lower interest rates than other leasing providers. Equipment and machinery suppliers are mostly foreign companies or branch companies of internationally recognized companies. In comparison to other leasing providers they are able to get low interest and long term loans from overseas, mostly from parent companies in order to finance leasing. The average number of leasing deals per supplier has increased from four in 2003 to 29 in 2007. The average size leasing deal concluded by suppliers was around $136,050 in 2007, demonstrating an almost four-fold increase in comparison with 2005. Unlike with banks, almost all deals are accounted for in U.S. dollars.

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Mongolia Leasing Industry Survey, 2008

Table 2.2. Average Lease Conditions by Equipment Suppliers, 2003-2007
2003 Number of Suppliers engaged in leasing Duration of lease agreements (months) Average down payment, % Interest rate, % Average number of leasing deals Main currency of lease transactions 2 24-36 30% 1.3-1.5 4 USD 2004 5 24-36 30% 1.3-1.5 7 USD 2005 4 24-36 30% 1.3-1.5 9 USD 2006 8 12-24 30% 1-1.2 13 USD 2007 15 12-24 30% 1-1.2 29 USD

Equipment suppliers benefit the most from the current legislative framework. They enjoy the VAT exemption for the interest portion of a lease payment. Their customers/lessees also benefit from reduction of taxable income by the amount of interest paid to them. Bank customers do not benefit from this provision as 86.1 percent of bank customers take leases for personal use and not for business purposes. According to the General Department of National Taxation, as of October 1, 2007, a total of 429 taxpayers deducted $2.6 million from their taxable income in accordance with this provision. The most problematic issue for suppliers as well as other types of lease providers is the registration of movable assets. Although the law on financial leasing states that movable assets can be registered, there is no regulation or regulatory agency that registers these assets. Creating such a registry would ensure that leasing companies have established priority over the leased asset in the event of the lessee’s bankruptcy. A proper asset registry system also ensures that assets offered as collateral by the lessee do not already have a lien against them. 2.2.3 Independent Leasing Companies and NBFIs There are two leasing companies specializing in financial leasing in Mongolia. Mongol Leasing was the first leasing company in Mongolia, established in 2002, has extensive experience in leasing and is an active player in the leasing market. Xac Leasing was established in May 2007 with the purpose to provide financial leasing to small and medium enterprises. Mongol Leasing is owned by the same business group that owns Golomt Bank, which was established by Xac Bank. Mongol Leasing is licensed as a nonbank financial institution and operates as an NBFI by fulfilling all requirements of the Bank of Mongolia, while Xac Leasing is established as a limited liability company. Types of equipment offered by the leasing companies for leasing are limited mostly to telecommunication (41.6 percent), construction (24.2 percent), agricultural (20.1 percent), and office equipment (14.1 percent).

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Mongolia Leasing Industry Survey, 2008

Chart 8
Total Lease Portfolio of Independent Leasing Companies 2007 by sector
Agricultural equipment 20.1% Telecom equipment 41.6%

Office equipment 14.1%

Construction equipment 24.2%

A total of 8 NBFIs (excluding Mongol Leasing) engaged in leasing were identified during the survey. The lease portfolio of NBFIs consists of a wide range of equipment, out of which agricultural equipment and cars account for 38.6 percent and 26.0 percent respectively in 2007. The other types of leased equipment are: consumer items (21.3 percent) and construction (13.1 percent) equipment, freight vehicles (0.4 percent), and equipment for trade (0.6 percent). Chart 9
Total Lease Portfolio of NBFI 2007 by sector
Equipment for trade 0.6% Cars 26.0% Construction equipment 13.1%

Office equipment 21.3%

Agricultural equipment 38.6%

Freight vehicles 0.4%

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Mongolia Leasing Industry Survey, 2008

Lease conditions offered by the leasing companies clearly indicate their interest to support small and medium enterprises. However, due to limited funding resources, they are highly selective about their clients. At the present only clients who had previous credit history in their respective banks (banks that established these leasing companies) were offered financial leasing. Terms are quite favorable, compared with other lease providers, with average lease terms up to 60 months, down payments of 10 percent, and a flexible lease payment schedule. Interest rates of 1.2-1.8 percent are also lower than that those of banks and NBFI’s. Table 2.3. Average Lease Conditions by Leasing Companies and NBFIs, 2007
Leasing Companies Number of Lease Providers Duration of lease agreements (months) Average down payment, % Interest rate, % Average number of leasing deals Main currency of lease transactions 2 12-60 10 1.2-1.8 21 USD NBFIs 8 24-36 30 1.3-2.0 32 MNT

In 2007 NBFIs financed 383 leasing deals with the total value of $194,400, which is a significant increase in comparison with 2006, when 89 leasing deals with a total value of $19,300 were concluded. 2.2.4 Other Lease Providers A total of 12 other lease providers were identified during the survey. They are the importers of used cars; suppliers of sewing, food processing, and catering equipment; and manufacturers of equipment. These lease providers are new to the Mongolian leasing market as they only started operations in 2006 or 2007. Their outstanding lease portfolio has increased from $0.53 million in 2006 to $1.7 million in 2007. As a share of the total, their lease portfolio accounts for 1.9 percent in 2006 and 2.2 percent in 2007. Lease conditions offered by these other lease providers are mostly for shorter periods of three to 12 months because they use leasing as a tool to increase their sales. Their interest rates and down payments are usually on the market average. Table 2.4. Average Lease Conditions by Other Lease Providers, 2006-2007
2006 Number of other lease providers Duration of lease agreements (months) Down payment, % Interest rate, % Average number of leasing deals Main currency of lease transactions 7 3-12 20-30 1.4-1.9 42 MNT 2007 12 3-12 10-30 1.3-1.6 84 MNT

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Mongolia Leasing Industry Survey, 2008

2.3 Sources of Financing The lessors surveyed receive a considerable portion of their financing from internal resources, supplier credits, and domestic banks. It must be noted that more than 60 percent of financing come from their own resources for the last four years and that most of the external financing is received from equipment suppliers. In order for the leasing industry to grow, the funding base needs to become more diversified and Mongolian leasing providers need to find alternative sources of financing, such as credits from local and international banks, bond issues, and increased capitalization. Table 2.5. Sources of Financing, 2004-2007
Internal: own capital of your company (%) 64.70 72.85 81.04 85.07 External: loans of domestic banks (%) 3.67 2.11 2.31 External: commercial loans of equipment producers (%) 35.30 23.48 16.84 12.34 Total source of financing (%) 100 100 100 100

2004 2005 2006 2007

2.4 Overdue Payments Only one-third of the lease providers reported having experience with late payments. In 2007, 487 lease deals with a total value of $1.09 million were reported as overdue, representing an increase in comparison with 2006, when 200 deals were overdue with a total value of $1.21 million. However, the value of deals with payments over 90 days due of the total value of outstanding lease deals in 2007 was only 1.4 percent, a decrease from 4.3 percent in 2006. The repayment rate was quite high for all lease providers -- well over 90 percent. Chart 9
Leases > 90 Days Overdue 2003 - 2007
1400 1200 $ thousands 1000 800 600 400 200 0 2003 2004 2005 2006 2007 213.3 7 30 72 100 0 506.1 394.0 200 300 200 600 1,092.4 487 500 400 Number of Deals

1,208.7

Value of deals

Number of deals

20

Mongolia Leasing Industry Survey, 2008

These results most likely reflect the situation when the credit supply is far lower than the demand, hence leasing companies and other lending institutions can be very selective. Moreover, although no collateral is needed, required documents (prove of constant income) in order to receive a leasing service is very complex, which helps to keep the repayment rate high but limits total volume. 2.5 Main Barriers to Leasing Development The surveyed respondents were asked to indicate the main barriers to leasing development in Mongolia. The most frequently mentioned barriers were: inconsistency in legislation and high cost of funding, followed by lack of funding resources, high tax burden, and lack of financial transparency. Approximately 40 percent of respondents named legislation gap/inconsistency and high cost of funding as the main barriers to leasing development. The above mentioned constraints, combined with high interest rates, decrease the attractiveness of leasing for domestic and foreign investors. Even those banks that have access to relatively cheap funds like deposits face problems with financing, therefore the leasing of consumer items is more popular with banks since these products are perceived as less risky. Other types of lessors such as equipment suppliers or non-bank financial institutions, are at even more disadvantage since they can not rely on deposits and must rely on external funding. Chart 10
Key Barriers to Leasing Development 2008 (in percentage terms)
Lack of leasing specialists Undeveloped second-hand equipment market Problems with accounting of leasing operations Potential clients are not aware about leasing opportunities Lack of eligible clients Lack of financial transparency High taxation burden Lack of funding sources High cost of funding Legislation gaps/ inconsistency
0 10 20

2 4 4 8 8 10 10 14 18 22
30

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Mongolia Leasing Industry Survey, 2008

2.6 Conclusion The survey shows significant positive development of the leasing sector in Mongolia. The leasing industry reached $89.6 million of new leases in 2007, a 163 percent increase from $34.1 million in 2006 and a 725 percent increase from $10.9 million in 2005. In terms of the outstanding leasing portfolio the market grew from $11 million in 2005 to $80 million in 2007. The number of lease providers also increased -- from 13 in 2005 to 48 in 2007 – reflecting the positive changes in the legal environment for leasing industry in Mongolia. Furthermore, the repayment rate was high for all lease providers, well over 90 percent. The sector has stabilized to some degree as indicated by the more favorable terms offered – longer terms and lower interest rates. As leasing companies command a larger share of leasing providers, terms should become more favorable and volumes will grow. However, lack of funding sources and inconsistency in legislation continue to limit the growth of leasing in Mongolia.

SECTION THREE: LEGAL FRAMEWORK FOR LEASING 3.1 General Overview Since 2004, Mongolia has significantly improved its legal framework for leasing. The new legislation, developed and approved with the active assistance of the IFC Mongolia Leasing Development Project, supported the development of the leasing sector. The Law on Financial Leasing clearly defines financial leasing and renting, property leasing and other types of contracts mentioned in the Civil Code, providing the basis for amending the tax legislation to put financial leasing on a level playing field with other types of financing. The Law on Financial Leasing is in line with the Civil Code and does not limit the definition of financial leasing to a three-party agreement. To determine that a contract is a financial lease, it must adhere to one of the following criteria: o at the end of the lease term the ownership of the asset is transferred to a lessee; o the term of a lease is at least three-fourths of the useful life of the asset (Article 5 of the Corporate Income Tax Law); o total amount of lease payments exceed 90 percent of the value of the asset. Apart from providing a definition of financial leasing, there are several legislative advantages in the new law on financial leasing that have greatly improved the legal environment and have removed the main legal barriers for development of leasing in Mongolia. For example, in the previous leasing practice, the prevailing majority of financial lease contracts were two-party agreements, i.e. they were concluded between a lessor and a lessee. This is explained by the preference of such two-party contracts in the

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Mongolia Leasing Industry Survey, 2008

Civil Code and the fact that the existing equipment providers often served as lessors going into contracts directly with lessees. The new leasing legislation does not give any preference to either a two-party or a three-party contract. Neither the Civil Code nor the bankruptcy legislation contained provisions guaranteeing safe return of a leased asset to a lessor in case of a lessee’s bankruptcy. Likewise, there were no provisions allowing a lessee to securely continue the financial lease in case the initial lessor is bankrupt and his/her duties has been overtaken by a successor. Therefore, the new leasing legislation has cleared up this situation. The Mongolian legislation does not determine in which cases a lessor can repossess a leased asset from a lessee. This means that parties to a leasing deal should negotiate and agree in each case. However, the new leasing law defines minimum conditions which would allow a lessor to repossess his/her assets on legal grounds. In addition, the new legislation has removed licensing of leasing activities, taking away at least one administrative barrier to development of the market. To summarize, the legislative advantages as introduced by the Law on Financial Leasing are as follows: o Introduction of secondary leasing to ensure that lessors can lease equipment repossessed from the first client to the second client; o More precise definitions of subleasing and leaseback arrangements; o Clearer non-court repossession rights for the lessor; o Clearer rights and responsibilities of a supplier, a lessor, and a lessee; o Absence of licensing requirement; o Absence of obligatory registration of the lease agreement; and, o Leasing as an activity is not supervised by the government structures. 3.1.1 Legal Environment Awareness As was expected, the new leasing legislation stimulated leasing market growth: 80 percent of the surveyed respondents agreed that the legal environment in Mongolia has improved. Most of the lease providers (74 percent) stated they were aware of the new law on financial leasing and the amendments to the VAT law and 64 percent indicated they were aware of the amendments to the CIT law. In addition, 29 percent of lease providers reported that the law on financial leasing positively affected their leasing operations, while another 29 percent stated they have been affected negatively as well as positively.

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Mongolia Leasing Industry Survey, 2008

3.1.2 Dealing with courts Only two companies reported that they had experience in dealing with courts regarding their leasing deals. In the last five years, a total of 13 cases were brought to the court, two in 2007. Approximately 80 percent of all cases had positive outcomes for lessors. 3.2 Accounting and Taxation of Financial Leasing Accounting for leasing: Mongolia adopted the International Accounting Standards (IAS) in 2002, when the accounting law was enacted and it became mandatory for all businesses and organizations to disclose their financial information in conformity with the IAS. In accordance with this, the accounting of leases in Mongolia is based on IAS 17. Taxation of leasing: In accordance with the taxation legislation in effect since 1993, financial leasing and operating lease/rent had been taxed in the same way. Amendments approved in June of 2006 and enacted in January 2007 differentiate between financial and operating lease, mainly based upon classification criteria of IAS 17. Also, a lease contract should not be shorter than 12 months in order to classify as financial lease. The following amendments to the taxation legislation have allowed financial leasing to compete with bank loans. Corporate income tax (CIT): The new tax legislation regards a financial lease as a financial transaction, when a lessor lends a lessee the amount needed for the lessee to purchase the (leased) asset. Accordingly, the interest portion of the lease payment is recognized as revenue for the lessor and is accounted as expense for the lessee. At the same time, based on the mutual agreement, the lessor and the lessee decide who will record the leased asset and depreciate it for tax purposes. The depreciation method for the leased asset complies with the depreciation norms established in the CIT Law. The term of depreciation is either five or ten years, depending on the type of an asset. There is a special norm of three years for depreciation of computers and spare parts for computers. Depreciation is calculated using the straightline method. In the previous version of the CIT law, only compulsory insurance premiums were accounted as expenses and deducted from the taxable income; the new tax amendments have incorporated voluntary insurance premiums in the category of expenses that are deductible from the taxable income as well. Withholding tax for non-resident lessors: Starting from January 1, 2007, non-resident lessors are taxed at the rate of 20 percent only on the interest income from cross border

24

Mongolia Leasing Industry Survey, 2008

financial leases and on the total amount of the lease income from cross border operational leases. Value added tax (VAT): Apart from the decrease of the current VAT rate from 15 percent to 10 percent, the new legislation has recognized financial leasing as a financial service and has exempted the interest portion of lease payments from VAT. The acquisition of a leased asset (domestic purchase or import) is subject to VAT. However the VAT law provides for a flexible schedule for paying VAT levied on the acquisition of a leased asset. A lessor or a lessee pays VAT in accordance with the lease payment schedule. As a result of these tax amendments, as of October 1, 2007 a total of 429 taxpayers deducted $2.6 million from their taxable income as reported by the General Department of the National Taxation. 3.3 Constraints for Further Development The year 2007 showed that though the newly enacted legislation has had significant impact on the development of the leasing services in Mongolia, there are still things to be done to improve regulation of this sector. The main constraints to the leasing market development are the following: o Contradictions between the Law on Financial Leasing and some other legislative acts: Under the present regulatory system, the role of bank and non-bank financial institutions (NBFIs) in financial leasing activity is somewhat unclear. In accordance with the Law on Financial Leasing, a few amendments were made to the banking law and the law on non-bank financial activities removing financial leasing from the list of activities allowed for banks and NBFIs. Since financial leasing is not included in this list it seems that banks and NBFIs are not allowed to provide financial leasing. At the same time, the banking law and the law on non-bank financial activities state banks and NBFIs can be engaged in other financial activities or services permitted by laws and regulations. According to this provision, banks and NBFIs seem to be allowed to conduct financial leasing activities. Therefore, clarification of the bank and NBFIs status in lease engagement by amending these laws is necessary. o Recording leased assets on books for a lessor or a lessee. Furthermore the choice for a lessor and a lessee to record a leased asset allowed by the CIT Law contradicts IAS, which state that a lessee will record a leased asset in his/her books. o Absence of registration system for leased assets: Registration of a leased asset is an important factor to reduce risk for a lessor. There is a certain possibility to use

25

Mongolia Leasing Industry Survey, 2008

a leased asset as collateral to receive a loan from another financial institution and there is no system in place to control this situation. Under the new legislation a lessor’s risk is comparatively high, in part because there is no proper system and no regulatory agency for registration of movable and leased assets. At the same time, the new law states that the parties shall register a leased asset on a voluntary basis, while as mentioned earlier there is no regulatory agency for registration. Thus even if parties have agreed to register a leased asset, they are not able to register it. A proper registration system is needed for lessors to establish priority over the leased asset, and ensure that other parties do not place a lien against the leased asset. o Improper statement for repossession of leased asset. A lessor has the right to temporarily repossess a leased asset if a lessee defaults to meet certain conditions. When these conditions have been eliminated, a lessor returns the leased asset to a lessee. However, a lessor has no right to impose an interest/fine for the period that the lessee has defaulted; though it may take a week, a month, or a year for the lessee to resume payments. Therefore a statement for repossession of a leased asset must be reconsidered. o Lack of consistency in taxation (or explanatory documents such as instructions from the relevant government agencies) makes taxation procedures for leasing transactions unclear, leaving the parties in a leasing deal with their own interpretations of taxation legislation. o Less attractive tax treatment for a leasing transaction in comparison with a bank loan. Enactment of the tax amendments has not increased attractiveness of leasing compared to bank loans. In order to make leasing more competitive with bank loans or other financing options, further changes should be introduced such as deduction of provision funds for a bad debt from the taxable income and ability to use accelerated depreciation. 3.4 Conclusion With support of the Mongolia Leasing Development Project important changes to the legislation regulating leasing industry were developed and brought into life. The Financial Leasing Law, together with the tax amendments, which came into force in January 2007, have brought positive changes to the economy, allowing leasing to become a powerful tool that can help transform Mongolia from a supplier of raw materials into a manufacturer of end products. New legislation helped financial leasing compete with bank lending, mainly as a result of removing the unfavorable tax treament of leases in comparison with loans. As a result more institutions offered equipment and vehicle leasing to businesses and individuals. These expanded financial leasing services helped small and medium enterprises improve production capacity by modernizing their equipment, thereby helping create new jobs and raise income levels. Awareness of the

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Mongolia Leasing Industry Survey, 2008

new leasing law is high among survey respondents. In the two cases where repossession cases needed to be resolved by the courts, the responding lessors had a positive outcome. However, there is still room for further improvement in legislation like resolving contradictions between various legal acts, providing more favorable conditions in taxation, and clarifying vague provisions.

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Mongolia Leasing Industry Survey, 2008. Annex 1: Main Indicators of Mongolian Leasing Industry

Annex 1. Main Indicators of Mongolian Leasing Industry, 2003-2007, by category of lease providers
Number and value of outstanding lease portfolio Category of Lease Providers
Year Outstanding amount of leasing payments for the portfolio of leased assets
As of Dec 31
Number Value in USD

Number and value of all new leases
Total amount of new leases during the year
Between Jan 1- Dec 31
Number Value in USD

Number and value of leases > 90 days overdue
Total outstanding amounts of lease payments, not just the overdue portion As of Dec 31
Number Value in USD

Number of lessees
Number of unique lessees
As of Dec 31 Number

Total

2003 2004 2005 2006 2007
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

366 6,039 17,851 38,018 82,764
306 5,900 17,642 37,359 81,003 60 105 133 192 438 28 51 83 119 6 25 40 195 344 1,009

1,929,131 6,352,826 10,955,098 27,996,957 80,206,885
78,920 1,320,287 4,452,943 19,533,685 56,790,160 1,850,211 4,869,536 6,179,318 7,257,838 20,407,171 162,113 315,236 659,876 1,139,380 892 7,601 7,060 133,754 538,498 1,736,419

493 7,753 23,936 47,218 94,171
485 7,632 23,706 46,499 92,224 8 83 140 181 471 27 34 41 50 11 56 89 383 408 1,043

473,168 5,568,540 10,865,499 34,097,041 89,639,188
108,362 2,368,259 8,131,731 30,963,447 71,190,657 364,805 3,055,413 2,545,162 2,101,140 15,873,804 143,438 175,172 386,240 585,000 1,430 13,434 19,301 194,389 626,912 1,795,339

7 30 72 200 487
1 23 67 185 416 6 7 5 7 8 4 11 4 52

213,350 506,078 393,998 1,208,690 1,092,400
24 9,152 143,715 197,998 621,386 213,326 496,926 250,283 429,407 180,441 536,540 89,734 44,745 200,839

560 5,824 16,831 36,403 79,911
492 5,667 16,557 35,614 77,969 68 119 184 252 494 27 34 41 50 11 56 88 321 408 1,077

Banks

Suppliers of equipment

Independent leasing companies

Non-Bank Financial Institutions

Other types of lease providers

Mongolia Leasing Industry Survey, 2008. Annex 2: Survey Methodology

Annex 2. Survey Methodology The IFC Mongolia Leasing Development Project, supported by the Japanese government and IFC trust funds, operated in Mongolia between July 2004 and September 2006. The project was designed to improve the leasing practices in Mongolia with the goal of increasing leasing volume and the quality of leasing products. By the time of the project closure it helped establish the necessary preconditions for a healthy leasing sector, supported by proper legislation favorable to the development of leasing. The project played the role of a catalyst by developing leasing legislation. The new leasing legislation and leasing related tax legislation developed with the Project’s assistance were enacted on June 22, 2006, and January 1, 2007 respectively. One year after the legislative changes came into effect, the time was right to evaluate the market and take the opportunity to assess the impact of the project The survey was conducted in March-April 2008 to capture the previous year’s market results. The survey gathered statistics from all lessors in Mongolia on their leasing transactions and their opinion on the regulatory environment for leasing in the country and perspectives for its development. The survey covered the period of 2003 and 2007.
Respondents were asked to give financial activity data as of December 31, 2007.

The survey targeted all lessors in Mongolia. 50 companies were identified for interviews, and 48 lessors were included in the survey sample, representing 100 percent of the leasing services providers in Mongolia. Most of respondents were located in Ulaanbaatar, the capital of Mongolia. The sample was comprised of 11 banks, 2 independent leasing companies, 8 non-bank financial institutions, 15 suppliers of equipment and machinery, and 12 other types of lease providers (manufacturers, suppliers of product other than equipment). The survey was conducted through face-to-face interviews with managers of the respondent companies. Collecting of information also included interviews with government officials and other market participants. A local survey company and a former IFC Project staff member were hired to do the work. A questionnaire developed by IFC was used for interviews. The questionnaire (attached as a separate file) consisted of 36 closed-ended and open-ended questions and was divided into 5 sections as follows: I. Information about lessor II. Leasing translations – statistics III. Leasing in Mongolia – status IV. Relations with MLDP/IFC V. Leasing Association The last section on more detailed financial information for 2006 and 2007 was intended for the MLDP clients only.

Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

Annex 3. Questionnaire for Lessors

Questionnaire for Lessors # ________Date of Interview_______________
(dd/mm/yyyy)

Mongolia Leasing Development Project (MLDP): follow-up survey, 2008 International Finance Corporation, the World Bank Group, www.ifc.org Contact information Ms. Hongorzul Dari, Mongolia Lessors’ Survey Coordinator, IFC, the World Bank Group Address: Mongolia, Ulaanbaatar, POB 46/800 Tel: +976 7011 6889; +976 9924 0630 E-mail: hongor55@hotmail.com Information about your company will be treated as confidential and will be used only in the aggregated format. Your company’s specific information will not be released. I. INFORMATION ABOUT LESSOR
Interviewer: questions 1.1-1.11 are filled in by Interviewer and checked with Respondent

1.1 Company Name
Codes for 1.2: Bank=1 Bank subsidiary/affiliates=2 Captive(=equipment supplier)=3 Independent leasing company=4 Non-bank financial institution (NBFI)=5 Other (please specify)=6 Codes for 1.3: Joint stock company=1 Limited liability company=2 Foreign invested company=3 Other (please specify)=4

1.2 Your company’s type of lessor

1.3 Legal form of your company

1.4 Mailing address 1.5 Telephone 1.6 Fax 1.7 E-mail 1.8 Web-site 1.9 Director/President 1.10 Name of person completing survey 1.11 Contact info for person completing survey 1.12 When was your company founded? 1.13 When did your company start its leasing operations? 1.14 Number of employees engaged in leasing operations 1.15 Amount of equity capital ____/_______ (mm/yyyy) ____/_______ (mm/yyyy) _______________ people _______________ Tugrik

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Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

1.16 Ownership structure, % 1.16.1 Public 1.16.2 Private (domestic) 1.16.3 Foreign investors II. LEASING TRANSACTIONS – STATISTICS 2.1 What percentage of your portfolio is financial or operating leasing, % 2.1.1 Financial leasing % 2.1.2 Operating leasing % % % %

Interviewer: ask about financial leasing operations. 2.2 Data on leasing operations 2.2.1 Number and value of outstanding lease portfolio
Year
Outstanding amount of leasing payments for the portfolio of leased assets

2.2.2 Number and value of all new leases
Total amount of new leases during the year

2.2.3 Number and value of leases > 90 days overdue
For overdue leases report total outstanding amounts of lease payments (and not just the overdue portion)

2.2.4 Number of lessees
Number of unique lessees

As of Dec 31
2.2.1.1 Number 2.2.1.2 Value (Tugrik)

Between Jan 1- Dec 31
2.2.2.1 Number 2.2.2.2 Value (Tugrik)

As of Dec 31
2.2.3.1 Number 2.2.3.2 Value (Tugrik)

As of Dec 31
Number

2003 2004 2005 2006 2007 2003 2.3 Average leases terms and conditions 2.3.1 Average duration of lease agreements, months 2.3.2 Average down payment, % 2.3.3 Average interest rate, % 2.3.4 Currency of lease transactions, % 2.3.4.1 Tugrik 2.3.4.2 US$ 2.3.4.3 Other (please specify) 2.4 Repayment rate, % 2.5 Court practice 2.5.1 Number of legal disputes you were involved in 2.5.2 Positive outcome of legal disputes, % 2.6 Number of vendors you work with 2.6.1 Local vendors 2004 2005 2006 2007

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Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

2.6.2 Foreign vendors 2.7 Portfolio of leased assets by equipment type, end of fiscal year=31 Dec., Tugrik 2003 2004 2005 2.7.1 2.7.2 2.7.3 2.7.4 2.7.5 2.7.6 2.7.7 2.7.8 2.7.9 2.7.10 2.7.11 2.7.12 2.7.13 2.7.14 2.7.15 2.7.16 Mining equipment Food processing Manufacturing equipment (skin processing, shoe making, textile equipment, etc.) Equipment for trade (refrigerators, shelves, electronic weights, etc.) Medical equipment Equipment for construction Office equipment (computers, copiers, faxes, etc.) Agricultural equipment Telecommunication Airplanes Railroad transport Freight vehicles Passenger transport (except cars) Cars Real estate (buildings & constructions) Other (please specify) 2004 2005

2006

2007

2.8 Sources of Financing 2.8.1 What sources does your company use for financing of leases • Internal: own capital of your company, Tugrik • • • • • • External: loans of domestic banks, Tugrik External: loans of foreign banks, Tugrik External: commercial loans of equipment producers, Tugrik External: issue of bonds, Tugrik External: funds from international finance institutions , Tugrik other (please, indicate_______________) ,
Tugrik

2006

2007

2.8.2 If you received external financing, please indicate the role played by the IFC MLDP in helping you access that financing?*
Enabled=1, Supported=2, None=3

*Definitions:
ENABLED (=1) means that your collaboration with the IFC project played a key role in your ability to secure this financing. SUPPORTED (=2) means that you most likely would have received this financing regardless of collaboration with the IFC project, but your ability to attract the financing improved as a result of the assistance received by the project. NON (=3) means that your collaboration with the IFC project played no role in your ability to attract financing.

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Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

III. LEASING IN MONGOLIA - STATUS 3.1 Please evaluate the changes in the leasing environment in Mongolia over the last three years: ____
Significantly improved=1, Somewhat improved=2, Unchanged=3, Slightly worsened=4

3.2 Please provide the following information on legislation affecting leasing operations: LAW Law on Financial

Leasing (22-Jun-06)
Description
The main significance of this law is that it gives a definition of financial leasing that discriminates clearly between financial leasing and renting, property leasing and other types of contract mentioned in the Civil Code, providing the basis for amending the tax laws to put financial leasing on a level playing field with other types of financing.

Amendments to the VAT Law (29-Jun-06)
The VAT rate is expected to go down from 15% to 10%. The VAT law exempts interest income generated by financial leasing from VAT and for financial leasing allows the VAT on leased assets to be charge according to the lease payment schedule instead of the whole amount paid at once when a lease agreement is entered into force.

Amendments to the CIT Law (29-Jun-06)
The leased asset will be recorded and depreciated on the books of either a lessor or a lessee, based on their mutual agreement; the insurance premium for the leased asset will be deductible from the taxable income; non-resident lessors will pay taxes only on their interest income (not on the full lease payment as it was the case); and interest paid for financial lease is deductible from taxable income of the lessee.

3.2.1 Are you aware of this legislation?
Yes=1, No=2

3.2.2 If YES, how did this legislation affect your leasing operations
Positively=1, Neither positively nor negatively=2, Negatively=3, Not sure=4

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Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

3.3 What are the main barriers to development of leasing in Mongolia in decreasing order of importance? (please rate 1, 2, 3, etc.) 3.3.1 Lack of funding sources 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.3.8 3.3.9 3.3.10 3.3.11 3.3.12 3.3.13 High cost of funding Lack of eligible clients Lack of financial transparency Potential clients are not aware about leasing opportunities Legislation gaps/ inconsistency High taxation burden Problems with accounting of leasing operations Licensing of leasing Lack of leasing specialists Vendors are not interested to work with leasing companies Undeveloped second-hand equipment market Other (please specify) No licensing in Mongolia

3.4 What are your expectations about future development of leasing in Mongolia? Please specify

3.5 What changes should be introduced for further development of leasing? Please specify

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Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

IV. RELATIONS WITH MLDP/IFC 4.1 Did you receive the following advisory services from the International Finance Corporation’s Mongolian Leasing Development Project (MLDP), which was active from 2004 to 2006? Yes=1, No=2 4.1.1 Receive project publications/materials 4.1.2 Participate in seminars/workshops/trainings? 4.1.3 Receive consultations on tax issues 4.1.4 Receive consultations on legal issues 4.1.5 Receive consultations on accounting issues 4.1.6 None of the above 4.1.7 Other (please specify) 4.2. Did you use information received from the MLDP to improve your company’s leasing operations?
Yes, to a great extent=1, Yes, to some extent=2, No, not at all=3

4.3. Please assess the services you received from the MLDP
Excellent=1, Good=2, Satisfactory=3, Somewhat unsatisfactory=4, Completely

unsatisfactory=5

4.4. List three benefits you have experienced as a result of working with the Project:

4.5. Please provide any feedback to the Project staff (anonymous):

V. LEASING ASSOCIATION 5.1 Do you know about any leasing association(s) in Mongolia? Yes=1, No=2 5.1.1 If YES, please specify name(s) of organization(s) 5.1.2 If YES, are you a member? Yes=1, No=2 5.1.3. If YES, please specify the name of organization(s) in which you are a member 5.2 Do you know about any other public organization which expresses interests of lessors? Yes=1, No=2 5.2.1 If YES, please specify name(s) of organization(s) 5.2.2 If YES, are you a member? Yes=1, No=2 5.2.3. If YES, please specify name of organization(s) in which you are a member

THANK YOU FOR YOUR PARTICIPATION!

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Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

FOR MLDP CLIENTS ONLY

The following table is to be completed by the leasing companies, which received advisory services from the Mongolian Leasing Development Project and which are NOT currently IFC Investment Clients.
Exchange rate For 2007: 1US$= 1170 MNT For 2006: 1US$= 1176 MNT

Total leasing portfolio outstanding

New leasing volume

Leases overdue >90 days

Lessees
end of fiscal year as of Dec 31
Unique

2007
end of fiscal year as of Dec 31 during fiscal year between Jan1 – Dec 31 end of fiscal year as of Dec 31
For overdue leases report total outstanding amounts of lease payments (and not just the overdue portion).

EXPLANATIONS

Outstanding amount of leasing payments for the portfolio of leased assets

Total amount of new leases during the year

Number of outstanding deals

Sum, Tugrik, by category

Number of new deals

Sum, Tugrik by category

Number of leases overdue

Sum, Tugrik by category

Number

Total portfolio Business equipment - for Micro, SME and Corporate Subtotal less then MNT 1.200 thousand from MNT 1.200 th. to MNT 6 mln from MNT 6 mln to MNT 12 mln from MNT 12 mln to MNT 120 mln from MNT 120 mln to MNT 1.2 bln from MNT 1.2 bln to MNT 2.4 bln more than MNT 2.4 billion Consumer items Subtotal

36

Mongolia Leasing Industry Survey, 2008. Annex 3: Questionnaire for Lessors

Total leasing portfolio outstanding

New leasing volume

Leases overdue >90 days

Lessees
end of fiscal year as of Dec 31
Unique

2006
end of fiscal year as of Dec 31 during fiscal year between Jan1 – Dec 31 end of fiscal year as of Dec 31
For overdue leases report total outstanding amounts of lease payments (and not just the overdue portion).

EXPLANATIONS

Outstanding amount of leasing payments for the portfolio of leased assets

Total amount of new leases during the year

Number of outstanding deals

Sum, Tugrik, by category

Number of new deals

Sum, Tugrik by category

Number of leases overdue

Sum, Tugrik by category

Number

Total portfolio Business equipment - for Micro, SME and Corporate Subtotal less then MNT 1.200 thousand from MNT 1.200 th. to MNT 6 mln from MNT 6 mln to MNT 12 mln from MNT 12 mln to MNT 120 mln from MNT 120 mln to MNT 1.2 bln from MNT 1.2 bln to MNT 2.4 bln more than MNT 2.4 billion Consumer items Subtotal

37