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Solongo Khosbayar clearly remembers the first shoes she made for her daughter: A pair of traditional Mongolian winter boots constructed of horsehide. That was just the beginning. At age 23, Khosbayar launched the Khorol Collection, a shoe-manufacturing business, and her husband joined her a few years later. Today, 11 years after the company was founded, it produces around 20,000 shoes every year for customers in Mongolia.

Early on, “It was just the two of us, a faithful sewing machine, and a lot of hard work, but I was determined to pursue my dreams and grow my business,” Khosbayar recalls. But expanding would require funding. And who would be willing to invest in two young entrepreneurs with little experience?

Khosbayar’s situation as a small business owner seeking financing is not unusual in Mongolia, where access to capital can present significant obstacles to growth. Even though Mongolia’s micro, small, and medium-sized enterprises (MSMEs) account for about half of the country’s jobs, lack of access to financing—which is essential to build businesses and create jobs—has created a financing gap estimated at $1.29 billion, or about 11 percent of the country’s GDP.

For Khosbayar and her husband, a savings account with IFC client XacBank paved the way for a loan of about 14 million Mongolian tughrik (approximately $11,500 in 2011). Now, the Khorol Collection employs 35 workers, and the company produces casual and formal shoes as well as school backpacks.

The loan from XacBank, Khosbayar says, was the turning point for her business. “Within a short time span, we managed to pay back our loans, which helped improve our credit history with the bank, so we received subsequent higher loans,” she says.

With 35 workers, Khorol Collection produces casual and formal shoes as well as school backpacks.

Overcoming Economic Volatility

Khosbayar’s situation illustrates how emerging economies like Mongolia, which experience bouts of economic volatility, can benefit from access to international partners. Starting in 1999, IFC provided advisory services to assist the bank in its transformation from an non-governmental organization to a bank focused on local small and medium enterprises (SMEs). Years later, when Mongolia’s banking sector suffered through a sharp drop in global commodity demand and prices, $5 million in subordinated debt and $2 million in equity from IFC strengthened the bank’s capital position.

Most recently, in July 2019, IFC’s $65 million syndicated loan to XacBank attracted five additional development financial institutions. This investment will support the bank as it helps the country’s MSMEs create up to 23,000 jobs in the next five years and diversify Mongolia’s economy. An additional $12 will also be mobilized from international investors for every $1 of IFC’s own account investment in Mongolia, contributing to the country’s economic recovery. The new project will help provide over 38,000 additional loans to microenterprises and over 6,700 additional loans to SMEs.

“This financing could not have been more timely,” says XacBank Chief Executive Officer Tsevegjav Gumenjav, “The local financial sector is in need of foreign direct investments to boost Mongolia’s economy.”

XacBank has long prioritized its outreach to SMEs, including women entrepreneurs. Typically, women clients are known for lower default rates than their male counterparts and are a strong source of deposits for banks. XacBank is also a member of IFC’s Banking on Women program, which works with financial institutions to boost access to finance for women entrepreneurs.

IFC’s support to XacBank help companies like Khorol Collection expand and hire more employees.

The Path Forward

As XacBank reinforces its relationship with the nation’s entrepreneurs, Mongolia’s government is working in parallel to bolster its financial sector by reforming the country’s insolvency systems. A more up-to-date strategy to address insolvencies would create an efficient way to resolve distressed debts and better debt collection standards that would benefit both lenders and borrowers.

Another path forward for Mongolia lies with secured-transaction reform. This aims to increase access to finance, especially for SMEs, through lending based on movable collateral. This would help small entrepreneurs build a credit history and progress toward access to credit. IFC is providing advisory services that will help the country achieve this reform.

For Khosbayar, who is preparing to build another shoe manufacturing factory, increasing production numbers is a concrete way of demonstrating business progress. Buying more equipment and hiring more people is yet another step toward achieving her dream. As much as she looks toward the future, though, she also acknowledges her past. “My grandfather was a shoe maker and I am continuing his legacy,” she says. “He would have been proud of me.”

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Published in September 2019