Mongolia's banking sector has long been defined by concentration. For decades, a handful of shareholders controlled the equity of most commercial banks. In 2021, Parliament set out to change that, rewriting the rules of bank ownership with the goal of dispersing control, strengthening governance, and pulling Mongolia's banks closer to international norms. Five years on, the project remains unfinished, and the law that began the reform is being rewritten to preserve its objectives.

How Did We Get Here?

• 2021 — Parliament caps any single shareholder's stake (including related parties) at 20%, mandates that the five SIBs convert to open joint-stock companies and IPO by June 2022, and sets December 31, 2023 as the deconcentration deadline.
• 2022 to 2023 — Khan Bank, TDB, Golomt Bank, XacBank, and State Bank complete IPOs, offering 5.0% to 11.4% of equity, raising MNT 446.8 billion, and drawing oversubscription between 17.2% and 204.6%.
• November 2023 — Public consultation acknowledges the original deadline is unreachable. At most SIBs, top-three shareholders still held above 85% of equity; at other commercial banks, the figure ranged from 76.6% to 100%. Cited obstacles: forced divestment of 40 to 80% stakes, and prolonged dual-listing preparation causing extended procedural timelines.
• June 2024 — Deadline extended to December 31, 2026 after cross-agency review.
• May 2026 — Targets still out of reach. New draft amendment enters public consultation.

Why Has Compliance Failed Twice?

The simple answer is that the law treats five banks as five independent compliance problems, when in practice they are the most important sector with the capacity to disrupt Mongolia's financial stability. Requiring all SIBs to sell stakes in the same period is neither strategic nor commercially sound. Synchronized forced selling does not deconcentrate ownership at fair value.

The transactions themselves are also unworkable in isolation. A controlling shareholder asked to sell down to the statutory cap is disposing of a substantial share of their position into a deadline-driven market that knows they are a forced seller. No rational owner accepts a fire-sale outcome when the penalty for missing the deadline has never been defined.

Even setting price aside, the buyers do not exist at the required scale. Mongolia's domestic capital base cannot absorb the volume of equity that would need to change hands across five SIBs simultaneously. Pension funds, insurers, and local institutions lack the balance sheet. Foreign strategic investors had the capital but no legal pathway to a meaningful stake, since the cap itself made entry uneconomic.

The IPOs were intended to bridge this gap, but the scale was insufficient. Floats of 5.0% to 11.4% of total equity could not meaningfully reduce concentrated positions to the statutory threshold.

Finally, the law set a deadline without consequences. Each missed deadline has been extended, and the market has learned. The rational response to an unenforceable rule is to wait, and the 2024 extension confirmed the lesson.

What Does the New Draft Actually Change?

The draft is best read not as a single reform, but as a coordinated package addressing three questions: who can invest, on what terms, and on what timeline.

• Higher ownership ceilings. The shareholding cap rises to 34% for SIBs and 51% for other banks (inclusive of related parties), replacing the 20% limit that strategic investors found too small to justify entry.
• Multilateral exemption. EBRD, ADB, IFC, and similar institutions are exempted from Article 36.15, which prohibited significant stakes in more than one bank, freeing them to engage at the scale their development mandates contemplate. Currently, IFC and EBRD hold 16.63% and 12.50% stakes respectively in XacBank.
• Nominal accounts for investment funds. Repeal of Article 36.13 allows funds to hold bank shares through nominal accounts on behalf of beneficial owners, aligning the Banking Law with the Securities Market Law and unlocking pooled investment vehicles.
• Higher influential shareholder threshold. The disclosure and supervisory trigger rises from 5% to 10%, matching practice in more than 80 jurisdictions and reducing procedural friction for institutional allocators.
• New deadline. The deconcentration compliance date moves from December 31, 2026 to December 31, 2029.

What the Draft Leaves Unresolved

This spring's Parliamentary session is the critical window. If the amendments are not approved before 2027, the banking sector enters a bottleneck heading into a politically sensitive period. 2027 is a presidential election year, and 2028 brings parliamentary elections. The amendments must pass in this spring session if they are to function as a path forward rather than another paper extension.

The more fundamental question is whether the proposed 2029 deadline is itself sufficient. International IPOs require a minimum of two years from preparation to listing, and dual-listing procedures have been cited as a binding constraint since 2023. A three-year window is workable in theory but leaves no margin for the legal, valuation, and procedural complications that have derailed every prior timeline. A longer horizon, paired with a clear and sequenced roadmap that allows banks to progress step by step, would give the sector room to execute on commercially reasonable terms rather against another rigid deadline. Extending the deadline a third time without that clarity carries reputational risk for Mongolia, not only for the banks. The current draft addresses who can invest and on what terms, but the how and when of execution remain underspecified. Policy must be clear, or the cycle repeats.

If the package passes substantially intact, the most immediate effect is a broader base of potential investors. Strategic foreign banks, multilateral institutions, and pooled investment vehicles all gain a credible path to participation, which should ease the supply overhang that has weighed on SIB share prices since listing. Whether this translates into actual transactions depends on valuation expectations on both sides and the speed at which due diligence and regulatory approvals can move.

The risk worth watching is enforcement. None of the proposed changes address the structural absence of consequences for missing the deadline. If 2029 arrives with compliance still incomplete, the market will have absorbed a third extension, and the credibility cost will be harder to recover.

Bank equities will be one of the central themes at CMM's Mongolia Investment Forum in London this September. Join us early in September for in-depth discussion of Mongolia's banking sector and equities.