Equity Investments in MFIs and Transformation: The Case of XAC, Mongolia

This paper has been written for MicroStart institutions, which are start-up, young, small institutions with a demonstrated potential for future growth. The paper is divided into 3 parts:

• Part 1: Provides a brief introduction to the organization, XAC, upon which this case study is based, and its transformation into a non-bank financial institution (NBFI);
• Part 2: Discusses the preparation of XAC for institutional transformation into a bank, including the increase of its equity base and the process for choosing investors and structuring investment deals;
• Part 3: Summarizes the status of XAC's efforts at the end of the preparation before transformation.

The paper analyzes the process of transformation of XAC into a bank and details the:

• Various operational features;
• Reasons for XAC's transformation into a private sector institution with commercial equity;
• Its success in transforming into a NBFI;
• Potential advantages and disadvantages of transformation;
• Transaction costs, in terms of human resources, financial costs, governance costs and timing;
• Necessary pre-conditions for transformation, which are to:
  • Develop and communicate a shared vision,
  • Build up essential institutional capabilities,
  • Be accountable,
  • Put together a realistic business plan,
  • Structure an investment plan,
  • Create and support an enabling environment;
• Process of choosing investors and structuring the deal;
• Challenges in working with the wider donor community.

The paper concludes by discussing XAC's transformation readiness in 2001.