Development of Inter-bank Foreign Exchange Market in Mongolia

Inter-bank markets are very limited in Mongolia, even for the basic instrument of money market placement. There is slightly more activity in foreign exchange markets–but the market is still very limited-with the basic instrument being purchases and sales of USD against MNT. Many of the banks have no need, or are not in a position, to use interbank markets. Banks are overly liquid, a reflection of the level of economic activity and the more restrictive credit stance being taken by banks in the aftermaths of widespread banking failures. This, in turn, has led to banks being much more selective with respect to counterparties, with an obvious impact on the demand for interbank products. The most effective way is the use of financial derivatives. It is a very frequently case for business organizations to be effected by the currency rate risk but it can be protected by the operation through banks. One possible way protect from currency rate change in the country is to use a new kind of markets (futures, forward, options etc.) that should be established, and it is important to liberate inter-bank FX market. In conclusion, this paper will define how it will influence the economy and monetary policy of the country. In addition, the Mongolian banking sector is an important in the Mongolian financial sector.