How Microfinancing Can Support Sustainable Livelihoods in a Protected Area

Known as the “Blue Pearl,” Khuvsgul Lake is a major tourist destination and part of a fragile ecosystem with global biodiversity values. The 11,800 square kilometers protected area is designated as a national park―a category which permits sustainable human activities in defined zones. It is located within 6 districts and has a small population (6,200 people in the park and 15,200 people outside it) with high rates of poverty and dependence on few income sources, such as local sale of meat, dairy, and wool.

The number of tourists at Khuvsgul Lake National Park grew to 74,178 in 2019 from 7,716 in 2004, and it resumed after the height of the coronavirus (COVID-19) pandemic.

Poverty rates in the area are among the highest in Mongolia. The livelihood of many residents is limited to livestock herding because of the remoteness of their location and few technical and financial resources. This creates vulnerability for food security or income, especially due to climate change, which brings harsher winters and hotter summers impacting pasture and livestock production. Many rural communities in the country face the same challenges.

Six community revolving funds were established to create a sustainable financing system to help develop new income streams from community-based tourism. These funds provided low-interest loans for the development of tourism goods and services that support the conservation of the Khuvsgul Lake National Park.

The project conducted stakeholder consultations to assess the demand for a revolving fund approach. Existing credit schemes were reviewed and training needs were identified. 

The community revolving funds were designed to have the following features:

• Simple management structure. One fund committee per district, each comprising seven representatives (5 from the community, 1 from the Khuvsgul Lake National Park management, and 1 from the district government), approves loan applications. A fund manager per committee screens these applications.  
• Two low-interest loan products with minimal collateral requirements. The “business loan” is open to all residents at an annual interest rate of 7.2% and maximum loan amount of MNT15 million (about $6,000). The “low-income loan” is for poor and vulnerable households and offered at 2.4% annual interest rate with a maximum loan size of MNT5 million (about $2,000).  Both products have a term of 18 months. Interest rates are derived from projections of minimum amounts needed to gradually increase the capital base of each community revolving fund and support logistical costs of the fund committees.
• Eligibility criteria. Applicants must be residents of the project districts and have no outstanding debts. Applicants to the low-income loan product must meet national definitions for poor and vulnerable households.
• Seed funds. A total of $760,000 or 25.3% of the project grant was divided into six amounts. These amounts served as the seed funds of the community revolving funds in each district.  The largest amounts were given to the two townships in the protected area with high poverty level.
• Fund committee bank accounts. Each fund committee opened a community revolving fund account at a local bank. Withdrawal from the account requires three signatures—from two committee members and the fund manager.
• Fund handbook. This detailed the stakeholder roles; procedures for loan applications, screening, and approval; lending rates, conditions, and eligibility criteria; and templates for reporting of fund meetings, screening, and loan approvals.

Capacity building

Two capacity building programs were implemented. The first training program was to build the technical capacity of the fund committees, fund managers, and loan applicants. The second one was to provide vocational training for topics identified through community feedback, e.g., tour guiding services.

Implementation

The project implementation unit coordinated fund establishment and pilot implementation for the first 2.5 years. The seed funds were disbursed to the fund committee bank accounts in four tranches. Tranche amounts were approved by the government and ADB based on loan applications and rates of disbursement and repayment. The community positions in the fund committees were elected by the communities. The fund manager positions were advertised and recruited at district level. Public notices were issued to invite residents to submit applications. District meetings and workshops were held throughout implementation to discuss procedures and seek feedback.

Handover

One year before project completion, the six community revolving funds were merged into one and transferred to a national financial institution (Mongolia’s State Bank) to ensure continued operation after the project. The institution was selected and the terms and conditions for handover were developed through a financial appraisal of the fund and consultations with the government and communities. This was formalized in a tripartite agreement between the government, communities, and bank. The fund committees were maintained to ensure continued community leadership to review and endorse loan applications. The bank assumed responsibility for final approval of the loans endorsed by the fund committees and for loan disbursement, monitoring, and reporting.

Biodiversity conservation

Environmental safeguards were put in place. Loan applications must comply with domestic laws and regulations on protected areas, the Khuvsgul Lake National Park management plan, and ADB’s Safeguard Policy Statement (2009).  Goat husbandry and cashmere production was excluded from the scope of the community revolving funds―despite cashmere being an important income source in rural Mongolia, grazing impacts by goats are particularly harmful to soil and vegetation compared with other livestock. 

The project also facilitated the signing of a voluntary “code of conduct” by communities and tour operators to reaffirm their commitment to uphold park regulations.

Lastly, training for loan applicants included information on the national park’s biodiversity values, regulations, and “green” measures in business plans, such as safe disposal of solid waste.

The project contributed to the efficient management of the protected area through sustainable rural livelihoods and tourism.

By project completion in 2020, 714 households at the Khuvsgul Lake National Park were earning income from 515 community-based small businesses established through loans from the community revolving funds. The loans benefited 2,428 residents or about 40% of the national park’s population.

The cumulative value of all loans issued by the funds was $1,507,253—almost doubling the $760,000 seed financing. Between 2019 and 2021, the capital base of the funds declined slightly because of the COVID-19 pandemic, yet all maintained a net positive balance. Loan repayment was almost 100%.

The project also promoted women leadership as 77% of the enterprises established with fund support were led by women. Moreover, 60.5% of all residents who were trained (1,996 of 3,301) are women.

As of 2022 (2.5 years since project completion), the consolidated community revolving fund remains fully operational. Since the handover, a further $1.2 million has been disbursed. The importance of the fund as a source of low-interest financing for communities in the project area has increased since the pandemic started.

Artisan making woodwork souvenirs with a loan from the project community revolving fund in Khuvsgul Province, Mongolia. Photo credit: ADB.

The project demonstrates how small seed financing can lead to significant livelihood benefits and sustainability. Community ownership, fund disbursement, and sustainability were greater through the loan-based revolving fund approach than if grants had been issued to residents.

Microfinancing for communities can be applied in a protected area so long as it complies with site management objectives. Future projects should place greater emphasis on encouraging community business proposals that directly benefit conservation targets of the protected area and on monitoring safeguard compliance of projects funded by a community revolving fund.

Key elements for the establishment and early success of the revolving funds were the participatory approach with stakeholders, gender inclusiveness, community-led selection of fund committee members, low interest rates and collateral requirements, qualified fund managers to support the fund committees, and training for project stakeholders.

Revolving funds established under a donor-funded project require an exit strategy to ensure continuation after project completion. For the handover, the project identified a suitable domestic agency, ensured compliance with domestic financial laws and regulations, and maintained transparency and the role of the community. The 2.5 years of project piloting and training were essential to solving microfinancing challenges and for the smooth transfer of the merged fund to a national financial institution.

Handover should be achieved as early as possible before project completion to enable continued monitoring and support. For the community revolving funds, post-handover challenges included the need to ensure continued reporting on the social benefits of fund operation (to complement reporting on their financial performance), ongoing communication with communities (e.g., on changes in interest rates), and continued dialogue and training with all stakeholders as needed.

Moreover, the project highlighted the importance of learning by doing. The approach taken by the project was new to all stakeholders and step-by-step efforts were required to develop trust and address issues as they were encountered.

Asian Development Bank (ADB). 2022. Mongolia: Integrated Livelihoods Improvement and Sustainable Tourism in Khuvsgul Lake National Park Project. Completion Report. Manila.

M.R. Bezuijen et al. 2020. Building the Climate Change Resilience of Mongolia’s Blue Pearl: The Case Study of Khuvsgul Lake National Park. Manila: Asian Development Bank.

S. Nergui. 2020. Mongolia: Integrated Livelihoods Improvement and Sustainable Tourism in Khuvsgul Lake National Park Project. Final Report: Community Managed Loan Revolving Fund’s Operation and its Sustainability. Manila: Asian Development Bank.

United Nations Environment Programme–World Conservation Monitoring Centre (UNEP-WCMC) and IUCN. 2021. Protected Planet Report 2020. Cambridge, UK: UNEP-WCMC/Gland, Switzerland: IUCN.