The Banking and Financial Sector of Laos

This paper analyses the challenges confronting the Lao financial sector. The paper:

• Examines the importance of the financial system for economic growth and stability;
• Provides an institutional analysis, describing current rules and incentives;
• Describes the emergence of Lao's financial sector in this environment;
• Assesses the success of the current financial system;
• Examines how the agricultural and private non-agricultural sectors are financed.

The paper examines the current state of the microfinance industry in Lao, and finds that:

• There are few non-bank financial institutions, and the microfinance system has only started to emerge over the past four years and is limited compared to other countries in the region;
• There is a large demand for microfinance services, and in particular for savings, but the supply of services remains low;
• Pilot tests have shown that it is possible, with adequate interest rates, to implement microfinance schemes in Lao;
• There are many challenges to implementing microfinance in Lao, including:
  • Low density population which creates problems for outreach,
  • Poor infrastructure, which increases transaction costs,
  • Low capacity in microfinance institutions,
  • Few local institutions and,
  • Limited experience and knowledge of best practice among donors
• A wider understanding of the advantages of microfinance is needed among policy makers;
• Existing regulation on credit cooperative needs to be modified to allow different models to emerge.

It argues that if the Lao microfinance industry integrates best practices, benefits from a good environment and an improved formal financial sector, it could contribute to Lao development and poverty reduction.