The development of microfinance in Laos dates back to the early 1990s when the country opened up and began evolving towards a market economy. The process started with support by multilateral and bilateral organizations for the establishment of village-based credit schemes and revolving funds. Between 1994 and 1996 NGOs followed suit. With donor support the number of credit schemes and revolving funds grew rapidly. By the end of 2011, this non-formal, unregulated sector comprised roughly 4,400 “Village Funds” with a total of about 430,000 members (6% of the total population) and an aggregated loan portfolio of approx. US$37 million.
One remarkable feature of village funds has been the relatively recent emergence of service networks of village funds or so called network support organizations (NSOs) which are built on principles such as self-financing, self-management and self-governance and provide technical assistance and financial services to their member village funds.
As to the regulated microfinance sector, it is younger and much smaller than the informal or semi-formal sector. Only in 2008, the Bank of the Lao PDR (BOL), the regulatory and supervisory authority of the sector, promulgated regulations for 3 categories of MFIs: Deposit Taking MFIs (DTMFIs), Non-Deposit Taking MFIs (NDTMFIs) and Savings & Credit Unions (SCUs). By the end of 2011, 42 MFIs (9 DTMFIs, 15 NDTMFIs and 18 SCUs) had been licenced or registered by BoL under these 3 categories.
As of the end of 2011, these regulated MFIs served about 68,000 clients in approximately 2,500 villages (29% of total Lao villages) and had roughly 19,000 borrowers and a total loan portfolio of about US$10 million.
In order to promote development of the microfinance sector, BOL set up a ‘Financial Institution Supervision Department’ (FISD) in late 2010 to oversee microfinance development activities in the country. Moreover, in October 2012 a new decree on microfinance was issued. It consolidates and elevates the previously separate regulations on DTMFIs and NDTMFIs. Among other things, it introduces the opportunity for participation of foreign equity investment. However, it does not specify up to what percentage foreign investors will be allowed to participate in the capital of an MFI. This and some other aspects will be defined in Implementation Guidelines BoL is presently preparing.
Despite some growth in the microfinance sector over the last years, there is still a large unmet demand for financial services in the Lao PDR as the outreach of the existing microfinance providers is still very limited and scattered. It is estimated that only 25% of Lao households have access to some kind of financial services
Moreover, the sector is still weak and faces multiple challenges: Many MFIs deal with high portfolio at risk levels and the capacity of staff as well as the governance level is low. Most MFIs are small in size with limited outreach. Several MFIs haven’t reached profitability yet and still depend on donor support. Furthermore, the level of transparency is still weak. There is not enough reliable performance data available which could serve as a benchmark for institutions.
Even though there are a few providers of meso-level services (in areas like accounting, auditing, MIS support, training, education, consulting and coaching), the demand for such services still outstrips supply in both quantitative and qualitative terms. And despite the existence of a solid regulatory and supervisory framework, BoL’s capacity to effectively regulate and supervise the growing number of MFIs is still limited.
In addition, a lack of awareness on microfinance good practice combined with challenges in improving stakeholder cooperation and coordination are all hampering sector development.
Source: NERI, BOL & GIZ, “Microfinance in the Lao PDR 2012, Vientiane Capital 2012
Microfinance Service Provider