Rural Finance in the Lao People's Democratic Republic: Demand, Supply, and Sustainability

The Lao People's Democratic Republic (Lao PDR) has recently embarked on a major program to reform its rural finance system. Until recently, the Government's policy to deliver rural financial services was focused on channeling directed, subsidized credit through the state-owned Agriculture Promotion Bank. As in many countries, this initiative was well intentioned but has had limited success in expanding outreach to rural households, especially poor households.

This study is based on a national survey of nearly 1,200 rural households, as well as all commercial banks and known microfinance initiatives in 2004, and provides a comprehensive overview of rural finance in the Lao PDR. The study finds that the formal sector (banks) and semiformal sector (microfinance initiatives) are not meeting the demand for financial services of the vast majority of rural households in the Lao PDR. However, the study notes that the Government's new market-oriented policy has the potential to have a significant positive impact on sector development.

Key recommendations of the study include the following:

• carrying out concrete actions to operationalize the new market-oriented policy
• phasing out directed lending from the banking sector
• supporting commercial microfinance initiatives through improvements in the policy, legal, and regulatory environment
• attracting foreign investment in the microfinance sector
• ensuring that private microfinance initiatives follow good practices and focus on sustainability from the outset
• holding regular stakeholder meetings to provide feedback to the authorities and propose new solutions to further develop the rural finance sector

The views expressed in this paper are the views of the author/s and do not necessarily reflect the views or policies of the Asian Development Bank Institute nor the Asian Development Bank. Names of countries or economies mentioned are chosen by the author/s, in the exercise of his/her/their academic freedom, and the Institute is in no way responsible for such usage.

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