Chapter 4: Rural Financial Services Supply- the Semiformal

The Semiformal Sector

Sector Participants

The semiformal sector in the Lao PDR primarily comprises project-based interventions that provide rural and microfinance services. They are labelled "semiformal" because they share some characteristics with the formal sector and other characteristics with the informal sector. These interventions are "formal" in the sense that they fall either under Government-approved activities sponsored by multilateral and bilateral development agencies and INGOs; or they operate under the current BOL regulations on credit cooperatives. They are "informal" in that the savings and credit activities carried out are not supervised by BOL and their financial sector operations are not subject to official financial reporting requirements.

Overall, the survey had 23 respondents (out of 25 organizations contacted), who between them supported 33 projects with a total of 50 microfinance initiatives. The respondents comprised three groups. The first consisted of 6 multilateral and bilateral development agencies supporting microfinance components in larger projects. These microfinance components took the form of providing credit lines for onlending as microcredit. The second group consisted of 14 INGOs supporting microfinance components that were included in larger projects. The third group consisted of three specialized MFIs set up specifically to provide sustainable microfinance services. ^1-3

Not all projects and microfinance initiatives are strictly "rural" as defined in Chapter 1. Most operate exclusively or primarily in rural areas, but some operate equally in rural and urban areas, and a few are primarily urban but still with some rural clients. Moreover, data on their borrowers are not comprehensive enough to determine the proportions that are rural and urban. However, to give a comprehensive picture of the institutional terrain of rural finance, we attempt to include all known semiformal sector activities that touch on rural areas. ^2-2

Multilateral and Bilateral Development Agencies

On 31 December 2003, multilateral and bilateral development agencies financed six credit lines delivered through Lao PDR partners for onlending as microcredit. These are summarized in Table 4.1 [ PDF 66.4KB | 1 pages ].

International Nongovernment Organizations

There are no domestic NGOs in the Lao PDR, but since the early 1990s several INGO-sponsored projects have been established. Sixteen INGOs were identified as having projects with microfinance components. As shown in Table 4.2 [ PDF 35.2KB | 1 pages ], 14 responded to the survey. ^3-3 These 14 had 21 projects with a total of 28 microfinance components. The financial services provided through these components are generally ancillary to the wider projects of which they form part, and have generally not been established with a view to creating sustainable MFIs.

Sustainable Microfinance Initiatives

Initiatives targeting sustainable microfinance in the Lao PDR began in 1996. By the end of 2003, three such initiatives were identified. First, the Cooperative de Credit de Soutien aux Petits Producteurs (CCSP) was established in 1996 by Lao entrepreneurs. It consists of 12 separately licensed credit cooperatives, listed in Table 4.3, all overseen by a central office in Vientiane. Second, the Microfinance Project was launched in 1997 with support from the United Nations Capital Development Fund (UNCDF) and the UNDP. It was transferred in 2002 to the Ministry of Finance (MOF), which continues to manage the project, now known as the Microfinance Office. It consists of three project components, listed in Table 4.3. Third, the Rural Development Cooperative (RDC) is a licensed credit cooperative and was started in August 2001 with support from the Vientiane Municipal Development Fund ^4-3. Table 4.3 [ PDF 35.2KB | 1 pages ] summarizes the 16 individual credit cooperatives or components of these three MFIs. ^5-1

Objectives of Microfinance Initiatives

The reported objectives of the microfinance initiatives vary with the overall project of which they form a part. Figure 4.1 [ PDF 124.6KB | 1 pages ] shows the percentage breakdown of the primary objectives of microfinance initiatives: 68% reported income generation as their primary objective, while 18% stated food security. Poverty alleviation, rural or community development, and health were also mentioned as primary objectives. Figure 4.2 [ PDF 124.6KB | 1 pages ] shows the percentage breakdown of secondary objectives of microfinance components. Secondary objectives of microfinance initiatives were more varied than primary objectives.

Local Partners

In the Lao PDR, multilateral, bilateral, and INGO projects are typically implemented through local partners. The LWU was the most frequent local partner. Three multilateral and bilateral development agencies cooperate with LWU in their microfinance components, and 9 INGO microfinance components are implemented through LWU. The Ministry of Agriculture and Forestry (MAF) was the next most frequent partner reported, being the partner in 4 INGO components (including 2 in conjunction with LWU and 1 in conjunction with other government departments). The 3 Microfinance Office project components worked with the MOF. Six project components reported various other local partners, while 3 components reported no local partner.

Types of Microfinance Organizational Forms

Three main types of microfinance organizational forms predominate in the Lao PDR. These are defined in this report as:

• Savings and Credit Unions (SCUs) and Credit Cooperatives operating under BOL regulations, which take savings and make loans; project funds and members' subscriptions and savings are combined to make loans that are disbursed and repaid in cash
• Village Savings and Credit Groups (VSCGs) not operating under BOL regulations, which take savings and make loans; project funds and members' savings are combined to make loans that are disbursed and repaid in cash or in kind, and
• Village Revolving Funds (VRFs) not operating under BOL regulations, which do not take savings; project funds are used for loans disbursed and repaid either in cash or in kind.

Five of the 6 multilateral and bilateral microfinance components were reported as VSCGs, and the remaining 1 operated as a VRF. Some 75% of INGO microfinance components reported operating as VSCGs and the remaining 25% as VRFs. For the 3 sustainably oriented MFIs, CCSP and RDC operate as cooperatives, while the Microfinance Office continues to operate as a project administered by the MOF. In the semiformal sector, there are no product offerings other than savings and loans.

Financial Structure

The absence of mandatory financial reporting requirements and BOL supervision in the semiformal sector means that balance sheets for the rural financial services activities of the participants are not generally available. Although BOL is responsible for the supervision of SCUs, such supervision was not effectively in place at the time of the survey. The financial reporting requirements of INGO projects in particular are not geared to such reporting and, in almost all cases, INGO head offices in Vientiane did not have detailed financial performance information on savings and credit activities.

Data on recent funding in Table 4.4 [ PDF 54.2KB | 1 pages ] shows the reported flows of funds into the semiformal sector since 1999. The data indicate:

• a rapid increase in funding for microfinance activities in the 5 years to the end of 2003, with the amount of funding doubling each year on average;
• however, overall, such funding remains low, at less than $1 million cumulatively over 5 years;
• 58.43% of the funds provided have been borrowed for onlending, and 27.46% of funds have been injected as grants for onlending. When taken together with 3.07% of total funding from members' shares (in the cooperative-based organizations), a total of 88.96% of funding has been allocated to lending; and
• funding of capacity building has grown but remains low at less that $100,000 cumulatively over 5 years.

Outreach

Figure 4.3 [ PDF 54.2KB | 1 pages ] shows the number of new microfinance initiatives (e.g., credit cooperative or project component) established each year in Lao PDR since 1995. Overall, the number of new microfinance components in projects has been increasing, with about half (48%) of new microfinance components commencing operations in the 3 years from 2001 to 2003.

The total number of villages reached by microfinance initiatives as of 31 December 2003 was reported as 930. The multilateral and bilateral microfinance components reached 211 villages; the INGO microfinance components reached 406 villages; and the MFIs reached 313 villages.

Collectively, the microfinance initiatives reported reaching 33,392 clients. However, one INGO (FIAM) was able to report on savings but not on its lending portfolio. FIAM reported 20,880 savers in 107 villages. The rest of the semiformal sector, excluding FIAM, reported 12,512 savers and 12,365 borrowers in 823 villages.

Savings

Only 1 of the 6 multilateral and bilateral microfinance components mobilized savings. They did so by providing savings services to eligible borrowers only. Seventy-five percent of INGO microfinance components provided savings services to eligible borrowers only, and 14.29% offered savings services to both eligible borrowers and the general public. Only 10.71% did not offer savings services. All 3 sustainably oriented MFIs collected savings: 14 of the 16 cooperatives or project components of these 3 MFIs (see Table 4.3 [ PDF 124.6KB | 1 pages ]) provided deposit services to eligible borrowers only, and 2 offered such services to both eligible borrowers and to the general public (namely, RDC and the SIPSACRES component of the Microfinance Project).

As shown in Table 4.5, data reported for the end of 2003 indicate that savings in the semiformal sector were KN7.50 billion ($750,782). These include KN5.66 billion ($532,922) reported by FIAM which, as noted in the previous section, was not able to report the corresponding amount of loans outstanding or the amount of funding it had provided over the previous 5 years. ^7-1 Removing the reported savings of FIAM from the analysis leaves a total of other savings in the system of KN1.84 billion ($217,860), which together with the amount of funding provided over the last 5 years for onlending (KN8.68 billion or $817,539) equals KN10.52 billion ($1.04 million) in liabilities and is reasonably consistent with the reported outstanding loans of KN12.03 billion ($1.13 million). ^8-1

INGO microfinance components reported the highest number of savers with a total of 26,239. ⁹ Multilateral and bilateral development agency microfinance components had a total of 2,378 savers, and the 3 MFIs had a total of 4,775 savers as of 31 December 2003. Overall, multilateral and bilateral microfinance components had the greatest percentage increase, 48.46%, in the value of savings over the previous 12 months. MFIs increased the total amount of savings by 14.97%, and INGO microfinance components increased savings by 1.57% in the year to 31 December 2003. However, overall savings of KN7.50 billion and outreach of 33,392 savers remains low–conservatively assuming each saver corresponds to one rural household, this implies outreach to only 3.7% of rural households. Even this is an overestimation because many MFI customers are urban, as are some participants in components supported by INGOs and multilateral and bilateral donors.

Loans

Mediums of Loan Disbursement and Repayment

Figure 4.4 [ PDF 80.1KB | 1 pages ] shows the percentage breakdown of mediums of loan disbursement for microfinance initiatives. Three of the 6 multilateral and bilateral development agency microfinance components disburse loans in cash only, and 3 disburse in either cash or in-kind mediums. ¹⁰ Among INGO microfinance components, 71.43% disburse loans in cash only; 10.71% disburse loans in cash, rice grain, or buffalo; 7.14% disburse loans in multiple in-kind mediums; and 3.37% disburse in cash and rice grain. All MFIs disburse loans in cash only.

Figure 4.5 [ PDF 56.1KB | 1 pages ] shows the percentage breakdown of mediums of loan repayment. Five of the 6 multilateral and bilateral microfinance components require loans to be repaid in cash only and one requires loans to be repaid in-kind. Mediums of loan repayment are more varied among INGO microfinance components: 71.43% require loans to be repaid in cash only; 17.86% require repayment in cash, rice grain, or the original animal borrowed; the remaining components require different combinations of cash and in-kind repayment.All MFIs require loans to be repaid in cash only.

Loan Clients

Figure 4.6 [ PDF 56.1KB | 1 pages ] shows the percentage breakdown of loan clients for microfinance initiatives– 66.67% of multilateral and bilateral development agency microfinance components provide loans to mixed groups only; 16.67% disburse loans to a broad spectrum of loan clients comprised of women and men as individuals, women's groups, men's groups, and mixed groups; and 16.67% provide loans to mixed groups and registered enterprises only. Individual INGO microfinance components tend to be more focused onlending specific to target client types: 60.71% provide loans to mixed groups only, 22.73% to women and men as individuals only, 7.14% to women and men as individuals and also mixed groups, 7.14% to women only as individuals, and 7.14% to women's groups. Thirteen of the 16 sustainably oriented MFI credit cooperatives or project components (81.25%) lend only to women and men as individuals and to mixed groups, and 18.75% lend to mixed groups only.

Credit Portfolios

Figure 4.7 [ PDF 82KB | 1 pages ] shows the percentage breakdown of credit portfolios by borrower's declared loan purpose, according to the responses of the sponsoring organizations, as of 31 December 2003. The MFI portfolios are distinguished by their concentration in the trade and handicraft sectors, the INGOs by concentration in livestock and crop production, and multilateral and bilateral development agencies by concentration in livestock, crops, and handicrafts.

Loan Characteristics

Loan Duration

Figure 4.8 [ PDF 141KB | 1 pages ] shows the terms of loan products offered by microfinance initiatives for various purposes. Loan products available from multilateral and bilateral development agency microfinance components have a median term of 12 months, while the median term for loan products from INGO microfinance components and MFIs is 6 months. The terms for loans offered by multilateral and bilateral development agency microfinance components vary from 3 to 84 months–for crop production, they vary from 6 to 84 months ¹¹, and for livestock production from 12 to 60 months. Terms for loans from INGO microfinance components vary from 3 to 36 months, which is the same range for crop production and livestock production loans. Terms for loans from MFIs vary from 1 to 12 months–for crop production, from 3 to 12 months; for livestock raising, from 4 to 12 months; and for handicraft, from 3 to 12 months. Overall, the terms of MFI loans are shorter than those of multilateral, bilateral, and INGO components, particularly for lending for livestock and crops.

Loan Agreements

Twenty-two out of the 23 survey respondents stated that they required written loan agreements for all loans made. Only one INGO did not use written loan agreements.

Collateral Requirements

Figure 4.9 [ PDF 70.7KB | 1 pages ] shows the percentage breakdown of collateral requirements for microfinance initiatives: 54.35% of loan products offered by multilateral and bilateral development agency microfinance components required a group guarantee as collateral, 23.91% did not require any collateral, and 21.74% required physical collateral. For INGO microfinance components, 83.41% of loan products required no collateral, 11.71% required a group guarantee, and 4.88% required physical collateral. All loan products that MFIs offered required collateral: 81.82% required physical collateral, and 18.18% required a group guarantee.

Interest Rates

Figure 4.10 [ PDF 82.7KB | 1 pages ] shows the median, maximum, and minimum effective annual interest rates on loan products offered by microfinance initiatives.

Loans products offered by microfinance initiatives have a median effective interest rate of 48% (annual percentage rate, APR) per year, while loans products offered by INGO microfinance components have a median rate of 22% per year (annual percentage rate, APR); and loan products from multilateral and bilateral development agency microfinance components have a median rate of 12% per year. However, median values of effective interest rates varied across different loan products for each group. For multilateral and bilateral development agency microfinance components, they ranged from 3 to 22%; for INGOs, from 3 to 108%; and for MFIs, from 24 to 84%. Survey results indicate that multilateral and bilateral development agencies and INGOs frequently subsidize interest rates and offer credit at well below costs. This is one reason why few, if any, of these initiatives are sustainable. Given the additional costs associated with microfinance, rates of between 35% and 50% would be expected for sustainable operations ¹². Only the three sustainably oriented MFIs regularly charge interest rates at these levels. As noted by CGAP: "Microcredit interest rates are set with the aim of providing viable, longterm financial services on a large scale. MFIs must set interest rates that cover all administrative costs, plus the cost of capital (including inflation), loan losses, and a provision for increasing equity. Unless MFIs do so, they may only operate for a limited time; reach a limited number of clients; and will tend to be driven by donor or government goals, not client needs. Only sustainable MFIs can provide permanent access to financial services to the hundreds of millions who need them."¹³

Repayment Methods

Some 57.53% of loan products were offered with repayment of principal and interest at loan maturity, while 41.78% of products were offered with monthly payments of interest and repayment of principal at loan maturity. Only 0.68% of products were offered with weekly payments of interest and repayment of principal at loan maturity.

Portfolio Performance

Table 4.6 [ PDF 66.5KB | 1 pages ] summarizes the reported characteristics of semiformal sector portfolios. As of 31 December 2003, the semiformal sector reported 12,365 outstanding borrowers with loans outstanding of KN12 billion. This included 3,945 borrowers from multilateral and bilateral agency initiatives, with loans of KN4.4 billion; 5,544 from INGO initiatives, with loans of KN5.2 billion; and 2,876 from MFIs, with loans of KN2.5 billion. Over the 12 months before the survey, 11,165 new loans had been made, including 2,741 from multilateral and bilateral agency initiatives, 4,878 from INGO initiatives, and 3,546 from MFIs.

Figures 4.11 and 4.12 [ PDF 73.7KB | 1 pages ] show the percentage of borrowers with overdues as of 31 December 2003, by type of microfinance project and by type of borrower.

MFIs had the lowest percentage of borrowers in arrears, at 7.68%. Multilateral and bilateral development agency projects reported 13.71% of borrowers in arrears. INGOs reported a slightly higher percentage of borrowers in arrears at 14.84%. When borrowers are considered by type, men's groups had the highest overdues, with 25% of groups in arrears. Mixed groups of men and women had the second highest level of arrears at 18.20%. The percentages of women's groups and men as individuals in arrears were 7.75% and 6.79% respectively. The lowest overdues were by women as individual borrowers at 3.05%. Overall this suggests that MFIs are better at controlling default, that individuals are less likely to default than groups, and that women are less likely to default than men when they borrow as individuals or as groups.

Figure 4.13 [ PDF 73.7KB | 1 pages ] shows the percentage of total amounts in arrears as of 31 December 2003 by borrower type ¹⁴. Consistent with Figure 4.12 [ PDF 73.7KB | 1 pages ], men as individuals accounted for the largest amounts in arrears, followed by mixed groups, men's groups, women as individuals, and women's groups.

Profitability of Microfinance

Of the 33 microfinance initiatives, 13 did not provide profit and loss information for 2003 in response to the survey. Fourteen provided profit and loss information that did not reconcile; 7 provided profit and loss information that reconciled. Overall, the information is not sufficiently reliable to draw conclusions and indicates significant weaknesses in financial reporting in the semiformal sector generally.

The Informal Sector

Sector Participants

In the Lao PDR, the informal sector comprises loans between households, informal moneylending, and lending through the traditional Lao houay. Additional information on the informal sector was gathered through the questions to households on their borrowing and is reported in greater detail in Chapter 6. In addition, the survey collected information about lending by households, and by 17 moneylenders who were prepared to identify themselves and participate in the survey. This section concerning the informal sector draws on all 3 sources of data.

Informal Loans by Households

Table 4.7 [ PDF 74KB | 1 pages ] shows the estimated total lending by rural households in the 12 months preceding the survey, extrapolated to the entire rural population from household survey data on households making loans.

The table indicates that rural households made an estimated 217,415 loans to friends and family, valued at KN407.33 billion ($38.34 million), and about 136,159 loans to others (households in the same village, other villages, and urban areas), valued at KN253.36 billion ($23.9 million) in the 12 months preceding the survey. The total estimated value of loans made by households in the period is KN660.69 billion ($62.2 million), dwarfing the amount loaned in the semiformal sector (KN12 billion). Overall, about 61% of loans by value and by number were made to friends and family. ¹⁵

As would be expected, the vast majority of lending was done by households in the wealthiest quartile: 76% of all lending (by volume) was done by the richest quartile, who also account for 43% of loans by number. Analysis by strata indicates that Other Rural households account for the vast majority of loans by number: they account for 60% of all loans, almost certainly the result of the lack of outreach by more formal and semiformal institutions in the remote Other Rural areas and, therefore, the need to rely on informal interhousehold loans. Other Rural areas also account for 44% of inter-household lending by volume.

Table 4.8[ PDF 61.2KB | 1 pages ] summarizes other key facts about loans made by rural households in the 12 months preceding the survey.

Informal Loans by Moneylenders and through Houay

In the 12 months before the survey, as estimated from the household survey more fully discussed in Chapter 6, moneylenders made loans to about 25,300 rural households in an estimated amount of KN27.30 billion ($2.57 million)– a fraction of the informal lending done by households, but still more than twice as much as the semiformal sector. Moreover, about 3,100 rural households participated in houay, which lent their members about KN18.53 billion ($1.74 million), about 50% more than the semiformal sector (excluding FIAM).

Table 4.9 [ PDF 66KB | 1 pages ] compares some characteristics of household loans with moneylender loans.

The table highlights:

• the vast majority of lending is in cash, especially by moneylenders, but because loans in-kind are smaller on average than loans in cash, a larger percentage of loans by number are made in-kind;
• moneylenders are more than 3 times as likely to require written loan agreements and more than 4 times as likely to require written collateral agreements than households;
• moneylenders have a lower level of overdue loans than households and charge higher effective interest rates;¹⁶
• regular collection of payments is more frequent with moneylenders, who show only 28.43% of loans as maturing in bullet payments of all interest and principal, compared to 52.97% of household loans; and
• moneylenders are about 7 times more likely than households to give loans where the interest is payable monthly, though households are more likely to collect daily payments from their borrowers.

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