Foreword

The Government of the Lao People's Democratic Republic (Lao PDR) has made significant efforts in the past 2 decades to extend financial services to poor and rural households. With 80% of Lao households, and 90% of poor households, based in rural areas, the provision of rural financial services can promote equitable growth and contribute to the Government's poverty reduction strategy by financing investment opportunities and risk-management strategies of poor and vulnerable households and their micro- and small enterprises.

Major financial sector reforms began in Lao PDR in 1988, with a view to making the financial system more efficient and market-oriented. This included the transformation of the country's mono-bank system into a two-tiered banking system consisting of a central bank and several state-owned commercial banks. In 1993, the Government created the Agriculture Promotion Bank (APB), with a mandate to extend credit and savings services to the rural areas of the Lao PDR. However, this has had limited success because APB's practice of carrying out policy lending at subsidized interest rates on behalf of the Government and donor-supported programs has resulted in some resource misallocation along with large losses that have eroded its capital, and therefore, limited the resources available for its expansion. Today, APB serves about 18% of all Lao households, but less than 5% of rural households.

The Government and international donors have also supported many microfinance projects across the country, especially in the last 10 years, often working through the Lao Women's Union. Some 1,600 village revolving funds have been established, as well as dozens of microfinance components of larger development projects. Again, however, the vast majority of such initiatives have resulted in unsustainable provision of microfinance services because most made loans at subsidized interest rates or lacked sufficient emphasis on long-term institution building. Most became non-operational after outside funding ended. At the same time, a small number of microfinance projects and institutions have demonstrated that best-practice initiatives can succeed in the Lao PDR, provided they focus on demand-driven services, charge interest rates that cover costs and allow profits and growth, and build capacity for professional management necessary for long-term sustainability.

With the lessons learned from both Lao and international experience, the Government has committed to, and begun implementing, a major reform program in rural and microfinance. This program includes: (i) restructuring APB to be a financially self-sustainable, market-oriented rural finance institution; (ii) actively promoting best-practice microfinance institutions (MFIs) through piloting of private, professionally managed, and financially self-sustainable savings and credit unions; (iii) issuing a national Policy Statement on Sustainable Rural and Microfinance to encourage development of the sector, including a diversity of MFI models to serve a dispersed and diverse population; (iv) preparing an enabling legal and regulatory framework allowing for multiple MFI models and products with minimum starting regulations, interest rate autonomy, private ownership and foreign investment; and (v) adopting and implementing an appropriate regulatory framework for prudential supervision of APB.

Before this study, the most recent national survey of rural and microfinance occurred in 1996 with support from the United Nations Development Programme. However, the data from this survey needed to be updated to form the basis for detailed policy formulation and project selection and design.

The present survey is intended to fill the gap in current knowledge, and results have already begun to inform the Government's policy decisions and strategy formulation, help design microfinance initiatives, and provide a baseline for monitoring development of the sector to assess the impact of reform and to make adjustments as necessary.

We would like to thank the survey respondents, especially the many rural households that generously contributed their time and their views in participating in this survey. Without their assistance, this report would not have been possible.

Comment(s)

There are [0] comment(s) for this entry. Post a comment.