Supporting microfinance in Laos’ rural areas
Title: Microfinance in Rural Areas – Access to Finance for the Poor IV
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Lead executing agency: Bank of the Lao PDR
Overall term: 2017 to 2018
The Lao People’s Democratic Republic (PDR) is categorised by the United Nations as one of the world’s least developed countries. More than two-thirds of its 6.5 million citizens live in rural areas and have only limited access to basic services, education and formal markets.
Despite the country’s progress in providing pro-poor financial services, only a few commercial banks and microfinance institutions operate outside of the urban centres. Access to formal financial services for the rural poor is therefore severely limited, and this remains a major challenge for both the Lao economy and individual households. People living in rural areas generally have limited financial resources and often lack the necessary reserves to cope with emergencies. Furthermore, they are not able to expand their businesses by taking out loans and cannot deposit their money safely because there are no banks within their reach.
Financially sustainable village banks and their support organisations provide their members with inclusive access to financial services.
The project is working with the Bank of the Lao PDR (BoL), the central bank of the country, to improve conditions for the provision of sustainable financial services. Additionally, the project supports BoL to establish strategies and regulatory documents to improve financial education and to better protect financial consumers. Together with the Microfinance Association, it also aims to develop the capacity of stakeholders in the Lao microfinance sector.
In the rural areas, the project is supporting seven microfinance institutions in their role as support organisations for local village bank networks. These organisations provide their member village banks with regular on-site technical assistance, including on-the-job coaching and training on bookkeeping, credit and risk management.
Building financial knowledge and basic business skills through targeted courses that address financial literacy as well as business literacy complements the project’s work on improving access to finance for the rural population. Gender equality and inclusive access are fundamental principles that guide all the project activities.
The project receives a financial contribution from the Australian Department of Foreign Affairs and Trade (DFAT).
The project supported BoL in the formulation of the Prime Ministerial Decree on Microfinance Institutions and its accompanying implementation guidelines, which came into force in November 2012 and May 2016 respectively. It is now assisting BoL in establishing a decree on financial consumer protection and a plan for strengthening financial literacy in the Lao PDR. AFC Consultants International supported the project in an earlier phase in 2011 by supporting the central bank in installing supervision software in their Financial Institution Supervision Department. The project also played a significant role in establishing the Lao Microfinance Association. This institution supports organisations working in the microfinance sector. It encourages them to provide input for the development of new regulations and builds the capacities of the sector’s workforce by offering a Microfinance Management Certificate Course.
Seven project-initiated network support organisations currently provide assistance to local village banks in 24 target districts. Four of the organisations are already generating enough operating income to cover their expenditure, proving that the concept is financially viable. By May 2018, the project had facilitated the formation of 610 village banks, which manage more than 85,000 active accounts. While most of these are family accounts, women hold about 57 per cent of the individually held accounts.
The combined value of the savings held in these banks already exceeds 222 billion Lao Kip (22.5 million Euro). The outstanding portfolio comprises 28,324 loans with a total volume of 209 billion Kip (21.1 million Euro). This model responds to the demand for safe saving and accessible loan facilities. Its success can be seen in the growing number of people taking advantage of the financial services offered.
Financial literacy training has reached more than 26,000 people in the target villages, with 54 per cent of the participants being women. In a cooperation with GIZ’s Vocational Education in Laos (VELA) project, the project has provided training to the teachers of 17 rural vocational schools, enabling them to pass on such knowledge to their students. In addition to that, business literacy training has been designed and is being rolled out which aims to increase business skills for entrepreneurs of micro and small businesses in the target areas.