Lao PDR: Development of Microfinance
FIRST has funded three technical assistance projects (aggregate cost US$ 534,000) in cooperation with the Asian Development Bank (ADB) in Lao PDR (Lao). All three projects were related to improving access to finance for the poor, and were an excellent example of how projects can build on each other at the same time as mitigating the risk of failure by only moving to the next stage if satisfactory progress had already been achieved in the prior stage. The three projects were:
- To survey the needs of the poor and the financial institutions serving those needs – essentially various forms of microfinance organizations;
- Based on the survey, and with Government acceptance of the results, to develop a strategy for increasing access to finance for the poor; and,
- Building on the strategy, to strengthen the capacity of the Bank of Lao (BOL) to regulate and supervise the microfinance sector.
Throughout these three projects, FIRST employed the same consulting firm – Enterplan – and they in turn cooperated closely with the ADB team and divided technical assistance inputs between them.
The Government of the Lao and ADB prepared a full Country Strategy Program (CSP) (2002-2004) in September 2001. The CSP provided the ADB with guidance on its operations in the Lao PDR for the next five years. The core strategies for reducing poverty were sustainable economic growth, inclusive social development, and good governance. The strategy focused on various operational priorities including rural development and market linkages, and private sector development.
An ADB-assisted workshop to discuss obstacles to private sector development was held in March 2002 with government officials, the private sector, and development partners. The workshop recommended, amongst other things, improving access to finance.
The survey was national in scope and attempted to measure supply of, and demand for, financial services in various areas of the country (including rural and peri-urban areas, outlying areas and those near market centres); and it also aimed to assess the profile of a typical client of various institutions to measure the degree to which the poor and non-poor have access to the different institutions (both informal and formal) and the terms of those services. The ADB and FIRST collaborated effectively throughout the project. The ADB officer contributed directly by providing analysis and comments for the final report.
For the survey, a stratified random sample of 1,189 households was selected. The household survey collected information on household demographics, economic activities, assets, liabilities, and attitudes to financial services. Analysis was carried out on the sample as a whole, as well as by stratum and by wealth quartile using appropriate statistical techniques.
For the rural financial services survey, separate questionnaires were designed for (i) banks; (ii) multilateral and bilateral development agencies, INGO, and MFI projects; and (iii) informal moneylenders. The questionnaires collected information on outreach of the institution; lending activities and loan portfolios; and savings services.
Overall, only 38% of reported income of rural households came from agriculture, livestock, or fishing. Over half of reported income came from business activities. Only the rural Mekong households reported more than half of their income from agriculture, livestock, and fishing. Among wealth quartiles, the poorest derived only 35% of their income from agriculture, livestock, and fishing, and the richest derived 37%. The results highlight the importance of non-agricultural income in rural Lao PDR. The survey concluded that there was a huge unsatisfied demand for loans by rural households, covering a wide range of production opportunities and non-production needs.
The survey revealed some important trends in rural and microfinance in Lao:
- There has been a rapid increase in funding for microfinance activities in the five 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 five years. Funding of capacity-building has also grown, but remains low, at less that $100,000 cumulatively over five years.
- The vast majority of lending (76%) was provided to households in the wealthiest quartile. Households in the other rural stratum account for the vast majority of loans by number – 60% of all loans (and 44% of loan volume), almost certainly the result of the lack of outreach by more formal and semi-formal institutions in the remote ‘Other Rural’ areas, and therefore the need to rely on informal inter-household loans.
- In rural areas of Lao PDR, savings are mostly in-kind. Non-cash savings account for 73.3% of total savings in rural areas. Non-cash savings exceed cash savings for each wealth quartile, and for three of four rural strata (the exception being peri-urban households). Livestock is the most common means of non-cash savings in Lao rural households, used by 98.2% of those households.
This project sought to develop a strategy and regulatory framework that would facilitate the development of a rural financial system to increase access to financial services and significantly expand income-generating opportunities, generate employment, and reduce poverty from current levels.
The consultants produced a comprehensive strategy and regulatory framework. This strategy and framework were submitted for public review and comment within the rural finance community. The Bank of Lao PDR also reviewed and provided comments. The Asian Development Bank, which worked in partnership with FIRST to fund this project, also commented on the strategy and framework.
The strategy had five basic components: (i) to create an enabling policy framework for public and private provision of rural and microfinance, (ii) to create a sound prudential regulatory and supervisory environment for public and private rural and microfinance institutions, (iii) to create a financially self-sustainable, market-oriented Agriculture Promotion Bank (APB), (iv) to create a diverse and competitive private sector, and (v) to create a supportive non-prudential regulatory environment. Under part (ii) the strategy called for, inter alia: (a) enhancing existing prudential regulations, (b) introducing a regulatory and supervisory regime for the private and public sector in rural and microfinance, and (c) building supervision capacity.
The project helped the Government and the Central Bank (Bank of Lao – BOL) develop a national policy and strategy for rural and microfinance (RMF) and draft related legislation and regulation for the sector. The policy statement was approved in November 2003 by the Prime Minister’s Office; the new microfinance regulations were issued in June 2005 by BOL.
Regulatory and supervisory Capacity Building
The project built on the previous projects and aimed to build capacity within the BOL to effectively implement the new regulatory framework and supervise the RMF Sector. It was also implemented in co-operation with the ADB, who proposed the project on behalf of BOL.
According to the survey carried out by FIRST’s consultants the MFI sector comprised of six multilateral or bilateral development funding agencies providing credit-lines for on-lending as microfinance as components of projects; 16 INGOs operating microfinance components; two specialized microfinance institutions set up specifically for microfinance purposes and targeting sustainability; and four savings and credit unions (SCUs). The sector reached only a small percentage of the Lao population (approximately 7% of the total number of poor households). According to the Government’s policy statement, the rural and microfinance sector should significantly expand over time to increase outreach to the greater number of poor in Lao PDR.
With joint assistance and funding from FIRST and ADB, the Department of Supervision of the BOL developed an enabling legal and regulatory framework for microfinance (the Framework), addressing prudential and non-prudential issues, that will facilitate the establishment of new financial institutions, specifically microfinance institutions.
Since 2003, the BOL had set up a Microfinance Division within the Supervision Department. The division was responsible for overviewing the MFIs activities, mainly through (a) drafting of regulation, guidelines and applying it for the licensing of MFIs, SCUs and Credit Cooperatives and (b) carrying out off-site supervision and on-site inspection based on information submitted by the supervised MFIs.
However, until then, the supervision of MFIs had been practically non-existent or in other cases inefficient. This was the result of the dearth of MFIs, which itself was the result of a previously unfavourable policy environment and the lack of a regulatory framework under which MFIs could be established and operate. With the adoption of an enabling policy framework and regulations, the piloting of best-practice savings and credit unions, and the expected establishment of more MFIs, BOL could begin implementing the new regulatory framework and supervising the microfinance sector. Indeed, with the microfinance regulations issued, BOL now had to establish procedures, guidelines, and pro forma documents for registering credit-only MFIs and assessing licensing applications and issuing deposit-taking licenses. Given BOL’s lack of experience in this sector, however, assistance was needed by BOL to harmonize the microfinance regulatory and supervisory regime, implement its provisions, and build BOL’s supervision capacity.
- Approaching technical assistance in a phased manner – in this case through three separate but related projects – helps to ensure the efficacy of the technical assistance and reduces the risk of project failure (apart from the first phase in a multi-phase approach).
- Analyzing the access to finance needs in a thorough manner involving all stakeholders and active assessment at the grass roots level helps to inform strategy, build political consensus and focus capacity building assistance.
- Working with the same consultants (if they produce quality outputs) through all phases generates consistency and builds cooperation with the stakeholders.
- Working with other donors or multi-lateral banks, by supplementing their technical assistance and lending activities, as part of a wider reform programme, enables FIRST to fill TA gaps effectively and leverage off the resources of the other partner – in this instance the ADB.
- The survey report put out under ADB cover. This is not only informative about the situation in Lao back in 2003 but also demonstrates a good survey methodology and incorporates recommendations for action and strategy based on survey results.
- Revised regulations for deposit-taking MFIs and registered MFIs.
- Terms of Reference for the strategy and supervisory capacity building projects.