Laos village banks are making progress, despite facing suspicion
Landlocked and economically tiny, insulated from an outside world it fears and mistrusts, Laos is a very unusual country. Its suspicions of the outsider, which locals wear openly on their faces, are baked in. They recall a century of suffocating French rule, shudder at the memory of American bombs raining down during the Vietnam War, and cast nervous eyes north, to a resurgent and intimidating China.
This fear of the unknown has shaped the country’s economic strategy – such as it is – and helps to explain why, even now, so many Laotian people and businesses struggle to find ways to access credit, get loans and, in many cases, open bank accounts.
But the problem runs far deeper. The capital Vientiane is a blast from the past, a reminder of what life in this part of southeast Asia was like a quarter of a century ago.
“It’s just like my country in the 1990s,” a Cantonese investor from Guangdong tells me over a Belgian beer in a shack on Donchan Road, as we watch the Mekong River trickle by in the distance. “You need a licence for everything, each one costs a fortune, and when you ask the government for one, they always say no.”
The economy is hopelessly managed and unbalanced, reliant on income from multilaterals, development banks and non-state non-governmental organizations, many of whom – such as the Netherlands’ Cordaid and UK post-conflict expert MAG – do amazing work.
GDP growth slipped to 6.5% in 2018, from 6.8% a year earlier, the result of natural disasters and a tragic dam collapse, while the current account deficit widened to 17.1%.
Long-term growth, the IMF said in August 2019, was “tilted to the downside” due to a host of reasons, including: “A large current account deficit, low level of reserves, a high level of debt, a managed exchange rate, and a dollarized banking system [that] amplify macro-vulnerabilities”.
Its future, it added, was overly dependent on two vast projects, both heavily backed by Chinese money.
The first is a $7.2 billion high-speed railway line set to link Vientiane with the southwest Chinese city of Kunming by 2021, the whole cost of which is being met by loans from Export-Import Bank of China.
The second is less a single project than a patchwork quilt of them: 25 hydro-electric dams, 10 already completed at a cost of over $11 billion, with 15 under construction, all built by Chinese state-owned enterprises (SOEs) and funded by Exim and China Development Bank.
[Many older Laotians have] always distrusted banks, so they prefer to keep their money at home or buried in the ground- Phantouleth Louangraj, ADB
In simple terms, Laos’s plan is to turn itself into a giant electricity-exporting machine. The Washington-based non-profit Radio Free Asia describes its future as “southeast Asia’s battery, built by China”.
Down at ground level, the view is very different. Laos isn’t short of banks – the country is home to 40 licensed financial institutions, including Banque Pour le Commerce Exterieur Lao (BCEL), one of just five companies listed on the Lao Securities Exchange, and a handful of foreign lenders.
Cambodia-based Acleda disburses loans to small businesses, while ANZ specializes in foreign exchange and transaction banking. China’s ICBC, which opened its first branch in Vientiane in 2012, provides yuan-denominated clearing services, works closely with mainland SOEs, and reckons itself to be the largest foreign lender at work in the country, with assets of $2.2 billion at the end of 2018.
There are plenty of microfinance institutions (MFIs) dotted around the country – a landmark 2014 FinScope study by South African non-profit FinMark put the total at 178.
Reaching the unbanked
Then there are the village banks, estimated to number more than 6,000, although no one is sure of the true figure. These ubiquitous outfits are tiny and highly localized lending institutions overseen by village elders and responsible for parcelling out micro loans to the poor and the needy.
Most of them mean well, but all of them are stymied in their attempts to reach out to unbanked customers by a stifling regulatory regime, poor infrastructure, a government that implicitly distrusts foreign lenders and public wariness of the formal banking system.
Many older Laotians, says Phantouleth Louangraj, senior economics officer at the Asian Development Bank (ADB) in Vientiane, have “always distrusted banks, so they prefer to keep their money at home or buried in the ground”.
Part of the wariness stems from the fact that in times gone by, making a cash withdrawal was arduous and intrusive.
“Banks would ask what you wanted to do with your money, and that scared people off,” Louangraj adds.
That has changed over the last decade somewhat. Banks rolled out thousands of ATMs, which cluster along busy roads – and the machines don’t ask if you plan to hire a car or buy a beer.
“Young people trust the banks more,” notes Louangraj. “The banks are better now than they were in the past. They’re more reliable and offer better services.”
[The share of the Lao population who actively use banking services is] around 30%, but that number is rising sharply in urban areas- Jerome Pirouz, TCX
But that doesn’t solve every problem. The country doesn’t have nearly enough bank branches. World Bank data from 2017 put the number of branches per 100,000 adults at 3.1, against 4.7 in Myanmar and 7.5 in Cambodia. Globally, the average is over 12. Financial inclusion remains perilously low: the World Bank’s 2017 Findex report put the share of Laotians with access to a formal bank account at just 29%.
Jerome Pirouz, head of structuring at TCX, a fund set up by the Dutch and German governments in 2007 to pool FX risk and promote frontier market currencies, puts the share of the Lao population who actively use banking services at “around 30%, but that number is rising sharply in urban areas.”
As is the case in most countries, the vast majority of businesses are small and medium-sized enterprises. One NGO chief reckons micro-sized enterprises make up 90% of all companies.
“Most firms are completely informal, working below the radar,” he says. “That’s how income and production is worked out here. But how do they get access to finance? It’s very hard, because the banks lend to the big state enterprises, and to firms and people linked to the Lao People’s Revolutionary Party,” which has ruled Laos since 1975.
Elsewhere in the region, authorities have taken a proactive approach to the problem by handing out licences to mobile money providers. The likes of Wing Money in Cambodia and Wave Money in Myanmar have revolutionized payments and banking in their home markets, bringing millions of individuals and corporates into the financial mainstream.
Jerome Pirouz, TCX
In Laos, the government has taken the opposite approach, blocking financial innovation at every turn, or using a morass of red tape to choke creativity at birth.
“There is no fintech industry here,” says the head of a foreign NGO. “The Bank of the Lao PDR [BoL] has no framework to regulate financial innovation, let alone to facilitate it.”
In a March 2019 report on fintech and financial literacy, ADB analysts Peter Morgan and Long Trinh noted that digital financial services were at a “very nascent stage” of development.
Some banks, notably BCEL and LaoVietBank, were digitally active, but their range of online services was limited to mobile top-up and utility bill payments.
Part of the problem is connectivity – fewer than one in three people owns a smartphone. But the real impasse is a lack of joined-up thinking in government.
“The environment for fintech startups is still difficult,” the ADB says in its report, noting that every startup company has to get an operating licence from two departments, one of which oversees SMEs, while the other regulates science and technology.
This is a breeding ground for the kind of bureaucracy that flourishes in countries under the thumb of Marxist-Leninist party politics. Entrepreneurs interviewed for this story tell nightmare tales of securing approval to open a business by one ministry, only to have their licence revoked by the other one.
Even when that hurdle is cleared, firms face the indifference of a government that cares so little about innovation and creativity, it refuses to offer subsidies and tax incentives.
And this hurts everyone. Startup firms, fintechs among them, will always struggle to borrow from traditional lenders if they do not have a licence to exist. In other markets, it is at this point that foreign investors step into the breach. That was the case in 2015, when Wave Money was formed with capital from Myanmar lender Yoma Bank and Norwegian telecommunications operator Telenor.
But, again, Laotian rules hinder rather than help.
“Even laws on foreign investment make it difficult for foreign investors to collaborate or invest in any startup in the country,” the ADB’s authors say.
That Vientiane is so far behind the curve was evident in May, when Soulysak Thamnuvong, acting director-general of BoL’s payments department, promised to send a report on financial technology and cashless payments to parliament by the end of 2019. This is a central bank that likes to move slowly – at least five years too slow.
Nor is it easy for MFIs to fill the gap. Rules prevent foreign investors from individually or collectively owning more than 30% of any locally licensed microfinance lender. And because capital is so difficult to access, most MFIs stay small and think small, which may explain why most individuals and small businesses barely know they exist and have so little faith in them.
In its 2014 survey, FinMark found that 28% of people hid their money in a “secret place at home”, while a quarter of respondents kept their cash locked up in a savings account at a commercial bank. Just 1% entrusted their money to a microfinance institution.
They were far more likely to put their capital to work in a more mobile form of collateral, including jewellery (7% of respondents) and livestock (23%).
Laos’s inability either to foster onshore capital or tap into pools of foreign money has become a national liability. While economic growth slipped slightly in 2018, credit growth dipped alarmingly. Bank credit as a share of all newly created private-sector credit expanded by 4.7% year on year in 2018, against comparable growth figures in the full year 2017 of 14.2% and 22% in 2016.
Phoukhong Chanthachack, general managing director of state-run BCEL, points to the challenges banks face in deciding who lend to. The lack of a national credit information bureau means that “banks still lack many important information to make a consideration on loan approval for individuals. Moreover, many businesses still use cash in their activities which is difficult for bank to monitor.”
In its August 2019 report, the IMF homed in on the issue of bank profitability and non-performing loans.
“The level of past NPLs… constrains further diversification of the economy,” it said.
Given that the BoL put the net level of bank NPLs at 3.1% at the end of 2018, the suspicion lingers that the IMF doesn’t trust its data. The Fund said the true level of soured loans at smaller onshore lenders is 12.3%. It twisted the dagger a little more when it stated that NPLs should, as a matter of course “be identified based on more solid accounting standards and be properly provisioned for as needed”.
Doubt, sniffs a development official is “always a healthy approach when dealing with government data”.
He points to the official prospectus published by the Lao ministry of finance in May 2015, when it filed to raise Bt1 billion ($33 million) worth of international bonds denominated in Thai baht. Contained in the document was an unusual and frankly startling confession.
Referring to an earlier IMF report, it admitted: “Shortcomings of government finance and macroeconomic statistics may hamper credit monitoring of Lao PDR by the bondholders.”
These failings, it said, included: “Unresolved gaps and inappropriate data collection and compilation methodology for the GDP estimates, the need to improve CPI data, timeliness of fiscal and monetary data reporting, exclusion of off-budget activities in fiscal data, and the need to improve monetary and external sector statistics.”
It’s not so much a case of finding the holes, but of discovering where they aren’t.
The outside world wants to help Laos – it’s just not clear the feeling is reciprocated. A small army of western development banks and multilaterals, from the ADB and the FC, to Germany’s Giz and KfW and the Paris-based Agence Française de Developpement are full of capital and goodwill, and desperate to find new ways to put their money to work.
Each has a different method of engagement.
The World Bank is slowly burning its way through a $13.2 million facility, approved in 2014 with the aim of financing SMEs and disbursed via three non-Lao lenders, including Vietnam’s Sacombank.
The Asian Development Bank prefers to lend direct to the Lao government. It describes itself as “one of the country’s largest multilateral financiers”, directing $2.65 billion in loans, grants and technical assistance since 1968.
Its latest facility, a $30.5 million loan to improve water supply and sanitation, was approved in September 2018.
Giz’s approach is more granular. The development agency has been kicking around in Laos since 2003, but moved into a higher gear six years later, when the German government rolled out its Access to Finance for the Poor programme, in alliance with the BoL.
The aim, says Thorsten Fuchs, Giz’s chief project manager in Vientiane, is to provide “support and supervision so that village banks can operate sustainably”.
The village bank, or village fund as it is also known, is a very basic construct. In years past, these standalone outfits, lacking any kind of government oversight, were little more than highly informal savings pools that locals could dip into when money was short. Many were badly run and collateral was often frittered away, either though shifty lending or poor book-keeping.
Throw a rock in the air in Vientiane and you’ll hit a development expert who views village banks with suspicion. (“They are dysfunctional and they do not meet people’s needs,” is the not-untypical view of one individual). FinMark’s 2014 survey found that just 5% of Laotians would put their money to work in one.
But that overlooks the changes that have quietly been wrought by Giz. Again, most of it is the simple stuff, but it is done well. The agency starts by buying each village bank a safe box, paper ledgers in which to record accounts, and pens and markers.
It then sends experts to each village to provide financial training to each bank’s oversight committee. Later, it moves on to providing more high-quality accounting and auditing support.
Fuchs says it is a process of constant engagement and education.
“When establishing a new village bank we go to the village, explain the concept and answer questions,” he says. “Usually a follow-up session in the following week is needed before the majority of villagers would agree to open the village bank.”
Each bank serves between 25 and 400 people, depending on the size of the settlement, and is overseen by a committee of five – usually a mix of locals and roving ‘community advisers’ appointed by and answerable to the development bank.
Laotians face three challenges when seeking to access formal credit of any kind. Most of them live in one of the country’s 8,600 villages, a day’s travel or more from the nearest bank branch.
Applying for a loan is a lengthy process that can take weeks and require repeat visits to see bank clerks. Finally, most citizens have little or no collateral. Land titles are usually heirlooms passed down the generations and rarely recorded on paper documents.
At a stroke, Giz and the BoL have found a way, if not to solve every problem, then at least to circumvent them.
Each village bank works the same way. It is open for business one fixed day a month, or two consecutive days for larger villages, with most sessions spent discussing loan applications. To be part of the process, residents must be local, and must open an account and maintain a minimum balance of NK5,000 ($0.58). They are given a savings book and a ledger, and get a regular income statement.
There is flexibility built into the system, Fuchs says.
“There’s an emergency loan facility in every village bank. If someone, say, has had an accident and needs medical help, they can take out an emergency loan, which is approved swiftly. This emergency service is highly valued by the people, and in some cases it already helped to save lives.”
Rule changes that restrict pricing, returns, what products you can offer, are announced – bang! – just like that, with no warning- Lao-based lender
Giz is careful to mitigate risk by lending to village banks via seven local microfinance firms, four of which are licensed affiliates of commercial lender BCEL’s agent banking division.
The seven MFIs, Fuchs says, have blossomed into sizeable businesses in their own right, employing 160 full-time staff that oversee 160,000 account holders in 700 villages. Combined deposits at all village banks totalled $37 million at the end of 2018, while the delinquency rate on loans is running at below 5%, not too bad for a frontier state.
It’s a good step in the right direction, but there is much still to be done at every level.
Nine of every 10 village banks are not covered by Giz’s programme, while at the national level, commercial lenders are hobbled by over-regulation and tyrannized by random shifts in regulation.
“Rule changes that restrict pricing, returns, what products you can offer, are announced – bang! – just like that, with no warning,” says a senior executive at a Lao-based lender. “In most jurisdictions it would look like government meddling in banks’ operations, which is exactly what it is, but here it is normal.”
Foreign banks are viewed with outright suspicion and that is unlikely to change, says a western diplomat working in Vientiane: “There is a whole range of constraints at work in Laos – political, financial, economic, cultural, historical – that prevents capital getting into the country from outside and then being put to work. These constraints are institutionalized and they hinder the country’s development.”
Whether you’re a retail customer, an SME, a foreign investor or even a mid-sized Laotian business, the challenge of accessing credit will remain, until the government and its financial pillars of wisdom – the central bank and the finance ministry – learn to loosen up and to allow financial innovation to permeate the banking sector.
Perhaps the burning issue here is not one of credit availability but of financial education: understanding the point of taking out a loan; and the value of money, from good book-keeping to meeting repayments. The ADB’s Louangraj describes meetings with young business owners who should borrow but won’t, for fear of getting trapped in debt.
BCEL’s Chanthachack says “many businesses still do not record their activities properly, which makes them unable to provide enough information when” applying for a bank loan.
Another development official sits down with business owners, many of them farmers just trying to earn more from their land, to talk numbers. Often, what they want far outstrips what they need.
Shielded from the world by a mistrustful government that manages badly and regulates poorly, Laos is a country low on credit, low on growth, and low on financial innovation.
It is a blast from the past – and not in a good way.