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The Microfinance Sector in the Lao PDR
The microfinance sector in the Lao PDR is currently undergoing a period of rapid growth and change. Increasingly, microfinance provision is being employed by both the governmental and non-governmental sector as a poverty alleviation strategy. The Government of the Lao PDR is committed to the development of a sustainable microfinance sector as outlined in the National Growth and Poverty Eradication Strategy; in addition, the Government of Lao PDR has also endorsed the first Microfinance Regulation (Regulation Number 10 in June 2006) to regulate the establishment and operations of microfinance institutions, as well as to assist practitioners in meeting their legal requirements in the sector.
Current challenges facing the microfinance sector in the Lao PDR include:
- Poor infrastructure and access to income generating activities. Developing services that are both appropriate and accessible to hard-to-reach communities that need microfinance service provision in the Lao PDR calls for innovative approaches that reach remote, low density populations with access to limited market economy or engaged in non-monetised markets in effective and sustainable ways;
- The lack of financial and accounting capacity among microfinance practitioners at the field level. Record keeping, loan and savings methodologies and strategic planning procedures are inadequately implemented due to lack of knowledge and skills among the field staff of microfinance practitioners. This has resulted in the failure of many projects and financial hardships for others;
- The vast number of stakeholders involved in service provision. The involvement of the majority of ministries, mass organisations and many donors and NGOs with limited experience in the sector has resulted in many services not taking advantage of international and national good practice experiences. The varying nature and reach of these microfinance services has also resulted in poor coordination in the sector;
- The lack of sustainability of services. Some microfinance practitioners receive subsidies that allow them to continue providing microfinance services without maintaining financial sustainability. While it could contribute to improving the overall reach of microfinance services, subsidising these services creates challenges for providers attempting to operate sustainably through uneven competition that will impact medium and long-term service provision;
- The view that microfinance is a tool for poverty alleviation for all people in every context. Inappropriate use of microfinance, for example, in villages without access to markets or without cash economies or loans disbursed to individuals and groups that are unable to utilise them for poverty alleviation, has frequently resulted in increasing debt and misunderstanding of the use of microfinance as a tool in poverty alleviation;
- Ensuring donor investment in the sector remains a continuous challenge in sustainable microfinance service provision;
- Increasing the depth and reach of microfinance services to ensure that the poor benefit from service provision. While current initiatives lack capacity to fulfil unmet demand due to poor programming and implementation, future efforts must include exit options to make microfinance provision for the poor sustainable, as well as effective in the short and long term.
The sector in the Lao PDR is currently at an exciting junction; a framework regulatory environment is in place for providers wanting to be recognised as MFIs, investment in the sector are increasing both in terms of operating capital and capacity development, and demand continues to increase. These factors provide a sound base for the development and establishment of a dynamic, sustainable and pro-poor microfinance sector in the Lao PDR.
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