Study on Generating Employment through Micro and Small Enterprise and Cooperative Development in Lao PDR
4.2 Access to Credit

4.2 Access to Credit

Access to credit in Laos is generally quite poor and only a few micro/small enterprises manage to obtain some form of formal or informal credit. According to the 1996 MIH-GTZ survey, only one enterprise in five has ever received a loan. Less than 2 per cent of all micro/small enterprises have ever received a bank loan. 11 per cent of micro/small enterprises, which is about half of those receiving any kind of credit, obtain their loans from family members. There seem to be two factors at play here:

• The underlying lack of funds for loans to micro/small enterprises, and
   
• An unwillingness to take loans at the market rate, even if they are available.

Minority and Gender Aspects of Credit. The pattern for both rural and urban micro/small enterprises in accessing credit is similar. Up to 79.9 per cent of rural entrepreneurs have never received a loan. Family members were the most common source of loans (11.1 per cent), followed by friends (3 per cent). Only 2.1 per cent of micro/small enterprises have received a bank loan.

Figure 16. Credit sources of rural and urban micro/small enterprises

(Source: The results of a National Survey, SMEs in Lao PDR, MIH-GTZ)

The survey also showed that while 22 per cent of female entrepreneurs managed to obtain credit, compared to only 7 per cent for male entrepreneurs, the average loan for a woman was substantially smaller than that for a man: 500,000 Kip compared to 4,700,000 Kip. This indicates a need for adequate small-scale credit for female-owned businesses. It may also suggest that women have better skills in negotiating with lending sources, a role that is considered quite acceptable in Lao society. In general, however, women do not like to approach banks (Reichenbach, Luangkhot, and Phengkhay, Gender Approach to Small Enterprise Development in the Lao PDR, 1996.) perhaps due to the traditional belief that it is shameful to borrow money and in particular to be in debt to a bank. Most women feel a bank is a place that is foreign to them and feel uncomfortable and diffident in filling out bank forms.

Rural women often lack legally recognized assets as collateral for the bank. (Country Report on Women in the Economic Development of the Lao PDR, Lao Women's Union, 1996; Gender Approach to Small Enterprise Development in the Lao PDR, 1996.) Women also prefer to obtain loans quickly and directly and with as little paperwork as possible. This is most easily done through informal moneylenders or informal savings and credit groups, despite the fact that the interest rates charged can be as much as 20 per cent a month. (Reichenbach, Luangkhot, and Phengkhay, Gender Approach to Small Enterprise Development in the Lao PDR, 1996.)

Credit Access for Persons with Disabilities

Access to formal loans is virtually non-existent for people with disabilities. The baseline study showed that 96 per cent of such persons did not know what a loan was. (Handicap International & National Center for Medical Rehabilitation, Bridging the Gap: Survey of Disabled Children & Adults, Lao PDR, 1999.) These persons tend to have lower incomes than the general population: 30 per cent of persons with disabilities, or of families with a disabled member (income for individuals in Laos is not usually separated from that of their family), earn less than 50,000 Kip per year. Only 17 per cent earn between 50,000 to 100,000 Kip per year, while 38 per cent have no income at all. About 40 per cent own animals and 43 per cent own land. Cash savings are almost non-existent with 98 per cent reporting they have no cash savings.

The most common problem identified by skilled or semi-skilled adults with disabilities who want to start an income generation activity is lack of funds. However the concept of credit is not always well understood, especially if the money is seen to come from international development agencies.

Conditions in the Financial Sector

Despite the importance of credit, most micro/small entrepreneurs starting businesses find access to it very difficult, which stems in part from the way the formal and informal credit sectors operate in Laos. (Micro-Finance and Sustainable Livelihoods in Lao PDR, June 1997.)

The Formal Sector

This comprises the three state-owned commercial banks: the Agricultural Promotion Bank, three joint-venture banks and the seven branches of foreign banks, together with one representative office.

The state-owned banks account for 71 per cent of the formal banking sector's total assets. The Bank of Lao PDR is the country's central bank and is also the bank of last resort, responsible for control of the money supply, managing reserves, and supervision of commercial banks. The formal banking system is concentrated in Vientiane and the other larger cities. An exception is the Agricultural Promotion Bank which has a branch network through all provinces.

According to an Asian Development Bank estimate, 90 per cent of the population does not have access to formal banking services. The lack of sufficient financial intermediaries and the weakness of the banking system as a whole make it difficult to mobilize domestic resources and so reduce dependence on foreign aid as the primary source of financing. According to the UNDP's microfinance survey, the Bank of Lao PDR and donor credit lines make up 64.6 per cent of total liabilities and capital for state-owned commercial banks. For the Agricultural Promotion Bank (APB) these two sources account for 92.4 per cent of liabilities and capital.

The low level of deposit mobilization can be explained by cultural habits, a general mistrust of financial institutions, and the high transaction costs and low interest rates available on savings and loans. (UNDP/CDF, Micro Finance in Rural Lao PDR, June, 1997)

The interest rate that the Agricultural Promotion Bank pays on its deposits is higher than the interest rate it charges on its loans. This means that apparently the Bank does not cover the costs of payments to its depositing customers from the income it earns from its borrowing customers and must subsidize it from other sources. Furthermore, the APB's interest rates are fixed by government policy rather than by the market. According to a GTZ/BAFIS survey on microfinance, lending interest rates of the State commercial banks vary, depending on the loan's duration and the economic sub sector. The rate can be as low as 7 per cent or as high as 27 per cent. (GTZ/BAFIS, Micro-Finance Survey on Lao PDR, 2001.)

The Informal Sector

There appears to be a greater chance of finding finance from the informal sector, particularly for female-owned and rural micro/small enterprises.

• Village Revolving Funds (VRF). There are various credit schemes including revolving funds that operate at the village level and have both social and economic objectives. According to a UNDP/UNCDF microfinance survey, the number of VRFs in 1997 was approximately 1,650, reaching 15 per cent of all rural villages. In 1997 the total outstanding credit provided to villagers through VRFs was close to US$5,000,000.
  
  Most VRFs have been established by international donor agencies and NGOs which provide grants to the Lao Government for credit funds at the provincial level. Because of its experience and its extensive network, the Lao Women's Union has been a key intermediary for these agencies.
  
  Although VRFs have made a significant contribution to community development they have not been an effective financial intermediary for domestic resource mobilization. Also, because they charge below-inflation interest rates and generally lack management skills most VRFs are not financially sustainable. Agencies are now giving this aspect high priority.

The other main forms of informal finance are: (UNDP/CDF, Micro finance in Rural Lao PDR, June 1997.)

• Rice Banks: to ensure rice sufficiency for villagers throughout the production season. Most have been established with financial assistance from the World Food Programme.
   
• Buffalo Banks: to ensure sufficient livestock for agricultural capacity.
   
• Rotating Fund Groups (or Houay). These are more common in urban than in rural areas and are the main source of informal financing for traders operating in the public markets of major cities. Members of a Houay contribute a fixed amount of money into a common pool. This money is then loaned out to the highest bidder, who makes regular fixed amount repayments of principal and interest. Nominal interest in a Houay can reach up to 60 per cent a year.
   
• Household-to-Household loans. This is the dominant form of financing for village households. In the UNDP/UNCDF survey they accounted for more than 50 per cent of all household debt with an estimated value of US$ 29,000,000.
   
• Moneylenders. Moneylenders are more an urban than a rural phenomenon. The UNDP/UNCDF survey found that only 1 per cent of respondents reported borrowing from moneylenders who usually provide short-term Thai Baht denominated loans at high interest rates. Monthly interest rate can reach 5 per cent.
   
• Credit from Suppliers. Suppliers are not a major source of financing in rural Laos though foreign suppliers seem to play an important role in some short-term trade financing. Long-term credit for fixed asset purchases from local as well as foreign suppliers is almost non-existent.

Better provision of micro and small-scale finance on its own will probably have only limited impact on small-scale business success. Complementary inputs, such as training, and skills in financial reporting and marketing will also be needed. (Handicap International & National Centre for Medical Rehabilitation, Bridging the Gap: Survey of Disabled Children & Adults, 1999.)

4.2 Access to Credit
Study on Generating Employment through Micro and Small Enterprise and Cooperative Development in Lao PDR

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