By Philippe Le Houérou
The anguish and determination of the people of Lao PDR has been all too evident in the past week, as the country continues its rescue and recovery efforts in the wake of the dam wall collapse in Attapeu province in the country’s south.
I arrived in Lao PDR just as this heartbreaking tragedy was unfolding. Our thoughts are with the victims and their families and our hopes are with the rescue workers still trying to find those missing, and reach those who have been stranded.
Amid this challenging time, it’s also evident as I’ve travelled the country that this is truly a beautiful place. It was back in the early 2000s that IFC’s tourism advisory service helped coin the phrase “Simply Beautiful” — from its friendly people to its vibrant culture and scenic charm, as seen in Vientiane and Luang Prabang, the slogan “Simply Beautiful” rings true.
Lao PDR is also a frontier market in East Asia which has made significant development strides over the last decade. With GDP growth averaging 7.8 percent per year Lao PDR is today the 13th fastest-growing economy globally. The pace of growth has helped the country meet one of its Millennium Development Goals of halving extreme poverty to below 24 percent by 2015.
But, a quarter of its people still live below the poverty line. Infrastructure remains a challenge. And only about 12 percent of Lao small and medium enterprises (SMEs) have a bank loan or a line of credit. These SMEs account for 97 percent of the private sector and provide 63 percent of jobs in Lao PDR.
Well-functioning infrastructure services, access to finance, and a conducive investment climate are all critical elements vital to support a high growth economy that enables the private sector to create more and better jobs and opportunities for people.
At IFC, the largest global organization working to promote the private sector in developing countries, we’ve been working to help Lao PDR meet its challenges. Building on a 20-year presence in the country, my commitment to the people of Lao PDR during my visit has been to pledge further resources and expertise to spur private sector investment. Our focus would be increased support for infrastructure, especially enabling more power transmission lines, as well as more efforts to improve access to finance for SMEs.
And I’m heartened by the government’s commitment to better leverage the private sector in all sectors of the economy, and set concrete targets to improve the regulatory environment to attract the private sector. We measure this through Doing Business, the World Bank Group’s annual report which looks at business regulations for local firms in economies around the globe.
In our talks with the Prime Minister Thongloun Sisoulith, senior government officials, and the private sector, we’ve also agreed to do more to expand support for SMEs, so enterprises can access the funding they need to grow and contribute their full potential to the nation’s growth path. With so many SMEs constrained in accessing finance in Lao PDR, it’s estimated they face a financing gap of US$1.2 billion. Women who own or run about a third of the country’s SMEs face a US$340 million financing gap.
Lao PDR is not alone in facing this problem. Access to finance for SMEs remains severely constrained in many developing countries, restricting business growth. Owners and entrepreneurs report access to capital to be one of their toughest challenges, even sometimes outranking electricity shortages.
So how can Lao PDR help close these financing gaps? One important response is creating an enabling operating environment that encourages banks to expand lending to SMEs.
Like some other emerging markets, Lao PDR currently uses interest rate caps as a method to prevent commercial banks from charging extortionary interest rates. This particularly low cap in Lao PDR, however, introduces an unintended market distortion. With the need to keep interest rates low to accommodate the cap, Lao PDR banks are pushed to lending primarily to large corporates, which already have access to finance. And for SMEs, which are perceived as higher risk, banks are unable to charge the relevant higher interest rate, due to the cap, which discourages lending to them.
As banks seek to expand access to finance for SMEs in a sustainable manner, a restriction on interest rate levels has adversely made banks become selective in choosing clients, favoring those who are less risky. Historically, markets experiencing interest rate caps witness a large decline of unsecured and small loans, as well as a reduction in credit to SMEs and other perceived riskier sectors. With interest rate caps, banks lose the incentive to grant long-term loans and finance emerging economic sectors, as the caps mean that the rate will be the same as for safer short-term loans.
To promote access to finance for Lao SMEs, removing the caps would allow banks to set interest rates to adequately price the risk of lending to SMEs. Once the banks are free to charge appropriate interest rates based on risk assessment, credit will begin to flow to entities like SMEs that need it most. This will also allow the banks to offer higher interest rates of deposits to attract Lao Kip liquidity as only about a quarter of the population own a savings account.
Another solution is new market opportunities that encourage banks to expand SME portfolios, especially to women-owned businesses. Around the world, we have found that investing in women is good business. Globally, the women’s market for banking is growing faster than the overall market. Many banks in Lao PDR — like those in other emerging market countries — either feel there is no need for a different approach to women entrepreneurs, or view their businesses as less profitable and higher risk. As a result, banks are missing an economic growth opportunity.
In Lao PDR, we advised Banque Franco-Lao (BFL) on how to develop both financial and non-financial products and services tailored to businesswomen. Within just two years, BFL grew its women-owned SME portfolio from serving just 50 women with US$8 million in loans in 2015 to 338 women with US$30 million loans today.
Lao PDR is at a critical juncture to accelerate continued high growth and pursue shared prosperity on its path to catching up with its neighbors. If it removes existing policy distortions, taps into the women’s market as a growth strategy, and eases the costs of doing business, Lao PDR can begin to unlock the full potential of the private sector and achieve even greater economic success.
Philippe Le Houérou is CEO of the International Finance Corporation.
