Laos: Banking Sector Consolidation Revisited

2002

Dr Nick J Freeman

In 1988, Laos had just two state-run banks. Fourteen years later, a third round of bank consolidation in three years sees the country reverting to a similar number. Prior to the commencement of economic reform in 1988, Laos’s two banks were the Banque d’Etat de la RDP Lao (BEL) and the Banque pour le Commerce Extérieur Lao (BCEL). The former looked after all domestic banking matters, and the latter focused on all foreign exchange, trade financing and overseas loans. As part of the reform process, the BEL became a more conventional central bank, and was renamed the Bank of the Lao PDR. BCEL, whilst always the largest commercial bank in Laos, became one of seven state-run commercial banks operating in the country by 1991. All were offshoots of the former BEL, headquartered in a number of the country’s major towns. In 1993, they were joined by an eighth state-run bank, the Agricultural Promotion Bank, providing low-cost loans to farmers and administering over some ODA-assisted micro-financing initiatives.

Then in 1999, six of the new state-run commercial banks – which then represented about 70 per cent of total bank assets in Laos - were consolidated into just two entities. The three banks headquartered in the north were consolidated into the single Lane Xang Bank, and the three banks from the south became the Lao May Bank. And then late last year, it was decided further to consolidate these two banks into a single entity, leaving Laos with this newly merged entity, BCEL and the Agricultural Promotion Bank.

A major factor behind these repeated mergers is the fact that Laos’s state-run banks in Laos are broadly insolvent, and burdened by high non-performing loans (of over 50 per cent). The Asian Development Bank assisted in recapitalising the state-run banks back in 1994, but it seems that a new round of recapitalisation is now required. The International Monetary Fund (IMF) has agreed to assist in this re-recapitalisation process which will occur in stages between now and 2005 and is likely to cost around US$50 million, or about 3 per cent of GDP. This will occur as part of a bank restructuring process, and is a key structural reform component of the three-year Poverty Reduction and Growth Facility (PRGF) agreed between Vientiane and the IMF in April 2001. Both quantitative and qualitative targets are being set for the restructuring of Laos’s state-run banks, and they will be accompanied by the introduction of new banking supervision regulations by the central bank.

One major difference between Laos banking situation today and that of 1988 is the additional presence of seven foreign bank branches (six of which are Thai banks) and three joint venture banks. The newest arrival on the Lao banking scene in the Lao Viet Bank, a joint venture between BCEL and Vietnam’s Bank for Investment and Development, which commenced operations in 2000. Headquartered in Vientiane, the bank’s primary aim is to provide trade financing for goods passing between Laos and Vietnam. The only major international bank with a permanent presence in Laos is Standard Chartered Bank.

WATCHPOINT: Expect to see radical improvements to the banking sector in Laos. Progress in this field will be a key determinant of future disbursements by the IMF, under its three-year PRGF loan program for Laos.

 

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