MAP Country Diagnostic Lao PDR. Presentation to Stakeholders 17th September 2015

Transcription

1 MAP Country Diagnostic Lao PDR Presentation to Stakeholders 17th September 2015

2 1. Review of the MAP Process in Laos

3 MAP Review What is Financial Inclusion/Access to Finance? Financial Inclusion (also Access to Finance) is the delivery of financial services at affordable costs to disadvantaged and low-income segments of society. Goals of Financial Inclusion: access at a reasonable cost for all households to a full range of financial services, including savings or deposit services, payment and transfer services, credit and insurance; sound and safe institutions governed by clear regulation and industry performance standards; financial and institutional sustainability, to ensure continuity and certainty of investment; and competition to ensure choice and affordability for clients.

4 MAP Review What is MAP? Multi-country project based on methodology developed by UNCDF, Cenfri and FinMark, to be carried out i 22 developing countries. A diagnostic and programmatic framework to support expanding access to financial services for disadvantaged and low-income individuals and micro and small businesses. Process of evidence-based country diagnostic and stakeholder dialogue, leading to the development of national financial inclusion strategies (roadmaps) that identify key drivers of financial inclusion and recommended action identified and developed together with stakeholders.

5 The MAP Process in Lao PDR MAIN EVENTS MAP Kick-off Workshop Analysis a. Context b. Regulation c. Demand Side (FinScope & Qualitative Research) d. Supply Side Stakeholders & Ressources aligned 1. Inception 2. Research & Analysis 3. Diagnostic & Recommendations 4. Road Map Development KEY OUTPUTS & OUTCOMES DIAGNOSTIC REPORT & SYNTHESIS ROADMAP FinScope Survey November 2014 January 2015 Stakeholder & Qualitative Interviews May July 2015 FinScope Launch 3/ MAP Presentation to Steering Committee 21/ Consultations with key stakeholders September 2015 MAP Stakeholder Workshop 17/ MAP Road Map Workshop November 2015 Time Frame months 5. Implementation 2-5 years 5

6 Content 1. Review of the MAP process in Laos 2. Country context 3. Financial sector overview 4. Financial sector regulation & supervision 5. Demand-side and target groups 6. Product market analysis 7. Drivers and barriers for Financial Inclusion 6

7 2. Country Context

8 Country Context Geography & Infrastructure Medium-size country with small population. Small size of economy and financial system. Rich in natural resources Good potential for economic development. Difficult topographic conditions. Mountainous North & East Lowlands along Mekong Expensive due to low population density and topography. Infrastructure under fast development. Roads (95% of adults live at location with road access), Electricity (92% of adults have access), Mobile phone network (77% of adults have cell phone access) But many people live in distance to basic services. 8

9 Furthest Nearest Country Context Proximity to services Percentage of people going to or aware of destination and take 60 minutes or less to get to destination Adults using or aware of destination Total Take 60 minutes or less Urban Rural with road Rural without road 1 Grocery store 99% 97% 99% 96% 95% P R O X I M I T Y 2 Market 3 Public transport / Bus stop 4 Bank branch 5 ATM machine 99% 74% 95% 63% 46% 96% 78% 95% 70% 62% 95% 71% 94% 58% 44% 92% 68% 91% 56% 45% 6 Post office 7 91% 68% 90% 56% 45% 9

10 Country Context History & Politics Single-party socialist republic since Initially isolationist, since 1990s increasing regional and global integration. Member of ASEAN since Stepwise adoption of international standards in financial sector. State structure: political-strategical and administrative wing. Balance between administrative and political demands is not codified. Substantial political influence on financial sector framework. Political decision-taking processes are Consensus-based; Inclusive within the government; Slow; With frequent high-level intervention. Low ranking in Transparency International's 2014 Corruption Perception Index: 25/100. Financial sector less affected. Mainly in relation to credit-related processes. 10

11 Country Context State Structure 11

12 Country Context Political focus areas New Economic Mechanism (1986) adoption of market economy. Ongoing process, strong elements of a state-directed economy remain. Integration of rural areas into the administrative structure. Decentralisation policy since Sam Sang policy Developed villages concept incl. village fund. Strong focus on poverty reduction: The National Growth and Poverty Eradication Strategy 2003 Priority areas: 72 poor and 47 poorest districts. Extensive use of subsidised credit in priority areas. The 5-year National Socio-Economic Development Plans Poverty reduction is main cross-cutting issue. 12

13 Country Context Demography, HRD & labour force Small, but growing population (2014: 6,8 mio., growth rate 1,6%). Statistics (mainly) based on nationality, not on residence. Implications for FinScope results: migrants. Large ethnic diversity. 49 main groups, majority of the population belonging to the Lao-Tai group. An agrarian economy with fast urbanisation. 64% living in rural areas, 78% involved in farming. Mostly subsistence farming. 91% of farmers farm their own land. Unallocated land is still available. Urban growth rate 5% p.a., high mobility of labour. Increase and changes in demand for financial services. Low unemployment, but underemployment and low productivity. Low level of formal employment. public sector 10,7% of adults, private sector 4,5%. Poor health and educational system HDR is major focus area in present NSEDP. 13

14 Country Context Macroeconomic Strong and stable economic growth. 7,3% p.a. In 5-y average; GNI PPP/cap USD in 2014 The national currency is stabilising, after hyperinflation in All-time low of 4,13% in High, but decreasing level of dollarization. 50% of domestic deposits in foreign currencies (THB & USD). High fiscal deficits in previous years. Pressure on state budget, with effect on state-financed projects and salaries. High inflows of Foreign Direct Investment. Mainly from China, Vietnam and Thailand. Economy, incl. Banking sector, is dominated by foreign capital. Deepening of the financial system and at times very high credit growth that has slowed down since M2/GDP-ratio 2014 is

15 Country Context Macroeconomic Development During the last decade strong economic development seconded by fast development of the financial sector GNI p.cap PPP (USD) M2/GDP Domestic Bank Credit/GDP Domestic Bank Deposits/GDP 15

16 Jun-09 Dec-10 Jun-12 Dec-13 Percent YOY Country Context Growth of Domestic Credit Credit to private sector (percentage points) Credit to SOEs (percentage points) Credit to the whole economy Growth of domestic credit Very high credit growth in previous years has decreased dramatically to 14% in

17 Country Context Socioeconomic Lao society is traditionally built on clan and village community. Supportive to community-based finance Almost no civic society organisations beyond village level. Gap in the provision of self-organised support services. Ethnic diversity in regard to economic behaviour. I have done / written a lot on this topic. I would say that ethnicity composes 80% of such economic behaviour. But it is always overlooked by 95% of outsiders. But the people / farmers know themselves. (M.C.) Lao culture is undergoing rapid change. Poverty reduction in Laos is progressing well, but growth is not pro-poor and inequality is on the rise. Poverty in Laos is strongly correlated with rural areas and with ethnic origin. Gender inequality differs between ethnic groups. 17

18 Country Context Inequality of growth Poor peoples consumption grows much slower than better-off peoples. Lao Luxury Car Rally Source: World Bank, Poverty Profile

19 Country Context Socioeconomic Context Poverty and ethnicity: High prevalence of poverty amongst ethnic minorities, but largest number of poor of Lao-Tai origin Source: World Bank, Poverty Profile

20 Country Context Economic Behaviour Laotian culture has traditionally been debt-averse. Risk averseness is intrinsic to a culture rooted in farming. But cultural attitude towards debt is changing, also due to strong government promotion. Laotians are sociable people preferring informal arrangements. Many adults are virtually innumerate. Most Laotians' exposure to a cash-based economy is quite recent, and most Lao have no previous experience in the kind of financial discipline that is elementary for the beneficial use of financial products. Lack of specific knowledge on products and how to access them. SME: Basic budgeting/planning skills, and knowledge of basic management and accounting practices are lagging behind. Many Lao people have high short-term horizon preference. General belief that thoughts about future bad events, including plans to mitigate their effects, actually may attract them to occur. 20

21 Country Context Economic Behaviour Most Lao act risk-averse in economic decisions. 'It is better to save where your money is safe than to take risks to make more.' 1% 27% 72% Agree Disagree Not sure /N/A 21

22 Demand Side & Target Groups Context 'The skills problem in Lao PDR is deeper and more severe than is generally recognized, being a problem not simply of vocational skills but of even basic reading and numeracy skills.' (WB Lao Development Report 2014) 22

23 3. Financial Sector Overview 23

24 Financial Sector Overview Background Small sector, with huge growth rates for the last 10 years. Mono-bank system - State Bank of Lao (SBL) in Division into initially 7 State-owned Banks (1988) and a central bank, the Bank of Lao (1990). Merging into 3 SOB with split-off of Nanyobay (Policy) Bank in Banque du Commerce Exterieur de Laos (BCEL), Lao Development Bank (LDB), Agricultural Promotion Bank (APB), Nanyobay Bank (NBB) Steady process from state-directed towards commercial banking system. State-Owned Banks in process of consolidation. Increasing number and market share of commercial banks. Majority of foreign bank or bank branches specifically providing for foreign enterprises operating in Laos. 24

25 Sector Main Players No. institutions Tot. assets No. clients Formal (Semiand) Informal Banks State-owned commercial banks, commercial banks Insurance State insurance organisations, insurance companies Non-bank FI Postal Savings Institute, Leasing companies, pawn shops, money transfer providers Microfinance Institutions incl. Savings & Credit Unions Village funds Informal providers Moneylenders, traders, Lin Houai n/a bio. n/a n/a 442 bio. 801 bio. n/a 1,52 mio. 2,02 mio. +? n/a Financial Sector Overview The Financial Landscape 25

26 Financial Sector Overview Banking Sector 4 State-Owned Banks (SOB) dominating the retail sector, with considerable outreach and depth. 4 Joint-Venture State Commercial Banks, 7 Private Banks, 4 Subsidiary Banks and 17 Foreign Commercial Bank Branches Only 12 of them having substantial retail network. New entrances almost exclusively with foreign capital and ownership. 1 case of bank run, no bank cracks. High trust into banking system. Non-state banks with low-end market presence: ACLEDA Bank, Phongsavanh Bank. 26

27 Financial Sector Overview Banking Sector Development Growth of the banking system Source: World Bank Economic Monitor

28 Financial Sector Overview Banking Sector Asset Distribution Banking Sector Assets Foreign Commercial Bank Branches 38% State-owned Banks 37% Foreign Commercial Bank Branches are overtaking State- Owned Banks in terms of assets Subsidiary Banks 4% Private Banks 12% Source: Banks Financial Statements 2014 Excl. LDB and 3 foreign bank branches not reporting Joint- Venture State Commercial Banks 9% 28

29 Financial Sector Overview Banking Sector Market Shares on Savings State-Owned Banks, esp. BCEL, dominate savings market. Phongsavanh Bank 3% Other 8% ACLEDA Bank Lao Ltd. 3% Agricultural Promotion Bank 20% Banque pour le Commerce Exterieur Lao 41% Lao Development Bank 25% No. Of savers, acc. To FinScope 29

30 Financial Sector Overview Banking Sector Market Shares on Credit NBB and APB are microfinance banks, ACLEDA largest share amongst other banks. Phongsavanh Joint Development Bank 1% 1% Indochina BanK Ltd. 1% Other 4% Banque pour le Commerce Exterieur Lao 4% Lao Viet Bank 3% ACLEDA Bank Lao Ltd. 6% Australia and New Zealand Banking Group Limited (ANZ) 0% Agricultural Promotion Bank 42% Lao Development Bank 11% Nayobay Bank 27% No. Of credits, acc. To FinScope 30

31 Financial Sector Overview Banks Return on Assets has a wide spread ( %). Profitability depending on loan portfolio performance and cost-efficiency. Low repayment discipline makes it difficult to obtain low PAR levels. Situation improved but far from good. History of high and partially hidden NPL culture. Official NPL 2,5%. Main barrier for using banks: image of banks vs. self-image of people. Banks (exc. APB, NBB and ACLEDA) do not consider low-end segment as priority. Credit (and savings) products (conditions and processes) are not adapted to lowend clients. 31

32 Financial Sector Overview Non-bank financial institutions 1 Special License (Postal Savings Inst.), 2 Staff Savings Inst. 14 Deposit taking Microfinance Institutions. 2 of them holding 69% of assets 30 Non-deposit taking MFIs. Mainly private investors 7 evolved as VF Network Support Organisations 22 Savings and Credit Unions. Mainly former Village Funds small, local, below-standard performance 33 Pawn shops. Little significance. 13 Specialised leasing companies Several recent entrances from foreign companies, with fast network expansion. Assumed to have high potential for expansion, also into the low-end market. Market share of non-bank financial institutions is small. Except Postal Services for remittances. 32

33 Financial Sector Overview Microfinance Institutions Few, mostly small and scattered MFI. Low market share, but good growth rates. Face heavy competition from village funds and banks. Difficulties to develop human resource capacity. Most MFI have traditional approach and low ambitions. Little innovativeness, but the innovative MFI are also the most successful ones. Only a small number of MFI have developed business models and products that can be subject to large-scale extension. Regulatory issues.

34 Financial Sector Overview (Semi-/) In-Formal Sector: Village Funds I Village Funds (Survey 2013) high outreach Confusing terminology: Revolving Fund, Village Development Fund, Savings Group, Village Savings and Credit Group, Village Bank Non-deposit taking and (mostly) deposit-taking. Originally, since 1990s, propagated by projects, multitude of village funds promoters without coordination. Government policy concerning Developed villages. Easy to set-up, fit well into Lao culture and local conditions. Good depth. Up to 100% of households are members (exc. very poor and very wealthy). 34

35 Financial Sector Overview (Semi-/) In-Formal Sector: Village Funds II Without support, most village funds are prone to Poor accounting; Elite capture fraud; Repayment problems mass default leading to a high rate of casualties. Est. >80% of village funds have large negative equity, or stop operations. Network Support Organisations. Governmental vs. membership-based approaches. Low capacity of governmental support, but with local differences. AFP approach is very successful in ensuring high quality of Village Banks, but can it become national reference? 35

36 Financial Sector Overview Village Funds SUCCESSFUL VILLAGE FUNDS Absorb % of village HH Mobilises savings into financial system. Savers are remunerated. Availability of credits to market rate. Promotes good financial behaviour. Stepping stone to the formal system. (Potential to link with the formal system). FAILING VILLAGE FUNDS (Poor peoples ) Savings are lost. Loss of social asset. Lowers trust in financial system. Promotes bad behaviour. <20%? >80%? Pushes people back to former credit sources. 36

37 Financial Sector Overview Informal Sector Moneylenders. local significance, where no alternative providers (village funds). Private-to-Business (P2B) lending. unknown extent, also dealing with large amounts. Trade-related finance sources: high incidence at places of informal interviews and possibly the prevailing source of credit in Laos Trader credits Informal Leasing (household goods, farm equipment) Contract farming Mainly foreign traders/ businesses. Lin Houai (ROSCA). once wide-spread at market places, now declining. 37

38 Financial Sector Overview Payments 15 years back: Domestic transfers: Entreprise des Postes Lao Country-wide network at district level International transfers: Western Union/Money Gram Network of bank- and sub-agents Now: Banks have developed new, cost-effective products and distribution channels for domestic and international transfer, payment of bills. Postal services still used widely. Informal channels: Friends and family if convenient. Informal trans-border remittances from Thailand. Mobile money products are currently under development One failed attempt in 2010 BCEL is running pilot project on internet-based agent banking 2 mobile operators have permission to run pilots 38

39 Financial Sector Overview National Payment System 39

40 Financial Sector Overview Insurance 14 private insurance companies Market leader AGL that had monopoly until Broad range of products, with (compulsory) vehicle insurance as primary product. Few low-end customers. Centralised governmental healthcare and social welfare system Covering poor HH and employed persons. 40

41 Financial Sector Overview Sector Profitability Very large spread in between institutions. Institutions operating with low-end segment have good financial performance. Category of Financial Institutions Return over Assets (RoA) Banks -16,57% - +2,06% Insurance Companies -48,86% - +4,19% Deposit Taking MFI 3,7% Non-Deposit Taking MFI 6,4% Savings and Credit Unions 3,4% Deposit Taking Village Funds 3,1% (10,46% before distribution of dividend) Non-deposit Taking Village Funds 4,3% Source: Banks financial reports, BoL, NERI

42 Financial Sector Overview Meso Level Two interest organisations: Bankers Association. Microfinance Association. Education & training: Banking Institute. Microfinance Association & private training providers. Support services (state-owned under BoL): Credit Bureau since 2007 Depositors Protection Fund. Lao Stock Exchange Market. Since Level of trade still low. Payment infrastructure under development RTGS available, but under-used. Internal or bilateral settlement predominate. 43

43 Stakeholder Map for Financial Inclusion Political Administrative Provincial Governments National Assembly Mass Organisations Min. Of Planning & Investment NCRDPE Min. Of Finance Other ministries Min. Of Agriculture & Forestry IFAD World Bank KfW National Party Congress/Polit Bureau ADB GIZ IFC UNCDF Prime Minister s Office SOB MFI Bank of Lao Private /other banks Village funds Other nonbank FI Insura nce Social Sec. Off. NGOs Support Other organis ations DGRV SBFIC Bankers Associati on Microfin ance Assoc Depos. Prot. Fund Inform al sector Leasin g Mobile money Industry 44

44 4. Financial Sector Regulation & Supervision 45

45 Regulation & Supervision Financial Inclusion Policy Party Congress, Central Committee, Polit Bureau Outlines national goals and long-term strategies. Prime Minister s Office Overall oversight over strategy implementation. Prime Minister decrees. Ministry of Planning and Investment Translates national strategy into 5-year National Socio-Economic Development Plans (NSEDP) Ministry of Finance Financial Sector Development Strategy Bank of Lao Rural and Microfinance Strategy National Assembly, other ministries and mass organisations Influence and participate in decision-taking processes. 46

46 Regulation and Supervision Financial Sector Regulation and Oversight Bank of Lao PDR Ministry of Finance Ministry of Labour and Social Welfare Banking Supervision Dep. Banks State-owned Enterprise Finance Management Dep. Insurance Social Security Fund Office Health and Social Security Financial Institutions Supervision Dep. Microfinance Inst. & SCU Leasing Other non-bank FI Mobile Money Capital Market 47

47 Regulation & Supervision Regulatory Framework 48

48 Regulation & Supervision Regulatory Framework Legislation and regulation process is slow. e.g. National Payment System, Microfinance Decree Implementation Guidelines, Leasing Law Legislation is issued before business models are developed, so there is a need for adaption along the way. Fast changing environment. High level of ad hoc direction by circulars, instructions, notices. Can be confusing for providers to follow. Anti Money Laundring regulations are no impediment for poor customers, but their poor implementation leads to international poor reputation with consequences for some foreign investors. 49

49 Regulation & Supervision Regulatory Issues I Legislation for banking sector is little restrictive. But recent move on interest rate regulation can have negative effects on Financial Inclusion. Negative incentive to save, challenging for banks working with high-cost clients, credit interest rate has little significance for poor people. Private banks are constrained in competing with SOB and foreign banks in attracting capital. Geographical expansion and upscaling is difficult for all financial institutions. High capital requirements to set up new branches. Restrictions on foreign capital for MFI. 50

50 Regulation & Supervision Regulatory Issues II Microfinance Institutions are regulated more restrictively than banks (and village funds). Restricted scope of business operations, higher financial ratios, NPL requirements Challenging not for operation, but for expansion of MFI. Growth paths set by MFI categorisation do not fit to the actual development, which is gradual. Growth/graduation paths VF>SCU, NDTMFI>DTMFI Ownership structure not congruent. Legal status of village funds is unclear. Presently de facto unregulated. Legislating and supervising responsibility needs clarification. BoL has overall responsibility for village funds, but can impossibly live up to it. National Committee for Rural Development and Poverty Eradication has supervision responsibility no common standard, low capacity 51

51 Requirement for registered capital Permitted business operations SCU NDTMFI DTMFI Commercial bank commercial bank branch LAK 30mio. LAK 200mio. LAK 3bio. LAK 300bio. (Foreign only LAK 100 bio.) LAK only: Credit and LAK only: Voluntary LAK only: Public savings, Public savings, credit, savings to members savings up to 80% of credit, investment into payments, insurance, only, domestic reg. cap., credit other business <10%, financial business payments upon application to BoL 3bio. 100bio. Capital requirement for new branch Foreign investment Only debt and grant Max. 30% of capital upon BoL approval, foreign credit permitted upon BoL approval Max. 30% of capital upon BoL approval, foreign credit permitted upon BoL approval Allowed Cash/total deposit 4% 4% 2% Capital adequacy Ratio 12% 12% 8% Loan Classification Substandard after 30d/25% Doubtful after 90d/50% Loss after 180d/100% Restructuring to avoid NPL classification prohibited Substandard after 30d/25% Doubtful after 90d/50% Loss after 180d/100% Substandard after 30d/25% Doubtful after 90d/50% Loss after 180d/100% Substandard after 90d/20% Doubtful after 180d/50% Loss after 360d/100% Restructered loans are not NPL Upper limit for loan size 10% of share capital LAK 50mio.; 80% of portfolio must be loans <LAK 10mio. none Calculation of credit interest Declining balance only Declining balance, flatrate for commercial loans <LAK15mio. and 52

52 Regulation & Supervision Supervision Supervision capacity for bank and non-bank financial institutions is insufficient. General lack of transparency. Basic data are in many cases not available/published. Financial institutions have and use work-arounds. Open non-compliance left without consequences. Tolerated non-compliance. Dialogue with BoL via branch organisations. BoL applies a practical approach towards supervision and compliance. Good way to compensate for gaps between legislation and Financial Institutions requirements. But BoL s authority is at stake vis-à-vis non-compliant institutions. 53

53 5. Demand-side and Target Groups 54

54 Demand-side Use of Financial Services Considerable share of adults using formal services. But use of informal services most widespread. 1 out of 4 adults is not using financial services. Share of adults using at least one financial service Banked 35.8 Other formal (non-bank) 25.2 Informally served 60.2 Not using financial services

55 Demand-side Location and Use of Financial Services No large gap in use of financial services between urban and rural areas But urban dwellers have more choices, and a higher use of formal services. 58 Urban Rural with road Rural without road Urban Rural with roads Rural without roads Banked Other formal Informal only Not using financial services 56

56 Demand-side Gender and Use of Financial Services No major differences between males and females. Higher use of informal services by women. Ethnic differences not covered by FinScope Male Female Female 35% 12% 29% 24% Banked Other formal Male 36% 10% 26% 28% Informal only Not using financial services 57

57 Demand-side Age and Use of Financial Services years 12 Lower use by young (<35y) and elder (>65y) years 23 Expected higher use by younger generation does not occur years years years years and older 6 65 and older 29% 9% 32% 30% years 34% 15% 29% 22% Banked years 42% 11% 27% 20% Other formal years 37% 10% 28% 25% Informal only years 33% 10% 27% 30% No use of financial services years 32% 11% 25% 32% 58

58 Demand-side Education and Use of Financial Services Very strong correlation between education and use. Education also main factor to income and formal employment. Education is indicator for social stratum. No (formal) education Pre-primary education Primary education Lower secondary Upper secondary Vocational education Tertiary/higher 7 Other 1 Tertiary/Higher Education Vocational Education Upper Secondary Education Lower Secondary Education Primary Education Pre-primary Education No (formal) Education 73% 63% 53% 38% 31% 9% 20% 6% 14% 8% 32% 14% 45% 15% 6% 6% 14% 12% 11% 15% 12% 20% 26% 22% 35% 25% 29% 46% Banked Other formal Informal only No use of financial services 59

59 Demand Side & Target Groups Target Groups Target groups are central to the MAP process. Entire adult population divided into a number of groups. Shared characteristics within groups (demographic, economic, financial access) Major differences between groups The main income source reported by survey respondents: Used as a proxy for the level and regularity of income, as well as an indicator of links with the real economy Used to divide the population into target groups 60

60 Demand Side & Target Groups How the Target Groups were made up Original income source (from FinScope) Self-employed (own business) formal Self-employed (own business) informal Make goods to sell Interest received from money lending Money from renting out land or property Salary/wages from govt. or state owned company Salary/wages from private company Farming Sell items collected from nature Pension Remittances (money from other people) Money from household member Salary/wages from an individual Farm worker Piece work Target group Self employed, non-farm Formal employee, non-farm Farming Dependent Informal employee Other 61

61 Demand Side & Target Groups Target Groups The farming group was very large (nearly half of adults). Other large groups included formal employees and self employed and covered a very wide spread of incomes. Three largest groups divided in half, into low and high income, divided at the median income. Final target groups High and low income formal employees High and low income farmers High and low income self-employed Informal employees Dependents 62

62 Demand Side & Target Groups The resulting target groups - 7.2% 12.2% 24.8% 23.4% 8.3% 7.6% 9.0% 7.6% Dependents Informal employees Low income farmers High income farmers Low inc. formal employees High inc. formal employees Size of bubble and % refers to share of adult population Low inc. nonfarm selfemployed High income non-farm selfemployed 63

63 Average (mean) monthly income, LAK million Demand Side & Target Groups Target Group Characteristics Income (average monthly income of group) National average (2.2) 64

64 Demand Side & Target Groups Target Group Characteristics Education (percentage of adults with lower sec. education or higher) 100% 80% 60% 40% 20% 0% National average (44%) 65

65 Demand Side & Target Groups Target Group Characteristics 80% Location (percent living in urban areas) 70% 60% 50% National average (37%) 40% 30% 20% 10% 0% Dependents Informally employed Low income farmers High income farmers Low income formal empl. High income formal empl. Low inc. non-farm self empl. High inc. non-farm self empl. 66

66 Demand Side & Target Groups Target Group Characteristics 80% 70% 60% Gender (percentage female) National average (51%) 50% 40% 30% 20% 10% 0% Dependents Informally employed Low income farmers High income farmers Low income formal empl. High income formal empl. Low inc. non-farm self empl. High inc. non-farm self empl. 67

67 Demand Side & Target Groups Target Group Characteristics 80% 70% Age (percentage under 45 years) National average (61%) 60% 50% 40% 30% 20% 10% 0% Dependents Informally employed Low income farmers High income farmers Low income formal empl. High income formal empl. Low inc. non-farm self empl. High inc. non-farm self empl. 68

68 % of group that are rural Demand Side & Target Groups Target Group Characteristics Groups vary by size, location & average income 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Low income farmers Dependents Low inc. non-farm self empl. Low income formal empl. High income farmers Informally employed Low income, rural High income formal empl. High inc. non-farm self empl. High income, urban 0% Average monthly income of group (LAK mn) size of bubble = size of 69

69 Demand Side & Target Groups Target Group Characteristics Proximity to services: % of group with access in 30 minutes or less 100% Grocery store 90% 80% Market 70% 60% Post Office 50% Bank 40% 30% ATM 20% Private money lender 10% 0% Almost everybody within 30 minutes of grocery store. Others require travelling to district centre. 70

70 Percent of group Demand Side & Target Groups Target Group Use of Finance Overall access - formal and informal - by target group 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 14% 5% 12% 10% 71% 70% 23% 14% 12% 18% 49% 50% 27% 15% 38% Banked Other formal Informal 34% 30% 34% 8% 12% 9% 23% 22% 20% Higher income groups have better access to finance, and use more bank/formal products Lower income groups have less access and are more dependent on informal products 71

71 Demand Side & Target Groups Access by product for target groups - 1 Insurance Informally employed Savings 80% Access 60% 40% 20% 0% Credit Remittances Bank Other formal Informal F&F Insurance Savings Dependents 80% Access 60% 40% 20% 0% Credit Remittances Bank Other formal Informal F&F Similar patterns of usage across target groups: high use of savings & remittances, low use of insurance and credit Compared to general pattern, dependents use more remittances, and low income farmers use more credit Insurance High income farmers Savings 100% Access 50% 0% Credit Remittances Bank Other formal Informal F&F Insurance Low income farmers Savings 100% Access 80% 60% 40% 20% 0% Credit Remittances 72 Bank Other formal Informal F&F

72 Demand Side & Target Groups Access by product for target groups - 2 High income formal empl. 100% Access Insurance 50% Credit 0% Savings Remittances Bank Other formal Informal F&F Similar patterns of usage across target groups: high savings, little credit, moderate use of insurance and remittances High income non-farm self-empl. 100% Access Insurance 50% Credit 0% Savings Remittances Bank Other formal Informal F&F Insurance Low income formal empl. Savings 100% Access 50% 0% Credit Remittances Compared to general pattern, low income groups use informal more. Formal employees remit more. Low income selfemployed use less insurance Low income non-farm self-empl. Insurance Savings 100% Access 50% 0% Credit Remittances Bank Other formal Informal F&F Bank Other formal Informal F&F 73

73 6. Product Market Analysis

74 Product Market Analysis Savings Current Use: Rural-urban Large extent of use of informal mechanisms Urban 2014 dwellers are using savings services, especially from formal providers, more than rural residents. However, a substantial part also in urban areas is not using financial institutions for savings. Banked Other formal Informal At home/secret place only Not saving Rural without road 9% 1% 43% 12% 35% Rural with road 16% 1% 43% 14% 26% Urban 43% 1% 26% 15% 15% Saving with bank Saving with informal mechanism Do not save Saving with other formal Saving at home or in secret place 75

75 Product Market Analysis Savings Current Use: Gender Women are saving more than men, and tend to do so in a more secure way by using financial institutions. FEMALE 27% 1% 37% 13% 22% MALE 24% 1% 36% 16% 23% Saving with bank Saving with informal mechanism Saving with other formal Saving at home or in secret place 76

76 Product Market Analysis Savings Current Use: Age Young people and old people are saving less, although many young people have cash income. Increasingly consumptionist behaviour? Using via their parents? 65 and older 20% 0% 43% 12% 26% years 24% 1% 33% 19% 23% years 27% 2% 39% 11% 21% years 26% 1% 38% 15% 20% years 25% 0% 37% 14% 24% years 24% 1% 31% 17% 28% Saving with bank Saving with other formal Saving with informal mechanism Saving at home or in secret place Do not save 77

77 Product Market Analysis Savings Current Use: Education Very strong correlation between education and savings behaviour. Lower educated are saving less, more unsecure, use less and mainly informal savings services. Tertiary/Higher Vocational Education Upper Secondary Lower Secondary Primary Education Pre-primary Education No (formal) Education 26% 19% 11% 0% 7% 1% 63% 55% 43% 2% 1% 46% 33% 1% 37% 43% 18% 0% 29% 1% 29% 15% 15% 21% 27% 9% 41% 6% 3% 9% 7% 18% 20% 22% 22% Saving with bank Saving with other formal Saving with informal mechanism Saving at home or in secret place Do not save 78

78 Product Market Analysis Savings Use by Target Groups High-income groups well-covered. Critically low savings coverage for low-income farmers, informally employed and a group of dependents. High income non-farming self 64.80% 0.60% 26.10% 1.20% 7.20% Low income non-farming self 28.10% 3.70% 29.60% 18.60% 19.90% High income formal employees 60.80% 2.60% 18.80% 12.40% 5.40% Low income formal employees 36.30% 1.10% 38.30% 12.80% 11.50% High income farmers 25.50% 0.90% 45.00% 14.60% 14.00% Low income farmers 9.40% 0.80% 40.60% 21.90% 27.20% Informally employed 12.70% 0.60% 37.30% 25.30% 24.00% Dependents 20.10% 0.60% 21.40% 18.20% 39.70% Saving with bank Saving with other formal Saving with informal mechanism Saving at home or in secret place Do not save 79

79 Product Market Analysis Savings Multiple use Well-served groups are using multiple mechanisms and providers. 70% 60% 50% 40% 30% 20% 10% 0% Dependents Informally Low inc. High inc. Low inc. High inc. Low inc. High inc. empl. farmers farmers formal empl. formal empl. non-farm non-farm Bank Other formal Informal At home/secret place self empl. self empl. 80

80 Product Market Analysis Savings Drivers and Use Cases 77% of adults save Medical expenses either planned or emergency 74 Saving is the financial mechanism most used for use in emergency situations. Developmental reasons Living expenses for when one has no money Non-medical emergency Offset of liquidity gaps. Low-risk mechanism for asset building and investment. Buying livestock 14 Providing for family when dead Retirement or old age 9 7 Other 1 81

81 Product Market Analysis Savings Payment of Major Expenses Majority relies on savings and social network to cover large expenditures. Mechanism to pay for major expenses experienced in the last 12 months Savings Rely on money from family Sell something to cover the Other Borrow from the bank Borrow elsewhere Rely on community

82 Product Market Analysis Savings - Provision for Retirement Savings are main mechanism for old age provision but few save proactively. Difficult to tell savings from assets. Savings Rely on money from family and friends Do not know Sell something to cover the costs Government grant Borrow from another registered Borrow from the bank Rely on community Borrow from money lender in community

83 Product Market Analysis Savings Barriers 23% of adults do not save No money after living expenses No income Save in other ways when they can Prefer spending money on things needed Stated financial stress Low income Behaviour/attitude/priorities Use of alternative mechanisms Behaviour/attitude Do not need it 5 Never thought about it 4 Don t know 3 84

84 Average savings amount (LAK mn) Product Market Analysis Users of different types of savings, by income Different savings mechanisms for different income levels and savings amounts size of bubble = total savings Bank Jewllery/gold Other Livestock In kind SCU Secret place Savings group Family & friends Village Fund MFI Average monthly income of users (LAK mn) 85

85 Savings Market Use cases, products and providers 86

86 LAK Product Market Analysis Savings Products and Providers Fee establishment Annual interest rate Other fees Current 1-year time Savings account 1-year time Savings account account - BCEL deposit account Patukham deposit account Village fund - BCEL DTMFI Patukham DTMFI % 6,13% 6% 12% Dividend: 0 - >30% Maintenance For untimely none none none fee LAK withdrawal Withdrawal fee LAK from other banks Low establishing and running costs for savings accounts. High interest rates for deposits (although recently capped for banks). High real interest rate with present low inflation rate. Interest follows perceived risk. 87

87 Product Market Analysis Savings Gaps and Potential Large parts of savings are not part of the financial system. Liquidity and accessibility requirements set limits for how much informal savings mechanisms can be absorbed. High potential and high relevance to mobilise savings. Poor people consider their savings too small to deposit them at banks. Well-functioning village funds can be successful vehicles for savings mobilisation. High potential for innovative distribution channels for banks and other providers to increase savings mobilisation. Example ATM network Mobile money Mobile banking teams Agents 88

88 No. of savers Product Market Analysis Savings by type of institution, number of borrowers and amount 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Village Fund Secret place Family Savings & friends group SCU MFI Livestock Other In kind size of bubble = total savings Jewellery/gold Banks Average savings size (LAK mn) Banks dominate in terms of size and number of savers Large part of savings is not intermediated not part of the financial system 89

89 Product Market Analysis Savings Potential Large potential for mobilisation of savings Source: GIZ Survey on Financial Literacy

90 Product Market Analysis Credit Current Use: Rural/urban Only small differences between rural and urban. Good coverage in rural areas by Nanyobay Bank, Agricultural Promotion Bank and village funds (mainly in the North) Banked Other formal Informal Friends/family only Not borrowing Rural without road 11% 0% 7% 3% 79% Rural with road 7% 1% 8% 4% 80% Urban 9% 1% 7% 2% 81% Borrow from bank Borrow from informal mechanisms Do not borrow Borrow from other formal Borrow from friends/family 91

91 Product Market Analysis Credit Current Use: Gender Women are borrowing more then men. Using informal mechanisms to a higher extent (village funds). FEMALE 7% 1% 9% 3% 80% MALE 9% 1% 6% 3% 82% Borrow from bank Borrow from informal mechanisms Do not borrow Borrow from other formal Borrow from friends/family 92

92 Product Market Analysis Credit Current Use: Age Main users of credit is age group 35 to 55 years, which is also the group with the highest income. 65 and older 4% 0% 3% 2% 91% years 7% 1% 5% 2% 85% years 10% 1% 10% 2% 77% years 10% 1% 8% 4% 77% years 6% 0% 7% 5% 82% years 5% 0% 7% 1% 87% Borrow from bank Borrow from other formal Borrow from informal mechanisms Borrow from friends/family Do not borrow 93

93 Product Market Analysis Credit Current Use: Education Correlation between use of credit education is less clear-cut, as many high educated have main income from salary with little demand to borrow for income-generating activities. Higher education more use of formal credit. Tertiary/Higher Education 5% 1% 4% 0% 91% Vocational Education 11% 4% 10% 2% 73% Upper Secondary Education 7% 1% 5% 1% 86% Lower Secondary Education 11% 1% 8% 3% 77% Primary Education 8% 0% 10% 3% 79% Pre-primary Education 7% 0% 6% 8% 79% No (formal) Education 5% 1% 6% 6% 82% Borrow from bank Borrow from informal mechanisms Borrow from other formal Borrow from friends/family 94

94 Product Market Analysis Credit Use by Target Groups Low-income groups are borrowing more than high-income. High income non-farming self 8.60% 0.80% 10.40% 3.30% 76.90% Low income non-farming self 4.50% 0.40% 18.00% 2.50% 74.60% High income formal employees Low income formal employees High income farmers 8.70% 1.40% 0.60% 1.80% 5.70% 0.70% 5.10% 1.90% 9.50% 0.60% 5.50% 3.10% 87.50% 86.70% 81.20% Low income farmers 6.10% 0.90% 8.30% 4.50% 80.20% Informally employed Dependents 7.30% 1.50% 7.20% 4.70% 1.90% 0.60% 4.90% 0.60% 92.00% 79.30% Borrow from bank Borrow from informal mechanisms Do not borrow Borrow from other formal Borrow from friends/family 95

95 Product Market Analysis Credit multiple use Low bank credit coverage for low-income MSME, but reliance on informal finance. Other low-income groups are well-covered. 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Dependents Informally empl. Low inc. farmers High inc. farmers Low inc. High inc. formal empl. formal empl. Low inc. non-farm self empl. High inc. non-farm self empl. Bank Other formal Informal Friends/family 96

96 Product Market Analysis Credit Level of Indebtedness Level of indebtedness is low in average, but low-income groups have an alarmingly high level of debts. Target Groups and indebtedness Average Monthly Income Av. Debt Av. Savings Debt/Income Ratio Dependents ,1 Informally employed ,3 Low income farmers ,1 High income farmers ,4 Low income formal employees ,5 High income formal employees ,2 Low income non-farming self employed (MSME) ,2 High income non-farming self employed (MSME) ,6 Income Groups and indebtedness Average Monthly Income Av. Debt Av. Savings Debt/Income Ratio Under 500,000 KIP ,1 500,001-1,000,000 KIP ,0 1,000,001-2,000,000 KIP ,1 2,000,001-5,000,000 KIP ,4 5,000,001 KIP and above ,3 97

97 Product Market Analysis Credit Background for Over-indebtedness Debt exceeds debt capacity (assets + income + financial skills). Policy loans to poor households. Collateral-based loans exceeding repayment capacity. High external risks. Debt structure suboptimal: Scattered, small-scale debt (expensive) Loan terms too short for cash flow (liquidity problem) 98

98 Product Market Analysis Credit Drivers and Use Cases 20% have borrowing/credit products Developmental reasons Living expenses Mainly for developmental purposes. Higher share of livelihood credits (bridging liquidity gaps, emergencies) amongst poor people. Medical expenses either planned or emergency Buying livestock Buying household appliances, goods or 8 Non-medical emergency 5 Other 5 99

99 Product Market Analysis Credit Barriers 80% do not borrow Can sustain life without debt Fear of debts Worried about ability to repay loan Interest charged on debt is too high Do not know where to borrow No respondent agreed with the statement Do not to have someone to borrow from! Not an access problem! High-risk environment not conducive for debt financing. Agriculture: In traditional farming systems, farmers pursue a low-risk investment strategy, avoiding debt. Do not want to borrow from money lenders 3 Do not have a credit record 2 Other 1 100

100 Credit market Use cases, products and providers 101

101 Product Market Analysis Credit Products and Providers Bank Loan 1 year (APB) Bank Loan 1 y (ACLEDA) SME loan 1 y (EMI) Village Fund 1 y Trader credit Leasing 6 m Processing Application Preparation fees form LAK fee LAK , Evaluation ,5 mio. dep. On fee LAK loan size mio. Collateral yes yes yes yes/no no n/a Annual 14-16% 17-19% 36-48% 6-48% 20-40% 24-30% interest rate (nominal) Other costs Administrati Administratio none none none on fee 0,5- n fee 1-2% 1% Credit is expensive with high interest rates. Very limited scope for long-term lending, none for >10y. 102

102 Avg. loan amount Product Market Analysis Users of different types of credit, by income Banks serve mainly high income group. Low-income groups served by other mechanisms. 50,000 45,000 size of bubble = no. of clients 40,000 35,000 30,000 Banks 25,000 20,000 Other APB 15,000 10,000 Village fund Goods in advance 5,000 0 Money lender Family & friends Average monthly income of users (LAK million) 103

103 Product Market Analysis Credit Subsidised Credit Widespread policy lending by development projects and government. Revolving funds. Policy lending by SOB, now mainly NBB. No impact assessment made, balance between positive and negative effects is not known. Shockingly high indebtedness of poor income groups. Negative side-effects. Not sustainable and needs permanent refinancing via state budget. Negative effect on savings. Raises customer expectations that can not be met in a sustainable way. Obstacle for commercial finance. Laos is divided into market-led and policy regions. Urban/lowland w. mainly commercial players and market conditions Rural/mountainuous dominated by policy initiatives, w. lower interest rates 104

104 Low demand according to FinScope. 16 Over-indebtedness is already occurring. 14 Doubtful benefit of credit on household welfare are credit management skills a 12 bottleneck, or are expectations too high? High interest rate, increase of real interest rate over time Present lack of (commercial) low-interest, long-term financing. 6 Majority of people is relucting to deal with banks. Banks (and other FIs ) 4 2 Product Market Analysis Credit Gaps Inflation Rate, Nominal and Real Interest Rates on Credit collateral-based lending methodologies defer poor people form lending Inflation Rate Reference Interest Rate 1y loan in LAK 105

105 Product Market Analysis Credit Opportunities Demand is difficult to assess. Often over-estimated. Confusion between need money and need credit Overstated during surveys Depending on credit conditions! Demand is evolving with increasing supply. Development of lending products and methodology that fits to the poor. Repayment schedule that fits to household s cash flow. Alternative collateral. Long-term financing of investments. Formal products for MSME lending (working capital and investment) Leasing seems to be a debt mechanism that fits well into many peoples conditions. Credit and credit capacity must grow alongside! 106

106 Product Market Analysis Perception of Benefit from Credit Only half of respondents with debt could see a positive impact on their life. Reflecting on lack of skills to manage debt? FinScope: 'Has your life improved after having borrowed money?' 13% 44% 43% Agree Disagree Not sure/no answer 107

107 Product Market Analysis Payments: Payment flow directions Main use is domestic, but there is also a considerable part of remittances from abroad (Lao nationals in Thailand). Net inflow of remittances from Domesti c receive 32% Internati onal send 4% Internati onal receive 25% abroad. Domesti c send 39% 108

108 Product Market Analysis Use of Payments: Rural/urban Equal/higher use of remittances in rural areas, but to a higher degree via informal mechanisms Banked Other formal Informal Friends/family only Do not remit Rural without road 12% 8% 18% 4% 58% Rural with road 14% 6% 6% 6% 68% Urban 22% 9% 5% 4% 60% Remit through bank Remit through informal mechanisms Remit through other formal non-bank Remit through friends and family 109

109 Product Market Analysis Use of Payments: Gender Females are remitting more than males. Higher share amongst dependents. Behavioural differences? Female 18% 9% 6% 6% 61% Male 16% 5% 6% 4% 69% Remit through bank Remit through informal mechanisms Do not remit Remit through other formal non-bank Remit through friends and family 110

110 Product Market Analysis Use of Payments: Age Lowest remittance use amongst 25 to 45 year old. Social life cycles: Young migrant workers and students. Young families do not have income to remit, children are at home. Mature families have higher income, support dependents (children, parents) Elderly are receipients 65 and older 17% 7% 7% 11% 58% years 15% 9% 15% 5% 56% years 22% 11% 6% 6% 55% years 15% 6% 3% 6% 70% years 15% 5% 5% 3% 72% years 20% 3% 8% 2% 67% Remit through bank Remit through informal mechanisms Do not remit Remit through other formal non-bank Remit through friends and family 111

111 Product Market Analysis Use of Payments: Education Higher education higher use of remittances. Tertiary/Higher Education 26% 14% 6% 3% 51% Vocational Education 24% 13% 5% 1% 57% Upper Secondary Education 28% 7% 4% 3% 58% Lower Secondary Education 21% 6% 6% 4% 63% Primary Education 14% 7% 7% 5% 67% Pre-primary Education 19% 4% 12% 5% 60% No (formal) Education 4% 4% 5% 9% 78% Remit through bank Remit through informal mechanisms Do not remit Remit through other formal non-bank Remit through friends and family 112

112 Product Market Analysis Payments Use by Target Groups Most relevant product for dependents group. Highly used by formal employees. Informally employed migrants and dependents are underrepresented in FinScope. High income non-farming self 24.60% 8.70% 3.80% 3.00% 59.90% Low income non-farming self 15.70% 10.90% 3.20% 7.40% 62.80% High income formal employees 27.60% 6.50% 3.00% 2.30% 60.50% Low income formal employees 23.20% 10.60% 7.40% 1.70% 57.10% High income farmers 19.20% 7.20% 7.40% 4.00% 62.00% Low income farmers 9.20% 6.60% 5.70% 4.50% 74.00% Informally employed 10.10% 6.00% 6.10% 2.00% 75.90% Dependents 18.80% 7.50% 13.00% 18.40% 42.30% Remit through bank Remit through informal mechanisms Do not remit Remit through other formal non-bank Remit through friends and family 113

113 Product Market Analysis Payments Drivers & Use Cases Remittances domestic and international. Place of income and place of consumption are distant. Migrant workers Support of dependents (students & elderly) Payroll payments domestic. Payment of bills domestic and international. 114

114 Cost send Cost receive Product Market Analysis Payments Products & Providers to to Domestic Remittance Remittance - Remittance Remittance - BCEL post family/friends bank LAK LAK for cost of water 0,1%, min. to other amount LAK USD 5, max. province. LAK > USD to LAK other banks for amount and to LAK 10 mio. receivers without bank (9%->1%) accounts none none 0,1%, min. USD 5, max. USD 500 Trans-border Remittance WU min. USD 15 -> USD 601 for amount USD (>15%->4%) none Costs of remitting are decreasing. Bank services very competitively priced. Remittance - informal 3% none Main part is remitted formally banks and post office. 115

115 Product Market Analysis Payments Gaps and Opportunities Money is remitted, when there is need for it. No visible gap in supply, but cheaper and more convenient channels have high potential. New technology and distribution channels, e.g. mobile money Large cash preference for payments. Supply channels and networks (OTC bank and post payments, debit and credit cards, ATM, POS, mobile apps) are expanding, but still little used for bill payments. 116

116 Product Market Analysis Insurance Current Use Overall low use of insurance products. Driven by compulsory insurance of vehicles. 30% of population is covered by public health insurance, but only 10% are aware. 117

117 Product Market Analysis Insurance Use by Target Groups High income and regular cash flows are positively correlated to the use of insurance. High income non-farming self 49.10% 1.60% 49.30% Low income non-farming self 22.70% 8.90% 68.30% High income formal employees 44.30% 6.50% 49.10% Low income formal employees 35.10% 6.50% 58.40% High income farmers 13.70% 4.30% 81.90% Low income farmers 5.70% 3.60% 90.70% Informally employed 7.00% 6.40% 86.60% Dependents 9.20% 7.20% 83.60% Insured through other formal Insured through informal mechanisms Do not have any insurance 118

118 Product Market Analysis Insurance Drivers & Barriers 23% of adults have insurance Of those insured uptake of insurance products is driven by: Formal insurance: Motor vehicle insurance 50% Medical aid / health fund 42% Life assurance 10% Informal insurance: Solidarity system/village funeral fund 91% Other 10% 77% of adults do not have any kind of insurance product covering risk Main barrier to the uptake of insurance: Have not heard of insurance 24% Have never thought of it 20% Claim they do not need insurance 16% Do not know how insurance works 18% Do not need insurance 16% Do not know how to get it 14% Do not know where to get it 9% Vehicle insurance as required by law. Medical aid / Health Insurance. Funeral funds. Main barrier: lack of knowledge and awareness. 119

119 Product Market Analysis Insurance Mechanisms Only a small, better-off part of the population uses insurance actively for risk management. The cultural feature to live in the present rather than to worry about the future is an impediment for insurance. Risk management is embedded in economic decision taking. Savings and credit are used for risk management. 120

120 Product Market Analysis Insurance Products & Providers Public Provider Health Equity Funds (HEF) households classified as poor State Authority for Social Security (SASS) mandatory for government staff Community-Based Health Insurance (CBHI) - project Social Security Organisation (SSO) private employees, mandatory for employer, but only part complies Merger in 1/2015. Seperate schemes for army and police corps Private Providers 14 licensed insurance companies, with AGL having 70% market share. Good range of products, mainly for high-end customers. Microinsurance credit life product under preparation in cooperation between AGL and MFIs. 121

121 Product Market Analysis Insurance Gaps and Opportunities Majority not insured. High relevance of health insurance. Other financial products can take (partly) over insurance functions. Specific, affordable products with basic coverage to be developed for low-end market. Further cooperation between insurance companies and MFI. 122

122 7. Drivers and Barriers for Financial Inclusion 123

123 Drivers and Barriers for Financial Inclusion Drivers Positive macroeconomic situation has been the main driver for the demand side of Financial Inclusion. Urbanisation, migration and growing share of income from employment increase demand for finance and esp. of formal finance. Growing efficiency in the financial sector. Better products and better access, but market interest rates remain high. High interest rates are beneficial for Financial Inclusion! Increased supply stimulates demand and widens the market. In rural areas, subsidised credit schemes and revolving funds have increased access to credit. The informal sector fills in, where the formal sector cannot provide. Many Laotians prefer informal services or use them supplementary, even though they have access to formal services. Informal leasing and trader credit are widely used, and in some areas the most used form for credit. 124

124 Drivers and Barriers for Financial Inclusion Drivers cont. Banks offer attractive savings products and have the main market share for remittances (but have a barrier towards low-end customers). First Microfinance Institutions have developed viable business models (but have only small market share). Village funds have been main drivers for Financial Inclusion under widely differing conditions (but without proper supervision, the vast majority of them is unsustainable). 125

125 Drivers and Barriers for Financial Inclusion Supply-Side Barriers Low efficiency due to low-performance culture. Difficult for financial institutions to recruit qualified staff. High interest rate level is impediment for credit to long-term, low-profit investments. Present lending procedures are deterring people from applying for loans. Mismatch between image of banks and self-image of people. Plenty of room for improvement of products and lending methodology. Unsustainability of financial initiatives in their present form: subsidised credit schemes, village funds - lack of awareness on the negative consequences of failed initiatives. Microfinance Institutions face multiple restraints by regulatory issues. 126

126 Drivers and Barriers for Financial Inclusion Demand Side Barriers Main limitations are not supply-related access barriers, but rather usage barriers related to demand. Low repayment morale makes it difficult to obtain low PAR levels. Demand is low in remote rural areas. Over-indebtedness amongst certain groups, especially low-income. Emerging demand is mainly informal. Difficulty to identify creditworthy lending projects. Financial skills on a low level. Mental barriers towards banks. 128

127 Drivers and Barriers for Financial Inclusion Outlook Trends & Opportunities The conducive economic climate is likely to remain stable (?). Credit is likely to play a larger role, but credit expansion will come with a risk. Interest rates will decrease (further). Increasing cooperation and integration will be beneficial for the (provider and the) consumer. Increasing demand for formal finance. 129

128 Drivers and Barriers for Financial Inclusion Sectors Outlook Who will provide future financial services to the poor? Banks will eventually grow 'downwards' towards low-income and rural segments. Banks can be particularly powerful in obtaining Financial Inclusion, if they decide to do so. Microfinance institutions can play a more significant role in Financial Inclusion, but there is need for massive upscaling. Village funds can become a success or continue to fail. Informal practices will continue to fill the gaps. 130

129 Thank you! Keith Jefferis Sebastian Behrle