Rural banks fulfil different roles in different countries, but across the board they help to promote financial inclusion efforts to move the local population – many who have never possessed a bank account – to participate in the regional economy. In Laos, village banks and credit unions could be a vital lifeline to connect poverty-stricken rural folks with microfinancing programs and pull themselves out of economic doldrums.
Landlocked and economically stifled, Laos has at least 40 licensed financial institutions including Banque Pour le Commerce Extérieur Lao (BCEL) and a handful of foreign lenders, with the most prominent being Chinese foreign exchangers that provide clearing services in yuan.
But decades of isolationist policies by the ruling Lao People’s Revolutionary Party following a century of closed-off French colonialism means that older generations of Lao people have a healthy distrust of traditional banking, and access to financial services can be scarce to non-existent.
Laos can address financial literacy woes with rural banks
Unlike many of their Southeast Asian neighbours, who have supercharged financial inclusion in their countries by leveraging digital finance alternatives, the Lao government has withstood financial innovation and leveraged bureaucracy to bog down efforts to apply for licences and set up local entities of foreign lenders.
While there have been moves to modernise the banking sector as well as forge collaborations with its neighbours to both grow infrastructure and cross-border payments, the vast majority of Lao people still live in one of the 8,600 villages in the rural countryside, at least a day’s travel from an institutional bank branch.
With such barriers and despite numerous local difficulties, rural banks have flourished and there are now over 850 scattered throughout Laos. Across Southeast Asia, rural banks have supplied underserved communities with financial access, supporting small and medium businesses (SMBs), agriculture, fishermen, and other remote communities.
These unique banks are often strategically located in a remote region and specialise in the local population’s needs, sometimes informally. With over 660 million people across Southeast Asia, one of the fastest growing regions in the world with a projected GDP of US$4.7 trillion by 2025, digitised financial services are increasingly in demand to provide credit facilities, support SMBs which employ the most people regionally as well as make up the bulk of interested participants, and generally provide information and troubleshoot financial issues for their community.
Countries like Vietnam, Cambodia and Indonesia have all accelerated their financial literacy by leveraging fintech services in areas like payments and remittances. In contrast, the digital services offered by incumbent banks like BCEL and LaoVietBank only extend to things like mobile top-ups and bill payments in Laos.
How rural banks work in Laos
Rural village banks in Laos typically serve between 80 and 400 people, were self-regulated and often managed by village elders with hardly any oversight. Essentially communal savings pools, it was uncertain if ‘customers’ could repay the amounts they borrowed.
Aside from the time and distance to access these banks, many rural folks in Laos had little in the way of traditional collateral, with land titles often hereditary and not always recorded on paper. And even so, loan applications at such village banks used to take weeks or months, oftentimes requiring repeat visits to see bank clerks who might be open for business only one or two fixed days a month.
Now loan applications at such village banks may only take days. Rural banks are growing at a rate of 10% per year and financial inclusion is steadily on the climb in Laos, albeit slowly. Microfinance institutions are also not hard to find in the country, with the concept being around since at least the 1990s and at least 122 registered with the Lao Microfinance Association in 2019.
Fintech connecting local microfinancing
Digitised fintech players can step in to partner with rural banks and connect microfinance offerings that have thus far been disjointed in the country. Despite rules preventing foreign investors from owning more than 30% of any locally licensed microfinance lender, a contingent of western development agencies like Germany’s Giz have been providing support to enable these village banks to operate more sustainably over the years, with programmes like Giz’s Access to Finance in partnership with Australian Aid and the Bank of Lao PDR (BoL).
They started by providing each bank with a safe box, pens and paper ledgers to record transactions, and requiring local residents to open an account with a minimum balance of LAK10,000 (US$0.58), and they would receive a savings book and a regular income statement.
By 2020, Giz’s program was enabling 831 village banks and the majority of local microfinance institutions, but the frontier nature of banking in Laos meant that data was difficult to standardise, and thus difficult to determine things like credit scores and loan risk assessments.
As Giz was closing down its Access to Finance programme in April 2022, the agency had contracted fintech LTS Ventures to build a simple and reliable platform called Lan Xang Banker. The platform’s technology automatically standardised financial records between its central servers and remotely-operated laptops by its field agents, which after three years of refining Lan Xang Banker to simplify and regulate processes for its local audience, today services over 225,000 villagers with better financial access.
LTS leverages blockchain technology to sync up records, uses a BoL-approved credit scoring model, and implemented know-your-customer (KYC) tech so customers would need to furnish ID in order to get a loan. Each customer would also be limited to a maximum of three loans, one being an emergency fund, and the limit is set and agreed upon by the individual microfinance agency or village bank issuing the loan.
With records stored on servers, customers can access the emergency loan if for example, paddy fields are damaged due to adverse floods. Adding value to its offering, Lan Xang Banker also provides news on weather forecasts, both in local regions and nationally.
Raising financial inclusion, lowering poverty
Beyond that, LTS aggregates data both from its own servers and from the World Bank and the University of Bern, Switzerland, to study poverty patterns and to progressively inculcate financial stability habits among its users. LTS Ventures’ co-founder Tim Scheffmann says the data indicates the number of financially included users are rising by 10% yearly.
The standardised and transparent data to see specific loan details like overdue amount greatly simplifies the use for the entire ecosystem in Laos – rural users, village banks, microfinancing institutions – and thereby increasing repeat usage.
LTS managing director Lattana Keosihavong, who is from southern Laos, says it can be challenging for local communities to adapt, but can see adoption moving in the right direction. Including for the first time, having more women-owned accounts (51%) which are all contributing to increasing financial inclusion while chipping away at regional poverty levels.
Lan Xang Banker is operational in six provinces, processing around 10,000 transactions daily according to Tim, and aims to be in 10 provinces by 2024 to reach a third of the Lao population.
“The next step is to bring out microfinance platform to more provinces and countries, and to educate people on financial literacy and give them access to finance,” Tim added.
