Potential best practice for improving the access to development finance by SMEs in Lao PDR

Abstract

Small and medium-sized enterprises (SMEs) are important to all economies, especially emerging economies like Lao People’s Democratic Republic (PDR) as they account for a majority of private sector businesses and are essential in generating wealth and social stability through employment creation and national outputs via investment. Even though globalization and trade liberalization bring vast benefits to businesses at all levels, the lack of access to finance by SMEs still poses negative consequences that largely endanger the economic development of the country. Despite the large amount of research that has been done on the access constraints for SMEs, limited studies have addressed the financial factors hampering the SME growth in Laos.

Therefore, the present research aims at investigating possible best practices to overcome factors undermining the banks’ ability to expand credits to the SME segment. Hence this qualitative study is employed to explore issues hampering both the supply and demand sides. The study covers some of the perspectives from the government, the banks and the SMEs through interviews with 12 participants. Taking into account the dynamicity and wide variety of different operational practices of banks and SMEs, exploring factors hindering the two sectors is significantly important.

Regarding supply constraints, a number of obstacles such as poor implementation mechanisms, especially on collateral enforceability; inadequate infrastructure such as a lack of reliable data by the central credit information bureau; and a lack of supporting policies remain crucial impediments which are continuously perceived as a thorn for the country’s government. As a result, SME accessibility is greatly damaged by the banks’ low risk appetites.

Demand constraints however, range from factors affecting the SMEs’ feasibility to the direct access for bank financing which is associated with the lack of know-how, limited financial literacy and the inability to present viable business plans. These issues force the SMEs to rely heavily on informal sources of finance especially from personal wealth and private lenders.

Realizing both the demand and supply constraints; improving the legal framework in terms of enforcing current laws and regulations; providing government subsidies and special privileges are perceived as complementary to government efforts to improve satisfying levels for private, state-owned and foreign banks to focus more on increasing SME portfolios. To ensure that the ultimate goals for both banks and SMEs are achieved, it is essential to encourage and increase coordination by all related stakeholders. The government, private sector and development agencies should work collaboratively to actively adopt and maintain a holistic approach to effectively develop both banking and SME sectors in order to help achieve the government’s objectives.