The Financial Sector
In March 1988, Decree 11 on the reform of the banking system was passed, separating commercial bank functions from central bank functions. The Vientiane branch of the old State Bank, the Banque d'État de la République Démocratique Populaire du Laos (RDPL), became the central monetary agency. In June 1990, the Central Banking Law was passed, establishing the Bank of the Lao People's Democratic Republic, or Central Bank, to replace the State Bank. Under this law, the Central Bank assumes responsibility for regulation and supervision of commercial and regional banks; maintenance of foreign exchange reserves; issuance and supervision of money for circulation; licensing, supervision, and regulation of financial services; and management of the monetary and credit system. The Central Bank has about ninety regional branches; as of 1991, the government was considering separating these branches into three regional banks, serving the southern, northern, and central regions.
Other branches of the former State Bank were transformed into autonomous commercial banks to promote private investment. These banks are responsible for accepting savings deposits from enterprises, government departments, and individuals, and for granting credit to state entities, joint ventures, and individuals for capital investment and business start-ups or expansion. Commercial banks are restricted from granting credit to economic units experiencing deficits and losses. These banks do not receive subsidies, although they do render 60 percent of their profits to the government.
By 1991 Laos had seven commercial banks, including the Joint Development Bank--a Lao-Thai joint venture--and six wholly stateowned banks. Government policy encourages privatization of these six banks. However, in part because of the absence of laws governing banking activities and in part because of the relatively small size of the economy, foreign bankers do not express much interest in these ventures.
The Foreign Trade Bank (Banque pour le Commerce Extérieur Lao-- BCEL), a subsidiary of the Central Bank, is the country's foreign exchange and foreign trade bank. By Decree 48 of July 1989, the Central Bank is assigned sole responsibility for setting and managing the exchange rate. BCEL was granted autonomy in November 1989 and was charged with handling foreign exchange transactions relating to trade; as of 1991, BCEL had arrangements with sixtyfour banks internationally. However, a Foreign Exchange Decree was scheduled to go into effect soon after 1991, allowing all commercial banks already authorized to deal in foreign exchange to carry out foreign exchange transactions themselves, thus removing BCEL's monopoly on such activities. Information on the status of this decree was unavailable as of mid-1994.
Responsibility for state-owned enterprise debts was transferred to the commercial banks, giving them enormous liquidity problems. To alleviate the precarious situation, in 1989 the government allowed foreign banks to begin operations in Laos. That October the Joint Development Bank became the first private commercial bank permitted to operate since 1975, followed soon thereafter by the Thai Military Bank. In addition, new reform measures stipulate that enterprises will have to clear all debts owed to the banks before being considered for new loans. In 1990 the Asian Development Bank granted Laos a soft loan of US$25 million to recapitalize the banking system.
Interest rates on commercial bank deposits with the Central Bank are uniform across the country and are generally higher than rates for enterprises depositing at the commercial banks. After August 1989, only minimum interest rates are set by authorities; banks are allowed to set specific rates on their own. Interest rates on deposits vary from bank to bank, depending on the type and currency of deposits. The annual rate on kip deposits at the end of 1991 was between zero and 1.2 percent for most banks; fixed deposits in kip earned between 16 and 24 percent annually, and deposits in United States dollars at some banks, including BCEL, earned 7 percent annually. Rates for loans depend on the term and currency of the loan and on the sector for which the investment is intended. Loans for the agriculture and forestry sectors carry rates ranging from 7 to 12 percent, for example, and loans for the services sector carry rates between 12 and 30 percent.
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