Strengthening Compliance Procedures for Financial Institutions in Lao PDR

Improving Deposit Insurance System in a Growing Economy

As the Lao People’s Democratic Republic (PDR) continues to liberalize its financial sector, policymakers are working to ensure that its banking system is equipped to deal with potential failures. The Depositor Protection Fund (DPF), in collaboration with international partners, is upgrading the existing tools and procedures for dealing with distressed financial institutions.

The Need for a Well-Functioning Exit Door

The country’s economy continues to grow at an average annual rate of 8%, one of the highest in the world. While none of the 38 licensed banks in Lao PDR has failed yet, the rapid growth of the banking sector means that the risk of failure is increasing.

Key Features of a Well-Functioning Deposit Insurance System

A recent workshop organized by the DPF and international partners highlighted the importance of having a clear understanding of the deposit payout process and the need for authorities to act before a bank faces liquidity or solvency problems. The key takeaways from the workshop included:

• Preparing the deposit payout process: This involves addressing any legal issues, having data on insured deposits available, and establishing payment agent arrangements with commercial banks.
• Addressing challenges in Lao PDR: Deposits are denominated in three currencies - Lao Kip, Thai Baht, and US dollars. This makes it challenging to prepare for deposit payouts.

Strengthening the DPF: One Step Towards Building an Effective Insolvency System

Much more work needs to be done to improve disclosure of financial information and risks by commercial banks, enhance market discipline, broaden tools available for financial authorities, facilitate corporate debt restructuring, and revise the legal framework. The country’s authorities are working with development partners to address these challenges and build an effective deposit insurance system.

Collaboration among Central Banks and Deposit Insurance Agencies

Collaboration among central banks and deposit insurance agencies in ASEAN member countries is underway to raise financial sector standards and learn from each other as the number of cross-border financial institutions continues to increase. This collaboration will be crucial as the Lao PDR’s economy continues to grow.

Building an Effective Insolvency System: Key Challenges Ahead

The country’s policymakers face several key challenges in building an effective insolvency system for financial institutions:

• Enhancing capacity: The DPF needs to enhance its capacity to deal with distressed banks.
• Improving disclosure: Commercial banks need to improve disclosure of financial information and risks.
• Revising the legal framework: The country’s legal framework needs to be revised to shorten asset recovery timelines and reduce costs.

Conclusion

As the Lao PDR continues to liberalize its financial sector, policymakers need to prioritize building an effective insolvency system for financial institutions. This will require collaboration among domestic and international partners, as well as a commitment to addressing the challenges outlined in this article.