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					Completion Report




Project Number: 33359
Loan Number: 1946
December 2010




Lao People’s Democratic Republic:
Banking Sector Reform Program
                              CURRENCY EQUIVALENTS

                    Currency Unit       –      Kip (KN)

                              At Appraisal          At Program Completion
                              (27 July 2002)        (31 March 2009)
          KN1.00          =   $0.00009              $0.00012
           $1.00          =   KN10,070              KN8,573


                                  ABBREVIATIONS

       ADB            –       Asian Development Bank
       AML            –       anti–money laundering (regime)
       APB            –       Agriculture Promotion Bank
       BCEL           –       Banque pour le Commerce Extérieur Lao
       BOL            –       Bank of the Lao PDR
       BRIC           –       bank restructuring implementation committee
       BSRP           –       Banking Sector Reform Program
       CAR            –       capital adequacy ratio
       CIB            –       Credit Information Bureau
       FIU            –       financial intelligence unit
       GDP            –       gross domestic product
       IMF            –       International Monetary Fund
       JFICT          –       Japan Fund for Information and Communication Technology
       Lao PDR        –       Lao People’s Democratic Republic
       LDB            –       Lao Development Bank
       NPL            –       nonperforming loan
       OEDR           –       Office of Economic Dispute Resolution
       SDR            –       special drawing right
       SOCB           –       state-owned commercial bank
       SOE            –       state-owned enterprise
       TA             –       technical assistance

                                        NOTES

(i)     The fiscal year (FY) of the government and its agencies ends on 30 September.
        “FY” before a calendar year denotes the year in which the fiscal year ends, e.g.,
        FY2009 ends on September 2009.

(ii)    In this report, “$” refers to US dollars.
Vice-President      C. Lawrence Greenwood, Jr., Operations 2
Director General    K. Senga, Southeast Asia Department (SERD)
Director            J. Ahmed, Financial Sector, Public Management, and Trade Division,
                      SERD

Team leader         T. Hla, Economist, SERD
Team member         M. L. Ventura, Associate Operations Analyst, SERD




In preparing any country program or strategy, financing any project, or by making any
designation of or reference to a particular territory or geographic area in this document, the
Asian Development Bank does not intend to make any judgments as to the legal or other status
of any territory or area.
                                       CONTENTS

                                                                     Page

BASIC DATA                                                              i

I.     PROGRAM DESCRIPTION                                              1

II.    EVALUATION OF DESIGN AND IMPLEMENTATION                          2
       A.   Relevance of Design and Formulation                         2
       B.   Program Output                                              3
       C.   Disbursements                                              10
       D.   Program Schedule                                           10
       E.   Implementation Arrangements                                10
       F.   Conditions and Covenants                                   11
       G.   Related Technical Assistance                               11
       H.   Consultant Recruitment and Procurement                     12
       I.   Performance of Consultants, Contractors, and Suppliers     12
       J.   Performance of the Borrower and the Executing Agency       12
       K.   Performance of the Asian Development Bank                  12

III.   EVALUATION OF PERFORMANCE                                       13
       A.   Relevance                                                  13
       B.   Effectiveness in Achieving Outcome                         13
       C.   Efficiency in Achieving Outcome and Output                 14
       D.   Preliminary Assessment of Sustainability                   14
       E.   Impact                                                     14

IV.    OVERALL ASSESSMENT AND RECOMMENDATIONS                          14
       A.   Overall Assessment                                         14
       B.   Lessons                                                    15
       C.   Recommendations                                            16


APPENDIXES
1.   Program Framework                                                 17
2.   Status of Compliance with Loan Covenants                          24
i


                                             BASIC DATA

    A.   Loan Identification

         1.     Country                             Lao People’s Democratic Republic (Lao PDR)
         2.     Loan Number                         1946
         3.     Program Title                       Banking Sector Reform Program
         4.     Borrower                            Lao People’s Democratic Republic
         5.     Executing Agency                    Bank of the Lao People’s Democratic Republic
         6.     Amount of Loan                      SDR11,341,000 ($15 million equivalent) as the
                                                    original loan amount and SDR11,341,000
                                                    ($17,042,978.29) as the net loan amount
         7.     Program Completion Report           PCR: LAO 1213
                Number

    B.   Loan Data
         1.    Appraisal
               – Date Started                       27 July 2002
               – Date Completed                     12 August 2002

         2.     Loan Negotiations
                – Date Started                      08 October 2002
                – Date Completed                    09 October 2002

         3.     Date of Board Approval              28 November 2002

         4.     Date of Loan Agreement              03 February 2003

         5.     Date of Loan Effectiveness
                – In Loan Agreement                 04 May 2003
                – Actual                            07 March 2003
                – Number of Extensions              None

         6.     Closing Date
                – In Loan Agreement                 31 December 2006
                – Actual                            31 March 2009
                – Number of Extensions              3

         7.     Terms of Loan
                – Interest Rate                     1% during grace period; 1.5% thereafter
                – Maturity (number of years)        24
                – Grace Period (number of years)    8

         8.     Disbursements
                a.     Dates
                         Initial Disbursement       Final Disbursement           Time Interval

                               24 March 2003          31 March 2009               72 months

                               Effective Date      Original Closing Date         Time Interval

                               07 March 2003        31 December 2006              45 months
ii


    b. Amount (SDR)

    Cat.
            Category or           Original         Partial          Revised            Amount            Undisbursed
    No.      Subloan              Allocation     Cancellations      Allocation        Disbursed            Balance
    (1)         (1)                   (2)         (3 = 2 − 4)           (4)               (5)              (6 = 4 − 5)

           First Tranche          3,781,000              0          3,781,000         3,781,000                   0
           Second Tranche         3,781,000              0          3,781,000         3,781,000                   0
           Third Tranche          3,779,000              0          3,779,000         3,779,000                   0

           Total (SDR)          11,341,000              0         11,341,000        11,341,000                   0
           Total ($)            17,042,978                        17,042,978        17,042,978                   0

    C.      Program Data

            Program Performance Report Ratings
                                                                                       Ratings

                                                                   Development                    Implementation
    Implementation Period                                           Objectives                        Progress
    30 Nov 2002–31 May 2006                                         Satisfactory                     Satisfactory
    30 Jun 2006–31 Dec 2009                                         Satisfactory                  Partly Satisfactory

 D.         Data on Asian Development Bank Missions
                                                                       No. of          No. of         Specialization of
 Name of Mission                                 Date                 Persons       Person-Days          Membersa
 Country Contact/                            3–12 Oct 2001                2              11                 a, b
  Consultation
 Fact Finding 1                           24 May–5 Jun 2002               11               95          a, b, c, d, e, f, g,
                                                                                                              h, i, j
 Fact Finding 2                             17–21 Jun 2002                12               40          a, b, c, d, e , f, g,
                                                                                                             h, i, j, k
 Appraisal                               27 Jul–12 Aug 2002                8              120          a, b, c, d, e, f, j, l
 Pre-implementation                        17–27 Jan 2003                  3               33                  a, b
 Review 1                                   8–21 May 2003                  1               14                    a
 Review 2                                 27 Jul–8 Aug 2003                2               20                  a, d
 Review 3                                  18–28 Nov 2003                  3               27                 a, d, f
 Review 4                                   9–20 Feb 2004                  3               36                a, d, m
 Review 5                                  10–18 May 2004                  3               27                d, m, n
 Review 6                                14 Jan–1 Feb 2005                 6               82             c, d, f, m, o
 Review 7                                   3–13 May 2005                  2               11                  c, m
 Review 8                                    6–14 Jul 2005                 4               23               c, f, m, o
 Review 9                                  12–16 Dec 2005                  4               20              c, m, o, p
 Review 10                                 23–26 Oct 2006                  1                4                    c
 Review 11                                   5–8 Dec 2006                  4               14               b, c, j, m
 Review 12                                 14–16 Feb 2007                  2                6                  b, m
 Review 13                                 11–15 Feb 2008                  3               11                  b, q
 Review 14                                 19–24 Oct 2008                  2               12                    b
 Program Completion Review                 15–19 Feb 2010                  2                6                   b, j
a
     a = financial economist, b = economist, c = financial sector specialist, d = counsel, e = project economist, f =
     director, g = poverty reduction specialist, h = investment officer, i = deputy director general, j = project/operations
     analyst, k = procurement/consulting services specialist, l = consultant, m = financial management specialist, n =
     young professional, o = microfinance specialist, p = administrative assistant, q = national officer
                                    I.       PROGRAM DESCRIPTION

1.      A banking crisis closely followed and in part was a consequence of the macroeconomic
and fiscal crisis that begin in 1998–1999 in the Lao People’s Democratic Republic (Lao PDR),
during which prices rose by 200% and the kip depreciated by a similar percentage. National
government revenues plunged during this period and the fiscal deficit reached 5.6% of gross
domestic product (GDP) in 2003. The fiscal crisis, combined with the prevalent practice of
directed bank lending to state-owned enterprises (SOEs) served to deepen and prolong the
banking crisis as arrears in government payments to SOE suppliers mounted, inflating the
already large volume of nonperforming loans (NPLs) at the state-owned commercial banks
(SOCBs). The SOCBs held some 70% of banking sector assets at the time. By 2004, NPLs in
the three largest SOCBs had reached 60%–80% while capital adequacy ratios (CARs) ranged
between −40% and 80%. The significant and growing cost of the needed restructuring
threatened to undermine further the government’s fragile fiscal position and adversely affect
macroeconomic stability if measures were not immediately taken to stem losses and address
fundamental issues confronting the sector.

2.      The Banking Sector Reform Program (BSRP) provided the policy-based element in a
package of policy and technical assistance (TA) aimed at restructuring the banking sector and
restoring it to financial health. Other integral elements of the package were a TA loan project,
two grant-based TA projects, and a Japan Fund for Information and Communication Technology
(JFICT) project, all in support of the implementation of reforms under the BSRP (see section G
for details). 1 At the time the program was formulated, the sector was facing crisis with a large
and growing stock of NPLs in SOCBs (composing more than 70% of total loans) leading to the
insolvency of the three largest SOCBs.

3.     The reforms under the BSRP and its associated TA projects were closely coordinated
with complementary funding from the International Monetary Fund (IMF) and the World Bank.
The IMF supported close monitoring of the fiscal and monetary framework to help minimize
macroeconomic risk, and the strengthening of supervision by the central bank. The World Bank
funded reforms in SOEs, many of which were insolvent and accounted for a large share of the
stock of NPLs at the SOCBs.

4.      While the restructuring of the banking sector was its core, the BSRP also had broader
objectives. It sought to build the foundations for a sounder and more efficient financial sector
and improve access to finance. To these ends, program extended support across the following
range of areas:

          (i)     Restructuring the banking sector. This component involved (i) strengthening
                  the legal framework for commercial banking and creating a level playing field for
                  SOCBs and private banks, (ii) improving governance in the main SOCBs through
                  governance agreements, and (iii) resolving NPLs in the main SOCBs and
                  assisting in their recapitalization.


1
    (i) ADB. 2002. Report and Recommendation of the President to the Board of Directors on a Proposed Technical
    Assistance Loan to the Lao People’s Democratic Republic for the Banking Sector Reform Project. Manila
    (TA Loan 1931-LAO); (ii) ADB. 2004. Grant Assistance to the Lao People’s Democratic Republic for Banking
    Automation to Support Outreach, Efficiency, and Governance. Manila (JFICT project 9050); (iii) ADB. 2002.
    Technical Assistance to the Lao People’s Democratic Republic for Strengthening Governance for Banking Sector
    Reform. Manila (TA 4002-LAO); and (iv) ADB. 2006. Technical Assistance to the Lao People’s Democratic
    Republic for Promoting Governance in Financial Transactions. Manila (TA 4770-LAO).
2


          (ii)     Strengthening of enabling legal environment and judicial oversight. The
                   measures under this component were intended to strengthen the commercial
                   legal environment by establishing a commercial chamber in the People’s
                   Supreme Court, building the capacity of commercial judges, and establishing an
                   anti–money laundering regime.
          (iii)    Facilitating private sector access to finance. The measures under this
                   component sought to develop the regulatory and institutional framework for
                   secured transactions and lease financing to improve access to finance,
                   especially for small and medium-sized enterprises (SMEs).
          (iv)     Promoting rural finance and microfinance. This component supported the
                   restructuring of the Agriculture Promotion Bank (APB) and its policy environment,
                   including the removal of policy loans from the bank’s mandate and the lifting of
                   interest rate ceilings on loans.

5.      The BSRP built on reforms under earlier Asian Development Bank (ADB) programs in
the financial sector that sought to support the sector’s transition from a monobank-based
system of directed credit to a structure that accommodated a wider range and number of
financial institutions, competition, and market-based financial intermediation. 2

6.       A loan of $15 million (SDR11.34 million) for the BSRP was approved by ADB on
28 November 2002. It was to be disbursed in three tranches of $5 million each (SDR3.78 million)
upon compliance with (i) specified first-tranche release conditions, upon loan effectiveness;
(ii) specified core second-tranche release conditions, about 18 months after loan effectiveness;
and (iii) specified core third-tranche release conditions, about 36 months after loan effectiveness.

7.      The loan agreement was signed on 3 February 2003 and became effective on
7 March 2003. The first tranche was disbursed on 24 March 2003, and the second tranche on
2 July 2008. The third tranche, originally scheduled for release by January 2006, was disbursed
on 31 March 2009.

                     II.      EVALUATION OF DESIGN AND IMPLEMENTATION

A.        Relevance of Design and Formulation

8.      The program’s objectives were grounded in the poverty reduction partnership agreement
between the government and ADB, 3 which includes a joint commitment to give priority to
(i) macroeconomic stability, (ii) faster economic growth based on a strengthened commercial
environment, and (iii) the development of a financial system that is conducive to private sector
development and achieves considerable rural outreach.

9.      At the time of program formulation and during implementation, the BSRP’s core
objective of restructuring the banking sector and restoring it to financial health was highly
relevant to dealing with the immediate exigencies of the crisis, as well as some of its underlying
causes. As noted below, this objective was not only consistent with the priorities of the
government and ADB but also critical to broader progress in development.

2
    ADB. 1990. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao
    People’s Democratic Republic for the Financial Sector Reform Project. Manila; and ADB. 1996. Report and
    Recommendation of the President to the Board of Directors on a Proposed Loan to the Lao People’s Democratic
    Republic for the Second Financial Sector Reform Project. Manila.
3
    ADB. 2001. Poverty Reduction Partnership Agreement between the Lao People’s Democratic Republic and the
    Asian Development Bank. Vientiane. 28 September.
                                                                                                   3



10.      The banking sector in the Lao PDR accounts for some 98% of total financial sector
assets and is dominated by a small number of SOCBs, which together account for some two-
thirds of sector assets. At the time of program formulation, much of the lending by these
institutions was policy-based, directed lending: decisions to allocate credit based not on
commercial criteria but rather on political or social considerations. These practices were a
holdover from the earlier monobank system, where the state used the banking system to
allocate credit. More than 60% of the loans made by the Banque pour le Commerce Extérieur
Lao (BCEL) 4 , for example, were to state enterprises.

11.     The dominant role of the SOCBs in the financial sector and their directed credit lending
largely undermined the sector’s essential function of promoting economic growth by allocating
resources to their most productive uses. Lending by SOCBs for political and social purposes
and to SOEs also served to crowd out private sector access to credit, impeding job creation
among other things. 5

12.     These practices, combined with weaknesses in general management, credit assessment,
and risk management capacity, contributed to the accumulation of a large and growing stock of
NPLs. The weak governance structure at the Bank of the Lao PDR (BOL) made matters worse.
The BOL lacked independence and adequate supervisory capacity, and further faced issues in
effectively conducting prudential supervision due to the conflict of interest inherent in its role as
both owner and regulator of SOCBs. The fiscal burden imposed by large and recurring losses in
the SOCBs threatened to undermine macroeconomic stability as well as investment in other
sectors vital to the country’s development, such as health and education.

13.     To allow the economy to achieve its growth potential and help meet the government
poverty reduction goals anchored in its National Socio-Economic Development Plan (2001–
2005), a sound and stable financial sector had to be established and resource allocation
improved. To this end, it was imperative that the SOCBs be restructured and recapitalized, and
their lending put on a commercial basis.

14.     The BSRP’s full scope, however, covered a wide range of reforms, some of which
extended beyond the immediate exigencies of the crisis and took a significantly longer time to
implement than anticipated under the program. In all, the BSRP entailed 42 policy actions
distributed over three tranches and eight implementing agencies. This mix of core objectives
with longer-term goals that were important but less integral to addressing the crisis, in retrospect,
appear to have diluted the focus and priorities of the program, and overstretched the resources
available for what was an already complex, urgent, and resource-intensive crisis operation.

B.         Program Output

           1.      Restructuring the Banking Sector and State-Owned Commercial Banks

                   a.       Sector Restructuring

15.      The measures under this component were intended to (i) reduce the number of SOCBs,
(ii) establish a legal framework for the banking sector that fostered competition and sound


4
    The largest SOCB.
5
    (SOEs notably account for only 1% of employment)
4


banking practices, and (iii) develop a forward-looking strategy that would promote a more
diverse, competitive, and commercially oriented financial sector.

16.     To help focus restructuring efforts and resources, two smaller SOCBs, Lao May Bank
and Lane Xang Bank, were merged into a newly created Lao Development Bank (LDB), thereby
reducing the number of operational SOCBs from three to two. Apart from helping to concentrate
limited managerial resources, the consolidation aimed to allow for the new entities to streamline
operations, reduce costs, and improve profitability over the medium term.

17.      Banking laws and regulations were strengthened through amendments to the
commercial banking decree aimed at (i) improving corporate governance in commercial banks,
(ii) strengthening prudential requirements, and (iii) providing for more equal treatment of
participants in the sector. The revised decree was later upgraded to the Law on Commercial
Banks (announced in January 2007), with provisions that (i) strengthen corporate governance in
banks by requiring them to create governance committees and directors to have relevant
banking experience, (ii) strengthen prudential requirements, and (iii) allow majority foreign
ownership of banks. The law also encourages competition in the sector by allowing all
commercial banks to operate branches nationwide.

18.     The government has adopted a financial sector strategy that outlines a broad vision and
road map for the development of the financial sector. The strategy presents a systematic
approach to developing the sector and to identifying and resolving issues that impede
development. It covers the modernization and strengthening of central bank operations, as well
as the development of (i) the banking sector, (ii) the capital market, (iii) money markets,
(iv) nonbank financial institutions, (v) microfinance, and (vii) financial sector infrastructure. The
strategy, however, took much longer to formulate and adopt than anticipated under the BSRP,
in part due to the government’s consultative and consensus-building approach, the novelty of
many of the financial concepts, and the wide range of stakeholders involved.

                  b.       Operational Restructuring of State-Owned Commercial Banks

19.     The key instrument underpinning the operational restructuring and recapitalization of the
remaining SOCBs (BCEL and LDB) was a set of governance agreements between the MOF,
the BOL, and the SOCBs. 6 The agreements established a systematic framework for the
restructuring process based on:

          (i)     a road map with defined financial and operating targets,
          (ii)    a business plan for achieving the targets,
          (iii)   a performance measurement system,
          (iv)    objective reviews of progress by external auditors, and
          (v)     a commitment by the BOL and the MOF to undertake corrective action where
                  needed.

20.     A fundamental aim of the agreements was to establish an effective credit culture within
the SOCBs (with approvals based on rigorous scrutiny of customers’ ability to repay) that would
lay the foundation for their sound operation after restructuring and recapitalization.


6
    The agreements were signed by the Minister of Finance, the BOL governor of the Bank of the Lao PDR, and the
    chair of each SOCB board.
                                                                                                                 5


21.    As a basis for this, the agreements gave the SOCBs the necessary independence in
extending credit and setting interest rates, with advisory and capacity building assistance from a
team of resident international banking advisers funded under a parallel TA loan (Banking Sector
Reform Project; see footnote 1). To induce the SOCBs to meet the operational restructuring
targets under the agreements, progress was linked to support for their financial restructuring
through the phased issue of recapitalization bonds by the MOF. 7

22.    The first set of governance agreements, reached in 2003, had to do with putting in place
the key elements of an institutional framework (e.g., credit committees) along with the
procedures, and the measures needed to reduce the losses and bring about more prudent,
commercially based lending. The targets and timelines under the agreements, however, proved
ambitious, given the fundamental nature of many of the measures and the need to build related
capacity. Parties to the agreements also found them overly complex and sought clearer
guidance on steps needed to implement key measures, including the performance evaluation of
SOCBs and the issue of recapitalization bonds. 8

23.     Initial progress in implementing the agreements was problematic as a result. Reviews by
external auditors noted only partial compliance by both SOCBs, delaying the targeted issue of
the first tranche of the recapitalization bonds. Also, as economic conditions improved, the
agreements seemed overly restrictive to the SOCBs. Growth in new lending (capped at 18%)
could not match the growth in deposits. The government therefore requested a revision of the
governance agreements 9 in 2005 to clarify and simplify procedures and redirect performance
targets to better reflect institutional capacity. The revised agreements were signed in July 2006,
and subsequent reviews by external auditors recorded substantial compliance by both SOCBs
with marked improvements in implementation and achievement of targets.

                 c.       Financial Restructuring of State-Owned Commercial Banks

24.     As outlined above, the BSRP backed a phased and conditional buildup of capital in the
SOCBs to lay the foundation for their long-term safety and soundness. The buildup was to be
achieved through (i) an aggressive program of case-by-case resolution of NPLs, with emphasis
on cash collection; (ii) the phased issue of government securities; and (iii) better operating
efficiency and retention of profits to increase equity, combined with measures under the
governance agreements that would place bank operations on a commercial basis and curtail
new NPLs. These measures were the core elements of a capital buildup plan for each SOCB to
meet the BOL’s capital adequacy ratio target of 8% over the medium term from close to −60% in
the case of LDB and close to −100% in the case of BCEL at the start of the BSRP.

25.     Notable progress has been made on all three fronts. Since 2004, BCEL has collected
some KN33.8 billion on NPLs, while LDB has collected some KN246 billion. Collection has been
less successful in the case of BCEL, perhaps because a major share of its loans (some 43%)
were made to SOEs, where repayment issues have proved to be more intractable than in the
private sector. 10 New lending to SOEs has since been sharply scaled back under the new
regime put in place by the governance agreements, which requires lending to be based on
commercial criteria and rules out new lending to borrowers in default.


7
   Recapitalization bonds were bonds issued by MOF to increase the chartered capital of the SOCBs. The bonds
   were nontransferable and had a term of 5 years, with interest supposed to be set at 1% above consumer inflation.
8
   The agreements and many of the key actions stipulated under them were clearly new to the country’s institutions.
9
   The need for revision was anticipated and provided for in the program design.
10
   LDB, on the other hand, had a much more limited exposure to SOEs, amounting to less than 2% of its portfolio.
 6


 26.    The phased issuance of government securities—principally of tranches of
 recapitalization bonds linked to progress in achieving the targets set in the governance
 agreements—has also significantly helped to strengthen the financial position of the SOCBs,
 though not at the pace originally foreseen.

 27.    Difficulties in implementing the first set of governance agreements and meeting the
 performance targets of SOCBs, along with the continued fiscal weakness of the government
 through 2005 and lack of clarity in procedures, delayed the issue of recapitalization bonds by
 the MOF. Issues in March 2003, October 2003, and May 2004 had originally been scheduled
 under the BSRP.

 28.      Subsequent progress in meeting the targets under the revised governance agreements
 and the government’s stronger fiscal position allowed the issue of bonds starting in 2006. The
 first issue of KN200 billion took place in February 2006 and the actual placement in June 2006.
 The second issue of KN150 billion was made in February 2007 with placement in
 September 2007. In February 2009 the MOF issued instructions for the placement of the
 remaining KN150 billion worth of bonds. Interest on the bonds was often paid about 3 months
 late to the SOCBs, in part due to weak cash management of the Treasury at the MOF.

 29.    The profitability of the SOCBs has improved since 2007 as the economy has grown
 more rapidly, spurring growth in lending under the new, commercially oriented, regime.
 Strengthening economic conditions and, more directly, better credit risk assessments by the
 SOCBs (due to measures instituted under the governance agreements) as well as stronger
 capacity have helped to dramatically reduce NPLs. NPL ratios have fallen below 3% on loans
 provided by BCEL and LDB after March 2003, while overall NPL ratios for BCEL (1.48% 11 ) and
 LDB (5%) reached historic lows in 2008. It should be noted, however, that NPLs measured
 under BOL criteria differ somewhat from those measured under international accounting
 standards (see Figure 1 and Table 1).

 30.    As a consequence of the impact of these measures, CARs markedly improved over the
 course of the program, with the CAR for BCEL increasing from almost −100% in 2003 to 5.65%
 in 2008 and the CAR for LDB improving from close to −60% in 2003 to −3.75% in 2008.

 Figure 1: Nonperforming Loan and Capital Adequacy Ratios of State-Owned Commercial Banks
    A. Nonperforming Loan Ratio                 B. Capital Adequacy Ratio
                          90                                                     20
                          80
                          70                                                      0
                                                   BCEL
                                                                                       2003         2004   2005    2006         2007
                          60
                                                                                 -20
                  % NPL




                          50
                                                                        CAR %




                          40                               APB
                                                                                 -40
                          30                                                                  LDB
                                                                                 -60                        BCEL          APB
                          20                 LDB
                          10                                                     -80
                          0
                               2003   2004         2005   2006   2007           -100




APB = Agriculture Promotion Bank, BCEL = Banque pour le Commerce Extérieur Lao, BOL = Bank of the Lao PDR,
LDB = Lao Development Bank, NPL = nonperforming loan.
Source: Bank of Lao PDR.



 11
      BCEL reported an (unaudited) NPL ratio of 0.7% for 2009.
                                                                                                                   7


 Table 1: Nonperforming Loans of State-Owned Commercial Banks, as of 31 December
                                           2007
                      (% of total loans, unless otherwise indicated)

   Loan Quality (IAS Classification)                  APB                BCEL                    LDB
   1. Current loans                                    16.0                70.0                   50.0
   2. Special mention                                  33.0                27.0                   26.0
   3. Substandard                                      22.0                 3.0                   19.0
   4. Doubtful                                         22.0                 0.0                    1.0
   5. Loss                                             19.0                 0.0                    4.0

   Memo items:
   NPL (IAS provisioning for categories
    3–5)                                                31.0                 1.7                    5.9
   NPL (based on BOL rules)                             14.1                 0.3                    2.4
   Outstanding loans (KN billion)                      319.0               872.0                  826.0
   Shareholders’ equity (KN billion)                  (175.0)               88.0                 (109.0)
  ( ) = negative, APB = Agriculture Promotion Bank, BCEL = Banque pour le Commerce Extérieur Lao,
  BOL = Bank of the Lao PDR, IAS = international accounting standards, LDB = Lao Development Bank,
  KN = kip, NPL = nonperforming loan.
  Note: The IAS lists five categories of loan quality, as shown in the table. Nonperforming loans are estimated
  from the provisioning for loans in categories 3–5. The BOL, on the other hand, uses a four-category system for
  rating loan performance and estimating NPLs.
  Source: Asian Development Bank.

                d.       Program Monitoring and Prudential Supervision

31.     The BSRP also required the BOL to ensure that (i) its Bank and Financial Institutions
Supervision Department visits each SOCB at least twice yearly to increase the reliability of
financial reports and confirm compliance with interim performance measures, and (ii) there is
adequate off-site monitoring for timely and accurate financial reporting.

32.     BOL carries out on-site inspections of each bank every 6 months, in addition to the
quarterly performance evaluation visits made to each SOCB under the program. Measures
established with respect to off-site monitoring include regularly assessing the financial
statements of the SOCBs, reviewing the findings of external auditors, and requiring banks to
regularly provide additional key data including loan portfolio data.

       2.       Strengthening the Enabling Legal Environment and Judicial Oversight

                a.       Commercial Division of Court Enforcement

33.     At the time of program formulation, judges had very limited training and experience in
commercial transactions and associated areas such as debt enforcement arising from loan
transactions, enforcement of securities, and bankruptcy. To strengthen the incentives to repay
loans, the BSRP sought to develop a court system that could effectively adjudicate commercial
cases and provide a credible threat of enforcement to borrowers.

34.     In line with program measures, a commercial chamber was established in the People’s
Supreme Court and judges were trained under attached TA. The training, originally intended to
be focused on commercial law, had to be reoriented toward building a more fundamental
understanding of the law instead. A follow-on TA was later provided to further develop capacity
in this area, but progress was slower than anticipated because of the need to develop basic
8


capacity first, as well as subsequent transfers of trained judicial personnel to jobs in unrelated
areas.

35.     Measures are beginning to have an impact, however. More NPL cases are being filed in
the commercial courts (30 in 2007) and more timely and better quality decisions noted by
SOCBs. The strongly communal structure of Lao society nonetheless means that asset
foreclosure remains a time-consuming process involving many parties and requiring a village
committee to oversee foreclosure and asset disposal. The auctioning of foreclosed assets is still
uncommon. But officials from the joint venture ANZ Vientiane Commercial Bank reported the
bank’s successful foreclosure of five properties in 2008, adding that the process, while time
consuming, was transparent.

36.     To improve the efficiency of asset resolution and alternative dispute resolution, the
BSRP also called for measures to initiate a structured voluntary system for resolving disputes
related to loan defaults. The Office of Economic Dispute and Resolution (OEDR), under the
Ministry of Justice, oversees this process. Under attached TA (footnote 1) and in line with
measures under the program, the OEDR has set up a mediation service, strengthened its
capacity, and worked to codify procedures, notably preparing a manual for mediation,
application forms for arbitration and mediation, and templates for arbitration awards. In 2008,
38 cases were submitted for mediation and arbitration through the OEDR.

               b.      Anti–Money Laundering Regime

37.     To strengthen governance and integrity in the banking sector, the BSRP included
measures aimed at development of an effective anti–money laundering (AML) regime. Among
its key elements were AML laws and regulations and a financial intelligence unit (FIU).

38.       Accordingly, the government issued a decree in March 2006 creating the basic legal
framework for an AML regime and providing for the formation of an FIU. A committee of senior
staff from BOL’s Bank and Financial Institutions Supervision department was the nucleus of the
FIU. In May 2007 this committee was upgraded to a separate unit equivalent to a department
with its own staff and budget. The FIU now has three divisions for (i) regulation and supervision,
(ii) information technology, and (iii) analysis. It is active in developing and issuing guidelines to
banks to implement the AML decree, and in analyzing suspicious transaction reports. In practice,
however, its operations have been limited by its staff and budgetary resources.

39.     Mechanisms for interagency cooperation were established in March 2008 with the
formation of a high-level interagency AML working group under the FIU director general and
including representatives from law enforcement, customs, and supervisory authorities. The
government has also taken an increasingly active role in strengthening international cooperation
in this area, joining regional AML bodies, notably the Asia/Pacific Group on Money Laundering
(APGML) in July 2008. Lao PDR is scheduled to undergo the first APGML mutual evaluation of
its AML regime toward the end of 2010.

       3.      Facilitating Private Sector Access to Credit

               a.      Secured Transactions System

40.     To strengthen the enforcement of security over land and other collateral and to give the
private sector better access to finance by allowing security to be taken over a wider range of
                                                                                                               9


property, measures aimed at introducing amendments to the Law on Secured Transactions and
related laws were also made part of the BSRP.

41.     The Law on Secured Transactions was amended in May 2005 to clarify the rights and
obligations of the parties with respect to collateral and strengthen enforcement. A draft decree
on lease financing was also developed to establish a legal framework for leasing that specifies
the rights and obligations of the parties and provides for conditional self-help repossession.

42.      Beyond the strengthening of the legal framework, the program also called for the
development of a fully computerized secured transactions registry and its linkage to records in
the motor vehicle registry. This condition was later waived, partly because of unforeseen
institutional complications. Under the BSRP, the MOF had been identified as the logical home
for the secured transactions registry, as it registered security over state assets (Department of
State Asset Management) and was also home to the land registry (land being the main form of
collateral used by banks). However, the transfer of the land registry to the Prime Minister’s
Office in 2005 significantly weakened the rationale for the MOF to be the base for the registry.

43.    These changes and the range of parties involved have led to protracted discussions on
where the registry might be housed and what the roles and responsibilities of the parties might
be. The matter still has to be decided. 12 The aim of linking the secured transactions registry to
records in the motor vehicle registry also proved somewhat misplaced, as records in the motor
vehicle registry were, at the time of program formulation, and still are paper based and
fragmented. A World Bank project has recently begun pilot-testing a computerized database
system, but its operationalization and rollout to all the provinces is likely to take some time.

44.     As an interim measure to strengthen security over collateral and improve private sector
access to finance, ADB and the BOL worked to upgrade the system at BOL’s Credit Information
Bureau (CIB) from one that was manual and paper based to a secure web-based system. The
system allows banks to efficiently perform collateral checks on property and movables and
register pledged assets—a function similar to the secured transactions notification from a
registry. Banks can also track customer credit histories, thereby giving customers a strong
incentive to maintain good repayment records to have better access to credit, on easier terms.
The CIB is now fully operational and its real-time online coverage is about 70% of all accounts.
The balance is largely attributable to accounts in rural branch offices that need to use off-line
manual processing for lack of computer connectivity.

           4.      Developing Rural Finance

                   a.       Agriculture Promotion Bank

45.     The BSRP also included measures aimed at transforming APB from a policy bank into a
commercial bank. The restructuring of APB began in 2004. Policy lending was separated from
commercial lending, and policy loans were transferred in 2007 to a new policy bank
(Nayoby Bank). A restructuring and recapitalization framework based on governance
agreements, similar to that used for BCEL and LDB, was constituted in 2007. Focused support
for implementation was provided under a separate TA cluster for rural finance development. 13


12
     The International Finance Corporation is also supporting planning for a secured transactions registry.
13
     ADB. 2006. Proposed Grant Assistance to the Lao People’s Democratic Republic for Upgrading of ICT and MIS at
     the Agriculture Promotion Bank. Manila (JFICT 9096-LAO).
10


46.     Restructuring is still ongoing, but there has been significant progress. The governance
agreements grant autonomy to APB management in setting interest rates—a major change in
policy and approach to a sector where subsidized credit was long the norm. The start of
restructuring, however, took longer than anticipated, partly because of the need for a feasibility
study and the work involved in separating the operations and assets (18 branches) of the old
APB into a new, commercially oriented APB and a policy bank.

               b.     Microfinance

47.      The program required the BOL to prepare, adopt, and implement regulations for
microfinance credit unions allowing a variety of microfinance models, interest rate autonomy,
and private ownership. The BOL has issued improved regulations for savings and credit unions
that allow interest rate autonomy and private ownership, among other things.

C.     Disbursements

48.     The loan comprised three tranches of $5 million each (about SDR3.78 million per
tranche, or a total of SDR11,341,000 at the time of loan effectiveness). The first tranche was
scheduled to be released upon loan effectiveness, the second about 18 months after that, and
the third after another 18 months. Disbursements were contingent on compliance with tranche
release conditions. The amounts actually disbursed were $5,178,760.08 for the first tranche,
$6,162,765.33 for the second, and $5,701,452.88 for the third. Therefore, actual disbursements
by the closing date of 31 March 2009 totaled $17,042,978.29 (SDR11,341,000).

D.     Program Schedule

49.     The first tranche was disbursed on 24 March 2003, 17 days after the loan was declared
effective. The second tranche, originally scheduled for release by October 2004, was disbursed
44 months later, on 2 July 2008, because of delays in meeting a number of tranche release
conditions. The third tranche, originally scheduled for release by January 2006, was disbursed
on 31 March 2009, 9 months after the second tranche was disbursed.

E.     Implementation Arrangements

50.    The executing agency for the program was the BOL. The implementing agencies were
the MOF, the Ministry of Justice, the Ministry of Security, the People’s Supreme Court, and
three SOCBs—BCEL, LDB, and APB.

51.      To support the implementation of the bank restructuring measures and to monitor and
help coordinate other BSRP reforms, the BOL created a bank restructuring implementation
committee (BRIC) under a deputy governor and including the chairs of key BOL committees
involved in the design of the program (bank restructuring, NPL, human resource committee, and
information technology committees) and senior representatives from the Bank and Financial
Institutions Supervision Department and other relevant departments.

52.     At the recommendation of ADB, the BRIC’s composition was expanded to include
representatives from the MOF and the chairs of the BCEL and LDB boards. The BRIC met
regularly throughout program implementation to review progress and address issues. Its
composition helped ensure appropriate attention to issues from senior officials where needed.
                                                                                                        11


53.   A project implementation unit was established in BOL to serve as the secretariat of the
BRIC and support the day-to-day monitoring and coordination of program implementation.

F.        Conditions and Covenants

54.    The disbursement of the second and third tranches of the BSRP was significantly
delayed by slow progress on a range of actions, including difficulties with the original set of
governance agreements and delays in the issue of recapitalization bonds by the MOF (see
Appendix 2 for details of the status of compliance). From 2007, however, progress markedly
speeded up, the most significant factors perhaps being the revisions made in the governance
agreements in 2006 that strengthened ownership and freed progress toward targets. The
achievement of targets, combined with the improved economy and the stronger fiscal position of
the government, in turn, facilitated the issue of recapitalization bonds by the MOF. Delays in the
issue of bonds may also be attributed in part to the weak cash management capacity of the
MOF, indicating the need to strengthen public financial management.

55.     The condition requiring the MOF to establish a secured transactions registry linked to the
motor vehicle registry was waived, but the waiver should not materially affect the core objectives
of the program. The condition could not realistically be met within the program period, given the
unanticipated institutional changes and the need to coordinate and achieve consensus across a
wide and disparate range of parties (as well as the fact that basic preconditions were not in
place in the case of the motor vehicle registry). The web-based system established at the CIB
as an interim measure has allowed key functional aspects of a secured transactions registry to
be provided, while also giving the private sector better access to finance by allowing borrowers,
notably SMEs, to supplement collateral with established credit histories.

G.        Related Technical Assistance

56.    The implementation of reforms under the BSRP was supported by a TA loan (Banking
Sector Reform Project) processed in parallel with the program, as well as an attached TA grant
(Strengthening Governance for Banking Sector Reform) (footnote 1). Additional support also
came later from a JFICT-funded project (Banking Automation to Support Outreach, Efficiency,
and Governance) in 2004 and a follow-on TA grant (Promoting Governance in Financial
Transactions) in 2006. Completion reports are available for the two grant-based TA projects. 14

57.     The Banking Sector Reform Project supported the implementation of core BSRP reforms
that were aimed at restructuring the SOCBs by (i) providing advisory and capacity development
services, including those of resident international banking advisers, for restructuring BCEL and
LDB and strengthening their governance, and (ii) upgrading computer systems and building
related capacity in SOCBs to complement the restructuring efforts.

58.     The project was critical to the implementation of the BSRP, particularly the restructuring
under the governance agreements. Close and sustained guidance and capacity building support
from the resident international banking advisers hired under the TA loan helped make the
fundamental restructuring of the SOCBs possible. The modern core banking systems
established in the SOCBs, with assistance from the TA loan project, allowed the banks to


14
     ADB. 2010. Technical Assistance Completion Report: Strengthening Governance for Banking Sector Reform.
     Manila; and ADB. 2009. Technical Assistance Completion Report: Promoting Governance in Financial
     Transactions. Manila.
12


manage their operations more effectively and efficiently and meet the stricter reporting
requirements of the BOL. The JFICT project also extended complementary support.

59.      The attached TA-based grant was primarily focused on the resolution of NPLs through
the commercial courts. The difficulties involved were greater than expected, partly because the
courts first needed help in building basic capacity. But the TA generally achieved the majority of
its expected output and was rated successful. A later TA provided follow-on support in this area
as well as in alternative dispute resolution and the establishment of a secured transactions
registry. While the output under the TA was satisfactory, some key outcomes are still pending
(e.g., the establishment of a secured transactions registry); for that reason the TA was rated
only partly successful. A key lesson noted in the completion report was that judicial reform is a
major undertaking requiring considerable, committed support over the long term rather than
intermittent TA if the results are to be significant and sustainable.

H.     Consultant Recruitment and Procurement

60.    The recruitment of consultants under the BSRP’s associated loan and grant-based TA
packages was generally satisfactory. The procurement of a core banking system for LDB under
the TA loan was significantly delayed at the start by procedural issues and related changes
made by the BOL in the project management team. The new system was eventually procured
and implemented successfully, but the process took longer than anticipated and required close
ADB support, partly because the new team lacked familiarity with procurement procedures and
the tasks involved in migrating the bank’s data and operations from largely ad hoc
arrangements to a modern integrated core banking system were inherently complex.

I.     Performance of Consultants, Contractors, and Suppliers

61.    The performance of consultants and contractors under the associated TA packages was
generally satisfactory.

J.     Performance of the Borrower and the Executing Agency

62.     The performance of the borrower and the executing agency is rated satisfactory. The
BOL, in its role as executing agency, generally provided able and responsive counterpart
support and adequate facilities throughout program implementation. Coordination with respect
to reforms that were considerably outside its direct jurisdiction, such as the establishment of a
secured transactions registry and the development of the commercial court system, was
problematic, but such issues are arguably attributable for the most part to program design. Key
departments in the BOL that took part in program implementation strengthened their capacity
over the course of the program, and staff gained deeper familiarity with ADB procedures and
processes. However, the lack of independence and weak supervisory capacity of the BOL, and
the conflict of interest inherent in its dual role as owner and regulator of SOCBs, undermined its
prudential supervision and therefore its effectiveness as executing agency. Frequent staff
rotations within the BOL also made it less effective.

K.     Performance of the Asian Development Bank

63.    The performance of ADB is rated satisfactory. Regular review missions were fielded
throughout the implementation of the program. The fact that implementation took significantly
longer than anticipated, however, reflected the various changes in mission leadership during
implementation. Given the program’s scope and complexity, these changes, along with
                                                                                               13


differences in approach and understanding with counterparts, probably delayed implementation
further. Progress in implementation depended on flexibility and a pragmatic approach to revising
the first set of governance agreements.

                          III.    EVALUATION OF PERFORMANCE

A.     Relevance

64.    The program’s design is rated as less relevant to achieving the targeted outcome. While
a main focus of the BSRP was the restructuring and recapitalization of the SOCBs, its scope
also, however, included a wide range of other measures that complicated implementation
without having a significant direct impact on the program’s main objective. Some of these
actions (establishment of a secured transaction registry) ultimately had to be waived, while
others (e.g., the development of the commercial court system) will require significant dedicated
resources over the medium to long term if fundamental issues are to be effectively addressed
and significant and sustainable progress achieved.

B.     Effectiveness in Achieving Outcome

65.     The program is rated effective in achieving its main targeted outcomes, but less effective
in other respects. While the financial sector in the Lao PDR remains shallow compared with that
of other countries in the region, the ratio of broad money to GDP (M2/GDP) underwent a
modest but significant increase, from 19% to 25%, over the course of program implementation.
This levels are similar to those in appropriate regional comparators such as Cambodia, and it
should be noted that the relative shallowness of the financial sector is in part a function of the
predominantly rural nature of the economy (some 80% of the population lives and works in the
rural areas) and the country’s stage of economic development (annual per capita income is
about $500).

66.     The restructuring and recapitalization process largely achieved its objective, as is
evident when performance after the program is compared with the benchmark at its start (see
Figure 1). The governance agreements under the BSRP had a key role in this process and
helped to improve corporate governance in the SOCBs. They established organizational
structures and incentives supportive of prudent lending on a commercial basis while giving
managements the requisite autonomy to achieve performance targets. Capacity in key areas
such as credit assessment was built and strengthened, and these changes are reflected in the
dramatic reduction in NPL ratios for new loans. The quality of assets is also reflected in the
substantial change in the loan portfolio away from a predominance of state enterprise loans
toward increased lending to private sector enterprises. By the end of 2007, for example, 75% of
BCEL’s lending was to non-state enterprises, compared with 41% in 2006.

67.     While SOCBs still account for the majority of financial sector assets (around 59%), their
share is declining with the entry and expansion of new private and joint venture banks (five new
commercial banks started operating in 2009). The entry of private banks will exert fresh
competitive pressures on the SOCBs, strengthening their incentives to improve performance,
while the new Law on Commercial Banks strengthens prudential requirements and provides for
more equal treatment for all banks.

68.    However, while the program was effective in achieving the core objective of restoring the
health of the banking sector, primarily the SOCBs, it was less effective in other elements of the
program, such as the development of commercial courts and related legal and judicial reforms.
14


The limited resources allocated to capacity development was a major reason. This sector
requires longer-term programmatic assistance.

C.     Efficiency in Achieving Outcome and Output

69.       The BSRP is rated less efficient in achieving its targeted outcome and output. While the
majority of the targeted outcomes were realized, many actions took considerably longer to
implement than originally anticipated and the program itself took some 6 years to complete
versus the originally targeted 3. Implementation likewise used up much more staff and
counterpart time and TA resources than planned, and needed additional support from a JFICT
project and a follow-on TA grant. The factors behind this assessment, already discussed above,
are as follows: (i) the government’s large fiscal deficits limited the resources available for
recapitalizing the SOCBs and attending to other immediate budgetary priorities; (ii) the
governance agreements were overly complex and noncompliance was high at the start; and
(iii) the program as designed was overloaded with conditions, and the array of implementing
agencies complicated program administration. However, once the government’s fiscal position
improved and the governance agreements were revised in 2006, the program went back on
track and implementation accelerated. The disbursement of the second tranche in July 2008
and the third tranche 9 months later was indicative of improved efficiency.

D.     Preliminary Assessment of Sustainability

70.     The sustainability of outcomes is rated likely in the core areas, although there are
downside risks. The SOCBs under the program were restructured and recapitalized and their
operations put on a firmer commercial basis. These changes were rooted in fundamental
structural changes in the institutions themselves and in revisions in sector laws and regulations,
notably the Law on Commercial Banks, which provides for stronger governance and greater
competition in the sector. But while the SOCBs dramatically improved their financial condition,
their CARs are still below BOL prudential targets. Further strengthening over the short to
medium term, and the development of strong credit cultures and prudent lending practices, is
required. The downside risks to sustainability are as follows: (i) the BOL is not independent and
its effectiveness as a prudential supervisor is undermined by its inherent conflict of interest as
both owner and regulator of the SOCBs; (ii) while the capital base of the SOCBs may have
significantly improved, it remains small and vulnerable to external shocks, and this vulnerability
is heightened by weaknesses in the macroeconomic framework that could worsen the balance
of payments (the ratio of gross international reserves to imports of about 4 months is relatively
low); and (iii) the excessively expansionary monetary policy pursued by the BOL in recent years
and high credit growth have increased the risks to macroeconomic stability.

E.     Impact

71.    The BSRP was a category C program. Its measures had minimal impact on the
environment, involuntary resettlement, and indigenous people.

                IV.    OVERALL ASSESSMENT AND RECOMMENDATIONS

A.     Overall Assessment

72.     The program is rated partly successful. It achieved its immediate and core objective of
restructuring the SOCBs and strengthening their financial position, but the implementation of a
range of conditions took significantly longer than anticipated and the output did not entirely
                                                                                                               15


contribute to the achievement of the main objective. At least partly responsible were the
program’s broad scope and the inclusion of actions that turned out to require a significantly
longer time to implement and much greater support than originally foreseen.

B.      Lessons

73.    Political support and macroeconomic stability are vital to the success of a
development assistance program. At the time the BSRP was approved, the government had
just come out of a severe macroeconomic and fiscal crisis. The fiscal situation had stabilized by
2003 with a deficit equivalent to 5.6% of GDP. The severe constraints on budget resources and
suppressed spending on the economic and social sectors meant that the MOF’s priorities were
not closely aligned with the goals of the BOL and the BSRP (which required a substantial
placement of interest-bearing government recapitalization bonds in the two SOCBs).

74.     Focus in scope is important. 15 The BSRP’s core and immediate objective was to
address the crisis facing the banking sector by restructuring and restoring the SOCBs to
financial health. Reforms directed at this objective required close attention and significant
support given their urgency and fundamental nature. As noted above, however, the program’s
scope also included a wide range of other measures (e.g., reform of the judicial system) that
diluted focus and complicated implementation 16 without directly supporting the achievement of
the program’s main objective, partly because of the much longer time and greater resources
needed for effective implementation. Closer assessment of the judicial system at the time of
program formulation could have highlighted the very basic level of capacity present, the
long-term nature of the support needed, and inherent difficulties in meaningfully achieving the
proposed goals within the program time frame and available resources.

75.    The program’s approach to dealing with NPLs might have concentrated more fruitfully on
strengthening credit assessment with a focus on future cash flows rather than security, through
greater support for the development of needed procedures and capacity in this regard.
Attempting concurrent reforms of a fundamental nature in the legal and judicial system requires
a significant commitment of resources over the medium to long term, well beyond those
available under the program and its associated TA.

76.    The program’s significantly longer than anticipated implementation also meant that there
was considerable turnover of key staff within executing and implementing agencies as well as
on the ADB team (six mission leaders over the course of implementation). These changes
contributed further to delays as new staff learned their responsibilities and adjusted to the many
exigencies of a complex and wide-ranging program. A program of more focused scope would
have helped reduce the effective transition period for new staff, thereby allowing more effective
and timely implementation.

77.    The tranche conditions were overloaded with complicated policy reforms and involved
too many implementing agencies with different interests, overstretching the weak administrative
capacity of the government. Policy conditions included adherence to complicated and lengthy
governance agreement agreements; legislative reforms, among them, amendments to the
Secured Transactions Law, the Law on (Civil) Judgment Enforcement, the Law on Civil
15
   The extended time period, the considerable amounts of counterpart and staff time, and the breadth of TA support
   involved in program implementation (6 years and about $6 million in loan and grant-based TA resources) clearly
   indicate the scope and complexity of the program. Significant additional support was also provided under rural
   finance–related projects to address APB and microfinance-related measures .
16
    Involving a significant number of implementing agencies, for one, made coordination more difficult.
16


Procedure, and the Anti–Money Laundering Law; the establishment of a financial intelligence
unit at the BOL; and the placement of recapitalization bonds at the two SOCBs. A governance
agreement to insulate a state bank from political interference was a relatively new instrument; its
use in the Lao PDR was therefore tantamount to an experiment.

78.     Flexibility can help strengthen stakeholder ownership and support effective
implementation. The first set of governance agreements had to be revised to unlock progress
in implementation.

79.    Funding should be commensurate to the size and scope of the program to align
incentives. The total amount of funding under the program was $15 million (spread over three
tranches), yet the release of funds was contingent on compliance with some 42 conditions,
some of which carried costs significantly greater than the program amount (e.g., recapitalization
of the SOCBs). 17 Many conditions also involved fundamental and far reaching institutional
changes that contributed to prolonging the implementation period by 3 years. This suggests a
mismatch between the magnitude and scope of the reforms undertaken and the program
amount, further diluting the incentives for timely and effective implementation.

C.         Recommendations (Program-Related)

80.     Future monitoring. While the financial condition of SOCBs under the program has
improved dramatically, their CARs are still below BOL prudential norms, and credit culture and
practices are still in a nascent state. The BOL should continue its close monitoring of the
SOCBs to ensure that they observe prudent lending practices and are further strengthened.
This matter should be followed up in the course of regular dialogue with the BOL and during
consultations as part of IMF article IV missions, at least until the CARs reach prudential targets
and NPL ratios indicate the establishment of strong and effective credit cultures.

81.     Additional assistance. Follow-on TA is now being provided to reinforce financial sector
supervision. Its components are aimed at strengthening the supervision of commercial banks
and developing microfinance and the anti–money laundering regime. While not directly related
to the objectives of the program, support for public financial management systems and related
capacity in the MOF should also be provided, as the implementation experience suggests.

82.    Future programs should pay more attention to exploring ways to increase the BOL’s
operational autonomy from the executive arm of government and reduce its operational linkages
with SOCBs including staff rotations to the state banks.

83.    Future programs in the financial sector should adopt more responsive program
modalities to ensure adequate flexibility, such as program clusters with policy triggers.

84.    Timing of the program performance evaluation report. It is recommended that a
program performance evaluation report be conducted within the next 12–18 months to further
assess the impact of reforms under the program.




17
     Interest payments alone on the recapitalization bonds were estimated at $18–$20 million over the originally
     anticipated program period of 3 years.
                                                                                                           Appendix 1       17


                                                 PROGRAM FRAMEWORK
                          Performance
     Design              Indicators and                Monitoring                  Assumptions
    Summary                 Targets                    Mechanisms                   and Risks                    Achievements

Goal
Promote              Increased financial          BOL economic reports        There is political               M2/GDP increased
sustainable growth   depth as indicated by        and official banking        commitment to undertake          from 19.4% in 2002 to
through a viable     M2/GDP                       statistics                  governance reforms.              25% in 2008.
financial sector
                     Higher share of private      Bank supervision reports    Balance-of-payments              Share of private
                     sector borrowers in                                      position is manageable.          sector borrowers in
                     portfolio of commercial                                                                   portfolio of
                     banks                                                                                     commercial banks
                                                                                                               (BCEL) increased
                                                                                                               from 41% in 2006 to
                                                                                                               75% in 2007.

                     Increase in asset quality    Quarterly credit reports    Inflationary and currency        Asset quality has
                     and improved                                             outlook is relatively stable     improved markedly in
                     commercial analysis for                                  over the medium term.            SOCBs, with the NPL
                     credit generation                                                                         ratio decreasing from
                                                                                                               some 70% in 2002 to
                                                                                                               less than 5% in 2008.

                     Increased share of           Bank’s internal             There is widespread              Entry and expansion
                     private banking in total     management reports on       consensus on the need to         of private commercial
                     assets                       business activity and       accelerate development           banks has reduced
                                                  customer base               strategy toward private          SOCB share of sector
                                                                              sector development.              assets from more
                                                                                                               than 70% in 2002 to
                                                                                                               less than 60% in
                                                                                                               2009.

Subgoals
Strengthen           Improved capital             Supervision reports         Macroeconomic                    CARs in the SOCBs
macroeconomic        adequacy ratios                                          management on the fiscal         have improved
resiliency to cope                                                            side improves.                   markedly, from close
with bank                                                                                                      to −100% in 2003 to
insolvency                                                                                                     5.7% in 2008 in the
                                                                                                               case of BCEL.
                     Strengthened                 Annual external audits      Capacity of supervision
                     transparency of bank         Quarterly credit reports    authorities improves.
                     and enterprise
                     operations

                     Reduction in NPLs in         Interest rate monitoring    SOCBs are able to take           Regular external
                     portfolio of banks to        statistics from BOL         action against politically       audits of SOCBs and
                     commercially                                             strong borrowers.                stricter BOL reporting
                     sustainable levels                                                                        requirements have
                                                                                                               been complied with
                                                                                                               by SOCBs.

                     Reduced risk premium         Supervision reports of      Government dedicates the         NPL ratios for BCEL
                     on local currency assets     BOL, financial reports of   best people to the top           and LDB reached
                                                  foreign branches and        management positions.            historic lows in 2008,
                                                  SOCBs                                                        with BCEL at 1.48%
                                                                                                               and LDB at 5%.
                     Maintenance of               ADB and other IFI review    High inflow of technical         BCEL reports an
                     adequate liquidity cover     missions                    assistance is well               unaudited NPL ratio
                     for foreign exchange                                     managed and efficiently          of 0.7% for 2009.
       18       Appendix 1



                              Performance
     Design                  Indicators and             Monitoring                  Assumptions
    Summary                     Targets                 Mechanisms                   and Risks             Achievements

                         deposits                                              deployed.

Develop                  Predictability and        Number of NPL cases         There is increased
commercial               certainty in the          resolved through court      reliance on court
environment for          enforcement of loan       system                      resolution of cases of
banking and              contracts                                             default.
financial
sector outreach

                         Increased share of        Monetary survey of          All stakeholders
                         private bank lending in   banking and rural finance   increasingly accept
                         the economy               and microfinance            multiple models of
                                                   institutions                outreach in provincial
                                                                               areas.

                         Increased proportion of   Monetary survey of
                         population with access    banking and rural finance
                         to sustainable and        and microfinance
                         reliable financial        institutions
                         services

Purpose/
Objective
Support the healthy      High overall CAMELS       Supervision reports and     BOL, MOF, MOJ, and
parts of the financial   rating of SOCBs and       reports on compliance       SOCBs are committed to
system and remove        increased share of        with governance             devoting resources and
or reduce the            banking carried out by    agreements                  attention to daily
harmful parts so as      non-SOCBs                                             implementation.
not to crowd out
good borrowers

Strengthen internal      Increased transparency    Performance monitoring      Human capacity-building
governance in the        in reporting and          reports of BFSD             program is well
SOCBs by                 compliance with                                       coordinated with
introducing              performance targets in    Credit files of SOCBs       restructuring activities.
corporate                governance agreements     with verification by
accountability                                     external auditors

Induce credit            Development of            Reports of ECC              NPL resolution is
culture by ensuring      commercial court                                      supported at highest
that formal              system with               Monitoring system for       levels of government.
governance               strengthened legal        judicial strengthening
structures are           framework and
applied                  streamlined procedures    ADB review missions
                         and strengthened
                         enforcement mechanism     External audit reports

Apply commercial                                   Quarterly BRIC reports      IFI coordination remains
principles to APB        Strategic plan of APB,                                strong and efficient.
operations to            which shows               Compliance with credit
remove distortions       commercial approach to    policies requiring
in rural finance         planning and good         financial statement
sector                   corporate governance in   analysis
                         policies and procedures
Ensure greater                                     Legal framework and         BOL and SOCB have the
access to financing      Better financial          operational registry        will and capacity to
by creditworthy          disclosure for bankable   system                      provide training for
                                                                                                           Appendix 1   19


                            Performance
     Design                Indicators and                Monitoring                 Assumptions
    Summary                   Targets                    Mechanisms                  and Risks                   Achievements

private sector          projects                                               borrowers in the
borrowers                                                                      preparation of accurate
                                                                               financial statements
                        Secured transactions
                        system                                                 Technical assistance is
                                                                               available and there is
                                                                               consensus on an action
                                                                               plan.

I. Restructuring the Banking Sector and SOCBs

A. Sector Restructuring

Consolidate SOCBs       Liquidation of one SOCB     Notice affecting           Design of plan for fixed
                        through 6-month             de-licensing and           assets, branch, and staff
                        consolidation and           cessation of activities    rationalization is
                        rationalization process                                satisfactory.

                        Reconstitution of           Notice and board           Adequate mitigation
                        branches and branch         decisions affecting        measures in case of staff
                        management for new          reconstitution of          retrenchment are in place.
                        bank                        branches and
                                                    management teams

Improve the             Amendments to Decree        New decree law and         There is government
competitive             Law on Commercial           revised articles of        consensus on the role and
environment for all     Banks promoting good        agreement for SOCBs        timing of foreign bank
banks                   banking, good               that demonstrate           entry into Vientiane and
                        governance, and a           compliance                 the provinces.
                        competitive framework
                        for all banks

Improve     strategic   Financial sector strategy   Adopted financial sector   There is government-wide
planning                for 2006–2010 using         strategy                   and IFI consensus on the
                        inputs from banking,                                   timing and sequencing of
                        rural finance,                                         various policy reforms.
                        microfinance, and other
                        subsectors


B. Operational Restructuring of SOCBs

Establish boards        New boards of directors     MOF notice identifying     Qualified candidates are
and management          (BODs), including full-     new BOD chair and          available for the positions
of new SOCB and         time chairs, of the         managing directors for     and accept them.
BCEL                    SOCBs, and managing         the two SOCBs
                        directors

                        Board appointment of        Board notice identifying   Qualified candidates are
                        qualified deputy            deputy managing director   available for the positions
                        managing directors and      and branch management      and accept them.
                        branch management           for the two SOCBs

Set up a                Yearly governance           Signed governance          There is consensus on
restructuring           agreements with each        agreements                 and acceptance of
framework               SOCB,a which include                                   performance targets and
                        updated performance                                    other provisions requiring
      20       Appendix 1



                             Performance
     Design                 Indicators and           Monitoring                   Assumptions
    Summary                    Targets               Mechanisms                    and Risks               Achievements

                     targets for the new                                     new governance policies
                     SOCB and BCEL for                                       and procedures.
                     each year based on
                     external audits of
                     previous performance
                     and future corporate
                     strategies

Hire foreign         IBAs on contract for       Contract, terms of           IBAs have acceptance
advisers             3 years                    reference, and work plan     and are able to transfer
                                                agreed on by IBAs and        knowledge, taking the
                                                BOL                          Lao PDR culture and
                                                                             traditions into account.

Introduce a social   Measures to mitigate       Mitigation plan in case of   Stakeholders can achieve
safety               adverse effects in the     retrenchment, and            consensus on an
net                  event of staff             quarterly BRIC reports on    acceptable plan given its
                     retrenchment               retrenchment activities      timing, sequencing, and
                                                                             cost.



C. Financial Restructuring Plan

Resolve NPLs         Resolution of all NPLs     BRIC monitoring system       The system can support
                     from 2000–2002, of         and quarterly reports        NPL resolution activities.
                     which KN90 billion is in   backed by SOCB
                     cash collection            documentation of             There is political will and
                                                collections through          high-level support for
                                                ledger reports, case         collection from connected
                                                dispensation notices, and    borrowers.
                                                other correspondence
                                                regarding NPL resolution

Institute            MOF provision of           Performance reports          MOF fiscal framework
government bond      government securities in   indicating satisfactory      remains intact to
injection            four equal tranches of     compliance with              accommodate interest
for pre-2000         KN120 billion each to      governance agreements        payment of government
NPLs                 compensate for pre-        and performance targets      securities.
                     2000 NPLs, provided
                     that performance targets   MOF-issued
                     for the bank under the     nontransferable,
                     governance agreements      nondiscountable
                     have been met              government securities

Compensate           Once the branch            Board and BOL notices        MOF fiscal framework
new bank             network for the new        indicating new branch        remains intact to
for managing LMB     SOCB has been              organization and             accommodate interest
NPLs                 determined and new         management                   payment of government
                     branch managers                                         securities.
                     appointed, MOF             MOF-issued
                     recapitalization of the    nontransferable,
                     new SOCB                   nondiscountable
                     proportionate to LMB’s     government securities
                     deficiency in performing
                     loans relative to
                     deposits, estimated at
                                                                                                          Appendix 1   21


                          Performance
     Design              Indicators and                Monitoring                   Assumptions
    Summary                 Targets                    Mechanisms                    and Risks                  Achievements

Seek                 KN154 billion                Board-approved capital       Banking environment
nongovernment                                     buildup plan with specific   develops significantly to
sources of           Recapitalization plan        reference to search for      attract private sector
capital              that includes the            strategic investor           investors into the
                     potential strategic                                       domestic financial sector.
                     investor

                     SOCB attainment of
                     regulatory capital
                     adequacy requirements
                     within an agreed period,
                     with the investor’s help

D. Prudential Supervision and Program Oversight

Provide program      Policy and                   BOL-established BRIC         Higher authorities devote
oversight            implementation units         chaired by deputy            sustained time and
                     charged with overseeing      governor, and PIU            attention to key program
                     the program                  charged with overseeing      decisions.
                                                  the program

                                                  Off-site supervision
                                                  reports

Provide BOL          Adequate off-site            At least two on-site         BFISD has the capacity
oversight            monitoring system in         inspection reports for       and political ability to
                     place for timely and         each SOCB                    enforce compliance with
                     accurate financial                                        basic reporting and
                     reporting to BOL’s                                        disclosure requirements.
                     BFISD, coupled with on-
                     site inspections


II. Strengthening the Legal Environment and Enabling Judicial Oversight

Strengthen           Commercial division of       Establishment decision       Supreme Court and
commercial court     the court with a set of                                   National Assembly
system               rules and procedures of      Adopted rules and            provide backing.
                     court specifying (i)         procedures
                     jurisdiction, (ii)                                        There is grassroots
                     commercial judges, and       Confirmation of 18           support particularly in the
                     (iii) rules and procedures   judges as designated         provinces for the
                     that limit appeals to                                     jurisdiction and authority
                     Supreme Court                Record of at least 10        of the new court.
                                                  cases involving NPLs
                                                  heard by commercial          Qualified judges are
                                                  division of the              available.
                                                  court
                                                                               At least 10 cases are
                                                                               appropriate, from a
                                                                               commercial and legal
                                                                               standpoint, for hearing by
                                                                               the commercial
                                                                               court.

                     Intensive training for at    Certification of training    Good trainers who can
                     least 15 judges              completion by trainers for   teach complex concepts
       22       Appendix 1



                              Performance
     Design                  Indicators and              Monitoring                  Assumptions
    Summary                     Targets                  Mechanisms                   and Risks                Achievements

                       designated as specialist     all 15 judges and           to local judges can be
                       commercial judges and        enforcement                 located.
                       for designated
                       enforcement officers

                       Credible structured          Documentation of at least   Involuntary legal/judicial
                       voluntary system             two cases of resolution     system poses a credible
                                                    through rules-based         threat.
                                                    system

Strengthen             Empowered                    Notice of clarification     Coordination and
enforcement            enforcement department       regarding the               cooperation with the
                       of the commercial            enforcement jurisdiction    Ministry of Security results
                       division of court with at    of the enforcement          in the provision of the
                       least 5 police officers      division                    police officers and the
                                                                                requisite clarification of
                                                                                enforcement power.

Institute AML          Officers instructed to       Seconded police officers    Technical assistance is
regime                 assist the department in                                 available and BOL and
                       enforcement-related                                      SOCBs are able to
                       activities                                               introduce detailed anti–
                                                                                money laundering
                                                                                procedures at their stage
                                                                                of development.

                       AML law and operational      Issue and publication of
                       FIU functions in place       FIU’s first report to the
                       for the banking sector       BOL governor

                                                    Information sharing and
                                                    cooperation
                                                    arrangements between
                                                    the FIU and regulatory
                                                    institutions in the Asia
                                                    and Pacific region
III. Facilitating Private Sector Access to Credit

Strengthen             Revised Secured              Passage of legislation      There is consensus on
legislative            Transactions Law and         that strengthens            secured transactions
framework for          related laws to extend,      enforcement and allows      enforcement procedures
secured                clarify, and strengthen      direct enforcement by       in MOJ, BOL, and
transactions           the ability of a lender to   lender                      National Assembly.
                       take effective security
                       over collateral                                          Funding is available.

                                                                                The legal framework is in
                       Fully computerized           Reports from                place.
                       secured transactions         computerized registry
                       registry in place

Develop                Use of standard              Management and board        The systems are accepted
financial reporting,   templates for                policies indicating the     by private banks and
accounting,            loan/security documents      required universal use of   understood by state
and auditing           by banks and financial       standard templates          banks.
systems                reporting by corporate
                       borrowers
                                                                                                         Appendix 1     23


                           Performance
     Design               Indicators and                Monitoring                  Assumptions
    Summary                  Targets                    Mechanisms                   and Risks                 Achievements

IV. Developing Rural Finance and Microfinance
Bring about          Diagnostic review,         Vision adopted by Prime        There is consensus on the
institutional        financial audit, corporate Minister, diagnostic           speed and timing of the
restructuring of APB vision and operational     review, audit report, and      introduction of commercial
                     restructuring              accepted restructuring         practices.
                     plan consistent with the   plan discussed at
                     corporate vision for APB workshops and seminars

Establish the APB      All necessary               Instructions including      An alternative, transparent
policy environment     instructions required to    those allowing APB          budget mechanism for
                       enable APB                  management to freely set    carrying out policy lending
                       management autonomy,        interest rates on loans     formerly carried out by
                       market orientation, and     and deposits, and           APB is successfully
                       self-sustainability under   subjecting all future       designed.
                       an appropriate              lending to commercial
                       prudential regulation       criteria
                       framework

Establish the MFI      Vision and strategy for     Regulatory framework        There is grassroots and
policy                 rural finance and           through notices or          political acceptance of
environment            microfinance sector         amendments to banking       APB’s new commercial
                                                   law, APB charter            mandate and lending
                                                                               policies.

                       Regulatory framework        Adopted paper identifying   There is grassroots and
                       for MFIs, enhanced          impediments to              political acceptance of the
                       regulations for savings     sustainable,                new commercial mandate
                       and credit unions, and      market-oriented rural       and lending policies for
                       operational examples of     finance and                 rural finance and
                       best-practice MFIs          microfinance, and           microfinance.
                                                   time-bound action plan
                                                   for removing those
                                                   impediments

                                                   Regulations based on a      BOL has the capacity to
                                                   participatory process,      regulate and supervise
                                                   allowing for multiple MFI   rural finance and
                                                   models and products,        microfinance institutions.
                                                   interest rate autonomy,
                                                   and private ownership

                                                  Three commercially
                                                  oriented member-owned
                                                  pilot savings and credit
                                                  unions
ADB = Asian Development Bank; APB = Agriculture Promotion Bank; BOL = Bank of the Lao PDR; BFISD = Bank and Financial
Institutions Supervision Department; BCEL = Banque pour le Commerce Extérieur Lao; BRIC = bank restructuring implementation
committee; CAMELS = capital adequacy, asset quality, management quality, earnings, liquidity, sensitivity to market risk; ECC =
external collection committee; FIU = financial intelligence unit; IBA = international banking adviser; IFI = international financial
institution; LMB = Lao May Bank; M2/GDP = broad money/gross domestic product; MFI = microfinance institution; MOF = Ministry of
Finance; MOJ = Ministry of Justice; NPL = nonperforming loan; SOCB = state-owned commercial bank.
a
  Including its board of directors and management.
24       Appendix 2


                          STATUS OF COMPLIANCE WITH LOAN COVENANTS
First-Tranche Release Conditions                                                                Status of Progress
I. Restructuring the Banking Sector and SOCBs
A. Sector Restructuring
1-1 On behalf of MOF, BOL to adopt time-bound action plan and begin transfer of           Complied with.
assets and liabilities of LMB and LXB to a new state-owned commercial bank
(SOCB), in order to reduce the number of operational SOCBs from 3 to 2.

1-2 BOL to issue instruction, which, for the existing branches of foreign banks,          Complied with.
extends the compliance date for new capital requirements to end-2005.

1-3 MOF to issue instruction that (i) all lending be carried out on a commercial basis,   Complied with.
(ii) management be free to set interest rates on loans and deposits, (iii) boards
appoint deputy managing directors and branch managers, (iv) and SOCBs
centralize credit decisions in head office.

1-4 BOL to confirm joint BOL-ADB-WB Financial Sector Note.                                Complied with.

B. Operational Restructuring of SOCBs
1-5 MOF to appoint the boards of directors (BODs), including full-time chairpersons,      Complied with.
of the SOCBs, who meet qualifications under the law, and managing directors
according to a predefined selection process,

1-6 MOF and BOL to approve governance agreements for each SOCB which                      Complied with.
include (i) performance targets for the new SOCB and BCEL for 2003, (ii) oversight
and review methodology, (iii) agreed-upon time frame for implementation, and
(iv) interim operational policies to be implemented until BOD approval of
comprehensive operational policies.

1-7 BOL to ensure that an international banking adviser is selected for each SOCB.        Complied with.

1-8 In the event of potential staff retrenchment personnel department of BOL to           Complied with.
adopt an action plan to develop a mitigation plan for bank employees.

C. Financial Restructuring Plan
1-9 BOL to ensure that (i) the external collection committee (ECC) is established,        Complied with.
(ii) the mandate of ECC is approved, and (iii) ECC undertakes a case-by-case
analysis of each NPL account over KN200 million.

D. Program Monitoring and Prudential Supervision
1-10 BOL to establish BRIC and program implementation unit (PIU) charged with             Complied with.
oversight of the Banking Sector Reform Program.

1-11 BOL to ensure SOCBs provide signed portfolio classification for 2001 based on        Complied with.
Regulation BOL98 classification and provisioning requirements
(completed March 2002).
II. Strengthening the Enabling Legal Environment and Judicial Oversight
1-12 MOJ to conduct review of judicial weaknesses in loan enforcement and hold            Complied with.
workshop to disseminate key findings and recommendations.




Second-Tranche Release Conditions                                                               Status of Progress
I. Restructuring the Banking Sector and SOCBs
A. Sector Restructuring
1-1 On behalf of MOF, BOL to finalize the liquidation of LMB and LXB.                     Complied with.

1-2 BOL to submit for consideration by the Standing Committee of the National             Complied with. BOL drafted a
                                                                                                   Appendix 2         25



Second-Tranche Release Conditions                                                                Status of Progress
Assembly, necessary amendments to Decree Law for Commercial Banks                        new law on commercial banks
which promote (i) good governance practices; (ii) good banking principles in line with   and this was passed into law by
the Basle Core Principles; and (iii) equal opportunities for the financial sector.       the National Assembly on
                                                                                         26 December 2006. ADB
                                                                                         provided substantive comments
                                                                                         on the draft and participated in the
                                                                                         second workshop in early
                                                                                         December 2006. The commercial
                                                                                         banking law is a substantial
                                                                                         improvement on the previous
                                                                                         legislative framework. It promotes
                                                                                         good governance practices
                                                                                         including mandating banks to
                                                                                         establish a governance committee
                                                                                         and requiring directors to have
                                                                                         banking experience. Prudential
                                                                                         regulations are in line good with
                                                                                         Basle Core Principles. The law
                                                                                         provides for a level playing field in
                                                                                         the banking sector by permitting
                                                                                         majority foreign ownership of
                                                                                         banks.
B. Operational Restructuring of SOCBs
1-3 (a) BOL MOF to ensure that MDs nominate, and boards appoint, qualified               (a) Complied with. New, qualified
deputy managing directors and branch management according to predefined                  management appointed to two
selection process for both SOCBs.                                                        SOCBs. Selection criteria
                                                                                         included management experience
    (b) Upon determining the branch network for the new SOCB and the                     and qualifications in the banking
appointment of the new branch managers, MOF to provide the new SOCB with                 sector and no criminal conviction.
recapitalization in an amount equivalent to LMB’s nonperforming loans for loans          For LDB the MOF appointed a
made between 1 January 2000 and 31 December 2002, currently estimated at                 new managing director and
KN154 billion.                                                                           deputy managing directors on
                                                                                         16 January 2003, and 18 branch
                                                                                         managers on 4 June 2003. As
                                                                                         stipulated in the amended
                                                                                         governance agreement of 2006,
                                                                                         the MOF nominated the chairman
                                                                                         of the LDB board of directors. An
                                                                                         MOF official was appointed to the
                                                                                         board on 24 August 2006
                                                                                         (Appointment Letter 1874/MOF).
                                                                                         For BCEL the MOF appointed the
                                                                                         managing director and the deputy
                                                                                         managing directors on
                                                                                         16 January 2003 and 17 branch
                                                                                         managers on 10 November 2003.
                                                                                         Further management changes
                                                                                         were made in 2005.
                                                                                         (b) See condition 5.
1-4 BOL to ensure that (i) the provisions of the governance agreements are strictly      Partially complied with as of
adhered to; and (ii) MOF, BOL, and the SOCBs agree in writing on the revised             2004; complied with by 2006.
governance agreements, including the performance targets for 2004 based on 2003          The first GAs were complicated
external audits; and (iii) in case of noncompliance with performance targets,            and not fully understood by
sanctions outlined in the governance agreements, including a postponement of bond        management of the two SOCBs.
injection and BOL pre-approval of credits and other risk decisions over                  Consequently, the GAs were
KN200 million, are effected in a timely manner, as required.                             revised in 2006 to better reflect
                                                                                         the capacities of two SOCBs.
                                                                                         Since 2004, two SOCBs have
                                                                                         demonstrated significant progress
26       Appendix 2




Second-Tranche Release Conditions                                                               Status of Progress
                                                                                        in understanding and adhering to
                                                                                        the GAs and the financial targets
                                                                                        set out in them.
                                                                                        The first KPMG GA compliance
                                                                                        report (1 November 2004) noted
                                                                                        partial compliance with the GAs in
                                                                                        2003. The E&Y GA compliance
                                                                                        report also noted partial
                                                                                        compliance in financial year 2004.
                                                                                        The E&Y GA compliance reports
                                                                                        for 2005 and 2006 showed
                                                                                        substantial compliance by BCEL
                                                                                        and LDB. The BRIC performance
                                                                                        assessment reports for the two
                                                                                        banks based on the audit reports
                                                                                        confirmed BCEL and LDB
                                                                                        compliance with the 2006 GAs.
1-5 BOL to ensure that the mitigation plan agreed to by ADB and developed in            Substantially complied with.
consultation with stakeholders, is in place, prior to undertaking any staff             BCEL did not make any staff
retrenchment.                                                                           redundant. In 2004, the newly
                                                                                        merged LDB made redundant 115
                                                                                        staff as part of its restructuring
                                                                                        plan. The plan was not submitted
                                                                                        to ADB before its implementation.
                                                                                        However, severance payments
                                                                                        were made to redundant staff in
                                                                                        accordance with the social
                                                                                        security law, which was adopted
                                                                                        following technical assistance
                                                                                        from the International Labor
                                                                                        Organization in the 1990s.
C. Financial Restructuring Plan
1-6 BOL to ensure that there is resolution of at least an aggregate amount of KN120     Complied with. According to
billion of SOCBs’ NPLs including KN60 billion through cash collection for loans         audited financial statements of
made between 1 January 2000 and 31 December 2002                                        2003 and 2004, the cumulative
                                                                                        NPL resolution up to the end of
                                                                                        2004 was KN359 billion (BCEL
                                                                                        KN114 billion, LDB KN245 billion).
                                                                                        Of these NPL resolutions, cash
                                                                                        collection was KN128.6 billion.
                                                                                        BCEL and LDB wrote off all
                                                                                        remaining stock and flow of NPLs
                                                                                        from their books on
                                                                                        December 2006. The full
                                                                                        cleansing of their balance sheets
                                                                                        represents an important symbolic
                                                                                        milestone for the banking sector.

1-7 MOF to provide government securities of up to KN120 billion to the SOCBs for        Complied with. Initially the bond
each of the following periods: (i) around March 2003, following reconfirmation of the   recapitalization made slow
governance agreements; (ii) prior to October 2003, provided that the June 2003          progress primarily because of the
performance targets for the bank under the governance agreements have been met;         difficult fiscal situation of the
and (iii) around May 2004, provided that the December 2003 performance targets          government. In 2005, the MOF
for the bank under the governance agreements have been met.                             had proposed and ADB concurred
                                                                                        with a restructuring of the
                                                                                        schedule for the issue of
                                                                                        recapitalization bonds in BCEL
                                                                                        and LDB (MOF letter 1617 of
                                                                                        26 September 2005). The
                                                                                                  Appendix 2       27



Second-Tranche Release Conditions                                                               Status of Progress
                                                                                        government has issued and
                                                                                        placed bonds in the following
                                                                                        amounts:
                                                                                        1. Issued bond instruction in
                                                                                        February 2006 with actual
                                                                                        placement in June 2006. BCEL
                                                                                        KN128.7 billion, LDB 71.3 billion.
                                                                                        2. Issued bond instruction in
                                                                                        February 2007, actual placement
                                                                                        on June 2007. BCEL KN98 billion,
                                                                                        LDB KN52 billion.
                                                                                        3. The remaining bond issuance
                                                                                        (KN150 billion) took place under
                                                                                        the third tranche in 2009.
1-8 BOL to ensure that the SOCBs develop the capital buildup plan which includes        Complied with. BCEL and LDB
the potential strategic investor to enable the SOCBs to reach capital adequacy          developed capital buildup plans to
requirements as determined by BOL regulations, within an agreed-upon time frame.        reach the prudential CAR ratio of
                                                                                        8% by 2009. The plans were
                                                                                        approved by the boards of two
                                                                                        SOCBs in May 2007. ADB
                                                                                        provided training to staff of two
                                                                                        SOCBs in capital buildup planning
                                                                                        and financial simulation
                                                                                        techniques for drafting the plans.
                                                                                        ADB also provided comments on
                                                                                        the draft plans, which were
                                                                                        incorporated in the plans. The
                                                                                        simulations showed that
                                                                                        placement of bonds and payment
                                                                                        of interest on the bonds was
                                                                                        important in ensuring that the two
                                                                                        SOCBs reached 8% CAR by
                                                                                        2009.
D. Program Monitoring and Prudential Supervision
1-9 BOL to ensure (i) the Bank Financial Institutions Supervision Department            Complied with. BOL carries out
(BFISD) undertakes at least two on-site inspection visits to each SOCB to enhance       on-site inspections every
the reliability of the financial reports and confirm compliance with interim            6 months. In addition, quarterly
performance measures; and (ii) adequate off-site monitoring system is in place for      performance evaluation visits are
timely and accurate financial reports.                                                  made to each SOCB.
                                                                                        Off-site monitoring includes
                                                                                        assessing financial statements of
                                                                                        the SOCBs incorporating findings
                                                                                        of external auditors, and requiring
                                                                                        banks to provide data on loan
                                                                                        portfolio, among other items.
1-10 MOJ, in consultation with the People’s Supreme Court, to ensure that               Complied with and ongoing.
commercial division of the court is established within the court system with a set of   (a) and (b) The Law on the
rules and procedures of court issued by the People’s Supreme Court specifying           People’s Supreme Court was
(a) the division’s jurisdiction by defining “commercial transaction cases”; (b) that    amended on Oct 2003 to give
commercial transaction cases in the commercial division will only be presided over      statutory recognition to the
by specialist commercial judges; (c) rules and procedures for enforcement of            commercial division of the
decisions in the commercial division; and (d) rules limiting appeals from the           People’s Supreme Court, the
commercial division to only the People’s Supreme Court.                                 appellate courts, and the people’s
                                                                                        provisional and metropolitan
                                                                                        courts. See
                                                                                        http://www.na.gov.la/eng/laws/pub
                                                                                        _adm/ppl’s_court_law.pdf.,
                                                                                        and under art. 48 and 49 of
                                                                                        Amending Law on Civil
28       Appendix 2




Second-Tranche Release Conditions                                                               Status of Progress
                                                                                        Procedures.
                                                                                        (c) Rules and procedures that
                                                                                        ensure transparent, timely,
                                                                                        efficient, and effective process
                                                                                        have been drafted and are
                                                                                        awaiting approval as part of
                                                                                        amendments to the Law on Civil
                                                                                        Procedures. The Amending Law
                                                                                        on Enforcement of Civil
                                                                                        Judgments and the Amending
                                                                                        Law on Civil Procedures were
                                                                                        passed by the National Assembly
                                                                                        on 15 May 2004 and proclaimed
                                                                                        by the President on
                                                                                        14 June 2004.
                                                                                        (d) The Law on the People’s
                                                                                        Supreme Court was amended on
                                                                                        October 2003 to incorporate the
                                                                                        appellate courts and appeal
                                                                                        procedures, but there remains an
                                                                                        avenue for a party to appeal to
                                                                                        the National Assembly.
1-11 MOJ to ensure that intensive training in (a) commercial practices has been         (a) Complied with. Fifteen judges
completed for at least 15 judges who will be classified as specialist commercial        were trained in commercial
judges for the commercial division of the court; and (b) enforcement procedures for     transactions under TA 4002.
enforcement officers has been undertaken.                                               Several of these judges later
                                                                                        moved to other offices. MOJ and
                                                                                        ADB felt that the initial number of
                                                                                        15 persons was not sufficient to
                                                                                        create a critical mass with
                                                                                        knowledge of commercial
                                                                                        transactions. An additional 48
                                                                                        judges and judges’ assistants
                                                                                        were provided with training in
                                                                                        2007 under TA 4770.
                                                                                        (b) Complied with. Enforcement
                                                                                        officers were trained in
                                                                                        procedures under ADB TA 4002.
1-12 MOJ to coordinate with the Ministry of Security, to ensure (i) the enforcement     Complied with. The Department
department of MOJ is empowered to enforce decisions of the commercial division of       of Enforcement of MOJ
court, and (ii) at least 5 police officers are instructed to assist the enforcement     produced a manual on
department in enforcement activities relating to decisions of the commercial division   enforcement procedures.
of court.                                                                               Mission reviews confirmed with
                                                                                        stakeholders that the Ministry of
                                                                                        Security provides police officers to
                                                                                        assist the enforcement
                                                                                        department of MOJ, as requested
                                                                                        by the latter.
1-13 BOL to (i) prepare anti–money laundering (AML) legislation and MOJ to submit       Complied with. The BOL drafted
for consideration by the relevant body for approval; and (ii) assume financial          an AML decree and this was
intelligence unit (FIU) functions for the banking sector.                               approved by the PMO on
                                                                                        27 March 2006. Initially BOL had
                                                                                        drafted and endorsed legislation
                                                                                        but the government had decided
                                                                                        on a PMO decree to test the legal
                                                                                        framework of the AML and to
                                                                                        quickly establish the FIU, officially
                                                                                        known as the AMLIU. BOL
                                                                                        assumed the responsibility of
                                                                                               Appendix 2        29



Second-Tranche Release Conditions                                                             Status of Progress
                                                                                     overseeing the AML decree.
                                                                                     Initially the AMLIU was
                                                                                     established as a committee
                                                                                     comprising four senior BOL
                                                                                     officials. In May 2007, BOL
                                                                                     upgraded the committee into a
                                                                                     unit under the governor, with
                                                                                     permanent staff, offices, and a
                                                                                     budget. BOL has issued
                                                                                     guidelines and operating
                                                                                     procedures for reporting
                                                                                     suspicious transactions.
                                                                                     State-owned banks have
                                                                                     developed internal AML
                                                                                     guidelines following training by
                                                                                     Bank Negara Malaysia FIU
                                                                                     technical staff.
III. Facilitating Private Sector Access to Finance
1-15 BOL/MOJ to submit for consideration by the National Assembly, draft             (a) Complied with. The National
amendments to the Secured Transactions Law, Decree on Lease Financing, to            Assembly passed appropriate
clarify the ability of a lender to take effective security over collateral, and to   amendments to the Secured
strengthen the enforcement process, including direct enforcement by lender, and to   Transactions Law in 2005, and
submit relevant draft amendments to designated authorities for approval.             the amended law was proclaimed
                                                                                     by the President on 25 May 2005.
                                                                                     (b) Substantially complied with.
                                                                                     Stakeholder awareness raising is
                                                                                     ongoing. The lease financing
                                                                                     decree was drafted in 2007 and
                                                                                     submitted to the PMO on
                                                                                     8 February 2008. The decree sets
                                                                                     the legal framework for
                                                                                     establishing a leasing company. It
                                                                                     specifies the rights and
                                                                                     obligations of relevant parties to a
                                                                                     leasing agreement. It includes a
                                                                                     conditional self-help provision.
                                                                                     Under Lao PDR law, a decree is
                                                                                     approved by the Prime Minister or
                                                                                     a minister, not the National
                                                                                     Assembly. Usually a decree is
                                                                                     issued in the first instance to test
                                                                                     the appropriateness of the
                                                                                     provisions before the formal
                                                                                     legislation is submitted to the
                                                                                     National Assembly.
1-16 BOL to hold workshops with a view to instructing all banks in Lao to use        Complied with. Under TA 4002,
standard templates for loan and security documents and financial reporting by all    SOCB loan staff were trained in
corporate borrowers.                                                                 standard templates for loan and
                                                                                     security documents and financial
                                                                                     reporting by corporate borrowers.
                                                                                     The templates were modified to
                                                                                     take local accounting practices
                                                                                     into account. With assistance
                                                                                     under TA 4002, BOL held
                                                                                     workshops on loan templates and
                                                                                     documents.
IV. Developing Rural Finance and Microfinance
1-17 APB to adopt and initiate implementation of operational and financial           Complied with. The plan has
restructuring plan consistent with corporate vision.                                 been incorporated into the
30       Appendix 2




Second-Tranche Release Conditions                                                             Status of Progress
                                                                                      GA that was signed on
                                                                                      30 March 2007. The GA specifies
                                                                                      the actions and performance
                                                                                      indicators for implementing the
                                                                                      plan (see section 3.6.1 of the GA).
1-18 MOF/BOL to issue all necessary instructions required to enable APB               Complied with. The government
management autonomy, market orientation, and self-sustainability, including           and APB signed the GA on
instructions that APB management will be allowed to freely set interest rates on      30 March 2007. The GA
loans and deposits, and that all future lending by APB be subject to commercial       incorporates all the necessary
criteria.                                                                             instructions and obligations of
                                                                                      each party to the GA, including
                                                                                      financial targets. Capacity at
                                                                                      smaller branches is lacking and
                                                                                      hence the delegation of loan
                                                                                      approval authority is being
                                                                                      phased in.
1-19 BOL to license three commercially oriented member-owned pilot savings and        Complied with. Licenses have
credit unions (SCUs) following international best practice and disseminate            been issued to three SCUs.
experience to stakeholders.                                                           Workshops were held in 2007 to
                                                                                      disseminate information, and the
                                                                                      experience of the three SCUs has
                                                                                      been analyzed.



Third-Tranche Release Conditions                                                             Status of Progress
I. Restructuring the Banking Sector and SOCBs
A. Sector Restructuring
1-1 BOL to prepare and adopt financial sector strategy covering 2006–2010, using      Complied with. BOL prepared
inputs from banking sector, rural, microfinance, and other subsectors.                and endorsed in February 2009
                                                                                      its financial sector strategy (2008–
                                                                                      2020). Extensive consultations
                                                                                      within government and among
                                                                                      stakeholders were carried out in
                                                                                      2008. The ADB mission provided
                                                                                      comments and input to the
                                                                                      financial sector strategy. On
                                                                                      23 February, BOL submitted its
                                                                                      financial sector strategy to the
                                                                                      PMO for higher-level approval.
                                                                                      While PMO approval was not
                                                                                      required under this core condition,
                                                                                      BOL and stakeholders believe
                                                                                      that PMO approval will provide it
                                                                                      with necessary political support
                                                                                      for implementing the strategy, as
                                                                                      related agencies will be involved
                                                                                      in implementation. The strategy
                                                                                      includes policy priorities and
                                                                                      actions in six areas including the
                                                                                      banking sector, nonbank financial
                                                                                      institutions, microfinance, the
                                                                                      money market, and the banking
                                                                                      sector infrastructure consistent
                                                                                      with the third-tranche release
                                                                                      condition.
B. Operational Restructuring of SOCBs
1-2 BOL to ensure that (i) the provisions of the governance agreements are strictly   Complied with. The 2007
adhered to; (ii) MOF, BOL, and the SOCBs agree in writing on the revised              financial accounts and GAs were
                                                                                                    Appendix 2        31



Third-Tranche Release Conditions                                                                   Status of Progress
governance agreements, including performance targets for 2005 based on 2004               externally audited by E&Y. The
external audits; and (iii) in the case of noncompliance with performance targets, the     E&Y GA compliance reports for
sanctions outlined under the governance agreements, including a postponement of           2007 show substantial
bond injection and BOL pre-approval of credits over KN200 million, are effected in a      compliance by BCEL and LDB
timely manner, as required.                                                               with the GA targets. The BRIC
                                                                                          performance assessment reports
                                                                                          for the two banks based on the
                                                                                          audit reports confirm BCEL and
                                                                                          LDB compliance with the 2007
                                                                                          GA. Notable achievements have
                                                                                          been the strong improvement in
                                                                                          NPLs, with NPLs based on
                                                                                          international accounting
                                                                                          standards (IAS 39) now at 1.7%
                                                                                          for BCEL and 5.9% for LDB. The
                                                                                          BCEL CAR has turned positive for
                                                                                          the first time in more than 10
                                                                                          years, with shareholders’ equity
                                                                                          valued at KN88 billion. LDB’s
                                                                                          CAR has also improved,
                                                                                          increasing from equity of −KN197
                                                                                          billion in 2006 to −KN109 billion in
                                                                                          2007. Further improvements in
                                                                                          equity have been made with the
                                                                                          placement of final recapitalization
                                                                                          bonds in December 2008–
                                                                                          January 2009.
C. Financial Restructuring Plan
1-3 BOL to ensure that there is resolution of any remaining NPLs identified in the        Complied with, according to the
audit of the 2002 accounts of the SOCBs, including an additional KN30 billion             audited financial statements of
through cash collection since July 2004.                                                  2007.

1-4 MOF to provide government securities of up to KN120 billion to the SOCBs,             Substantially complied with
provided that the performance targets for each bank under the governance                  and ongoing. The minister of
agreements in the review period up to December 2004 have been met.                        finance has issued a legal
                                                                                          instruction to the Treasury to
                                                                                          place the final recapitalization
                                                                                          bonds of KN150 billion into BCEL
                                                                                          and LDB (decision of
                                                                                          27 February 2009). From past
                                                                                          experience, it will take a few
                                                                                          months for the Treasury to place
                                                                                          the bonds in the two banks and
                                                                                          for the banks to make the
                                                                                          accounting changes in their
                                                                                          balance sheets. In all, KN500
                                                                                          billion in recapitalization bonds
                                                                                          will have been issued, bringing
                                                                                          the BCEL’s CAR close to the
                                                                                          BOL’s prudential requirement of
                                                                                          8%, and turning LDB’s CAR
                                                                                          positive, thereby achieving the
                                                                                          rationale and objectives of the
                                                                                          program.
1-5 BOL, on behalf of MOF, to actively explore possibilities of strategic investors for   Complied with. BOL has looked
one SOCB and report to ADB on process and prospects.                                      for strategic investors for the
                                                                                          BCEL and LDB. In 2006 it entered
                                                                                          into tentative discussions with the
                                                                                          ANZ group on possible equity
32       Appendix 2




Third-Tranche Release Conditions                                                          Status of Progress
                                                                                 divestment and other forms of
                                                                                 cooperation in BCEL. However,
                                                                                 the discussion did not develop
                                                                                 into strategic investments in the
                                                                                 SOCBs. The ANZ group later
                                                                                 purchased 60% equity in the
                                                                                 much smaller Vientiane
                                                                                 Commercial Bank. The
                                                                                 government’s approach is now to
                                                                                 improve the net worth of the
                                                                                 banks before they enter into
                                                                                 a strategic arrangement with
                                                                                 another bank, thereby producing
                                                                                 larger proceeds for the
                                                                                 government. With improvement in
                                                                                 BCEL’s financial position, the
                                                                                 government is exploring the
                                                                                 possibilities for strategic investors
                                                                                 with the BCEL. The government’s
                                                                                 strategy for the BCEL has two
                                                                                 pillars. The first is business
                                                                                 development. BOL and BCEL are
                                                                                 negotiating with French bank
                                                                                 Banque Populaire for the
                                                                                 establishment of a joint-venture
                                                                                 bank to serve the retail market.
                                                                                 The second pillar of the BCEL’s
                                                                                 strategy involves the medium-
                                                                                 term equitization of the bank, with
                                                                                 the end in view of listing some
                                                                                 share of equity on the Lao PDR
                                                                                 stock market once it is
                                                                                 established. As part of its
                                                                                 equitization plan BCEL intends to
                                                                                 explore the possibility of
                                                                                 assistance from a strategic
                                                                                 investor in preparing the bank for
                                                                                 equitization and listing on the
                                                                                 stock market.
D. Program Monitoring and Prudential Supervision
II. Strengthening the Enabling Legal Environment and Judicial Oversight
1-6 Commercial division of the court to have filed at least 10 cases involving   Complied with. The two SOCBs
nonperforming loans.                                                             reported a total of 30 NPL cases
                                                                                 filed at the commercial courts in
                                                                                 2007. This case total was
                                                                                 confirmed by the commercial
                                                                                 court division (commercial
                                                                                 chamber) of the People’s
                                                                                 Supreme Court.
                                                                                 The ANZ Vientiane Commercial
                                                                                 Bank reported that it successfully
                                                                                 foreclosed on five properties
                                                                                 through the commercial chamber.
                                                                                 Copies of commercial chamber
                                                                                 judgments on resolved cases
                                                                                 were provided to an ADB BSRP
                                                                                 review mission in February 2007.
                                                                                 The two largest banks (BCEL and
                                                                                 LDB) have reported improved
                                                                                                Appendix 2       33



Third-Tranche Release Conditions                                                             Status of Progress
                                                                                      access to the courts since 2006
                                                                                      and quality of judgments has also
                                                                                      improved. These have enhanced
                                                                                      confidence in the ability of the
                                                                                      commercial courts to resolve
                                                                                      cases dealing with loan defaults.

1-7 BOL/MOJ to initiate Structured Voluntary System.                                  Complied with. The OEDR at the
                                                                                      MOJ has initiated a structured
                                                                                      voluntary system (mediation and
                                                                                      arbitration) for resolving
                                                                                      commercial disputes. ADB TA
                                                                                      was provided to MOJ to assist it in
                                                                                      developing a manual and
                                                                                      guidelines for arbitration and
                                                                                      mediation services, as well as in
                                                                                      training arbiters and mediators.
                                                                                      OEDR has produced the manual,
                                                                                      which was endorsed by MOJ in
                                                                                      February 2008. It has also
                                                                                      produced application forms for
                                                                                      arbitration and mediation, and
                                                                                      templates for arbitration awards.
                                                                                      In 2008, 38 cases were submitted
                                                                                      for mediation and arbitration at
                                                                                      OEDR. Arbiters are designated by
                                                                                      OEDR. Mediators are selected by
                                                                                      parties under the economic
                                                                                      disputes settlement law (2005).
1-8 FIU to be fully operational in accordance with the AML legislation and to issue   Complied with. AMLIU,
the first report to the Governor of BOL and publish its report in full.               upgraded to department status in
                                                                                      the BOL, has four divisions and a
                                                                                      full-time staff of six. Compliance
                                                                                      officers have been designated in
                                                                                      each commercial bank. AMLIU
                                                                                      joined APG in July 2007. It
                                                                                      participated in the APG annual
                                                                                      meeting in Bali in July 2008 and
                                                                                      presented its first jurisdiction
                                                                                      report at the meeting. AMLIU
                                                                                      produced its first performance
                                                                                      report for 2004–2008 and an
                                                                                      operational plan for 2008–2010.
                                                                                      The report was submitted to the
                                                                                      governor. To support the
                                                                                      operational action plan, a grant of
                                                                                      $250,000 from the Cooperation
                                                                                      Fund for Regional Trade and
                                                                                      Financial Security Initiative, and
                                                                                      administered by ADB, has been
                                                                                      provided to the AMLIU to assist
                                                                                      with capacity development in the
                                                                                      agency. The grant funds were
                                                                                      expected to be mobilized in the
                                                                                      first quarter of 2009.
III. Facilitating Private Sector Access to Finance
1-9 MOF to ensure fully computerized secured transactions registry is in place with   Waived. Under ADB TA that was
linkages to the motor vehicle registry.                                               completed in mid-2007, legal
                                                                                      experts provided assistance to
34      Appendix 2




Third-Tranche Release Conditions                                                         Status of Progress
                                                                                MOJ in drafting an implementing
                                                                                decree for the secured
                                                                                transactions law and a plan for
                                                                                establishing a secured
                                                                                transactions registry. Institutional
                                                                                changes since the formulation of
                                                                                the BSRP meant that the original
                                                                                core condition needed revision. At
                                                                                the time the program was
                                                                                formulated in 2002, MOF was
                                                                                responsible for registering
                                                                                security over state assets
                                                                                (Department of State Asset
                                                                                Management). The land registry
                                                                                was also under the jurisdiction of
                                                                                MOF (land is the major collateral
                                                                                used by banks). This made MOF
                                                                                a logical home for the securitized
                                                                                transaction registry. In 2005, the
                                                                                land registry was transferred out
                                                                                of the MOF to the PMO, making
                                                                                the MOF a less relevant place for
                                                                                a registry. The motor vehicle
                                                                                registry at the Ministry of
                                                                                Transportation has a manual
                                                                                paper registry, although a World
                                                                                Bank project has begun to
                                                                                pilot-test a web-based system.
                                                                                The rollout to provinces will take
                                                                                much longer. For these reasons, it
                                                                                is not possible to link the
                                                                                securitized transaction registry
                                                                                with the motor vehicle registry,
                                                                                nor is the MOF the logical home
                                                                                for it. ADB and the government
                                                                                have agreed to phase in the
                                                                                securitized transactions registry.
                                                                                In the interim, ADB and BOL have
                                                                                agreed to use the CIB housed at
                                                                                BOL to allow firms to search for
                                                                                collateral-backed loans. With ADB
                                                                                assistance under the private
                                                                                sector and SME development
                                                                                project, the CIB has been
                                                                                upgraded from a manual,
                                                                                paper-based system to a
                                                                                web-based, protected system that
                                                                                allows commercial banks to
                                                                                submit and search for collateral
                                                                                on loans.
IV. Developing Rural Finance and Microfinance
1-10 APB to implement the time-bound measures outlined in its operational and   Complied with. Under the
financial restructuring plan as of June 2005.                                   second tranche, the GA signed by
                                                                                APB and the Government of the
                                                                                Lao PDR constitutes the
                                                                                restructuring plan. Key
                                                                                restructuring measures completed
                                                                                in 2007 and 2008 were: (i) APB
                                                                                department mandates, job
                                            Appendix 2       35



Third-Tranche Release Conditions            Status of Progress
                                   descriptions, and staff selection
                                   process for the appointment of
                                   heads of departments were
                                   approved by the BOD meeting of
                                   30 June 2008 (BOD Minutes of
                                   Meeting 06/08, 30 June 2008). A
                                   predefined selection process
                                   based on specific qualifications
                                   and experience was agreed on.
                                   Training was provided in the use
                                   of the performance assessment
                                   system, and directors and
                                   departmental heads underwent
                                   performance assessment. An
                                   analysis of job skill gaps was
                                   undertaken for directors and
                                   department heads using the
                                   approved departmental mandates
                                   and job descriptions. A training
                                   plan to address minor gaps in the
                                   required skills was prepared.
                                   Training activities were to take
                                   place in September 2008.
                                   (ii) APB’s corporate planning team
                                   prepared the 2007 performance
                                   targets and the APB board
                                   approved it on 25 December 2007
                                   (Board of Directors Minutes of
                                   Meeting 178/APB,
                                   25 December 2007). The team
                                   prepared the 2008–2010
                                   corporate plan in early 2008 on
                                   the basis of APB’s 2007 draft
                                   accounts. The plan was approved
                                   by the APB board on 9 May 2008
                                   (Board of Directors Minutes of
                                   Meeting 04/08 convened on
                                   09 May 2008) and was later
                                   updated using the final 2007
                                   external audit findings and
                                   approved by the APB board on
                                   30 June 2008 (Board of Directors
                                   Minutes of Meeting 06/08,
                                   30 June 2008).
                                   (iii) As of 18 September 2006, all
                                   domestically financed policy loans
                                   of APB, including loss-graded
                                   loans, totaling KN53 billion, had
                                   been transferred to the Nayoby
                                   Bank (NBB) (BOL Approval
                                   369/BOL, 18 September 2006).
                                   APB has undertaken two
                                   write-offs of NPLs. The first one,
                                   in January 2007, was of KN17.3
                                   billion of loss-graded loans as of
                                   the 31 December 2003 accounts
                                   (BOL Confirmation Letter 05/IRD,
                                   25 January 2007). This write-off
                                   was a condition for the release of
36      Appendix 2




Third-Tranche Release Conditions                                                           Status of Progress
                                                                                  the first tranche in June 2007. On
                                                                                  15 October 2007, APB asked
                                                                                  BOL to write off loss loans as of
                                                                                  31 December 2006 of KN52.23
                                                                                  billion, $348,100, and
                                                                                  B14,500,000 (APB Request.
                                                                                  544/APB, 15 October 2007)). This
                                                                                  request was granted by BOL on
                                                                                  13 November 2007 (BOL
                                                                                  No-Objection Letter 466/BFSD,
                                                                                  13 November 2007). Upon receipt
                                                                                  of BOL’s approval, the APB board
                                                                                  approved the write-off in their
                                                                                  ordinary meeting on
                                                                                  15 December 2007 (APB BOD
                                                                                  Approval No. 10/APB, 15
                                                                                  December 2006) and the write-off
                                                                                  was approved by MOF on
                                                                                  13 March 2008 (MOF
                                                                                  No-Objection Letter 0553/MOF,
                                                                                  13 March 2008). The transfers
                                                                                  and write offs were reflected in
                                                                                  APB accounts as of
                                                                                  12 December 2007,
                                                                                  8 January 2008, and
                                                                                  15 January 2008.
                                                                                  (iv) NBB was established on
                                                                                  29 January 2007 by a decision of
                                                                                  the PMO (PMO Notice
                                                                                  1244/PMO, 25 August 2006).
                                                                                  NBB is a nonprofit financial
                                                                                  institution providing credit lines
                                                                                  and soft loans from policy funds
                                                                                  for poverty reduction in 47 poor
                                                                                  districts (Charter of Nayoby Bank
                                                                                  03/NBB, 8 February 2007,
                                                                                  Article 2). NBB is a
                                                                                  non-deposit-taking institution
                                                                                  (NBB Charter, Article 12.2)
                                                                                  exempted from income taxes
                                                                                  (PMO Notice 1244/PMO,
                                                                                  25 August 2006) and from
                                                                                  stabilization regulatory measures
                                                                                  of BOL (NBB Charter, Article 3).
1-11 BOL to adopt and implement appropriate regulatory framework for prudential   Complied with. Since
supervision of APB.                                                               September 2007, BOL has
                                                                                  conducted monthly off-site
                                                                                  monitoring of the three SCUs
                                                                                  (Luang Prabang, Seno, and
                                                                                  Vientiane) using the microfinance
                                                                                  supervision manual approved for
                                                                                  testing by BOL in August 2007
                                                                                  and later approved for mandatory
                                                                                  use in December 2007.
                                                                                  BOL has completed three on-site
                                                                                  inspections of the three pilot
                                                                                  SCUs (September 2005,
                                                                                  August 2007, and January–
                                                                                  February 2008). The last
                                                                                             Appendix 2       37



Third-Tranche Release Conditions                                                            Status of Progress
                                                                                    inspection covered three MFIs
                                                                                    and five SCUs.
1-12 BOL to adopt and implement regulatory framework for microfinance institutions  Complied with. The BOL issued
(MFIs) and enhanced SCU regulations, based on a participatory process, allowing     a set of regulations in July 2008
for multiple MFI models and products with minimum starting regulations, interest    revising the regulatory framework
rate autonomy, and private ownership.                                               for MFIs. These regulations cover
                                                                                    enhanced SCU regulations,
                                                                                    interest rate autonomy, and
                                                                                    private ownership.
ADB = Asian Development Bank, AML = anti–money laundering, AMLIU = Anti–Money Laundering Intelligence Unit,
APB = Agriculture Promotion Bank, APG = Asia/Pacific Group on Money Laundering, BCEL = Banque pour le Commerce
Extérieur Lao, BFISD = Bank and Financial Institutions Supervision Department, BOL = Bank of the Lao PDR, BRIC =
bank restructuring implementation committee, BOD = board of directors, CAR = capital adequacy ratio, CIB = credit
information bureau, E&Y = Ernst & Young, ECC = external collection committee, FIU = financial intelligence unit, GA =
governance agreement, LDB = Lao Development Bank, LMB = Lao May Bank, LXB = Lane Xang Bank, MFI =
microfinance institution, MOF = Ministry of Finance, MOJ = Ministry of Justice, MOU = memorandum of understanding,
NBB = Nayoby Bank, NPL = nonperforming loan, OEDR = Office of Economic Dispute Resolution, PIU = project
implementation unit, PMO = Prime Minister’s Office, RBP = restructuring and business plan, SCU = savings and credit
union, SMEs = small and medium-sized enterprises.

				
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