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This study examined progress in rural and microfinance operations in the three Lower Mekong Region countries of Cambodia, the Lao People’s Democratic Republic (Lao PDR), and Viet Nam as compared with standards set by international best practices. Particular attention was paid to the policy environment, which includes regulatory norms and their implementation, as well as the financial infrastructure (e.g., credit bureaus and microfinance associations). Special attention was also focused on the impact of this environment on the development and performance of institutions providing micro and rural financial services. Ultimately, this examination should provide guidance for government officials and international development agencies on which types of interventions can be most supportive of an array of efficient and sustainable institutions providing financial products and services that are attractive to the poor, especially those in rural areas.

The study first reviewed recent literature on rural and microfinance in the three countries and then literature on micro, rural, agricultural, informal, and small- and medium-enterprise finance in developing countries pertinent to understanding the situations in the three countries. The authors then visited the three countries, each for an intensive period of 4 to 6 days, working with a local partner in each country. During these visits, they met with key officials of relevant government agencies and the main entities providing rural and microfinance services, including public and private banks, microfinance institutions (MFIs), and financial cooperatives. They also distributed a standard questionnaire to all rural and microfinance service providers, requesting basic information on the entity (e.g., size and the extent of its collaboration with local governments and mass organizations) and detailed data on deposits and loan portfolios. Seventeen microfinance providers in Cambodia, 13 in the Lao PDR, and 19 in Viet Nam responded to the survey questionnaire. Based on the foregoing information, draft country chapters were prepared and then reviewed by the local partners, government officials, and officials from some of the entities surveyed in each country. At the same time, the two introductory chapters were written and reviewed. Finally, the concluding chapter was written to summarize the findings, highlight similarities and differences among the three countries, and provide recommendations.

Starting from rather similar conditions a decade ago, the three countries have diverged significantly both in the approaches they have taken to ensuring the delivery of rural and microfinance services in the rural areas, especially to the poor, and in the results they achieved. Of the three countries, Viet Nam appears to depend most heavily on the government and its institutions, not only in providing the legal and regulatory framework and institutional infrastructure for rural and microfinance but also in delivering financial products and services. This approach has resulted in a very limited role for private entities in rural and microfinance, both because of the legal and regulatory framework (indeed, the infrastructure for rural and microfinance is the most advanced of the three countries, especially the credit bureau) and because of the crowding out of private entities by government rural and microfinance providers that are supported by subsidies.¹ The government’s Vietnam Bank for Social Policies (VBSP) has received very high rankings from the Microfinance Information Exchange (MIX) for its lending operations. It is ranked among the top five in Asia in the following categories: outreach to borrowers, percentage of the poor reached, and the productivity of its loan officers.² In contrast, only four private Vietnamese entities are included in the MIX database, and only one of these has been mentioned among the top hundred in Asia.

Cambodia presents a very different picture, with only one inconsequential government bank and a number of highly successful private MFIs making up its rural and microfinance subsector. Fourteen such entities report to MIX, and of these, five are ranked among the top hundred MFIs globally. These results, of course, are due not primarily to an absence of government banks but rather to the support provided to these entities by Cambodia’s government, including and especially a legal and regulatory regime that has emphasized transparency and equal treatment of different types of entities. Support has also included training and technical assistance for the implementation of international best practices in rural and microfinance, focused not just on individual entities but also on building a coordinating organization devoted to strengthening rural and microfinance in general. Most recently, this support has taken the form of offering nonbanks showing good performance and the ability to manage risks permission to mobilize deposits. These approaches have been supported by international development agencies and international nongovernment organizations (NGOs) that have been attracted to Cambodia by the equal treatment given to foreign investors. Nonetheless, important challenges remain, among which are the successful implementation of deposit mobilization regulations and creation of an effective credit bureau.

The Lao PDR approach appears to resemble Viet Nam’s more than Cambodia’s. The government’s Agricultural Promotion Bank, by far the largest provider of rural financial services in the country, has had serious loan recovery problems leading to substantially negative net worth and a need for significant infusions of capital. Even with these capital infusions and the creation of the Nayoby Bank to take over policy lending, it remains uncertain if reforms of its operations and full support for these reforms from government officials at the highest levels will be sufficient to overcome its problems.³ Nonetheless, the government has recently issued important decrees to clarify rules governing credit unions and other types of financial cooperatives and to divide MFIs into those that can and those that cannot mobilize deposits from the public, although it is too soon to know if these decrees will be effectively implemented, or if these will lead to desired outcomes. At the same time, the Lao PDR needs major support from international development agencies and international NGOs, not only for technical assistance and training to implement international best practices but also to develop infrastructure for rural and microfinance (e.g., a coordinating entity for MFIs and a more inclusive credit bureau, along with basic elements such as improvement in accounting and auditing for transparency and risk management).

Because of the substantial differences among the three countries, recommendations for potential improvements in their respective rural and microfinance subsectors also differ significantly. In Viet Nam, rural and microfinance based on an overwhelming role for government appears to be quite successful. However, this relies on significant financial subsidies and, perhaps even more important, on implicit subsidies for client selection and loan recovery provided by mass organizations. For Viet Nam to catch up with current practice in rural and microfinance elsewhere in the world, it is necessary that the government fundamentally change its approach. To start with, the country needs a thorough analytical survey of rural finance similar to the one carried out for the Lao PDR in 2004. This survey must fully examine the extent of the outreach of formal financial services—including the impact of mass organizations on the efficiency of resource allocation. The survey should be followed by technical assistance involving training and exposure to best practices and new techniques for rural and microfinance as implemented elsewhere in the world to help convince government officials of the usefulness of embarking on significant reforms of the current system.

For Cambodia, the study’s recommendations are specific and narrow: technical assistance to develop the deposit mobilization capabilities of MFIs that decide to move in that direction, with the expectation that the best-performing ones will be the most interested. Such technical assistance, based on international best practice experiences, is likely to emphasize the advantages of focusing on current clienteles—and the marketing techniques needed to do this successfully. Financial support for major upgrades of management information systems and information technology systems of MFIs may be needed for their operations and enhanced risk management. Of course, other activities could beneficially be undertaken such as a comprehensive rural finance survey to measure outreach and to support marketing of deposit services, along with further development of credit bureau capabilities.

For the Lao PDR, recommendations focus primarily on monitoring the major reforms recently begun (e.g., restructuring the Agricultural Promotion Bank, setting a proper course for the new Nayoby Bank, and implementing the recent decrees for credit cooperatives and MFIs) and especially strengthening these reforms as needed. In addition, a variety of other improvements could be promoted, including training and technical assistance for MFIs on best practices (provided in part through developing a strong coordinating entity), making credit bureaus more inclusive, strengthening and refocusing central bank regulatory activities (e.g., promoting risk-based supervision), and enhancing basic infrastructure such as accounting and auditing capabilities.