Lao’s SME Sector
SMEs are the backbone of Lao’s economy, and the government is aiming to reduce the obstacles that inhibit their potential
According to a 2019 report from the World Bank, small and medium-sized enterprises (SMEs) account for 99 percent of all registered firms in Lao, and around 82 percent of employment. These SMEs have played a vital role in Lao’s economic development, especially in the trade, manufacturing and service sectors.
Unlocking the potential of the country’s SMEs is vital to ensure Lao’s continuing economic development and its cultural wellbeing. This is something that both public and private stakeholders are aware of. The Government of Lao’s 8th National Social Economic Development Plan (8th NSEDP 2016-2020) incorporates the SME Development Plan 2016-2020 to help promote SMEs. The government wants to promote a non-resource exploitation based economy, with agriculture, tourism and manufacturing, the private sector and SMEs at the centre of socio-economic development.
Despite the proliferation of SMEs in Lao, many small companies are hindered by various factors that inhibit growth. The first of these is access to finance, which had become a more acute constraint even before the pandemic. The World Bank suggests that this is the result of a variety of factors, such as the banking sector’s caution in loaning money to SMEs (believing it to be high-risk), that there is a lack of variety of finances offered to SMEs (especially in rural locations). Many SMEs end up turning to microfinance institutions instead, which results in loans with far higher interest rates.
Not all SME owners and entrepreneurs have had training in management and financial planning – low financial literacy can inhibit growth. Furthermore, informal sector SMEs may indulge in poor practices (such as low compliance levels) which can unfairly impact upon more compliant firms.
Another problem SMEs face is access to a consistent supply of electricity. Although electrification in Lao is improving, SMEs – especially those in rural areas – have reported delays and difficulties establishing a connection, and a consistent electricity supply.
Improving SMEs’ access to finance is vital. The World Bank suggests: diversifying financial products and services offered to SMEs by banks and other institutions; improving SME capacity in financial management and accounting practices; and improving credit information coverage to financial institutions to better assess lending risks.
Lao National Chamber of Commerce and Industry (LNCCI) recently collaborated with Sacombank to provide loans intended to catalyse the growth of SMEs in Lao. At present, business owners and farmers who apply for a loan must offer land or house as collateral before they are eligible for a loan. But under the new Nang Fa Fund, LNCCI will authorise the loan and act as guarantor, meaning that SMEs will not have to offer land or house to the bank.
Improving infrastructure within the country will also be beneficial to SMEs. Investment into the energy distribution network and grid connections would be particularly valuable.
The Lao National Chamber of Commerce and Industry (LNCCI)
Lao National Chamber of Commerce and Industry (LNCCI) is an independent body which represents the business community in Lao. It has more than 4,000 members represented across 18 provinces, business associations and groups.
LNCCI functions as the nexus between state and private enterprises, and its key responsibility is to identify the problems and concerns of its members and ensure that they are presented to the government. This advocacy ensures that business policies and legislation is developed with Lao’s business community in mind; its SME sector in particular.
LNCCI believes it is vital for private businesses in Lao to work hand in hand with the government in enabling SMEs to move faster in adopting new technologies and business models; responding to new value chains and market opportunities. Its Strategic Private Sector Development Plan 2018-2020 consists of four main pillars, one of which is ‘Service Provision for Lao Businesses (incl. SMEs) and the development of SME Service Centres.
In 2017, LNCCI worked with the Ministry of Industry and Commerce (MOIC) to create the SME Service Centre (SSC) – an independent organisation to help SMEs access training, information and support. The first office was located within the capital of Vientiane (within the LNCCI). Since then, the SSC has opened branches in Luang Prabang, Champasak and Savannakhet. Over time, it is looking to expand into other provinces.
Focus on: Training and Empowerment of SMEs in Lao
Training and support will help uplift and improve the SME sector in Lao, providing a solid foundation for sustainable development
The Lao government’s new SME Service Centre provides training in book-keeping, writing business plans and much more. It holds regular workshops and events, including an annual Entrepreneurship Day (in partnership with the International Labour Organization) to promote startups and entrepreneurial creativity with discussions and networking sessions. The most recent event was held in Luang Prabang, and was attended by 500 guests.
The government has also recently founded the Department of Small and Medium Enterprises Promotion, which has been established to promote SMEs while improving their access to funds. It also works with other stakeholders – such as banks, government officials and industry officials – on outreach programmes to make them aware of the importance of SMEs, and how they can be helped via loans and technical scholarships.
Many SMEs end up borrowing money from one of the country’s 200 microfinance institutions – as banks won’t release funds to them – which have interest rates up to four times higher than banks. The Ministry of Finance has hired expert researchers to help develop micro-credit provisioning programmes via micro-finance institutions, thereby providing loans for a fixed term at a low interest rate. This will help boost the sector.
Recently, delegates from the Department of Small and Medium Enterprises, the Ministry of Trade and United States Agency for International Development (USAID) met to discuss how digital tools could help SMEs in Laos, especially during COVID-19. Representatives of the Ministry of Telecommunications and Communications, as well as successful entrepreneurs, shared knowledge and ideas on adapting to the digital economy. Solutions established included the introduction of real-world digital products and services onto the market, as well as establishing a forum for emerging SMEs in Lao, Cambodia and Myanmar to facilitate knowledge transfer.