Depositors shift money to microfinance, earning more interest
Depositors shift money to microfinance, earning more interest
The lower interest rates provided by commercial banks have convinced many depositorsto move their cash to microfinance institutions where they can benefit from higher interest rates.
According to a recent report from the Bank of the Lao PDR, the value of deposits at microfinance institutions in the second quarter of 2014 was just 133.89 billion kip.
But the figure rose to 263.69 billion kip in the fourth quarter of 2015 before jumping to 467.18 billion kip in December 2016.
Experts in the field said the value of deposits at microfinance institutions has grown significantly over the two past years since banks lowered their interest rates in 2015.
Banks lowered their interest rates on both deposits and loans in line with a decision made by the Bank of the Lao PDR, which aimed to stimulate economic activity.
This is a major change in the banking sector as the government wants to reduce the interest charged on loans, in a bid to boost domestic productivity for commercial purposes.
Bankers say the interest rate will change every year based on the inflation rate. In August 2015, inflation averaged 4.13 percent so the interest rate for one year will be 2 percent more which makes it 6.13 percent.
Late last year, banks again lowered interest rates, offering 4.02 percent on 6-month deposits, 5.72 percent on 12-month deposits, 6.90 percent on 36-month deposits, 6.97 percent on 48-month deposits, and 7.04 percent on 60-month deposits.
However, there is some concern that if many people deposit their money in microfinance or other financial institutions, it will be difficult for small banks (or banks with weak financial capacity) to source funding to sustain their viability.
Director of Ekphatthana Microfinance Institution Mr Somphone Sisenglath told Vientiane Times last week that microfinance institutions have been growing over the past two years in response to the needs of local markets.
He said microfinance institutions had also dropped interest rates from 16 to 14 percent recently in parallel with the action taken by banks.
�Microfinance providers are like retailers whereas banks can be likened to wholesale operations. Microfinance mostly gives loans to small businesses so we can't charge the same rates as banks.�
The number of microfinance institutions has increased in recent years. More than 100 are now registered with the Bank of the Lao PDR, excluding leasing units and various funds.
About half of them are in Vientiane so there is room for their growth in the provinces.
Mr Somphone said there is more competition in Laos within the finance industry. But it's good that more people can access finance so they can run a business and boost productivity.
One of the most significant points to note is that businesses and producers need to use the loans they obtain wisely, so that the money they borrow benefits their business and productivity, thereby generating more income and increasing their prosperity.
