Strengthening Banking Supervision in Lao PDR (IMF)

Project Development Objective (PDO)

The objective of the technical assistance is to assist the Bank of Lao (BoL) in improving its institutional framework and supervisory capacity towards the longer-term goal of adhering to international standards and maintaining financial stability in Lao PDR. 


The BoL has requested TA from MCM to help strengthen its bank supervisory functions against the background of a rapidly growing economy and increased vulnerabilities in the banking system. There are 38 commercial banks operating in Lao PDR, including the four state-owned commercial banks (SOCBs), three joint venture (JVBs) banks, nine private banks (PBs), and 22 foreign bank branches (FBBs) and subsidiaries (FBSs) as of April 2015. The banking sector is highly concentrated in the four SOCBs, which accounted for 52 percent of total assets in the system. The JVBs had 11 percent of total assets, PBs about 18 percent, and FBBs and FBSs accounted for 19 percent.
The 2015 IMF assessment mission noted that the number of BoL’s banking supervision staff is sufficient to supervise the 38 banks currently active in Lao PDR. Furthermore, the on-site and off-site supervision framework contains the necessary elements for an efficient banking supervision although there is substantial room for improvement. 
The BoL’s current approach to banking supervision focuses primarily on banks’ compliance with laws and regulations. This approach is essentially backward-looking, gives little attention to a bank’s business strategy and operating environment, and fails to recognize the risks a bank is facing and the adequacy of its risk management policies. 
The medium-term objective of the authorities is to build a robust supervisory capacity at the BoL while the longer-term goal is to establish risk-based supervision. International experience shows that these ambitious objectives usually take a relatively long period of time to be completed. The initial step, for which this assistance is provided, focuses on building a foundation for effective off-site and on-site banking supervision in the form of sound and forward-looking risk analysis within the central bank.

Activities / Output

This project is the first step in the capacity building effort and is expected to last one year. It would be dedicated mainly to develop a strong off-site supervision framework and to prepare a strategy for reinforcing on-site supervision. The next steps to be considered consecutively would focus on risk-based and forward looking on-site and off-site supervision development. 
The expected deliverables of this project are the following:
1.  Update on-site and off-site supervision manual including risk-based supervision elements;
2.  Assist the BoL with developing procedures and reporting tools for off-site supervision and banks’
     inspection planning; 
3.  Conduct hands-on training and capacity building through close interaction with banking
     supervision staff and informal seminars and training events; 
4.  Improve the CAMELS framework; and
5.  Implement risk-based institutional profiles.

Expected Outcomes

The short- and medium-term outcomes of this project include: 
•  The BoL has strengthened banks’ risk assessment frameworks: 
    o  Quality and timeliness of regulatory data enhanced;  
    o  Supervisory reporting system improved.
•  The BoL has strengthened institutional structures and procedures for RBS implementation 
•  Supervisors have sufficient capacity to effectively implement risk-based supervision and other
    supervisory processes
•  Move from compliance-based to risk-based supervision
•  Early detection of banking sector vulnerabilities to decrease destabilizing bank failures