The Laotian financial system is small and subject to heavy government involvement. Supervision and regulation of financial seervices are weak. The banking sector is the most important part of the financial system. Three state-owned banks dominate the banking sector, accounting for about 70 percent of assets. There are 10 private and foreign banks, but their activities are limited. The Government extensively directs credit. The banking sector is hindered by NPLs, predominanly from state-owned banks to SoEs. Microfinance has a small presence.
The dominating state-owned banks are still struggling to solve heavy accumulations of NPLs caused by the steep depreciation of the local currency (kip) in US$ denominated laons after the 1997 Asian financial crisis and the directed finance inherited. These accumulations are the result of loans to loss making SoEs and loans directed by provincial governments to local contractors. A huge budget is needed in order for state-owned commercial banks (SOCBs) to solve their NPL problems and achieve the necessary capital adequacy. However, another difficulty is the shortage of national budget. Recently, SOCBs' loans assets have been flush with loss provisions, which have caused deterioration of equity in their balance sheets. Without restructuring of SOCBs, further financial system development cannot bt achieved