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The Lao Access to Finance Fund (LAFF) achieved a significant milestone when the refinancing to five financial institutions, three commercial banks, and two deposit-taking microfinance institutions (DTMFIs), of which three are brand new partners of LAFF, was endorsed on 19 May 2021. The LAFF, a KfW-financed MSME fund is assisted technically by AFC.
The LAFF also attained another milestone in its process of becoming a self-reliant autonomous entity. Its operational set up now has a full-fledged structure consisting of a steering committee, a three-member Credit Committee, a full time director, and three staff including two technical staff who are central to the credit function. The two newly recruited technical staff are now working full-time and progressively administering the fund while the AFC team is mentoring them. The LAFF is now on its way towards operational autonomy and sustainability, which are the goals of the second phase of the project by 2020 until 2023. Due to the strong performance under the previous phase, KfW re-hired AFC to effectively support the Bank of the Lao PDR (BoL) on this formidable journey.
This new funding round was initiated by a public Call for Proposals in February 2021, where the terms of the refinancing offer were carefully prepared to match the needs of local commercial banks and DTMFIs. The interest rates offered were finely tuned to encourage local financial institutions to serve the MSME segments more aggressively, while avoiding turning away local financial institutions from tapping private sector refinancing or from mobilizing deposits from the public.
The credit assessment process was detailed and ranged from desk review of documents received, analysis of financials, ascertaining, assessing organizational and operations aspects of financial institutions. The due diligence process also involved an in-depth study of functional areas of each institution and seeking clarifications on information submitted, including historical and forecast financial statements. The team worked well and effectively in order to be ready for the Credit Committee meeting on 19 May 2021 to review and approve the loans.
What LAFF achieved during the period, from calling for application to final approval, is commendable as all these activities were carried out during the Covid-19 pandemic, which became more challenging due to a national lockdown imposed by the Government of Laos. The team responded quickly by switching midway the due diligence mission via videoconferencing, but still keeping the same level of proactive investigation and rich interaction with the participants.
The credit committee meeting, with all its members in attendance, was a first of its kind for many reasons. The credit committee played an active role and was fully engaged. The dynamics generated a sensible and focused debate within the credit committee around issues of absorptive capacity of applicants, diversification of funding sources and customer protection, to name a few. After the credit committee meeting, a series of quick actions were taken which included receiving no objections from KfW, drafting of offer letters, fine-tuning to meet conditions of overall project agreements and contacting the selected Partner Financial Institutions (PFIs) to inform them of the decision and share the offers. The LAFF Management Unit (LMU) staff performed these important tasks with technical guidance from the TA team. As of 30 June 2021, all the contracts have been negotiated and signed by the financial institutions.
In parallel, the LMU held meetings with two PFIs to assess their capacity building needs which would lay the foundation to assist them technically under the project. The selected strategy was to focus first on the MFIs who would benefit from immediate inputs in accomplishing the project targets. Once these trainings are underway, the other three PFIs will be approached to jointly assess the capacity building needs.
The project support will go beyond the PFIs but will support the microfinance and banking industry in addressing issues in responsible financing and instill best practices. Our partner, the Lao Microfinance Association (LMFA) will lead this effort through an assessment of practices, creating awareness through national workshops, and drafting guidelines for the industry.
While the LMU as the fund management entity has grown through the process to be a nascent fund management entity, there is still much to be done to attain the status of an autonomous refinancing facility such as setting-up the accounting system, monitoring loan contracts after disbursement and reporting on financials and outcomes. However, the demand has been heightened and a next Call for Proposals is seen by the end of this year with more candidate institutions.
The LMU is getting lots of visibility for its work and is often commended by the industry and other stakeholders. As the technical assistance providers, AFC team is proud to be a part of this success and more than ready to face the remaining challenges.
For further information, please contact Jakob Lutz (Jakob.lutz [at] afci.de)