After commencing economic reform towards a more liberalized system, the Lao Government tried to bring the banking and finance system in line with the demands of the economy.

Since 1988, periodic reforms have been made as required under Ministers Council Resolution II/PSL, of 12 March 1988, which stated that the national bank would be managed independently as a commercial entity and the entire banking system adopt a commercial stance.

In mid 1990, a law to establish the Bank of the Lao PDR was enacted. The law determines the role of the bank under the new system.

At the beginning of 1992, provisions were made to protect the gradual evolution of the banking and financial sector until they were able to accept autonomy on the same basis at the international banking and finance community.

Meanwhile, the government began to allow foreigners to play a role in the banking business in terms of joint ventures and the opening of branches or agencies. However, their activities were restricted to Vientiane Municipality.

With the memberships in the international Monetary Fund (IMF) and the World Bank, the Bank of the Lao PDR has joined various funding and banking organization, including the Asian Development Bank. Under the guide and the supervision of the Bank of the Lao PDR, there are 34 commercial banks and branches including domestic and foreign banks. These banks can be characterized as specialized and general commercial banks. While general banks deal with deposits or handle short and long term support funds for investment, they also supply business with working capital needed to back up production activities. Usually general banks are involved in the supply of funds for commercial and financial transaction. Specialized banks were established in order in order to facilitate financing for specific sectors of the national economy whose monetary needs could not be fully supplied by the general banks because of restriction on funds and profitability. Although specialized banks were created for specific and individual business area, they recently conduct activities similar to those of general banks.

Under the supervision of the Bank of the Lao PDR, the commercial banks located throughout the territory are as follows:

State-owned bank

1. Bank of Foreign Trade : head office in Vientiane, two branches in Savannakhet and Pakse
2. Sethathirath Bank : head office in Vientiane, two branches in Phonehong and Paksane
3. Phaktai Bank : head office in Pakse
4. Nakhorn Luang Bank in Vientiane
5. Aloun Mai Bank, regional bank with office in Xamneua
6. Lao Mai Bank, regional bank with head office in Savannakhet
7. Lane Xang Bank, head office in Luangprabang
8. Agricultural Promotion Bank, head office in Vientiane

Joint Venture Bank

1. Vientiane Commercial Bank
2. Joint Development Bank

Foreign bank and branches

1. Public Bank, Malaysian branch
2. Standard Chartered Bank
3. Bangkok Bank branch
4. Siam Commercial Bank branch
5. Krung Thai Bank branch
6. Thai Farmer’s Bank branch
7. Thai Military Bank branch
8. Ayudhaya Bank branch

The Bank of the Lao PDR requires commercial banks to maintain the liquidity of their assets. They are required to have a reserve capital set by law and a debt ratio of a specified rate. Most significantly, they are obliged to offer the agricultural sector loans amounting to at least 15% of the total amount of their deposits. The loans may be either operated by the bank itself or deposited with the Agricultural Promotion Bank.

After foreign banks began to operate in Laos, local banks received the opportunity to learn more of international banking standards and have become increasingly competitive, especially in employing strategies to increase deposits. Moreover, they have been absorbing knowledge of international financial practice. The Bank of Foreign Trade has also adjusted itself to meet the requirements of the business community.

Laos has greatly relaxed its control over interest rates since 1991. At present, the Bank of the Lao PDR determines only the prime rate of deposits and the advanced interest rate on loans. For foreign exchange rates, the Bank of the Lao PDR determines the medium rate of the Kip against foreign currencies whereas the actual exchange rate is set by the commercial banks, provided that movement is within the scope determined by the Bank of the Lao PDR. The general public and resident aliens are allowed to have a foreign currency deposit account and to use the account to pay debts, transfer money abroad, for overseas travel, etc. For local payments of goods and services, however, transactions are to be made in Kip.

Since banking and finance play an important role in both the promotion and restriction of trade and foreign investment, banking in Laos has had to be adjusted to a certain extent. Improvements have been undertaken with the assistance of the World Bank, the Asian Development Bank and the International Monetary Fund. For the time being, Laos still relies significantly upon the assistance of foreign finance and banking institutions in the development of the country.