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MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY VONGPHAKONE VONGSOUPHANH IMPROVING ACCESS TO BANK CREDIT OF SMALL AND MEDIUMSIZED ENTERPRISES IN THE LAO PEOPLE'S DEMOCRATIC REPUBLIC SUMMARY OF THE ECONOMIC DOCTORAL THESIS Hanoi, 2021 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING ACADEMY VONGPHAKONE VONGSOUPHANH IMPROVING ACCESS TO BANK CREDIT OF SMALL AND MEDIUMSIZED ENTERPRISES IN THE LAO PEOPLE'S DEMOCRATIC REPUBLIC Major: Finance - Banking Code: 9.34.02.01 SUMMARY OF THE ECONOMIC DOCTORAL THESIS Supervisors: Dr Nguyen Thi Hong Hai Dr Nguyen Thi Thai Hung Hanoi, 2021 PREFACE Urgency of the thesis topic In the Lao People’s Democratic Republic (Lao PDR), small and medium-sized enterprises (SMEs) are an important component of the economy These enterprises account for a very large number and contribute significantly to economic growth, create jobs, contribute to increase income for people, stabilize society, filling small gaps in markets and making a significant contribution to national income Due to their relatively compact size, SMEs operate quite flexibly in most areas of production and business of the Lao economy Over the years, these enterprises have made significant progress, however, due to limitations in business management and operation experience, and limitations on the collateral value SMEs are quite flexible and dynamic in doing business in Laos, so in recent years there have been significant progress, however, in order to survive, develop and improve their competitiveness, SMEs need support, especially capital to improve product quality, renew equipment, scale up production and business operation However, due to many limitations in operating experience and collateral value, SMEs are currently facing numerous difficulties in accessing sources of credit, especially medium and long-term capital sources The lack of capital for production and business is the biggest barrier to the development of SMEs in Laos In addition, the uncertainties of the world economic situation, the internal difficulties of the Lao economy, and increased inflation and interest rates have greatly affected the business environment of these enterprises As a result, many SMEs face difficulties, have to reduce production, or even stop operating or go bankrupt That hinder SMEs from accessing bank credit to restore production activities damaged by the negative impact of the unstable economy Because of the important role of SMEs in the development of the economy as well as the difficulties that these enterprises are facing, it is necessary to implement effective measures for SMEs to be proactive in business This poses the problem of how to improve credit access for SMEs Based on the above reasons, the author selected the topic of “Improving access to bank credit of small and medium-sized enterprises in the Lao People’s Democratic Republic” for this doctoral thesis 2 Overview of the research 2.1 Foreign studies As of now, many scientific works related to the content of the thesis have been published domestically and internationally The author selected and categorized the works that the thesis compared, inherited and developed into groups: (i) Theoretical research works: The theory of credit allocation (Stiglitz and Weiss, 1981; Namara et al., 2020) Institutional economics (Olson, 1971; North and Thomas, 1973; North, 1990; Adam, 2020; Meramveliotakis, 2021) The theory of social networks (Granovetter, 1973) and the theory of regulatory economics (Keynes, 1936) (ii) Experimental research works: Doctoral thesiss, scientific research works, articles published in prestigious scientific journals Among them are the studies of Jankowicz & Hisrich (1987), International Finance Corporation (2009), Nghiem Van Bay (2010), Tran Trong Huy (2013), Nguyen Thi Kim Ly (2013), Ngo Thi Mai Linh (2015), Dang Thi Huyen Huong (2016), etc 2.2 Situation of domestic research Currently, in Laos there is no research on the issue of improving access to bank credit of SMEs but only a few research papers with fairly similar conditions to the thesis as follows: Phengsy Sylavy (2012), Diengkham Sengkeomysay (2014), Phaylom Nodnapho (2014), Kongchampha Ounkham (2016), Sattakoun Vannasinh (2017) In addition to the doctoral thesis by Lao authors, a number of master’s theses also address the issue of SMEs development in localities of Laos such as Thalongsay Thammavong (2016), Korkeo Phommyvanh (2017) In general, in Laos the research works related to improving the access to bank credit of SMEs are quite limited and there are almost no studies on this issue 2.3 Research gap The published studies still have some issues to be supplemented and perfected, the author identifies research gaps on SMEs' to access bank credit as follows: First, the published studies only stop at studying the experiences of countries around the world from which to draw "policy" lessons for national governments The experience and lessons learned to improve access to bank credit of SMEs have not been fully and comprehensively studied for all entities (SMEs, commercial banks, government and localities) Second, the results of published studies focus on surveying and measuring the ability to access bank credit in a commercial bank or a specific area, but so far there has not been an in-depth and comprehensive study on the ability to access bank credit of SMEs in Laos In particular, as of now there is a lack of researchs that combine both qualitative and quantitative data to obtain scientific evidence to provide solutions and recommendations to improve access to bank credit of SMEs in Laos in association with current socio-economic development conditions Research objectives and research questions 3.1 Research objectives The thesis is carried out with the following research objectives: - To systematize the basics of credit operations of commercial banks and access to bank credit of SMEs - To nalyze and assess the current situation of accessing to bank credit of SMEs in Laos to find out the causes and barriers to accessing to bank credit of SMEs in Laos - To propose solutions to improve access to bank credit of SMEs in Laos 3.2 Research questions The thesis answers the following research questions: - How is the situation of SMEs’ access to bank credit in Laos? - What are factors affecting the SMEs’ access to bank credit in Laos? - What are solutions and recommendations to improve SMEs’ access to bank credit in Laos? Research subjects and research scop + The research object of the thesis is: access to bank credit of SMEs + The research scope: - Scope: SMEs in Laos - Research period: + Secondary survey data of the World Bank in years, including 2009, 2012, 2016 and 2018 + Primary survey data: In-depth interviews with officials of state agencies and banks in April 2021 Research Methods - Qualitative research method: In this thesis, the author approached the problem in a practical way, directly into the existing credit activities that commercial banks in Laos are providing to SMEs, and based on the enterprises’ actual needs in terms of access to credit as well as the restraints that these enterprises face in the process of access to credit In line with the practical approach, the basic research methods of the thesisare practical research methods, which directly affect access to bank loans of SMEs in Laos, to clarify the situation - In-depth interviews: The author conducts in-depth interviews with staff working at state agencies related to SMEs and staff working at banks give loans to SMEs in Laos - Quantitative research method: The author uses probit model to assess the factors affecting access to bank capital To carry out quantitative assessment, the thesis performs the following steps: Step 1: Conduct a research overview; Step 2: Formulate research hypothetheses; Step 3: Select research model; Step 4: Process research data; Step 5: Run the model and verify the hypotheses; Step 6: Test the durability of the model To study the factors affecting access to credit, the author relies on the studies of Rahman et al (2017) and Gou et al (2018) to propose variables using the research model as follows: 𝐴𝑝𝑝𝑙𝑖𝑐𝑎𝑡𝑖𝑜𝑛𝑖𝑡 = 𝛼0 + 𝛽1 𝐹𝑖𝑟𝑚𝑖𝑡 + 𝛽2 𝑀𝑎𝑐𝑟𝑜𝑖𝑡 + 𝛾𝑗 + 𝜆𝑡 + 𝜀𝑖𝑡 (first) Where: i and j represent the enterprises and industry, 𝛾𝑗 represents the industryspecific fixed effect, representing unobserved variables that are industry-specific but not change over time 𝜆𝑡 is a time-fixed effect that reflects macroeconomic changes that change through time and affect all enterprises 𝐹𝑖𝑟𝑚𝑖𝑡 is a set of variables which reflect the enterprise characteristics 𝑀𝑎𝑐𝑟𝑜𝑖𝑡 is a set of variables that reflect the characteristics of the macro environment 𝜀𝑖𝑡 is the random noise of the model The thesisuses data from World Bank surveys on enterprises in Laos Scientific contributions of the thesis 6.1 Theoretical contributions Theoretical contributions of the thesis include: (i) Build a theoretical framework on SMEs’ access to bank credit Firstly, the thesis presents the general problems of SMEs, then the bank credit of SMEs and SMEs’ ability to access bank credit; (ii) Next, the thesis builds hypotheses about factors affecting the SMEs’ access to bank credit in Laos; (iii) The thesis studies the experiences of nations around the world on improving SMEs’ ability to access bank credit 6.2 Practical contributions The thesis assesses the current situation of access to bank credit of SMEs in Laos through steps First, the author provides a general analysis of the access to bank credit of SMEs in Laos Then, the author analyzes the factors affecting SMEs’ ability to access bank credit Finally, the author assesses the status of access to bank credit of SMEs in Laos through model results and in-depth interviews Based on the research results on theory, experiment and orientation of credit activities for SMEs in Laos, the author proposes solutions and recommendations to improve access to bank credit of SMEs in Laos The system of solutions and recommendations is expected to contribute to developing bank credit of SMEs in Laos Structure of the thesis In addition to the introduction, conclusion, references, list of acronyms, list of tables, diagrams, the content of thesis is compsed of chapters as follows: Chapter SMEs and SMEs' access to bank Credit Chapter Actual situation of access to bank credit of SMEs in Laos Chapter Solutions and recommendations to improve access to bank credit of SMEs in Laos CHAPTER SMEs AND SMEs’ ACCESS TO BANK CREDIT 1.1 General problems of SMEs 1.1.1 Concept of SMEs Small and medium-sized enterprises (SMEs) are production and business organizations with limited scale according to certain criteria, associated with each stage of socio-economic development of each country 1.1.2 Characteristics of SMEs - Nature of business activities: SMEs are often concentrated in processing and service sector, i.e closer to consumers - Material resources: In general, SMEs are limited by capital, resources, land and technology - Executive management capacity: due to the origin, nature, and size, the managers of SMEs often grasp, cover and manage most aspects of business activities - Dependency or passivity: Due to the characteristics, SMEs are more passive in the market Their opportunity to "wake up" or "lead" the market is very small - The business leadership team is dynamic, but their management capacity is not high and the management apparatus is lean: SMEs are characterized by a limited number of employees, the management is often directly performed by the business owner, the handling of work is almost transferred directly from the business owner to each employee without going through many intermediate management levels - SMEs have low market access and face many difficulties in international economic integration: SMEs often not spend a lot of money on marketing activities, so building and positioning brands in the market are still limied, difficult to reach the international market 1.1.3 The role of SMEs SMEs play a very important position in the economy of each country, even in developed countries In the current trend of integration and globalization, all countries pay attention to supporting SMEs in order to maximize the mobilization of resources and support for large enterprises (LEs), increasing the product competitiveness For Laos, the position of SMEs is even more important This is most significant in recent years 1.2 Accessibility to bank credit of SMEs 1.2.1 Bank credit of SMEs 1.2.1.1 Concept of bank credit Bank credit is a temporary transfer relationship of an amount of value (in the form of money or in kind) from the bank to customers (individuals, enterprises and other entities) for a period of time, the bank must recover an amount of value greater than the original amount 1.2.1.2 Bank credit characteristics Bank credit has some characteristics as follows: First: Bank credit is based on trust Second: Bank credit is the transfer of an asset with a time limit Third: Bank credit must be on the principle that the repayment must be greater than the principal value of the loan This difference is the price paid for the temporary right to use capital Fourth: Bank credit is a potentially high-risk activity for a bank, that is, when a bank grants credit to a customer, by the due date, the customer may be slow to repay and unable to pay debt, exposing the bank to credit risk Fifth: Bank credit must be secured according to regulations, to protect the interests of the bank, when customers borrow money on the basis of mortgage of dependent assets owned by the customer or the guarantee of a third party This is the second source for debt collection when the first source cannot pay the debt 1.2.1.3 Bank credit classification Credit activities are diversified and abundant with various forms, in order to use and manage credit effectively with low risk and good profit for the bank, the bank credit is classified The types of credit classification include the following types: - Classification by credit period - Classification by currency used - Classification by guarantee - Classification by repayment method 1.2.1.4 Bank credit of SMEs a Concept Bank credit of SMEs is understood as the act that commercial bank transfer to the SME a sum of money for the SMEs to use for production and business purposes, within a certain period of time under the principle of repaying both principal and interest on time b The role of bank credit of SMEs - Bank credit contributes to accelerating the production cycle of SMEs - Bank credit helps to form the optimal capital structure for SMEs - Bank credit contributes to solving the problem of lack of capital for SMEs, allowing enterprises to seize opportunities and improve competitiveness in the market - Bank credit helps SMEs improve the efficiency of capital use, contributing to a healthy economy - Bank credit is the driving force for SMEs to improve the efficiency of their production and business activities, establish their reputation and position their brands in the market 1.2.2 Access to bank credit of SMEs 1.2.2.1 Concept The SMEs’ access to bank credit is understood as the ability of SMEs to borrow money from commercial banks to finance their production and business activities 1.2.2.2 Forms Regarding access to bank credit, SMEs have commonly applied approaches such as borrowing, discount, using factoring, using bank guarantees, and issuing corporate bonds 1.2.3 Developing factors affecting the access to bank credit of SMEs 1.2.3.1 Subjective factors Three theories were selected as framework theory research to achieve the goal of the study These theories include asymmetric information theory, human capital theory and theory of the firm Some characteristics of owner-manager and company, business strategies and bank conditions were selected based on the three theories to determine the relationship between these variables and SMEs in borrowing loans Therefore, this study combines different theories to understand enterprises which borrow bank loans 11 1.3.2.4 Lessons for Central Banks First, the Central Bank is required to review and perfect the legal framework on lending of credit institutions in order to reduce cumbersome procedures that are not appropriate to reality, and create favorable conditions for SMEs to access credit from banks for production and business activities Second, in addition to operating interest rates in the direction of maintaining stable interest rates, the Central Bank is required to strengthen the implementation of incentives to support SMEs to access bank credit capital with low interest rates Third, the central bank is required to continue to organize and promote the achieved results of the enterprise - bank matchmaking program Conclusion of Chapter In Chapter 1, the author built a theoretical framework for SMEs and SME's access to bank credit First, the author presents the general problems of SMEs, then the bank credit of SMEs and the access to bank credit of SMEs Next, the author builds hypotheses about factors affecting the ability to access bank credit of SMEs Finally, the author studies the experiences of countries around the world on improving access to bank credit for SMEs 12 CHAPTER ACTUAL SITUATION OF ACCESS TO BANK CREDIT OF SMES IN LAOS 2.1 Overview of SMEs of Lao PDR 2.1.1 Scale of development The number and share of SMEs in total number of enterprises has not changed significantly since 2006 The Lao Statistical Bureau collects data every 5–7 years (data for the years 2006, 2013 and 2018 are available) There were 126,717 SMEs in 2006 and 124,510 in 2013 and 124,567 in 2018 As a share of the total number of enterprises, SMEs represent 99.8% of enterprises in Lao PDR each year Growth of SMEs fell by 1.7% between 2006-2013 and increased by 0.05% from 2013 to 2018 2.1.2 Employment SMEs employed 238,703 employees in 2006 and 472,231 employees in 2013 and 472,529 employees in 2018 These figures represent 87.4%, 82.9% and 82.4% of total employment, respectively with a decreasing trend in the proportion of SMEs’ employment in the total labor force 2.1.3 Business productivity Nominal Gross Domestic Product (GDP) was 152 trillion LAK in 2018, with real GDP growth rate remaining high at 6.2% in 2018 but decreasing to 5.0% in 2019 Currently specific data on the contribution of SMEs to GDP by value or percentage is not available 2.1.4 Market Access SMEs mainly operate domestically with a limited number of customers and have little exposure to the global market 2.1.5 Technology and innovation 2.1.6 Connect and support Lao National Chamber of Commerce and Industry (LNCCI) provides business development services, networking opportunities and business incubation opportunities to its members LNCCI has 4,000 members of which SMEs account for 99% The member companies’ business is mainly on trading, manufacturing, hotels and pharmaceuticals LNCCI sponsors three SME Service Centers 2.2 Actual situation of access to bank credit of SMEs in Lao PDR 2.2.1 Commercial banking system 2.2.1.1 History of formation and development 13 2.2.1.2 Organizational structure of commercial banks in Laos The bank system in Laos has historically been dominated by three state-owned commercial banks (SOCBs), which together account for 59% of total bank assets 2.2.2 Actual situation of access to bank credit of SMEs In this part, the thesiswill rely on the World Bank's enterprise survey data (WBES) in Laos for years, including 2009, 2012, 2016 and 2018 to assess the actual situation of access to bank credit of SMEs After cleaning the data by removing the missing observations, the thesishas 1161 observations including 1129 for SMEs which account for 97.24% Average value of SMEs access to bank credit over the years: Compared with 10% in 2009, in 2012 this value increased to 30%, but then decreased to about 13% in 2016 and increased to approx 20% in 2018 2.2.2.1 Sources of credit SMEs face financial constraints to doing business in Laos The main sources of financing for working capital are internal funds or retained earnings, bank loans, commercial credit, and loans from friends and relatives 2.2.2.2 Funding request Only a small percentage of SMEs request funding from a financial institution SMEs which requested financing accounted for approx 25% of total requesting enterprises Percentage of SMEs applying for new credit: Only 18.77% of SMEs responded that they applied for a new credit 79.29% of SMEs did not apply for new credit Reasons for SMEs not to apply for new credit: approx 55% of SMEs reported difficulties in access to capital About 22% of SMEs face huge constraints 2.3 Analysis of factors affecting the access to bank credit of SMEs in Lao PDR 2.3.1 Data The thesisuses data from a World Bank survey on enterprises in Laos The survey was conducted in the provinces of Vientiane, Luang Prabang, Khammounane, Savannakhet and Champasak 2.3.2 Regression model Proposed variables using the research model are as follows: 𝐴𝑝𝑝𝑙𝑖𝑐𝑎𝑡𝑖𝑜𝑛𝑖𝑡 = 𝛼0 + 𝛽1 𝐹𝑖𝑟𝑚𝑖𝑡 + 𝛽2 𝑀𝑎𝑐𝑟𝑜𝑖𝑡 + 𝛾𝑗 + 𝜆𝑡 + 𝜀𝑖𝑡 (first) Where: i and j represent the enterprises and industry, 𝛾𝑗 represents the industryspecific fixed effect, representing unobserved variables that are industry-specific but 14 not change over time 𝜆𝑡 is a time-fixed effect that reflects macroeconomic changes that change through time and affect all enterprises 𝐹𝑖𝑟𝑚𝑖𝑡 is a set of variables which reflect the enterprise characteristics 𝑀𝑎𝑐𝑟𝑜𝑖𝑡 is a set of variables that reflect the characteristics of the macro environment 𝜀𝑖𝑡 is the random noise of the model The names, definitions, sign of expectation value and reference sources of the variables are described in Table 2.7 Table 2.7 Variable definition Variable name Variable definition Expect sign Source Dependent variable Application dummy variable, takes the value of if the firm applies for a loan and if it does not apply for a loan Explanatory variable: Firm characteristics LnSale the natural logarithm of sale-peremployee ratio and is a variable that reflects the production efficiency of the firm + Alam (2003), Rahman et al (2017) LnSize the natural logarithm of the number of full-time employees, reflecting the size of the firm + Alam (2003), Rahman et al (2017) LnAge natural logarithm of the age of the firm +/- Pickernell et al (2013), Vos et al (2007) Female dummy variable, taking the value if the business owner is female and if male - Rahman et al (2017) LnManager natural logarithm of years of experience of the business manager + Foreign dummy variable, taking the value of if + Davenport and Davenport (1999) Gou et al 15 Variable name Expect sign Variable definition the firm has foreign capital and if otherwise Innovation dummy variable, taking the value of if the firm is introducing a new product or new production process and if otherwise FormalRegister dummy variable, takes value of if the Source (2018) + Rahman et al (2017) + Campos et firm is officially registered and if al (2018) otherwise Collateral set of dummy 𝐶𝑜𝑙_𝐿𝑎𝑛𝑑𝑖 , variables including 𝐶𝑜𝑙_𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖 , + Storey (2016) and 𝐶𝑜𝑙_𝑃𝑒𝑟𝑠𝑜𝑛𝑎𝑙𝑖 will take the value if the firm i uses the collateral assets of the business owner's including Receivables/Inventories and Land, Personal Assets respectively Explanatory variable: Macro variable Interest interest rates - Osano and Languitone (2016) LnPrivateCredit natural logarithm % of private credit in + GDP Osano and Languitone (2016) LnEX natural logarithm of USD/KIP exchange + rate Osano and Languitone (2016) LnGDP natural logarithm of GDP + Osano and Languitone (2016) LnM2 natural logarithm of M2 + Osano and Languitone (2016) 16 2.3.3 Result analysis - Labor productivity affects the ability of enterprises to borrow capital - Strong impacts of GDP growth, money supply and exchange rate on SMEs' access to bank credit - Using collateral, which is the owner's land and personal assets e.g a passbook will increase the probability of getting a loan from the bank - Factors of firm size, foreign ownership and private sector credit only have an impact when SMEs not face financial barriers - The use of land as collateral continues to play an important role in obtaining loans - When faced with institutional barriers, the impact of factors such as labor productivity, enterprise size, innovation, interest rates and credit to the private sector becomes less effective or ineffective - Bribery has a positive effect on the ability of enterprises to borrow money from banks 2.4 Assessing the current situation of access to bank credit of SMEs in Lao PDR 2.4.1 Achievements The rate of SMEs’ access to bank credit in the period 2009-2018 in Laos is 20% In which, this rate reached nearly 30% in 2012 Outstanding loans to SMEs amounted to 14.1 trillion LAK ($1.6 billion) by the end of 2019 By sector, as of the end of 2019, wholesale and retail trade accounted for the largest proportion of SME loans (37.0%), followed by construction (20.7%) and other services (18.6%) Non-performing loans (NPLs) as a percentage of total loans were stable during 2015–2019 (3.1%) Laos has built a specialized state-owned commercial bank to help SMEs access concessional loans; efforts to establish credit guarantees are underway and the government has extended financial intermediary loans to SMEs through an SME incentive fund 2.4.2 Shortcomings and causes 2.4.2.1 Shortcomings 17 Compared with countries in the region such as Indonesia, Thailand and Vietnam, the rate of SMEs’ access to bank credit is much lower in Laos The non-bank financial sector is small and has yet to meet the unmet financial needs of SMEs In the author's sample, approx 55% of SMEs reported difficulties in accessing capital; Microfinance institutions and leasing companies are the main source of non-bank financing for SMEs The results from the regression model show that factors such as loan interest rates and foreign ownership have a negative impact on reducing the ability to borrow capital Although factors such as labor productivity, firm size, and private sector credit have a positive impact on the ability to borrow capital, when enterprises face financial and institutional barriers, these factors become less effective or ineffective This result has critical policy implications and will be discussed in Chapter 2.4.2.2 Causes of shortcomings Digital financial services are in their infancy as fintech-related regulations are yet to be implemented; However, the central bank is pushing for branchless banking to follow its financial inclusion roadmap; but SMEs are still unfamiliar with fintech as their understanding of digital finance needs to be enhanced Capital markets are not a source of funding for growing SMEs and startups; there is no dedicated SME equity market although the securities commission has begun to weigh in on a new board for SMEs The financial infrastructure needed to promote financial access is still underdeveloped, with a credit and collateral registry bureau in its infancy or planning stage Financial institutions and the private sector have initiated financial literacy training and education to increase access to finance for SMEs In order to have a deeper analysis of the causes of shortcomings in SMEs’ access to bank credit, the author conducted in-depth interviews with subjects: agencies related to SMEs (1 sheet for SMEPDO, sheet for LNCCI, sheet for Development Assistance Center) and banks (2 sheets for SOCBs, sheets for private commercial bank, sheets for foreign banks) The author conducted interviews by emailing questions and/or making phonecalls in the period from April 15 to 30, 2021 The author 18 used open-ended questions a Subjective causes Strengths and Weaknesses of Lao SMEs (Question No 2, Appendix 1) Based on the answer to question about the strengths and weaknesses of Lao SMEs, the subjective reasons are shown as follows From the banks' point of view, 03 out of 05 respondents agree that SMEs are the main drivers of economic growth However, one of them argues that SMEs are still in the early stages of development, constrained by limited local knowledge and low-quality technology One respondent pointed out that export enterprises in Laos are inferior to neighboring countries and that local enterprises are also affected by the competition created by greater economic integration in the regional market Risks associated with financing SMEs (Question 4, Appendix 1) From the bank's point of view, 04 out of 05 respondents indicated that the majority of businesses in Laos are small businesses, usually family businesses with a simple management structure, in which the owner is known to have limited knowledge in business management 03 respondents indicated that the lack of business planning ability, the lack of know-how and the lack of accounting skills were the main bottlenecks affecting the performance of SMEs 02 respondents added that if the borrowers have poor financial literacy, banks have to work even harder to assess the enterprise’s creditworthiness Another problem encountered is available information are still incomplete and sometimes unclear In summary, the reason for the difficulty in accessing bank credit from SMEs is the lack of business knowledge and management skills, limited capacity for capital absorption, low guarantee capacity, low liquidity and poor reliability b Objective reasons Business environment (Question 1, Appendix 1) 02 respondents said that the government's open-door policy allows for more domestic and foreign investment and that the country's economy is boosted by growth in the resource sector The proliferation of regional and international banks leads to increased competition in the banking market, and this leads to a rapid growth in deposits and credits 04 respondents suggested that the increase in foreign bank entry encourages domestic banks to improve their banking products and services 19 Banking industry environment (Question 3, Appendix 1) From a banking perspective, 02 respondents said that the importance of SMEs is reflected in the fact that state-owned commercial banks continue to serve these small businesses through government support, but 03 respondents said that banks are riskaverse and less favorable to SMEs Criteria that banks use to decide how to lend to SMEs (Question 5, Appendix 1) All the banks interviewed agreed that collateral was taken as the basic criterion for loan evaluation 03 respondents added that the quality of fixed collateral such as land and buildings is the highest requirement of banks However, 02 respondents said that in general banks often focus on business performance, financial status, quality of collateral as a basis for loan evaluation Because this is a lending policy question specifically aimed at bank respondents, government interviewees were not asked this question Government policy on the relationship between banks and SMEs (Question 6, Appendix 1) From a banking perspective, all respondents agreed that there was not much interference in banking operations of Bank of the Lao P.D.R (BOL) 03 respondents added that to support the SME sector, the Lao Development Bank (LDB) is designated as the bank for SMEs However, two opinions that the lack of accountability of the LDB remains a major concern Furthermore, one respondent made the important point that commercial banks still need to comply with the reporting requirements and operating rules of the BOL In short, the cause of SMEs’ difficulty in access to bank credit from the banks is due to the banks' bias in favor of loans to large enterprises, inappropriate loan approval database, banks’ requirements to ensure credit safety are not suitable with the specific characteristics of SMEs, slow in applying technology in credit activities Conclusion of chapter In chapter 2, the author assesses the actual situation of SMEs’ access to bank credit in Laos First, the thesisprovides a general analysis of the access to bank credit of SMEs in Laos After that, the thesisevaluates the factors affecting the ability to 20 access bank credit of SMEs Finally, the thesisassesses the actual situation of SMEs' ability to access bank credit based on qualitative analysis and empirical models Based on the analysis of experimental results, the thesishas pointed out the shortcomings and analyzed the causes based on the results of in-depth interviews 21 CHAPTER SOLUTIONS AND RECOMMENDATIONS TO IMPROVE ACCESS TO BANK CREDIT OF SMEs IN LAOS PDR 3.1 Orientation of credit activities of SMEs in Lao PDR 3.1.1 Orientation to develop SMEs in Lao PDR SME development is crucial to sustaining economic development Although Laos has maintained a high economic growth rate, there are still serious macroeconomic problems that need to be overcome First, Laos is essentially facing a chronic twin deficit in government spending and international trade The financial source of the deficit mainly depends on foreign sources Second, recent economic development in Laos is highly dependent on resources such as mining and hydropower 3.1.2 Orientation to develop bank credit towards inclusive finance of SMEs in Lao PDR The Government of Laos (GoL) has stepped up private sector development to promote growth Therefore, to achieve this goal, GoL has established strategies and policies to support SME development 3.1.3 Orientation to support SMEs under the impact of Covid-19 In response to the Covid-19 crisis, the government is expanding programs to stimulate access to finance for SMEs The government's SME Promotion Fund (SME PF) has injected 100 billion kip into financing SMEs through commercial banks in the form of low-interest long-term loans (currently at 3%) The fund focuses on production and business enterprises in rural areas 3.2 Solutions to improve access to bank credit for SMEs in Lao PDR - SMEs need to improve production and business capacity - SMEs need to increase investment in valuable fixed assets, actively access unsecured loans, loans secured by assets formed in the future - SMEs need to SMEs need to build and strengthen relationships with commercial banks, local government and other enterprises to reduce financial barriers and institutional barriers 3.3 Recommendations 3.3.1 Recommendations to the Government of Laos 22 First, the government needs to perfect, develop and implement synchronously the legal system to support SMEs Second, it is neccessary to increase the quantity and quality of training courses and knowledge training sessions for SMEs Third, it is advisable to plan and establish the State Venture Capital Fund; provide mechanisms and policies to encourage other capital sources to invest in SMEs Fourth, to continue to maintain macroeconomic stability, stabilize the money market, resolve non-performing loan, and lower lending rates Fifth, the government needs to take measures to improve the business environment and remove institutional barriers 3.3.2 Recommendations to the Central Bank of Laos - To review and perfect the legal framework - To manage interest rates in the direction of maintaining stable interest rates - To continue to organize and promote the achieved results of the enterprise bank matchmaking program - To continue to have more effective plans and policies to handle non-perfoming loans - To promote cooperation with international financial institutions to carry out credit extension and credit guarantee activities for SMEs 3.3.3 Recommendations to Lao commercial banks - Commercial banks must be really knowledgeable about SMEs to make timely adjustments to their credit policies of credit institutions - It is necessary to diversify and promote credit programs and products of commercial banks to SMEs - Credit institutions shall continue to innovate and establish transparent credit extension process, procedures and conditions Also, it is necessary to establish a specialized department to assist SMEs in completing loan documents and procedures - Credit institutions need to develop flexible interest rate policies according to borrowers, reducing other costs associated with borrowing capital - Credit institutions need to flexibly apply collateral conditions, increase the ratio of credit extension to the value of collateral assets 23 Conclusion of chapter In chapter 3, the thesispresents the orientation of credit activities for SMEs in Laos On the basis of orientation and analysis results in the current situation in Chapter 2, the thesisproposes a system of three groups of solutions for SMEs in Laos To implement these solutions, the thesisproposes three groups of recommendations for the Government of Laos, the Central Bank of Laos and Lao commercial banks to improve access to bank credit for SMEs in Laos 24 CONCLUSION In Chapter 1, the thesisbuilt a theoretical framework on SMEs’ access to bank credit Firstly, the thesispresents the general problems of SMEs, then the bank credit of SMEs and SMEs’ ability to access bank credit Next, the thesisbuilds hypotheses about factors affecting the SMEs’ access to bank credit in Laos Lastly, the thesisstudies the experiences of nations around the world on improving SMEs’ access to bank credit In chapter 2, the thesisassesses the actual situation of SMEs’ access to bank credit in Laos First, the author provided a general analysis of the access to bank credit of SMEs in Laos Next, the author analyzed the factors affecting SMEs’ ability to access bank credit Then the author assessed the actual situation of access to bank credit of SMEs in Laos through model results and in-depth interviews Finally, based on the results of qualitative and quantitative analysis, the thesisshowed the shortcomings and analyzed the causes In chapter 3, the thesispresented the orientation of credit activities for SMEs in Laos On the basis of orientation and the current situation analysis results in Chapter 2, the thesisproposed solutions and recommendations to improve access to bank credit of SMEs in Laos Through this thesis, the author wishes that the system of solutions and recommendations could partially contribute to the development of bank credit for SMEs in Laos LIST OF AUTHORS’ RELATED PUBLISHED RESEARCH WORKS Vongphakone vongsouphanh, Opportunities and challenges for the commercial banking system after Laos' accession to the WTO, Economy and Forecast Review, Issue no 10, April 2018 Vongphakone vongsouphanh, The bank credit for small and mediums enterprises (SMEs) perspectives and challenges The 10th International Conference on Socio – Economic and Environmental Issues in Development (ICSEED 2019) at Hung Vuong University, Phu Tho, Vietnam May 9,2019 Vongphakone vongsouphanh, The Banking Sector To Promote Agricultural Sector And Poverty Reduction in Lao PDR the 15th International Conference on Humanities and Social Sciences (IC-HUSO 2019) at the Faculty of Humanities and Social Sciences, Khon Kaen University, Thailand, 11-12 November 2019 Vongphakone vongsouphanh, Restructuring the Lao commercial banking system: Situation and solutions Economy and Forecast Review Issue no 02, January 2021 Vongphakone vongsouphanh, Factors affecting access to bank credit for SMEs in Laos Journal of International Economics and Management, Issue no 137, May 2021 ... Thomas, 1973; North, 1990; Adam, 2020; Meramveliotakis, 2021) The theory of social networks (Granovetter, 1973) and the theory of regulatory economics (Keynes, 1936) (ii) Experimental research works:... Sylavy (2012), Diengkham Sengkeomysay (2014), Phaylom Nodnapho (2014), Kongchampha Ounkham (2016), Sattakoun Vannasinh (2017) In addition to the doctoral thesis by Lao authors, a number of master’s... in developed countries In the current trend of integration and globalization, all countries pay attention to supporting SMEs in order to maximize the mobilization of resources and support for large