The Financial Cooperation component of the AFP-project as part of bilateral development cooperation between the Federal Republic of Germany and the Lao People’s Democratic Republic (Lao PDR) was concluded on the 24th of March 2014, with the Ministry of Finance (MoF) and Bank of Lao PDR (BoL) as signatories for the Lao PDR, and KfW for the Federal Republic of Germany. The agreed objectives and principles on management and implementation of the Financial Cooperation were embedded in two formal documents, the Financing Agreement and the Separate Agreement, which effectively function as program document (prodoc), and have guided the Inception Report in hand.
The objective of the Financial Cooperation component (from hereon: the project) is to support sustainable, inclusive economic development by enhancing access to sustainable and needs-based financial services for Micro, Small and Medium Enterprises (MSMEs). In order to achieve this objective, BoL, as Project Executing Agency (PEA), agreed to set-up a revolving fund to be used exclusively to lend to, or refinance, banks that have a strong interest in MSME lending The fund would be financed from a conditional grant in the value of EUR 3.0 million, made available by the German Government through KfW and named “Lao Access to Finance Fund” (LAFF) At the core of the agreed project approach is sustainable market development; pricing of the fund’s refinancing line shall be market-based and borrowing banks shall apply their own strategic marketing approach and credit policies. Subsidized interest rates and targeting lending to MSMEs that don’t meet the bank’s credit policies, or can’t meet market requirements, are outside the scope of the project.
Criteria were agreed to access eligibility of banks, in order to ensure that the selection of Partner Financial Institutions (PFIs), i.e. those financial service providers (FSPs) that would borrow from the project, would be limited to FSPs with an ample interest in and strategic focus on MSME lending, and the organizational capacity and financial strength to deliver good-quality market-based financial services to MSMEs on a sustainable basis and at some minimum scale. Criteria for MSME borrowers and loan products were agreed as well, to support outreach to groups of MSMEs that are most deprived of credit services (sometimes called the “missing middle”) and offer loan products for which unmet demand is highest; all within the boundaries set by the bank’s strategic marketing approach and credit policies.