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The Operation and Management of Village Development Fund in 1 Province, Lao PDR

Bounthom Sisoumang* Ph.D student, Department of Agricultural and Resource Economics Faculty of Economics, Kasetsart University. 10900.. Email: [email protected]

Vute Wangwacharakul** Associate .Professor , Department of Agricultural and Resource Economics Faculty of Economics, Kasetsart University. Bangkok 10900.Thailand. Email: [email protected]

Visit Limsombunchai Assistant .Professor, Department of Agricultural and Resource Economics Faculty of Economics, Kasetsart University. Bangkok 10900.Thailand. Email: [email protected]

Abstract

As a least developed country, the economy of Lao PDR is agricultural based with high percentage of poor people living in rural area, poverty eradication and rural development is at the centre of the government’s economic and social development policies. Village development fund has been used as an important strategy to increase access to financial capital of the rural poor. This paper reviews the development of village development fund in , Lao PDR and assess its operation and management especially on the structure, management rules, operation and performance aspects, and supported by the interview of village development fund management committees of two districts in the province. The results show that the village development fund has expanded gradually over the past few years. The management is generally satisfactory. However, main problems encountered are those related to ethical ground and good

1 Paper selected for presentation at the 7th ASAE conference . 13-16 October, 2011.Hanoi, Vietnam * Presenter ** Corresponding author

2 governance of management personnel. By policies, the village development fund shall contribute to social development in the villages. This requires not only management skills and experiences to optimize business and social goals, but also knowledge and understanding of the members to accpet flexible or relative moderate rate of return to deposit. The non-performance loans, as observed, are mostly caused by crop or livestock raising failure.

Hence, to sustain the village development fund in Champasak province, it is important to widen the capacity development by more campaign on basic knowledge of principles/concepts among the members; ethical development and good governance among management and advisory committees. To avoid non-performance loan, it is essential to reduce risks from investment in agricultural or non-agricultural activities. This requires more support from the public sector to ensure efficiency and sustainability of the village development fund.

Keyword: Operation, Management, Village Development Fund, Champasak, Lao PDR.

Poverty problem in Champasak province

Lao is a poor country with population of 6.3 million people and contained with ethnic groups living around the country from the north to the west. The country shares borders with China, Myanmar, Thailand, Vietnam, and . In 1986, the Lao government adopted a policy to ensure self-sufficiency food supply and transformed the economy from a centrally planned to a market oriented one. Since then, the gross domestic product of the country has increased gradually in a range of 4-8% per year (Table 1). As shown in Table 1, agriculture had been the most important sector to the economy. It contributed nearly 60 percent of GDP in the early 1990s and still constituted nearly one-half of total GDP of the country in the early 2000s. In contrast, share of industry to total GDP increased at about the same rate and contributed about one-fourth to the economy in the early 2000s. Service sector of Lao PDR consistently contributed about one-fourth of total GDP over the period. Consumer price indices, especially during the later period of 1990s were very high and contained at between 8-16% in the early of 2000s. GDP growth and price indices indicated the drop in real income over the period.

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Table 1 GDP growth of Lao PDR and share by sector, 1992 – 2004 (percent) Year 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Total GDP 7.0 5.9 7.7 7.5 6.9 6.9 4.0 7.3 5.8 5.7 5.7 5.3 6.0 Agriculture 58.0 56.3 56.6 54.3 52.2 52.2 51.8 52.2 51.8 50.6 49.9 48.0 47.2 (% of total) Industry 16.7 17.4 17.8 18.8 20.6 20.8 21.9 22 22.6 23.4 24.5 26.0 26.6 (% of total) Services 25.3 26.3 25.6 26.9 27.2 27.0 26.3 25.8 25.5 25.8 25.0 25.0 26.2 (% of total) Consumer - - - - 13.0 27.5 84.4 134.0 27.1 7.8 10.8 15.6 11.4 Price Inflation Source: Asian Development Bank (2002) & (2005), Government of Lao PDR (2003).

Similar to other developing or least-developed countries, tend to concentrate where natural resources are rich and infrastructure is well developed. The urban sector is relatively well developed in both economic and social aspects. The rural households, on the other hand, live in a relatively poor developed areas, rely on rainfed agriculture and lack of other economic opportunities or social support. Many areas are accessible only in dry season. Hence, a larger proportion of people in rural area are under poverty line compared to those in urban areas. The Lao government has emphasized the development efforts to improve the living standard, healthcare and enhance education opportunities of these poor people. By region, during the early 1990s, poverty in Lao is high in the northern region and common in southern and central regions. There were very few provinces in the regions, such as Xayabury in Northern region and province and Vientiane municipality that were relatively better off (Table 2). Social and economic development over the past decades has gradually improved the poverty conditions in the country, although the percentage was remain high at between 32 to 38%.

Table 2: Percentage of Poor by Region and Province, 1992/93-2002/03.

Province LECS1 LECS2 LECS3 Change Change 1992/93 1997/98 2002/03 92/93 to 97/98 to 97/98 02/03 Northern Region 51.6 47.3 37.9 -4.3 -9.4

Oudomxay 45.8 66.1 45.1 20.3 -21.0 4

Luongnamtha 40.5 51.1 22.8 10.6 -28.3 Huaphanh 71.3 71.3 51.5 0.0 -19.8 Phongsaly 72.0 57.9 50.8 -14.1 -7.2 Luongphrabang 58.5 40.8 39.5 -17.7 -1.4 Xayabury 22.4 17.7 25.0 -4.6 7.3 Bokeo 42.4 38.9 22.1 -3.4 -17.8

Central Rigion 45.0 39.4 35.4 -5.6 -4.0

Borikhamxay 16.6 27.9 28.7 11.3 0.8 Khammuane 47.1 44.5 33.7 -2.6 -10.8 30.7 27.8 19.0 -2.9 -8.8 53.1 41.9 43.1 -11.2 1.2 Xiengkhuang 63.0 42.9 41.6 -20.2 -1.3 Xaysomboun SR -62.8 30.6 - - 32.1

Southern Region 45.7 39.8 32.6 -5.9 -7.2

Saravane 43.6 39.2 54.3 -4.4 15.1 Champasak 41.4 37.4 18.4 -4.0 -19.0 67.0 49.7 41.8 -17.2 -7.9 60.5 48.0 44.0 -12.4 -4.0

Vientiane 33.6 13.5 16.7 -20.0 3.2 Municipality

Lao PDR 46.0 39.1 33.5 -6.9 -5.6 Source: Authors’ calculations based on LECS3 2003 Note: LECS = Lao Economic Country Survey

Despite the declining percentage of population under poverty line, poverty levels in Lao PDR remain serious, particularly in less developed provinces such as Sekong and Attapeu in the South, Savannakhet and Xiengkhuang in the Central region or Huaphanh or Phongsaly in the Noth. The Lao government has implemented the National Poverty Eradication Programmed (NPEP) aiming at helping the poorest groups by improving the basic needs such as health services, primary education, infrastructure and agricultural products, with the target to graduate from its Least Developed Country status and meet the Millennium Development Goals (MDG s) by 2020.

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Champasak province is in the southern part of Lao and shares the border with Thailand and Cambodia. The province is rich with natural resources, particularly water and forest. Agriculture contributed about 30% of the provincial product while industry contributed slightly lower at about 27% in 2010. With the rich nature, service sector in Champasak province contributed more than 40% to the provincial product. Tourism contributed most as can be seen from number of tourist increased sharply from merely 8,000 in 1999 to 140,000 people in year 2006 (Department of Planning and Investment, 2010). Compared to other provinces of the South, Champasak province has relatively succeeded in poverty reduction over the past decade (Table 2). Percentage of poor people in the province dropped gradually from 15% in 2004 to 5% in 2008. Despite of that, the poverty rates in Champasak province were still high in some districts, particularly Munlapamok and Sukuma and Paksong (Table 3).

Table 3 Poverty rate, by district in Champasak province, 2004-2008 No Name of district Percentage of poor household to total 2004 2005 2006 2007 2008 1 0.7 0.28 2 0.18 0 2 Sanasomboun 6.39 4.43 3.06 2.63 1.45 3 Bachieng 14.79 10.6 8.95 5.75 4.03 4 Paksong 10.28 12.23 11.87 12 8.2 5 Pathumphone 26.35 23.49 13.24 5.96 3.65 6 Phonthong 5.61 3.8 3.81 2.71 2.47 7 Champasak 16.08 11.12 9.75 7.48 5.92 8 Sukuma 15.17 11.77 11.45 11.02 10.02 9 Munlapamok 57.08 53.97 48.83 31.05 26.8 10 Khong 25.41 16.89 12.79 7.22 4.23 Total 15.23 12.66 10.67 7.29 5.54 Source: The department planning and investment of Champasak province

In general, districts that shared borders with other countries tend to have lower poverty rates than those do not. This is due mainly to more agriculture and non-agriculture trade opportunities across borders. For example, the poverty rate in Sanasomboun and Phonthong that shared border with Thailand and Khong that shared border with Cambodia were lower than those of other districts except for Pakse district, the capital of Champasak province. On the other hand, 6 districts located on upland and less accessible such as Paksong and Sukuma tend to have higher poverty rates than others. Note that Bachieng and Sukuma were the two districts in Champasak province that the GOL(Government of Lao) set as pilot districts for the Policy Bank to provide financial support to accelerate poverty eradication. In 2010, there were four districts that poverty rates were only or less than 2% and another two districts with the low rates of 5-6% (Table 4). Surprisingly, poverty rates in three districts (Paksong, Pathumphone and Sukuma) increased in 2010. This was probably due to poor agriculture harvests in the period.

Table 4 Poverty rate in Champasak province, year 2010

No Name of district No of No of poor Poverty rate household households 1. Pakse 12,798 5 0 2. Sanasomboun 12,476 150 1 3. Phonthong 15,545 369 2 4. Bachieng 9,118 502 6 5. Paksong 12,195 3,112 26 6. Pathumphone 9,771 1.100 11 7. Champasak 9,980 450 5 8. Sukuma 8,545 2,757 32 9. Munlapamok 5,507 942 17 10 Khong 14,389 39 0 Source: Calculated from raw data of Department of Political and Rural Development, Chanmpasak province

Lao financial sector

After independence day (1975), the financial sector in Lao PDR was weak and set up only in urban areas. People living in rural areas had to rely from informal financial sector for capital for their investment in agriculture or non-agriculture. During the 1980s, the banks, as a financial mechanism, were centrally planned, administrative and subsidized from central to local levels. During this period, the bank also had very limited resources and loans were restricted to support only state factories, enterprises, farms and cooperatives. Very limited funds were provided to private sector or individuals.

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Since early 1990s to present, the market-oriented policies of the Lao government have resulted in substantial change to the financial sector of the economy. The Central Bank (the Bank of Lao PDR or BOL) has gradually played increasing role of macroeconomics to safeguard the foreign reserve of the Government, regulate the printing of currencies and transform the banks’ branches in Lao and restructure the state owned banks. The BOL is also responsible to draft the financial sector strategies to focus on macroeconomic stability and regulatory framework with provision of financial services from the state to market force and monitor by the bank of Lao PDR (Viengthong Keomanisy,2003).

Formal Sector

The Bank of Lao PDR (BOL) is in charge of the financial sector in Lao PDR and working as supervisory and regulatory of the public and private banks in the country. In 2010, there were four state owned commercial banks, compared to 14 foreign and domestic private banks (Table 5). The private and foreign banks still concentrate mainly in non-agriculture and urban areas. They play limited roles in supporting the poor people. Development of formal financial sector in Lao PDR is still slow, particularly in supporting of agricultural sector. This is mainly due to the relatively business wise less attractive of the sector. It is also partly due to the lack of effective collaterals of the farm households. The only state-owned bank that directly link to rural household is the Agriculture Promotion Bank (APB). The bank has branches in most districts and serve agricultural sector and farmers in rural area. In 2007 the Lao government set up the Policy Bank to enhance financial access to the poor people living in 47 poorest districts in Lao PDR. The Policy Bank only provides loans to support agricultural production of specific farmers’ groups(Litsamy Latsavong,Margarete O. Biallas.2007). Table 5 The banks in Lao PDR, 2009 No Category Number of banks 1 State owned commercial bank 4 2 Joint venture bank 2 3 Foreign bank 7 4 Private bank 7 Sources: Bank of the Lao PDR, 2009 8

Semi-Formal Sector

The semi-formal financial sector is allowed to provide limited finance services, such as loans but not deposit or savings account. This semi-formal sector is mostly operated by NGOs (non-government organization) with specific objectives under different projects or programs. The fund is usually from international development cooperation. The operation is normally limited in certain areas with specific project periods. This semi-formal financial sector was established in 2004 in three provinces of Lao PDR namely Vientiane, Luang Prabang, and Savannakhet and supported by the Asian Development Bank (ADB) and others such as AFD(French International Development Agency) to support the commercial capacity-building of coffee growers in . and UNDP supports to the government of Lao through the UN Development Assistance Framework (UNDAF) and the Government's National Socio- economic Development Plan (NSEDP). This project aim is to increase human development and meet the Millennium Development Goals (MDGs).

Informal sectors

This sector is the most important financial sources of the poor urban and rural households. The operators range from money lenders to shop owners or traders. They provide all services as needed, especially loans or deposits. Nevertheless, loan service is probably the most important activity of this informal financial sector. Poor and low income households are normally not served by formal financial institutions because of their high risks, high costs, and low profitability. These particular groups are also lack of collaterals required by formal financial institutions. Hence, the poor and low income households have to rely on informal sources of microfinance (ADB, 2000). There are several strong and well-perform micro finance in several countries such as Grameen bank in Bangladesh, Bank Rakyat Indonesia (BRI) and Bancosol in Bolivia. In 2005, 9 microfinance in South Asia covered at least 35 million of some 270 million families and contributed about 15 percent of overall of credit to low income families2. In Viatnam, microfinance was observed as an important tool for poverty reduction (Nghiem, H., Coelli, T. and Rao, D. S. P (2006)). In Thailand, the government injected nearly US$ 2,000 million as village fund to villages and communities across the country and it became one of the main sources of fund to villagers and community members to enhance their agricultural or non-agricultural investment (Anan Wattanakuljarus, 2008).

Village Development Fund in Champasak province, Lao PDR

Similarly, In Lao, a village development fund was set up nation-wide in 1997 by the government policy to provide financial services to the poor people. The fund is aiming at enhancing income generating activities and contributing to poverty alleviation (Table 6). As can be seen, with slightly more than a decade, there were more than 2,300 establishment of village development fund with more than 3.2 hundred thousand households as the members. It is also notable that about one-half of the establishments were in the Central region (Table 6). Village development fund is the largest informal financial sector in Lao PDR.

Table 6 Village development fund in Lao PDR, by region, year 2009

No Region Number of village Number of member development funds (households or persons in (establishment) thousand or what) 1 Northern 914 57,198 2 Central 1,603 208,901 3 Southern 797 68,522 Total 3,314 334,621 Source: Microfinance Statistic (NERI)

A village development fund in Lao PDR is a small-scale source of fund. By principle, it is set up by villagers, made up of members’ properties and assets, which may either be in form of cash or kinds (rice, animals or other products). Members contribute to the fund base on their own capacity to afford a contribution, either on an individual, voluntary basis or through a

2 Microfinance in South Asia: Toward financial inclusion for the poor 10 collective agreement amongst several villagers to form a collective fund. In addition, this fund is also aimed at providing small-scale financial services, such as small-scale banking (credit and deposit), which is intended to access members with cash/capital and run their own business.

Specifically, the reasons behind the establishment of the village development fund are to: (i) provide a resource of revolving funds within the villages to provide either credit or savings to its members, which will be used to establish income generating activities, to the need in emergency or in responding to particular situations in the villages; (ii) support and build the capacity of the villages in terms of the financial resources management and au system, in accordance with the local situation; (iii) establish process of self reliance in terms of learning, taking one’s own initiative to address problems and to encourage, strengthen and expand the local economy; (iv) ensure villagers actively participate as key elements in strengthening the social - economic situation of their villages; 3 (v) safeguard the local environment, culture and traditions for the future .

In order to strengthen local management capacity, local people must take part and participate in determining the future direction and management of their own villages by using their own existing knowledge and resources, with technical supports from the relevant authorities. This participatory approach is also intended to nurture solidarity and assistance amongst villagers, particularly amongst the poorest group. Rule and regulation of village development fund has been improved for better control of fund over time. To be able to efficiently manage and make use of the village development fund in a sustainable manner, some important principles must be applied: (i) people/villagers make their own choices/ plans and implement the village development fund independently; the local government authorities should provide consultation and advice on technical issues only;

3 Souphith Darachanthra, creating the village development fund, microfinance newsletter 11

(ii) the development fund is a fund to provide credit or mobilize savings for its members only. Members must also abide by the rules and regulations of the village development fund and the amount borrowed must be repaid back into the village development fund with interest within agreed period, stated in the loan contract. (iii) The village development fund members will receive dividends according to their shares and members who deposit saving into the village development fund will receive interest according to the village development fund rules and procedures.

It should also be noted that existence of village development fund is also part of the criteria for a village to be classified as development village or be a member of a cluster of development village. This condition induces the villages to establish village development fund and ensure its existence. Following the Decree of the Prime minister of Lao PDR No 09, regarding the development of villages and groups of villages in Lao PDR and according to the policy of the Governor of Champasak province to promote financial access of the rural households, the first village development fund in Champasak province was set up in year 2000 in 10 villages of Phonethong district with amount of fund of 4 millions kip (or about 510 US$). Since then, village development fund has been established across the province and increase gradually. The number of funds was more than 370 in the year 2009 (Table 7)

Table 7 Establishment of village development fund in Champasak province, Lao PDR, 2001-2009

No District Year Total 2001-2005 2006 2007 2008 2009 1 Pakse 8 7 10 11 6 42 2 Sanasomboun 3 6 8 10 5 32 3 Bachieng 15 5 8 7 5 40 4 Paksong 3 4 7 7 5 26 5 Pathumphone 5 13 10 9 5 42 6 Phonethong 38 7 9 10 7 71 7 Champasak 1 5 8 9 7 30 8 Soukhouma 6 3 3 4 3 19 12

9 Moun 2 4 5 4 2 17 10 Khong 6 13 12 15 8 54 Total 87 67 80 86 53 Source: Office of political and rural development

Following the general principles, village development fund in Champasak province has the role to promote saving and provide credit facility to its members. The fund normally requires a minimum saving of not less than 5,000 kip per month from each member. Failing to continue saving for 3 months will result in the loss of membership from the village development fund. For credit, members with saving of not less than 3 months could apply for credit of not more than 5 times of the money deposited to the fund. The period of loan ranges from 3 to 6 months with the interest rates between 2-5 percent. Borrowers are subject to payment of interest every month and repayment of the capital at the end of the lending period.

Management and Administrative Structure of Village Development Fund

The management and administrative structure of village development fund is generally the same in Lao PDR. Figure 1 shows the structure of village development fund in Champasak province. Similar to cooperative concept, the village development fund is governed by its members. The members elect the management committee and its advisory committee. The management committee normally composes of 3-5 members responsible in five areas of work, as shown in Figure 1. The provincial authorities play the role of monitoring and evaluation at district and provincial level (Figure 1). Hence, management of village development fund is overseen by the members. This is quite important in terms of efficiency and sustainability of the fund. The members must realize their roles and sufficiently and effectively participate in the development of the fund. Knowledge and understanding on principles of the fund of the members are crucial.

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Monitor Evaluation

Member Province

District Advisory Management committee

Accounting Agricultur Group Service Saving Sector e product product and trade and credit sector sector sector sector

Figure 1 The structure of Village Development Fund in Champasak province, Lao PDR

There are three sources of fund to village development fund. The most important source of fund is the compulsory monthly deposit from the members. The other two are registration fee and income from interest (Figure 2). Note that in few villages, farmers are charged for water fees and the income is given to the village development fund.

Registration (3000 kip per member )

Deposit (5000 kip or Village development fund more per Credit member)

Income from Interest

Figure 2 Flow of fund of Village Development Fund in Champasak province 14

As of 2010, 429 villages in Champasak province have established village development fund with a total amount of fund of about 25 billion kip, or about 58 million kip/village (Table 8). Partly due to the rules and procedure, members saving with fund were larger than those receiving loans.

Table 8 Number of members and amount of savings and loans of the village development fund by district in Champasak province, 2010 No Name of village member Total saving members Total loan district (number) saving (million kip) borrowing (million kip) (persons) (persons) 1 Pakse 42 8,400 9,890.55 4,665 9,853.97 2 Sanasomboun 45 3,302 928.60 1,104 860.50 3 Phonethong 50 8,186 7,526.45 2,469 7,274.96 4 Bachieng 39 4,291 918.76 1,954 903.96 5 Paksong 52 2,612 334.923 2,326 331.00 6 Pathumphone 56 4,229 1,286.35 3,686 1,279.30 7 Champasak 24 777 382.34 249 380.00 8 Sukuma 34 1,196 138.53 709 135.40 9 Munlapamok 25 1,449 481.73 282 460.25 10 Khong 62 7,260 3,248.56 1,461 3,109.63 Total 429 41,702 25,136.81 18,905 24,588.97 Source: Office of political and rural development

Compared among districts, it is notable that the size of fund in the capital district (Pakse district) and districts with border to neighboring countries (Phonethong and Khong district) are relatively large. This is due mainly to concentration of the economic activitie, especially domestic and border trade in these areas. The funds in other districts are relatively small due to the relatively weak and limited economic activities which are mainly agriculture. Note also that these areas are also poor in terms of basic infrastructure and social services.

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Some Observation of Village Development Fund in Champasak Province

As can be seen from the discussion above, village development funds in Lao PDR in general and in Champasak province in particular, are very much dependent on participation of the members and the management capability of the committee. This section discusses some characteristics of the key players of the fund in Champasak province that related to the management and operation efficiency of the fund. Information from the interview of the village 4 development fund management committees in two districts, namely Pakse and Bachieng are used to highlight the points of discussion.

Management committee

To develop village development fund, the government has facilitated the establishment of the village development fund through training and technical support to village leaders. Following the principles described above, the village leaders are responsible for consulting the village members and agree on rules and regulation of its own village fund. The training is generally last for one or two days for the preparation of the establishment of the fund. General guidelines for management and operation of the fund are provided. An annual meeting to assess the development and exchange experiences between village development fund management committees and the provincial officials is also organized. With the self reliance policy, the village development funds are expected to be able to operate profitably and sustainably. Table 9 The opinion of village development fund management committee

Items Number Percentage PakSe Bachieng Total Pak Se Bachieng Total Lack of knowledge and 6 1 7 14.28 2.56 8.64 understanding among members Lack of knowledge 2 0 2 4.76 0 2.46 among committee Poor performance of the 2 6 8 4.76 15.38 9.87

4 Pakse is the most advanced urban district in Champasak province with the poverty rate of zero. There are 42 villages in Pakse district. Bachieng is one of the 47 poorest districts in the country that succeeded in reducing poverty rate among the rural districts. There are 45 villages in Bachieng district. All 42 and 39 village development funds in Pakse and Bachieng districts were interviewed. 16 committee Complicated procedures 1 0 1 2.38 0 1.23 for loan application Poor enforcement of 6 0 6 14.28 0 7.4 rules/regulations on loan Members didn’t follow 24 11 35 57.14 28.2 43.2 the rules Insufficient fund 4 1 5 9.52 2.56 6.17 Poor performance of the 5 2 7 11.9 5.12 8.64 fund Low deposit rate from 6 0 6 14.28 0 7.4 members Lack of transparency 1 0 1 2.38 0 1.23 No participation from 1 0 1 2.38 0 1.23 rich farmers

Probably one of the most important key players of village development fund in Lao PDR is the village development fund committee. The committee composes of 3-10 members elected from the village development fund members . As shown in figure 3, About one-half of the committee members have either primary or secondary education. It is also notable that more than one-third of them finished high school. This suggests that the committee members do have good basic education. Their capacities could be enhanced effectively through sufficient and proper training. The interview of the village development fund committees also did not identify technical constraints of the committees. Only about 10% the management committees were lack of knowledge or responsibility in management. 17

Education level

3% 15% 35% primery school

secondary school 35% 13% High school Certificate

Diploma

Baachelor

Figure 3 The education level of village development fund committee in Pakse and Bachiang districts, as of 2010

The management of the fund

As the village development fund is solely managed by villagers whose financial management knowledge is very limited, the operation of village development fund is critically dependent on the capacity enhancement programs of the public sector at the initial stage and the participation of the stakeholders. This is especially true for financial management since knowledge on basic accounting and record keeping system must be well-understood. Types of training provided to the management committees are the important tools of the government to enhance the management operation capacity. Figure 4 shows that about one-half of the training offered is on accounting system, one- fourth is given to credit issue and another one-fifth devoted to general concept of rural finance. It could be said that by subjects, the training is generally corresponding to the technical needs. It is nevertheless, equally important to emphasize the ethical perspectives and good governance concept to ensure transparency and accountability of the system are well in place. As shown in Table 9, several problems are related to the management of the fund. The most critical one is the lack of compliance to the rules and regulations of the members. More than 43% of the 18 respondents indicated such a problem. As found in Pakse, personal privilege and lack of transparency were the key drivers of the problem. The experiences of village development fund in Champasak province suggest that the subjects generally cover the technical needs of the management. The issues are more on principles of the fund and ethical aspects and good governance as well as time allocated to the training, including exercises or practices. Development of curriculum on those aspects to enhance management capability should be considered.

60 Percent

50

40

30

20

10

0 Rural financial Credit Accounting Self study Cooperative

Figure 4 Percentage of training given to village development fund management committee members, by types of training, 2010

Operation of the fund Operation of the fund is an important factor contributing to efficient fund management. The mobilization of fund, cost and return of deposit and loan and the turn-over period of fund are critical to the development. Operation of the fund varies among villages. Basically, deposit and credit are opened in specific time of each month, each time could last from one to three days depending on the size of the fund and either the beginning or the end of the month. Locations of offices of the village funds also vary among villages, some in the village headmen houses, others in the community centers, or temples. 19

As a general rule, the members are obliged to save monthly, at minimum of three consecutive months. The credit ceiling is subject to the amount saved with the fund. The loan periods and the interest rates are agreed by the members, within the ranges allowed by the government (between 2-5% per month). For example, the interest rate charged in Huayangkham village is 5% per month, compared to that of Nonsay village of 2% per month. The differences generally reflect the demand and supply of fund and partly reflect opportunity costs of investments in the villages. However, it is surprised to observe that loans for emergency cases are charged at lower rates than income generating loans. This reflects the effects of social tie within the rural communities in Lao PDR. The interest earned by deposit to the fund depends on the profit of the operation of the fund. At the end of each year, 70% of the income will return to the members as interest earned from the deposit. Hence, the interest rate for deposit varies from year to year. Nevertheless, in general, the members expect the interest rate for deposit to the village development fund to be higher than that of commercial banks (at about 12% per year). According to the villagers, this village fund operation system enhances the household practices to monitor not only performance of the village development fund but also their own financial management, especially consumption and saving behaviors. The loan periods also depend on the policies of different villages. Normally, loan period for business is shorter than that for agricultural production activities, This is reflected by shorter term of loan in villages in urban areas of Pakse district, compared to that of Bachieng district. For example, loan for purchasing of passenger tricycles or bamboo processing or pig farming in Pakse district is only for three to four months while loans for agriculture or non-agriculture activities in Bachieng districts are between 4-6 months. Figure 5 shows the shares of loans by different loan periods. The loan periods affect the rates of turnover and hence the profitability of the fund. Nevertheless, loan period for agriculture has to allow for sufficient time for farmers to generate return. Thus, by nature of activity, loans provided to agriculture tend to be attached with higher risks than non-agriculture. Partly due to the risk perception and in order to ensure the management performance, it is observed that many village funds restrict loans only to the first half of the year.

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Not only income generating activities are supported by the village development funds, certain consumption needs, especially for education and health are also supported. While agriculture and business cover about three-quarters of the funds, education and health constitute the remaining one-quarter of them (Figure 6).

40

35

30

25

20

15

10 5 0

3 month 4 month 6 month

Figure 5 Percentage of village development fund borrowed by different loan periods 2010

21

50

45

40

35

30

25

20

15

10

5

0 Education Business Agriculture product illness

Figure 6 The percentage of credit from village development fund by types of uses

There is no specific comments related to operation of the fund from the fund personnel. As shown in Table 9, few responses were on complicated procedures, low interest rate for saving deposit and the amount of fund was too small. In summary, operation of the fund is generally similar among villages, although certain differences in interest rates charged and loan periods are observed. Most loans are given to income generating activities, although some are provided for consumption needs. The deposit rate of interest is practically determined by performance of the village development fund. Hence, rates of interest for loans and repayment rates are important factors in this regards.

Performance of the fund

In general, the financial performance is reflected by the profit generated to the investor. With multiple objectives of the village development fund, the performance of the fund is influenced to the most extent by general guidelines provided by the provincial authority. It is notable that village development fund in Lao PDR, including Champasak province, is required to contribute to village development, including maintenance of temples, improvement of schools, maintenance of public infrastructure or utilities like roads or health centers of the villages. 22

As the operation cost is minimal, income of the village development fund is used as the basis for distribution. There is no specific regulation for income distribution of the village development fund, although suggested distribution is given in general that 70% as return to the share holders, 20% to management and advisory committees and the remaining 10% is for operation of the fund and social development of the village (Table 10).

Table 10 General guidelines for distribution of income of village development fund Category Share of total income (%) Return to the share holders 70 Compensation to the management committee 15 Compensation to the advisory committee 5 Reserves 5 Social development of the village 5

Given as optional, different villages, based on the suggested list, determines their own distribution, depending on the structure and environment. For example in Sanamxay village of Pakse district, they provided slightly lower share to management and advisory committee and higher share to social development. They also allocated a small share for capacity building activities (Table 11)

Table 11 Distribution of income from village development fund in Sanamxay village Category Share of total income (%) Return to the share holders 65 Compensation to the management committee 12 Compensation to the advisory committee 5 Reserves 3 Social development of the village 10 Study tour 3 District advisor 2

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The repayment rate of loan is a key factor to income generation of the village development fund. About 20% of village funds in Pakse had difficulties in loan repayment while the problems in Bachieng were relatively less. Note that in many cases, the non-performance loans were caused by crop or livestock raising failure. Ability to collect loan repayment of village development fund are unique among villages. It is also observed that close relationship among village members can induce positive or negative effects to repayment rates. In certain villages, senior and respectful managers tend to be able to chase for loan repayment. On the other hand, managers tend to fail when the customers have close relationship with and more senior than them. This is also reflected by the views expressed in table 9. In general, it can be said that social structure in the villages could also positively or negatively affects the performance of the management of the village development fund.

Conclusion: The village development fund set up with the Lao government policy as a supporting tool for poverty eradication in the country. By principles, the fund hopes to utilize the wage income or earning within the villages to develop self evolving fund to foster village development. The village development fund is generally guided by common rules and procedures. Strong public support has been provided through training, monitoring and evaluation of the public agencies. The performance of the fund is mostly rest upon the capacity of the villages themselves. Champasak province had been regarded as one of the poorest provinces in the South. With the rich of natural resources and strong commitments of the public sector, poverty level of the province has declined satisfactorily. The village development fund of the province has also been well-developed. This study reviews the overall development and highlights some problems encountered by two advanced urban and rural districts of the province. Organization structure of the village development funds is the same in general. They also have similar management and operation guidelines provided by the authorities. This is also true in Champasak province. Development of village development fund in Champasak province is largely dependent on the commitments of the management and advisory committees. With good education, potential capacity development is high. The public sector also regularly provides technical supports to the villages. However, management problems are mostly induced by personal 24 relationship or social cohesion within the villages. While members ignored the rules, the management was reluctant to enforce them. The performance of the village development fund is generally satisfactory. Surprisingly, relatively more village funds in the advanced urban district of Pakse had problems related to non-performance loan than the rural district of Bachieng. It is important to note that the problems were due to business failure not by misuse of the loan. It should also be noted that all village development funds are required to contribute certain benefit to social development of the villages. The special characteristics of village development fund in Lao PDR that required certain contribution to village development and flexible return to the share holders as interest to saving deposit need good balance between economic and social incentives to the stakeholders. The observations of the village development fund in Champasak province and the views from selected village development fund indicate that it is important to widen the capacity development by more campaign on basic knowledge of principles/concepts among the members; ethical development and good governance among management and advisory committees. To avoid non- performance loan, it is essential to reduce risks from investment in agricultural or non- agricultural activities. This requires more support from the public sector to ensure efficiency and sustainability of the village development fund.

ACKNOWLEDGMENT

I am indebted to express my thanks to Kasetsart University and Princess Sirindhorn International Center for Research Development and Technology Transfer, for funding this study.

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