Instilling Credit Culture in State-owned Banks - Experience from Lao PDR

Abstract

Banks are essential for developing countries to transform savings into new investments, without which economic growth and poverty reduction will be retarded. However, development has frequently been set back by bank failures. Banking is much more problematic in transitional economies as these economies move from state planning to market-based approaches for the allocation of goods and services. Because of this uncertain economic environment, banking failures have invariably led to major difficulties in terms of a build-up in nonperforming loans (NPL) and periodic crises.

What can be done to create a viable and stable commercial banking system especially in transitional economies? The key elements of standard prescriptions are competitive markets, private ownership of banks, and effective banking supervision. Transition economies have found it to be a daunting task to develop and maintain such a market-based banking system. Effective banking systems have yet to be achieved in most of the transition economies, from the People's Republic of China to Eastern Europe. Experience shows that a fully effective market-based banking system can take a generation or longer to develop, especially under the more successful but slower phasing in Asia.