Factors Affecting the Level of Operational Risk of Commercial Banks in the Lao PDR

Abstract

This study examines the factors influencing operational risk and their effects on the performance of commercial banks in the Lao People’s Democratic Republic (Lao PDR). The primary objective is to identify and analyze the determinants of operational risk using panel data from 32 commercial banks over the period 2020–2024. Secondary data were obtained from the official websites of the Bank of the Lao PDR and individual commercial banks, aggregated into annual observations, and analyzed using Panel Logit Regression. Data processing and estimation were conducted using Microsoft Excel and STATA 17. The results indicate that total loans and total assets of commercial banks increased steadily between 2020 and 2024, highlighting a growing exposure to operational risk. Given that loans constitute the core assets of banks, the inability of borrowers to fulfill their obligations may elevate operational risk. Despite this, the Non-Performing Loans (NPL) ratio and Return on Equity (ROE) remained within acceptable thresholds, suggesting that the banking sector has effectively managed these risk components, thereby limiting the impact on overall operational performance. Of the nine independent variables examined, four were found to have statistically significant effects on operational risk. These include: (1) nplr ratio, exhibiting a low-risk impact of approximately 0.70%; (2) ROE, with a modest positive association of about 1.71%; (3) state-owned commercial banks (SOEs), associated with a low operational risk impact of 16.98%; and (4) joint-venture banks (JBs), with a low-risk impact of 4.90%. The remaining five variables were not statistically significant