Following the adoption of the New Economic Mechanism, banking sector reform was initiated as one of key components of economic reform policy in Laos. Since the process of reform began in Laos, banking sector has undergone significant changes and the performance of banks has improved significantly, especially in recent years. The banking sector reform, which was initiated by the Bank of the Lao PDR in the late 1980s, has brought a competitive environment for banking industry and banks are now offering a wide range of financial services and products to the public. In light of this development, this paper provides an overview of evolution and current structure and developments of the banking sector in the context of reform measures taken over the past two decades. The paper also analyses the financial performance of the banking sector by firstly examining the key financial development indicators and then uses a widely-used CAMEL framework surrounding capital adequacy, asset quality, management efficiency, earnings and profitability and liquidity to evaluate the financial performance. The results of this study is useful for assisting central bankers to know the strengths and weaknesses for formulating strategies and polices that will promote an effective and sound banking system.