In our last issue we carried an article written by Francis Kelfala on the state of the banks in Sierra Leone and the apparent liquidity crisis that accompanies the month of December. In the following article, the Public Relations Officer of the central bank, Beresford Taylor, reacts to the issues raised.
By Beresford Taylor
I read your very interesting and thoughtful article, entitled “Our Banks and the Month of December”, published in the Politico Newspaper of 12 November, 2013 under the Column, Perspective.
Let me welcome what I sense is a deep interest in a sound, solid and efficient financial sector for Sierra Leone. Your interest in this case is in sync with the mandate and mission of the Bank of Sierra Leone. Let me quickly assure you that the Bank has in the past three years undertaken extensive regulatory and prudential reforms geared towards strengthening the banking system and its operating environment. I will, in a moment, apprise you of these reforms.
Your assertion, or better still generalization, that in the month of December of the past three years, banks have exhibited an inability to meet depositors’ demand for cash, is unfounded and cannot to be accurate. Suffice it to say that I do agree with you that demand for cash is substantially heightened within this period, as evident in the size of queues in almost all the banking halls. This development in itself may be growing, year after year. But could it be attributed to an inability to meet depositors’ demand? Of course the answer is no. First of all, queues are a factor of the deposit base of any bank. In the past three years this base has been increasing steadily. This accounts for incremental queues in banking halls. For December the demand for cash is consolidated with a given timeframe and augmented by holiday makers and others picking up overseas remittances from friends and family. Please read the Governor’s Annual Dinner Speech of 2010 and 2011. You will notice that the number of persons holding accounts or using banking services at all has been growing exponentially. I am sure you are aware that December is a festive season and aggregate demand for goods and services in general appreciates.
Secondly, I will encourage you to look at the balance sheet of commercial banks in the country for the period highlighted. This is what you will notice: total asset for all banks grew by double digits, so too did profits. Loss making banks also decreased incrementally. Currently, the Industry‘s estimated value is tipping 25 trillion leones and growing. Minimum capital requirement is at an all-time high of 30 billion leones and is scheduled for review this year. Does this sound or look like an industry that is unsound? Now like I said, bank queues are inconvenient and time wasting, but they exist everywhere.
I appreciate your explanation of the art of banking but to attribute banking hall queues to liquidity risk is also erroneous. Also I will advise you to look at the balance sheet of commercial banks and see their liquidity position. The tight monetary policy stance of the Bank of Sierra Leone in the past three years also indicates a resolve to keep liquidity clamped not loose. Basic economics tells you the regulator is worried about liquidity posing inflationary threats when Monetary Policy Rate(MPR) is tight. You will also notice that inflation has been ebbing downwards over the past three years as a result.
I agree that some banks have been found wanting in terms of their adherence to the regulations. This development in itself does not weaken their capacity to safe keep depositors’ funds, nor does it pose any risk to the banking system in general. I will encourage you to read the amended Bank of Sierra Leone Act, Banking Act, the Anti Money Laundering and Countering the Financing of Terrorism Act, the Credit Reference Act (all passed into law in the past three years) and the new prudential guidelines issued by the Bank of Sierra Leone last year. You can find all of these documents on the Bank of Sierra Leone Website: bsl.gov.sl. These legal instruments have strengthened banking regulations and give the central bank unprecedented autonomy in supervising commercial banks. Recently, the Bank of Sierra Leone took administrative action against banks for breach of supervisory regulations. The Bank has also heightened the level of transparency in the conduct of the business of banking to the extent that fraud within banks is no longer a corporate secret. The central bank has and will continue to seek criminal penalty for bank fraudsters. This is not to say the prevalence of fraud in banks is at a risk posing level, they are just a bi-product of enhanced transparency and accountability in the financial sector. Let me assure you that this trend will continue.
Since you have dedicated substantial space in your piece to the issue of risk in the banking sector, I will use this mail too to update you on the risk management regime in the industry, which we have already made several publications about. Credit risk indeed is a focus of the central bank and the banking sector in general. Banks are to comply fully with the single obligor limit to ensure that the credit market is not concentrated. Provisioning for loans deemed at risk of default or bad are pegged to the minimum capital of the bank concern. Where loans are moved from non-performing to bad, the bank that offered such a loan is required to plug off the value from their minimum capital and augment same accordingly. This ensures that banks are sound at all times. The bank of Sierra Leone is on record to have applied administrative sanctions against banks for a breach of these regulations in some instances placing embargo on further credits until the breach is remedied.
However risk is fundamental to banking. Every intermediation in this business has some risk element. Banks cannot be averse to risk. We have been ensuring that banks can take risk but do so prudently and with reasoning. With regards the specific case you mentioned, you are encouraged to look at the statement of the Attorney General on the matter.
In the past three years every Sierra Leonean that has visited a bank, to make withdrawal, has got it. Increasing, people receive their salaries in commercial banks and migration from the informal to the formal financial sector is picking up. In a nutshell confidence in the financial sector is growing. Please be encouraged to read the World Bank and IMF reports on Sierra Leone and the Doing Business Reports published recently.
Let me hasten to refresh your memory about the cash shortage experienced in December of 2011, reasons for which we adequately informed the public about. Sierra Leone’s economy had, as reported by all the credible institutions, picked up and was growing at a reasonable speed. The central bank had recently replaced all the notes in the economy with resized banknotes. New mining companies had been making substantial cash payments to landowners and other stakeholders in their areas of operation. The beneficiaries in turn did not have bank accounts or were far away from the nearest bank. This development drained cash in banks, a situation that was alleviated by a robust cash mobilization drive undertaken by commercials banks and the central bank putting replacement notes into circulation. Unfortunately there was no liquidity problem.
Now, the forgoing does not imply that there will not be queues in December this year. Unfortunately, like every month in the year, there will be queues maybe even longer. Because our compatriots are becoming account holders like you. Should someone be doing something to ensure customers’ inconvenience is minimized? Yes, this is what has been done already. The Bank of Sierra Leone has spearheaded the largest overhaul of the country’s payment system, replacing the analog manual system, where cheques took three to ten days to clear, to one that is based on an integrated information technology network in which the same is processed within hour regardless of where it was issued. Large value payments will not be paid over the counter anymore and bank transfers are now within minutes.
What is the meaning of all of this for the customers? It means large value customers will be excluded from queues. Low value but large volume customers can utilize cheques for purchases and minimize their visits to banking halls. For regular payments, such as bills, rents and school fees customer can send instructions to their banks to process payment. This can significantly reduce the numbers of depositors in queues. I will encourage you to help educate your many readers of the alternative ways to use financial services that now exit so that the inconvenience of long queues could be avoided.
Beresford Taylor is the Public Relations Officer of the Bank of Sierra Leone.
© Politico 14/11/13
