By Tanu Jalloh
The last time I looked at the financial sector of the economy of Sierra Leone was when in November 2013 it became obvious that somebody had to draw attention to an emergent banking sector, but one that was prone to financial security challenges amidst regulatory incapacity.
In Sierra Leone such an oversight is being provided by the central bank as per regulation but in itself is largely fraught with challenges of incapacity, in a way opening possibilities of criminal enterprises. We have seen some of them take advantage of that weakness. A case in point was the 2013 investigation of probably Sierra Leone’s biggest cases of banking fraud, involving some commercial banks. I still believe that that theft, which also indicted a businessman, Kabbah Kalu, with a confederate of managers in certain banks, could have been averted if we had had a system that worked.
At the time, in all the three matters that were being investigated by the police, fraud was conceived, instituted and perpetuated by some low level criminals who were and are still functioning as businessmen. Without prejudice, that case could well be dead. It is as incensing as it is unbelievable that Mr. Kalu could fleece commercial banks of Le40 billion (which is about US$9.3 million) without a bond to show that due diligence was followed and that it went through all thorough security screening measures as superintended by the regulator. This is why I think the Central Bank was culpable too. This is because all other banks in the country are found by law to keep a fixed portion of their total deposits as reserves with the central bank. These reserves help the central bank to control the issue of credit by commercial banks.
Unfortunately, I am yet to see anything solid since the Financial Sector Development Plan Support Project in 2013, with a development objective to “strengthen the capacity of the Bank of Sierra Leone and contribute to improve efficiency in financial intermediation, safeguard financial sector stability, reduce transaction costs of money transfer and expand access to financial services”. I will limit this piece to what the Central Bank would have done, even with challenges to regulate, to safeguard and ensure financial sector stability.
The country’s situation in terms of capacity to regulate the banking industry or the financial services sector is at the mercy of the aristocrats – rogue businessmen who have the grace of the powers that be. They can never access those huge loans and refuse to pay without the necessary political patronage and advertent regulatory paucity. Meanwhile, genuine small scale but innovative and promising businesses languish for want of loans without recourse to politics. Thus, there is what I call a serious transactional inequality with no equal access and reasonable conditions to loan facilities for small businesses; no congenial win-win interest rate.
All of these are a bane to the opening up of burgeoning local informal businesses in particular and the economy in general. Some of these concerns cannot be evaded in the search for answers to the current state of affairs of the country’s financial sector. Much as they look unsettling, revelations on weak and pliable banking regulations in Sierra Leone make up an integral part of the economic difficulties the country faces right now.
There is a cause for concern. And here are some of the reasons for apprehensions:
In late 2011 the “Stability Analysis Report on Sierra Leone’s Financial Sector” indicated that “the banking system was vulnerable to a certain level in all of the key areas of assessment and, therefore, had weaknesses.”
As a consequence, between October and December 2011, this fear became a reality with a liquidity crisis that has resurfaced at the close and beginning of each year and during such festivities in December and January.
It would also seem that the Central Bank could not tell when a bank’s financial standing was healthy for as long as the collateral condition was met. It is not a secret that banks, the world over, have the tendency to cheat in their quest for profit maximisation; they falsify interest rates and lie about their healthy financial standings or fake asset acquisition as collateral to regulatory bodies. I must say that that situation may be festering in Sierra Leone, despite the huge economic prospects that have heightened investor confidence in the recent past.
In fact in a July 2011 document titled: ‘Financial Sector Reform and Development in Sierra Leone,’ authored by Omotunde E. G. Johnson for the International Growth Centre (IGC), the pessimism makes the situation even grimmer.
“Sierra Leone is at a very low level of financial development. It is a country of about six million people, with a per capita annual income currently around US$315. Sierra Leone currently has thirteen commercial banks, nine community banks…, two savings and loans…, and some forty-two foreign exchange bureaus,” according to the centre, which is based at the London School of Economics and offers independent advice on economic growth to governments of developing countries.
In the United States and United Kingdom, for example, there are oversight bodies that ensure standard operational procedures, with utmost respect for financial traditions and transparent transactions – be they interbank or client-based. In other words, banks should not deal with one another often without letting the regulator know the extent or details of their transactions, or simply operating accounts on behalf of rogue business people.
Is that happening here? And where the foundation of banks is shaky and may crumble unless those banks lie about their financial and transactional health, independent regulatory bodies should be ready and able to come in and safeguard people’s savings. I am not aware of any independent institution that provides regular critical insights into the operations of commercial banks, with a view to letting the public know how they operate. It could even raise the red flag where a possible breach of best practice is imminent. And where a parallel appraisal is lacking, banks might just dissolve and leave in their wake a cataclysmic economic setback. The adverse effects could even be more serious in countries like Sierra Leone. And here are some explanations for my being cynical.
Sierra Leone has a fairly liberalised financial system but interest rates and exchange rates are obviously market-determined. In other words, there are no selective credit controls.“The guiding principle of a central bank is that it should act only in the public interest...” says Dr Michiel Hendrik de Kock, one of the greatest South African bankers.
Meanwhile, the IGC had observed that: “The soundness of the financial system [of Sierra Leone] is in some question, although it is not in any danger of crisis. The capital–asset ratio of the banks, for example, is good (about 17%), but non-performing loans are a problem, tending to hover around 16% in recent years”. The report also found out that the state of banking supervision was rudimentary. Again the Central Bank’s supervisory efforts and capacity had been questioned.
“One certainly does not see any attempt to explicitly organize the approach to assessing the soundness and management of a financial firm in light of risks and risk management. This would emphasize the importance of a clear understanding of financial risks and optimal assignment of the responsibility for managing different types of risk (namely, liquidity, credit, interest rate, market, foreign exchange, operational, sovereign, legal, and fraud risk),” said IGC.
It is on that note that I conclude that the regulatory strategy of this country is in dire need of a focused, coherent and modern approach to making the best out of the banking sector while minimising risks at every stage of financial transactions.
© Politico 04/02/15
