By Francis Ben Kaifala Esq.
Banks are the heartbeat of a functioning financial system and economy. Their role in ensuring access to credit, maturity transformation, and intermediating the transfer of money from those who have too much but cannot use it immediately; to those who do not have but need money immediately, keeps the wheels of the economy turning. This is why ideas on improving the quality of banking, including the legal and regulatory regime, so as to make it catch up with the dynamics of modern times are important.
The essential characteristics of Banking were set out in UNITED DOMINIONS TRUST V. KIRKWOOD (1966) 2QB 431 (C.A) as follows: “the collection of money by receiving deposits upon loans repayable when and as expressly or impliedly agreed upon, and the utilization of the money so collected by loaning it again in such sums as are required”.
In order to perform the above functions, bankers use current accounts, deposit accounts, fixed-deposit accounts, orders, cherubs, secured loans, discounting bills, note issues, letters of credit telegraphic transfers, and other means that the necessities of business may lead them to develop. This open-ended list of innovations of banking leaves room for ones that could be risky, but increase returns and make our ‘bankers’ modern bankers.
Our bankers need to go beyond the traditional banking operations and take risks that will boost their returns, expand the economy, and advance financial innovations and products which will in turn stimulate and expand the economy. They only reach their full potentials if they are willing to break the boundaries of traditional banking and explore previously untested areas of modern banking like loan sales (including the use of loan assignments, creation of trusts, novations and sub-participation), derivative transactions, credit default swaps, asset securitization, modern project finance, etc. The continued reliance on traditional products like mortgages and charges makes our banking sector look rudimentary.
Where bankers are bankers, banks and not really the government would be the central planners of the over-all economy, particularly through their role as credit allocators. By this role, a functioning bank would determine those that meet the criteria for credit, what that person or entity so deemed fit is going to do with the fund, they would assess the project and the risk associated with it, they would assess and forecast the possible returns and the likelihood that the particular client will be in the position at the stipulated time to return the money lent.
Moreover, bankers, with consultation with competent lawyers, would provide much needed banking advice to individuals and institutions on transactions involving important economic and business activities like mergers and acquisitions; provide brokerage services for stock markets; engage in financial assets management, and extend trade in financial markets for profit. They should be able to do this without necessarily inflicting heavy deadweight cost on the economy.
Bankers should be willing to move away from archaic traditional banking and take up their role as specialists in holding risks - be it solvency risk, liquidity risk, or other non-systemic risks - rather than avoiding them. They can secure their position to realize their full potential by working with competent lawyers so as to develop and put in place safety catches through the pieces of advice given during the course of business by tightening and avoiding loopholes in legal commercial documentation, by conducting proper due diligence exercises on the borrower and the project, by diversifying risks within the different geographical settings and sectors of the economy, and other ex post facto measures like the realization of collaterals.
Because our system is not as functional as should be, our bankers keep lending to those who everyone else lends to. But in a good banking system, bankers would lend to those that others do not lend to. In other words, they should not always lend to those who everyone else is lending to. Banks should ensure that the right balance is struck between efficiency and safety while at the same time aligning the needs of their customers with the overall long term viability of the economy. This will ensure that their returns are not threatened and their turnover is enhanced while at the same time having stimulating effect in the economy.
The way banking is organized and done has a direct bearing on a lot of economic activities. For instance, a lay man in banking and finance would find it hard to understand that there is a direct relationship between interest rates on loans provided by banks (or set by the central bank) and unemployment. Simple banking decisions like interest rates will encourage new businesses to develop, expand and thrive through reliance on debt financing. When access to credit in the economy is not stifled by excessive interest rates, more businesses will be willing to take loans; the more businesses and people are willing to take loans and risks, the more they are likely to expand their business operations; as their businesses expand, the new or expanded businesses will reduce unemployment and guarantee job creation.
That the interest rate in Sierra Leone is set at between 22% and 38% is detrimental to the overall economic wellbeing of the country and an obvious hindrance to entrepreneurship. That it has remained so almost fifteen (15) years since the war ended and little or nothing has been done about it by the Central Bank or the bankers themselves is a deliberate hold on the economy.
About four years ago, I happened to have attended a conference on entrepreneurship, and the reasons given by the then chair of the Commercial Bankers’ Association for the high interest rate were: the risk associated with recovery, the high overhead cost of banking and the volatile situation in the country after having recovered from war, etc. But the same conditions do not now prevail; but interest rate has remained stagnant for long without at least regulatory intervention or a decision by the bankers themselves to reduce it to sustainable levels. This is not only damaging to the economy but also hurtful to even the banks – as it leads to proliferation of bad debts and failed businesses among others.
If Sierra Leone’s bankers are to be modern bankers, they have to be aware that there is a serious correlation between banking and the economy and that bankers have an equal, if not a greater role to play in planning the economy as the government. The viability of the economy will lead to a boom in the banking sector, its products and returns. Therefore, they must be innovative in their products, take more risks, and rely on professional expertise to secure their backs (in terms of legal due diligence, documentation and advice). They must take heed not to always lend to those who everyone else lends to and they must be willing to encourage indigenous borrowers and break new grounds. They must perform their role diligently while taking heed to keep their operations simple, safe, small, more diverse, and stable - thereby bringing banking in line with the dynamics of the 21st Century.
Francis Ben Kaifala Esq. is a Senior Partner in the Law Firm Kaifala, Conteh & Co., Top Floor, 81 Pademba Road, Freetown; He holds the joint LLM (Master of Laws) in Law & Economics from the School of Law and the School of Economics and Finance at Queen Mary University of London. Email: fkaifala@yahoo.fr
(C) Politico 21/10/14
