BUSINESS WORLD The Central Bank of Sierra Leone and “Coin Changers” Posted by on Jan 6, 2009, 23:30

Sierra Leone’s financial system, like in many other economies, has evolved over time. Prior to independence in 1961, the financial system was part of the colonial monetary arrangement with the West African Currency Board (WACB) as the issuing authority. There were only two commercial banks in operation at the time, namely: The Bank of British West Africa Ltd which is now Standard Chartered Bank Sierra Leone Ltd. and Barclays Bank (D.C.O) later became Barclays Bank Sierra Leone Ltd and now transformed to Rokel Commercial Bank. These banks were branches of large British commercial banks with headquarters in Britain and were primarily established to provide banking facilities for British trading firms and the colonial administration in Sierra Leone.

After independence in 1961, the then government focused on the promotion of rapid economic growth and development throughout the country. As a result, monetary and financial institutions were designed to assume the responsibility of mobilizing domestic resources as capital for development. The WACB was found inappropriate in this changed environment and was thus replaced by the Bank of Sierra Leone in August 1964. This remarkable development was followed by rapid growth of indigenous financial institutions, starting with the incorporation of the National Development Bank (NDB) as a public limited company in 1968, the National Insurance Company (NIC) and the National Cooperative Development Bank (NCDB) in 1971, and in 1973 the first indigenous commercial bank, the Sierra Leone Commercial Bank (SLCB), was established. A series of domestic institutions then followed including the International Bank for Trade and Industry and the First Merchant bank of Sierra Leone.

The Central Bank

The Central Bank, which is the Bank of Sierra Leone (BSL), is the apex of the financial system in the country. BSL performs the following functions in the economy:

1. Supervision of the banking system: the BSL supervises the banking system of the country. Central may be responsible for banking system. Its officials collect information from commercial bank and take necessary decision by two ways- a) bank examine and b) bank regulation 

2. Advising the government on monetary policy: The decision on monetary policy may be taken by the central bank. Monetary policy refers to the manipulation of interest rates and money supply to achieve a given level of economic growth. The central bank does corporate with the government on economic policy generally and will produce advice on monetary policy and economic matters, including all the statistics.

3. Issue of banknotes: The central bank controls the issue of banknotes and coins. Increasingly, most payment these days do not involve cash but cheques, standing order, direct debit, and so on. Nevertheless, cash is important as bank’s cash holdings are a constraint on creation of credit through the cash requirement ratio.
4. Acting as banker to other banks: The Central bank does act as banker to the other banks (such as Sierra Leone Commercial Bank Ltd, Rokel Commercial Bank Ltd, Union Trust Bank Ltd, Standard Chartered Bank SL Ltd., First International Bank Ltd, Guarantee Trust Bank Ltd, and the recently established International Commercial Bank Sierra Leone Ltd, Eco Bank Ltd, Pro-Credit Bank, Access Bank, Zenith Bank and UBA operating) in the country. As well as holding accounts with international bodies like IMF, World Bank, etc. It is a common habit for the central bank to insist that the other banks hold non-interest bearing reserves with in proportion to their deposit.
5. Acting as banker to government: Normally a central bank acts as the government’s banker. It receives revenues for Taxes and other income and pay out money for t6he government’s expenditure. Usually, it will not lend to the government but will help the government to borrow money by the sales of its bill and bonds.
6. Raising money for the government: The government Treasury bill and bond markets are covered by the central bank. While sometimes the treasury or ministry of finance handle

The “Coin Changers”

We can see from the above functions of the central bank that the BSL is by statute charged with the primary responsibility of regulating the economy. Since the Bank of Sierra Leone (BSL) commenced its operations in 1964, its statutory responsibility has been the promotion of monetary stability through the formulation and implementation of monetary policy and the development of a sound financial structure. It is thus expected to supervise and regulate the activities of commercial banks and other financial institutions to ensure a healthy financial system. It is also responsible for promoting credit and exchange conditions conducive to the balanced growth of the economy. This statutory mandate notwithstanding, it seems as if the BSL has already given up on the ‘Coin Changers”. The “coin changers” are those boys who exchange the national currency ‘note Le’ for the ‘coin Le’. Normally they buy Le1000 note for Le 900 coins; the Le 100 coin goes to them as commission. The boldness and openness with which the Boys are doing their business suggests that the central bank has given tacit approval to these markets even though they are technically illegal. As mentioned above, the central bank is responsible for the issuance of currency notes and coins, while the commercial banks assist in the distribution of these notes and coins. However, in the recent past, we have witnessed increased activities of “coin changers” especially in the capital city Freetown. Pricing the national currency the Leone (Le) against itself is indeed a unique feature of the exchange rate market. It is only in Sierra Leone that Le 1000 note is worth Le 900 coins. This illegal selling of the national currency is casting a very dark shadow on the effectiveness of the central bank in enforcing the laws that established it. Some observers are even of the opinion that the BSL is using these “coin changers” to carry out its issuance of notes and coins function. Or else where are they getting their daily supply of coins, if not from the central bank? Or is it legal to exchange the Le for the Le at lower rates?

The Exchange Rate Market

It is a well-known fact that black market activities in the exchange rate market play an important informational role in the country. The rates change in the foreign exchange market for example, incorporate risk and scarcity premium, and as such are not equal to the equilibrium exchange rate. The foreign exchange market, for instance, is the monetary link between countries that makes it possible for international trade to be accomplished more efficiently than barter.  Because each nation uses its own monetary unit, people in one country who want to purchase something in another country must exchange their own currency for the other to accommodate the transaction. The foreign exchange market is where one nation's currency is traded for another. Normally, the exchange rate is the price of one currency (the foreign currency) in terms of another currency (the domestic currency). It is simply the amount of domestic currency that is exchanged for one unit of the foreign currency. Practically, the exchange rate is the amount of Leones (Le) that are exchange for one US dollar ($). The average exchange rate for the first six months of 2008 is Le 2,971.52 per one US $. This means that one requires Le 2,972 to buy just one US dollar. This is the official figure prepared by the central bank.

In the domestic currency market of Sierra Leone, the black market exchange rate is the price of the ‘notes Le’ in terms of the ‘coins Le’ on the black market. Several factors are responsible for the emergence of the black market for foreign currency. Many observers have advanced reasons for the existence of the domestic currency exchange rate such as devaluation of the currency, the printing of higher denominations of the Le (e.g. the Le 5,000 and Le 10,000); the unwillingness of commercial banks to pay out coins to clients on the counter; and the increased demand for coins by the public for basic transactions such as paying transportation fare. Black market for coin changing is a fact of life in Sierra Leone. One only needs to visit down town PZ, Siaka Stevens Street St. John, Up-gun, etc to behold the growing number of “Coin Changers”, as they could be called, in full operational gear.  Some people now prefer to call them the “shadow central bankers”. Interestingly, these “Shadow Central Bankers” tend to serve the people more promptly and effectively than mainstream commercial banks. The “Shadow Central Bankers” for example, are willing to change any ‘notes Le’; whereas the commercial banks tend to find every available reason as why they can not pay you coins to the point of leaving some money value of a cheque with these banks.

Because of the illegal nature of these the coin changing Black markets, information about the size and the volume of transactions in these markets are scanty. The current consensus, however, is that these markets are increasing in size throughout the country. Chronic and persistent monetary accommodation strategy of financing budget deficit has the potential of reducing the attractiveness of holding lower denominations of the domestic currency, and private agents increasingly hold higher denominations of the domestic currency as a matter of convenience. The black market, in such situations, provides a convenient avenue for the petty traders and drivers who normally deal with smaller business transactions to carry out their business with ease. On one hand, the presence of the black market helps the development process by providing jobs and livelihood for a good number of the unemployed as well as providing an avenue for carrying out smaller business transactions with ease, especially where the commercial banks constantly reluctant to pay out coins on the counter. This means that the market provides an added avenue to satisfy unfulfilled demand for lower denomination of the Le in the commercial banks. On the other hand, domestic currency trading creates rent-seeking activities that could service as tax on currency transactions.