BUSINESS WORLD Banking Regulation and Banking Crises in Sierra Leone Posted by on Jan 31, 2009, 17:50

Sierra Leone is small economy with 5 million people. The country relies mainly of agriculture and mining sectors for its foreign exchange earns. Although the economy’s GDP is growing at a 6.5% average annually, yet poverty is sill widespread in the country. This notwithstanding, the country has a growing and ever-expanding banking sector (it seems). Currently, there are at least 13 commercial banks operating in the country with the relevant license and other documents.  Given our fragile financial system, many observers have raised concerns as to whether the economy can sufficiently accommodate 13 commercial banks, all scrambling for about two million people with bank accounts.

History of Banking

The history of financial institutions in Sierra Leone has been particularly significant in the last decade with regard to intermediaries (banks), capital markets and financial instruments. Structural changes have mainly involved the more traditional financial operators in banking, but have also involved investment firms and insurance companies.

Regulatory arrangements have also been the object of significant change. Such dynamics are at the centre of attention at international venues. Apart from the IBTI saga in the mid 19980s, Sierra Leone has not faced serious financial/banking crisis over the years. However the commercial banking explosion seen in the last five years in this country is making many analysts very, very uncomfortable. Some have even describe the banking industry as ‘sitting on a time bomb’ given the fact that 13 commercial banks to service just five million people is  incredible. A good number of the bank customers are (government) employees with just salary accounts; two-three days after salary payments such accounts are emptied. So, is such a situation sustainable in the long run? Given the fact that banks are profit-making institutions through depository and lending rates differentials, the answer is definitely no. Unless there are visible steps taken by the central bank to limit the number of plays, it is believed that the Sierra Leone economy will soon reach its limits; thus causing a banking crisis. And the current global financial crisis is not even helping matters. Workers remittances from abroad through the banking system are on the decline, thus affecting an important source of revenue of banks.

The Bank of Sierra Leone

Since the central bank (the Bank of Sierra Leone) is at the apex of the financial system in the country and charged with the responsibility of licensing these banks, (BSL) should be able to tell the people of this country whether or not we are sitting on a time boom of a banking crisis.  It is obvious that the central bank (BSL) is by statute charged with the primary responsibility of regulating the financial sector, which includes the Banking industry and hence 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. For example, banks and other financial institutions must register with BSL before they commence operation. Among other things, these are the procedures that commercials banks go through in order to obtain a license for operation in Sierra Leone :

1. Any company wishing to carry on deposit taking in Sierra Leone must be registered in Sierra Leone.

2. It must apply in writing for a license to the Bank of Sierra Leone.

3. The application for a banking license should be accompanied by:

·        Names and addresses of the promoters or sponsors

·        Business activity of promoters/sponsors:

·        Names and addresses of the companies, firms, concerns in which they are interested as principal shareholders, directors, partners, proprietors or guarantors indicating the nature of interest.

·        Amount and percentage of shareholding or stake

·        Balance Sheet and Profit and Loss accounts of the concerns for the last 3 years to assess their performance.

·        Nature of management participation by the promoters/sponsors.

·        Banker's credit reports.

·        Details of litigations, if any, against the promoters/sponsors, which are pending.

·        Whether any of them were subject to insolvency/bankruptcy proceedings in the past and if so, the details thereof.

·        Report on market survey or feasibility study and report.

·        A copy of the Memorandum and Articles of Association of the company in English language

·        A copy of the latest audited balance sheet of the company in English language

·        A copy of the Certificate of Registration

·        Names, qualifications, experience and addresses of the members of the Board of Directors and Senior Management of the proposed bank

·        Nomination of External Auditors

4. Capital structure of the proposed bank should be adequate. The minimum paid-up capital is determined by the Central Bank by regulations from time to time.

5. Business plan for the proposed bank clearly stating objectives and giving detailed financial projections, customer attraction plan, target market and investment strategies and the proposed risk management strategy. The financial projections should be made for the initial five (5) years and explanation given of the assumptions made in preparing the projections.

6. Expertise of the promoters in the management of financial institutions

Infrastructural arrangements for the proposed bank including the following: Suitability of premises, computerization, both hardware and software and maintenance, accounting procedures and operations manual, organizational structure, corporate policies and management, internal audit, manpower recruitment, training, as well as correspondent and agency arrangements. All this is just an attempt on the part of the central bank to limit banking crisis but not to stop it from occurring.

Banking Regulation

Banking regulations are a form of regulation or supervision, which subjects banking institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the banking/financial system. As stated above, the Bank of Sierra Leone handles these forms of regulations. The BSL does this through its Banking Supervison Department, which carries out regular onsite visits. The specific aims of the supervison visits are usually:

·        To enforce applicable laws

·        To prosecute cases of market misconduct, such as insider trading

·        To license providers of financial services

·        To protect clients, and investigate complaints

·        To maintain confidence in the financial system

Regulation can also be considered as legal restrictions promulgated by government authority. One can consider regulation as actions of conduct imposing sanctions (such as a fine). This action of administrative law, or implementing regulatory law, may be contrasted with statutory or case law.

Regulation mandated by a state attempts to produce outcomes which might not otherwise occur, produce or prevent outcomes in different places to what might otherwise occur, or produce or prevent outcomes in different timescales than would otherwise occur.

In the present circumstance, when even the the gaint economies of USA and EU countries are crubling due to banking/financial crisis due mainly to failure of the free market economy notion, the BSL should intensify its regulations role in the financial sector. It is strongly believed that BSL regulation strategy should include putting a limit to the number of Banks operation in this samll economy of ours. It is believed that strong regulation is necessary due to the following reasons: Pursuit of macroeconomic and microeconomic stability: Safeguarding of the stability of the system translates into macro-controls over the financial exchanges, clearing houses and securities settlement systems.

Measures should include the legally required amount of capital, borrowing limits and integrity requirements; and more specific rules due to the special nature of financial intermediation, such as risk based capital ratios, limits to portfolio investments and the regulation of off-balance activities. Projection of customers and investor of such banks; the BSL should be able to protect the customers and investors of banks in this country by preventing a banking crisis. It is known that banks do deposit some money with the central in the case of bankruptcy, but that might not be enough to cover all liabilities in the case of collapse.