BUSINESS WORLD The Central Bank of Sierra Leone’s Role in Regulating the Financial System in the Face of Crisis Posted by on Mar 31, 2009, 11:11

The current global financial crisis is a by-product of the unchecked financial liberalization of western countries. Financial liberalization differs from trade liberalization in this important respect: unilateral deregulation benefits the deregulator because it pulls business from abroad.  In trade, a lone liberalizer may be hurt if other countries enjoy its open markets without reciprocating.  In finance, by contrast, countries that don’t follow the lead of liberalizers run the risk of losing investors and borrowers to the countries where prices of financial services are lower. 

This logic, it would seem, unleashes a dangerous “race to the bottom” among financial regulators of the world. In actual practice, we do not observe a downward spiral of competitive deregulation.  Global integration among national markets has increased competition in financial services, to be sure.  It would be tempting to conclude that there is a strong regime in international finance that is holding the line on competitive deregulation. 

Perhaps the bank supervising bodies, with their recommendations for capital adequacy, risk management, and supervisory standards, is the response of anxious bank regulators to arrest this inevitable slide to irresponsible banking.  An epistemic community of like-minded government officials comes to the rescue of market forces out of control.  Recent history suggests that although western governments began strengthening prudential rules to regulate their financial sector, yet actual enforcement of such rules was for the most part lacking in many countries. 

So a competitive financial regulatory framework with accompanying prudential measures though the second choice for many countries has become the dominant one. It should be pointed out that banking, like any other sector, wants a cartel, which would guarantee profitability.  If it is politically strong enough to get one, it may end up driving away business, at least from customers with cross border mobility, and small depositors and borrowers may be left out of this competition.  In other words, political institutions, which channel and constrain the choices governments make, allow for considerable cross-national variability. 

The Central bank role

The central bank, the Bank of Sierra Leone is at the centre of the financial system in Sierra Leone; and it is 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: any company wishing to carry on deposit taking in Sierra Leone must be registered in Sierra Leone; it must apply in writing for a license to the Bank of Sierra Leone; the application for a banking license should be accompanied by; 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; 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; and expertise of the promoters in the management of financial institutions Infrastructural arrangements for the proposed bank- including 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.

Regulations

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 Supervision Department, which carries out regular onsite visits. The specific aims of the supervision 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 giant economies of USA and EU countries are crumbling 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 small 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.

Sierra Leone

The historically financial institutions in Sierra Leone have 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. 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 just 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 need for enforcement