BUSINESS WORLD
Commercial Banks And Resource Mobilization For Economic Development
By
May 27, 2008, 12:05

This is another area that needs our urgent attention and calls for the extension of banking services to population group-wise as well as spatially. An increase in the number of bank offices can mean channeling of a greater fraction of the nations savings into investment through the mediation of the banking system, which in turn, may lead to initiation of increasing number of investment projects. Banks have made substantial efforts at reducing the spread between the lending and deposit rates particularly in the past two years but again in this regard the efforts so far are inadequate. The spread between the lending and the deposit rates falling gradually.

However, what is worth noting is that the level of spread seems to be still high as compared to an average level of around 3 to 4 per cent observed in the case of many developing countries. Narrowing of spreads is reflective of the efficient management of the bank through minimization of operational costs. The smaller the spread, the greater could be the stimulation for loan demands for industrial development. It will also be easier to provide the necessary stimulus to the process of deposit mobilization, particularly from those areas/regions which though endowed with surpluses/savings but have no investment/saving outlets. Thus, savings could be appreciably boosted by exploring ways of garnering hitherto untapped saving potential across the various regions in Sierra Leone. Commercial banks in Sierra Leone have been able to meet the credit requirements in the economy, particularly, the short-term financing requirements.

However, it is worth noting that the situation regarding mobilization and allocation of resources for meeting the medium and long-term financing requirements of the economy has not been that encouraging. While realizing the fact that commercial banks in Sierra Leone are efficient, the fact remains that, financing gap still exist in the economy.

An effort to meet this financing gap requires the creation of appropriate institutional structures. Else such financing gaps continue to exist, hampering the growth process. This is reflected in high unemployment rate and disappointing performance of the manufacturing and services sectors that are in dire need of long-term capital. A review of the contemporary global experience with the banking systems also suggests the need for resolution of such financing gaps in economic development on an urgent footing.

Regulatory Environment

The underlying problem in this context arises from the fact that the commercial banking system normally operates under certain regulatory framework. The regulatory framework requires that banks should pursue prudent lending activities. This in most cases has meant adherence to strict lending norms as per regulatory requirements. Further, the short-term nature of the liabilities of commercial banks dictates that the term structure of their loans should be tailored to suit their balance sheets. It is very important that banks should pursue a policy of maintaining a most appropriate asset-liability structure.

In other words, there should be a consistency between the asset structure and liability structure in terms of maturity and yield structure. These requirements very often constrain banks in fulfilling the medium and long-term requirements of financing or in extending loans to deserving sections of the society even-though their requirements are genuine.

Many analysts stated that perhaps the most important issue is not the specific causes of a banking crisis, but the ability of the political authorities to come together to develop a strategy and then implement it. This is a point that is worth emphasizing. Political decision makers must recognize that there is a problem and make quick and resolute actions. Developing a political consensus on the path forward is a critical step. Most importantly, the process must be seen as fair and transparent. Bank owners and borrowers must be prevented from exerting inappropriate interference. The policies adapted must be transparent and uniformly implemented.

Special interests will always try to gain in period of economic distress. The policy challenge is to build a broad domestic consensus for the difficult challenges ahead without giving in to limited, special interest groups. Also progress must be made in understanding the true condition of the banking system. While banks appear reasonably liquid, their solvency remains unclear. This reflects uncertainties about compensation for policy-related losses as well as concerns about the quality of banks' portfolios. These issues must be quickly addressed. Specifically: The mechanism for compensating banks for policy-related losses should be finalized; the regulatory framework should be updated; Banks must provide detailed audits, business plans, and monthly cash flow projections.

In addition, the central bank must determine the state of the banking system. Using financial statements and the business plans, viable and nonviable banks should be identified. Viability can be determined by evaluating banks' capital, the strength and commitment of shareholders to recapitalize the bank, the business plans, their client base, the quality of the loan portfolio, and future cash flow. Fifth, non-viable banks must be resolved, either through recapitalization and restructuring by shareholders, or through least cost resolution techniques including merger, sale, or liquidation.

Also regardless of the resolution option chosen, if feasible, additional losses to depositors should be minimized. If depositors lose confidence further, it will be difficult to prevent a resurgence of bank runs.

Finally the autonomy of the central bank has increasingly become an accepted international standard. Autonomy allows the central bank to act in the best interest of the country, aiming monetary policy at controlling inflation and ensuring financial stability. I would urge the Sierra Leone Government to continue their movement towards the full autonomy of the central bank.

The Development Bank

It needs no emphasis that all identified viable projects need be encouraged and financed. For the reasons outlined above and based on a host of other considerations, the encouragement of the growth of other financial intermediaries outside the banking system is imperative. A case in hand is the plan to establish a development bank. It is believed that, the National Development Bank (NDB) should be developmental oriented but run on business principle where possible.

 As a leading agency of the Government it should trigger medium and long-term projects for developmental purposes. It should be charged with the responsibility of channeling scarce capital into selected industries, prohibit/minimize risk taking through issuance of guarantees, for medium term and long-term loans. Its structure should ensure that resources flow widely and efficiently to promising sectors that are capable of creating additional employment and value addition to the economy. Such an institution shall be owned by the public sector in the majority. This is important to enable the institution to raise funding at low costs and have credibility with other Developmental agencies at the regional and international arena such as African Development Bank, etc. Other institutions of super national nature or institutions owned by foreign Governments could be invited to participate as minority shareholders. Private sector agencies could also be encouraged to work together with this

Institution by way of subscription to preferential shares and debentures of the institution. What is important here again, is that, the institution should be well capitalized, because without sufficient resources, it will never be able to perform its assigned responsibilities as per expectations.

The Role of Other Financial Institutions

Commercial banks alone will not solve the deficit in demand for long-term credit nor could the development bank meet the overall financing requirements. Financing needs being diverse and specific in nature, there is a need for other types of institutions like venture capital, private debt equities, etc.

Venture capital can play a major role in providing equity capital to finance high-risk investments e.g. grape projects, ostrich and many others. Advantage of venture capital allows investors to share more fully in the rewards to a successful venture and also helps firms in avoiding cash-flow problems associated with debt financing. This is one of the options that need to be looked into by the policy makers. In this light, a tax system that recognizes, the authorities should consider the effort of venture capitalist. The same could be applicable to leasing and factoring companies. Private Debt securities market can also enhance the availability of long-term capital. A well-established private debt securities market can improve the capacity of domestic capital markets to accommodate large and more complex funding arrangements and diversify the process of financing away from the banking sector. Private bond market would allow companies to obtain long-term fixed rate financing at a much lower cost relative to bank credit. This will be quite a challenging task to all of us.

The Sierra Leone financial sector is still under-developed. It is still dominated by the commercial banking institutions. Though there are a few specialized financial institutions, a well-designed financial superstructure is yet to evolve. On your question as to whether commercial banks do play a developmental role, my answer would be yes:

v Commercial banks have played, are playing and would play a much greater and much more proactive role in economic development. In this context, what needs to be addressed now is as to how to improve their contributing to economic development further, given the fact that their contribution to

v GDP is still below their potential. Some of the thoughts outlined by me earlier deserve attention in this regard and provoke further thinking on the subject. Yes, they need to do more.

v They need to be innovative in order to increase their participation in economic development.

v There still exists a wide financing gap.

But that gap cannot just be filled by commercial banks alone. Commercial banks may not have sufficient resources to provide long-term loans for investment purposes because of the structure of their balance sheets. Other players do need to play their role as well, including the authorities (BSL). The challenge is for all of us to come up with workable but lasting solution.