BUSINESS WORLD
Regulation, Financial Institutions and the Central Bank of Sierra Leone
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Jun 23, 2008, 10:24

The Regulatory Role of the Bank of Sierra Leone unlike the other financial institutions, which merely act as a medium through which the economy is regulated is different.  The central bank is by statute charged with the primary responsibility of regulating the economy. Since the Bank of Sierra Leone Act became law in March 1963 and the Bank commenced operations in August 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.

The Bank has over the years been largely successful in executing these responsibilities and attaining its primary objective of price stability. Given the adverse macroeconomic imbalances which characterized the economy in the mid 1980s, the rate of inflation skyrocketed to an all-time high of about 187 percent.

In a bid to address these economic challenges, the Bank shifted away from direct monetary controls found to be financially repressive to a more efficient system of indirect monetary management. Consistent with this framework was the liberalization of trading in government securities through an auction system, with the interest rate being market determined. With this policy shift, the Bank succeeded in drastically reducing the rate of inflation to below 5 percent in 2002. Today, the inflation rate as reflected by the consumer price index has been relatively stable at just above 10 percent, on a year on year basis.

Notwithstanding this achievement, the Bank has continued to strengthen its operations. Open market operations, the main instrument of monetary management employed by the Bank, has been deepened with the introduction of Secondary Market Operations and is currently in an advanced stage of introducing Securities Repurchase Agreements with the banks and other financial institutions.

In further striving to enhance the efficacy of monetary policy, the Bank is in the process of modernization of the national payments system by developing an efficient payments system framework. With technical assistance from the International Monetary Fund (IMF), the Bank is also developing a Liquidity Forecasting framework geared towards an efficient domestic liquidity management. Such a framework helps determine the appropriate quantum of liquidity to inject or withdraw from the system consistent with the country’s overall macroeconomic objectives. The Bank has also vigorously pursued its mandate of maintaining financial stability through the development an efficient banking supervisory framework. The Bank conducts both on-site and off-site monitoring and supervision of all the commercial banks in line with international best practices such as the “Basle Core principles”. Stringent guidelines are also set out for their registration including a minimum capital requirement and ensuring that the managerial cadre is comprised of ‘fit and tested persons’.

The Bank has had periods of significant challenges, especially in the early 1990s in executing its supervisory role. The Bank has since not only strengthened its supervisory capabilities, it has expanded its operational base. This is evident by the enactment of Financial Services Act 2001 which paved the way for a more robust supervision of the financial services sector. Within the framework of this Act, the Bank currently supervises and regulates the operations of the foreign exchange bureaux and the First Discount House SL Ltd. Modalities are being put in place to extend supervision to the other financial institutions including National Development Bank, SALHOC Savings and Loans, Finance and Trust Corporation and Home Finance Company SL Ltd, among others.

Over the years, the Bank has worked assiduously towards stabilizing the exchange value of the Leone in relation to other currencies. The exchange rate was removed from administrative controls in 1992 and is now market-determined. The liberalization of the Current Account of International transactions in December 1995 and the subsequent review of exchange controls in November 2002 and May 2003 have enhanced the conduct of foreign exchange transactions.

The introduction of a weekly foreign exchange auction in February 2000 has led to the gradual convergence and narrowing of the spread in the foreign exchange rates. Despite severe external shocks caused by a volatile oil market, the Bank has strived to maintain the value of the Leone within acceptable limits.

It has also in the past introduced a number of developmental schemes including the Premium Savings Bonds Scheme, Export Credit Guarantee Scheme, Domestic Credit Guarantee Scheme, and the Rural Banking Scheme to varying degrees of success. The Bank continues to maintain a cordial working relationship with international financial institutions, notably the IMF and the World Bank, in formulating and monitoring programmes aimed at restoring macroeconomic stability. Effective economic policy management requires a high degree of synergy between monetary and fiscal policy.

The Bank therefore works very closely with the Ministry of Finance in ensuring consistency of policies. By continuing to serve as a lender of last resort to government through the provision of ways and means advances, within statutory limits, the Bank ensures that the economy is well regulated.