On behalf of the Council of Liberian Experts in the Diaspora (COLED), Inc., of which the Banking and Financial Cluster is an offspring, we welcome you to this platform. We are grateful that you found time and interest to visit and learn more about our vision and mission.

COLED, Inc. is a 501(c)(3) not-for-profit organization under the U.S. Internal Revenue Service. It was formed in October 2023 to harness the skill sets of diaspora Liberians to enhance and complement the knowledge gap in Liberia, which is critical to addressing the country’s socio-economic and infrastructural development needs. To achieve this end, the organization is structured along specialized clusters that provide advisory services through periodic research papers.

As the Cluster name suggests, the Banking and Financial Sector’s primary focus is on developments within that sector. In particular, the Cluster will periodically hold consultations with the authorities of the Central Bank of Liberia (CBL) to understand the Bank’s policy rationale and how these policies align with the Act establishing the Bank in 1999, and to assess how these policies affect the overall performance of the Liberian economy. The CBL acts as an apex body to regulate and supervise all financial institutions; ensure a stable and healthy financial system; ensure an efficient payment system; moderate inflation; and stimulate balanced economic growth. In years past, however, policies to achieve these responsibilities and objectives have not been without controversies, concerns, and challenges.

The challenges of the banking and financial sector of the Liberian economy are numerous and well documented. These challenges must be viewed from three perspectives: i) the role of the central monetary authority (CBL) to conduct independent and prudential policies that ensure balanced and sustainable economic growth; ii) strengthening regulatory and supervisory activities in the financial sector to ensure resilience and stability; and iii) expanding and modernizing a wide range of financial services to facilitate financial deepening in the economy.

Some Key Policy Challenges for the Monetary Authority (Central Bank of Liberia)

• Preserving the operational independence of the CBL. The Government of Liberia (GOL) has sole ownership of the CBL. A review of the Acts that established both the CBL in 1999 and its predecessor, the National Bank of Liberia in 1974, shows they were empowered with functional independence to conduct monetary policy. However, during periods of poor fiscal outturns, past administrations failed to exercise this independence to influence the flow of aggregate credit toward productive ends. In many cases, the Central Bank/NBL prioritized credit allocation to the government, giving rise to persistent deficit financing and a crowding-out phenomenon. Printing banknotes and using commercial banks’ reserves became a frequent recourse for funding government deficits. This practice did not serve useful monetary policy objectives. Quantitative easing or credit expansion is usually targeted at supporting growth; in practice, this stance became inimical to growth. If the CBL is to exercise effective independence, the overbearing stance of the government must be curtailed or minimized.
• De-dollarization vs. dollarization. A dual-currency situation exists in Liberia, with both Liberian dollars and United States dollars as legal tender. Statutorily, prices for transactions are to be indicated in Liberian dollars. Payments are also accepted in U.S. dollars. A thriving parallel market exists in which fundamentals show exchange-rate disparities. For example, the CBL reported that as of January 27, 2024, the average of the selling and buying exchange rates between the Liberian and United States dollars was L$189.80 = US$1. Movements in the exchange rate reflect an imbalance between the demand for and supply of foreign currency and have implications for the balance of payments. The effectiveness of conducting monetary policy under a dual-currency arrangement must be assessed to determine its appropriateness and its potential to distort policy. In this regard, COLED could recommend the appropriate currency arrangement and the technical adjustments (monetary and fiscal) required to dollarize or de-dollarize.
• Taming inflationary pressures. High inflation reduces consumers’ purchasing power. Exchange-rate pass-through and other exogenous factors, including supply chain constraints and external developments, are the main drivers of inflationary pressure in Liberia. Exchange-rate variations often result from imbalances between the demand for and supply of foreign currency to facilitate trade and services, which signals a balance of payments problem. Policy options include increasing foreign currency earnings, reducing imports while boosting domestic production, and, where foreign exchange is available, applying sterilization methods to absorb excess domestic currency. Altering the composition of financial assets is another option.
• Promoting and incentivizing financial inclusion and financial deepening to increase the range of financial services. Financial markets in Liberia remain shallow and lack a variety of instruments. There are no secondary markets for trading financial derivatives. New methods of diversifying financial services are needed to spur growth and maximize returns. The CBL should lead in innovating and diversifying financial products and in creating secondary markets where derivatives can be traded. This would improve the transmission of monetary policy. In many emerging economies, reliance on microfinance institutions, especially in rural areas, is broadening services to unbanked communities and helping mobilize domestic resources. COLED can undertake additional research to identify how Liberia’s domestic financial markets can be deepened to increase the range of services.

Strengthening the regulatory and supervisory framework of the financial sector

• Lessons to be learned from past bank failures. A series of bank failures between the 1980s and 2000 undermined the banking system. The military takeover in 1980 had devastating effects. Capital inadequacy and weak management at commercial banks contributed to failures. Specialized banks created for mortgage and agricultural lending failed due to weak supervision. Ensuring safety and risk mitigation rests with the CBL. The CBL must strengthen its regulatory and supervisory arm. A risk-mitigation framework should be developed alongside legal and regulatory regimes to guard against insolvency, including the creation of a deposit insurance institution. The guidance of the Basel Committee on Banking Supervision (Basel I, II, and III) will be useful. Consideration of recapitalizing the defunct National Housing and Savings Bank (NHSB) and the Agricultural and Cooperative Development Bank (ACDB) should not be ruled out, though it may require significant resources. COLED can investigate options to safeguard financial-sector assets in a crisis and assess whether resources can be marshaled to recapitalize the NHSB and the ACDB.
• Encouraging banks to modernize banking practices. Financial technology is driving services in the financial sector and its importance cannot be overstated. Most banks are migrating from traditional practices, such as standing in long lines for deposits or withdrawals, to online banking. In emerging and low-income countries, digital mobile banking is narrowing the divide between the formal and informal sectors. Payments and credit allocation are being facilitated through mobile money platforms. Central banks are exploring Central Bank Digital Currency (CBDC) for domestic and international trade facilitation. These platforms should be assessed for viability and risk.
• Bank non-profitability. Banks and non-banks operate under constraints that affect profitability. Non-performing loans and infrastructural constraints, such as inconsistent electricity and the high cost of running generators, weigh on performance. Steps for debt resolution must be implemented to minimize losses. A credit reference system to deter and penalize chronic defaulters is a sensible starting point. COLED can examine how such a system can be established with appropriate guardrails.

Strengthening the regulatory and supervisory framework of non-bank financial services institutions

• Insurance companies. The Act authorizing insurance companies in Liberia was first passed in 1973. It was not clear whether operations were conducted within a regulatory framework. With the creation of the CBL under an amended Act in 1999, oversight responsibilities for insurance operations were ceded to the CBL. In 2013, an Act approved a regulatory and supervisory framework to guide insurance companies, formally empowering the CBL to regulate and supervise the sector. Several amendments since 2013 have addressed governance, non-payment of premiums, and management structure. The operations of the National Insurance Company of Liberia (NICOL) and the National Social Security and Welfare Corporation of Liberia (NASSCORP) continue to be reviewed. In particular, the Act that created NICOL provides it the sole and exclusive right to insure all government business. The solvency of NASSCORP was questioned in a 2015 World Bank study. A review of these institutions is needed to determine their viability.
• Establishing an institute for banking studies and economic analysis. If not already established, such an institute could provide training in best practices in banking, finance, and economic analysis. This would enhance the capacity and resilience of the banking and financial sector. COLED has the capacity to develop a standardized curriculum to provide the requisite instruction.

COLED has assembled a cadre of experts with many years of experience in academia and the corporate world to bring complementary context and deeper understanding to these challenges for a nuanced perspective. Some members have worked directly with the central monetary authority and within the Liberian banking system for many years. While these skills are significant, we welcome guest or alternative contributions to enrich the literature.

For questions or more information about the Banking and Financial Sector Cluster, please contact Christopher F. Konneh Sr., Interim Chairperson, at (856) 408-9383 or chrisfumbak58@gmail.com; or contact Mr. Penti Tarpeh Jr., Co-Chairperson, at (510) 469-3010 or tpenti@gmail.com.

Critical Issues:

• Monetary Policies (Central Bank)
• Micro-finance
• Commercial Banking
• Credit Unions
• Mortgage Companies
• Insurance Companies
• Appropriate Collateral
• Training Bankers
• Rural Banking
• Regulations and Supervision
• Online Banking
• ATM – Automatic Teller Machines
• Credit Cards
• Deposit Insurance
• Collateral Safety