Banking & Financial Services

COLED BANKING AND FINANCIAL CLAUSTER WELCOME STATEMENT

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 indeed very grateful that you could find some time and interest to visit our platform and learn more about our vision and mission.

COLED, Inc., is a 501©3 non-for-profit organization under the U.S. Internal Revenue System. It was formed in October 2023 with the intent to harness the skill sets of diaspora Liberians to enhance and compliment the knowledge gap in Liberia which is critical in addressing the socio-economic and infrastructural development needs of the Country. To achieve this end, the organization is organized systemically along the lines of specialized clusters providing advisory services through the production of periodic research papers.

As the Cluster name suggests, the Banking and Financial Sector primary focus will be on developments within that sector. In particular, the Cluster will periodically hold consultations with the authorities of the Central Bank of Liberia (CBL) not only to gain understanding of the Bank’s policy rationale and how these policies align with the Act establishing the Bank in 1999, but to also understand how these policies affect the overall performance of the Liberia 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 the economy. In the years past, however, policies to achieve these primary responsibilities and objectives have not been without controversies, concerns and challenges.

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

Meet our leaders

I'm the Acting Chairman/ Banking and Financial Sector Cluster

I'm the Co-Chair for the Banking and Financial Sector Cluster

Christopher F. Konneh, Sr

Chairman

Critical Issues

Summery Coming SOoy

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

1. Preserving the Operational Independence of the CBL-

The government of Liberia (GOL) has sole ownership of the CBL. A cursory view of the Acts that established both the Central Bank of Liberia (CBL) in 1999 and its immediate predecessor, the National Bank of Liberia in 1974, clearly suggested that they were empowered and provided functional independence to conduct monetary policy. However, during periods of poor fiscal out-turns, past administrations failed to exercise this power of independence to influence the flow or direction of aggregate credit towards productive ends in the economy. In most cases, the Central Bank/NBL prioritized credit allocation to the government substantially, thereby given rise to persistent deficit-financing and a crowding-out phenomenon. Printing banknotes and the use of commercial banks’ reserves became a frequent recourse for funding the government’s deficit. This practice did not serve any useful monetary policy objective. Quantitative easing policies or expansion of credit to the economy is usually targeted at supporting growth. However, this policy stance became inimical to economic growth. If the CBL must be effective in exercising its independence, a review of the government’s overbearing stance must be curtailed or minimized.

2. De-dollarization vs. Dollarization-

2. A dual currency situation exists in Liberia with both Liberian dollars and United States dollars being legal tender and circulating in the economy. Statutorily, prices for all transactions in the economy are supposed to be indicated in Liberian dollars. This fact notwithstanding, payments are also accepted in U.S. dollars. A thriving parallel market exit in which market fundamentals clearly show an exchange rate disparity between the two currencies. For example, it was reported on the CBL website that as of 27th January 2024, the average of the selling and buying exchange rates between the Liberian and United States dollars was recorded at L$189.80 = US$1.0. Movements in the exchange rate are clearly an underlying symptom of an imbalance between the demand for and supply of foreign currency in the economy and have fundamental implications for the balance of payments position of the country. The effectiveness of conducting monetary policy under a dual currency arrangement must be assessed to determine its appropriateness/inappropriateness and its confluence on policy distortion. In this regard, COLED could use its expertise to recommend the appropriate currency arrangement to be adopted and the technical adjustments (monetary and fiscal) required to dollarize or de-dollarize.

3. Taming Inflationary Pressures-

High inflation has the propensity to reduce the purchasing power of consumers. The pass-through effects of fluctuations in the exchange rate and other exogenous factors (supply chain constraints and external developments) are the main root causes of the inflationary pressure in the Liberian economy. Variations in the exchange rate usually results from an imbalance between the demand for and supply of foreign currency to facilitate international trade and services. Clearly, this portends a balance of payments (BOP) problem or difficulty. Although there are several policy options to minimize and mitigate inflationary pressures on an economy, two choices invariably stand out; either increase earnings in your foreign currencies or reduce imports and simultaneously boost domestic production. If, on the other hand, there is availability of foreign exchange, applying sterilization methods to reduce the excess of the domestic currency from circulation could be utilized also to curb the inflationary rate. Altering the composition of financial assets in the economy is also another option.

4. Promoting and Incentivizing Financial Inclusion and Financial Deepening to Increase the Range of Financial Services:

Financial markets in the Liberian economy remain very shallow because they are not developed to offer a variety of financial instruments. Additionally, there are no secondary markets for trading financial derivatives. New and ingenious methods of diversifying financial services to spur economic growth and maximize returns on investment are needed. The CBL must take the lead to innovate and diversify the growth of financial products, and as well, create secondary financial markets where financial derivatives can be traded. In this way, the impulses of monetary policy can be transmitted readily to spur economic growth. In most emerging or developing countries, the reliance on microfinancing institutions, especially in rural areas, to broaden or expand financial services to unbanked communities is driving the strategy of financial inclusion and deepening financial inclusion. It is also helping the process of mobilizing domestic resources to support economic growth. COLED could undertake additional research with the view to understanding how the domestic financial markets can be deepened further beyond the current shallow scope to increase the range of financial services in the economy.

B. Strengthening the Regulatory and Supervisory Framework of the Financial Sector:

1. Lessons to be Learned from past Bank Failures -

Series of bank failures between the 1980s and 2000 rocked the core foundation of the banking system in Liberia. The resilience of the banking system was never the same after the devastating effects of the military takeover in 1980. Capital inadequacy and weak management structures of commercial banks also contributed to bank failures. Specialized banks which were created to facilitate credit for special purposes such as mortgage and agricultural lending, failed because of weak supervision. The onus for ensuring safety and risk mitigation, primarily rest with the central monetary authority (CBL). Therefore, the CBL must undertake all measures to strengthen its regulatory and supervisory arm. A framework for risk mitigation must be developed in tandem with establishing the legal and regulatory regimes to guide against insolvency, such as the creation of a deposit insurance institution. The instructions of the BASEL Committee on Banking Conventions (I, II & III) will be useful in this regard. Consideration for the recapitalization of the defunct National Housing and Savings Bank (NHSB) and the Agricultural and Cooperative Development Bank (ACDB) must not be ruled out, although this endeavor may require enormous resources. COLED can investigate the options available to safeguard the assets of the financial sector in the event of a financial crisis, as well as whether it is possible to garner the resources to recapitalize the NHSB and the ACDB.

2. Encouraging Banks to Modernize Banking Practices:

The use of financial technology (FinTech) to drive services in the financial sector appears to be driving the industry in the twenty-first century, and its importance cannot be over emphasized. Most banks are migrating from traditional banking practices such as standing in long lines to make a deposit or do a withdrawal, to online banking. In emerging and low-income countries, the adaptation and use of digital mobile banking practices is helping to narrow the divide between the formal and informal sectors of the economy. Payments and credit allocation are being facilitated with the use of digital mobile money platforms. Central banks are migrating to the use of Central Bank Digital Currency (CBDC) for the purpose of both domestic and international trade facilitation. These different platforms ought to be assessed for their viability and the associated risk of their use

3. Banks Non-Profitability:

Banks and non-banks alike continue to operate under extraneous and binding constraints that affect the level of their profitability. The incidence of non-performing loans (NPLs) and other infrastructural constraints, such as the unavailability of consistent electricity, coupled with the high cost of running private generators,s are affecting their profitability. Appropriate steps and measures for debt resolution must be put into place to minimize financial losses. A credit reference system to interdict or prohibit rewarding bad creditors could be a place to begin. COLED can investigate further how such a system can be set up and manned with the appropriate guiderails or safeguards.

C. Strengthening the Regulatory and Supervisory Framework of Non-Bank Financial Services Institutions:

1. Insurance Companies-

The Act authorizing the creation of insurance companies in Liberia was first passed in 1973. At the time, it was not clear if the operations of the insurance companies were conducted within a regulatory or supervisory framework. With the creation of the Central Bank of Liberia (CBL) through an amended Act in 1999, oversight responsibilities for the operations of insurance companies in Liberia was ceded to the CBL. However, it was not until 2013 that an Act to approve a Regulatory and Supervisory Framework to guide the operations of insurance companies in Liberia was passed. This mandate clearly puts the CBL in the position now to regulate and supervise the activities of insurance companies in Liberia. Several amendments to the insurance laws to address issues of governance, non-payment of premium, and management structure, have been passed through legislative acts since 2013. The operations of the National Insurance Company of Liberia (NICOL) and the National Social Security Corporation of Liberia (NASSCORP) continued to come under review. In particular, the Act that created NICOL provide it the sole and exclusive right to insure all government businesses. For the most part the solvency of NASSCORP remain questionable based on a study done by the World Bank in 2015. A review of these institutions operations is needed to determine their viability.

D. Establishing an Institute for Banking Studies and Economic Analysis-

If not established already, an institute of this nature could be a training ground providing best practices in banking, financial and economic analysis. This would help to enhance the capacity and resilience of the banking and financial sector. COLED has the capacity to develop a standardize curriculum to provide the requisite instructions.

COLED

COLED has assembled a cadre of experts who have many years of work experience in academia and the corporate world, to bring us more understanding and complimentary context to these challenges for a nuance perspective. Some of our members have worked directly with the erstwhile governing central authority and the banking system in Liberia for many years. These set of skills notwithstanding, we will welcome guest or alternative contributions to our body of knowledge to enrich the literature.

For any question(s) or more information about the Banking and Financial Sector Cluster, please contact Christopher F. Konneh, Sr. who is the current Interim Chairperson on the Banking and Financial Sector Cluster by phone at either (856)408-9383 or by email at chrisfumbak58@gmail.com; or you may contact Mr. Penti Tarpeh, Jr., Co-Chairperson at either (510)469-3010 or by email at tpenti@gmail.com.