The authorities have been urged to ensure continuation of reforms to banking supervision and regulation, including full application of the Banking and Bank of Sierra Leone (BSL) Acts as amended in 2019, and move forward with restructuring of the two state-owned banks. Deepening financial reforms is necessary to safeguard financial stability and spur growth, the World Bank says. “It might be useful for the BSL to conduct independent Asset Quality Reviews for all banks to ensure proper loan classification and provisioning and draft time-bound supervisory action plans.”
Whilst adding that, making monetary policy responses to inflationary pressure and business cycle shocks more effective is pivotal for inclusive growth. “One priority should be the development of money markets to lengthen the yield curve and deepen interbank transactions, especially foreign exchange, to allow for efficient price discovery and smoother transition of monetary.” With inflation still in double digits, the BSL is advised to keep monetary policy tight to reduce inflation to single digits. It should also continue to ensure that the exchange rate is market-determined by intervening in the foreign exchange market only to smooth excessive volatility and discourage speculation.
Also, the BSL should collaborate with the Ministry of Finance (MoF) in aggressively moving its financial inclusion strategy forward by introducing a national switch, a new national identity system to allow for unique identifiers, and regulations to promote agent banking. The World Bank cited the weakness of the two state-owned banks which it says could jeopardize both financial sector stability and the growth outlook over the medium term because of high lending rates, poor asset quality, and minimal liquidity.
“The risk of loan defaults has been amplified with the high and increasing levels of nonperforming loans (NPLs). As businesses deal with depleted cash flow during the pandemic due to lower sales, the risk of loan defaults will rise. The high cost of funds—in a risky lending environment featuring macroeconomic imbalances—is the primary challenge to private investment and bank growth.”
By Zainab Iyamide Joaque