Freetown, SIERRA LEONE – While the financial system maintains stability, the Central Bank has identified certain vulnerabilities within the banking sector, emphasizing these risks in its recent Monetary Policy Report.
Asset quality emerges as a significant concern, with the Central Bank noting a considerable variation among banks. Five institutions, including four local banks, reported non-performing loans (NPLs) well above the maximum threshold. Limited intermediation to support growth adds to these challenges.
The report also highlights the potential threat of Cyber Security and Information Technology, particularly in the shift from traditional to technology-driven banking. Recognizing this evolving risk landscape is crucial for maintaining robust cybersecurity measures.
Further risk breakdowns include the high level of NPLs, posing a financial stability risk. Banks display hesitancy in supporting viable products in the private sector, leading to credit concentration in specific sectors. Additionally, an increase in foreign currency deposits and the banking sector’s heavy reliance on earnings from securities are identified as risk factors.
The Central Bank’s report reveals a continuous rise in foreign currency deposits from 2022Q1 to 2023Q2, presenting a potential threat to the system amidst the ongoing depreciation of the Leone.
Despite the concerns, the banking sector is anticipated to remain relatively stable, primarily due to a significant portion of assets being invested in government securities, considered relatively risk-free. The report underscores that increased government borrowing will offer risk-free investment opportunities for banks, thereby improving the risk-weighted assets of the banking sector.
However, challenges such as rising inflation and the depreciating Leone may impact the fiscal space, potentially leading to the accumulation of arrears. This, in turn, could affect the non-performing loans (NPLs) of the banking sector, prompting a need for strategic measures to address these challenges in the evolving economic landscape. ZIJ/4/12/2023