The two state owned banks report says, represent a fiscal risk to the budget, because if they fail the government will have to intervene so there must be a quick resolution to this problem.
In his presentation on the recent economic trends as part of the findings of the Sierra Leone Economic Outlook (SLEU) published by the World Bank, Senior Economist Kemoh Mansaray, added that going forward the central bank should do an independent quality review to assess the real status of those two banks.
He said that there may be several options, but it is left with the government to take the desired path as the World Bank is just flagging the issue as it is important that they resolve these problems, otherwise they may pose significant burden on the budget going forward, if these banks fail.
Nonetheless, the credit conditions is said to have remained tight as bank credit growth slowed to 4.9 percent from 17.9 percent, reflecting the tighter policy stance of the central bank and a slowdown in economic activities.
The domestic banking system the SLEU says has faced significant challenges due to a combination of the effects of the twin shocks (the contraction of the economy in 2015 due to the Ebola epidemic and the collapse of iron ore prices) and preexisting weaknesses.
The two state-owned banks, Rokel Commercial Bank (RCB) and Sierra Leone Commercial Banks (SLCB), they added continue to be key players with 28.6 percent of assets, 36.2 percent of deposits, and 23.8% of credit.
Both state-owned banks had to recognize large and long-standing asset problems in 2014, which caused an erosion of their capital base and resulted in measures being taken by the authorities to initiate their restructuring. A large share of the loans of RCB and SLCB are unauthorized overdrafts, indicating weak corporate governance arrangements.
Overall, the SLEU indicates that the financial sector remains broadly stable, but significant risks persist and total assets of the banking system increased by 17.4 percent to Le 7.43 trillion in 2017, funded mainly by increases in deposits and shareholders’ funds.
The total deposit base expanded by 4.0 percent to Le 5.27 trillion in 2017, while shareholders’ funds grew by 42.6 percent to Le 1.05 trillion, accounting for 11.6 percent of total liabilities in 2017.
The average capital adequacy ratio of the banking industry increased from 30.7 percent in 2016 to 34.1 percent in 2017, indicating a strong capacity for loss absorption. Although capital adequacy appears high, it does provide significant buffers because credit risk is not adequately captured and situations vary widely across banks.
Mansaray emphasized that the stress of the two largest banks in the system represents a significant strain on the financial system and a challenge for the authorities. Profitability improved in 2017 from its lull in the previous year as both return on assets (ROA) and return on equity (ROE) increased to 5.3 percent and 25.6 percent from 0.03 and 0.22 percent, respectively in 2016.
Overall liquidity moderated to 66.9 percent in 2017 from 71.8 in 2016, driven largely by the increase in foreign currency deposits in total deposits and the sharp depreciation of the Leone in 2016.
However, foreign exchange liquidity has become scarce. Several banks (particularly private and state-owned local banks) are increasingly facing challenges to clear U.S. transactions, a source of significant risks. As a result, the net foreign currency open position to capital widened to -6.9 percent in 2017 from -2.0 percent in 2016.
Mansaray also highlighted that with all the new borrowings lined up and if the country continues to incur fiscal deficit, they may move to high risk of debt distress.
On the fiscal side, he added that there is a type of false financing into the buildup of arrears which he says is basically weakening the loan portfolios of commercial banks who basically try to pre-finance contractors to carry out government contracts and if this situation is not addressed quickly it may continue to hurt the banking system.
By Zainab Iyamide Joaque
Monday June 25, 2018.
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