Liquid Financial Sector With No Money Market -The case of Liberia & A factor impeding banks profitability
It is incontestable that regulators of Liberia’s Financial System have exerted efforts to improve the Country’s economy. However, a significant component of the Financial System, for over decades, has not surfaced in the reform process thus impeding significant profit in the economy that could ignite employment and address the issue of both Human and Infrastructure development.
The Financial system that currently operates the Liberian economy regrettably lacks a Money Market that could have enhanced the smooth functioning of Commercial Banks and propel their business objective of profit maximization by sending their idle cash for short term lending.
Because of rising confidence in the Banking sector and increased economic activities (credit to CBL), the sector has repeatedly shown steady growth in deposit and assets. However, this growth has never translated into corresponding profits and the absence of a Money Market, which could be used to trade such cash (Growth in deposit) and attract profit on a short term basis, is one of the major factors. (High operating cost, delinquent borrowers and the Court system are other factors, but will be discussed later).
By the end of December 2011 the Banking Industry’s deposit base increased by 35% with a total of 37% increment in assets. The loan to deposit ratio (LDR) for the sector was below 60%; this again is another justification of the comfortable liquidity position of the Country’s Banking sector. Unfortunately, this growth in deposit and excess liquidity only lead to overcrowded vaults during the period mentioned thus leading to “GROWTH WITHOUT PROFIT”.
Besides banks profitability, the need for a structured and well-functioning Money Market is rooted in economic reality that Money Market creates an avenue for government to meet its immediate expenditure needs by generating short-term funds through the treasury bills floated in the market thereby averting governments from sourcing Finance from Inflationary sources. To further highlight this, in the absence of a developed Money market, the government would be forced to print and issue more money or borrow from the Central bank to service her expenditure needs. In short, Money Market averts the INFLATIONARY SOURCE OF FINANCE TO GOVERNMENT.
Profitability of banks in the Country’s Banking Sector has remained one of the major challenges to bank expansion and their desire to provide other “State of the Art” and “Life Touching” products and services. This problem of profitability is not only noticeable and expressed by Shareholders of the Commercial Banks but also the Political leadership of the Country.
Even though not referencing the need to expedite what so ever process is on the way for the establishment of the Country’s Money Market, President Sirleaf in Her Annual Message to the First Session of the 53rd Natioanl Legislature spoke of the need to increase banks profitability which she said gives the public easy access to credit.
The presence of Money Market in any developed or developing economy has proven to be a catalyst for the effective implementation of the Monetary Policy of Central Banks since it pumps new money into the economy in slums and siphons thus regulating the flow of money in the economy in a way that does not only promote, but also guarantee economic growth along with stability. That is why the Act establishing the CBL puts the establishment and maintenance of an effective Money Market as one of its cardinal responsibilities.
To the contrary in Liberia, one of the many reasons that necessitate this publication, the inflow of money in the country’s economy does not guarantee substantial growth and stability; even if it signals growth. Because money entering the country’s economy enters through inflationary source; the printing of additional bank notes.
Including the above, and equally considering other notable contributions (DEVELOPMENT OF TRADE AND FORMULATION OF SUITABLE MONETARY POLICY) of a Money Market to the economic growth of a country’s economy, this piece seeks to highlight the undisputable significance of Money Market that would have guaranteed the smooth functioning of Commercial Banks in Liberia, enhance their profitability, and in the overall brings about transformative change in the economy.
Like other businesses, Banks in Liberia objective is to maximize profit. This must not sound offensive because the profit maximization objective of banks, if realized, translates directly into expansion which ignites employment, increased credit, and among other things, reallocates resources among different economic sectors and businesses. These growth indicators, though not currently lacking in the economy, could move at a faster rate with the presence of Money Market that provides Commercial banks the appropriate platform to increase profit through temporarily employing their surplus funds “IDLE CASH” in easily realizable assets that would be existing in the Money market.
The economy continues to attract Private Capital Flows or Foreign Direct Investment (FDI) and the CBL’s has a very sensitive vision to increase Liberian owned business access to finance.
In line with its laudable vision to increase Liberian owned business access to credit, the CBL launched a US$ 5.0 Million Credit Stimulus package of which US$ 2,986,692.52 has been successfully pumped in Liberian business via credit (Source, CBL website: www. Cbl.org.lr).
In line with this same vision, the CBL, in January of this year, provided L$ 200,000.000.00 (Two Hundred Million) as Loan Extension and Availability Facility designed to provide soft loans to Microfinance institutions (MFIs), Credit Unions and Village Savings and Loan Association (VSLAs). This empowerment of Liberian businesses also extended to the Tailor, Textile Union and Women in Margibi with contribution of L$ 350,000.00 & L$ 250,000.00 respectively; all under the CBL’s outreach.
With these smart initiatives by the CBL coupled with the expected increase in Foreign Direct Investment; it becomes very clear that deposit at Commercial banks will quadruple; a situation that now demands an urgent market environment (Money Market) that these idle cash can be traded by Commercial banks and members of the public including government that could use same to fund its many projects.
As a country working on a foundation built over the last six years to improve the lives of its citizens, access to finance by Liberian owned business which leads to the domestic ownership of the economy, ignites employment, and propels government’s general agenda of happy economic environment for it citizens, is very significant and banks profitability remains a major mainstay in this regard.
The time to do this, and address the issue of growth without profit in Liberia’s banking industry, is now!!