Banks Warned Against Liquid Risk!

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The Central Bank of Liberia (CBL) has expressed serious concern over commercial banks holding most of their assets in foreign accounts.

The CBL warned of a potential liquidity risk to the banking industry in meeting domestic liquidity needs if banks continue to hold most of their assets in foreign countries.

 In its second quarter Financial & Economic Bulletin for 2014, the CBL indicated that the most of the composition of the banking industry’s liquid assets are held in foreign accounts. Most of the nine banks operating in Liberia are subsidiaries of foreign own- banks.

 “The composition of the industry’s liquid assets shows that most of these assets are held in foreign accounts, which may pose a potential liquidity risk to the system in meeting domestic liquidity needs,” the Bank said.

The CBL, however, noted that except for two banks, the loan to deposit ratios both at individual bank and industry levels are below 70.0 percent.

 “This is evidence of the comfortable liquidity position of most of the banks to meet the liquidity needs of their customers. Regarding CBL’s restriction on commercial banks’ placement abroad, all of the banks are in compliance with the regulations.”

The CBL has meanwhile announced growth in commercial bank lending for the second quarter ending June, 2014. According to the CBL, the growth in credits to various sectors of the economy during the quarter expanded by 6.3 percent to over L$30 billion,  compared to the 4.1 percent rate of the previous quarter.

 Bank loans to ‘other sectors,’   comprising largely of service institutions, households, government of Liberia and public corporations, amongst others, were the main drivers of credit growth, coupled with a 6.6 percent increase in credit to the manufacturing sector.

 Year-on-year comparison revealed that credit grew by 30.5 percent, arising from expansions in credit to the construction; transport, storage and  communications sectors, as well as a growth in the agriculture sector.

These data for the second quarter were, however, collected prior to height of the Ebola crisis, which has now led banks to review and slow their lending processes.

The Bank reports that the growth is driven by the reconstruction of the country during the reporting period.

It also says that the growth was also propelled by the growth in the transportation and communications sector arising from Government of Liberia’s duty-free-privilege granted to the commercial transport sub-sector; and the agriculture stimulus initiatives are among factors that drove year-on- year credit growth in the economy.

The banking sector is challenged by weak profitability of the banking industry due to poor assets quality and weak credit administration, said CBL,  declaring that few of the banks reported net losses for the quarter. Two banks, not named, fell short of meeting the minimum net worth requirement for each bank by the CBL. The Banking industry is also hit by large non-performing loans which is not a little over 15 percent.  

Trends in the average interest rates for the quarter were mixed,  as interest rates on lending, mortgage and time deposits showed marginal increases of 0.03, 0.05 and 0.7 percentage points, respectively, while interest rate on certificate of deposits rose to about 1.0 percent. Interest rates on personal loan and savings rates remained unchanged despite generally upward movements in the interest rates for the quarter ended June, 2014.

The spread between the lending and savings rates slightly increased also by 0.03 percentage point, compared with 0.1 percentage point decline recorded in the preceding quarter.

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