Commercial Banks’ Credit Plunges


Commercial banks’ credit to various sectors of the economy fell in the first quarter of 2014 as inflation, pressured by rising depreciation of the Liberian dollar, continues to push commodity prices upward. Commercial banks’ credit moderated to 4.1 percent compared to the previous quarter’s rate of 6.3 percent. The Central Bank of Liberia (CBL) says the slowdown was mainly influenced by declines in loans extended to service-related institutions, public corporations and individuals, respectively, by 36.1 percent, 18.8 percent, and 16.8 percent.

The manufacturing sector of the economy which deals with multiple outputs was hit by this development as cement, spirit, soft drink, soap, bleach, candle, and mattresses recorded increases, while the outputs of all other manufactured commodities declined. Industrial outputs for gold and iron ore also recorded declines during the quarter while diamond output registered an increase.
 Figures provided by the CBL, however, show that year on comparison, credit growth expanded by 40.7 percent and this was on the back of a 37.6 percent increase in credit to the construction sector. The increase in credit to the construction sector shows that the sector is becoming of a serious business attraction for banks.

Interest Rates

Meanwhile, the trends in the interest rates showed mixed movements when weigh against the preceding quarter as average rates on lending and mortgage declined while interest rates on time deposits, savings, and certificate of deposits showed increases with personal loan rate remaining unchanged.

Yearly comparison meanwhile indicates that interest rates for the quarter generally showed upward movement. The spread between the average lending and saving rates slightly decreased by 0.09 percentage [9.0 basis points] point, reflective of the gradual competitiveness of the banking sector.

Lending rate moderated at 13.65 percent, from 13.75 percent in the fourth quarter of 2013. Average personal rate is 14.1 percent, while average mortgage rate is 14.25 percent. The CBL usually publish the lending rates apply by all nine commercial banks in Liberia.  Inflationary pressure continues to rise mainly as a result of exchange rate depreciation.
Inflation which stabilized in January, 2014 at 7.7 percent, moved up to 7.9 percent in February and further up to 8.9 percent in March 2014.

Bank Sector in Good Health

In the face of these challenges, the banking sector remained on a steady path with strong performance in key balance sheet items during the quarter.

The industry continued to be well capitalized and liquid with significant growth in deposits and loans. Though the industry’s total assets declined slightly by 0.4 percent to L$70.0 billion over the previous quarter, but it grew by 15.0 percent over the corresponding period in 2013. According to a CBL report, total loans and advances rose by 4.0 percent to L$28.3 billion compared with the last quarter and also surge by 40.0 percent over the same period in 2013.

Deposits recorded a slight increase of 0.7 percent to L$48.6 billion compared with the previous quarter, and also increase by 16.0 percent over the level recorded a year ago. Total capital also increased by 3.0 percent to L$9.3 billion when compared with the previous quarter, and 13.0 percent over the corresponding period in 2013.

“Overall, the growth rates reflect growing public confidence in the banking system and expansion of economic activities within the country,” the CBL observed. However, the industry’s profitability still remains a challenge due to what the CBL referred to as poor quality of loans stemming from poor credit culture and relatively high operating expenses associated with the poor state of infrastructure, especially electricity supply.

However, due to high operating costs and loan provisioning, the industry recorded a net loss of L$244.29 million as at end-March, 2014, an improvement of 62 percent from the corresponding quarter in 2013. Profitability in the banking sector remains a challenge, largely on account of high operating costs of banks, coupled with high loan loss provisions due to poor asset quality.

Amidst these challenges, the industry’s capital adequacy ratio (CAR) declined by 4.4 percentage points, from 24.9 percent in the last quarter in 2013 to 20.5 percent at end-March, 2014. The CBL has meanwhile, assured that public that all of the banks are in excess of the 10.0 percent minimum requirement. The industry’s net worth, on the other hand, increased by 3.0 percent over the same period. However, relative to the minimum net worth for each bank, two banks fell below the minimum requirement of US$10.0 million.

Non Performing Loans

Non-performing loans (NPLs) as a percentage of total loans in the industry at end-March, 2014, declined slightly by 0.3 percentage points to 14.5 percent, from 14.8 percent in the previous quarter. NPLs ratio declined by 5.8 percentage points from 20.3 percent to 14.5 percent at end-March, 2014.

Th improvement, an economist at the CBL says, was due to the continuous monitoring of loan quality by the CBL as well as write-offs of some delinquent loans by several banks in the industry.

The volume of non-performing loans declined slightly by 0.03 percent compared to end-March, 2013. Five of the 9 banks reported non-performing loans to total loans above the tolerable limit of 10.0 percent, while the remaining 4 banks were within the limit. The banking industry recorded gross earnings of L$1.867 billion and total operating profit (before loan loss provisions and taxes) of L$1.765 billion at the end of the reporting quarter.

The banking industry, which continues to maintain a strong liquidity position, recorded a liquidity ratio of 25.4 percent at the end of the first quarter of 2014. All of the banks were above the minimum required liquidity ratio of 15 percent.

The total liquid assets of the industry for the current period was L$12.31 billion. Two of the banks have loan to deposit ratios above the CBL acceptable limit of 70.0 percent. However, the banking industry has a comfortable liquidity position to meet the liquidity needs of customers and other contingent liabilities.

CBL’s Monetary Policy Stance

The conduct of monetary policy by CBL continues to be focused on the achievement of exchange rate and price level stability within the economy. The introduction of the T-bills auction and CBL’s notes is also aiding the process of Liberian-dollar liquidity management, in addition to the Foreign Exchange Auction.
L$8.8 billion in Circulation

For the first quarter of 2014, Liberian dollars in circulation totaled L$8,820.2 (eight billion eight hundred twenty million two hundred thousand), representing a decline of 6.8 percent compared with L$9,468.0 (nine billion four hundred sixty eight million) reported for the 4th quarter of 2013.

According to the CBL, the fall was mainly on account of 6.9 percent and 6.8 percent reductions in currency in and outside banks, respectively.

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