Licensing of First Discount House in Liberia

 

Published at: 04/25/2024 - 13:23 / Updated at: 04/25/2024 - 13:24
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Article by Guest Contributor

Financial markets all over the world continue to evolve and the market in Liberia has not been left out of this global phenomenon.  This evolution is critical to enable us to navigate and realize the opportunities in our rather unique marketplace.  Discount houses have thrived at various times in several major economies.  

These specialized institutions serve as intermediaries between banks and also other financial institutions offering short term lending and discounting services for various financial instruments hence contributing to the stability of the financial markets.  

This article delves into the rather essential role of discount houses and establishes the compelling need for the existence of a discount house in the Liberia financial system. 

In the words of Tony Ribbins “change is inevitable, while progress is optional”.  In my view the evolution of the Liberia financial system to include discount houses is inevitable and also ensures the requisite progress in the market.  The authorities must be commended for licensing the first discount house to operate in Liberia. 

Recent money market developments in Liberia have culminated in the issuance of revised Prudential Regulations in June 2021, CBL/FMB/001/2021, on the licensing and regulatory requirement for Discount Houses in Liberia. 

This has now resulted in the establishment and operation of the First Discount House LIBERIA MERCHANT CAPITAL.  Discount houses typically act as a go between banks and the Central Bank (CBL) for liquidity cover from the CBL to the market.

Some of the issues that Discount Houses are set up to address are:

The lack of development of the secondary market in the Money Market,

 • No Price discovery,

 • Low level of Liquidity in Government securities,

 • Low participation in Government securities by the public, and 

• The inability to realize Monetary Policy transmission to reduce money supply.  

The major function of a Discount House is to assist the Monetary Authorities in the management of liquidity and monetary Policy transmission in the interbank market. This includes:

 • Promotion of growth and efficiency of the money market.

 • Intermediation of funds between the Central Bank and the deposit money banks.

 • Facilitation of the issuance and sale of the short-term government securities including serving as underwriters.

 • Provision of discount and rediscount facilities to banks thereby relieving the Central Bank of the burden of carrying out such tasks.

Currently, Liberia Merchant Capital (Discount House) activities include 

a) Facilitating the issuance and sale of short-term government securities, CBL bills and other eligible short-term financial instruments (including commercial bills issued by private and state-owned Liberian corporations);

b) Entering into Repurchase agreements (repos) and reverse repurchase agreements (reverse repos) of eligible securities approved by the CBL; 

c) Selling/ buyback of financial instruments; 

d) Acceptance of call money from licensed banks and other financial institutions; 

e) Interbank borrowings and placements; 

f) Trade eligible financial instruments in the secondary market; 

g) Providing discount/re-discount facilities for Treasury securities and other eligible financial instruments;

h) Providing fund/portfolio management and financial advisory services;

 i) Accepting short term investments in the form prescribed by the CBL; and

 j) Performing other activities as may be prescribed by the CBL from time to time

.  Liberia Merchant Capital (LMC) will mostly provide its services using the medium of repurchase agreements

  • Repurchase agreement (Repo)
    • This is essentially where eligible securities are sold against cash with a simultaneous commitment or agreement to buy them back at a specified date and price fixed at transaction date. 
    • Typical repos will range from overnight to 180 days (as prescribed by the CBL).
  • Reverse repurchase agreement (Reverse repo)
    • The opposite of a repo is called a reverse repo where securities are bought against cash with a simultaneous undertaking to sell them back at a future date at a price fixed in advance. 
    • This transaction temporarily releases liquidity to a holder of a financial instrument.
  • Outright purchases and sales of securities
    • This is where securities are sold or bought outright with no prior agreement of a buyback. The transaction is final. Ownership of the securities changes hands.
    • Through this, the discount house creates liquidity for owners’ financial instruments who want to liquidate their investment before maturity. 
    • It is one of the most important features of a liquid secondary market.
  • Open repo
    • This is a repo in which specific eligible financial instruments are traded on open terms where investors place funds which are callable on some pre-agreed notice period such as 7 days. 

Call money

  • This is money placed by banks with a discount house as part of their reserve requirement ratio.

Strong Collaboration of the Bankers’ Association and the Treasurers Dealers’ Club will also help shape policies and practices in the Money Market. 

Beyond licensing, Commercial Banks, the Central Bank and the general public together with other market players must embrace the concept of Discount Houses as a critical player in the quest for greater stability, efficiency and improved liquidity management on the market. 

About the author:

The writer is a Banking Consultant and a Former Managing Director of Ecobank Liberia.