When politics and ignorance collide, the truth usually is the first casualty of the collision. In the case of the repeated wrongheaded assertions by some politicians to malign the good intentions of the Central Bank of Liberia in advancing its financial inclusion policy by increasing access to finance to Liberia’s unbanked market, it is clear the paranoia of politics reigns supreme. Firstly, do these politicians understand that financial inclusion is good economics and it promotes the empowerment of the country’s poor?
Do they know that in most rural communities in this country, there are no financial institutions to provide the banking needs of citizens involved in viable economic activities? Are they aware that there is limited funding to agriculture, and resultantly, one of the factors contributing to the lack of food security in Liberia is the barrier in accessing funding? How is increasing access to finance by supporting the efforts of communities and commercial banks to deliver services in remote and underprivileged areas undermining the country’s economic order?
I’ve heard politicians saying they want to know how “our money” is being spent. Your monies, ladies and gentlemen are in the general and specific accounts of the Government of Liberia deposited at the Central Bank and no one can touch them without authorization by layers of government laws. They are not under the control of the Central Bank. Only the Government of Liberia can request how much and to whom those funds can be paid.
On the other hand, monies used as placement to commercial banks at discount rates for relending as a means of improving liquidity in the financial sector are not “our” money. They are the reserves of commercial banks in Liberia. For those uninformed about the nature of central banks, let me provide basic knowledge on how they operate and why it is important to understand that no one is giving anyone free money.
By law, all commercial banks are required to place a percentage of their deposits with the Central Bank of Liberia. This is called a reserve requirement. Today, the reserve requirement or ratio at the CBL is 15 percent for United States Dollars and 22 percent for Liberian dollars. For every one hundred dollars deposited in a commercial bank, 15 or 22 dollars of that must be placed with the Central Bank depending on what currency was deposited. That is a balance kept in the name of the Commercial Bank. The amount fluctuates depending upon the deposits at the bank. What happens to all this cash held by the commercial banks at the Central Bank? Nothing in the case of Liberia. They are mostly idle money lying there with no impact on the economy. Imagine now, with Liberian dollar liquidity in the billions and the reserve portion of banks’ reserves at the Central Bank. Does it make any sense for all that money to just sit there idly performing no function and in the case of Liberian dollars, depreciating against foreign currencies? It is senseless. Therefore, most Central Banks open discount windows where commercial banks can borrow from the reserve bank (Central Bank) as liquidity enhancement. In the case of the US Federal Reserve, this discount window interest rate is the benchmark for all other interest rates, from prime rates to the cost of treasury bills, all the way up to short and long term capital market instruments.
In the case of funding to agriculture, the Central Bank of Liberia placed 5 million dollars with Afriland Bank at a rate of 3 percent, with strict instructions to be lent to the agriculture sector at no more than 9 percent. The issue is placing money at the disposal of a commercial bank, with the risk mitigation by the reserves of Afriland as collateral. At the maturity of the placement, the current account of the commercial bank was debited. Whose money was spent to provide financing to agriculture? Was money taken out of the general account of the Republic of Liberia and squandered? Does it make sense for any politician to be asking such ignorant question or is there a political motivation? If the question is meant to elicit an informed answer, then the Central Bank officials should be invited to a hearing at the National Legislature to explain how the process works. But going on the public airwaves to disingenuously mislead the public in order to score political points is wrong and it undermines the financial autonomy of the Central Bank of Liberia. The calls can also have a damaging effect on the relationship between fiscal and monetary authorities in Liberia and put the country’s program under the IMF and World Bank under unnecessary suspicion. If the acts of the Central Bank to advance financial inclusion were against fiduciary and prudential guidelines, the first institutions to sound a warning bell would be from the Breton Woods structure. Let’s not forget that Liberia is still under an externally monitored fiscal and monetary regime. The IMF just left Liberia on May 8, 2015 as part of its routine checks, balances and consultations.
The CBL must be supported to carry out its function, especially for sectors such as agriculture, where banks are reluctant to lend. Out of a total loan portfolio of 343 million United States dollars in the commercial banking system, as of December 31, 2014, only six percent or 23 million dollars was lent to agriculture, forestry and fishing. Non-performing loans as a percentage of loans to the sector was 17%. Although the amount of the loan to agriculture is not disaggregated by subsectors, yet it would be safe to assume that most of that money went into nonfood agriculture, principally into Liberia’s biggest cash crop: rubber.
Clearly, banks are either unwilling, unable or do not have the capacity to lend to agriculture in Liberia. Lending to agriculture is obviously not as profitable as the short term maturity loans that can be made, for example in trade finance. The bulk of commercial bank loan portfolio, 177 million dollars or nearly half of all loans were made to finance trade, meaning imports, which indicates that most of the financing went to the largest importers in the country, mainly the Indians and Lebanese.
As a result of the limitations in bank credits to farmers, which indicates the severity of the lack of financial inclusion in the rural areas, the Central Bank of Liberia has sought to increase services to households out of Monrovia.
The Central Bank of Liberia developed the Liberian Strategy for Financial Inclusion (LSFI) from 2009-2013 in order to respond to the need of expanding banking services to poor people in all parts of Liberia. That plan has received lots of commendation from those impacted in communities all over Liberia. The Bank currently supports the following in furtherance of its strategic objectives:
1. Opening of 6 rural community finance institutions (RCFI’s), with three additional planned;
2. Support to or coordination with other microfinance institutions:
c) Liberty Finance
d) Corporate credit Unions
e) Community Credit Unions
f) Village Savings and Loan institutions
Additionally and as a stimuli to the economy, the CBL had to reduce the barriers to accessing financial products by:
1. Designed and implemented the Loan Extension Availability Facility (LEAF) to fund SME
2. Provided SME capital of US5.0 million to commercial banks for onward lending. The CBL provided the funds at 3 percent interest for onward lending at 8 percent to qualified borrowers. The risks were mitigated by the reserves of the commercial banks. The program was hugely successful and ended in 2013.
3. A home mortgage Program of USD10 million dollars was inaugurated through LBDI
4. Placement of USD 5 million plus 181,250,000 LD to Afriland Bank at 3 percent interest for long term funding to agriculture, to support planting of cocoa, coffee, rubber, and oil palm.
Whose money is it? It is not our money. The process of providing liquidity to commercial banks is a necessary and prudent element in reserve banking and should be applauded and not condemned due to politics. And so it goes.
Samuel P. Jackson is a former banker with Chase Manhattan, Wells Fargo, Bank of America and Credit Suisse, in the United States of America. He can be reached at [email protected]