The Poor Credit Performance of Commercial Banks
By Geepu Nah Tiepoh
July 19, 2001
A country's financial system, including its banking institutions, is the oil that greases the engines of its economic growth. Banks provide the vital function of mobilizing savings from those who have it and allocating such savings to those who wish to borrow to invest in economic development. When these two cardinal functions are not effectively provided by a country's banking institutions, then its economic performance is seriously hampered. Since suffering the destruction of civil war, Liberia's commercial banks have not been fully revitalized to a point where they can adequately perform these tasks. The latest information on the banks' performance in the first two quarters of this year has not yet been made public; however, based on their performance from last year, and in light of the continuing security and political crisis of the country, it is safe to conclude that the banks are still not providing the adequate level of lending services to the economy. According to the Annual Report of the Central Bank of Liberia for 2000, commercial banks' credit to the key sectors of the economy contracted severely during last year.
The banks' total outstanding loans and advances to all the vital economic sectors sharply declined by 49.3% from L$1,760.2 million at the end of 1999 to just L$892.4 million at the end of 2000. Agriculture suffered the greatest decline in bank credit, by 79.2% from L$739.7 million at the end of 1999 to L$154.2 million at the end of 2000. However, within agriculture, the forestry sub-sector experienced a strong increase in credit, as its total loan portfolio went from L$58.8 million in 1999 to L$126.5 million in 2000 (an increase of 115.1%). The manufacturing sector suffered the second-highest contraction in credit, next to agriculture. Its total portfolio declined by 62% from L$450,000 in 1999 to L$171,000. The construction and trade, hotel and restaurant sectors were the only sectors that saw an increase in commercial banks' credit. Bank credit to the construction sector went up from L$3.4 million to L$14.8 million (an increase of 335.2%), while the share of the trade, hotel and restaurant sector expanded by 56.3% from L$76.7 million in 1999 to L$119.9 million in 2000.
Why has the commercial banks' total credit to the economy been so low? There are so many factors that have affected the banks' credit performance. I will concentrate on only few of them, all of which are interdependent. The banks are not succeeding in attracting capital savings, and this partly has to do with the prevailing climate of political, security and management crisis in the country, which causes the general public not to have confidence in the country's financial institutions. An evidence of this is the recent refusal by the Liberian Marketing Association (LMA) of president Taylor's appeal to members of the business community not to hoard their money but deposit it in the banks (The Perspective, June 12). The LMA said that its members could not deposit their money in the banks because they lack confidence in the banking system. However, the banks' difficulties in attracting savings also have to do with the huge discrepancy between their average deposit and lending rates. The average deposit rate, which was supposed to attract savings from the public, has been low and stagnant compared to the average lending rate. For instance, according to the Central Bank, the commercial banks' average deposit rate increased only marginally in the year 2000, from 5.74% in 1999 to just 5.86% at the end of December 2000 (an increase of just 0.12 percentage point). Over the same period, however, the banks' average lending rate jumped by 2.2 percentage points from 19.1% to 21.3%. Given the general crisis of confidence in the banking institutions, and the unattractive average deposit rate of the banks, it has been reported that the non-bank public sector has preferred to hold their money in cash outside of the banks.
The above-mentioned factors have helped to create a situation whereby the volume of currency outside the banks has been growing, whereas bank deposits have correspondingly declined. For example, currency outside banks grew to a peak of L$698.3 million at the end of December 2000 (a 31.2% increase from January), before declining in the first months of this year. Demand deposits, on the other hand, went down from L$1,040.8 million in March 2000 to 898.8 by the end of the year.
Commercial banks' average lend rate is a key determinant of the amount of credit that productive investors can be willing to absorb. If the rate is too high, firms and producers will be less induced to borrow and invest in new and existing projects. The average lending rates of Liberia's commercial banks have been fluctuating over the last few years, but they have shown a definite upward trend. They fell to only 17% at the end of December 1999 from a high of 26% in 1998. Since last year, they have remained above 21%, with the latest figure for April this year indicating that the rate is now at 22%. The commercial banks (which are now five in number) may be demanding these high rates to reflect the real cost and the risk of lending in an uncertain political and security environment, but by so doing they may also be suffocating the recovery of the economy. Moreover, a policy has to be instituted that will increase bank savings, so that the upward pressure on lending rates can be minimized.
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