The Poor Credit Performance
of Commercial Banks
By Geepu Nah Tiepoh
The Perspective
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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