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Financial insecurity, banks & regulations

By Tanu Jalloh

Even in the most secure environment of financial services, dealing with problems of insecurity around the operations of banks and other financial institutions would hinge on the strength of the set of regulationsthat governs the industry. But the capacity of who administers the law is a different ballgame altogether, depending, of course, on the level of regulatory sophistication and political will that exist.

Ideally, with regulations, conformity is imperative but with ethics all of them are conformable. This means in the absence of state regulation, ethical considerations must prevail.

Banks, the world over, have the tendency to cheat in their quest for profit maximisation, falsify interest rates, and lie about their healthy financial standing or fake asset acquisition as collateral to regulatory bodies.While the situation may be festering in Sierra Leone, with huge economic prospects and investor confidence, Nigeria had had its own share of poor banking regulations. The continent’s second largest economy had its financial sector pruned and its aristocrats tamed, with 14 banks surviving the overhauling, by Central Bank Governor Mallam Sanusi Lamido Sanusi since 2009.He sent shockwaves through the corporate establishment, sacking the chiefs of eight of the banks and felling pillars of Nigeria's financial aristocracy who had long seen themselves as beyond the reach of the regulators in doing so.

That was probably the saving grace for an oil producer that was at the brink of economic collapse. Like in Nigeria those fly-by-night bankscould be in Sierra Leone where regulation is said to be weak and operational burdenplaced on the clientele to bear. Such vulnerable openings encourage money laundering, counterfeiting and serious economic crimes.

In the United States of America and United Kingdom, for example, there are oversights bodies that ensure standard operational procedures with utmost respect for financial traditions or principles and transparent transactions – be they interbank or client based.In other words, banks should not deal with one another often without letting the regulator know the extent or details of their transactions or simply operating accounts on behalf of rogue business people.But where the foundation of banks is shaky and may crumble unless those banks lie about their financial and transactional health, independent regulatory bodies should be ready and able to come in and safeguard people’s savings.And where a parallel appraisal is lacking, banks would dissolve and leave in their wake a cataclysmic economic setback. This could evenbe more serious in countries like Sierra Leone. I’ll give reasons.

I listened to the BBC a week ago and marveled at the way the Standard Chartered Bank in New York, one of UK’s five largest,was treated while it defended itself against allegations that it hid $250 billion in transactions tied to Iran.Some well over sixty thousand transactions were said to have taken place between the bank and Iranian businesses. The US was concerned that such stealthy businesses were in fact scandalous and in breach of standard regulations.


Also, in the United Kingdom as investigations into the London interbank offered rate, the LIBOR interest rate-rigging becomes a financial scandal of unbelievable proportions, some analysts suggested that some 16 of the world's largest banks have perpetrated the biggest fraud in history.By manipulating the LIBOR, by raising or lowering it, banks allegedly could make their balance sheets appear healthier than they were, while consumers and members of the public apparently paid the shortfall. Even though the manipulation scandal began in London its effects could be global and should therefore see multinational banks fall under strict regulation.Some of these banks, Barclays (until September1999when it became Rokel Commercial Bank)and Standard Chartered Bank, happen to operate in Sierra Leone where money laundering and such fraud could not be easily detected.

On its website, Standard Chartered Bank Sierra Leone confirmed that the country was set for rapid growth.“We forecast 30% real GDP growth in 2012. Iron-ore production should see a quadrupling of exports; but the current account deficit should remain, with only modest fiscal revenue gains in the medium term. Donor-dependence is likely to continue.” Standard Chartered Bank is one of the three largest, including Sierra Leone Commercial Bank, Rokel Commercial Bank, holding about 54% of total assets in the industry. It is the biggest in terms of global profile and a readymade trajectory into the country’s economy straight from the securities exchanges in London and New York.

However, allegations are that the world's largest banks, among them Standard Chartered Bank, have been fraudulently fixing interest rates around the world for at least the past decade, if not for a much longer period of time.Looking at the susceptibilities of the banking sector to hazards with particular reference to fears around risk management, control and oversight, strength and preparedness of the central bank to provide adequate supervision in 2012, I realised that the trials of a flagging relationship between the regulator,its authority and the financial system could be at risk more than ever before.

The country’s situationin terms of capacity to regulate the banking industry or the financial services sector is at the mercy of the aristocrats. There is serious transactional inequality with no amiable access to and reasonable conditions to loan facilities for small enterprises;no congenial win-win interest rate pegging.All of these are a bane to the opening up of burgeoning local informal businessesin particular and the economy in general. Some of these concerns cannot be evaded in the search for answers to the current state of affairs of the country’s financial sector. Much as they look unsettling, revelations on weak and pliable banking regulations in Sierra Leone make up an integral part of the economic difficulties the country faces right now.

Here are some of the reasons for apprehensions. In late 2011 the Stability Analysis Report on Sierra Leone’s Financial Sector” indicated that “the banking system was vulnerable to a certain level in all of the key areas of assessment and, therefore, had weaknesses.” As a consequence, between October and December 2011, this fear became a reality with liquidity crisis that has refused to go.

In fact in a July 2011 document titled: ‘Financial Sector Reform and Development in Sierra Leone,’ authored by Omotunde E. G. Johnson for the International Growth Centre (IGC), the pessimism was even justified. “Sierra Leone is at a very low level of financial development. It is a country of about six million people, with a per capita annual income currently around US$315. Sierra Leone currently has thirteen commercial banks, nine community banks…, two savings and loans…, and some forty-two foreign exchange bureaus,” according to the IGC, which is based at the London School of Economics and offers independent advice on economic growth to governments of developing countries.

Sierra Leone has a fairly liberalised financial system but interest rates and exchange rates are obviously market-determined. In other words, there are no selective credit controls.

“The soundness of the financial system is in some question, although it is not in any danger of crisis. The capital–asset ratio of the banks, for example, is good (about 17%), but non-performing loans are a problem, tending to hover around 16% in recent years,” the IGC observed. The report also found out that the current state of banking supervision was rudimentary. Again the BSL’s supervisory efforts, capacity and capability are being questioned.

“One certainly does not see any attempt to explicitly organize the approach to assessing the soundness and management of a financial firm in light of risks and risk management. This would emphasize the importance of a clear understanding of financial risks and optimal assignment of the responsibility for managing different types of risk (namely, liquidity, credit, interest rate, market, foreign exchange, operational, sovereign, legal, and fraud risk),” said IGC.

All in all, the regulatory strategy in Sierra Leone is in need of a focused, coherent, modern approach. Banks in the country are small with assets averaging about US$45 million as at July 2011.Next we shall look at the Banking Act 201, how governments and independent financial regulators operate across the world and why in fact Sierra Leone badly needs one that is modeled on basic financial system with a global appeal.