LIBERIA: BANKING SYSTEM STABILIZING DESPITE CHALLENGES

UNCLAS SECTION 01 OF 03 MONROVIA 000415

SENSITIVE
SIPDIS

E.O.12958: N/A
TAGS: EFIN EINV PGOV LI
SUBJECT: LIBERIA: BANKING SYSTEM STABILIZING DESPITE CHALLENGES

REF: MONROVIA 271


1. (SBU) Summary: Although banking services remain concentrated in
Monrovia, the number of banks is increasing and most are expanding
their reach outside the capital. Indicators of financial soundness
are improving, and there is competition to increase services beyond
money transfers and fee-based transactions. Inbound money transfers
have declined since late 2008, and bankers expect the global
financial crunch to increase stress on the banking system. Despite
the Central Bank of Liberia's (CBL) announcement of a temporary hold
on issuance of new banking licenses, there have been four new bank
licenses issued, primarily to Nigerian banks, since the CBL made a
similar announcement. End summary.

The Indicators are Improving
--------------


2. (U) As of the end of 2008, banks' average capital adequacy ratio
stood at 22%, with all banks but one exceeding the 8% required
minimum CAR. (Note: Required bank capitalization was increased from
$2 million to $6 million in 2008, and will be $8 million at
end-2009.) Aggregate commercial bank credit increased by 46.5% in
2008, and levels of credit to the private sector increased from
60.2% in 2006 to 98.6% in 2008.


3. (SBU) By end-January 2009, non-performing loans had declined to
14.2% from a November 2008 peak of 19.1%. Bankers expect
non-performing loans to increase again as the economy worsens.
(Note: GDP growth was 7.1% in 2008 but is expected to be about 4-5%
in 2009, down from the original forecast of 9.5%. End note.) The
economic slow-down has already had an impact on the GOL's ability to
meet its commitments to CBL and two commercial banks to which it
owes millions from borrowing by past governments, with promised
payments arriving just before the deadline for provisioning by at
least one of the commercial banks.


4. (U) The Liberian dollar money supply (M1) increased 21.6% in
2008, a slower rate of growth than the 29.6% increase in 2007.
According to the Central Bank, the lower growth reflects a
tightening of monetary policy to control inflation. However, M1
including U.S. dollar deposits in banks, converted to Liberian
dollars, showed an increased of 43.9% over the 2007 level, with U.S.
dollars accounting for about two-thirds of the total money supply.
(Note: The dual currency regime complicates the impact of the CBL's
monetary policy. The CBL cannot measure U.S. dollars that are not
in the banking system. End note.)


5. (U) According to the Central Bank, interest rates declined at
the end of 2008, to 15.8% for loans. The rate on time deposits
increased slightly to 4.1%. Inflation was 6.4% in January 2009,
down from a peak of 26.6% in August 2008. The average inflation
rate in 2008 was 17.5%. (Note: the GOL's draft budget assumes a
2009-10 interest rate of 3.3%. End note.)

Outbound Remittances are Exceeding Incoming
--------------


6. (U) Many Liberians have long relied on funds from relatives
abroad, especially in the United States. Although there is seasonal
fluctuation, there has been a clear trend. From October
2008-January 2009, inbound remittances ranged from $64-75 million;
outbound ranged from $76 to 89 million. There was a surge in
December in both cases, but outbound transfers consistently exceed
inbound, and that is starting to be reflected in the exchange rate.
In 2008, outbound remittances totaled $201.2 million, down 33.6
percent from 2007. Since at least the fourth quarter of 2008,
outbound remittances have consistently exceeded inbound flows.


7. (U) Despite the lack of detailed data, banking sources agree
that the economic situation in the United States and Europe has
contributed to the drop in inward transfers. While inbound
remittances are primarily from the United States, outbound
destinations are more diverse. One banker reports an increase in
outward transfers by foreign UN and NGO employees, who now have to
transfer money to families at home. In mid-May, the GOL found it
necessary to make a public denial that there was capital flight.
However, we note major families of the former elite maintain their
off-shore bank accounts and are not investing in upgrading their
central Monrovia real estate.


8. (U) The Liberia dollar remained fairly steady against the U.S.
dollar over the past few years, at about LD60-63 per USD, but there
has been recent depreciation, to over LD70/USD in May 2009. U.S.
dollar demand deposit accounts grew 62.1% in 2008, compared to a
48.1% increase in Liberian dollar demand deposit accounts. The CBL
governor has stated the weekly foreign exchange auctions are
"insufficient for liquidity management."

What to do with Liberian dollars?
--------------


MONROVIA 00000415 002 OF 003



9. (U) The liquidity ratio -- averaging over 50%-- is telling.
Banks are warehouses for Liberian dollars and, with no secondary
market, no GOL Liberian dollar bonds, and minimal lending, the cash
is piling up. One banker expressed frustration that he has millions
in Liberian dollars earning no return while the GOL has shortages.
He proposed very limited and tightly controlled bond issuances,
perhaps for road construction. The minister of finance has proposed
a similar plan (reftel). (Note: The required liquidity ratio is 15
%.) At a May 26 press conference, President Sirleaf addressed the
continuing concerns about "capital flight," saying the GOL is
looking for ways to increase demand for Liberian dollars, including
possibly accepting them for payment of some taxes and customs duty.
(Currently all taxes and customs duties must be paid in U.S.
dollars.) This is a major but long-resisted policy change that
likely reflects increasing balance of payments pressures.

New Entrants: Welcome Nigeria
--------------


10. (U) Liberia has eight commercial banks, four of which opened or
acquired new management within the past year. United Bank for
Africa (UBA) has become a prominent player in the market since
opening in July 2008. Since then, AccessBank Liberia (AccessHolding
of Germany with participation by the IFC, ADB, European Investment
Bank),opened in January 2009 and Guaranty Trust Bank of Nigeria
opened April 6.


11. (U) The CBL approved the 100% purchase of Italian-owned Global
Bank by Platinum Habib Bank, a combination of Nigeria's Platinum
Bank and Habib Bank (Pakistan/Aga Khan),in February 2009. A
provisional license for Oceanic Bank Liberia is pending, with a
likely opening in 2010. Of five new or potential bank investors in
the past year, four (UBA, GTB, OBL and PHB) are Nigerian.


12. (U) First International Bank, licensed in 2005, is also
Nigerian. The CBL has announced a moratorium on new bank licenses
but we have been told, unofficially, that ban applies only to
Nigerian banks. In a May 28 speech, the CBL governor, presumably
addressing fears of foreign take-over of the banking sector, noted
that there are 75 Liberians in bank management, compared to 19
foreigners, and 883 Liberians in non-management bank jobs, compared
to 10 foreigners.


13. (U) Of the older banks, LBDI (the Liberian Bank for Development
and Investment, founded in 1961) remains partially GOL-owned, with
foreign ownership by Afri-Investment, the IFC, International Bank
and Firestone, among others. Ecobank (1999) is a branch of the
regional Ecobank International. International Bank (founded in
2000) is majority American-owned and recently established a
correspondent banking relationship with Citibank.


14. (U) The new competition (supported by political stability) is
showing results. Banks are expanding, with 30 branches (up from 19
a year ago) and several new bank windows around the country.
Despite the expansion, banking services are still inaccessible to
many. It is hard to convey the lack of access to banks endured by
most Liberians: eight of 15 counties have no financial institution
at all. Outside Monrovia, services are minimal and transport and
communication remain difficult. Many bank branches outside Monrovia
offer minimal service (primarily money transfers). It is standard
practice for civil servants in the counties, including teachers, to
spend one week a month traveling to and from the nearest bank to
cash their salary checks.

What next?
--------------


15. (U) The CBL identifies the high incidence of non-performing
loans, limited investment opportunities, and high overhead costs as
impediments to bank performance, and notes that the expected decline
in economic activity and remittance flows will affect bank
profitability. Banks cite additional obstacles such as the lack of
roads and electricity, the cost of providing security and
transporting cash, and the lack of an address system, a reliable
land registry, or functioning courts. A more effective banking
sector depends on stronger supervision and updated technology.
Commercial banks are eager for the CBL to progress on a regulatory
framework for a more effective credit reporting/rating system.
Currently banks report deadbeats to the CBL, but only hear back
whether the applicant has a loan outstanding or not: the CBL does
not provide information on the amount of existing loans or payment
history.


16. (U) The CBL is considering, in the medium term, establishing a
deposit insurance scheme. There has also been talk of establishing
a Financial Intelligence Unit, and the CBL supports establishment of
a fast-track commercial court and a credit reference system.
Liberian banks are also close to supporting credit card payments and
at least one bank has ATMs. The Central Bank has been working on
updating regulations to accommodate the requirements of
micro-finance lending.

MONROVIA 00000415 003 OF 003




17. (SBU) Comment: The Central Bank's public statements sound
promising, but it is not moving fast enough. Banks report almost
total lack of communication or support for their concerns on
fighting money laundering and other issues. The CBL's annual report
made no direct reference to its wide-spread multi-year "check
recycling" scam, and there has been no convincing demonstration of
measure to prevent future malfeasance. The recent fraudulent
transfer of $1 million from the CBL to a commercial bank, involving
a forgery of the President's signature, was discovered
after-the-fact by the Governor of the CBL, not by any internal
governance or due-diligence measures.


19. (SBU) The CBL acknowledges the need for training and capacity
building, but has not been receptive to past assistance. Although
bankers disagree on many issues, there is consensus that under
current leadership, there will be changes at the margins but the CBL
will continue to be a force for maintaining the status quo.

THOMAS-GREENFIELD