The Sierra Leone Financial System

By Emmanuel S. E. Leigh

This book provides readers with wonderful and fascinating historical facts that have never been assembled into a single text. The book was written in perspective, to capture the attention of scholars and prospective investors.
Facts have been corroborated and perceptions taken from real life-experiences in some of the institutions mentioned in the text. For those scholars aiming to gain knowledge of the financial system in Sierra Leone, the book leads them to major topics that should stimulate further studies. Indeed, readers will be left with the wish of researching more. Some of the topics might appear short lived, especially with the fast evolving financial situation.
Considering the structure, the book sets for scholars, an ad-hoc platform for discussion that could give rise to significant political and economic analysis. A brief synopsis of the book follows.
The Bank of Sierra Leone was established to serve as an agency that would build up a reputation for the highest standards of management and integrity. In this instance, it aims at formulating and implementing monetary and supervisory policies to foster a sound financial environment.
The business of commercial banking has evolved rapidly in recent years, as banks have confronted volatile economic conditions and revised regulations. New methods and the evolution of new banks may have some influence on how these activities are expedited but the business of banking is unchanged.
The facts on other financial institutions are directed to the integration of the unorganized with the organized sector. It was possible to integrate the two sectors in banking institutions specializing in the requirements of the rural areas. Such institutions combine the provision of credits with marketing and provide ancillary services so as to ensure that credits made available, increase the productive capacity of the recipients.
Government financial management in Sierra Leone provides collective goods and services that correspond to the performance of its traditional functions and at the same time promote growth and development, stability, equitable distribution of income and wealth. Its objectives are often interwoven with other economic sectors in the country. These are subject to further studies and interpretation. They become meaningful only when specific contents are translated into policies.
Though the repercussions of the decade long rebel war on the financial structure have not been specifically mentioned in the book, the toll was devastating. However, the government has established a unique track record for a post-conflict country.

• Language: English
• Publisher: AuthorHouse
• Release date: Apr 30, 2004
• ISBN: 9781410776853

Emmanuel S. E. Leigh

Emmanuel S. E. Leigh earned his first degree in Business Administration at the University of Cincinnati, U. S. A. in 1979.  He participated in a ten-week course for Public Finance in 1985, conducted at the International Monetary Fund Institute.  In 1989 he earned his Masters degree in Business Administration at the University of Birmingham, U. K.   He worked as a senior civil servant in Sierra Leone for over twenty years, holding senior accounting positions at the Treasury and some Government Ministries and Departments.   Mr Leigh is the author of a paper on ‘Government Financial Management in Sierra Leone’ (Unpublished), written for the United Nations Department for Technical Corporation for Development.  The paper featured at a mini-roundtable conference in 1989, held in Cyprus for Least Developed Countries.    Between 1989 and 1991, he was a United Nations Volunteer (UNV) Accountant in St Vincent and the Grenadines, West Indies.   He also lectured on part-time basis, at the Institute of Public Administration and Management, University of Sierra Leone.    Mr Leigh’s personal passions are reading, research on world financial issues, football and playing the organ.  

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© 2004 by Emmanuel S. E. Leigh. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission from the author.

First published by AuthorHouse 04/07/04

ISBN: 1-4107-7685-9 (e-book)

ISBN: 1-4184-2493-5 (Paperback)

ISBN: 978-1-4107-7685-3 (eBook)

Contents

DEDICATION

ABOUT THE AUTHOR

ACKNOWLEDGEMENT

PREFACE

INTRODUCTION

PART ONE: CENTRAL BANKING

Chapter 1: The Establishment of Bank of Sierra Leone

Chapter 2: Organisational Structure

Chapter 3 - Functions of the Bank of Sierra Leone

Chapter 4 - Tools of Monetary Policy

PART TWO COMMERCIAL BANKING

Chapter 5 - The Evolution of Commercial

Banking in Sierra Leone

Chapter 6 - The Operations of Commercial Banks

in Sierra Leone – Sources and Uses of Funds

Chapter 7- Main Feature of Commercial

Banks in Sierra Leone

Chapter 8 Indigenous Commercial Banking in Sierra Leone

PART THREE – OTHER FINANCIAL INSTITUTIONS

Chapter 9 Development Banking

Chater 10 Co-operative Banking

Chapter 11 Rural Banking

Chapter 12 Insurance Industry in Sierra Leone

Chapter 13 The Salpost Savings Bank

Chapter 14 Sierra Leone Housing Corporation Savings and Loans (SLHCSL)

Chapter 15 First Discount House Limited (FDHL)

PART FOUR – GOVERNMENT FINANCIAL MANAGEMENT

Chapter 16 Budgeting

Chapter 17 Accounting

Chapter 18 Tax Policy

Chapter 19 Public Finance

Chapter 20 Relations with the World Bank (WB)

and International Monetary Fund (IMF)

APPENDIX 11-1

APPENDIX 11-2

APPENDIX 11-3

APPENDIX 11-4

BIBLIOGRAPHY

DEDICATION

This book is dedicated to Coulsona and Laurasona.

ABOUT THE AUTHOR

Emmanuel S. E. Leigh earned his first degree in Business Administration at the University of Cincinnati, U. S. A. in 1979. He participated in a ten-week course for Public Finance in 1985, conducted at the International Monetary Fund Institute. In 1989 he earned his Masters degree in Business Administration at the University of Birmingham, U. K.

He worked as a senior civil servant in Sierra Leone for over twenty years, holding senior accounting positions at the Treasury and some Government Ministries and Departments.

Mr Leigh is the author of a paper on ‘Government Financial Management in Sierra Leone’ (Unpublished), written for the United Nations Department for Technical Corporation for Development. The paper featured at a mini-roundtable conference in 1989, held in Cyprus for Least Developed Countries.

Between 1989 and 1991, he was a United Nations Volunteer (UNV) Accountant in St Vincent and the Grenadines, West Indies.

He also lectured on part-time basis, at the Institute of Public Administration and Management, University of Sierra Leone.

Mr Leigh’s personal passions are reading, research on world financial issues, football and playing the organ.

ACKNOWLEDGEMENT

My primary debt is to the hundreds of people that I interviewed in Sierra Leone. Your input, concerns, questions, articles and kind attention helped me explore the subtleties of the financial system in Sierra Leone, though it is evolving at a rapid stage.

My special gratitude goes to the personnel at the libraries of the Bank of Sierra Leone and the Ministry of Agriculture, Forestry and Food security. Mrs Sylvia Blyden, wherever you may be, your insight on the insurance industry during your tenure of office at the Ministry of Finance, is well appreciated

The document produced by Mr Wang, former Adviser to the Accountant General, was very useful in writing this book.

Special gratitude goes to Mr. Jacob Kanu, the late Mr. Allie Jabbie, Mr. Sulay Kamara and many others for their unflagging inspiration, love and guidance during my research period.

I am grateful to the fine people at the institutions highlighted in this text for answering my questions and providing invaluable information and materials.

My appreciation will not be complete if I do not mention Mr Feridoun Sarraf, who was my mentor at the Ministry of Finance. I worked closely with him while he was the IMF Budget Adviser at the Ministry of Finance from 1983-1985, and then 1987-1988. He inspired me to develop my knowledge for achieving the highest goal.

Finally, I give my thanks to Mrs Dolcie Martin, Mrs Rose Sesay and Mrs Coulsona Leigh for typing the draft and final manuscript in Microsoft setting.

PREFACE

The financial system in Sierra Leone is very narrow, with only the Central Bank being the forefront of regulation and the commercial banks being the key players. Financial evolutions in Sierra Leone have revealed that other financial institutions do intermediate in the system. These institutions offer a broad range of services, thus making the financial sector more diversified and competitive. They are institutions that do not constitute any homogeneous group as they are engaged in different but specialised activities with varying degrees of implications for monetary stability and public interest.

They conduct their various operations by the use of instruments. Instruments refer to cash, securities, bonds or equities depending on the place or mode of operation. These places of operation are known as financial markets. Financial markets comprise of the money and capital markets. The money market deals in short term funds. It exists primarily as a means of liquidity adjustment. The capital market consists of primary and secondary markets. While primary market is concerned with raising new funds, secondary markets are for the sale and purchase of existing securities that are in possession, thus enabling savers who purchased them when they had surplus funds, to recover their money when they are in need of cash.

This book is divided into four parts, with twenty chapters, and it spans the entire Sierra Leone financial system. Part one has four chapters, which discuss the evolution, structure and functions of the Bank of Sierra Leone (Central Bank). Part two comprises four chapters, which examine the evolution, features, operations and indigenisation of commercial banking in Sierra Leone. Part three is developed into seven chapters, dealing with other financial institutions in the country, such as, Development banking, Rural banking, Insurance industry, Post Office Savings Bank, Co-operative banking, The Sierra Leone Housing Corporation Savings and Loan and the First Discount House Limited (FDHL). Part four in five chapters, discusses Government budgeting, Accounting, Tax policy, Public finance in Government financial management, and Government relations with the International Monetary Fund (IMF) and the World Bank (WB).

Writing about the fast changing scenes was a very difficult task. I had difficulties in obtaining up-to-date data and information on the fast-changing economic and financial situation in Sierra Leone. However, I had great assistance from the libraries at the Central Bank, Ministry of Development and Economic Planning, Ministry of Agriculture, Forestry and Food security individuals in some of the institutions mentioned in the book and my wife.

The views expressed in the book are my personal views as a researcher and do not in any way reflect my official status as a former senior civil servant in Sierra Leone.

INTRODUCTION

Sierra Leone exhibits the typical features of a developing country in the African economy with high ratio of foreign trade to gross domestic product (GDP), low level of urbanization and high level of monetization.

After independence the government pursued wide range of planning and development strategies with industrialisation at the helm. The economy grew at nearly 4 percent a year. It is recorded that despite the first oil shock in 1973 economic growth exceeded 3 percent a year up to 1975. This outstanding growth rate enticed a continuous increase in government expenditure in the face of sluggish export and revenue growth. Thus, during 1975-80 GDP growth slowed down to about 1 percent a year. Per capita income declined both in real and absolute terms and domestic inflation rate accelerated to 21 percent by 1979.

Hosting the OAU conference in Sierra Leone in 1980 meant massive importation of luxuries, which implied the use of foreign reserves. The period 1980-85 ushered in debt crises for Sierra Leone. The period marked the greatest deterioration in agricultural performance and the terms of trade fell more sharply than other countries in West Africa. With the deterioration in the balance of payments (bop) Sierra Leone resort to borrowing and thus the debt burden continued to increase. This trend forced the country into negotiations with the International Monetary Fund (IMF) and the World Bank. These multilateral organisations as well as bilateral donors considered the economy of Sierra Leone as a disaster case even in comparison with other countries of Sub-Sahara Africa. Per capita income in 1988 was measured to be the same as in the mid-1960s and almost 20 percent below the peak reached in 1981. By 1988 Sierra Leone was declared ineligible for IMF borrowing and the poor economic performance continued to have its toll on the populace.

The coincidence of poor economic management and poor political framework sent the country to the brink, and by the first quarter of 1991 Sierra Leone was engaged in a senseless war that only helped to dash the hopes of economic optimists. The civil conflict resulted economic devastation and breakdown of law and order that led to further worsening of the well being of two thirds of the populace. The levity with which the authorities treated the conflict led to a coup d’ tat in 1992. With a military government in place and some technocrats brought to the forefront in economic policy-making, the IMF and World Bank hoped to see a recovering economy.

Financial liberalisation and tight budgetary practices were sought as a means of making market forces work and keep the exchange rate at a stable level. On the macro platform, Sierra Leone was considered as a facsimile of success but poverty became more pronounced, with retrenchment and displacement of the populace racing side by side. Inflation was still volatile and productivity level within the country was coming to a halt. This had a negative effect on the conduct of monetary policy and as such monetary trends became expansionary, contrary to the objective of a contradictory monetary policy. With the change in government in 1996, it was a dream that there would be improved real sector performance, a declining trend in inflation rates, a stable exchange rate and chance for sustained protective security. This dream was shattered in the wake of another coup d’ tat that led to both a withdrawal of donor assistance and a loss of human resources in the form of brain drain - teachers, doctors, lawyers, lecturers, civil servants, nurses, police and military personnel, journalists, to name a few, left the country for neighboring countries and beyond. This had an adverse effect on the entire economy and ‘vault financing’ became the order of the day with its inflationary impact.

The year 1998 saw the restoration of democracy in Sierra Leone at a time when the country depend on hand-outs from well-meaning friends to save the nation from collapse. Programmes for health, education and community-based organisations, reform of the legal system, gender mainstreaming, etc. became the new focus.

Government and monetary authorities have not been able to address this new wave in the foreign exchange market. Resettlement, rehabilitation and reintegration seemed to be an agenda issue in the short-run for long-term planning but this was not encouraged, and a vicious attack on civilians and property occurred in the wake of 1999 that lasted for nearly three months. The invasion of the capital, Freetown in January 1999, climaxed with the Lome Peace Accord and its attendant implications. The invasion led to a decline in GDP and domestic revenue and the depreciation of exchange rate. The cessation of hostilities and developments in donor assistance to Sierra Leone showed positive signs for the economy. The Economic Recovery and Rehabilitation Programme and the hopes of demobilisation, rehabilitation, reintegration and resettlement foreshadowed good news for the Sierra Leone economy.

In the year 2001, there was a steady improvement in the security situation of the country. The Government’s focus changed from conflict management and short term relief to medium term development and growth, and was able to endorse an Interim Poverty Reduction Strategy Paper (IPRSP) in July 2001. The Board of the International Monetary Fund (IMF) in turn approved Sierra Leone’s request for three years under the Poverty Reduction and Growth Facility (PRGF) in support of a medium term programme.

With a per capita GDP of about US$134 in 2000, Sierra Leone made substantial progress in implementing economic reforms, despite recurrent disruptions caused by the civil war that last until mid-1999. Following a peace agreement reached in mid 1999, the government, with support from multilateral donors, adopted a strong economic rehabilitation and recovery programme aimed at sustaining the peace through disarmament, demobolization and reintegration programmes, promoting macro economic stability, and implementing key structural reforms. The government’s recovery programme and peace efforts was aided by the presence of a United Nations Peace Keeping Force (UNAMSIL) in Sierra Leone since late 1999. Remarkable progress continued on the peace front with the disarmament programme for ex-combatants completed in January 2002.

The economic situation improved significantly since mid-1999 as the disarmament and reintegration of ex-combatants gained momentum and the private sector confidence revived. Economic performance in 2000 was excellent with real GDP recovering to 3.8 percent growth in 2000 from –8.1 percent in 1999, and price inflation declining sharply to –0.9 percent from 34.1 percent in 1999. Real GDP growth was estimated at 5.4 percent in 2001 slightly above the projected figure, and inflation averaged 2.2 percent compared with the target of 8 percent. Sierra Leone also made strong structural reforms, which includes, tax policy and administrative reforms that support private sector redevelopment and fiscal stability, improved public expenditure management and control, exchange and trade liberization to strengthen competitiveness, financial sector modernization and regulatory reforms, improvements in governance, and more delivery of social services.

It is against these background that this book has been written to inform the present and future generation about the financial evolution in Sierra Leone, namely, the existence of new commercial banks, revised banking regulations, new regulations on Government budgeting and accounting procedures, insurance companies and government relations with international organisations. Similarly, since Government is ardently encouraging investors into the country it is imperative to present to existing and prospective investors a text that summarises the evolutionary and operational practices of the system that controls the means of payments and purchasing power in the country.

PART ONE: CENTRAL BANKING

The establishment of West African Currency Board (WACB) in 1912 was based on the proposals submitted by the Emmot committee set up in 1911 to consider matters affecting the currency of British West African Colonies. The basic function of the board was the issue of the amount of currency required by the commercial banks and trading firms and to buy as much sterling that the banks and business firms were willing to sell.

The Secretary of state for colonies appointed the Board and it operated from London. It’s local agents were the Accountant General in each territory, who controlled the Board’s stock of un-issued currency, issued and redeemed the currency as directed by the Board.

The Board was obliged to buy and sell the currency it had issued - The West African pound was at fixed rates against sterling in London. Because of this obligation and the fact that local currency could come into circulation only with the support of an equivalent amount in sterling; the value of the WACB currency was always stable in relation to sterling and had virtually the same exchange rate vis-à-vis other currencies.

The most important achievement of the Board, which operated a sterling exchange system, was that it unified the currency system and facilitated the growth of external trade on which the economies of the colonies were dependent. However, it failed to integrate the currency and credit system in the West African colonies and provided no impetus to their internal development other than their export crops.

From 1912 until the late fifties, the Board fulfilled its primary task of providing complete convertibility of West African currency for sterling and, following the withdrawal of Ghana and Nigeria in 1957 and 1958 respectively, Britain was able to redeem its currency in both countries without impairing its obligations to the Gambia and Sierra Leone.

The Loynes Proposal

There was the idea that to remain a member of the currency Board after independence was inconsistent with political independence. With the approach to independence in 1961, the Governments of Sierra Leone and the Gambia invited Mr J B Loynes from the Bank of England to examine the present currency system and to meet the economic and political needs of the two territories both common and individual. Loynes argued that the WACB could be of no advantage to Sierra Leone but he never considered a joint Sierra Leone/Gambia currency Board as a practicable alternative because of the different political status of the two countries and consequent divergent interest. This is because Sierra Leone and the Gambia had very little economic or trade links and the distance between the two territories was a problem. He was against the establishment of a Central Bank.He felt that in developing countries Central Banks had generally been influenced by prestige and partly by the mistaken belief that such an institution could create developments. Secondly he did not think the conditions for the proper working of a Central Bank existed in Sierra Leone. Finally there was no need for a Central Bank because the country’s banking system with its London connection provided adequate and efficient service to the Government and the public.

Having rejected a Central Bank, and considering that a joint currency board was not appropriate, he recommended the establishment of a Monetary Institute. This new institution was in fact a currency board with a new name. It was hoped that after some time the Institute should be able to perform all the functions of a Central Bank. Although the Government accepted the Loynes Report, it did not establish the monetary institute that was recommended.

Chapter 1: The Establishment of Bank of Sierra Leone

The first indication that Government intended to establish a Central Bank rather than a monetary institute was given by the Minister of Finance in his 1962/63 Budget Speech, where he said No independent country can regard itself as truly independent until it has set its own national currency. The time is not too distant when Sierra Leone too will have its own Central Bank. During that Financial year the Government undertook the preliminary arrangements of a traditional Central Bank including the drafting of the legislation. The phrase ‘traditional Central Bank’ is used to connote the idea, the objectives and procedures of the new Central Bank. The Bank of Sierra Leone closely follow those of the older central banks, and no reliance was placed on the new control devices.

The Mission Statement:

The Mission of the Bank of Sierra Leone is to formulate and implement monetary and supervisory policies to foster a sound economic and financial environment. To this end, the Bank aims at building and maintaining a strong and efficient organisation with highly motivated professional employees working in the best interest of Sierra Leone.

The Beginning of Central Banking in Sierra Leone

The appointment of Mr. Gordon Hall in 1962 actually marked the beginning of Central Banking in Sierra Leone. His team comprised of Mr. S B Nicol-Cole seconded from the Ministry of Trade and Industry and Mr. Juma Sei from the Ministry of Finance. Drafting the Bank of Sierra Leone Act, occupied most of 1962. This involved the study of Central Banking Legislation in other developing countries, especially Ghana and Nigeria. It also involved visits to other central banks. The draft of the Bank of Sierra Leone bill was submitted to the Ministry of Finance and it finally became law on March 27, 1963.

The next stage consisted of planning the introduction of the new currency, which was to replace pounds, shillings and pence of the WACB. This involved designing, arranging for printing and minting, and the introduction of the new currency to the country. Arrangements were also made for the transfer of Government’s account from the commercial banks to the Central Bank. The doors of the Bank of Sierra Leone were opened for business on August 4, 1964 in the premises of the Leone House, and there were fifty-three staff. Also on that day, the Minister of Finance launched the new currency and the Bank was formally declared opened. To avoid confusion in the minds of the public the Leone notes and cent coin were substantially similar in shape, colour and size to the old WACB currency.

While the change over was in progress, the Bank began its function as banker to the Government on November 1, 1964 by taking over from the commercial banks deposit accounts. On November 5, 1964 the Bank of Sierra Leone began to issue Treasury Bills and in 1965 it began to act as a Registrar of Government Stocks. On January 12, 1965, the Bank established a Clearing House for commercial banks to ensure a more efficient clearing of cheques. On June 25, 1965, it took over the administration of Exchange Control, which were then handled by the Ministry of Finance. In November 1966 all departments of the Bank except the Research Department and the Exchange Control Department moved from Leone House to its new building at Siaka Stevens Street. The remaining departments moved in January 1967 and the building itself was formally opened on November 26, 1967.

The Bank of Sierra Leone Act 1963 and 1970 (Amendment) Act

The Bank of Sierra Leone Act 1963 defined among other things, the status and powers of the Bank and its principal objectives were:

a) To issue legal tender currency in Sierra Leone and to maintain external reserves in order to safeguard the international value of the currency.

b To act as banker and financial adviser to the Government.

c) To promote monetary stability and sound financial structure.

In order to play a more meaningful role in the economic affairs of the country, the Bank of Sierra Leone (Amendment) Act 1970 had the following purposes: -

a) To promote monetary stability and sound financial structure.

b) To maintain the internal and external value of the currency.

c) To promote credit and exchange conditions conducive to the balance growth of the economy.

In the light of the above purposes the following are some of the important changes introduced in the 1970 Act: -

1. Capital

In part III, Section 7 sub section (2) the Minister of Finance shall transfer to the ownership of the Bank non-negotiable, non-interest bearing securities issued by the government for the purpose of preserving the paid up capital of the Bank if the Board feels that the Banks assets are less than the sum of its liabilities and paid up capital.

2. Profits and General Reserves

Under the 1963 Act - Section 8 - sub section 2, the determination and allocation of profits at the end of the financial year was as follows:

a) One - fourth profits paid to general reserve, if general reserve was less than the paid up capital.

b) If general reserve was greater but not twice as great as the capital one-eight profits was paid to the general reserve fund.

Under the 1970 (Amendment) Act the ratios of profit paid to the general fund was change to one-third and one-sixth, respectively. The general reserve fund of the latter was allowed to increase to four times the paid up capital.

On the distribution of profits, the 1970 Act Section 8 Sub Section 3b stipulated that the Bank, "in consultation with the Minister of Finance shall allocate a suitable amount to the development credit fund established under Section 40 for the provision of loans and advances to farmers and large business enterprises as