LIBERIA: Consistent Progress in a Challenging Environment
After the protracted civil war ended in 2003, Liberia needed to rebuild the financial sector from the basics. The financial sector was narrow and underdeveloped, characterized by limited financial instruments, a low level of financial intermediation, and limited trust among the public. A number of systemic and institutional constraints had led to limited availability of financing for productive investment, particularly for SMEs, as well as rural-based agricultural industries. These constraints included a high volume of nonperforming loans (40 percent in 2006), ineffective judicial procedures for loan recovery, high intermediation costs (especially in rural areas), inadequate credit risk management systems, few adequately trained personnel, and non-transparent corporate governance practices.
TA provided under the FIRST Initiative in seven projects worth nearly $1.5 million, delivered by both the IMF and the World Bank, has focused on providing strategic direction for the reform and development of the financial sector and strengthening the capacity of the Central Bank of Liberia (CBL). Areas of assistance have included support to the Regulation and Supervision Department to develop and implement a financial stability and macroprudential surveillance capacity; developing and implementing a structured on-site examination approach including corporate governance, risk management, internal controls, and internal audit; and developing and implementing a legal and regulatory framework for risk-based consolidated supervision. TA included the following projects:
- 2008: Financial Sector Diagnostics Study (Project #8049, Revitalizing Financial Services), implemented by the World Bank
- 2008: Banking Supervision (Project #8061, Banking Supervision Reform), implemented by the IMF
- 2010: Capital Markets (Project #10056, Capital Markets Strategy & Legal and Regulatory Framework), implemented by the World Bank
- 2011: NBFIs (Project #10055, NBFI Insurance Regulatory and Supervision Framework), implemented by the World Bank FIRST Impact Stories from Regions FIRST 2015 Annual Report | 33
- 2012: Stress Testing (Project #10276, Developing Capacity for Stress Testing), implemented by the IMF
- 2014: Financial Sector Development Implementation Plan (Project #A052, Financial Sector Development Implementation Plan), implemented by the World Bank
- 2014: Liquidity Forecasting (Project #A048, Enhancing Liquidity Forecasting at the Central Bank of Liberia), implemented by the IMF
The Financial Sector Diagnostic Plan, developed under the FIRST Initiative in 2008, has helped guide authorities toward development of the government bond market, credit information systems, a strengthened payments system, risk-based supervision capabilities and reform of the insurance and microfinance sectors, among other elements. The Financial Sector Development Implementation Plan (FSDIP) that is now being developed will take stock of the past reforms and lay out the next generation of reforms needed.
Development partners, notably the IFC, the U.S. Agency for International Development, the United Nations Capital Development Fund, the African Development Bank, and the World Council of Credit Unions have also been active in assisting the government in the financial sector. Each of these partners assists in supporting a distinct area of financial sector development. The initiatives supported by FIRST have been valuable in complementing donor activities with a broad development plan for the sector, addressing cross-cutting issues.
The Liberian authorities have been implementing reforms aimed at creating a stable, safe, efficient, and accessible banking sector. Banking (including microfinance) and insurance account for almost the entirety of financial sector assets (92 percent in 2014). The CBL has taken important steps toward sustaining the overall health of the banking system; strengthening the legal institutional framework and financial infrastructure; and consolidating its regulatory and supervisory capacity. Significant progress has also been made in promoting access to finance, including promoting mobile money services, establishing the Collateral Registry, reforming the credit union sector, as well as through other initiatives of the CBL and the government of Liberia.
Much progress has been made on the macroprudential side. Stress testing capacity has been developed at the CBL: the staff now has the ability to conduct stress testing, monitor vulnerability, and provide advice to commercial banks as they move toward the adoption of their own stress tests. The CBL has started integrating stress testing in its macro- and microprudential analytical work as an additional tool for financial stability analysis and/or as an early warning indicator. The CBL has the framework in place as well as the necessary tools for the production of a financial stability report.
FIRST TA in the nonbank financial institution (NBFI) sector has assisted in the development of an insurance supervisory capacity and the adoption of modern risk-based methods for supervision and assessment of insurance companies’ financial statements and has contributed to the preparation of the new Insurance Act, promulgated in December 2014 together with new capital requirements. Several other prudential regulations have been developed and are expected to be issued soon to further strengthen the activities of insurance operators and the enabling environment.
While microfinance remains very small in Liberia, with fewer than 25,000 active borrowers (supplemented by a much smaller number of credit union borrowers), it represents an important avenue for financial inclusion, particularly in rural areas. FIRST supported authorities in establishing regulations and guidelines for the development of the microfinance sector as well as for effective supervision of the sector. This included drafting Prudential Regulations for Microfinance Deposit-Taking Institutions and Nonbank Financial Institutions (which were enacted and subsequently resulted in the licensing of new institutions), field examination of a number of microfinance institutions, operational risk assessment, and computer-assisted examination techniques.
The CBL undertook several measures to strengthen the financial sector and, despite significant challenges, made significant progress in revitalizing the banking sector, as shown by the steady growth in bank credit to GDP and in several measures on which Liberia is now comparable with country peers in the Economic Community of West African States (ECOWAS), as depicted in figure 7.
Although the Ebola crisis has certainly adversely affected the financial sector, especially the smaller institutions and those serving the “bottom of the pyramid,” it has been a testament to the strengthened regulation and oversight of the financial sector, led by the Central Bank of Liberia, that the banking and insurance sectors have remained well capitalized and liquid throughout the crisis and that confidence in the system has not wavered.
Liberia has followed a market-based approach to financial sector development, without state-owned institutions, allowing both domestic and local banks the opportunity to grow. Although nonperforming loans remain persistently high (slightly below 20 percent; up from 14.5 percent at the start of the Ebola crisis in May 2014), the level is a marked improvement from that seen in 2006 (40 percent). Credit to the private sector has grown significantly over this period.
A sound financial sector will promote healthy competition among strong financial institutions in rendering diverse and appropriate financial products to the public. A more efficient financial sector will increase private sector credit and lower borrowing costs. A more inclusive financial sector will increase access to finance by MSMEs and low-income households, and support the eradication of poverty. The government of Liberia has taken important steps toward achieving these objectives in keeping with the Agenda for Transformation, which is the strategic development agenda for the country that is expected to make Liberia a middleincome country by 2030, and also help build an inclusive financial system for sustained economic growth and development.