Financial Sector Overview
Founded in 1847, Liberia is Africa's oldest republic. The two civil wars between 1989-2003 caused widespread loss of life, suppressed economic activity, and destroyed vital infrastructure, including electricity lines, roads, and water and sewage systems. During that period, Liberia lost about 8% of its population. Despite its abundant natural wealth and favorable geographic location, Liberia is among the world’s poorest countries. It ranked 181st out of 189 countries in the latest United Nations Development Programme (UNDP) Human Development Index and Gender Inequality Index (2017). The country continues to lag behind its regional and global peers on indicators of the quality of the business environment. In the 2018 Doing Business report, Liberia ranked 172nd out of 190 countries on the overall ease of doing business. The World Bank 2017 Enterprise Survey identified high tax rates and constraints on access to finance, electricity, and land as the most important obstacles facing Liberian firms. As a transition state, Liberia receives large amounts of direct budget support, investment financing, humanitarian aid, and technical assistance (TA). In 2014-2016, net official development assistance (ODA) to Liberia represented 45.3% of its GDP and amounted to almost 2.3 times Liberia’s gross capital formation—one of the highest ratios in the world. ODA helps cover the substantial gap between the government’s capacity for public spending and the needs of its growing population. With 5 other countries including Gambia – Ghana – Guinea – Nigeria and Sierra Leone, Liberia is a member state of the West African Monetary Zone (WAMZ) whose objective is to set up a second monetary zone in the West African region, beside the West African Economic and Monetary Union (WAEMU) comprising 7 Francophone countries and Guinea Bissau. The ultimate goal at medium and long term for these countries is to move towards a unique monetary zone through the ECOWAS Monetary Cooperation Programme (EMCP).
Financial Sector Overview
The financial sector in Liberia is regulated and supervised by the Central Bank of Liberia (CBL), except for the domestic pension system. As of 31 December 2018, the domestic financial sector consists of 9 commercial banks with 93 branches; 1 Non-bank Financial Institution (the Liberian Enterprise Development Finance Company (LEDFC)); 1 deposit-taking Microfinance Institution (MFI) called Diaconia; 18 registered Micro-Finance Institutions (MFIs); 12 Rural Community Finance Institutions (RCFI); 2 mobile money operators; 285 credit unions; 2,300 Village Savings and Loan Associations (VSLAs); 152 registered licensed foreign exchange bureaux; 19 insurance companies with 31 branches; 1 pension fund (Nasscorp); and 2 insurance brokerage firms.
The banking sector liquidity is at high level (41%), largely above the CBL minimum requirement (15%). However, due to limited credit market and the virtual non-inexistence of domestic financial market instruments, Liberian banks have very little opportunity to invest their excess liquidity. Furthermore, the credit rating system is not effective, but banks have access to the CBL’s manual Credit Reference System (CRS) which provides information to banks and non-bank financial institutions about borrowers’ credit history, including any derogatory information. In terms of financial access and inclusion, the CBL also maintains a centralized collateral registry in order to facilitate SMEs financing through the country, although this incentive is not working well. The financial infrastructure remains underdeveloped as well. Financial institutions essentially cover urban zones and few of them offer digital financial services, including ATMs, electronic payment transfers and mobile money services. Institutional investors only are allowed to buy government debt securities sold by the CBL Financial Markets Department (FMD). The FMD is responsible to manage the Central Securities Depository and is currently working on modalities to bring retail investors into the market.
With 9 commercial banks, the banking industry is the largest subsector of the financial sector, accounting for at least 85% of the total assets of the financial sector in 2017. Total credit to the economy stood at 72.75 billion L$ (Liberian dollar) (462.5 USD billion) at the end of 2018, representing a 33% increase compared with the credit performance at end-December 2017. Trade (13.9%), construction (5.6%), energy (3.4%) and agriculture (2.9%) benefited most from the banks credit in 2018. With more than 96.9% of the total bank financing, credit to private sector increased by 16.4% in 2018, from 14.6 % recorded in 2017. Lending to government and public corporations therefore appears very low (3.1 %), in comparison with other banking sectors in Sub-Saharan Africa; but Liberian banks are increasingly exploring additional sources of revenue such as investing in public debt securities.
Between 2016 and 2018, the average lending rate decreased from 13.6 % to 12.4 %, while the average savings rate slightly increased from 2% to 2.1% during the same period. Financial soundness and performance indicators also indicate a “stable and resilient” banking sector, although non-performing loans (13.8 % in 2018) remains a challenge and negatively impact Liberian banks profitability.
Overall, the financial sector remained relatively resilient and continued to expand despite the legacy of the negative impact of the Ebola crisis and external shocks from the fall in international commodity prices. Foreign banks or branches can establish operations in Liberia, and are subject to prudential measures or other regulations required by the CBL.
Financial inclusion is a key pillar of the CBL with various institutions such as the Rural Community Financial Institutions (RCFIs), the Microfinance Institutions (MFIs), the Credit Unions, the Village Savings and Loans Associations (VSLA) and the mobile money operators. CBL has a special unit dedicated to this subsector, the Microfinance and Financial Inclusion Unit. In support of the national strategy on access to affordable finance, the CBL, in partnership with the private sector, has supported the establishment of 12 Rural Community Finance Institutions (RCFIs) which operate in 8 counties. All of the RCFIs are involved in the payments of civil servants’ salaries, thereby alleviating the burdens previously faced by teachers and health workers to access their salaries.10 RCFIs have been granting salary-based loans while they are all involved in providing money transfer services including remittances as well as mobile money services.
The Village Savings and Loan Association (VSLA) has over the years served as an effective channel in achieving the financial inclusion goal of the Bank. The CBL has provided loans to the VSLAs under the Loan Extension and Availability Facility program to increase their outreach as well as their economic returns.
Credit Unions also play a key role in providing financial services to rural Liberia. The Liberia Credit Union National Association (LCUNA) is the Apex institution of the sector and works with primary credit unions which are present in every political sub-division in the country. These primary credit unions are member-based institutions engaged in savings mobilization and credit extension to rural Liberians.
Considering the important role of the microfinance sector in the domestic financial inclusion process, the reform of the sector has been given high priority under the Financial Sector Development Implementation Plan (FSDIP) launched in 2016 with technical assistance from the World Bank Group and financial support from the Financial Institutions Reform and Strengthening Trust (FIRST) Fund Initiative. At end-September 2018, the total number of clients in the microfinance sector was 36 296, up from 26352 recorded in September 2017 with an increase of 91 % in female clients.
In Liberia, access to finance remains a key constraint for most Micro, Small and Medium- Enterprises (well below the SSA average). Some examples of new venture capital initiatives are ongoing in Liberia – the West Africa Venture Fund (set up by IFC for SMEs in Liberia and Sierra Leone) and Ignite Fund (Stichting – a Dutch foundation) -, but the market has not presented the opportunities anticipated and these initiatives are helping only at the margin. Licensed as a non-bank financial institution in 2007, the Liberian Enterprise Development Finance Company (LEDFC) has been engaged in development and trade financing with extension of access to credit to Liberian-owned Small and Medium Enterprises (SMEs).
Digital finance is experiencing a fast-growing development in Liberia. There were 2.68 million mobile money subscribers in 2018 from which 11.3 % were active. The transactions value was equivalent to 33.1 USD million in 2018, while the number of mobile money agents increased from 3 525 in 2017 to 6 722 at end of 2018. There is a wider use of mobile money services for remittances, bill payments and recently taxes payment. Remittance inflows are also strategic and important for the economic development in Liberia. As a share of GDP in 2017, Liberia is the first African recipient of remittance inflows with 25.9 %, although only 0.6 USD billion was received this year; compared to 22.3 USD billion for the first Sub-Saharan Africa recipient: Nigeria.
The insurance sector consists of 19 companies with 31 branches. The total insurance assets and capital respectively decreased by 24.1 % and 37.1% between 2016 and 2017, but they strongly increased in 2018 respectively by 50.1 and 68.3 %. These developments were largely attributed to the enforcement of CBL Regulation CBL/RSD/INS/005/2016 Concerning Prudential Requirements of Insurance Companies, followed by successful capital increases and risk supervisory actions in 2018. Companies which were found to be significantly undercapitalized were seized and placed under Provisional Administrators (CBL Report, 2018). Main lines of business underwritten are motor, group health, life, engineering project bonds, and marine cargo. Most of the companies concentrate on short-term insurance. The largest class of business is motor (which is in principle compulsory). The number of insurance companies operating in Liberia (19) seems large for the size of the sector. Total insurance assets were 49.5 USD million in 2018, with 19.5 USD million as gross premiums. There has been some rationalization since the CBL started regulating the sector in 2011 and it is anticipated that further consolidation will take place with the implementation of new minimum capital requirements. The CBL has also begun the process of reforming the reinsurance sector, with the restructuring of the National Insurance Corporation of Liberia (NICOL) in order to focus solely on reinsurance.
A new Act was promulgated in December 2016 (replacing the old Act) establishing the National Social Security and Welfare Corporation (Nasscorp). There are three funds administered by the Corporation: the National Pension Fund, the Employment Injury Fund and the Welfare Fund. The recently audited accounts of the Corporation show that at the end of June 2016, net assets were 89.7 USD million as against 79.2 USD million in June 2015. There were many issues with the old pension scheme administered by NASSCORP. The previous ld scheme did not cover all employees, but the new Act allows self-employed persons to enroll and other pension schemes on a voluntary basis. The new scheme also has a specific provision for penalties imposed on defaulting employers including the Government.
Investments by NASSCORP had been heavily concentrated in real estate. The investment policy has been amended to include securities issued by the government or approved financial institutions.