Banking Sector Compliance Challenges in Sierra Leone: Stability and Concerns Amidst Declining Profitability

The Bank of Sierra Leone (BSL) has released its latest report, highlighting a mixed bag of performance indicators for the country’s banking sector. While the sector has maintained stability and satisfactory capitalization, several concerns have emerged, including declining profitability and increasing reliance on foreign currency.

Stability and Capitalization

The BSL report highlights that the banking sector in Sierra Leone has maintained stability and adequate capitalization. The sector’s Liquidity Ratio increased from 110.6% to 117.2%, indicating an increase in liquid assets held by banks. Additionally, the ratio of liquid assets to short-term liabilities rose from 92.2% to 95.5%.

Declining Profitability

However, the report also reveals that the profitability of banks in Sierra Leone experienced a decline in the fourth quarter of 2022. The Return on Assets (ROA) dropped to 6.5%, and Return on Equity (ROE) decreased to 28.2% compared to 7.0% and 30.3% respectively in the previous quarter.

Capital Adequacy Ratio

The report highlights a decline in the Capital to Asset Ratio (CAR) to 35.2% in the fourth quarter, compared to 42.8% in the third quarter. Despite this decrease, the CAR remained above the regulatory minimum, suggesting that banks have sufficient capital to cover potential losses.

Non-Performing Loans

The asset quality of banks also showed improvement, with the ratio of Non-Performing Loans (NPLs) to Total Loans decreasing from 13.8% to 12.1%. However, NPLs still exceeded the prudential limit of 10%, indicating a need for further improvement.

Deposits and Investments

Total deposits in the banking sector grew by 19.52% from Le 14.17 trillion in the third quarter to Le 16.94 trillion in the fourth quarter, serving as the primary source of funds for banks. Foreign currency-denominated deposit liabilities increased significantly, rising from 29.5% in the first quarter to 40.7% in the fourth quarter.

Gross loans and advances saw a marginal decrease of 2.12%, while T-bill holdings by the banking sector decreased slightly by 2.60%. However, T-bond holdings increased by 18.42%.

Conclusion

Overall, Sierra Leone’s banking sector has maintained stability and adequate capitalization, although there are areas that require attention, such as profitability, NPLs, and the increasing reliance on foreign currency. The BSL will likely continue monitoring these indicators closely to ensure the sector’s resilience and sustainable growth.