VZCZCXRO5592
RR RUEHMA RUEHPA
DE RUEHMV #0415/01 1611752
ZNR UUUUU ZZH
R 101752Z JUN 09
FM AMEMBASSY MONROVIA
TO RUEHC/SECSTATE WASHDC 1081
RUEATRA/DEPT OF TREASURY WASHDC
INFO RUEHZK/ECOWAS COLLECTIVE

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