Liberia Leasing Investment Forum

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Dana Clarke
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1 Finance Leasing in Liberia: Unlocking Accelerated Market and Business Development Realities of Leasing in Liberia Liberia Bankers Association Monrovia, 13-14

2 Presentation Outline Banking Sector Scan Lending Environment; Banks Readiness and Required Incentives Business Practices and Payment Rates on Financial Products Prospects for Local Entrepreneurs and Businesses

3 Banking Sector Scan Number of licensed commercial banks: nine (9). Number of branches: 74 in 10 counties Capital Adequacy Ratio (CAR): 24.9% at 31/03/12 versus 10% minimum requirement. Liquidity Ratio: 45.6% at 31/03/12 against 15% required minimum. Non-performing loans: 23.6% at 31/03/12.

4 Banking Sector Scan (continued) Return on Assets: 0.10% at 31/03/12 Return on Equity: 1.00% at 31/03/12. Loans to the private sector: US$216.8 million L$ million Demand Deposits: US$241.1 million L$1,631.6 million Time & Savings Deposits: US$112.3 million; L$3,432.4 million

5 Banking Sector Scan (continued) Average Lending Rate 13.3% Average Savings Rate 2% Profitability remains a challenge due to high amortization expenses of new banks, high loan loss provision due to poor asset quality and high operating costs.

6 Lending Environment Banks are well capitalized and liquid but are carrying huge Non-Performing Loans (NPL). Regulatory collateral requirement prohibitive for many SMEs to access finance especially for expensive/specialized equipment and machinery Non-performing loans to total loans was at 23.6% as at March 2012 (20.7% at December 2011).

7 Lending Environment (continued) Interest rates, though appearing high on a nominal basis are well within range from a regional perspective but may appear relatively prohibitive for many SMEs. The risk profile, credit history of clients and the level of non-performing loans in the banking sector have fed into determination of interest rates.

8 Lending Environment (continued) Limited credit information, especially for new borrowers continues to pose a challenge for commercial banks. Leasing is particularly useful in getting around some of the constraints to lending in the Liberian context for SMEs that may lack the credit history or sufficient collateral to access traditional forms of financing.

9 Banks Readiness for Leasing Banks authorized to do finance leases under Financial Institutions Act of 1999 Banks in process of adopting IFRS which will lead to standardized accounting treatment of lease transactions Legal framework now in place to protect banks interest and ensure speedy resolution of disputes

10 Banks Readiness for Leasing (cont) Commercial Code passed in 2010 and now in place, specifically Chapter 3A Finance Leases Commercial Court also established for speedy resolution and swift enforcement of judgments Need establishment of Finance Lease Registry Funding constraints limited or non-availability of long term funds

11 Banks Readiness for Leasing (cont) Prudential Consideration: Banks balance sheet structures skewered towards short term financing and will not easily support finance leases despite the excess liquidity evidenced by banking industry

12 Banks Readiness for Leasing (cont) Capacity to handle big ticket transactions banks are constrained by their capital base and the single obligor limit. With capital base set at US$10 million and single obligor limit of 20%, maximum a single bank can finance is US$2 million. LBA pleased to note that CBL Policy Statement 2012 encourages syndication among banks.

13 Banks Readiness for Leasing (cont) Training banks have done some, thanks to IFC/CBL. But this needs to be expanded and intensified as many in the banking sector still have limited knowledge of leasing. Banks will need to establish units within their operations and commit sufficient time and resources to development of finance leases.

14 Required Incentives Tax concessions to lessors and lessees should be instituted. For example, lowering corporate income tax on leased assets to encourage leasing Tax rebates to banks that provide leasing facilities to leasing companies. Availability of long term funds at attractive rates to jump start the leasing business in Liberia

15 Business Practices and Payment Rates on Financial Products Credit Culture Liberia has a poor credit culture evidenced by the high non-performing loans being carried by the banks. This will have to change as such levels of nonperformance will doom the development of leasing

16 Business Practices and Payment Rates on Financial Products (continued) LBA is pleased to see the CBL, in its Policy Statement 2012 declare : the CBL will begin immediately a review of the relationship between delinquent borrowers of respective banks, including corporate entities, to implement a policy of naming and shaming. The CBL will also issue a directive that will bar the banks from dealing with major offenders.

17 Business Practices and Payment Rates on Financial Products (continued) The current interest rate structure can accommodate finance leases and the local lending rate band will be well within the regional interest rate band.

18 Prospects for Local Entrepreneurs and Businesses We recommend that the initial sectors to target for leasing should be: Construction Logging Mining Oil & Gas

19 Prospects for Local Entrepreneurs and Businesses (continued) The above mentioned sectors have ability and capacity to absorb lease costs through their operations This will also provide time for banks to develop experience in leasing given limited existing knowledge and also allow banks to better understand the dynamics of the lease market

20 Prospects for Local Entrepreneurs and Businesses (continued) A 2008 IFC study indicated that leasing accounts for 0.5 to 2% of GDP in developing countries. If we assume 1% for Liberia and use MOF revised figures for projected real GDP for leads to potential market size of US$94 million for the first five years. * * % of GDP is not only measure. Can also use % of imported equipment and % of net loans which would lead to higher projected market size.

21 Prospects for Local Entrepreneurs and Businesses (continued) Entrepreneurs should focus on a few types of equipment initially, especially in the construction sector, to lower costs Need an aggressive awareness campaign for entrepreneurs on the advantages of finance leases as traditional bank credit is often only available to top tier clients. Leasing provides opportunity for SMEs to access MT funds.

22 Prospects for Local Entrepreneurs and Businesses (continued) Critical success factors: Implementation of linkages programs for entrepreneurs with multinationals, concessions and government infrastructure programs. Introduction of preference categories to support local entrepreneurs. Confidence in the judicial system and fast track adjudication of related commercial disputes.

23 Prospects for Local Entrepreneurs and Businesses (continued) Banks need to devote more training budget to leasing There is need for a robust credit reference system LBA is pleased to learn from the CBL s Policy Statement 2012 that the existing Credit Reference System (CRS) operated by the CBL will be enhanced and that the CBL will work towards the eventual establishment of a full-fledged credit reference bureau in the medium to long term.

24 Thank You! Liberia Bankers Association 2 nd Floor Suite, 12 Broad Street Snapper Hill Monrovia, Liberia Attn: Milton A. Weeks, Head of Secretariat Tel: liberian_bankers@yahoo.com

POLICY STATEMENT Consolidating Gains and Charting New Directions: A Strong Financial System for Sustainable Economic Growth

POLICY STATEMENT Consolidating Gains and Charting New Directions: A Strong Financial System for Sustainable Economic Growth POLICY STATEMENT 2010 Consolidating Gains and Charting New Directions: A Strong Financial System for Sustainable Economic Growth I. INTRODUCTION This Policy Statement sets out the fundamental objectives