High lending rates are frustrating Sierra Leonean businesses as local entrepreneurs are led to shun banks, depriving themselves of much-needed capital.

Last week, the Sierra Leone Chamber of Commerce, Industry and Agriculture (SLCCIA) convened a ‘soul searching’ forum for traders, lenders and the government to discuss access to cheaper capital by SMEs and the private sector in general.

"Access of finance has been a significant barrier to the growth of SMEs in the country," said Mrs Gladys Strasser King, president of the Chamber.

She said the private sector primarily relies on banks and financial institutions hence the was a need to engage these firms. Over 90 per cent of Sierra Leone`s financial sector’s assets is said to be in the banking segment.

Interest rates are currently between 22 and 28 per cent, with prime lending rates at 17 and 18 per cent. This trend lags far behind the impressive decline in national inflation rates since the beginning of the year, as indicated by the Bank of Sierra Leone (BSL) figures.

The BSL has now cut its rates three times this year alone to align them with lower government treasury rates and money market rates. As of September 3, the Banks`s Monetary Policy Rate stood at 12 per cent, compared to 20.0 per cent in December 2012.

Citing also a decline in interest on government securities, the central bank described the lending rates as unacceptable and contrary to normal market reaction.

Its even warned of punitive actions against banks maintaining “unreasonable” rates.

Diminished appetite

Commercial banks have traditionally depended on government`s short-term borrowing which provides high returns in terms of interest rate. But this has reduced due to the government`s expressed fiscal prudence policy which saw diminished appetite for borrowing and decline in its Treasury Bill Rates.

The BSL insists reduction in state domestic borrowing goes along with reduction in rates.

The high lending rates means demand for loans has drastically gone down. Credit to the private sector was said to be 7.3 per cent in 2012, down from 22.6 per cent previously.

The explanation for all this maybe found in a popular view that because Sierra Leone operates a liberalised economy, things like interest rates are supposed to be determined by market forces.

But when market failures are observed, "the Bank of Sierra Leone will intervene," Governor Sheku Sambadeen Sisay was quoted saying.

Among other measures, the BSL plans to introduce a system it says will bring transparency in the determination of interest rates.

Overnight

This includes sharing with the public information on how commercial banks reach their rates.

But commercial banks argue that despite reported favourable economic conditions, lending rates cannot just drop overnight.

They also partly blame the burden of unpaid debts as a determinant factor.

Some 13 commercial banks operate in the country with a population of a little over six million, with 10 of these owned by Nigerians.

Only 10 per cent of Sierra Leoneans are banked, according to the BSL.

Commercial banks seem more preoccupied with the thought of recovering huge non-performing loans, according to observers.

Only the British-owned Standard Chartered announced a reduction of its prime lending rate recently (July) – down 18 per cent from 26 per cent.

Urged patience

Aisatou Jalloh Abadjie, managing director of Nigerian subsidiary FI Bank, reflected the views of other banking executives at the forum by urging for patience. The rates would go down but only gradually, said the only female banking MD in the country.

She said that between 15 and 20 per cent of FIB`s loans have gone bad thanks to a culture of repayment apathy among Sierra Leoneans.

Experts are warning that commercial banks must start crafting innovative means of making money outside the traditional government T-bills and high interest rates.

"If a commercial bank spends 10 years to get its loan back, how can it reduce rates?” said one expert who also urged SMEs associations to rein in their members.

The BSL also insists on commercial banks utilising the Credit Reference Bureau, created last year, to ensure indebted business people don’t access loans at the expense of complying customers.