This Selected Issues paper discusses initiatives to promote export diversification and growth in Liberia. Liberia's exports have been very concentrated in the past, but some progress in export diversification has been made in recent years, mostly in the enclave sectors. The government has launched the Liberia Agricultural Transformation Agenda (LATA) to support diversification and transformation. LATA strives to build up the agricultural sector as well as adopt a supportive industrial policy. Improving business climate and external competitiveness could play an important role in increasing export diversification in Liberia. Efficiency could also be increased through better access to markets and technology, cheaper imported inputs, as well as more competition with imports.

Abstract

This Selected Issues paper discusses initiatives to promote export diversification and growth in Liberia. Liberia's exports have been very concentrated in the past, but some progress in export diversification has been made in recent years, mostly in the enclave sectors. The government has launched the Liberia Agricultural Transformation Agenda (LATA) to support diversification and transformation. LATA strives to build up the agricultural sector as well as adopt a supportive industrial policy. Improving business climate and external competitiveness could play an important role in increasing export diversification in Liberia. Efficiency could also be increased through better access to markets and technology, cheaper imported inputs, as well as more competition with imports.

Financial Inclusion in Liberia1

Financial inclusion in Liberia needs to be improved, with indicators of financial inclusion, such as physical access to financial services, lower than the fragile country average and the regional average. These indicators are well far from the middle income country levels—the benchmark for the long-term Liberia Rising agenda. Improving financial inclusion could strengthen the resilience of the Liberian economy against shocks by supporting economic diversification through private sector development, and increasing credit options and risk sharing for enterprises and households. The Liberian authorities could promote financial inclusion by reforming financial sector laws and regulations and improving the business environment.

A. Introduction

1. Financial inclusion, defined as how many people and/or firms have access to, and use formal financial services, can play an important role in Liberia’s economic development. Recent research, such as IMF (2015) and World Bank (2014), has already identified some positive linkages between economic and firms’ growth and financial inclusion. Also, adequate financial inclusion could improve the resilience of households against life and economic events through more credit options and risk sharing. Liberia’s medium-term development strategy, the Agenda for Transformation (AfT), envisages access to financial services as a key pillar to enhance private sector development, job creation, and gender equality.

2. Non-bank financial institutions (FIs) play an important role in promoting financial inclusion in Liberia. Although Liberia’s financial sector is dominated by commercial banks in terms of financial assets, they are basically serving large customers in a few main towns. Non-bank FIs, such as micro finance institutions, complement commercial banks by offering financial services to the majority of individuals and micro, small, and medium-size enterprises (MSMEs).

3. The recent impact of the commodity price shock underlines the need for economic diversification. As a result of the decline in prices, exports (mostly iron ore and rubber) declined by 43 percent from 2014 to 2015, lowering GDP growth from 8.1 percent in 2014 to 0 percent in 2015. Economic diversification would add drivers of growth and contain the economy’s vulnerability to commodity prices. Wider entrepreneurship and business opportunities, a necessary condition for economic diversification, also require adequate financial inclusion. But “access to financing” in Liberia is the second largest problem for doing business in Liberia.2

4. The Ebola epidemic highlighted households’ vulnerability. During the epidemic, more than 40 percent of the employed population lost their jobs.3 Although all the counties have now financial service providers, both access and usage are still limited.

5. This paper describes the current situation and recent developments of financial inclusion in Liberia. The paper first summarizes the main features of the financial sector in Liberia, and then focus on physical access to financial services and usage of financial services as key aspects of financial inclusion. Physical access, expressed by the number of financial institutions and their branches and ATMs, indicates how easily people have physically access to financial service providers. Usage, expressed by private credit and bank deposits in percent of GDP and numbers of accounts for financial services, indicates how much people use financial services. The paper then describes the impact of the Ebola crisis and commodity price decline on the development of the financial sector. Recommendations to ensure further development of the financial sector conclude the paper.

B. The Financial Sector in Liberia

6. The financial sector is fairly diversified. The financial sector consists of nine commercial banks, one development finance company, one microfinance deposit-taking institution, 20 insurance companies, 20 microfinance institutions, nine licensed rural community financial institutions, 400 credit unions, and 1450 village savings and loans associations.4 In this paper, non-bank FIs include all the financial institutions above other than commercial banks. Seven out of the nine commercial banks are foreign-owned. The nine rural community financial institutions have been established with strong support by the CBL to ensure access to basic financial services such as direct debit or deposit taking in rural areas in 2014 and 2015. Commercial banks dominate the sector in terms of asset size with 90 percent of total financial assets.5

7. Although Liberia’s financial deepening is advanced compared with neighboring countries, the role of commercial banks in domestic economy is limited. In terms of financial deepening measured by M2 over GDP (Figure 1) and deposit over GDP (Figure 2), Liberia is doing better than the ECOWAS average. However, foreign concession companies, which are the main exporters of Liberia as covering natural resources, rely on off-shore foreign banks for their main financial transaction and use domestic banks only for payments to local employees and contractors. Commercial banks serve mainly the established businesses in Monrovia and a few main towns by providing short-term trade credit, generally in the service sector (which includes construction). On the other hand, for the majority of population, non-bank FIs are the main loan providers.

Figure 1.
Figure 1.

M2, 2014

(percent of GDP, weighted average)

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: International Financial Statistics; and IMF staff estimates.
Figure 2.
Figure 2.

Deposits, 2014

(percent of GDP, weighted average)

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: IMF Financial Access Survey; and IMF estimates.

8. The Central Bank of Liberia (CBL) is collecting information about financial inclusion regularly, but its coverage needs to be expanded. The number of financial institutions and their branches is monitored and published annually. Furthermore, the CBL conducted a nation-wide survey regarding financial access in 2013 and published the results in 2015. The survey covered not only the supply side, but also demand side, e.g., why Liberians took loans and what types of institutions they used. In addition, in 2016, the CBL produced the Financial Sector Development Implementation Plan (FSDIP) with technical assistance of the World Bank Group and financial support of the Financial Institutions Reform and Strengthening (FIRST) Trust Fund Initiative. The FIRST collected a wide range of financial sector data and analyzed the sector. With regard to financial inclusion, the CBL collects and publishes basic information, such as the number of accounts, outstanding deposits, etc., from commercial banks. Some types of financial institutions, such as village saving and loan institutions, and some aspects of financial access, such as demographic and gender information, are however not closely and regularly monitored by the CBL. Furthermore, Liberia is not covered by the World Bank Global Findex, a survey-based database on financial inclusion covering more than 140 countries. Therefore, available data do not provide a full picture of the extent of financial inclusion in the country.

C. Physical Access to Financial Services

9. Physical access points to commercial bank services are very limited. There are only four commercial bank branches and two ATMs per 100,000 adult population and less than one branch and ATM per 1,000 km2, with very slow growth since 2010 (Figure 3). This level of access is lower not only than the average for sub-Saharan African (SSA), but also the average for two other relevant comparator groups—fragile economies and ECOWAS—and far below the middle income country (MIC) average, Liberia’s long-term goal as laid out in the Liberia Rising 2030 agenda. Furthermore, about 60 percent of commercial bank branches are concentrated in the capital region, where about one quarter of population lives (Figure 4). As a result, the physical presence of commercial banks in rural areas is extremely scarce, with four out of 15 counties not served by any commercial bank branch.

Figure 3.
Figure 3.

Physical Access to Commercial Banks

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: IMF Financial Access Survey; and IMF staff estimates.
Figure 4.
Figure 4.

Liberia: Distribution of Commercial Bank Branches, 2014

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Source: Liberian authorities.Note: “No data” indicates that no bank branch exists.

10. Non-bank FIs play an important role, especially in rural areas. The number of other non-bank FIs, such as credit union and village saving and loan associations, has rapidly grown and the number of non-bank FIs is now about 74 per 100,000 adults. Thanks to rural community financial institutions, all 15 counties now have access to at least some financial services.6 Thus, although non-bank FIs provide only simple financial services, they provide a decisive contribution to the inclusiveness of the financial sector.

11. Three major factors contribute to the limited physical presence of the banking sector. First, banks have been struggling with low profitability for the last several years despite relatively high interest spreads (Figure 5), due to limited lending opportunities, poor asset quality (which requires high provisioning), weak lender protection, and lack of money markets. Weak lender protection (Figure 6), in particular, stemming largely from costly judiciary process and weak contract enforcement, makes banks more risk averse and reduces business opportunities. Second, poor infrastructure (included limited and costly access to electricity) increases cost of building and maintaining branches in rural areas. Also, weak communication network in rural areas does not allow banks to maintain their business remotely. Third, the land registration scheme makes it more difficult for banks to open a new branch, since the registration process is currently time-consuming and costly. Besides, land, especially in rural areas, often does not have even clear owners, and land dispute resolution is weak.7

Figure 5.
Figure 5.

Banking Sector Performance

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: Liberian authorities; World Bank Doing Business Indicators; World Development Indicators; and IMF staff estimates.
Figure 6.
Figure 6.

Liberia: Doing Business Indicators, 2016

(Distance from Frontiers)

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: Doing Business Indicators, 2016, World Bank; and IMF staff estimates.

D. Usage of Financial Services

12. Use of services also has significant space for further development. Limited access to lending is often mentioned as a key obstacle to the development of the private sector. In fact, credit to the private sector, at 19 percent of GDP in 2014, is relatively high (Figure 7), but the number of commercial bank loan accounts is small (Figure 8), implying that credit is concentrated on few borrowers. With regard to deposit accounts, commercial bank deposits, at 28 percent of GDP in 2014, are fairly large compared both the fragile and ECOWAS averages (Figure 2), and relatively high usage of deposits is confirmed by the number of deposit accounts (283 per 1,000 adults for 2014), higher than the ECOWAS and fragile economy averages. In contrast, penetration of non-cash payment tools is weak. In 2011, only about 3 percent of adult population used debit cards, much lower than the fragile and ECOWAS averages.8 And by end 2015, only four banks out of nine were issuing debit cards. Also, only a small portion of population uses electronic payment systems.9

Figure 7.
Figure 7.

Private Credit, 2014

(percent of GDP, weighted average)

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: International Financial Statistics; and IMF staff estimates.
Figure 8.
Figure 8.

Usage of Financial Services

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Sources: IMF Financial Access Survey; and IMF staff estimates.

13. Non-bank FIs are important financing sources for households. Although commercial banks account for 90 percent of financial assets, about 70 percent of individuals who borrowed money in 2013 relied on non-bank FIs instead of commercial banks.10 More broadly, non-bank FIs provide microfinance to individuals and MSMEs, as opposed to commercial banks, which generally do business with relatively large customers.

14. But services offered by non-bank FIs are costly. In particular, lending rates by the commercial banks are much cheaper than non-bank FIs. Although there is no systematic statistics, the average borrowing rate of commercial banks is around 14 percent whereas compared to upward of 25 percent for MFIs and 40 percent for credit unions.

15. The use of mobile money, a relatively new channel of financial services, services has been rising fast (Box). Liberia’s mobile money services started in 2011 when the CBL issued Mobile Money Guidelines. The 2014 Mobile Money Regulation allows for the establishment of non-bank financial institutions to provide mobile money services. In 2014, mobile money deposits were estimated at US$1.7 million, while transfers were estimated at US$0.2 million. Three commercial banks are providing money payment services in partnership with Lonestar Cell MTM Mobile Money Inc. Credit unions and a few foreign exchange bureaus are now also participating in the market, which could help the system to adjust for Liberia’s dual currency scheme. Mobile money services cover all the 15 counties.

Mobile Money

Technological progress created a new channel to access financial services through mobile phones, also known as mobile money or mobile banking. Use of mobile money has increased rapidly along with the strong growth of mobile telephony markets. Thanks to mobile phones, financial institutions, and sometimes even non-financial institutions, can offer financial services to clients, who do not have access to traditional channels, such as bank branches and ATMs and debit cards. Mobile money services typically include money transfers, payments, deposits, and withdrawals. Therefore, access to mobile money implies that even people living in rural areas where population density is too low to bank build branches for banks can benefit from basic financial services.

Sub-Saharan Africa (SSA), especially, East Africa, is among the regions, which are most benefiting from mobile money. Due to several reasons, including limited road network, insufficient power generation, weak business environment, and poor financial literacy, traditional channels of financial services in SSA countries are highly limited compared with other regions. The rapid spread of mobile phone coverage is helping to improve financial inclusion. One example is the remarkable success of M-PESA in Kenya. M-PESA is a mobile money system launched in Kenya in 2007, which has contributed to the expansion of active mobile money account from 1.3 million in 2007 to 25 million in 2014.

In Liberia, mobile money penetration is advanced compared with neighboring countries, but it is still lower than the SSA average. To achieve further expansion, Liberia needs to tackle two specific issues in addition to the infrastructure and regulatory issues that are shared with other developing countries. First, mobile money must be adjusted to the dual currency system. A large portion of financial assets are denominated in U.S. dollars whereas people use Liberian dollars for their small-size transactions. Therefore, for financial inclusion, involving poor and/or people living in rural communities, easy conversion between U.S. dollars and Liberian dollars within the system would be essential. Second, a quick customer identification system should be introduced to mitigate AML/CFT risks, which might be deepened by mobile money.

A02ufig01

Number of Mobile Money Accounts, 2014

(per 1,000 adults)

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Source: IMF Financial Access Survey.

16. Several factors hold lending back. For lenders, virtually no creditworthiness information is available as there is no comprehensive database of credit history of borrowers. (Table 1) The CBL established a credit bureau and have been upgrading the credit reference system. Lack of a national identification system is another factor of limited credit reference. However, the current system has not yet been fully modernized, resulting in slow updates of information. Judicial contract enforcement and corporate transparency are weak, resulting in poor protection of lenders. On the supply side, high NPL rate combined with Liberia’s weak insolvency scheme weighs on the balance sheet of banks, making lending more difficult and non-inclusive. These factors make catering to smaller, less publicly known operators, such as households and MSMEs, riskier. Constraints on collateral, which suppress its role as security for lending, negatively affect banks’ propensity to lend. Land ownership rights are not well defined under the current law (see the previous section), and there is very limited secondary market for land and real estate, partly because non-citizens (notably the Lebanese and Indian minorities which are very active in business) cannot own real estate. Lack of a well-organized collateral registry scheme had also hindered loan contracts. Until the launch of an online movable collateral registry supported by the IFC in June 2014, Liberians could hardly borrow money using their assets other than buildings of recent construction as collateral. Corporate transparency is very poor and recovery rate at the time of bankruptcy is very low.11 In addition, financial literacy is generally low, and individual and SMEs have limited capacity to prepare good business plans and convincing investment opportunities.

Table 1.

Details of Gettig Credit

article image
Sources: Doing Business Indicators, 2016, World Bank; and IMF staff estimates.

17. The authorities have supported several initiatives to improve financial inclusion, especially by promoting lending to SMEs. The CBL launched the Small-Medium Enterprises Credit Stimulus Initiative in 2010, providing low-interest financing to Liberian-owned small and medium size enterprises. The Ministry of Finance and Development Planning (MFDP) set up the Private Sector Development Project in July 2014, based on Government Enhancement Fund account in the Liberia Bank of Development and Investment. The project has provided loans of US$2.1 million in total to 41 businesses as of May 23, 2016. Also, the African Development Bank is providing technical assistance to Access Bank for MSME support. USAID has established a loan guarantee program through ECO Bank and International Bank. The CBL is planning to introduce deposit guarantee scheme, which may promote access to deposits. In June 2016, the Ministry of Education launched the pilot project of wage payments through the mobile money system. This could boost the growth of the mobile money market. In addition, the 2014 Payment System Act modernized the supervision and regulation framework of the national payment system in Liberia. The CBL has been upgrading its payment system infrastructure and has fully implemented the National Electronic Payments Switch in 2015, which allows bank customers to access ATMs, POS, Visa, and Master Card services.

E. Impact of Recent Crises on Financial Inclusion

18. The Ebola epidemic has adversely affected financial inclusion. Due to limited data, it is difficult to directly measure the impact of the epidemic on financial inclusion. However, the number of microfinance institutions (MFIs) decreased from 23 to 20 in the course of 2015, reflecting the epidemic’s disruption of MSME’s activities and household incomes. In addition, in early stage of the Ebola epidemic (March through September 2014), the uncertainty on economic prospects triggered extensive bank deposit withdrawals with demand deposits falling by 12 percent. Also, the economic slowdown and the impact on borrowers’ assets and activities increased non-performing loans (NPLs) during the epidemic from 14.5 percent of total loans in March 2014 to 19.2 percent in June 2015. As a result of these developments, private credit growth rates fell rapidly in 2014, even going negative in January 2015 and recovering only marginally in the following months (Figure 9).

Figure 9.
Figure 9.

Liberia Private Credit

(Annual Percent Change)

Citation: IMF Staff Country Reports 2016, 239; 10.5089/9781498371599.002.A002

Source: Central Bank of Liberia.

19. The decline in commodity prices also hit the financial sector. Although the natural resource sector is relatively segmented from the domestic economy, the contraction of rubber and iron ore exports, in particular, reduced business for local contractors and led to layoffs of local workers, resulting in a decrease in the usage of financial services.

F. Policy Recommendations

20. The factors holding back financial inclusion described above point to potential areas of intervention by the government and the CBL, in coordination with donors.

The main measures to improve access to financial services are:

  • Enhancing investor protection by reforming corporate transparency regulation and insolvency scheme to protect lenders’ rights;

  • Establishing the interbank market for short-term liquidity, foreign exchange, and T-bill and T-bond to promote a more efficient asset management;

  • Improving infrastructure, especially in the areas of electricity, communication network, and road, which could would reduce costs of expanding the bank branch network in rural areas; and

  • Approving and implementing the new Land Right Act, which would improve land ownership rights, establish a land management framework for the acquisition, use, and transfer, and protection of land rights, and ensure equality of land rights.

The main measures to deepen usage of financial services are:

  • Expanding credit registration coverage and establishing nation-wide credit information database as well as improving investor protection, judiciary process, and contract enforcement;

  • Further promoting the new collateral registry, which could increase opportunities to use bank lending for SMEs and households;

  • Introducing a deposit guarantee scheme to make opening bank accounts more attractive;

  • Introducing a national identification system to strengthen credit registration and mitigate the AML/CFT risks through mobile money; and

  • Over the longer run, increasing financial literacy for the population.

References and Background Documents

  • Central Bank of Liberia. 2015. “Liberia Financial Inclusion Survey Report”, Monrovia.

  • Government of Liberia. 2013. “Agenda for Transformation – Steps towards Liberia RISING 2030”, Monrovia.

  • Sahay, Ratna, Martin Cihak, Papa N’Diaye, Adolfo Barajas, Srobona Mitra, Annette Kyobe, Yen Nian Mooi, and Seyed Reza Yousefi. 2015Financial Inclusion: Can It Meet Multiple Macroeconomic Goals?”, IMF Staff Discussion Note (SDN/15/17).

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  • World Bank. 2014. “Global Financial Development Report: Financial Inclusion”, Washington.

  • World Bank. 2014–2015. “The Socio-Economic Impacts of Ebola in Liberia”, Washington.

  • World Economic Forum. 2015. “The Global Competitiveness Report 2015 – 2016”, Geneva.

  • World Bank. 2015Doing Business 2016 – Economy Profile Liberia”, Washington.

1

Prepared by Atsushi Oshima.

3

World Bank (20142015).

4

There is no license and/or register scheme for credit unions and village savings and loans associations. The village savings and loans associations provide short-term loans (2–3 months) for micro business or temporary personal needs. They normally consist of 25–30 members, mostly women.

6

Four counties did not have any financial institutions in 2012.

7

A new Land Act, which reform the current practices to define and protect land ownership better, is under discussion by the National Legislature.

8

World Bank Global Financial Development database.

9

“Electronic payments” refers to payments made through wire transfers or payments made online for bill clearance and/or goods and service purchase.

Liberia: Selected Issues
Author: International Monetary Fund. African Dept.