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New lending model comes into force in Sierra Leone

By Mabinty Kamara

The Bank of Sierra Leone (BSL) has announced a new model by which all commercial banks should calculate their prime lending rates.

The new model to calculate base rate, as it is referred to in financial jargons, which came into effect on March 1, will serve as a basis on which the minimum lending rate/ otherwise called the Prime Lending Rate, will be calculated so that banks avoid losses, BSL officials said.

Commercial banks will be required to compute their base rates on a quarterly basis and they will be obliged to display them in their places of business and publish same in at least three major local newspapers.

The move is geared towards enhancing fair competition and protecting the banking sector in general, according to the banking regulator. "The base rate computation model is introduced to make credit pricing more transparent across commercial banks. The model developed by the Bank of Sierra Leone takes into consideration the cost of funds, operating cost and the profit margin," a statement from the BSL reads in part.

BSL spokesman, Beresford Taylor, told Politico that the new model was borne out of the desire to bring transparency in the determination of the base rate. He said it was developed in consultation with the 13 commercial banks operating in the country.

Taylor said the public hardly knew what determined the interest rate they paid for loans and other financial services offered by commercial banks.

"Before this time, commercial banks had varieties of formulae used as interest rate and this makes it difficult for customers to know what determines the interest rate they pay to the banks. I believe this will create positive impact on the customers owing to the transparency it will bring to the minimum lending rate," Taylor said.

But an analyst in the commercial banking sector disagreed with the new model. They told Politico that it was hardly the "right solution," noting that it had the potential effect of causing stagnation in the banking industry.

"This will not augur well for the economy," the analyst, who asked not to be named, said, stressing that the new model would keep off many commercial banks from businesses.

They argued that banks should be allowed to work on different lending rates since they operated on different conditions. The source further noted that the rationale for different commercial banks to offer different lending rates were anchored on the various cost of operations they incurred.

"If a bank offers loans to five customers with different lending rates, and one customer defaults on payment while the four customers pay, the bank would not lose as the money received from the four customers would cover up the defaulting customer," the source explained.

(C) Politico 03/03/16


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