The Sierra Leone Financial System

PART ONE: CENTRAL BANKING

The establishment of West African currency Board (WACB) in 1912 was based on the proposals submitted by the Emmot committee set up in 1911 to consider matters affecting the currency of West African Colonies.  The basic function of the board was the issue of the amount of currency required by the commercial banks and trading firms and to buy as much sterling that the banks and business firms were willing to sell.

The Secretary of state for colonies appointed the Board and it operated from London.  It’s local agents were the Accountant General in each territory, who controlled the Board’s stock of unissued currency, and issued and redeemed the currency as directed by the Board.

The Board was obliged to buy and sell the currency it had issued - The West African pound was at fixed rates against sterling in London.  Because of this obligation and the fact that local currency could come into circulation only with the support of an equivalent amount in sterling; the value of the WACB currency was always stable in relation to sterling and had virtually the same exchange rate vis-à-vis other currencies.

When the WACB required Le4 million Sierra Leone Government securities, there was a departure from the 100 per cent sterling backing in 1957.  The introduction of this fiduciary element did not change the basis on which the WACB operated as one-for-one marginal relationship between WACB currencies, so sterling was affected.

The most important achievement of the Board which operated a sterling exchange system was that it unified the currency system and facilitated the growth of external trade on which the economies of the colonies were dependent but it failed to integrate the currency and credit system in the West African colonies and provided no impetus to their internal development other than their export crops.

From 1912 until the late fifties, the Board fulfilled its primary task of providing complete convertibility of West African currency for sterling and, following the withdrawal of Ghana and Nigeria in 1957 and 1958 respectively, Britain was able to redeem its currency in both countries without impairing its obligations to the Gambia and Sierra Leone.

The Loynes Proposal

There was the idea that to remain a member of the currency Board after independence was inconsistent with Political Independence.  With the approach to Independence in 1961, the Governments of Sierra Leone and the Gambia invited Mr J B Loynes from the Bank of England to “examine the present currency system and to meet the economic and political needs of the two territories both common and individual.”  Loynes argued that the WACB could be of no advantage to Sierra Leone but he never considered a joint Sierra Leone/Gambia currency Board as a practicable alternative because of the different political status of the two countries and consequent divergent interest, for the fact that Sierra Leone and the Gambia had very little economic or trade links between them and the distance between the two territories.  He was against the establishment of a Central Bank; he felt that in developing countries Central Banks had generally been influenced by prestige and partly by the mistaken belief that such an institution could create developments.  Secondly he did not think the conditions for the proper working of a central bank existed in Sierra Leone.  Finally there was no need for a Central Bank because the country’s banking system with its London connection provided adequate and efficient service to the Government and the public.

Having rejected a Central Bank, and considering that a joint currency board was not appropriate, he recommended the establishment of a Monetary Institute.  This new institution was in fact a currency board with a new name.  It was hoped that after some time the Institute should be able to perform all the function of a Central Bank.  Although the Government accepted the Loynes Report, it did not establish the monetary institute recommended.