Effect of Inflation on the Savings Mobilization Potential of Commercial Banks in Sierra Leone. A Case Study of the Rokel Commercial Bank

Abstract

The economy in Sierra Leone is characterized by a perpetual inflationary trend. Inflation is a critical concern for a stable financial system in business entities. As a result of inflation and the poor financial performance of business entities in Sierra Leone, the non-performing loan (NPL) indicator exceeds the tolerable limit, which negatively impacts the profitability of banks. The destructive consequences of inflation are untold. For instance, the financial liberalization theory agrees that inflation results in macroeconomic disability. The aim of the study is to help optimize the local savings mobilization capacity of commercial banks in Sierra Leone, enabling them to efficiently survive in light of the challenges presented by the inflation trend. A secondary research design was employed in the study using both quantitative and qualitative systematic reviews. To complement the secondary data, a rapid assessment study was carried out with customers and officials of the Sierra Leone Rokel Commercial Bank and the Bank of Sierra Leone regarding issues of their likely behavior in light of changing financial intermediation variables such as the deposit rate of interest (DRI), lending rate of interest (LRI), Treasury Bill Rate (TBR), and foreign exchange rate (FER). Records on the savings pattern of customers were used to determine the Total Deposit Output Rate (TDOR). The coverage period is from the 2018 to 2023 financial year. The study revealed that inflation adversely affects the local funds mobilization efforts of commercial banks in Sierra Leone. The behavior of bank customers and the profit maximization behavior of commercial banks stand out as the two main causes. The evidence gathered indicates that during inflationary periods, commercial banks focus their investment funds on the foreign exchange market, limiting funds available for local investment through higher lending rates and selective credit control instruments.