Chapter 1

This study is on the creation of credit facilities to Small and Medium Size Enterprises in Sierra Leone with special focus on the construction industries.

1.1 Background to the Economy of Sierra Leone

Sierra Leone is a relatively small country, on the West Coast of Africa with an area of approximately 28,000square miles. The estimated population is 5.5 million inhabitants, 30% of whom resides in the western area of the country according to recent census in 2006.

The state of the country’s economy, immediately after independence from the British Colony in 1961 up to the 1970’s, was quite satisfactory in terms of performance. The exchange rate between the Leone and other foreign currencies was relatively good. More so, the British Pound Sterling was exchanged at One pound (£1) to One Leone (Le1). The inflation rate was extremely low. The country’s earnings from exports were very much attractive, with Diamond export accounting for well over 50% of the country’s foreign exchange earnings. This was closely followed by cash crop exports such as Cocoa, coffee, oil palm, piassava and chillies. The country’s external debt position at this time was not high,

Between 1972 to 1975, the economy started experiencing down turn that was mainly due to external factors, such as the famous oil price shock in 1973. Naturally, the 1980 Organisation of Africa Unity (OAU) summit that was hosted by the government of Sierra Leone fuelled the debt crisis in Sierra Leone.

Because of the foreign exchange scarcity in the country, the credit agreement between domestic importers and their business partners aboard collapsed. In 1988, the country was forced to devalue her currency.

Between 1992 and 1994, Sierra Leone successfully implemented an adjustment program supported by the International Monetary Fund (IMF) under the Right Accumulation Program (RAP). The World Bank also supported the program through the Reconstruction of Import Credit (RIC) in 1992 and the Structural Adjustment Credit (SAC) in 1993. Following the successful implementation of the RAP, the IMF approved a three year arrangement support under Enhanced Structural Adjustment Facility (ESAF). The implementation of the first annual program was disrupted by the escalation of the rebel activities in 1995. With the return of democracy in 1996, the IMF supported the economic recovery program adopted by the new Government with a second annual program under the ESAF.

Poverty intensified with real per capita declining to US$142 in 2000. Since then Sierra Leone has been classified as the poorest country in the world and ranks at the bottom of the United Nations Development Programme (UNDP) Human Development Index.

The growth in the economy has been underpinned by broad recovery in Agriculture, mining, manufacturing, construction and the service sector.

The economy of the Country continues to worsen in early 1992 when the civil unrest started which causes untold sufferings on humans and the entire country. Many people were forced out of their houses and eventually became displaced persons and refugees in their own country and neighbouring country like Guinea, The Gambia and Ghana. Almost all segments of the business economy collapsed including banking and lending institutions. It was then the problems of growth in economy worsen and every thing completely deteriorated and collapsed.

The almost 11 years of civil unrest ended in March 2002. The end of the war actually opens the door for a new beginning, for new economic growth and prosperity in the face of peace and unity. The situation has recently worsened because of the credit crunch faced by many of the world famous banking institutions and Sierra Leone has not been any exceptions. The effect coupled with other factors has created more gaps for banking institutions to provide loans to small and medium enterprises. In a press release from Prlog Dec. 15, 2008 by Robin Trehan as quoted “SMEs represent over ninety-nine percent of the country’s employers. While it is essential that these businesses obtain the necessary funding to remain active, they are often the first to suffer when financial crisis hits. Banks already facing financial hardship often deem SMEs as too risky to finance. Credit terms are becoming increasingly harder and qualifying for financing is subject to much stricter guidelines. There are things that SMEs can do, however, to increase their chances of finding financing”.

1.2 Statement of the Problem

The term credit in this thesis refers to an amount or sum placed at a person’s disposal by a bank and usually to be repaid with interest within a given period of time. Small and Medium Size Enterprises (SME) is very important in terms of the dynamic role in the development of the private sector in Sierra Leone. The SME’s are regarded as an engine for any economic growth and development in any country.

They provide opportunities for job creation and expansion in the physical reconstruction of the economy especially for a post war development country like Sierra Leone. Majority of the physical infrastructures ranging from housing, office buildings and business structures were all destroyed during the civil unrest. These structures need to be reconstructed for the economy to grow and become prosper. Today many construction companies or firms have emerged to assist in the rehabilitation and reconstruction.

While there may be some of the construction companies who have existed of years, it is also true that majority of these construction companies are new ones who are just coming up to help and provide their expertise in the development of Sierra Leone. But yet still, it is a challenge for many of these companies to adequately involve in the process of rehabilitation and reconstruction simply because they cannot get the required finance in the form of overdraft or loans, or provide the necessary collateral for the banks as required, making them less competitive.

In Sierra Leone the performance of SME’s over the years has been very poor which is due to the fact that the creation of credit from the banks which is an essential stimulant for private investment in the construction industries has been grossly under performing. This is one of the reasons for poor performance of the economy in terms of growth in most developing countries including Sierra Leone.

Construction companies have not been able to access huge funds by way of loan over the years from the banking and other financial institutions, mainly due to lack of confidence in the private sector as a result of problems like moral hazards and the absence of collateral security and the lack of experience in construction engineering.

1.3 Justification of the Study

The importance of the construction industries in the process of rehabilitation and reconstruction of the war towns in Sierra Leone cannot be over-emphasized. During the war there was so much destruction of infrastructures in the country, now that there is peace there is high need for reconstructions and the development of new roads and structures to aid national growth.

International organisations like the International Monetary Fund (IMF), World Bank, African Development Bank (ADB) main focus is to assist Small Medium Size Enterprises (SME) in developing countries gain strong financial base. It had been felt that SMEs employ majority of the work force in the developing countries, therefore, they have realised that when SME become financially stable the economy of the nation will be better and that the citizens will be able to live a comfortable life.

The role of commercial banks and other financial institutions in private sector development and the assessment of their overall performance in terms of economic growth and development has not received much of the attention by researchers. The central bank maintaining interest rate at high level has greatly contributed to discourage SMEs from borrowing from retail banks and other financial institution for investment purposes.

This is one of the reasons why most SMEs are under developed. Besides commercial banks are requesting for very stiff conditions to access loan by the private sector. A study on the provision of credit to construction companies for investment towards economic growth has not been studied in greater detail by previous researchers. This among others, gave me the urge to probe into the activities of the commercial banks and other financial institutions in the creation of credit to construction companies in Sierra Leone,

This study is to help government and other professionals as well as other stakeholders, to grasp fully the implications of credit refusal to small and medium size enterprises and how it will affect the development of the nation. The result of this study is hope to enable banking and other financial institutions, local and national government and other stakeholders to device concrete ways by which small and medium size enterprises can easily get access to credit to undertake construction programmes.

1.4 Objectives of the study

The main aim of the study is to assess the implications of credit creations by the banks and other financial institutions to Small and Medium Size Enterprises with special focus on the Construction Industries for economic growth and development in Sierra Leone.

The specific objectives are:

To determine the extent to which banks have been contributing to the development of the construction industries in Sierra Leone.

To examine some of the reasons responsible for the inability of the construction industries to solicit loans from the banks and other financial institutions for the purpose of investment.

To establish reasons for the reluctance of the banking and other financial institutions to provide the much needed funds for private sector development.

To examine the reasons for the reluctance of the banking sector to provide the much needed funds for SME in the construction industries for development, even though SME’s are regarded as the engine of economic growth.

1.5 Research Questions:

Certain research questions will be drawn up for proper examination of this objective. These include:

To what extent do commercial banks provide funds to Small and Medium Size Enterprises in the construction Industries?

What are the main problems encountered by the construction companies in terms of securing loans and overdrafts from the commercial banks?

What is responsible for the low investment of the private sector (SME’s) in Sierra Leone?

What is the role of the central bank in facilitating credit creation for SME’s in the pursuit of development in Sierra Leone?

What is the role of the Government ministry in the area of infrastructural developmental plans for Sierra Leone?

The study will make use of secondary data received from the Bank of Sierra Leone, Commercial Banks and some of the registered construction companies in Sierra Leone.

The study will try to reveal the reasons for the constraints Small and Medium size Enterprises are facing in securing credit facilities from the banks. Interviews will be conducted with senior officers of both the banking industries and construction sectors, together with government officers in the area of national development for the country.

1.6 Definition of Operational Terms:

1. Credit Creation: Credit creation is the multiple expansions of banks demand deposits. It is an open secret now that banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits to the customers on demand.

2. Venture Capital: Venture Capital is the name given to equity finance provided to support new, expanding and entrepreneurial businesses. Venture capitalists usually prefer to take a close interest in the business that is the subject of their investment. This could involve taking part in decision made by the business. Funds provided by venture capitalist are often referred to as private capital.(Mclaney E, 2003)

3. Gearing: Small businesses are in a fundamentally different position from that of the larger one on the issue of gearing. Financial risk to which capital gearing gives rise tends to emphasise operating risk, which will be present with or without gearing. Small businesses are more exposed to financial risk than public liability companies. (Mclaney, 2003)

4. Bank and Institutional Debt: Long term loans are available from banks and other financial institutions at both fixed and floating interest rates, provided the issuing bank is convinced that the purpose of the loan is a good one. The cost of bank loan is usually a floating rate of 3-6 percent above the base rate, depending on the perceived risk of the borrowing company. The issuing bank charges an arrangement fee on bank loans, which are usually secured by a fixed and floating charge, the nature of the charge depending on the availability of assets of good quality to act as security.

A repayment schedule is often agreed between the bank and the borrowing company, structured to meet the specific needs of the borrower and in accordance with the lending policies of the bank. (Watson D & Head A, 2007)

5. Security –the Bank’s Perspective: A bank has little to lose and much to gain by taking security for a loan. A bank’s solicitor should check that the borrower and any other party providing security have capacity to do so. (The company act 1989, prima facie, a company could pursue only the objects for which its memorandum stated it was incorporated)

6. Security – the Borrower’s Perspective: It is often difficult for a borrower to argue against a reasonable request for security. However, some borrowers will be contractually prohibited from providing security by a negative pledge in a document to which they are already a party. Specialised lending for financing a project will always be secured over the asset or project in question. (Adams D, 2006)

7. Cash Flow Statements for Small Companies: Financial Report Standard (FRS1) prescribes a format for cash flow statements. Except for very small companies, all companies are required to prepare a cash flow statement for each accounting period.

There are two approaches available under the standard; the direct method which shows the operating cash receipts and payments summing to the net cash flow from operating activities, and the indirect method which identifies the net cash flow via reconciliation to operating profit. (Wood F, 2002).

1.7 Hypothesis

1.8 Scope and Methodology

1.9 Dissertation Map

1.10 Limitation of the Study


Literature Review

2.0 Introduction

The purpose of this chapter is to make a review of related literature on Small and Medium isze Enterprises and the Creation of Credit in the Construction Industry. With these literatures the researcher will have a better understanding of the study, as well as what has already been done on it in the form of previous research.

2.2 Definition of Small and Medium Size Enterprises

A business can be considered small on basis of predetermined criteria such as the number of employees, annual turnover or capital employed. In the late 1990s, it was estimated that small businesses with fewer than 50 employees accounted for 99 per cent of all UK business, almost 50 per cent of non government employment and 42 per cent of turnover. Small firms have become a focus for governmental policy at both national and intergovernmental level. Bolton in his report in 1971 identified three main characteristics of a small firm:

.were independently owned - The business securities are not quoted in any established capital market that is they are not traded in the efficient market.

.were managed in a personalised way- The ownership of the business’s equity and hence its control lie in the hands of a small close knit-group; that is it is a family type business.

.possessed a limited share of the total market

2.3 Nature of Small and Medium Size Enterprises

The Bolton report, the first official government inquiry into small firms attempted to establish standard definitions of small firms for particular sector of industry based on numerical indicators of size such as sales or number of employees. A firm with 250 employees in a labour intensive industry may still be a small firm. (Brown, 1987)

Criteria for Small and Medium Size Enterprises

Size Category

Number of Employees

Maximum Annual Turnover (euros)

Maximum Balance balance sheet total

Micro Firm

0 -9

2 million euros

2 million

Small Firm

10 – 49

10 million euros

10 million

Medium-sized Firm

50 – 249

50 million

43 million

2.4 Objectives of Small and Medium Size Enterprises

In SME’s the managers and the shareholders are likely to be substantially the same person or at least closely connected with one another. Thus agency problems, and their potential associated costs, are likely to have little or possibly no impact on the typical small business.

Because of the elimination of agency gap, most managers of SME’s are shareholder; they would make decisions following a pure wealth-maximising goal more determinedly than would be the case in the typical large enterprise. The motives of managers or owners of small businesses are diverse. These motives might be the desire to experience the satisfaction of building up a business, a desire to lead a particular way of life, or a desire to keep someone (perhaps family) tradition alive.

Since it is possible for managers to know the personal objectives of shareholders of small business, decisions can probably be made with these in mind. Both large and small businesses that makes a series of decisions causing the wealth to diminish, will sooner or later fail. Wealth maximisation goal is very important to small business and cannot be ignored.

2.5 Organisation of Small and Medium Enterprises

The research will consider Small and Medium Size Enterprises in the construction industries that are organised as private limited companies. According to Mclaney (2003) private companies need be of no minimum size; public companies must issue at least £50,000 of nominal share capital, of which 25% must be paid up. There is no upper limit on the size of a private company.

Private companies are entitled to restrict the transfer of their shares; that is it is possible for the company’s Articles of Association to contain a clause giving the directors the power to refuse to register a transfer, at their discretion. While private companies must publish annual accounts, the volume of details is rather less than that which the law requires of public companies.

2.6 Sources of Finance for Small and Medium Size Enterprises

Several inquires have dealt with the financing of SMEs and each of these enquires discovered, to a greater extent, that small businesses find it more difficult and more expensive to raise external finance.

A particular problem faced by small businesses in their quest for equity capital is the lack of an `exit route’. Generally investors require that there be some way of liquidating their investment before they are prepared to commit funds to it. A number of schemes have been introduced to help small businesses:

2.6.1. The loan Guarantee Scheme (LGS)

as first introduced in 1981 to cover situations were potential borrowers were unable to provide sufficient collateral or where the bank deem the risk of lending unacceptable.

2.6.2. The Enterprise Investment Scheme (EIS) –

This scheme replaced the Business Expansion Scheme (BES) and it is designed to help small unquoted companies to raise equity finance from business angels

2.6.3.The Venture Capital Trust (VCT) –

The trust was introduced in 1995 to encourage individuals to invest in smaller, unlisted trading companies. Venture Capital is the name given to equity finance provided to support new, expanding and entrepreneurial businesses. Venture capitalists usually prefer to take a close interest in the business. This could involve taking part in decision made by the business. Funds provided by venture capitalist are often referred to as private capital.(Mclaney E, 2003)

2.6.4. The Enterprise Fund (EF) -

it was announced in the competitiveness white paper in 1998 and is designed to help the financing of small businesses with growth potential.

2.6.5. The National Business Angel Network (NBAN) -

it was launched in 1999 to connect ‘business angels’ with companies seeking equity capital

2.6.6. The late payment of Commercial Debts (Interest) act 1998

gives certain small businesses a statutory right to claim interest from large businesses and the public sector on late payment of commercial debts.

2.7 Gearing

Small businesses are in a fundamentally different position from that of the larger one on the issue of gearing. Financial risk to which capital gearing gives rise tends to emphasise operating risk, which will be present with or without gearing. Small businesses are more exposed to financial risk than public liability companies.(Mclaney,2003)

2.8 Help and Advice to Small Businesses

One of the major barriers faced by SMEs is the lack of information, help and advice on their operations. Recent initiative to improve this sphere includes:

2.8.1. The business link network – organised in 1993 as a ‘one stop shop’ for information and advice to SMEs. It brings together the services of major business development services in the single accessible location.

2.8.2. The Enterprise Zone – launched in 1997 as a definitive internet site for business information. It provides help on a whole range of business issues.

2.8.3. The Information Society Initiative/Interforum E-Commerce Award – launched in 1999 as part of government’s e-commerce strategy. It is essentially an award scheme to recognise and reward best practice in the use of electronic trading among smaller firms.

2.9 Bank and Institutional Debt

Long term loans are available from banks and other financial institutions at both fixed and floating interest rates, provided the issuing bank is convinced that the purpose of the loan is a good one. The cost of bank loan is usually a floating rate of 3-6 percent above the base rate, depending on the perceived risk of the borrowing company. The issuing bank charges an arrangement fee on bank loans, which are usually secured by a fixed and floating charge, the nature of the charge depending on the availability of assets of good quality to act as security. A repayment schedule is often agreed between the bank and the borrowing company, structured to meet the specific needs of the borrower and in accordance with the lending policies of the bank. (Watson D & Head A, 2007)

2.10 Security –the Bank’s Perspective

A bank has little to lose and much to gain by taking security for a loan. A bank’s solicitor should check that the borrower and any other party providing security have capacity to do so. (The company act 1989, prima facie, a company could pursue only the objects for which its memorandum stated it was incorporated)

2.11 Security – the Borrower’s Perspective

It is often difficult for a borrower to argue against a reasonable request for security. However, some borrowers will be contractually prohibited from providing security by a negative pledge in a document to which they are already a party. Specialised lending for financing a project will always be secured over the asset or project in question. (Adams D,2006)

2.12 Working Capital Problems of the Small Business

Working capital is the difference between current assets over current liabilities. The amount invested by businesses in working capital is often high in proportion to the total assets employed. It is important that these amounts are managed properly. It is often claimed that many small businesses suffer from a lack of capital and, where this is the case, tight control over working capital investment becomes critical. There are evidence, however, that SB are not very good at managing their working capital, and this has been cited as the major cause of their high failure rate compared with that of large businesses.

2.13 Credit Management

Small businesses don’t have the resources to manage their trade debtors (account receivables) effectively. Most small businesses don’t have a credit control department. Small business also lack proper debt collection procedures, such as prompt invoicing and sending out regular statements.

These risks probably tend to increase where there is an excessive concern for growth. In an attempt to increase sales, small businesses may be too willing to extend credit to customers that are poor credit risk

Lack of market power is another issue for small businesses. They find themselves in a weak position when negotiating credit terms with larger businesses. When big customer exceeds the terms of credit, the small supplier may feel inhibited from pressing the customer for payment in case future sales are lost. (A survey undertaken by the Credit Management Research Centre (CMRC) during April and June, 2003, indicates that small businesses are likely to have to wait an average of 60 days for their trade debtors to pay.

2.14 Cash Flow Statements for Small Companies

Financial Report Standard (FRS1) prescribes a format for cash flow statements. Except for very small companies, all companies are required to prepare a cash flow statement for each accounting period. There are two approaches available under the standard; the direct method which shows the operating cash receipts and payments summing to the net cash flow from operating activities, and the indirect method which identifies the net cash flow via reconciliation to operating profit.(Wood F,2002)

Credit Creation

2.15 Definition of Credit Creation

The BNET business dictionary defines credit creation as the collective ability of lenders to make money available to borrowers. Credit creation is the multiple expansions of banks demand deposits. Banks advance a major portion of their deposits to the borrowers and keep smaller parts of deposits to customers on demand. The tendency on the part of commercial banks to expand their demand deposits as a multiple of their excess cash reserve is called creation of credit.

2.16 Functions of Financial Intermediation in Credit Creation

Financial intermediation is the process of channelling funds between those who wish to lend or invest and those who wish to borrow or require investment funds. Financial intermediaries act as principal, creating new financial assets and liabilities. They do not act solely as agents, charging a commission for their services. (The Monetary and Financial System-CIB/BPP Publication 1993 Edition)

Any institution standing between the ultimate provider of funds and the ultimate user of funds is engaged in financial intermediation. There are many types of institutions and other organisations that act as intermediaries in matching firms and individuals who need finance with those who wish to invest. These institutions also provide other services which are non-intermediary services like financial advisory services, fund management services and advice to undertakers and mergers provider by merchant banks. Some of the organisation that acts as financial intermediaries is as follows:

2.16.1 Clearing Banks – this bank participate in system which simplifies daily payment so that all the thousands of individual customer payments are reduced to a few transfers of credit between the banks. They offer various accounts to investors and provide large amount of short to medium-term loans to the business sector and the personal sector. The work of these institutions can best be understood through a consideration of the main items in their balance sheet.

2.16.2 Clearing Bank Liabilities – The money from the banks responsible comes chiefly from their customer’s sight and time deposits- mostly current and deposit accounts with which most people are familiar. An important additional item relates to certificates of deposit. These are issued generally for a medium amount of £50,000 and a maximum of £500,000 with an initial term to maturity of from three months to five years.

Clearing Bank Assets Customers’ money is re-lent in a variety of ways. The main aim of the bank is to have a range of lending instruments of varying terms so that money can be recovered quickly and yet, at the same time, earn the maximum return.

2.16.3 Investment Banks / Merchant Banks

The investment banks or Merchant banks have some functions that they undertake:

2.16.3.i Financial Advice to Business Firms

Few manufacturing or commercial companies of any size can now afford to be without the advice of a merchant bank. Such advice is necessary in order to obtain investment capital, to invest surplus funds, to guard against takeover, or to take over others. Increasingly, the merchant banks have themselves become activity involved in the financial management of their business client and have had an influence over the direction these affairs have taken.

2.16.3.ii Providing Finance to Business

Merchant banks also compete in the services of leasing, factoring, hire-purchase and general lending. They are also the gateway to the capital market for long-term funds because they are likely to have specified departments handling capital issues as ‘issuing houses’.

2.16.4 Foreign Trade

A lot of merchant bank are active in the promotion of foreign trade by providing marine insurance, credits, and assistance in appointing foreign agents and arranging foreign payments. Merchant bank is essentially in the general business of creating wealth and of helping those who show that they are capable of successful business enterprise. It is expected that merchant banks will operate without the large branch network necessary for a clearing bank, they work closely with their clients and be more ready to take business risk and promote business enterprise than clearing bank.

2.16.5 Building Societies

These take deposits from the household sector and lend to individuals buying their own homes. They have recently grown rapidly in the UK and now provide many of the services offered by clearing banks. Over the years many have converted to banks.

2.16.6 Finance Companies/Houses – Providing medium-term instalment credits to the business and personal sector. These are usually owned by business sector firms or by other financial itermediaries.

2.17 Services Provided by Financial Institutions

Financial institutions are organisations that provide services in connection with one or more of the following:-

Financial intermediation, linking ultimate providers of funds with ultimate users and creating new financial assets in the process.

Exchanging financial assets on behalf of their customers, that is acting as brokers or agents for clients.

Exchanging financial assets for their own accounts - proprietary dealers, as they are termed.

Helping to create financial assets for their customers, and then selling these assets to others in the market - underwriting new share issues, for example

Providing investment advice to others, example to people seeking a personal pension or to firms on mergers and takeovers.

Fund management- managing the whole or part of a pension fund, for example some large non-financial companies have their own financial subsidiaries. In the United Kingdom Ford Motor Finance and Mark and Spencer Finance Services.

2.18 Consideration for Credit

Care must be taken when deciding on the types of customer to credit. The following factors are to be checked before a decision is made:

2.18.1 Capital – The customer must be financially sound before any credit is extended. An examination of the companies account should be carried out prior to the decision. The lending institution should assess the profitability and liquidity of the customer.

2.18.2 Capacity – The customer must have the capacity to pay whatever debts. The payment record of the customer, the types of business operations and the physical resources are to be examined. The valve of goods that the customer wishes to buy must be related to the total financial resources.

2.18.3 Collateral – Some form of security is necessary when asking for goods or services on credit. The lending institution must be convinced that the customer is able to offer satisfactory form of security.

2.18.4 Conditions – The industry and the general economic condition of the particular country or region that the customer operates may influence the ability of the customer to pay the outstanding on due date.

2.18.5 Character – The willingness of the customers to pay back credit depend on the honesty and integrity of that individual. Where the customer is a limited company this will mean assessing of character of its directors. The business must feel satisfied that the customer will make every effort to pay the amount owing.

2.19 Government’s Assistance

Small firms Loan Guarantee Scheme are one of the most effective ways in which government can assist small businesses (SB). This scheme aims to help SB that has good business plans but lack security to secure loan. The scheme guarantees loans made over a 2 -10 year period to SB from participating banks for the sums of £5,000 to £250,000. The government will guarantee 75 per cent of the amount borrowed in return for a premium of 2 per cent on the amount of the loan. Businesses with sales not exceeding £3 million per annum (£5 million per year for manufacturing businesses) are eligible for this scheme.

The government also provides financial help through grants for Research and Development (RD) and by providing investors in SB with tax incentives. SB benefit through the government from business links (providing information) concerning the source of finance available and by providing practical advice. (Atrill P, 2003)

2.20 The Importance of Commercial Banks in Credit Creation

According to Rajan (1995) banks essentially perform two functions; they provide liquidity – Every time customers withdraw money from an automated teller machine (ATM) or write a cheque, they rely on the bank’s liquidity provision function.

Early influential papers in banking quite naturally focused on the role of banks in meeting the liquidity needs of depositors. There is little difference between a demand deposit that an investor holds and a line of credit extended to a firm. Both products require the bank to pay on demand, therefore it could be concluded that the bank provides liquidity on both sides of the balance sheet – to depositors and borrowers.

Samolyk (1994) notes that commercial banks still pay a significant role in funding business borrowers; we estimate that the share of non-financial business borrowing that commercial banks fund on their balance sheet has not declined notably in five decades. Nevertheless, there has been a clear shift in how banks lend – a shift from shorter-term lending not secured by real estate to loans collateralized by business real estate. This shift may reflect banks continuing comparative advantage in real estate lending, a form of lending less well suited to the standardisation necessary for asset securitisation.

According to the United States Department of State (2008), in Morocco, a USAID loan portfolio guarantee is supporting the agency’s work to boost development of municipal water resources management. The guarantee covers 50 per cent of the principal loans up to USD4.7 million from the Funds DeEquipment Communal (FEC), a private Moroccan bank, to municipal and local government for infrastructure projects related to wastewater treatment and reuse. With USAID’s guarantee, FEC is able to provide local governments with commercial financing for eligible projects and extend part of the guarantee to commercial banks to promote additional commercial lending for infrastructure development.

2.21 Government Policies to Encourage Competition

When Government encourage more competition this will have an increasing effect on the national output and reduce inflation. There are five major policies government can adapt in encouraging effective competition:

2.21.1 Privatisation- This can lead to increased efficiency, more consumer choice and lower prices. It can involve the introduction of private service into the public sector (eg, private contractors providing construction work on public buildings). When private contractors compete for franchise cost of provision of service will be lower.

2.21.2 Deregulation – This is the removal of monopoly right from the public sector. (eg. The operation of the transport system in the United Kingdom). Another example was the so called “Big Bang “on the stock exchange in 1986. Under this, the monopoly power of ‘jobbers’ to deal in stock and shares on the stock exchange was abolished.

2.21.3 Introducing market Relationships into the public sector – This is where the government tries to get different departments or elements within a particular part of the public sector to ‘trade’ with each other, so as to encourage healthy competition and efficiency.

2.21.4 Private Finance Initiative - This where a private company is contracted by a government department or local authority to finance and build a project. The government then pays the company to maintain and/or run it, or simply rent the assets from the company. The aim of public-private partnership is to introduce competition (tendering process) and private sector expertise into the provision of public services.

2.21.5 Free Trade and Capital Movements – International trade and investment is central to a market-orientated supply side policy. When government remove controls on the purchase and the sale of foreign currencies, thereby permitting free inflow and outflow of capital.

2.22 Management and Evaluation of Long Term Debt

Cunningham et al explained that for a company to be able to evaluate its liquidity and financial flexibility as well as its ability to finance operations over the long run, both external and internal users must be familiar with how it issues and reports any long term debt. User must be knowledgeable about how market forces affect the ability of a company to issue long term debt. When company like construction companies borrows from the bank or other financial institutions, the debt or borrowings is call note payable.

2.23 Limited Liability Company

If the firm has unlimited liabilities, it means if the business goes bankrupt and cannot pay its creditors, the owners personal possessions can be taken and used to pay the debt owed.

Although many small firms have unlimited liability, large organisations face so much greater risks that only some of security for personal asset encourages people to invest and accept the greater risks involved. Limited liability indicates that the liability of the shareholders for the debts of a business is limited to the amount they have invested in the business and not their personal assets. Most of the construction companies in Sierra Leone are limited liability in nature. They are owned by either a family or a small group of shareholders. Limited companies are said to have a separate corporate identity, in other words, an identity separate from their shareholders. They can sue and be sued.(Alan Whitcomb,1999).

2.24 Construction Industry

The Role of Construction Industry in National Development

The construction industry is a distinct sector of the economy which makes its direct contribution to economic growth like all the other sectors such as agriculture, manufacturing and services. Many writers have stressed the importance of adequate construction capacity for socio-economic development (Turin, 1973; World Bank 1984; Edwards and Miles 1984; Wells 1986; Ofori 1993b). The industry has great employment-generation potential as labour-intensive technologies are economically viable for most items of construction work.

Construction is a complex activity which is influenced by many factors. Several of these factors constitute problems for, and constraints on enterprises involved in construction. These relates to resources, documents, procedures, statutes, regulations and so on. In developing countries these difficulties and bottlenecks are relatively more severe and more enormous compared with industrialised countries.

A study by Turin (1973) of all major countries in the 1960s showed that in industrialised countries construction accounted for between 3 and 8 percent of Gross Domestic Product (GDP) and between 2 and 10 per cent of total national employment. Large percentage of inputs to the sector is bough-in from other sectors of the economy Low and Leong (1992) found major differences between countries at different levels of development. Countries with high GDP per capital had higher per capita value added in construction, as well as per capita gross output in construction.

2.25 Some Characteristics of Construction

In many of the least developed countries in the world today as much as one half of the total construction output may be in civil-engineering projects (roads, railways, ports, dams, power stations, drainage projects or water supplies) forming the basic infrastructure that is so vital to all other forms of economic and social activity. Commercially-built housing is generally less than one-third of the total.

The reminder of new construction work is in the form of other buildings (hospitals, health centres, schools, offices, factories, agricultural buildings and hotels). Also included in the data for net output, or valued –added, by the construction sector is the on-going repair and maintenance of all existing structures – a frequently much neglected form of economic activity in the poorer countries, but one which is now beginning to receive some of the attention it deserves.

The size of the construction industry in the UK is impressive, both in terms of output and employment. Construction output in 2009 was £6.5 billion ( 7 per cent of GDP0, of which 54 per cent was new work and 46 per cent repair and maintenance. The industry employs around 1.5 million people. Industry statistics reveals that the industry comprises mainly of small firms. Large firms of 1200+ employees undertake a mere 13 per cent of new work and repairs and maintenance. Small firms (1 – 7employees) and Small and Medium size Enterprises (SMEs, 8 – 114 employees) undertake a further 61 per cent of work leaving medium sized firms (115 – 1199) with the remaining 26 per cent.

Types of firm include general contractors, who undertake a range of building and civil engineering work, specialist trade contractors, specialist management consulting firms undertaking project management, and consultants – architects, quantity surveyors and engineers. In addition, there are firms offering a combined design and build service and some offering a ‘one-stop-shop’ to clients. Peripheral services, such as materials and component supply and plant hire, remain separate but are becoming more integrated into the industry’s activities as the trend towards greater prefabrication leads to increasing off-site activities.

Within the construction sector there in fact exists considerable scope for substitution between inputs and high degree of technological flexibility in production. In the poorest countries, the full range of technological alternatives is generally adopted.

The heterogeneous nature of the products of the industry- in terms of inputs, technology, standards and end use – is perhaps part of the explanation for the widespread failure of economists and other concerned with development issues (not to mention the public at large) to grasp the concept of construction as a clearly identifiable economic sector. Construction is different from other economic sectors, thus it is argued that there is not, and cannot be, any such thing as a standard construction product. A house is not, and cannot be, the same product as a hospital or a school. It is important to understand these differences and put them in proper perspective.

A far more significant distinguishing characteristic of construction – perhaps its only truly unique feature – is the fact that the completed products are generally not mobile but fixed for all time in the particular location where they are built. A large part of output for construction consists of capital goods – products required for the production of other goods. As a result of this fact, construction, in common with other capital goods industries, is in fact peculiarly susceptible to variations in the level of activity in the economy. Thus during period s of rapid economic expansion construction output is required to grow at a faster rate than that of other sectors and during periods of stagnation or decline the construction industry is the first to suffer.

2.26 Construction Management

The construction industry offers an exciting, dynamic environment in which to work The creative approach to work add satisfaction of making tangible changes to the micro-environment which the building or structure occupies, There has been a significant decline in public sector construction activity and an increase in the importance of the private client – especially the private corporate client.

Technological change driven by the rise in the use of information technology, has increased site and off-site productivity and enabled pre-project modelling of designs within the computer. The rise of private finance initiative (PFI) and private public partnerships with build-operate-transfer contracts has forced more emphasis on life-cycle costing of buildings and structures. The department of Environment, Transport and the Regions (DETR) (Egan) Report (1998) introduced the concept of key performance indicators for the construction industry and triggered the recent report for people (2000) initiative.

Fragmentation and confrontation are still endemic in the construction industry’s culture and are slow to change in spite of new methods of contract creating co-operative opportunities. Too many high profile projects still come in late and vastly over budget. There is still an image problem for the construction industry which has led to declining entrance levels at craft and degree levels in college and universities. The gender balance is still predominately male with only 12 per cent of women employed in the industry.

2.27 The Financing Problem of Construction

Investment in a constructed facility represents a cost in the short term that returns benefits only over the long term use of the facility. Thus, costs occur earlier than the benefits, and owners of facilities must obtain the capital resources to finance the costs of construction. For these reasons, attention to project finance is an important aspect of project management. Unless an owner immediately and completely covers the costs incurred by each project, these organizations face financing problems of their own.

In essence, the project finance problem is to obtain funds to bridge the time between making expenditures and obtaining revenues. Based on the conceptual plan, the cost estimate and the construction plan, the cash flow of costs and receipts for a project can be estimated. Normally, this cash flow will involve expenditures in early periods. During planning and design, expenditures of the owner are modest, whereas substantial costs are incurred during construction.

Plans considered by owners for facility financing typically have both long and short term aspects. In the long term, sources of revenue include sales, grants, and tax revenues. Borrowed funds must be eventually paid back from these other sources. In the short term, a wider variety of financing options exist, including borrowing, grants, corporate investment funds, payment delays and others.

Many of these financing options involve the participation of third parties such as banks or bond underwriters. For private facilities such as office buildings, it is customary to have completely different financing arrangements during the construction period and during the period of facility use. During the latter period, mortgage or loan funds can be secured by the value of the facility itself.

On the other hand, the options for borrowing by contractors to bridge their expenditures and receipts during construction are relatively limited. For small or medium size projects, overdrafts from bank accounts are the most common form of construction financing. Usually, a maximum limit is imposed on an overdraft account by the bank on the basis of expected expenditures and receipts for the duration of construction. Contractors who are engaged in large projects often own substantial assets and can make use of other forms of financing which have lower interest charges than over drafting.

2.28 The Importance of the Literature Review to the present study

Banks and other financial institution failures to provide credit to construction companies could cause damage to the country’s economy. Banks are needed not just for the intermediation between lenders and borrowers, but they also oil the wheels of the everyday commerce of a nation. If the banking system collapses, the infrastructure for making and receiving payment collapse too, and the rest of the economy could follow closely.

In order to assist small and medium size enterprises in the construction industries, banks developed investment banking and financial intermediation functions. With capital market in their infancy and relatively few, large investor banks are well positioned to draw long term funds from savers, and transfer them to construction companies on acceptable conditions.

2.29 Conclusion

This chapter presented the theoretical concepts on which the research studies will be based. There has been a thorough check of literature relating to the creation of credit facilities to small and medium size enterprises and a look at the construction industry.

Chapter Three

Research Methodology

3.0 Introduction

Careful considerations have been taken to assess the implications of credit creation by banks and other financial institutions to small and medium size enterprises in the construction industries for economic growth and development of Sierra Leone. The researcher has been able to progress knowingly and unknowingly of the various stages of the research Onion by Saunders et al. the ideology of the research onion is nothing different from the view of other authors.

It also acknowledges the types of research approaches, philosophy, and design, and how and why they would be applied in this study. Moreover, the sampling considerations (size and techniques), data collection methods as well as how data will be analysed in order to resolve the research questions are discussed in detail in this chapter. An analysis is made of the extent of validity and reliability of the study, as well as the limitations of the research.

The sample population for this study are the registered construction companies in Sierra Leone and financial intermediaries (with special reference to the loans and advances made by commercial banks and other financial institutions in the form of Credit).

3.1 Research Philosophy

Saunders et al (2003), describe research philosophy as “the way in which knowledge is developed and judged as being acceptable”. Research philosophy is the belief we have on how we deal with the research. Sunders et al group it in three categories as epistemology, ontology and axiology.

When similar findings are generally accepted as a piece of academic work it could be termed as 3.1.1.Epistemology. The Concise English dictionary defines Epistemology as the philosophical study of the nature, limits, and grounds of knowledge. It seeks to answer a comparative question of approaches; whether social, management and business approach.

3.1.2. Ontology - seeks to understand the nature of reality there by posing a question of assumptions about researchers; it seeks to understand the way the world operates and the stiffness to a particular view or belief.

3.1.3. Axiology issues concerned with the personal values, morality and ethics of the researcher. It assess ones own value in the creation and finding of solution in the field of aesthetics and ethics. Three views about the research dominate the literature and these can be listed as:

3.2 Positivism

From the aim to uncover the laws that governed the workings of the universe a view of what constituted reality (Ontology) and of knowing about that reality (epistemology) developed into a standpoint that we commonly call the attitude of scientific inquiry. Positivism could be law based in such that theory are analysed to formulate hypothesis which when tested gives room for laws to be assessed and this laws becomes basis of fact.

Sunders et al (2007) Bryman and Bell (2007) define positivism as “an epistemological position that advocates the application of the methods of the natural sciences to the study of social reality and beyond”. Remedy et al. (1998), describe a research based on principles of positivism as one in which the researcher “works with an observable social reality and that the end product of such research can be law-like generalizations similar to those produced by the physical and natural scientists”.

3.3 Realism

Realism is a branch of epistemology and shares futures with positivism because of its scientific method to the development of knowledge. Realism as scientific enquires is such that what we perceives as reality is the truth. In the researchers work, final result on a particular issue could be in the form of direct realism or critical realism. In a direct realism the researcher gives explanation to findings in a practical view point by experience which defines the world correctly. While in the critical realism, the researcher gives its finding from the limited information gathered. Sometimes this information from the critical realism is seen to be enough and correct but our senses sometimes deceive us. Sunders et al 2007.

3.4 Interpretivism

For this research, the interpretivism approach is very crucial in that it puts the researcher in an empathy state to handle every situation in the formation of the research solutions. Sunders et al 2007.

According to Kaplan and Maxwell (1994), it is through the meaning that people assign to phenomena that they can be understood. The authors hold that research based on interpretivism “does not predefine dependent and independent variables, but focuses on the full complexity of human sense making as the situation emerges”.

3.5 Research Approach

According to Sunder el al the approaches to research question depends on the structure and understanding of the question by the researcher at the beginning of the research. A good understanding of the research question will aid better choice of approach.

3.6 Deduction and Induction

Chris Hart (2006) in his book on ‘Doing a Literature Review’ defined the research approaches as follows:

3.6.1 Deductive –it is commonly a statement whose truth or falsity is known in advance of experience or observation (prior to experience) referring to instances of reasoning in which the conclusion follows from the premises.

3.6.2 Induction – This is commonly statement whose truth is made more probable by the accumulation of confirming evidence (based on experience) referring to instance of reasoning in which statements are made about a phenomenon based on observations. Induction expresses more of interpretivism

Deductive approach holds more to scientific research in that development of theory is the basic steps achieved by rigorous test.

3.7 Research Design

The research is designed to meet the aims and objectives of the researcher. The researcher’s findings and questions are presented either in the form of descriptive, exploratory or explanatory answers. According to Zikmund (2000), a research design is a “master plan that specifies the methods and procedures for collecting and analysing the needed information”.

3.7.1 Exploratory

Exploratory research is used in instances where the subject of the study cannot be measured in a quantitative manner or where the process of measurement cannot realistically represent particular qualities. Sunders at el 2007 in mentioning Adams and Schvaneveldt (1991) pointed that exploratory approach in his flexible state does not really means that one should be out of focus because it is usually very broad in early approach but in the long run it begins to take shape as it narrows down to the subject matter.

3.7.2 Descriptive

The descriptive research gives a further understanding of an explanatory research or exploratory research. It gives a better description of a person, event or situations. However, descriptive research method is not a very good way of going about research when it is used as a means to an end in itself. Nevertheless, the researcher seeks to use the descriptive methods as a base and went further to synthesizing and analyzing the data from the descriptive source. Saunders et al (2007)

3.7.3 Explanatory

Explanatory research is research conducted in order to explain any behaviour in the market. It could be done through using questionnaires, group discussions, interviews, random sampling, etc. The explanatory style is applicable when there is need to explain differences among findings. These findings could be as a result of the quantitative or qualitative data collected or from both. For the purpose of this research, the researcher also used an explanatory approach to make clearer findings from qualitative data. Sunders et al (2007)

3.8 Data Collection

According to Yin (1994) research approach is preferred when a case study methodology is used. It addresses the research questions of the how-why, the researchers control over the process insignificant. Sekaran (1992) also suggested that case studies researches can be explanatory, descriptive or hypothetical.

Data have been collected from both primary and secondary sources. Primary data have been collected by using interview technique with managers and senior officers of both the banks and Construction companies, whilst secondary data have been collected from journals, magazines, publications, books and the internet.

3.9 Reliability and Validity

3.9.1 Reliability; The data collected are seen to be reliable when the techniques applied by the researcher aids ‘consistent result’. Nevertheless, reliability satisfaction could be hampered by some threat which Robison described as participant error, participant bias, and observer error and observer bias.

Robson (2002)

3.9.2 Validity; a piece of research becomes valid when the findings appear to become what they really are. Practically, validity is all about having legal efficacy, going into research to show if the out come will become what is generally accepted by the concerns. Dochartaigh (2002) indicate that reliability and validity of secondary data refers to the authority and reputation of the sources. For the purpose of this research, the researcher tried to ensure that secondary data information’s are from reliable and valid source.

3.10 Secondary Data

Secondary research involves collecting data from either the originator or a distributor of primary research. In other words, accessing information already gathered. In most cases this means finding information from third-party sources such as research reports, company websites, magazine articles, and other sources

Researchers are attracted to secondary research due to the time savings and potential cost savings in acquiring information. Yet while secondary information holds numerous benefits and may help address many research questions, finding the right information often proves difficult

According to sunders et al, secondary data collection method has got three approaches which are documentary, multiple and survey secondary data.

3.10.1 Documentary: - data got via documentary are either in a written form or unwritten form. The written form are sources like report and minutes from committee, news papers and diaries etc while the non written sources could be media, television, video recording etc. For the purpose of this research, the researcher used the written form to acquire information to aid findings.

3.10.2 Survey based: - This refers to “data collected using a survey strategy, usually by questionnaires that have already been analysed for their original purpose” Saunders et al (2007). Survey based findings is census based, continuous and regular survey based or Ad hoc survey based. The researcher also used the survey based in the area of ad hoc and continuous and regular surveys to get data in a secondary form.

3.10.3 Multiple sources: - the multiple sources are the use of either documentary or survey base or the combination of both to get data intended for the research. In doing this research, the researcher found data in both forms considering the area based and the time series based. Sunders et al (2007)

3.11 Primary Data

In the collection of primary data collection, the researcher used methods such as interviews and questionnaires. The key point here is that the data you collected is unique to you and your research and, until you publish, no one else has access to it.

3.11.1 Interview Design

Interviewing is a technique that is primarily used to gain an understanding of the underlying reasons and motivations for people’s attitudes, preferences or behaviour. Interviews can be undertaken on a personal one-to-one basis or in a group. They can be conducted at work, at home, in the street or in a shopping centre, or some other agreed location. According to Saunders et al (2007) an interview is a discussion of two or more people for a particular purpose.

For the purpose of this study the researcher conducted interviews with respective managers of financial institutions and operations managers, construction engineers and owners of construction companies. These are the commonly used forms of interviews: Structured, Semi-structured and Unstructured or In-depth interviews.

3.11.1(i) Structured interviews, according to Saunders et al (2007), make use of “questionnaires based on a predetermined and standardized or identical set of questions”. The authors refer to them as “interviewer-administered questionnaires”. In this case, there is social interaction between the researcher and the respondent.

3.11.1(ii) Semi-structured interviews are a non standardized form of interview and are often referred to as qualitative research interviews (King, 2004). The researcher has a list of different questions to be answered which may vary from one interview to the other.

3.11.1(iii) In-Depth (Unstructured interviews) are informal and are used to explore in depth a general area of interest (Saunders et al., 2007). They could be addressed as an informal correspondence between interviewer and interviewee. The “interviewee has the opportunity to talk freely about events, behaviour and beliefs in relation to the topic area” while the interviewer takes record of by audio recording or by taking note. (Saunders et al.2007).

Forms of Interviews


Non standardized


Interviewer administered questionnaires



Focus Groups

Focus Groups

Internet interviews and intranet-meditated (electronic) group interviews

Group interviews

Internet and intranet-meditated (electronic) interviews

Telephone interviews

Face-to-face interviews

Source: Saunders et al. (2007 p. 313)

3.12 Sampling Application

According to Malhotra (2004), a sample is a “subgroup of the elements of the population selected for participation in a study”. The population in itself is referred to by Saunders et al (2007) as the “full set of cases from which a sample is taken”. Knowing how to go about sampling is very important in that one decides how to take a sample. Few of the registered construction companies were chosen as sample and contacted for the purpose of this research.

Sampling really became an alternative when survey of the entire population of chosen organizations proves impossible, when the researchers budget to carry out research findings on entire population was obviously insufficient, when the time available to carry survey on the entire population proves abortive and lastly the need for quick result due to these factors made it imperative for the need of sampling techniques. To affect a good result after considering these barriers, the knowledge of sampling frame, sampling technique and sampling size was employed.

3.12.1 Sampling Techniques

One of the most important issues in determining the sample is the sample size. The sample size will produce estimates that are precise enough to be useful, given the sampling technique to be used. The researcher directly controls only the sample size; to produce an estimate from the sample that is precise enough for the study objectives. The sampling techniques have two views which are probability or representative sampling and non- probability and judgmental sampling.

3.12.1(i)Probability samples; A probability sampling method is any method of sampling that utilizes some form of random selection. A probability sampling with a poor response rate dose not in the end give you a particularly good representative of the population. Probability sampling is usually the case where the sample collected from the population is usually known and the same in all cases. Probability sampling is of survey-based research strategy in that the research needs to make some amendment during the course to meet the objective of the research question.

3.12.1(ii) Non-probability samples; It is often usual that case study form or research use the non-probability samples. We can divide non probability sampling methods into two broad types: accidental or purposive. Most sampling methods are purposive in nature because we usually approach the sampling problem with a specific plan in mind.. According to Malhotra (2004), choosing between non-probability and probability samples should be based on considerations such as “the nature of the research, relative magnitude of non-sampling versus sampling errors, variability in the population, as well as statistical and operational considerations”.

3.12.2 Sampling Frame; sampling frame is the initial summation of the entire population in which the sample is drawn from. For research objective to be melt, completeness of the sample frame is pivotal because if the list is inaccurate then it is very possible that some cases that would have been drawn from the list for interview would have been skipped. In a practical application of this method the researcher should be able to know if the listed cases in the sampling frame are of importance to the research question.

3.12.3 Sampling Size; Determining the sample size is complex, it involves several qualitative and quantitative considerations. Important factors that should be considered in determining the sample size include: The importance of the decision to be taken; the nature of the research; the number of variables; the nature of the analysis; sample sizes used in similar studies; incidence rates; completion rates; resource constraints; the size of the total population; and the confidence the researcher needs to have in the data (Saunders et al., 2007

3.13 Data Analysis;

Sunders et al (2007) recommended for researchers to take down notes during non standardization interviews. He also discussed six inductively based analytical procedures to analyses qualitative data. These are data display and analysis, template analysis, analytical induction, grounded theory, discourses analysis, and narrative analysis. With regards to this research, data display and analysis procedures were used. Data for this study was reduced by summarizing and simplifying the data collected.

3.14 Limitations of the study

The researcher faced problems with data collection. The time of interview with the construction company Managers was not conducive. The interview was conducted over the phone from the United Kingdom. Most times they were on site and the noise coming from the background was pretty loud and disturbing. This was detrimental for the quality of the audio records.

3.15 Conclusion

This chapter has described in detail the methods which have been used to achieve the research aims and objectives. It shows that the study was a qualitative research based on the ideas of Phenomenology philosophy. The study used the inductive approach on a number of construction companies in Sierra Leone operating as small and medium size enterprises. Data was collected by both secondary and primary methods using questionnaire and interview methods. These results were analysed using the data display and analysis method.

Chapter 4

Data Presentation and Analysis

4.0 Introduction

This chapter is geared towards analysing and presenting the data and findings that were collected during the research. The findings range from changes in market overview to benchmarks and contributions by the banks and other financial institutions toward the creation of credit for small and medium size enterprises in the construction industries in Sierra Leone.

In a bid to give a more detailed quantitative and qualitative analysis of the performance of construction companies, comparisons have been made amongst the various construction companies and lending institutions.

In short, a thorough review of the objectives set out in the study will be undertaken, recommendations on the way forward made, with a view to ensuring that the banks together with the construction companies contributes significantly to the development aspiration of the country.

4.1 The Sierra Leone economic and political context

According to the 2005/6 annual statistical digest that was produced in 2008 it was mentioned that population is approximately six million people, which is means that the population is growing at a rate of 2.3% per annum.

The United Nations Industrial Development Organisation (UNIDO) did an independent evaluation on the Post Conflict Small and Medium Size Enterprises (SMEs) support programme for industrial development and poverty alleviation in Sierra Leone in 2007. In that report it was mentioned that six-years after the civil conflict, Sierra Leone found itself with a severely damaged physical infrastructure and serious socio-economic problems.

In order to restore stability and recover the national productive capacity the Government launched various strategies and polices such as “the National Recovery Strategy” and the “Interim Poverty Reduction level and the resumption of mineral exports, thus taking advantage of the country’s rich natural resources.

Construction and reconstruction activities, increasing volumes of inward remittances and investments by Sierra Leonean’ residing abroad. Sierra Leone has also made progress in re-establishing essential public services and in terms of political stability. In spite of these positive economic trends, Sierra Leone remains one of the poorest countries in the world with a national Gross Domestic Product (GDP) of US$1.4 billion and a per capita GDP of only US$ 240. About 82% of the population is estimated to live below the poverty line of US$ 1.00 per day and over 50 per cent of the population live in absolute poverty. The situation is worse in the rural areas, where the corresponding figure is 65 per cent.

4.2 Market Overview

From the Leonedirect website there are about 94 registered construction companies operating in Sierra Leone. Almost all of these companies are categorised as Small and Medium Size Enterprises. With the plenty work expected to be carried out in the country after the war, it is best for the nation to have enormous skills to lead out in the construction industry. During the research it was brought out that most of the companies only have two engineers.

In Sierra Leone today, there are about 14 Commercial banks and three other financial intermediaries in operation. With this new development it is expected that SMEs should be able to get easy access to credit, customers should enjoy low rates and charges from the banks in a bid of economic development and national building.

This is not the case; amongst the companies sampled only few of the banks have being giving out loans to construction companies in aide of their construction projects. For this research Rokel Commercial Bank Sierra Leone will be used in most instance because of the simple fact that they have been the one bank that have being giving out loans and advances to most of the construction companies interviewed.

4.3 Other Financial Institutions operating in Sierra Leone

There are other financial intermediaries that operate in the country apart from banks. At the moment there are about three prominent institutions that can perform in the role of credit creation in the country just as banks to construction companies in the aim of national development. These institutions are;

4.3.1 First Discount House (SL) Limited – this institution has made great impact in both the primary and secondary markets. They are involved in floating shares for most of the companies and corporate bodies. They are at the top of establishment of the stock exchange market in the country.

4.3.2 Capital Discount House Limited- This was formed over three years ago to compete directly with the first discount house. They have succeeded in creating options for investors and the awareness to have alternative. They intend including auctions as part of their portfolio and also form a reservoir for excess funds from commercial banks which are deposited interest free at the central bank.

4.3.3 Home Finance Company – The Central Bank Governor in his opening speech at the launching ceremony of the Home Finance Company (HFC) Mortgage and Saving Sierra Leone Limited operated by National Social Security and Insurance Trust (NASSIT) in July this year commended the National Social Security and Insurance Trust for the foresight displayed in their investment in HFC Mortgage and Savings (SL) Limited. HFC will address the burning issue of shortage in supply and financing of housing in Sierra Leone.

4.3.4 Alliance Housing Finance – the aims and objectives of this company are similar to that of Home Finance. With the introduction of this company customers have alternative.

4.3.5 Sierra Leone Housing Corporation – this office oversees the maintenance of Government owned buildings. They are in charge of the low cost buildings in the eastern part of the city of Freetown.

4.4 Services Offered by Commercial Banks

Adams (2006) explained that the traditional role of the bank is taking deposits and making loans to individuals (Retail and Private Banking) and Business (Corporate Banking) and providing related services. They attract depositors by paying interest on their deposit accounts, and by offering products such as high yield investments. In addition customers should have easy access to their funds and also be able to transfer funds to the various sectors of the economy. It should be noted that the transfer of funds within an economy is the lubricant for any economic growth and development as it stimulate the creation of credit.

Some of the traditional services provided by the financial intermediaries in Sierra Leone include;

Customers Current Deposits Account

Customers Savings Accounts

Fixed Deposits Accounts

Foreign Exchange Services

Loans and Overdraft Facilities

Safe Custody Services

Other Banking Services include;

Standing Orders

Customer Transfer of Funds

Special Clearing of Cheques

Swop Transactions

Travellers Cheques

Issue of Bankers Cheques

Purchases and Sale of Foreign Currency Notes

Inward and Outward Documentary Letters of Credit

Sale of Foreign Currency Drafts

Purchase of Foreign Currency Cheques

Inward and Outwards SWIFT Payments

Inward and Outward Bills of Collection

Bonds, Guarantees and Indemnities

Certificate of Balance on Request

Letter of Reference

Letter of Reports to Auditors on behalf and at customers requests

Internet Banking Services

Overseas Money Transfer System

Processing of Salaries

Automated Teller Machine (ATM)

Visa and Master Card encashment services.

The lending banks now deal with almost every facet of commercial lending (Adams,2006); they may have different rates for the same service. Traditional labels like clearing bank, discount house, etc have become meaningless. Some of the services provided can develop into different brand names. For example Rokel Commercial Bank (RCB) categories its savings deposits account into three; Ordinary, Instant access and Premium Savings Accounts, they all have different features.

Whereas, Standard Chartered Bank Sierra Leone Limited has two categories, Ordinary and Savings Plus Accounts. These two account have there different features and for the savings plus account you are entitled to cheque book, although there are some restrictions which makes it different from normal cheque or current account

4.5 Credit Creation in the Form of Loans and Advances

Loans and Advances can be categorised according to the target market, for example, corporate loans for business and personal loans for individuals. Loans can be categorised into different sectors of the economy, Construction, Agriculture, Manufacturing and Service Industries. From the questionnaire answered by managing directors and owners of construction companies in the country on loans facilities granted, RCB took the lead.

Most of the companies answered they have received loans from RCB, the next bank according to the sample selected was First International Bank (FIB). With this response from construction companies I had the urge to get a better understanding of the loans and advances policy of RCB. What are the criteria for granting of loans and advances?

All the banks have granted loans to some or all of the sectors of the economy. However, it is certain that in the business of taking deposits, the bank gives out loans which forms deposits and further loans within the industry and hence credit creation which enhance economic growth and development of the country. The bulk loans granted by RCB are geared towards private sector development which according to the World Bank and International Monetary Fund (IMF) report, is the basis for any developing economy. RCB is currently the leading commercial lender in the country.

4.6 Government Drive toward Reconstruction

At the request of the Ministry of Trade and Industry (MTI), the UK’s Department for International Development (DFID) is supporting a medium term Private Sector Development (PSD) programme, which focuses on the activities of MTI aimed at promoting domestic and foreign investment in trade and industry. The programme supports MTI objectives in playing a coordinating role across government and the private sector to ensure achievement of PSD goals as set out in the PRSP and Vision 2025 documents. It provides the structure that will enable the appropriate sequencing of initiatives covering legal reform, institutional strengthening, and investment promotion activities. (www.mtisl,org/filespsdp mfinal April,06)

The government in its drive toward reconstruction and rehabilitation of the country after the 11 years civil war set up various offices to promote settlement with the aide of foreign donations. The office of National Commission for Social Action (NACSA) was created and works mainly with international donor organisations like the World Bank, International Monetary Fund, Department for International Development (DFID), etc. in providing the much needed resources to meet with their programmes. Their mission statement of this all important organisation is thus:

4.6.1 Mission Statement for NACSA

To fund community-based and demand-driven activities that promotes sustainable development leading to the alleviation of poverty, reduction in the risk of renewed conflict and improvement in the well-being of Sierra Leonean.

To fund public works projects that improve public goods, generate incomes for as many poor people as possible and reduce poverty.

To build capacity

a) Of micro-finance institutions able to lend funds to micro-entrepreneurs and others;

b) Of local government bodies so they can progressively lead and manage local development initiatives and

c) Of our NGO and private sector partners so they can more effectively deliver development-related goods and services.

To improve the speed of delivery, quality and impact of development initiatives with the support of communities, NGOs, relevant ministries, private sector partners, donors and others.

To help make Sierra Leone a safe and opportunity-rich environment for coming generations.

4.7 Housing

The Housing module was included with the aim of evaluating housing characteristics, the occupancy status of the household; household size and room density; access to drinking water, toilet facilities, source of lighting and fuel, rubbish disposal, and materials used in house construction, and household participation in the community.

In the population and housing census 2006 report sponsored by the United Nation Family Planning Association (UNFPA), European Union (EU) and the Sierra Leone Statistics Office it was indicated that most households in Sierra Leone either live in single rooms (26%) or two-room dwelling units (34%). In the urban area, more households live in one or two-room dwelling units (68%) than in the rural (55%).

There are more dwelling units in the rural area that have at least three rooms (45%) than in the urban area (32%). 32.8% of the Households own the dwellings that they occupied in Sierra Leone. In the provinces, that is, Southern, Eastern and Northern Regions, almost all dwellings were either owned by occupants or rent-free, but for the Western Region, most households paid rent for the dwellings they occupied (69.4 %).

In Sierra Leone, the outside walls of houses are mostly constructed of mud and mud bricks (61%), 17% have cement brick walls, while 7% are wood and corrugated iron sheet walls. The same pattern for materials used for constructing walls is seen in the regions except the Western Area where 50% of households live in houses with walls made of cement, 30% corrugated iron sheet and 9% mud/mud-bricks. Nation-wide, 60% of households live in houses with mud floors and 36% with cement floors. In Sierra Leone, corrugated iron sheet (63% of household) and thatch (26% of household) are the major materials used for constructing household roofs.

4.7.1 Physical Infrastructure Sierra Leone is reputed to have made significant strides in promoting infrastructural development in the decades immediately following independence in 1961. However, increase population growth, shrinking resources, public ownership and corruption and mismanagement led to the present poor state of the country’s physical infrastructures. (Sierra Leone Vision 2025)

4.7.2 Shelter and Human Settlements

After several brainstorming exercise the team for Vision 2025 came up with the conclusion that the Shelter situation throughout country is characterised by both qualitative and quantitative deficiencies, and this is particularly serious for the lower income groups and the urban poor who live mostly in overcrowded conditions and poor dwelling houses. The squatter settlements and inner city slums in the capital city of Freetown are generally located in hazard prone and environmentally unsafe areas.

The majority of households nation-wide do not enjoy adequate housing services; pit latrines are the most common method of sewage disposal, and less than 20% of all households have access to safe drinking water.

Sierra Leone’s past and present development, constraints and efforts at addressing the challenges facing the country’s housing problems has brought about a situational analysis. A number of bottlenecks have impinged on the country’s prospects for sustained growth and development as depicted by the reviews carried out by the Vision 2025 team.

Principal among these are bad governance, weak institutional policies and capacities, misguided programmes, corruption and mismanagement, political instability, insecurity, lack of patriotism, lack of commitment, and the vulnerability of the macro economy to the imbalances and shocks of the external environment. The overall strategic issue for the economy revolves around the key question “How to attain a well-developed, self-reliant, and competitive private sector-led economy with strong indigenous participation?”

There have been a number of impediments to the attainment of a vibrant private sector in the country. Principal among these include limited development budget resources, little or no venture capital, corruption and mismanagement, low household incomes and savings mobilisation, unconducive legislative and regulatory framework, hostile policy environment, and perhaps more important, is the general lack of commitment to the development of the private sector. This therefore calls for a more conscious effort on the part of both government and other key stakeholders to promote private sector development in a more rigorous and consistent manner in order to attain within the next 20 years, a strong, competitive and growing economy.

4.8 Stable, Competitive and Growing Economy:

The country has a small open economy, characterised by chronic structural rigidities and macroeconomic imbalances created by the vicissitudes in the global economic environment. These factors have rendered the economy weak, unstable and uncompetitive both locally and internationally, with a concomitant decline in output and real incomes per capita. The situation has been further compounded by the deteriorating physical infrastructure that had almost attained a state of disrepair. To reverse the economic downturn the government has, since 1989 embarked on a series of economic reform programmes like the PRSP programme aimed at macroeconomic stabilisation and structural adjustment for sustained growth both in the medium and longer terms.

There have, however, been mixed results from the stabilisation efforts as evidenced by the continued vulnerability of the economy to external shocks, unstable currency and exchange rates, high inflationary trends and widening of overall balance of trade and payments deficits. In addition to the structural weaknesses and instability that characterize the economy, its performance and growth are further hindered by the high degree of un competitiveness both in microeconomic and macroeconomic terms. In microeconomic terms, local firms and industries have not only been inadequate, but also lack the capacity to increase profits and grow, particularly the capacity to acquire and utilize advanced technologies for production, business and management information systems.

Similarly, in macroeconomic terms the country has been suffering from both weak comparative and competitive advantages. Thus, national industries lack the ability to produce and manufacture products that can survive international competition and standards. There is a desire for dynamic competitiveness that involves principally three forms of “deepening” vis-à-vis upgrading existing technologies within local industries; venturing into new and more complex production and manufacturing activities; and increasing local linkages in production. Sierra Leoneans, therefore, aspire for a stable strong and competitive economy to ensure long-run export growth based on a large export base of high technology products. 4.9 Private Sector Driven Economy In April 2006 the Sierra Leone Private Sector Development (PSD) support to the MTI for programme to develop and implement a national PSD strategy that was sponsored by DFID. The development of the private sector has been recognised as an important strategy for stimulating economic recovery and growth.

However, the economic trends have continued to show a severe downturn in performance over the years. Efforts at propelling the private sector as the engine of economic growth have been forestalled by government’s continued and extensive dominance over economic activities. This notwithstanding, government and its functionaries are now fully aware that with a vibrant private sector operating in an environment of good governance and political stability, a number of initiatives have been undertaken for the development of the sector. These initiatives received further impetus when private sector development occupied centre stage in the economic recovery programme.

From the PSD document it is evident that some efforts at revitalising and strengthening the private sector include: reviewing the legal and regulatory framework; strengthening the capacity of law enforcement institutions to ensure that rules and regulations are enforced in a fair and transparent manner; repeal of the 1983 Industrial Development Act, which was developed along the belief that government takes the lead in promoting investment and economic growth while the private sector follows. Furthermore, government is making strides to reduce its role as owner and operator of public enterprises by undertaking a comprehensive divestiture and public enterprise reform programme.

Sierra Leoneans, therefore, generally perceive these developments in the domestic economic environment to be hostile or rather unfavourable to enable them contribute meaningfully to economic development. It is therefore not surprising that Sierra Leoneans see themselves as “second class citizens” in their own country due to their marginal ownership and control over national resources and assets. There is, however, an increasing potential for foreign direct investment in all productive sectors of the economy. In recognition of the role of foreign direct investment, a new Investment Code is being developed to dismantle taxation irregularities and define the guarantees and other incentives to be offered to investors. But foreign direct investment inflows have also been very marginal.

Despite these appalling statistics over the years, private sector development has been focused on strengthening the institutional environment for indigenous small and medium scale enterprises on the grounds that they have the potential to become a key source of economic growth, employment and wealth creation. Given the enormous scope and opportunities for private sector development in the economy, Sierra Leoneans aspire for economic empowerment through their effective participation in investment activities and favourable partnerships with potential foreign investors in the private sector. 4.10 Reduced Donor Dependent Economy As the economic crises increases, the economic sovereignty of the nation also weakened. For this reason, the country’s economy has been aptly described in a number of official documents as “donor-driven” due to the over-reliance on external donor funding and support.

The huge annual budget deficits have largely been financed by external donor inflows in the form of project and programme loans and grants. The heavy reliance on these means of sustaining the economy has continually exposed it to total collapse in the event of donor fatigue, withdrawal or suspension of requisite financing. Even more alarming is the heavy reliance on donor support for financing the annual development budget, which indicates that 90% of funding is obtained from foreign sources, while the remaining 10% is supported under government counterpart funding.

Sierra Leoneans are, however, fully cognizant of the fact that their country is greatly endowed with diverse natural resources to warrant the extent of over dependence on external financial support. It is generally believed that with the effective exploitation and utilisation of the nation’s resources, the country will become self-reliant with a high prospect for growth, while at the same time restoring its dignity among the comity of nations. While Sierra Leoneans fully appreciate that the attainment of total economic independence remains an elusive dream, yet they aspire for an increased and appreciable level of economic self-reliance in order to minimize the dominance of foreign donors over economic and other critical decisions.

4.11 Creation of a New Capital City

In the immediate post-colonial years, Freetown was a clean, beautiful and attractive city, with a breath-taking peninsular mountains basked in a beautiful mix of colours exuberated by tropical plants. It’s well laid out buildings, drainages, roads and streets and above all, its abundant open spaces for recreation and relaxation made it the envy of many other West African states. Over the years, however, poor town planning and land use patterns, population growth, poverty, corruption and mismanagement, have resulted in the uncoordinated growth and claustrophobic appearance of the city.

Consequently, the city is over congested with houses constructed right up to the building line, narrow and poorly arranged roads and streets, substandard housing designs, no open spaces separating residential areas from commercial and industrial establishments, as well as poor drainage and waste disposal systems. Compounding these problems is the location of Freetown between the Atlantic Ocean and the Peninsular Hills, which leaves little or no scope for expansion to cope with the growing population and infrastructural development.

Furthermore, in order to ease the pressure on the capital city due to over-centralisation, as well as improving the poor state of the regional headquarter towns, the nation aspires for the creation of a new capital city and upgrading the regional headquarter towns to city status.

4.12 Recommendations

The document of the Vision 2025 the people o sierra Leone have put together the following as specific aspirations regarding the development of the country’s infrastructure:

4.12.1 Shelter

The people aspire for permanent housing for all in the form of, low cost housing and home mortgage schemes that are constructed with affordable local building materials. Such housing should be healthy, safe and secure, with amenities such as electricity, clean and safe drinking water, sanitation and waste disposal systems and communication.

4.12.2 Access to Affordable/Low Cost Housing and Building Materials

Good housing is essential for quality life. Sierra Leoneans therefore aspire for improved low cost/affordable housing and building materials nationwide.

The national aspirations were obtained through the popular participation and the process stimulated exchange of views among participants, taking into consideration future bearing events, major actors, critical uncertainties, trends and the nation’s strengths, weaknesses, opportunities and threats (SWOT). From these aspirations, it is clearly evident that the development challenges facing Sierra Leone are enormous, in terms of resources (financial and human capacity).

This therefore calls for a conscious and committed effort in the management and utilisation of the nation’s resources, as well as the formulation of policies and programmes that are pertinent for the attainment of the nation’s aspiration.

4.13 Analysis of the Population By Industry

Distribution of the Labour Force by Industry

The structure of an economy is determined by the proportion of the population engaged in agriculture, industry and services. As an economy develops, it is expected that the distribution of the economically active population will shift from the agriculture sector to other sectors such as manufacturing, telecommunication, services industry etc. Thus an agrarian economy has a large proportion of the labour force engaged in agriculture. An analysis of the labour force by industry was done by the central statistics office of Sierra Leone to determine the economic structure in the country.

The distribution of the labour force by industry and Sex

Sierra Leone (Males & Females)




Total Labour Force

Distribution of Labour Force (%)

Total Labour Force

Distribution of Labour Force (%)

Total Labour Force

Distribution of Labour Force (%)

Crop Faming

Source: 2004 Population and Housing Census

4.14 International Support Programme

The Sierra Leone Integrated Programme (SLIP) “Post Conflict SME Support Programme for

Industrial Development and Poverty Alleviation” was approved in May 2004 and had a 48 months duration with a total budget of US$ 5,146,700. It was designed as a post

Conflict SME support programme for industrial development and poverty alleviation, through entrepreneurial development, and the provision of employment and income Opportunities for the poor in depressed rural communities and displaced people in Freetown.

The Programme has been working in a difficult environment and has been confronted with many challenges and not the least in mobilizing funds for the implementation of its various components. It was a relatively large programme in a country with relatively few donors. This resulted in delays and in a major part of the Programme not being funded. In fact, the total budget allotment of US$ 738,479 stems from UNIDO’s own sources of funding.

Description of Objectives




Improve policy environment for the development of micro, small and medium scale industries led by entrepreneurial and investors’ initiatives

Secretariats of Sierra Leone Chamber of Commerce, Industry and Agriculture (SLCCIA), Sierra Leone Indigenous Business Association (SLIBA), Petty Traders Orgs. Strengthened. SME Unit of the Ministry of Trade Industry established. Statistics on small and medium enterprises available.

Not funded

Not implemented

Component covered by Joint UNDP/UNIDO

PSD Programme


Reduce the development gap between the economies of provinces and Freetown with human resource development for micro and small-scale entrepreneurship promotion in the provinces based on the self-reliant market-demand-led growth

Growth Centres in Bo, Makeni, Kenema, Binkolo and Pujehun will be rehabilitated. New Growth Centres will be established in Bauya, Rotifunk, Kabala and Kambia. Freetown Production Centre established. Staff of the Growth Centres and a Freetown Production Centre will be trained

Partially implemented. Growth centres in Binkolo, Kpandebu and Pujehun are being rehabilitated


To improve food security by reducing post-harvest losses of agricultural produce through the promotion of commercial post harvest activities: New product development, food safety and quality, training programmes.

Training in use and maintenance of appropriate technology to enhance agricultural production. Commercial pilot food processing centres in each agricultural zone.

Partially implemented in growth centres in Binkolo, Kpandebu and Pujehun

To improve market access and competitiveness of the food sector (Special focus on fisheries)

Strengthening of the Sierra Leone Standards Board, the fisheries Department, Food inspection services –Ministry of Health. Food safety and quality assurance and advisory services for trade facilitation and public health. Capacity building for regulations, inspection and enforcement of food safety laws.

Not funded

Not implemented


Capacity Building in Food Science and Technology

Establishing of an internationally acceptable program in food science and technology at the Njala University.

Not funded

Not implemented

Source: Independent Evaluation Sierra Leone UNIDO integrated Programme

An independent evaluation of the Integrated Programme (IP) was conducted in February/March 2008. The purpose of the evaluation was to assess the effectiveness in terms of achievement of outputs and outcomes, prospects for development impact and sustainability, efficiency in implementation, provide recommendations for the future and identify lessons learned.

4.15 Lending – An Instrument for Private Sector Development

The study for the creation of credit by the commercial banks and other financial institutions for private sector development in Sierra Leone with special emphasis to the construction industries is important, it will open up new doors in the area of Bank Lending at the national level and assist the Government and other concerned parties to mould their policies and operations to boost up their efforts in the provision of credit. Adams (2006) stated that before a bank decides to lend a borrower it initial job is to assess the credit risk of the borrower.

Though poverty alleviation has being on the top of most important national goals in the country, there has not been any improvement on the problem of poverty and unemployment. This is because the commercial banks and the other financial institutions has been finding it difficult in providing requisite credit to vulnerable potential borrowers mainly because the later does not and cannot provide the necessary collateral.

Andrew Fight (2006) in his book Introduction to Project Finance described construction lender to be concerned with the design engineering and construction risks, since completing the construction is necessary in order to enable the borrower to draw down the permanent financing and use it to repay the initial construction loan. Andrew (2006) mentioned that the relationship between the sponsor and contractor is based on the fact that the turnkey nature of the construction project requires the contractor to deliver the contract on spec and on time.

Rokel Commercial Bank (SL) Limited as one of the leading lending banks constitute over 20 per cent of the market in advances related business. The fact of the matter is that the bulk of these lending’s are not evenly spread across the various sectors and mainly concentrated in Freetown and the provincial headquarter towns.

Commercial Banks and other Financial Institutions in Sierra Leone should therefore be thinking of moving away from the traditional norms of credit when dealing with borrowers from the rural areas. From the research it was mentioned that banks do not accept properties in the rural towns as collateral.

4.16 Rokel Commercial Bank Limited Advance Circular 03/2007

From the questionnaire that was answered by Directors and Engineers of construction companies operating in Sierra Leone it was evident that Rokel Commercial Bank was the leading lender to construction companies, therefore I decided to study their policy and procedures on loans and advances;

Paragraph 1 of the circular explains that the bank will make salient points with additional comment as appropriate, or attach copies such that this circular that covers present advances procedures.

Paragraph 2. Managers are to personally check the security listed against the actual documents held and to sign a certificate. “We certify that the security held has been checked and are in order”. Where security is not in order, a note of defects and remedial action taken is to be added.

Paragraph 3 excess Reports – the manager should show highest and lowest position and credit turnover for the month up to the reporting date. Show precise details of the purpose for which the excess was granted.

Paragraph 4 Security a) Insurance – All property mortgaged to the bank is to be adequately insured against fire (and theft as appropriate).

b) Guarantees -

Guarantees must be correctly signed and witnessed on the branch premises

Guarantors must be handed a copy of the guarantee (Clearly marked “Copy”) and their signed acknowledgement obtain on the original

Under no circumstance may a customer or third party take a guarantee out of the bank to obtain signatures.

Guarantees may only be treated as extendable security to the extent to which they are supported by tangible security.

Paragraph 5 – Charges for work undertaken by the Bank’s Solicitors

Wherever action is necessary by the solicitors in preparing security documentation, customers should be advised that the cost of suck work is for their account.

Wherever legal documentation is necessary to secure an advance, the documentation is always to be drawn up by the bank’s solicitors.

Paragraph 6 – Discounted Loans

Discounted loans, which are subject to the usual lending guidelines and branch discretionary limits, differ from traditional loans in that interest is calculated at the outset on the full amount of the loan granted for the full period of the loan. The interest is added to the principal loan amount and the resultant total repaid in equal monthly instalments over the term agreed. In this way borrowers are aware of the exact amount required to meet each repayment which will include both capital and interest elements.

4.16.1 Interest

Interest is charged when loans are granted. It is calculated as follows: -

Amount of Loan x Interest Rate x Period of Loan (in Month)

100 x 12

4.16.2 Repayments

Repayments of the loan is to be equal amounts in each month,

Amount of Loan + Total Interest

Term of Loan in Months

4.17 Guidelines for the issuing of Loans and Advances Policy

Branch discretionary limits apply to the amount of the loan before interest

Interest rate will be advised by head office from time to time

Maximum period of loan 36 months 9except where otherwise agreed with Head Office)

Loans must not, under any circumstance to be granted to customers who have maintained a current account for less than six months. In any event current account must have been satisfactorily conducted. Ensure name is not on classified Debts lists.

During currency of loan, current account to be maintained strictly in credit and no other loan(s) should be outstanding.

Not to be granted for expenditure of a recurring nature,

Repayments should not exceed 1/3rd the applicants monthly net take home pay

4.18 Findings

The researcher sent out questionnaires to owner of construction companies and had telephone interviews with some of the Managers and engineers. During this period the researcher was also privileged to conduct interviews with managers from two of the leading banks in the country, government officials. I was able to go through the lending policy guideline for Rokel Commercial banks. These were some of the findings of the problems construction companies and the banks face in the creation of credit for national and economic development;

4.19 The construction Companies Perspective

The researcher interviewed few of the registered company managers. I interviewed the Director of Loma Construction Company, the Manager of Equatorial Construction and the Senior Engineer of Kor Services to name a few, and from their responses it was evident that they all seem to have similar problem when it come to getting loans and advances from the financial institutions. Analysing the feed backs the problems experienced can be categorised into three major sectors. The outcome of the research revealed that the construction companies are face with the problem of Collateral, Lack of Proper Accounting Records, and Bribery request from banking officials to name but a few.

4.19.1 Collateral – this happens to be one of the main problems that the construction companies are having in securing loan from the lending institutions. It is even worst for those operating in the provinces; the banks do not accept properties in the province as collateral. At a meeting organised in November,2007 by the International Bank for Re-Construction and Development (IBRD) held in Freetown for contractors, Banks, Suppliers and Government officers from the Ministry of Finance, the issue of collateral was brought out as one of the problems the construction companies were faced with.

The banks are willing to give out loans and advances to Small and Medium size Enterprises (SMEs) in the construction industries but the regulation is that they must produce collateral as a way of securing themselves in the event of default. The International Bank for Reconstruction and Development at the same meeting disclosed that they were having Le2 Billion worth of defaulted guarantees by contractors because they were not able to meet with the standards of the requirements for the contracts.

4.19.2 Accounting records – It was pointed out during the research that most of the construction companies do not maintain proper accounting records. The banks require them to produce complete books of accounting records of their past and present performances. As SMEs record keeping does not bother owners. They are very slack in maintaining accounting record, thereby, having problems with the bank in securing loans for their operations. One of the programmes managers of Nacsa confirmed that this is one of the bottlenecks that local construction companies faced when they bid for contract with their office,

4.19.3 High Interest Rate- the construction companies are suffering with having to pay high interest charges for loans and advances taken from the banks and other financial institutions. This interest payment reduces their profit margins, thereby creating more constraints for the construction companies.

4.19.4 Bribery expectations from Banking Staff – prominent during the research questions was the issuing of giving bribes to bank officials to facilitate the process of acquiring loans or advances from the bank. They have little or no alternatives but to comply with this ugly situation of giving tips and bribes to banking officials. According to one of the manager they have to always make provision for it, when calculating the project expenses. This eats into the construction companies overhead, and limits them in performing well. They would have to cover up for the unbudgeted spending at the bank as a result either the work is not completed or poor quality of work is done at the end.

4.19.5 Bureaucracy of government officials- The protocols required in securing a tender from Government is so rigid that they sometimes frustrate construction companies. This due process delays the start dates and sometimes the entire project. Government through Nacsa requires a lot of documentations from contractors before they can be awarded with contracts.

4.19.6 Refusal of Banks to Issue Performance Bonds in favour of some Contractors – The banks as a financial intermediary is expected to support SMEs in the issuance of bands, but they sometimes refuse because the SMEs do not have adequate collateral to support the bond that they require them to issue.

4.19.7 Letter of Credit- for government or large non governmental organisation to award your company with a contract they would want to have a letter of credit from your bank to confirm the kind of customer account you are operating and how reliable you are. This is not been done by the banks in most case and at the end they loose out in getting the contract for lack of letter of credit from their banks. In my interview with one of the directors of Lomah construction companies it was disturbing to understand that they lost a big contract from the ministry of education for the construction of new class room blocks in the North just because their bankers refused to give him a letter of credit on time, to guarantee that they are capable to undertake the said contract.

4.19.8 Legal Fees- the banks adds up the cost of the legal services performed by their own bank lawyer to the charges the customers incurs in securing the loan. The Managing Director of Equatorial Construction and Industrial Company Limited in a telephone interview with me pointed out that this charge was unfair. The lawyer is an employee of the bank and the work of vetting documentations presented for loan application is part of the job for which he/she is employed, therefore, there should not be an extra charge on the customers, because when the loan is granted they are required to pay interest charges on the said loan.

The purpose of the meeting organised by the International Bank for Reconstruction and Development in Sierra Leone(this is a World Bank Institution) was to throw light on, discuss and answer questions on the bank’s payment instruments (Letters of Credit, Special commitments etc) and Bank Guarantees and Performance Securities often required during the tender process. At this meeting the facilitators encouraged all parties to speak out freely so that the problems would be identified and then together they would find solution in resolving the problems.

4.20 The Banks and Other Financial Institutions Perspective

According to Adams D (2006) in his book Banking and Capital Markets it is pointed out that the traditional role of banks and other financial institutions is taking deposits and making loans and related services to individual and businesses there by creating credit. The bank tries to attract customers and build confidence for depositors to lodge their monies with the bank, in the form of paying interest on their deposits. The vast majority of money lent by banks and other financial institutions is not theirs, it comes from their depositors.

Banks in their move to give out loans and advances to SMEs require them to meet with their guideline stipulated. Banks are involved in business to make profit for their shareholders and the funds they are operating with dose not belong to them but their various depositors, therefore, they should be very careful in the way they disburse cash to businesses in the form of loans and advances During the research I had interview with one of the managers of Rokel Commercial Bank which happened to be the leading lender of funds to construction companies in the country, and during the interview he was quick to inform me of the problems they are having with small and medium size enterprises with regards to loan applications. Some of the guidelines lay down by RCB (which is common to most other banks) for lending are thus;

The provision of collateral – Because of the defaults by the construction companies the bank is particular on the provision of collateral, so that they will have something to fall back to in the event that you mess up with the funds or the contract.

Risk Consideration- According to RCB advances by way of loan and overdraft to any one borrower or group should not exceed 25 per cent of the banks net worth, for manufacturing sector the bank marked it at 15% whereas for construction it is 25%. Companies do not understand this range system; all they want is for their loan applications to be approved.

Account Balance – the customers account must always be in debit before they can request for loan, and that the account should have being in operation for a minimum of six months before any loan application is made.

Extracts from the Balance sheet of Rokel Commercial Bank Sierra Leone Limited

(Formally Barclays Bank of Sierra Leone Limited)

Amounts in thousands of Leones






Loans and Advance to customers






Source: Rokel Commercial Bank published account extract

The above table is an indicator of the trend Rokel Commercial Bank is making in the area of loans and advances to her customers. There is a steady increase each year. During the research most of the construction companies answered the questionnaire that they received loans from Rokel Commercial bank. Going through their published financial statement it can be proven that indeed they have being supporting their customers by giving out loans and advances.

4.21 Government’s Perspective of the problem

In the bid for reconstruction government have put together some regulations that will help both the commercial banks and the construction companies to have smoother relationship. During my research I had telephone interview with officials from the Ministry of Finance, the central bank and the Ministry of Trade and Industry. They all spoke with the same voice. They are determine to see that Sierra Leone get back its past glory of been the Anthems of West Africa.

When I contacted one of the engineers at Nacsa he mentioned some of the bottlenecks that they are having in dealing with construction contractors. He told me that some of the contractors are businessmen instead of the professional they are claiming. They are not qualified engineers and hence cannot deliver when contracts are awarded to them.

The Government (Nacsa) write proposal to donor agencies and when they are approved it is endorsed by the Ministry of Finance, after which Nacsa will advertise mostly through news papers and radio stations for bidders, This type of project they call demand driven project, it can be implemented in collaboration with the local councils at time. With this project the contractors are required to submit Bid of security from a bank, performance bond, advance payment guarantee, certificate from National Revenue Authority (NRA), proper statement of accounts etc. These are all considered as bottlenecks in the process of awarding contracts to small and medium size enterprises. Most of these requirements they are not able to produce and at the end they are disqualified.

Number of Permits and Floor Area By Region



No. of Permits issued

Floor Area( Sq Ft)


No. of Permits issued

Floor Area (sq ft)


No. of Permits issued

Floor Area (sq ft)

Western Area





















Key Source: Ministry of Lands, Housing and Country Planning

Western area; average 3,000 sq ft permit is sand.

Urban Average area 2,500 sq ft per permit is sand.

Rural Average area 2,000 sq ft per permit is sand.

From the above table it can be seen that number of permits issued in the Western area increased considerably from 2004 to 2005. This is an indicator for the Governments determination in pushing the reconstruction drive in the country

The construction companies are blaming the Government for not making controls over the commercial banks through the central bank to reduce the interest rate for the loans and advances issued out.

To be able to get a contract from government you would have to go through a tender system. The time it takes from advertising to the issuing out of the contracts is so long. Even, when the contract is awarded the time it also takes for the mobilization of operational cash to be released is very slow. The many protocols of the government affect the smooth operations of the construction company.

4.22 Implications of Research Findings and Recommendation

The Small and Medium size Enterprises are faced with serious problems in Sierra Leone. My research was focused on the difficulties construction companies are faced with in securing credits from banks and other financial institutions for national development. After the war it is expected for reconstruction to take place and government have come out with so mach strategies in solving some of the construction problems in the country, but their efforts needed to be doubled.

A closer study was carried out on the leading commercial bank lenders of credit to the construction companies and one of the reasons for the continued success is that they have been able to generate funds which have been utilised by the private sector for business enhancement and consequently creating credit for national development.

Chapter 5

Conclusion and Recommendations

5.0 Introduction

This chapter gives a summary of the study; it also includes a summary of key findings in which the researcher tried to link the literature review with the main findings, conclusions as well as attempting to make some recommendations which will enhance the art of credit creation as an instrument for Small and Medium size Enterprises development in the country. The recommendations are divided into three, thus; a) To the management of the banks and other financial institutions, b) To the Government of Sierra Leone and to future researchers on this topic. Future researcher’s suggestions or recommendations may be different to the ones I am giving now and that my suggestions/Recommendations are not exhaustive.

5.1 Implications of Findings

The research has been focused on creation credit facilities to Small and Medium Size Enterprises in the Construction Industry in Sierra Leone. Ten construction companies, two of the leading Banks that create lending facilities and the central bank were used as my case study. We are now give a description to economic growth and development as well as the relative implications of the role commercial banks, the central bank and the construction companies play in nation building, based on the finding of the study.

Access to Financial resources in all sectors of economic activities is the most critical inputs for a nation’s economic growth. The provision of capital for multiple objectives of national development especially with construction and rehabilitation is unlikely to be feasible if the resources allocation is left to the capital markets to decide. Finance of economic development is not necessarily provided at socially optimal and sustainable levels if global and domestic capital markets are the primary institutional mechanism for achieving economic development objectives.

When companies endeavour to improve on their performance in all aspect of there operations, then they will by able to maximise their profits. During the study it was pointed out that SMEs are not keeping proper records and this is affecting their growth level. For efficient operation construction companies should ensure effective board and senior management oversight, sound process for measuring, monitoring and controlling the operations.

There are many new banks that have sprang in the financial industry in the country, but Rokel Commercial Bank Sierra Leone Limited has traversed a long way to be a pioneer in economic development by initiating economic development. They operate on sound liquidity risk management, from trend in their published financial statement it can be seen that profit had increased in 8 years by 78%. As at 31st December,1999 the profit recorded was Le5.8 Billion, because of hard work, determination and focus by management the profit recorded for the year ended 31st December,2007 was Le10.3 Billion. In line with this marginal profit there has also been increase in the banks total assets and therefore the ability to extend credit and contingent liabilities.

With the introduction of new banks in the financial industry, the quality of service provided has improved and has enhanced technological advancement in the industry. Like wise, if construction companies are to organise themselves in a better way, they will be able to improve the quality of services they provide to both the Government and the community in the country. They will be able to attract more funds from the financial Institution, thereby, making the creation of credit an easy exercise.

In an under developed economy , it is necessary to recognise the role of commercial banks, so that both public and private sectors can benefit in the creation of credit for national development.

The SMEs have definitely proved themselves to be a viable institution and a significant contributor to economic growth and development of Sierra Leone, whilst at the same time commending a favourable image in terms of perception to its customers.

5.3 Recommendations

Continued success and organisational sustainability is considered to be long term and it entails a range of reinforcing roles and tasks. Leaders must challenge themselves by asking tough questions like; do customers really need our products, or just our functions or services? Are we creating genuine value for society or appropriate value for money? What is the rightful place for Small and Medium Size Enterprises (private sector) in the economy?

The support from the Government and the banking and other financial institutions in the day to day operations of SMEs especially in the construction industry is very significant. The financial sector plays a pivotal role in the creation of credit in the economy of any country. As a service institution they are considered to complex in nature, therefore, it is important that management braces itself to new developmental changes.

On the basis of these issues the researcher have made the following recommendations in order to enhance the role of small and medium size enterprises (private sector) and the lending institutions in the growth and development aspirations of the country.

5.4 Recommendations to the Management of Commercial Banks and other Financial Institutions

The Board of Directors and Management of the commercial banks and other financial institutions (Financial Intermediaries) should not relent; they need to adopt a more robust marketing posture in keeping with its aims and objectives. There is no doubt that the competition will get keener and new entrants will appear on the stage. Banks can only survive by being proactive and receptive to their customer’s complaints and demand. Unless a bank takes care of its customers in the short term it would be difficult to survive in the long run. An important goal of a bank is to service the financial needs of its customers.

Financial Intermediaries are considered as providers of credit and they should always try to meet the needs of their customers in the form of either deposits or loans or foreign exchange. The bank must be prepared to accommodate the special and routine needs of its customers for loans and advances – need that can be very large for corporate customers like construction companies.

The banks should always give the opportunity by informing their customers about the banks new products, services and delivery channels. Introduce of new accounts thereby showing customers how much they care. Service charges need not only be competitive but affordable.

At joint meeting of contractors and officials both the banks and the ministry of finance (Government) organised by the International Bank for Construction and Development (World Bank) it was clear that there was a problem between the providers of credit (the financial Institutions) a the borrowers of funds (construction Companies). Based on the out come of that meeting and the research conducted I would want to make the following recommendations;

a) The banks should take a careful look at the clauses of bonds and guarantees aimed at reviewing them where necessary. There must be some amount of flexibility so that the bond holders would be more confident to do additional business with the bank.

b) The banks should actively chase customers for an extension of expired bond and/or seek for a signed indemnity form beneficiaries where necessary for the released/discharged of the Securities. When customers are obligated they will do their uttermost to repay, When they know that if they make carelessness they are bound to loose their security they will put more seriousness.

The banks should at all time take adequate cash cover and/or easily realisable security before issuing bonds and guarantees. If they don’t have adequate cover then their liquidity level will run low in the event of default.

Policies and procedures must be constantly reviewed to control liquidity risk and other exposures.

Building strong and lasting relationship with key providers of funding. These include companies and other corporate bodies, government and non governmental organisations.

Management should consider making more long term loans(credit creation) where fixed regular repayments are required in order to have a very good quality of assets by effective planning and control.

As going concerns, commercial banks should prevent excessive bunching of maturities so that it is not seen to be drawing from a particular market too much and too frequently. Maturity of assets must be evenly spread as best as possible.

Procedures should be established to ensure that information flow remains timely and uninterrupted, and that they provide senior management with the precise information it needs in order to make quick decisions. A clear division of responsibility must be set up so that all personnel understand what is expected from them during a problem situation.

Attentions should be given to appropriate approval processes, limits, reviews and other mechanics designed to provide a reasonable assurance that the banks liquidity risk management objectives are achieved.

Commercial banks should continue to maintain a positive cash flow as it affects liquidity. This will enable the bank to make up for any short falls in emergency situations.

Commercial banks should continue to adopt the know Your Customer (KYC) procedures. This will reduce both operational and credit risks.

5.5 Recommendations to Government of Sierra Leone

In a bid for national growth and development, the government should be seen as playing the leading role in supporting small and medium size enterprises in the creation of credit facilities in the construction industry. Considering the economic climate of Sierra Leone, about 80 per cent donor driven, there is every reason for the Government to push SMEs to be focus and productive.

The government through the central bank should be bracing up itself by way of reviewing their regulatory controls and supervisory methods to meet the various economic challenges in the country. Government must ensure that sound monetary and related economic policies are in place to protect hard working sierra Leonean’s who want own small scale enterprises in the construction industry that would want to contribute to national development.

Government should encourage and promote indigenous companies to develop. Provide schemes to support private sector development in the country.

In view of international pressures regarding money laundering and also in the interest of protecting indigenous owners of small and medium size enterprises in the country, the central bank must ensure that new entrants in the banking industry are compliant with international ethics and codes of banking practice.

The creation of specific legal framework, which will assist financial institutions to speedily obtain redress from those bad debt customers and dodgy companies operating in the country

The government should include among other things, the setting up of Credit Guarantee Scheme for SMEs especially for in the rural areas. This will enable these small scale construction companies (who do not have collateral security) to obtain loans and overdrafts from the commercial banks. This will help in the decentralisation process and also foster private sector development.

It is widely accepted that the impact of high interest rates may have a negative effect on economic growth and development. High interest rates increases cost of production, it also put upward pressure on public debt servicing costs. High interest rates raise the short term returns on lending money in the country and hence encourage capital inflows. However, in a struggling economy like Sierra Leone government must try to maintain low interest rates in the benefit of its citizens.

5.6 Recommendations to Small and Medium Size Enterprises in the Construction Industry

During this study it has been pointed out that most of the construction companies are having difficulties in getting credits facilities from lending financial institutions in the country. This is due to certain factors that might not be as a result of the construction companies making. Some of the problems that they are faced with is based on the fact of the nature of the trade. Construction loans are considered as high risk loans.

It was brought to the attention of the researcher that Rokel Commercial Bank lending policy guidelines marked construction on 25 per cent on risk consideration. In the reconstruction drive of the nation after the 11 years civil war there is every need for construction companies to be in the forefront of nation building. In view of this fact the researcher is making the following recommendations;

SMEs in the construction business must be seen to be organised. There are 93 registered construction companies in the country. 65 per cent of these are located in the capital city in Freetown. Due to decentralisation, Construction companies can be seen to do well if they are spread in all the districts headquarter towns of the country.

The indigenous owners of construction companies must come together with there resources and form strong units and work with one objective. From the questionnaire sent out must of the companies only have two engineers and there not specialised experts in certain areas. They are engaged in all sort of designed structure. It was noted from one of the officers I spoke with from the bank, that one of the problems that hinders SMEs in the construction industry in Sierra Leone from getting loans and advances is that they lack skilled staff. If they can encourage themselves to merge together then we would all see the benefit to the pivotal role they could play in the national and economic development.

Construction companies must endeavour to train their staff so that the issue of substandard work will be out in the present time. Training is pertinent to any organisations progress. The association of building engineers must try to locally train employees, so that they can produce quality jobs when contracts are awarded to them.

The production of collateral in securing loans from the financial institutions as criteria must be revisited. The researcher noticed the difficulties that starting companies are faced with to produce collateral. The recommendation is for the contractors association to prevail on the Government to intervene in addressing the issue of flexing the terms of the collateral.

5.7 Recommendations for Further Research

This study was geared towards the creation of credit to small and medium size enterprises in the construction industry in Sierra Leone. The main reason for this study was the fact that the author used to work with a non governmental organisation (NGO) in Sierra Leone that was involved in construction work and the office was having a lot of implementation problems with both the banks and the Government asking for different sort of demands like letters of credit, asking for collateral, requesting for things that were not just realistic. There was the need for the work that NGO was going to do but yet there were all these bottlenecks that were slowing the work down.

Construction Industry is a vast industry in the country, I have found it interesting going through this study but there are many areas to the problems that SMEs face in the country. Someone might take a further study into the same area that I have done or would want to take a closer look at different study in the subject matter.


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