The purpose of this study is to investigate the
presence of a bank lending channel of monetary policy in the Sierra Leone. This
study uses a dynamic panel data method namely generalized method of moments (GMM)
procedure, employing quarterly bank-level data spanning the period 2014-2018,
to empirically investigate whether or not changes in the monetary policy in
Sierra Leone influence bank lending behaviour, i.e., existence of a bank
lending channel. It also examines the extent to which bank-level characteristics-size,
liquidity and capital-affect the effectiveness of the monetary policy. Our
result revealed that the monetary policy rate significantly and negatively
influences banks’
loan supply. Specifically, a 100 basis point increase in the monetary policy
rate leads to a 0.43 percent decrease in loan supply to the economy. This lends
support for the existence of the bank lending channel of monetary policy
transmission in Sierra Leone and that banks do play a role in Sierra Leone’s
monetary transmission mechanism. In addition, the interaction term between
monetary policy variable and size has the positive sign and is statistically
significant. The positive sign of the interaction term with size is consistent
with the theoretical explanation of the bank lending channel, which assumes
that lending volumes of larger banks are less sensitive to monetary policy
conditions than that for smaller banks. Furthermore, commercial banks’ loan
supply in Sierra Leone is also explained by past loan supply, economic activity
(Real GDP) and inflation. However, we find that liquidity and bank capital do
not influence banks’ loan supply. The statistical insignificance of the
interaction term with capital and liquidity suggests that bank capital and liquidity are not a source of
asymmetric response of banks to monetary policy stance. The main policy
implications that can be gleaned from this study are that, in assessing the stance of the monetary policy,
beside the Monetary policy rate, it is important for the Central Bank to
monitor the micro-dynamics of individual bank characteristics, as it relates to
size, in order to enhance the efficacy of monetary policy impact on the real
sector in Sierra Leone.
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