Crafting Banking Sector Stability Index for Sierra Leone

Stability in the banking sector of Sierra Leone is crucial because it gives confidence and trust in the banking ecosystem. However, it is vital to assess the health conditions of the sector, by means of a composite Banking Sector Stability Index (BSSI) for Sierra Leone. This BSSI will supplement the suite of early warning indicators of the financial system and offers a platform to keep policymakers informed about the dynamics in the ecosystem of Sierra Leone. This study developed a Banking Sector Stability Index (BSSI) for Sierra Leone, using a nest of financial soundness indicators and gauges the health of the banking ecosystem with short term forecasting tendencies conditions in the banking ecosystem. It applied statistical and Conference Board Methodology normalization processes on Sierra Leone’s banking data from 2019Q1 to 2022Q4. The resultant index traced fairly well the episodes of crisis in the system over the study period. It could, therefore, be employed as a complementary regulatory policy tool to gauge potential risks to enable monetary authorities take timely precautionary policy measures to assuage crisis in the banking ecosystem.