Ongoing investment in Libya is driving expansion of banking assets: 36% year-on-year in April 2009. The banking sector is dominated by the Libyan Foreign Bank (LFB) and four state owned or controlled commercial banks (85% of assets).
Banking Law of 2005 established the Central Bank of Libya’s independence and role as regulator. At present, the CBL is cautiously reforming the banking sector.
Libya’s financial services industry remains highly protected, according a recent European Union report. Shares in some of the state banks have been offered to Libyan citizens, and private banks are permitted, but the banking sector has not been opened to foreign institutions; Islamic finance is largely absent from the market.
The most significant reforms in the service sector over the past decade have occurred in banking and finance. Banking Law No.1 of 2005, along with the Anti‐Money Laundering Law No.2 of 2005, are aimed at creating a new legal framework for the banking system in Libya.
The country’s five public banks were recapitalised and its four private banks licensed. The Bank of Commerce and Development is the most substantial of the four private banks and has led the way in the modernisation of Libya’s banking sector by introducing modern services such as ATMs and credit cards. Twenty-one regional banks have been merged, banking supervision reinforced, interest rates and foreign exchange partially liberalised, and the exchange rate unified.
The year 2007 saw the start of a strategy announced by the Central Bank in 2004, to develop and modernise the banking system to meet international standards.
Minority stakes of two Libyan banks were sold to foreign investors. The first step was to sell off a minority stake in Sahara Bank, the second largest commercial bank with total assets of around $3.6 billion. BNP Paribas SA won a bid for the privatisation of Libya's Sahara Bank with 19% of the shares, for about €145 million with the option to raise their participation up to 51% in three to five years.
The Wahda Bank sale was structured in the same way as the previous deal, with the offer of an initial 19% stake.
As the EU report says, liberalisation of financial services offers potentially significant economic benefits along with high risks. Significant short term adjustment impacts are likely to be experienced as the domestic industry contracts in response to increased competition, and careful phasing will be needed to minimise these. Strong regulation and supervision will remain essential, to avoid a significant increase in the risk of financial instability and potential for major adverse economic and social impacts.
State-owned and private commercial banks offer a similar product range. Retail services include current and savings accounts, loans and money transfer. Corporate customers are offered trade finance and cash management services. Banks may open l/cs and guarantees for foreign corporates operating in the country.
The CBL has been working with the IMF to create a structured capital market and the first sovereign bond issue is expected in 1-2 years, according to observers. There has been a gradual improvement of banking supervision with centralising data and improving processes.
Historically, Libya has lacked a credit culture: banks sat on liquidity and the limited lending activity that existed was to the public sector, and was poorly controlled. In response, the CBL has been working on a central Credit Bureau for the last year.
The database has been in operation from April 2009 and 25% of individuals and corporates have been assessed.
The Credit Bureau will improve comprehension of lending risks, but also seeks to encourage lending; stimulation of economic growth and enhancing banks’ profitability. The project is supported by a team of international specialists and a
38% increase in lending is expected in 2009.
The CBL has been seeking to upgrade technology supported by international experts.
A project currently coming to fruition is the National Payment System; previously, payments were slow and unreliable, sometimes even made through another country.
Order 19 (of May 2009) allows local banks to form strategic partnerships. Up to 49% ownership by a foreign entity is permitted. Foreign branches and representative offices are now allowed. In 2008, a number of foreign commercial banks won approval to open their representative offices, including two UAE banks: Abu Dhabi's First Gulf Bank (FBG.AD) partly owned by the Economic and Social Fund of Libya and National Bank of Abu Dhabi (NBAD), one bank from Qatar Masraf al rayan, interested in the strategic geographical location of Libya as well as Egyptian investment bank Beltone Financial, also in partnership with Economic and Social Fund of Libya.
In addition, seven other foreign banks currently operate representative offices in Libya: Bank of Valleta (Malta), UBI (France), Bawag (Austria), BACB (UK), the Housing Bank for Trade and Finance (Jordan), Suez Canal Bank (Egypt) and ABC (Bahrain).
In March 2005 a new law allowed the opening of branches of foreign banks for the first time, with minimum capital of $50 million. Foreign banks have expressed interest, and HSBC and Qatar National Bank have opened branches. BACB has started discussions about the acquisition of a stake in the Bank of Commerce and Development. Others reported to be interested are Standard Chartered, Crédit Industriel et Commercial and Citigroup.
Overall, despite progress, the country’s banking system remains highly centralized. Libya has looked to a number of sources of foreign advice in pursuing reform. In October 2008, a cooperation agreement was signed between the Libyan Stock Exchange Market and London Stock Exchange, providing for training teams from the Libyan Stock Exchange in Tripoli and London to enable them to run stock market operations.
Limited deregulation of the insurance market began in 1999 with the creation of the United Insurance Company as a joint public/private venture, and approval has been given for two private sector insurance companies.Global Arab Network
Material for this report comes from a draft final report published as part of the EU-Libya Free Trade Agreement negotiations. Additional material comes from a recent talk on Libyan banking by Michael Parr, the Chief Executive of the British Arab Commercial Bank (BACB).
This article appears in the fortnightly bulletin of the Arab-British Chamber of Commerce (02/09/2009)