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Finance & Banking | Global Arab Network
Libya reforming banking and financial system
Global Arab Network - - Mohammed Almasri
Libya’s process of transformation has been underpinned by a program of institutional reform that has had as its core the development and restructuring of the banking sector.
Since 2005, with the passage of the banking law, the CBL has been implementing a gradual liberalization process of the entire banking system with the aim to restructure and modernize the commercial banks. An important component of the CBL’s strategy has been to open the Libyan market gradually for foreign banks and develop the Libyan banking sector and improve its competitiveness regionally and internationally.

Role of the Central Bank
The CBL started its operations in April 1956, replacing the Libyan Currency Committee that was established in 1951. In 2005, a new banking law broadened the mandate of the CBL and assigned it the following responsibilities: (i) currency issuance; (ii) monetary policy; (iii) financial stability; (iv) reserve management; and (v) supervision of the foreign exchange market. In addition, the CBL has been entrusted to advise the government on macroeconomic policies. The CBL is managed by a board of directors with a broad authority to achieve the above objectives and responsibilities.

A comprehensive program is under way to modernize the central bank, upgrade the monetary policy framework, and establish a functional-based organizational structure. Banking supervision is being enhanced through improving regulations in line with international standards; and strengthening bank reporting and both on-site and off-site supervisory procedures.

Reform of the Banking System
Two public banks, Sahara and Wahda, are now partly privatized with foreign partners, BNP Paribas and Arab Bank respectively holding 19% stakes and management contracts. Both banks have the option to raise their stakes to 51% within 3-5 years if the reform measures and benchmarks agreed on with the CBL at the time of sale are met. The two largest commercial banks, which are still owned by the CBL, Gumhouria bank (which is the result of the merger of the old Gumhouria Bank and Al- Ummah Bank) and National Commercial Bank (NCB), are now listed (15%) on the domestic stock market. As for the community banks, they merged and formed the National Banking Corporation (NBC).

There are nine small private banks among the current list of 16 commercial banks. The First Gulf Libyan bank with share holding divided equally between the First Gulf bank of Abu Dhabi and the ESDF, started operations in November 2008. The Libyan Qatar bank which is owned equally between the Libyan Foreign bank and a Qatari holding company, will start operation in March 2010. And, in 2009, two private banks, Aman and Al Motahad, sold a 40% stake to Banco Espirito and Ahli United Bank, respectively. In addition, there are 19 foreign banks’ representative offices in Libya.
The CBL has a medium-term privatization strategy to gradually phase-out its holdings of the three commercial banks (Gumhouria, NCB, and NBC). The entire banking system will be in private hands by 2011.

Other measures to strengthen the financial system
The anti-money laundering law (AML), passed in 2005, established two supervisory bodies, a Financial Intelligence Unit (FIU) and a national committee for combating money laundering. The main role of the FIU is to investigate all suspicious transactions as reported by commercial banks and make recommendations to the CBL governor. The FIU is also responsible for exchanging information and cooperating with its foreign counterparts on anti-money laundering cases. Whereas, the role of the national committee for combating money laundering is to recommend policies and procedures on all issues related to AML.

The credit bureau, known as the Libyan Credit Information Center (LCIC), started operations in April 2009. In the first stage, the LCIC focused on the commercial side, just corporate and small and medium enterprises (SMEs). Work to include information on consumers will start in 2010. Banks use of the LCIC has been increasing. All banks have been invited to join the LCIC and the expectation is that all of them would have joined by end March/April 2010.

Considerable progress has been made in putting together the many complex aspects of the payment system. In 2008, the CBL went live with a Real Time Gross Settlement System, and the automated clearing house (ACH) and automated check processing (ACP) are in operation now. A deposit insurance fund has been set up, funded by the commercial banks, to protect deposits up to LD100,000. However, the level of protection declines gradually after the first LD 10,000. Interest rates on both deposits and lending are completely market determined. Banks are free to set rates as they see fit.

Developments in the Libyan Banking Sector
Since 2007, the Libyan banking sector has achieved extraordinary growth, deposits almost doubled.
This increase was accompanied by an increase in the equity of banks which grew by about 58% in the first nine months of 2009. The ratio of NPLs to total loans has declined to 18.6 percent at end September 2009 and the level of provisions was approximately 80% of total NPLs at end September 2009.

Regulatory environment
The CBL continues to strengthen the regulatory environment and has adopted a more risk-focused approach to banking regulation and supervision. To that end, the measures below were introduced:

Capital Adequacy Ratio
Banks are required to comply with Basel 1 requirements. Their capital adequacy ratio (Tier 1 and Tier 2 capital) should be at least 8%.

Leverage Ratio
Over and above the capital adequacy ratio, banks should keep a maximum leverage ratio, determined as the ratio of deposits to equity, not to exceed 30.

Credit Risk Limits
• Credit to Deposit Ratio, the total credit portfolio should not exceed 70% of the deposit base;
• Credit Concentration, total loans to one customer or group of related customers (after taking into consideration eligible collateral) should not exceed 20% of the bank’s tier1 capital;
• Placements with foreign banks should satisfy the following criteria: (i) foreign banks should be rated A- or better; (ii) deposits at each foreign bank abroad should not exceed 70% of Tier 1 Capital; and (iii) total accounts and placements deposited in all foreign banks outside Libya should not exceed 200% of Tier 1 Capital.

Liquidity Ratio
Banks are required to keep a minimum liquidity ratio of 25%, defined as total liquid assets over total deposits and other liabilities.

Required Reserves at CBL
Banks are required to maintain minimum reserves at CBL equal to 20% of total deposits and other liabilities; Besides the above limits, there are also several other regulatory ratios that the CBL will be introducing in the period ahead, in line with international standards and best practices.

Banking Opportunities
The restructuring of the Libyan economy, the increased role of the private domestic and foreign investors, and the large public development budget planned over the medium-term are providing banks with excellent opportunities to expand their business in Libya.

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