The aftermath of the Libyan revolution presents significant opportunities for policymakers in the country to create stronger political and financial institutions. In this transitional environment, many Libyans have called for Islamic banking services to be offered. Layla El- Wafi and Assad Riyany discuss the Libyan financial landscape and the prospects for Islamic finance in the country.
There is no doubt that Libya is a country in transition and renewal. Following the popular uprising in February 2011, the multitude of large billboards and posters featuring Colonel Gaddafi, Libya’s dictator of 42 years, has been replaced with photos of candidates taking part in the first free elections in decades and messages of national reconciliation.
After decades of isolation under Gaddafi’s autocratic rule, the Libyan market re-opened in 1999 following the normalisation of diplomatic relations and the suspension of UN and EU sanctions against Libya. From this time the former regime pursued a haphazard investment plan to rebuild or put in place much-needed infrastructure in numerous sectors including oil/gas, social housing and commercial building, transportation, water/desalination, health, education, telecommunications and tourism. With Africa’s largest proven oil reserves, Libya exports almost 70% of its oil production to the EU primarily through a direct pipeline to Italy. The Gaddafi regime had claimed of plans to diversify the economy and promote other sectors such as tourism and finance but in reality, these claims remained just that.
Today, Libya is experiencing a sensitive transitional period in which a new democratic political system is expected to emerge. The democratically elected General National Council (Libya’s interim parliament) is expected to select a new government by the end of October. It is widely expected that the new administration will carry forward many fundamental reforms to all aspects of public life. Since the appointment of the new governor of the Central Bank of Libya (CBL) – Saddek El Kabeer – reform of the banking and finance sector in Libya has gathered momentum. The banking and finance sector in Libya suffered a great deal of neglect under the old regime as it was reduced to a basic system that contributed very little to the economic development of Libya’s economy. As a result, the CBL is in the process of conducting an extensive review of all banking laws with the aim of implementing international standards and making Libyan banks a major contributor to the large-scale development needed in Libya. These reviews are conducted in cooperation with international agencies such as the World Bank. The introduction of Islamic finance in Libya is gathering momentum as Libya’s conservative Muslim society looks for alternatives to interest-based conventional banking.
Banking Practice and Culture
Under Gaddafi’s rule, Libya’s banking system was dominated by a handful of state-owned institutions tightly controlled by the regime. Libya’s economy was always a cash-based economy where most Libyans did not use credit cards and their banking practices were largely limited to cash deposits and withdrawals. Due to the former regime’s chronic inability to diversify the economy away from the oil and gas sectors, Libyan fiscal policy continues to be dominated by oil revenues generated to support the huge burden of the bloated civil service and the extensive subsidy system. Despite all of these problems Libya’s macroeconomic position remains strong and should continue to be so in the medium term, largely of course because of the high international price for Libya’s crude oil and the recent discovery of natural gas reserves which has yet to be fully exploited.
Large commercial Libyan banks were owned by the state until 2005 when the Libyan government decided to sell two large state-owned banks (Al Sahari Bank and Al Wahda Bank) to private investors. However, by 2006, it became clear that the divestment of these two banks was not successful and the CBL switched its focus to exploring the possibility of allowing foreign banks to buy into Al Sahari and Al Wahda banks. After an auction process, BNP Paribas acquired 19.5% of Al Sahari Bank and Arab Bank acquired 19.5 % of Al Wahda Bank. In 2010 the CBL ran an auction to grant the first banking license to a foreign bank. The auction was won by Unicredit, which gave it the right to open subsidiaries in Libya.
Current Status of Islamic Finance and future prospects
Under the previous regime, there was not much activity in Libya by way of Islamic finance because of fears that the government would lose its control over banking regulation to the religious establishment and encourage political dissent. However due to increasing domestic demand post-revolution, the activity of Libyan-owned banks in the Gulf (for example Arab Banking Corporation) where Islamic finance is more prevalent and the increased investment by Gulf banks in Libya, together with recent measures taken by the CBL to promote Islamic banking, the industry is set to grow.
In May 2012, a new Islamic banking law was approved to facilitate the development of Islamic finance in Libya and it is expected to be implemented by the end of this year. Earlier in the year the Libyan government signed a memorandum of understanding with the Islamic Development Bank (IDB) to establish a framework of cooperation and exchanges. To date, this has included a visit by representatives from the IDB’s Islamic.
“While IF experts do not expect the entire Libyan financial system to become fully Shari’a-compliant, they agree that the opportunities for consultants, training firms and banks which specialise in Islamic banking are plentiful in a country which has huge oil wealth and holds tens of billions of dollars in offshore assets.”
Corporation for Insurance of Investments and Export Credits to help develop Libya’s private sector and local expertise in exports. In August the CBL, in cooperation with the IDB, facilitated the first in a series of Islamic banking workshops to explore the financing of small and medium-sized enterprises and establish strategic partnerships between various stakeholders including commercial banks, governments and NGOs.
At a recent conference of Arab central bankers in Kuwait, the CBL Governor Saddek El Kabeer told reporters of the high demand for Islamic finance in Libya and the CBL’s efforts to set up a “road map” to facilitate its operations. “The demand is so high in Libya so we set up a higher committee for Islamic finance… now they are working to set up a road map for Islamic finance in Libya,” he said. He also reiterated that the authorities envisaged several options for Islamic banking services. One would be to allow conventional banks to open Islamic branches or ‘windows’ and another would be to permit conventional banks to become Islamic. The CBL is also considering the introduction of a special licence for Islamic banking. The licensing options are still under discussion because authorities have yet to agree on capital requirements.
While Islamic finance experts do not expect the entire Libyan financial system to become fully Shari’a-compliant, they agree that the opportunities for consultants, training firms and banks which specialise in Islamic banking are plentiful in a country which has huge oil wealth and hold tens of billions of dollars in offshore assets. The country’s main sovereign state fund, the Libyan Investment Authority, is worth an estimated US$65 to $70 billion. Local banks have already taken steps to meet the rise in demand for Islamic finance. For example, Gumhouria Bank (Libya’s largest commercial bank) has opened a number of branches that offer Shari’a-compliant products and is in the process of introducing new Islamic products to their clients (currently they are only offering murabaha products).
Even before the change in the political regime, Islamic banks had been taking an interest in Libya. The CBL held meetings on Shari’a-compliant finance under the previous regime, although nothing materialised at that time. Today, offering Islamic financial services in Libya is high on the agenda for many Shari’a-compliant banks, particularly those based in the Arabian Gulf. Common language and, to a degree, culture, would help, as would the familiarity of banks in Bahrain, Qatar, Saudi Arabia and the UAE with arranging Sukuk, helping manage oil wealth, and organizing project finance.
As Libya’s Islamic finance sector grows there will be opportunities beyond banking. Libya has a relatively narrow set of technocrats and bankers with experience in international finance, let alone Islamic banking. This means that CBL will have to rely on foreign advisors and Islamic scholars to help set up the new system and monitor its development. This will be sufficient as a short-term measure to launch Islamic finance in Libya; however, in the longer term, and in order to build a strong and vibrant sector, the country will need to educate and train local professionals and build national capacity.
Conclusion
Despite the current political and security challenges, there are many opportunities for business in Libya, especially for financial institutions. We believe that reform of the banking and finance sector will continue to be a priority for the CBL, which has already taken major steps towards pushing the Libyan banking sector into the 21st century to make it a positive contributor to the development of the new Libya.
Islamic finance in Libya is most certainly a growth sector and given London’s role in Islamic banking and finance, it will likely be a key player in this development. In order to mitigate the risks and reap the rewards of doing business in Libya, an appreciation of laws including interim provisions as well as international tax, investment laws and treaties is required. Investors should not be put off but should seek specialised advice and guidance.
Layla El-Wafi is an Associate at Addleshaw Goddard LLP in London specialising in banking. She has an active role in the firm’s MENA business development team advising on trips and transactions with a focus on Libya.
Assad Riyany is the Head of Treasury Sales at ABC International Bank-London which is the European subsidiary of the Arab Banking Corporation Group. He has extensive knowledge of Libyan financial institutions through his work covering the Libyan market for the past ten years as well as his position as a board member in one of Libya’s commercial banks.
