In 2012 Libya established laws relating to Islamic banking and this year, the central bank announced its intention to issue Sukuk and Islamic banking licences: creating an exciting forecast for the future of Islamic finance in Libya. REBECCA SIMMONDS explores.
Legal and regulatory
Under the regime of Muammar Gaddafi, Islamic finance was not encouraged in Libya. However following the events of the Arab Spring and the subsequent political changes, in 2012, following the establishment of the National Transitional Council, Law No. 46 of 2012 introduced Islamic banking to the country. In January 2013, the legally elected General National Congress passed Decree No. 1 of 2013 banning the charging of interest on loans granted to individuals (the decree will also be applicable to corporate loans from 2015).
The General National Congress has been working, with help from the World Bank, towards the development of a well-structured framework to accommodate Islamic finance and ensure it coexists effectively with conventional banking products. There has also been a move to update a 2005 law to allow foreign banks to operate in Libya.
Libya scored 187 out of 189 in the World Bank’s Doing Business 2013 report. Obtaining medium-term financing is problematic, due to the lack of clarity regarding the implementation of the reforms to loan regulations.
In November 2013, the Libyan Ministry for Economy signed an agreement with the Islamic Corporation for the Development of the Private Sector (ICD), a member of the Islamic Development Bank (IDB) Group, to structure several Shariah compliant finance mechanisms that will address the issues faced by SMEs. No details regarding these finance mechanisms have been released, but the government has stated that their implementation will assist in the economic development of the country, and generate employment as well as improve opportunities for business.
Banking and finance
Prior to the civil war, the banking system was dominated by four state-owned institutions and most transactions for ordinary Libyans were limited to cash deposits and withdrawals. Given this, Libyan banks remain substantially under-developed and the government, along with the banking and finance industry, is working to strengthen the infrastructure of the sector in order to improve operations and products. Currently the 16 banks operating in Libya (which include seven foreign banks) offer mainly conventional banking services with some also providing interest-free Islamic banking through Shariah compliant windows. Al Baraka Group, HSBC, National Bank of Abu Dhabi (NBAD) and Standard Chartered Bank all have representative offices in Libya; while BNP Paribas holds a 19% stake in Libyan bank Sahara. In November, the central bank announced that it planned to issue three Islamic banking licences in 2014 with five more institutions currently being evaluated, although the names of the banks were not released.
In September 2013, Libya announced plans to fund works to facilitate a large increase in oil refining and chemical production. The cost estimate for the development is approximately US$60 billion and borrowing funds for these works, rather than using the country’s own reserves, would allow the government to continue to utilize its own funds on infrastructure development. As such, the Libyan government is considering funding the oil refining works with a sovereign Sukuk issuance.
Libya’s central bank is also progressing towards seeking a credit rating from S&P and has appointed a company to assist in the process. It has been reported that the chief economist of NBAD, Giyas Gokkent, predicts that given Libya’s lack of debt and the revenue generated via oil, that Libya is likely to achieve a rating of ‘bbb’ on the provision that security conditions improve.
Continued civil unrest has deterred many companies from making the move to invest in Libya. The government is paving the way towards privatization with the promise of changes to investment laws, to bring legal protections in line with international standards.
The UK sees significant potential in Libya’s private sector and growing economy. Libya is also promoting its Islamic banking system as a draw for countries like Bahrain that have investments in Libya to build on; Bahrain’s Al Ahli United Bank holds a 40% stake in Libyan United Bank, and many banks in the GCC region are looking towards Africa as a region for expansion.
The change to the banking regulations to introduce Islamic banking caused a lot of initial confusion in its implementation, with conventional banks freezing the issuance of loans, and a slow start to the provision of Islamic products to fill the gap in the market. This is slowly resolving itself, as the government introduces more regulation to ease the transition to 2015 when non-Shariah compliant banking is completely phased out.
The GCC offers opportunities for Libya with Crescent Petroleum, based in the UAE and owner of a fifth of Dana Gas, reporting interest in expansion into the country and NBAD has applied to the Libyan government for a banking licence.
The business and banking sectors are areas that the government is focused on developing; with a 97% Muslim population, Islamic finance has the potential to generate huge revenue, not only from financial products and transactions, but also the processes that surround them, such as training, consultation and thought leadership.
Libya’s challenges stem from the current instability within the country and the pace of change to regulations that facilitate business. If these two issues can be overcome, the transition in 2015 to a completely Shariah compliant banking industry provides many opportunities for the banking sector in Libya to grow and take advantage of the current need GCC banks have to expand.