By Amr O. Farkash.
25 August 2013:
In short the answer lies within the deposits of the commercial banks in the Central Bank . . .[restrict]of Libya (CBL) that amount to a total of LYD 35.6 billion as of 31st of March 2013.
Interestingly, after the decree of the GNC to halt the current conventional banking credit, due to the introduction of Islamic banking practices, the picture looks even more gloomy, as there is no real transitional road map from current conventional practices to the Islamic one.
The Libyan budget for this fiscal year (2013) amounts to LYD66.8 billion and the amount of deposits within the CBL are about half of the figure of the budget. Now, let’s go further with our imagination and picture half of the figure of those deposits (35.6/2= LYD 17.3billion, almost double what is given out in credit now to the private sector) being injected in the economy in value added activities, the answer will be the economy will thrive.
On 31st of March 2013, according to the CBL the broad money (money supply) amounted to LYD 64.7 billion, and again half of this money is returned to the CBL in form of deposits. It is quite obvious we have a problem in the banking intermediation process in Libya. This is not a problem post February 17th Revolution; it is rather a historical one, present from the time of Qaddafi.
If we investigate the figures we see that the situation cannot be expected to improve with banking deposits set to consistently outstrip the growth in loan facilities. Aside from the deposit taking function, the Libyan banks’ main function in the market is providing “trade finance.” Thus, the function of injecting liquidity from surplus units to deficit units in the economy is not really happening.
The trade finance business is the backbone of the Libyan banking industry and is the major revenue generator for banks along with FX trading. This of course is attributed to the amount of import and export business we have in Libya, as well as the small activity of the private sector in the total economy.
Libya has the lowest loans to deposits ratio in the MENA region (23.4% as of March 2013) and interestingly enough, if we take the largest private bank in Libya by asset base (Bank of Commerce & Development /QNB) we will find the figure in March 2013 falls to 11%. The intriguing question here would be why the largest private bank is failing in matching the local industry average and the Mena region average (circa 70%).
According to a Gemini Investment management report, the UAE had in April 2013 a loan-deposit ratio of 90%, whilst Qatar had 102% and KSA with 85% for the same period. Thus Libya is lagging behind by at least 60 percentage points to those three GCC countries.
So where is the flaw in the system and why does the largest private bank in Libya have such a low ratio?
The answer lies in three critical pillars that are missing in Libya and they need to be tackled swiftly in order for the industry to begin working efficiently:
- Legal protection for creditors
During Qaddafi’s era, rule of law in the financial sector was seldom effective. This in turn left banks very cautious in lending to private entities, as well as individuals. Most banks preferred and still prefer lending to the public sector, public sector employees and a thin line of the private sector that provide real estate collaterals.
In essence, banks do not trust the system nor do they trust the credit worthiness of the people, causing the lending process to fester.
2. Credit Bureau
A functioning bureau would evaluate risks and provide a decision-making framework in deciding whether to allow or halt credit. Whilst Libya’s small population depends in large part on the local reputation of businesses and individuals, the banking world does not. A fair structure to evaluate each case on its own is very much needed. Creating a credit bureau is a good start; however on its own it cannot function unless policies, procedures and laws are effective.
3. Solid Credit Applications
The Libyan private sector lags behind in its financial awareness. Most of the businesses in the private sector apply for credit knowing that they need real estate collateral, to start with, but they fail to grasp the idea that credit applications are often decided upon cash flow. Banks simply need to know and ensure that the borrower will be able to repay his debt in a timely manner.
Therefore, the private sector needs to supply applications that provide the bottom line to whether they can repay their debt or not. This can be tackled by focusing on the financial management function in the private sector by training it and making it aware of the requirements of banks and how to prepare and package financial information in credit applications.
On the other hand, banking credit officers need to be made aware with the tools that would enable them to assess partially the applicants on their financial sounding and plans.
If the above three processes are built into the financial sector, then credit in the Libyan market will grow as would the risk. Policymakers should accordingly ensure that checks and balances are in place and up to the task, so that the gains achieved are not adversely affected by bad practices and higher risk portfolios.
Amr O. Farkash is Director at OEA Capital a Libyan investment and corporate advisory firm. [/restrict]
