Mark Dempsey was commissioned by the London-based Legatum Institute to draw up a paper on Libya’s Central Bank and banking system. . . .[restrict]He interviewed private and public banking representatives, including a small number of staff from the Central Bank, as well as others working in the financial sector, from private equity and investment advisory firms, and financial journalists. He here gives his views, which were presented at at conference in London entitled “Reforming Libya’s financial sector, and the politics that go with it”.
London, 27 December, 2013:
Four years travelling in and out of Iraq, working for a development finance non-profit agency on a programme of technical assistance for the Central Bank of Iraq, left me unsurprised at what I heard during the course of my interviews in Libya.
The banking system is a state-dominated and inefficient mess. Nevertheless I am ultimately far more optimistic for Libya than for Iraq that the necessary reforms for Libya’s banking sector will be made.
From the outset it was easier to meet people in Libya – access is always going to be key. There is, too, an overwhelming realisation of two factors: that change is needed and that reform of the financial sector and financial intermediation are vital for job creation.
However, seemingly arbitrary decisions by the Central Bank of Libya (CBL) have not stimulated confidence in the authorities. In particular, a number of people with whom I spoke were dismayed at the law to make all financial institutions deal solely as Islamic finance institutions. Dismay gave way to incredulousness at the manner in which the General National Congress (GNC) and the CBL made the decision with no consultation sought whatsoever from the private-sector community.
Based on thoughts of the interviewees there are a number of changes which could be made quickly and would impact investment and growth positively. Libya is a state in transition where creation of jobs is a priority in an economy which is suffering chronic losses on a daily basis due to the prevalence of militias who have no interests but their own rather than Libya’s. The blocking of exports of Libya’s oil, the most important source of revenue, has not only crippled the economy but also demonstrated the need for economic diversification and again highlighted the disproportionate reliance on oil revenues on behalf of the state.
Immediate recommendations to start tackling reform include:
- Loosen regulations around financial institutions to allow them to deploy their surplus capital.
- Cap the amount of deposits which banks may place on the over/night (O/N) at the CBL. While the one-percent rate is low and should be an incentive for profit-seeking banks to lend rather than keep cash with the CBL, the highly leveraged position of these banks means that they can deposit with the CBL up to 20-fold their equity (based on the most recent CBL regulatory reports, LD 36 billion is held as time deposits – while the total equity of all the banks is LD 3.5 billion) and the one-percent return would translate into 20-percent return on equity. The rest of deposits are partly invested as loans but mostly used to finance trade, which earns reasonable fees – making the banks overall attractive investments for stakeholders. The CBL can play a very important role by adopting policies that would incentivise banks to lend and invest more. Such policies should not only encourage more lending but also investments with a long-term view of creating a proper financial sector and capital market.
- Engage the private sector institutions for policy advice as to how get capital flowing and lending to SMEs and the general public.
- Build on existing work (from 2007) to establish an independent credit bureau as a matter of urgency. This would allow for risk-based decision-making when lending.
- As a matter of utmost urgency, establish an independent committee to start seriously considering the issue of property rights and the re-establishment of a property registry. It has been suggested looking at East European states such as Romania to see how they dealt with such a contentious and complex issue. Libya has similar macro challenges to states such as Romania after the fall of communism.
- Complete economic dependence on the state, meaning private sector and financial institutions never had to develop or compete;
- A bloated public sector;
- The security apparatus engendered distrust amongst the general population following the fall of the dictatorial regime.
- And two particular examples that make Romania a possible case for further study:
- Ceausescu like Gaddafi created a culture of personality around himself;
- Romania also had a bloody post-revolution period.
- Establish an independent banking academy, which is funded by the banks themselves to start building capacity within the financial sector.
- Incentivise foreign banks to come to Libya. The knowledge and technology transfer they offer will be of huge benefit as the market opens.
- Finally, in order to foster confidence from the banking sector and the public at large, the CBL needs to make governance a priority. This translates as the CBL and its board divesting all ownership stakes in any financial institution.
Needless to say, it is still relatively early days following 42 years of highly personalised autocratic rule. But these are the times when the foundations are laid that will shape the future of Libya. Time is of the essence. It is incumbent that law makers use of all resources at their disposal to ensure a prosperous Libya which will benefits all.
Such resources include recognising the tremendous knowledge that Libyan returnees bring. There are many such individuals in the financial sector. Libya needs to recognise that it is lucky to have them back. Iraq is not in such a position.
Opinion articles do not necessarily reflect the views of the Libya Herald [/restrict]
