Libya should be a picture of economic vitality. With vast hydrocarbons reserves, a highly liquid banking sector and a small population, the country’s fundamentals are strong. Instead, the country's post-conflict transition continues to be blighted by political infighting, militia-led violence and economic mismanagement. These ills have led to a massive reduction in oil output, from about 1.6 million barrels per day at its peak to less than 300,000 barrels today. For a country that is completely reliant on hydrocarbon income, the impact has been severe.
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According to some estimates, Libya's central bank has spent about $30bn of its $130bn in foreign currency reserves propping up the economy over the past year. This problem is set to worsen, as the national legislature approved a huge but overdue 2014 budget of $47bn in late June. Despite being a marginal reduction on 2013 numbers, spending by Libya’s transitional governments has ballooned in recent years to accommodate a bloated public sector, upon which it draws significant legitimacy and support.
“Public spending is diverted away from projects that could stimulate growth of the non-hydrocarbon sector towards measures aimed at enhancing social cohesion, such as spending on subsidies and public sector wages,” says Oliver Masetti, an economist covering Africa with the global risk analysis team at Deutsche Bank.
New realities
In this milieu, Libya’s banking sector is adapting to new realities. With political paralysis dogging the country’s immediate outlook, a new emphasis is being placed on the private sector’s potential to nurture security and development. “Growth and investment has to be a tool for promoting security,” says Adel Dajani, a director at Aman Bank, one of Libya’s leading private lenders.
As such, the key question facing the country today is how best to stimulate its private sector. To date, the transitional authorities have failed to invest in much-needed infrastructure development. This failure has been compounded by ongoing industrial disputes at major oil terminals and rebel takeovers of other major hydrocarbons facilities. Cumulatively, these events have pushed the country’s banks and its capital-starved private sector into a difficult position.
“The banking system is flush with liquidity. What Libya really needs is institutional reform as well as a different kind of leadership to move the country forward. The political classes lack a long-term economic vision, so the private sector has to take the initiative if we want growth and investment to resume,” says Mr Dajani.
According to figures from the Central Bank of Libya, from February 2014, assets held at the country’s commercial banks amounted to about $78bn, while central bank certificates of deposit held by these institutions amounted to $35bn. Despite this underlying strength, lending rates have been stunted since the early 2000s. Lending to the private sector is very low, at about 10% of gross domestic product, according to research from Deutsche Bank.
Private support
To date, financial support for private enterprises has largely come from the country’s private lenders, despite being dwarfed in size by their larger state-backed counterparts. To some extent, this support has emerged out of necessity. Under the current system, Libya’s state lenders enjoy exclusive access to most government contracts, even though this work has diminished in recent years. This system is supported by the country’s central bank, whose board members also hold senior positions in Libya’s largest state-backed lenders.
“Private banks are focusing their activities on the private sector which has posted double-digit growth over the past three years. In many ways, it is the lone engine of economic growth because the government has failed to spend a single dollar on the ground in terms of infrastructure projects,” says Naaman Elbouri, chairman of local lender Saraya Bank.
While this private bank-private sector relationship is deepening, it has not been immune from the systemic political and cultural challenges afflicting other parts of the Libyan economy. In particular, the banks have been forced to pursue ultra-cautious lending strategies while the national land registry remains closed. This closure has caused havoc for the country’s financial sector. For nearly three-and-a-half years, Libyan banks have been unable to determine the true status of a property used against a loan. Similarly, existing paper deeds are deemed relatively worthless due to the high number of forgeries and misappropriated documents in circulation.
Lacking the ability to secure collateral against their loans, the banks have resorted to trust in familiar but informal relationships. "Lending is based on customers’ goodwill and far less on a company’s solid financials as it should be in the absence of security over fixed assets,” says Mr Elbouri.
Compounding this problem, poor levels of corporate governance are also hampering lending activity. In response to decades of onerous tax regimes, Libya’s private sector has taken much of its activity off the books and into the shadow economy. This has created a strong culture in which off-sheet activity has become the norm, making it difficult to lend against existing cash flows.
“Nobody should be blaming the banks. They will only operate in a transparent, reliable environment,” says Husni Bey, chairman of HB Group, one of Libya’s largest private conglomerates.
On the positive side
Despite this daunting constellation of challenges, Libya’s situation is not without reasons for optimism. In particular, the dominance of the state-owned banks, which account for about 85% of the banking sector’s total assets, appears to be on the wane.
“The private banking sector in Libya will [eventually] surpass the government-owned banks in terms of size and scope of their activity. The state banks are too large, their problems are huge and they are slow at taking action. So it will be easy enough for the private banks to compete against this, even though the state-owned banks are guaranteed all government-related contracts,” says Mr Elbouri.
As this power transition unfolds, it is expected to unleash greater lending and investment opportunities on a more competitive basis. Yet, despite its difficulties, Libya’s banking sector is no stranger to innovation and progress. In the midst of one of the most troubling years since the fall of former ruler Muammar Gaddafi, private lenders in particular are investing in their mobile and automated banking infrastructure with an eye to longer term growth.
“We have 10 mobile banking units going all over the country – and we’re one of the few African banks to have this capability. We have now introduced the first automated branch in north Africa, so we are quite proud of what we have achieved under difficult circumstances,” says Mr Dajani at Aman Bank.
Sentiment remains bullish among the country’s bankers. Despite the deteriorating security situation, in which most lenders now employ armed security to protect their branches, most are looking to longer term development opportunities. In May this year, Libya became a member country of the European Bank for Reconstruction and Development, the first step on the path towards receiving external financing for the country’s private sector. This type of multilateral engagement could be a significant catalyst for economic development over the long term.
Moreover, the prospects of fixing Libya’s broken land registry are also encouraging. “The number of property deeds in circulation is about 3 million to 4 million so I don’t think it will take years to have the land registry in order. With today’s technology it should be a matter of months. What is needed is the political will to execute this,” says Mr Bey at HB Group.
Instability fears
Nevertheless, this tone of optimism must be tempered against the immediate prospects of continued political instability. The near-term outlook for Libya’s political and macroeconomic environment is poor. Meanwhile, the country’s lawmakers are forging ahead with plans to transition the banking system to be fully sharia-compliant in the coming years. This change, initially scheduled for 2015, is set to be postponed as discussions between the Central Bank of Libya and the country’s lenders continue.
“There is a risk that if the changes are implemented too quickly, there [will be] too little time for the banking system to adopt and offer enough sharia-compliant instruments. This could further constrain credit extension in the medium term,” says Mr Masetti at Deutsche Bank.
Libya’s potential is undeniably vast. Yet, for now, the void in political leadership is stunting its growth prospects. Until a viable political consensus for the country’s development emerges, it seems that the domestic banks will be facing an uphill battle in their mission to revive this troubled state.
