One of the interesting aspects of Libya's financial transformation has been the establishment in 2006 of the Economic and Social Development Fund (ESDF), a unique project with unique social aims for Libya's low-income families.
Rather than following traditional social welfare programmes involving direct payments and benefits, the Libyans have adopted a different ideology, empowering the people to participate in purchasing public projects within a programme of privatisations and a widening ownership base.
Distinct target
"The fund has been created to give a chance for all people to participate in the development cycle," says Hamed Arbi El-houderi, ESDF chairman. While governments in many countries talk a lot about a more equitable distribution of wealth, this fund is targeted at the 300,000 poorest families in the country, comprising one-third of the population, and is aimed not only to boost the purchasing power of those families but also to change investment attitudes and to help build the Libyan economy.
While the strategy of encouraging low-income Libyan families to participate in the production process, with the aim of increasing national wealth and improving the families' income, almost seems too good to be true, there is strong social support behind the asset-building approach and there is evidence that the scheme is working.
Commercial basis
Key to the fund is the fact it is not open-ended, there is a limit of 300,000 designated families (200,000 families have already been assigned) and it operates on a purely commercial basis. Also, according to Mr El-houderi, Ld14bn ($11.4bn) has been allocated by the government to the fund and some significant investments have been made.
While Mr El-houderi explains that about one-third of the Ld14bn remains in cash, the ESDF has bought majority stakes in two major banks, Sahara Bank and Wahda Bank, as well as making investments across all sectors. By April this year, the fund had built up a diverse range of investments led by financial investments (Ld2.9bn, 21%), followed by the service sector (Ld2.2bn, 15%), real estate (Ld1.7bn, 12%), tourism (Ld1.3bn, 9%) and industrial (Ld1.2bn, 9%).
Given the 19% stakes held by BNP Paribas and Arab Bank in Sahara and Wahda, respectively, the fund holds about 80% of each bank and expects to do well as the foreign banks acquire bigger stakes over time. It is also creating increasing job opportunities, with fund investments providing 26,742 jobs as of April this year.
Portfolio structure
How do low-income families become investors and asset builders? Under the scheme, which is similar to a trust fund, an investment portfolio is allocated to each family, which has to hold on to that portfolio for at least five years. The ESDF notes that families will eventually be allowed to sell their portfolios, but there will be some restrictions; the fund is trying to build an understanding of shares and trading at a time when few people have any experience in such investments and the country's infant stock exchange only has a handful of listed shares. Nevertheless, the fund and the distribution of dividends is seen as part of a new wealth distribution model that will not leave the poorest members of Libyan society trailing behind.
Under the scheme, there were 184,865 beneficiary families at the end of 2008 and this is expected to grow to 300,000 families by the end of 2009. The ESDF takes dividends and distributes them to the families while reinvesting retained earnings in projects on a purely commercial basis. In 2007, the fund distributed Ld500m in dividends and this distribution figure increased to Ld700m in 2008. This represented a 10% dividend distribution in 2008, amounting to Ld3000 for a three-person family with a portfolio of Ld30,000. Larger families, with five people for example, would have larger portfolios of about Ld50,000 and would receive larger dividends.
Equitable model
The structure of the fund is considered to have many positive economic and social repercussions. Not only is it allowing a wider range of ownership in this relatively undeveloped emerging economy, and boosting Libya's infant stock market, but it is also creating a much more socially acceptable welfare and equitable wealth distribution model.
With Libya's relatively small population of 6 million and relatively high gross domestic product per capita, which was $14,479 in 2008, the country is in a strong position, after years of financial isolation, to implement such an innovative scheme and the role of the ESDF appears to be going from strength to strength.
