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WorldMarch 1 2012

Libya: what now?

As Libya emerges from 42 years of state domination under former leader Muammar Gaddafi and an eight-month civil war, the country’s banking sector faces opportunities and challenges in almost equal measure. 
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Libya: what now?

Like all sectors, Libya’s banking market was severely disrupted by the eight-month civil war that saw the death of former leader Muammar Gaddafi, but as the lifeblood of the economy, a smoothly functioning banking sector is crucial to rebuilding the country. 

The immediate challenge for the authorities is to restore liquidity after Libyans rushed to withdraw their cash from the banks during the revolution that began in February 2011 and ended on October 23 when the country’s liberation was declared.

Money rush

The Central Bank of Libya (CBL) says a total of Ld7bn ($5.6bn) was withdrawn during the war, while Mr Gaddafi’s entourage seized a further Ld3bn to Ld4bn. According to the International Monetary Fund, currency in circulation doubled from Ld7.5bn at the end of 2010 to Ld15.4bn at the end of 2011. As a result, vault cash held by the CBL and commercial banks is largely exhausted.

“The biggest challenge today is winning back the trust of Libyans towards the banks and working out how best to develop the banking sector in Libya in the future,” says Essam Allag, deputy general manager of Gumhouria Bank. “Many Libyans are hoarding a lot of cash and because of the current security situation which is still quite fragile, we are offering them assistance with transportation in case they are scared about returning their money.”

During the revolution, Libyans chose to hoard their money under mattresses or even carry it out of the country in suitcases, especially across the border into Tunisia, for fear of it falling into corrupt hands.

Stabilisation drive

In an effort to restore liquidity and stabilise the Libyan dinar, the CBL is working on injecting cash into local banks by printing Ld6bn-worth of new currency to replace the existing Ld50 and Ld20 banknotes. The first batch, worth Ld300m, was delivered on December 24 last year. 

The former Ld50 denominated notes that account for Ld2bn within the country are in the process of being phased out and the Ld20 notes, that make up Ld4bn, will be the next step. The final date for handing in the Ld50 bill is March 15, 2012; after that date, Libyan banks have a week to deposit these bills into their central bank accounts. The Ld20 will be withdrawn after March. 

In the wake of bank runs during the revolution, the CBL also imposed a limit on cash withdrawals by individuals to Ld750 a month, and although there are signs that this limit will be raised, it has made things extremely difficult for companies and people trying to access funds to pay their staff and rebuild their lives.

“The central bank wants to change things gradually as there is still only a fragile trust in the banks, so many people are still choosing to transfer their money outside,” says Abdulrazak Elhosh, general manager of First Gulf Libyan Bank, which was set up through a partnership between First Gulf Bank, the third largest bank in the United Arab Emirates, and the Libyan government’s Economic and Social Development Fund (ESDF). “But along with trying to keep liquidity in the system, it is also a measure aimed at trying to control inflation. The problem is that you can’t plan for tomorrow as everything is dependent on the liquidity situation – we have even had to provide other banks with funding,” he adds.

Patient approach 

However, while there is a sense of frustration, banks in Libya recognise that they need to be patient and believe that confidence is returning. “The mentality of Libyans has changed a lot since the end of the revolution,” says Mr Allag. “Three to four months ago, people didn’t have any trust in the bank but now we won’t see money going out without very sensible reasons.”

“Trust is growing sharply,” says Mr Elhosh. “In March we had a very big problem with liquidity but we felt the trust growing again after the death of Gaddafi in October, and after the central bank allowed letters of credit [LCs] to be opened.”

First Gulf Libyan Bank did not issue any new LCs from February until November last year but this is the main focus of their business today and indeed the market in which most Libyan banks are currently competing. Given that Libya is a net importer of almost all products except for hydrocarbons, the majority of foreign companies selling their goods in Libya operate by using LCs, a strategy that has proven highly profitable for the banks, accounting for the lion’s share of their fee-generating business.

However the arrival of private banks since the early 2000s has led to some overcrowding in this segment that, in turn, has led to pressure on margins. There is a clear need for banks to expand into new lines of business. Libya has a total of 17 commercial banks but the banking sector remains dominated by the four big state-owned banks – Gumhouria, Sahara, Wahda and National Commercial Bank – that account for about 90% of total bank assets. This has both limited competition from privately owned banks and also reduced the incentive for competition between state banks.

Shake-up needed

All state banks are in need of a radical shake-up – whether it is through increased efficiency, better management or improved service provision. Prior to the revolution, the central bank had been spearheading a restructuring of the banking sector through privatisations, mergers and acquisitions, initial public offerings and the entry of foreign banks into the market. This was helping to foster a more commercially driven culture and encouraging banks to make positive inroads into uncharted territory. 

Established in late 2003, Aman Bank was part of the first wave of private banks to begin operations in Libya. Then, the year after the CBLhad granted granted permission to foreign banks to acquire up to 49% of any local bank in June 2009, Bank Espirito Santo acquired a 40% stake in Aman along with management control, and has been innovatively expanding into the retail space ever since. 

“Libya is a hugely underbanked country – only 25% of the population have a relationship with a bank,” says Adel Dajani at Aman Bank. “We started mobile banking three to four years ago and we are the only bank in north Africa that provides this service.” With 40,000 cards, Aman Bank is now the leading provider of credit and debit cards in Libya – responsible for 75% of all issuance. With more than 100 ATMs, it also supplies over 60% of all ATM coverage in the country.

“State banks haven’t really ventured into retail banking in the way we have because it is a big ship to navigate in terms of technology and management. As a smaller, private institution, we can be much more agile,” says Mr Dajani. "It’s a cash economy and there is a growing middle class, particularly now that Libya is going to be developing. If the government takes the right economic measures then the whole population could become middle class.”

I’m not 99% – I’m 100% sure that Islamic banking would be successful here because it is an untapped market and Libya has an entirely Muslim population

Abdulrazak Elhosh

Islamic finance hope

Indeed, how the Libyan government chooses to develop the economy over the next few years will have a huge influence over the shape of the banking sector. The interim government has made few concrete pledges with regards to its economic policy, but one area that it has been very vocal about is its enthusiasm for Islamic finance. 

Announcing the country’s liberation to a jubilant crowd in Benghazi at the end of October, National Transitional Council (NTC) chief Mustafa Abdel Jalil proclaimed: “We as a Muslim nation have taken Islamic sharia as the source of legislation, therefore any law that contradicts the principles of Islam is legally nullified. We are working to establish Islamic banks that are far from interest.” 

At the end of January this year, the central bank published draft guidelines on Islamic finance and is planning to finalise regulations by the end of March. It is alleged to have held consultative talks with numerous banks that are all keen to apply for a licence. This form of finance could provide another important source of growth in both retail and wholesale areas. 

“I’m not 99% – I’m 100% sure that Islamic banking would be successful here because it is an untapped market and Libya has an entirely Muslim population,” says Mr Elhosh. 

Mr Dajani is just as enthusiastic. “Provided the CBL draws up a clear regulatory framework then I’m very keen,” he says. “Libya is an extremely religious country with very devout Muslims. Some banks started with windows but I don’t think this is the right approach – I would want to set it up as a separate entity that would provide the same products but in a sharia version.” 

Rebuilding task

Given the scale of both construction and reconstruction that lies ahead, project finance will also become a lucrative area for banks. But conscious of its limited institutional legitimacy, the NTC’s appetite for awarding contracts is likely to be constrained in the near future. Until a national unity government is democratically elected – unlikely to be before early 2013 – this form of finance is unlikely to flourish.

The size of the role that foreign banks will play in providing finance to rebuild Libya is also unclear at this point. Current regulations in the country prohibit foreign banks from opening a branch but CBL regulation allows them to acquire stakes in local banks.

There is a certain apprehension about letting new foreign banks in based on past experience. In 2007, both Jordan’s Arab Bank and France’s BNP Paribas respectively acquired 19% stakes in Wahda Bank and Sahara Bank and full management control. However, prior to the revolution, BNP was publicly criticised for its management of the bank and relations had become strained. 

Meanwhile, in early February, the CBL decided not to partake in Italian lender UniCredit’s €7.5bn rights issue. Formerly one of the largest shareholders with a 5% stake, this will see the CBL dilute its interest to less than 3%.

Since the revolution, most Libyan banks have been put under the direct supervision of the CBL and many foreign banks have not yet resumed their operations. However, in November 2011, HSBC reopened its representative office in Tripoli that had closed in February in the wake of the UN sanctions against the Gaddafi regime. It was established in 2006, and was the first, and is today the only UK bank to have a representative office in the country. HSBC does not yet have a licence to offer banking services in Libya and is therefore focused on providing financial advice on project, infrastructure and trade finance.

The CBL's task

Of course there are opportunities in all financial fields because Libya’s banking industry is still very much at a nascent stage of development and the country's infrastructure is in desperate need of modernisation. To date, the banks have offered limited financial products and the public bank managers have lacked clear incentives to expand their portfolios.

While there is now great optimism for the future, the reality is that Libya is going to be a hard market to operate in until a formal government and a clear regulatory system is in place. In this regard, the CBL has come under fire for being too opaque about its current and future strategy. 

“The central bank needs to look at itself first as an institution,” says Mr Dajani. “After more than 40 years of state-controlled directives, it is not an easy job that lies before it. But it needs new blood and leadership to become a truly independent central bank.”

Before the uprising, the CBL was steering a course away from its ownership role in the economy to becoming more of a prudent regulator that allowed the private sector to take the lead. The key challenge now for the CBL will be ensuring it does not adopt too light an approach and strikes a healthy balance. In light of all the growth that is planned and the unfreezing of assets, it is arguably even more important now than before that the CBL continues to strengthen banking supervision and regulations in line with international best practice.

NPL worries

It is important that the CBL develops a framework for addressing non-performing loans (NPLs) so that the banks obtain a clear picture of the impact of the revolution on their balance sheets in 2011 and ensures that they have sufficient capital to cover losses and delayed repayments.

NPLs in the banking system were 17.2% of total loans at the end of 2010 – one of the highest in the Middle East and north Africa region. The CBL expects to have information on NPLs for 2011 by early March, but given the length of the conflict they are expected to have increased sharply. Some loans may have been made to elements of the former regime and may be irrecoverable.

The banking community recognises that there is a wealth of opportunity on its doorstep but this can only be realised by continuing the restructuring and modernisation of the banking sector that was under way before the revolution.

In the past, it was the lack of financing that acted as a brake on Libya’s development. But if supervised appropriately, the banking sector can play an invaluable role in carving out the future direction in which the economy develops and in acting as a catalyst for growth.

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Read more about:  Africa , Libya