Libya: Libya Finance Profile

Financial Sector Profile

Libya is the third major African oil producer with the major proven reserves in the continent. Its economy is heavily dependent on revenues from the oil and gas sectors, which, as of 2008, provide over 98 % of export earnings, 75 % of government revenue, and account for additional than two-thirds of GDP. Per capita gain is almost four times above the African average, at USD 14,000.

In light of the Libyan economy’s heavy reliance on hydrocarbons, recent fluctuations in international commodity prices led to GDP increase dropping from 7.5 % in 2007 to 2 % in 2009 – although a rebound to 4 % is expected for 2010. Despite recent efforts to diversify the economy, which have included massive investments in the agricultural sector and plans to create a regional financial hub, boosting non-hydrocarbon increase remains an significant challenge.

The country was subject to international sanction as a result of its role in the 1989 Lockerbie airplane bombing and its efforts to build weapons of mass destruction. United Nations sanctions were from presently on lifted in 2003 and US sanctions in 2004, next the country abandoned its nuclear ambitions; Libya has since begun a process of reform to modernize the economy, restart exploration and development of its oil and gas industry, and reintegrate with the international markets.

Libya's economy remains highly centralized and continues to be dominated by the public sector, which accounts for additional than 90 % of activity. The government, which nationalized all banks in 1970, has however recently eased banking laws to allow financial liberalization and banking privatization.

The country’s banking system comprises the Central Bank of Libya, 10 commercial banks, 3 specialized banks and one offshore institution, the Libyan Foreign Bank. While Jumhuriya Bank, the major in Libya, is all government-owned, the private sector has presently a majority share in seven out of the ten commercial banks in the country.

BANKING

Libya has embarked on a major reform programme of the national-dominated banking sector during which all system will be restructured and several banks privatised. The Central Bank of Libya (CBL) has been building the technological, regulatory and institutional infrastructure needed to turn over its holdings in the sector, becoming a regulator rather than the owner-regulator. The banking sector has grown quickly over the completed five years in line with increased economic activity in general. The CBL’s banking assets rose from LD54.93bn ($44.66bn) in 2005 to LD79.55bn ($64.67bn) in 2006 and LD101.45bn ($82.48bn) in 2007.

Total CBL banking assets reached LD111.51bn ($90.66bn) by the end of the initial quarter of 2008. Under national control Libya’s banking policies have been relatively defensive, which has restricted access to credit, as banks keep most of their liquidity in short-term deposits, but this is beginning to change in preparation for the sector’s overhaul, with a new emphasis to orient the sector towards profitability.

The privatisation and restructuring taking place should help private firms and SMEs gain access to the financial tools they require to compete in the new economy. As well as Libyans become increasingly aware of the price of using banks to manage their money, the top banks will benefit from their early involvement in this market.

CAPITAL MARKETS

The government has used banks and insurance companies to jumpstart the Libyan Stock Market (LSM) and privatisation efforts in general, slowly feeding them into the private sector. It has thus far proved an significant tool for widening the ownership base of private enterprises, improving access to capital, increasing transparency in the local business environment and providing a lower-risk entry point for foreign involvement in the economy.

Initial public offerings (IPOs) started in 2007, but the LSM was not fully operational until January 2008. Stakes in seven companies have been listed: Sahara Bank, Wahda Bank, Bank of Commerce and Improvment(C&D bank), Assaray Bank, Libya Insurance Company (LIC), United Insurance and Sahara Insurance. Although the second quarter of the year 2008 was relatively volatile, with the banking index starting from a base of 1000 in April and closing at 940.44 in June next a high of 1284.21 and a low of 874.14, the next year is primed to be an eventful one for the fledgling LSM. It is establishing a commodities exchange and developing the infrastructure for E-trading.

It is as well working to encourage foreigners to trade on it. The bourse still needs an international custodian for foreign funds and a significant all of legislative clarity regarding the repatriation of funds, but these are to be imminently resolved. With the government steadily working to privatise up to 375 national companies in the coming years, most of which will be listed, the LSM is on a steep learning curve.

INSURANCE

Education and awareness campaigns are key in raising the price of insurance products in the domestic market. Long accustomed to the basic national welfare system, the take-up rates of health, life and contents insurance are underperforming. Total insurance premiums for Libya are estimated to be worth around $300m-$350m, which co

mpared to less wealthy neighbours, such as Tunisia ($600m) and Egypt ($534m), is low. Currently there are seven insurance companies active in the Libyan market, but it is still dominated by the Libyan Insurance Company (LIC), which is almost five-times larger than its closest competitor. Despite this chance, new entrants are as well reporting strong year-on-year gross premium increase.

Key segments of the sector include shipping and aviation, inclunding newer offerings such as motor and health insurance. The Insurance Supervision and Controlling Authority is working with all of the country’s companies to advise on a strategy to promote insurance as a necessity. This is being done through advertising campaigns, in the case of some companies, and through educational programmes. As private sector development begins to make an impact on the Libyan market, it is anticipated that the insurance sector will grow to serve it.

Over the completed years, significant and consistent evolution has been made on financial reforms, inclunding privatisation. With the restructuring of national-owned commercial banks, further development of financial intermediation is expected. Aside from the oil and gas industry, banking is presently the single most significant sector receiving policy makers’ focused attention.

Privatisation in the banking sector, which started in 2007, is continuing a strong trend. Two of the five public commercial banks have been privatised to reputable foreign banks, with immediate management control and the option to purchase up to 51 % stakes in three to five years. Two of the remaining three banks merged in April 2008, and most regional banks have as well been merged into a single entity. Going forward, authorities plan to privatise the remaining public commercial bank through the newly established stock market. Moreover, agreement has been reached with financial institutions from the United Arab Emirates and Qatar to establish two new banking groups.

The easing of regulations, allowing local commercial banks to seek strategic partnerships with foreign banks, should help open up the sector further. Despite the development, access to private financial services is limited by fundamental structural issues and distortive incentives. Most access to credit occurs through government-backed Appropriate Credit Institutions. However, these institutions are said to be crowding out commercial bank credit with their zero-cost of funding, lax lending standards and minimal interest rates.