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Country Guides: Libya Securities and Banking

By Reema Ali
Last Updated: Feb 19, 2010

Since the UN sanctions were lifted in 2003 and 2004, Libya has launched a series of structural reforms and accelerated its transition to what the authorities call "people's capitalism". Progress has been made in recent years to liberalise the economy; however, it remains largely state controlled and heavily dependent on hydrocarbon resources. Crude oil and gas account for about 70 per cent of GDP, 90 per cent of total government revenues and 98 per cent of total exports in 2007. In March 2008, Libya launched a Wealth Distribution Program to distribute part of the oil wealth to the population and reduce the size of the government.

The Libyan financial system is nascent. It comprises 11 commercial banks, four specialised credit institutions ( "SCIs") , 48 regional banks, one exchange bureau and five insurance companies. The five largest commercial banks were all state-owned until 2006. Since then, two have been privatised and two of the three remaining public commercial banks were merged in April 2008. The two largest commercial banks, which are still owned by the CBL, Gumhouria bank (which is the result of the merger of the old Gumhouria Bank and Al- Ummah Bank) and National Commercial Bank (NCB), are now listed (15%) on the domestic stock market.

BNP Paribas acquired 19 per cent of Sahara Bank in August 2007, with immediate management control and the option to purchase additional shares of up to 51 per cent within three to five years. Arab Bank acquired Wahda Bank in February 2008 under similar terms. Most regional banks have also been merged into one bank -thevNational Banking Corporation (NBC)-and agreements have been reached with financial institutions from the United Arab Emirates and Qatar to establish two new banks. The First is Gulf Libyan bank with share holding divided equally between the First Gulf bank of Abu Dhabi and the ESDF, started operations in November 2008.The second is The Libyan Qatar bank which is owned equally between the Libyan Foreign bank and a Qatari holding company.The SCIs are also state-owned and the government finances them. The authorities indicate that they have contracted international consultants to design an action plan to reform the SCIs.

There are also several representative offices for foreign banks in Libya and most local banks are now able to establish relationships and strategic partnerships with foreign banks.

State-owned and private commercial banks offer a similar product range. Retail services include current and savings accounts, loans and money transfer. Corporate customers are offered trade finance and cash management services. Banks may open letters of credit and guarantees for foreign corporations operating in the country.

Libya historically did not have a credit market and whatever lending activity that took place was to the public sector. The Central Bank has been working on a Credit Bureau in order to improve credit risk assessments and to increase lending activities. The Central bank has also developed a National Payment System in order to allow national banks to make payments efficiently and reliably without the need to resort to other countries banks. A Real Time Gross Settlement System, and the automated clearing house (ACH) and automated check processing (ACP) are in operation now. A deposit insurance fund has been set up, funded by the commercial banks, to protect deposits up to LD100,000.

Overall, despite progress, the country's banking system remains highly centralized. The CBL has a medium-term privatization strategy to gradually phase-out its holdings of the three commercial banks (Gumhouria, NCB, and NBC). The aim is to have the entire banking system in private hands by 2011.

Libya's stock exchange was established in 2006. By the end of 2007, seven companies (mostly banks) were listed with a capitalisation of 1.2bn Libyan dinars (1.4 per cent of GDP). In October 2008, a cooperation agreement was signed between the Libyan Stock Exchange Market and London Stock Exchange, providing for training teams from the Libyan Stock Exchange in Tripoli and London to enable them to run stock market operations.

The insurance sector is small and largely underdeveloped, with total market premium income at LD190m in 2006. In 1999 limited deregulation of the insurance market began with the creation of the United Insurance Company as a joint public/private venture, and approval has been given for two private sector insurance companies.

Banking Supervision

Progress has been made in banking supervision with the enactment of Banking Law No. 1 of 2005. The Banking Law provides for the autonomy of the Central Bank and its jurisdiction over monitoring and supervising banking institutions to ensure the soundness of their financial position and performance, and to protect the rights of their depositors and customers. The new law relaxes the rules regarding foreign exchange. Article 41 provides that with the exception of public entities (to the extent that the foreign exchange is not a result of its activities), any natural person or legal entity may retain any foreign exchange that is owned or possessed or that is transferred to them and may execute any foreign exchange transaction, including transfers, to Libya or abroad. Article 43 provides a reversal of previously established policies.

The law allows commercial banks that operate in Libya to open accounts in foreign exchange for natural persons and legal entities that are fed by deposits in foreign exchange; sums transferred from abroad; sums transferred from another domestic account in foreign exchange; the foreign currency equivalent that commercial banks receive for the purchase of foreign banknotes, traveller's cheques, or other means of payment in foreign exchange that is credited to the account; banking interest on the aforesaid accounts; and any other legal channel. These accounts can be used to make cash payment in foreign currency to the account holder himself or to any payee whom he specifies; to execute transfers in a foreign currency inside Libya or abroad based on the account holder's request; to make transfers to another account in foreign exchange; or for any other legal purposes.

Banks may, based on an account holder's request or authorisation, purchase all or a portion of the balance of the account holder's account in foreign currency in exchange for any other currency at the exchange rate that prevails on the date of the purchase, according to the rules and conditions that the Central Bank decrees. Engaging in foreign exchange business requires a licence from the Central Bank and foreign exchange transactions must be executed through banks and entities that the Central Bank licenses for this purpose. The value of goods and services inside Libya must be paid for in Libyan dinar or the equivalent value thereof by means of banking payment that the Central Bank has authorised. The law prohibits the bringing into or taking out of Libya Libyan currency except in the cases, and according to the conditions, that the board of directors of the Central Bank stipulates in a decree published in the Register of Actions (Official Gazette).

Commercial banks that operate in Libya may grant credit in foreign exchange with sufficient guarantees of the recovery of the value thereof in foreign exchange at the designated times. They may also transact in foreign exchange among themselves within the limits of the balances that they are permitted to receive under the rules that the board of directors of the Central Bank has established.

Commercial banks must assume the form of a Libyan joint-stock company with paid-up capital of at least LD10m divided into shares. The value of a share shall not exceed LD10. Natural persons and public and private legal entities may hold shares, according to the rules and conditions that the board of directors of the Central Bank stipulates in a decree. The Central Bank may permit the establishment of banks with foreign capital. It may also permit foreign banks to hold shares in domestic banks and to open branches or representation offices in Libya, according to the terms and conditions that the board of directors of the Central Bank has established. Foreign banks are subject to the supervision of the monetary authority in the country where their head office is located, and the capital allocated for a branch's activity in Libya is at least $50m.

It is clear that Libya has, and continues to shed out, the old policies in exchange for new ones that favour a market economy, although it is doing so in a piecemeal and a one-step-at-a-time approach.

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Reema Ali is managing partner of AP Consulting. She is resident in Washington, D.C., where she manages the firm's international practice. She has practiced law for over 21 years in the Middle East, working with major US, European and Japanese companies, during this time she has been resident in both the Middle East and the US. Tel: 202-347-2400