Libya: Islamic Finance and Economic Development – Opportunities and Challenges

Libya, a country only recently ravaged by war and
instability is currently experiencing nearly all of the problems that inhibit
growth in the financial sector. It is also, however, the holder of Africa’s
largest oil reserves, which translates into large capital surpluses and is at
the very root of what is needed to build a vibrant financial sector.

These surpluses are also something that is lacking among Libya’s immediate
neighbours, many of whom are also experiencing the pains of developing a
post-revolutionary financial system. If ever there were an opportunity for the
Islamic finance industry to stand up and be counted, it is now during Libya’s
hour of need. A surplus of liquidity, the public demand for Shariah-complaint
tools, the widely-expected economic growth driven by construction and
infrastructure activities, as well as the increase in oil production will all
create huge opportunities for Islamic finance. Nevertheless, there are
challenges facing the industry such as a lack of financial human resources, an
incomplete regulatory framework, and remaining doubts about the country’s

While Libya, unlike its neighbours, has a great source
of internal finance through the sale of oil, it does not have a qualified pool
of internal finance talent, who can deploy the surplus liquidity properly; in
short we have the capital while others have the financial expertise. Over the
past four decades the country has suffered from a poorly functioning and
underdeveloped banking sector, which did not contribute meaningfully to
economic growth.

Among the legacies of a stagnant banking sector is
a generation or two of bankers without significant experience in the
sophisticated instruments of modern finance and asset management. This means
that the country lags behind Egypt and, according to the Central Bank of
Libya’s statistics department, the banking sector’s loan-to-deposit (LTD) ratio
stands at no more than 25% compared with more than 50% in Egypt. In order to
make these surpluses productive, Libya must open its doors to international
investment houses, form long-term partnerships, and develop future local human
capital that may take the lead in banking and the capital market sector.     

A Challenging Deadline

Finance, both
conventional and Islamic, will always need dynamic financial regulators behind
it to set the market in line with globe best practices, thus bettering the
changes of participation from outsiders. The public demand for Islamic finance
last year forced the country’s highest regulator, the National Transitional
Council (NTC) of Libya to issue a law barring interest-based transactions and
converting the entire financial sector to be Shariah-complaint before 2015.

However, the timeframe announced is a challenge on its own. Government
bodies such as the Central Bank of Libya (CBL), the Libyan Stock Market,
Ministry of Finance, and Ministry of Economy are presently behind the stated
deadline. If Libyan regulators cannot develop a robust framework for an
interest-free banking sector and capital market, the results of the conversion
will be weak and will not serve a business-minded public keen to expand. Sadly,
delays and partial regulations will, over time, decrease public support for
Islamic finance.

As well as regulatory improvements, the overarching
challenge for Islamic finance as well as other industries within the country is
to maintain stability and convince the global community that now is the right
time to set-up within Libya. Political volatilities surrounding the transfer of
power from the transitional government to a more permanent governance
structure, together with an uptick in domestic security incidents affecting the
army and civilians, have acted as obstacles to any smooth recovery and have
delayed long-term economic planning.

Despite the challenges,
Islamic finance in Libya holds great promise. Whether it realises this great
potential will be based on the effectiveness of the Libyan leadership, both at
the highest levels and within financial   corridors. If they can make the
necessary changes and improve security, surely the prize will be large.


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