March 27, 2014 Leave a comment
While Libya’s government and economy struggle to stay afloat through the tumultuous post-Gaddafi transition, the country’s banks are holding assets valued at up to $170bn that are doing little more than gathering dust, according to banking sources and financial institutions.
In the last 12 months, rebel blockades of eastern oil terminals and the Tripoli-based central administration’s inability to maintain authority in eastern and southern towns have crippled the country’s national finances.
Only last week, rebel groups orchestrated the lifting of oil from the Es Sider port without authorization from Tripoli. The stolen oil was loaded onto the Morning Glory III, a North Korean flagged 21,000 tonne tanker named, which managed to evade the Libyan authorities for almost a week before being stormed by US Navy SEALs and returned to Libya. The incident led to the sacking of Prime Minister Ali Zeidan by the country’s interim General National Congress (GNC) on March 11.
Oil exports account for more than 90 percent of Libya’s government revenue, so blockades such as this one have led to a ballooning budget deficit. As a result, the country is desperate for capital in order to bridge shortfalls and rebuild vital infrastructure.
The capital is there, at least in theory. According to one source in the Central Bank, the total value of assets held in Libya’s banks may be as high as $170bn, with $90bn at the direct disposal of the Central Bank and $60bn controlled by the state investment company, the Libyan Investment Authority (LIA).
“There’s a huge amount of dormant money because the banks are acting like safe deposit boxes, not financial institutions,” Namaan el-Bouri, the fund manager of Tadawul Real Estate Fund, tells This is Africa.
These assets should be leveraged to help rebuild the country by providing funds for private business and public infrastructure investment, he argues.
“Most of the assets are sat in the Central Bank, and this is a big part of the problem. The status quo suits those in political power, some of whom really do not know what they are doing. Everyone’s focused on the security situation, but security could be restored with growth and investment,” he explains.
In the decade preceding the 2011 uprisings that led to the dismantling of Muammar Qadhafi’s autocratic regime, Libya’s partial reabsorption into the world economic system led to selective wealth accumulation. The value of assets held in Libya’s commercial banks grew by over 300 percent. In 2003 they were held to be around $11.5bn. By 2010 estimates reached over $50bn.
But the assets have historically had difficulty finding their way to use in productive investments.
In 2010 just 13.5 percent of bank assets constituted loans to the private sector. The problem has continued in post-Qadhafi Libya. Last year, the country’s loan-to-deposit ratio was approximately 23 percent. By comparison, the regional average was more than 80 percent.
Libya’s population is growing at around 1.7 percent a year, and 45 percent of the population is under 25 years old. The state claims the unemployment rate is 15 percent, but youth unemployment is believed to be much higher. At least 150,000 jobs a year will be needed for the next five years in addition to the 860,000 jobs currently needed to fix the unemployment problem.
More freely available investment capital could help stimulate job creation, but banks face serious problems in loaning to business – in large part due to problems securing collateral.
“In Libya, unfortunately, we have a structural problem with securitizing any loan and this is the main reason banks are not lending,” says Husni Bey, the chairman of the largest private holding group in Libya, HB group.
“Property is key in all countries as an asset for banks to loan against, but in Libya this is not functioning.”
Mr Bey says that Libya lacks an accurate and readily accessible land registry that can provide a framework for collateral, and as a result banks are not willing to lend to businesses.
“The land registry system is so messed up that banks won’t loan because forgeries are rife and there is no working system to authenticate land ownership, let alone a usable database,” he tells This is Africa.
“We have a very limited stock exchange, so land should be all the more important because banks need security.”
Mr Bey says the procedure to recover debts through assets is currently next to impossible, but the private sector itself is showing some signs of strength, and with political will the problem could be solved.
“This is very easy to fix. We are a country of six million and maybe one million families. Libya is not a city state like Dubai or Kuwait, but neither is it Morocco or Egypt. In Libya we have our own capital – we don’t need foreign capital for investment,” he argues.
Pushing through such significant reforms will nonetheless be difficult without concerted pressure from financial institutions themselves and sympathetic political groups.
The central problem
Such pressure has thus far not materialised. Some point to a high degree of crossover between state institutions and banks as contributing to sclerosis at the heart of the financial system.
“Almost all the banks in Libya are majority owned or even fully owned by the state,” a Libyan banker who works for one of the world’s largest banks and asked not to be named tells This is Africa.
State-owned banks do still dominate Libya’s financial world, but partial privatisations in 2007 saw France’s BNP Paribas buy a 19 percent stake in Sahara Bank, and the Arab Bank of Jordan take 19 percent of Wahada bank.
“The head of the Central Bank, currently Sadiq Kabeer, is selected by the GNC. He is a politically important figure, but frankly thus far hasn’t played an important role,” the individual says. Mr Kabeer is widely considered to be an ally of the Islamist faction within Libya’s GNC.
There have been tentative moves to get rid of Mr Kabeer, who is technically only an interim governor, including opening up the applications process for a new governor. So far, nothing has come of it. Mr Kabeer was criticized as under-qualified and incompetent by multiple sources This is Africa spoke to about the Central Bank.
While leadership remains an issue, structural reforms are also needed in the Central Bank if there is to be any prospect of Libya putting its extensive domestic wealth to use, according to Mark Dempsey, a former advisor to the Central Bank of Iraq who has published extensive research on Libya’s financial institutions.
“The question is how does Libya get its Central Bank working,” he tells This is Africa. “Ultimately we have to stimulate the economy by getting banks lending.”
There are three reforms that are needed, according to Mr Dempsey. First the Central Bank’s duties must be separated by creating an independent regulator. Second conflicts of interest, such as several board members of the Central Bank also having stakes in state banks, should be eliminated. Finally, a credit bureau system should be built in order to provide banks with data to make risk management decisions on potential borrowers, he says.
Though the steps are clear enough, catalyzing the political will to push through banking reform deadlock is difficult while the tenuous security situation remains in the foreground of most players’ thinking.
“All of this comes back to the dilemma of reform in Libya: how can it be done when nothing moves and so much energy is being devoted to security sector reform because of the militia crisis?” Mr Dempsey asks.
Fixing the financial system will not be easy. However, if Libya is to rebuild or begin to shield itself from the economic and political dangers of oil dependence, getting the country’s billions working for it will be a good place to start.
This article was originally published with Financial Times: This is Africa on March 26 2014.