Overview of the Financial Sector

Prior to the outbreak of armed conflict in 2011, Libya's financial system had a solid foundation despite a shallow and undeveloped financial sector. A few years later, political issues also affected the financial sector with the advent of two financial systems operating in the country. One system was supervised and regulated by the Central Bank of Libya (CBL), while a second parallel financial system was run by the Benghazi Central Bank (BCB). This two-tier system, combined with the BCB's drawdown of liquidity and foreign exchange reserves from some banks, created significant systemic risk for the entire financial sector. Since 2022, a process of reunification of the two central banks has been initiated and is still ongoing. Building on its traditional tasks of implementing monetary policy, establishing a regulatory framework, and supervising the entire financial sector, the Central Bank CBL has worked to maintain a sustainable stock of foreign reserves until 2021. In addition, electronic payment methods have rapidly emerged as a transactional alternative under the CBL's leadership. The number of e-payment cardholders increased from 91,500 in 2016 to 581,000 in the first half of 2019, while mobile money has been integrated into the CBL's financial inclusion strategy. The CBL has also begun developing instructions for banks and financial institutions to increase their awareness and ability to track and report potential money laundering and terrorist financing activities. Libya is also a member of the Middle East and North Africa Financial Action Task Force (MENAFATF). The insurance sector is overseen by the Insurance Supervision and Controlling Authority. The national pension system is managed by a social security fund under the Ministry of Social Affairs, while a stock exchange (the Libyan Stock Market - LSM) was established in 2006 to diversify the sources of financing for the domestic economy but has been closed since 2014. Lastly, there is a sovereign wealth fund, The Libyan Investment Authority (LIA).The latest available figures from their website  show that their assets amounted to $68.4 billion in 2019, or 99% of the GDP in the same year.

The Banking Sector

Structure of the banking sector - Libya’s banking sector  comprises 20 banking institutions, 6 of which are state-owned (3 are 100% state owned and 3 are part owned).Whilst there has been foreign investment in the sector in the past, these have generally been plagued  with problems and subsequently foreign banks have withdrawn from the country.  As of 2022, there were 580  bank branches and agencies throughout the country. Banks account for approximately 80 percent of financial sector assets[1]. Due to the decline in GDP resulting from  the  COVID-19 pandemic bank assets increased from 33 percent of GDP in 2019 to 77 percent of GDP in 2020, before falling back to  to 12 percent of GDP in 2021), as the economy recovered.

Financial Strength of the Banking Sector - Although banking supervision by the CBL has improved somewhat in recent years, it remains weak. The poor digitization of banks forces them to rely on paper trails that are not always reliable. The lack of systematic risk management in banks also hinders supervision. There is no additional classification requirement to reflect Basel developments and few banks in Libya have an Internal Risk-Based (IRB) classification system. The issue of central bank unification, which is not yet effective, also remains a problem for the implementation and strengthening of risk-based supervision and the adoption of international prudential standards for Libyan commercial banks. In the meantime Libyan banks have generally performed well with resilient asset quality since 2018, as evidenced by the low NPL ratio, which remained below 5 percent and stabilized at 3.2 percent in 2022 with strong provision coverage. Banks held up well with adequate capital and liquid assets above recommended levels by CBL following Basel II amid the pandemic, suggesting that supportive measures undertaken seem efficient. The banking system also remained resilient, having entered the crisis well-capitalized and with ample liquidity. The Capital Adequacy Ratio (CAR) decreased from 19.2% in 2019 to 15.7% in 2022.  However, Central Bank of Libya stated that these high ratios are a consequence of the weakened capacity of banks to use their funds and the inability to expand loans and credit facilities.

Financial Inclusion

Overall, Libya has financial inclusion indicators close to those of upper-middle-income countries. According to Global Findex 2017 data,[2] the country outperforms its peers in the "Middle East and North Africa" (MENA) and Sub-Saharan Africa. The proportion of adults holding an account in a financial institution, was 65.7% in Libya, against an average of 43.5%  in MENA and 42.6% Sub-Saharan Africa in 2017. In addition, 59.6 percent of adult women and 71.8 percent of rural adults had access to financial services in the country, while only 35.3 percent of women and 36.9 percent of rural adults were financially included in MENA in the same year.  The financial inclusion rate in Libya in 2017 as measured by the number of accounts also remains even higher than that of other North African countries in 2021. As for the level of borrowing from financial institutions, it was only 8% in 2017, which confirms the difficulty of access to financing for individuals and the private sector.

The recent liquidity crisis in Libya, combined with the CBL's incentives, encouraged the expansion of electronic payment transactions. The number of electronic payment cardholders literally increased six-fold between 2016 and June 2019 to more than 581,000 users, i.e. around 9% of the Libyan population. The value of electronic transactions amounted to LYD 1.6 billion (USD 1.14 billion) in the first half of 2019, representing 10% of the levels of bank credits and 1.8% of bank deposits in June 2019. The first mobile money service by a mobile phone operator was only launched in 2017, followed more recently by offers from some commercial banks.  Electronic payments were also made by 32% of the adult population in 2016, compared to 33.3% in the MENA zone and 34.4% in Sub-Saharan Africa. The potential for mobile money and online payments remains high due to the significant penetration of mobile telephony estimated at 169.6 % in 2022, while the Internet usage rate for the total population was at only 49.6% in 2022[3].

Financing of Small- and Medium-sized Enterprise (SME)

Microfinance

The microfinance industry in Libya is embryonic, but it has significant potential. Libya’s first microfinance firm opened in 2019. Assaray Bank (ATIB), in partnership with Expertise France, launched Namaa Tamweel, with branches in Tripoli and Benghazi. A multi-donors funded[4] program under the supervision of Expertise France[5] aimed to support CBL with the development of the legal and supervisory framework to support microfinance development[6]. There was no provision for credit extension by non-bank financial institutions, and microfinance firms could not take deposits. Only banks regulated by CBL were engage in either. The multi-donors funded program supported the Libyan authorities in the creation of the necessary informational and regulatory framework to build an efficient credit market.  Specifically, the interventions included support for: (1) improving the services offered by the Libyan credit bureau, (2) reactivating the credit guarantee fund, (3) developing a venture capital fund, and (4) improving access to finance for Libyan small and medium-sized enterprises. However, to our knowledge, there is no publicly available information on the outcomes and impact of these interventions, with the exception of the microfinance institution Namaa Tamweel. Even for Namaa Tamweel, there is no information available on the actual number of entrepreneurs who have benefited from these services and the impact on their businesses.

The market has opened considerably but remains weak and disorganized. The industry evolved from a single state-owned player, the Libyan Insurance Company (LIC), founded in 1971. Licenses were issued to new domestic players which mostly operated as sales operations for international reinsurers. By 2018, there were 22 licensed insurance providers, 18 of which were licensed in Tripoli, and 4 licensed separately in the East. They had an aggregated net asset value of over 1.2 billion dinars (US$ 879.1 million). Regulatory oversight of the insurance industry in Libya has been limited and is under the Libya Insurance Supervision Board (LISB) which was set up in 2008 reporting to the Ministry of the Economy under governing Law #3 (2005).

Capital Market

The creation of the Libyan Stock Market (LSM) in 2006 was helpful in diversifying funding sources in the economy, even though relatively recent compared to other advanced stock markets in the MENA region. It has also facilitated the economic liberalisation strategy initiated in the late 1990s through the gradual disengagement of the state from certain public enterprises. Consequently, some twenty public enterprises were partially privatised on the LSM before 2010. According to the latest available data, 12 companies were listed on the LSM at the end of 2018, including 7 commercial banks and 3 insurance companies. However, daily transactions were suspended in 2014 due to the deteriorating security situation.

Revenue from oil extraction has been significant in the past, enabling the government to develop long-term investment strategies by creating a sovereign wealth fund in 2006 known as the Libyan Investment Authority (LIA). Its main mission was to monetise the surplus oil windfall for the benefit of future generations by investing in the most attractive markets both in Africa and abroad. In 2019, managed assets were estimated at USD 68.4 billion, or 99% of GDP.