Financial Sector Overview
Libya is an oil-producing North African country whose economic and security environments were seriously affected by the collateral impacts of the Arab Spring. The country experienced permanent political instability until 2019, which significantly affected the overall credibility of government institutions, the business environment, the optimal mobilisation of tax revenue, and sound economic management. Endowed with huge oil and gas reserves, the country covers an area of 1.8 million km2 with a population of 6.5 million in 2018. Oil accounts for more than 75% of domestic economic activities and about 90% of tax revenue, while agriculture accounts for less than 2% of GDP, even though it employs more than 18% of the active population. The armed conflicts of recent years and political bicephalism led to a sharp drop in oil exports and consequently in gross domestic product (GDP) between 2010 and 2015, which fell from USD 68.9 billion to USD 17.2 billion before rebounding to USD 43.6 billion in 2018. Despite the sharp decline in GDP per capita from USD 11 417 in 2010 to USD 6 700 in 2018, it remained among the highest in Africa. In contrast, inflation rose sharply between 2015 and 2018, averaging around 22%. These inflationary pressures could be explained, among other things, by the sharp depreciation of the local currency, the Libyan Dinar, against the anchor currency (the US dollar - USD), the high prices of imported goods for the local economy, and the malfunctioning or disruptions in supply inherent in commodity value chains. The fragile security climate also negatively affected the country's investment appeal and aggravated its structural deficiencies, including unemployment, poverty and lack of housing and social welfare services. The 2019 Doing Business ranking put Libya on 186th position out of 190 countries, listing the country among the five least attractive economies in the world.
Overview of the Financial Sector
Prior to the outbreak of the armed conflicts in 2011, Libya's financial system was based on solid foundations despite its underdeveloped and shallow financial sector. A few years later, political bicephalism also affected the financial sector with the advent of two financial systems operating in the country in 2019. One system is supervised and regulated by the Central Bank of Libya (CBL) while a second parallel financial system is being operated by the Benghazi Central Bank (BCB) (the latter covers an area controlled by a separatist government in the east of the country). This bicephalism combined with the BCB's drawdown from the liquidity and foreign exchange reserves of some banks creates a significant systemic risk for the entire financial sector.
The Libyan financial system is still dominated by commercial banks. Building on its traditional tasks of monetary policy implementation, regulatory framework setting and supervision of the overall financial sector, the CBL has worked to maintain a sustainable stock of foreign exchange reserves in the face of declining oil prices and widening fiscal deficits between 2014 and 2017. Moreover, in response to the recent liquidity crisis in the country, electronic payment methods have swiftly emerged as a transactional alternative under the CBL's management. The number of electronic 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 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. Lastly, there is a sovereign fund in the Libyan financial system, the Libyan Investment Authority (LIA), whose assets amounted to USD 66 billion in 2018, or 151% of GDP in the same year.
The Banking Sector
Structure of the banking sector - As of 31 December 2018, the banking sector consisted of 19 commercial banks including the 3 banks located in the zone under the control of the separatist government. Under CBL supervision, the assets of the official banking sector amounted to LYD 115.8 billion (USD 82.4 billion) as of 31 August 2019, equivalent to 192% of GDP in local currency of the previous year. Despite the context of prolonged political crisis, banking assets have experienced significant growth since 2010 (+77.3%). This increase has been more modest over the past 4 years (+28.4%). As early as 2005, the State reduced its participation in bank shareholding to attract private and international capital to the sector.
Structure of Loans and Deposits – Loans to the economy tended to increase slightly between 2010 and August 2019, from LYD 13.05 billion (USD 9.3 billion) to LYD 16.4 billion (USD 11.7 billion) - an increase of 25.7% lower than the growth rate of banking assets over the same period. The financial depth level as of 31 December 2018, approximated by the ratio between credits to the economy and GDP, reached 27.2%. However, in 2015, the level of credit to the economy reached a peak of LYD 20.2 billion (USD 14.4 billion) in a context of sharply falling oil prices. Deposits collected by commercial banks increased sharply from LYD 55.3 billion (USD 39.4 billion) in 2010 to LYD 92.1 billion (USD 65.6 billion) AS OF 31 August 2019 (+66.6%), despite the fragile security and economic context. Demand deposits accounted for nearly 90% of total deposits in 2019. A law was passed in 2013 to ban all interest-based banking services.
Financial Strength of the Banking Sector - Although the banking and financial system in Libya suffered from some bicephalism in 2019, the stability of the entire banking sector has been preserved by the internationally recognised central bank (the CBL). Against a backdrop of political and security fragility, the significant increase in the level of loans and deposits collected between 2010 and 2019 in the CBL-controlled area demonstrates a certain resilience of the domestic banking sector. Moreover, the excess reserves of banks under CBL supervision on average represented three times the level of reserve requirements in nominal terms between 2016 and August 2019. The Capital Adequacy Ratio (CAR) also increased between 2010 and August 2019, from 26.3% to 34.3%. The CAR levels are well above the thresholds defined by Basel II (8%) and Basel III (10.5%) and provide information on the banking sector's ability to cope with systemic insolvency risks.
Overall, Libya has financial inclusion indicators close to those of upper middle-income countries. The country outperforms its peers in "Middle East and North Africa" (MENA) or Sub-Saharan Africa according to Global Findex 2017 data. The financial inclusion rate, perceived as the proportion of adults holding an account in a financial institution, was 65.7% in 2017 in Libya, while those in MENA and Sub-Saharan Africa reached 43.5% and 42.6%, respectively. Moreover, 59.6% of adult women and 71.8% of adults living in rural areas have access to financial services in the country, while only 35.3% of women and 36.9% of adults living in rural areas are financially included in the MENA zone.
The context of political crisis seems to have favoured a more intensive use of electronic means of payment by the population, including bank cards and mobile money. The scarcity of cash and hard currency in situations of prolonged political crisis - as was the case in Libya from 2014 - makes the use of electronic means of payment in merchant or person-to-person (P2P) transactions more practical and convenient. However, compared to its peers in sub-Saharan Africa and even North Africa, Libya is lagging structurally in terms of mobile money penetration and microfinance.
Digital Finance and Mobile Money
The recent liquidity crisis in Libya, combined with the CBL's incentives, had encouraged the expansion of electronic payment transactions. The number of electronic payment cardholders literally increased sixfold 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 including mobile money services. 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% in 2017, while the Internet usage rate for the total population was projected at only 20% in 2016.
Financing of Small- and Medium-sized Enterprise (SME)
Given the predominance of the public sector in the domestic economy, the private productive base is poorly developed. Most SMEs lack financing and the law prohibiting interest rate-based banking services tends to increase banks' risk aversion towards SMEs; the low level of (SME?) profitability and the absence of (a record of) guarantees and credit histories to assess the repayment capacity and moral hazard of local SMEs reinforce bank prudence. However, the government has put in place initiatives and mechanisms for institutional support to SMEs. These include a loan guarantee fund (Libyan Guarantee Lending Fund) which has temporarily ceased operations since 2015, a rural and agricultural bank which is currently operational, an Islamic finance fund in support of youth employment and five regional investment funds that had been formally established but were not yet operational as of 31 December 2016.
There was still no explicit microfinance regulatory framework in place in 2019. A feasibility study was conducted in 2017 as part of the European Union (EU) SLEIDSE initiative (Support to Libya for Economic Integration, Diversification and Sustainable Employment), aimed at better economic integration and job diversification in Libya. The study underscored the importance of developing microfinance services to effectively meet the needs of SMEs and very small enterprises (VSEs). With this impetus, and through funding from the British Government (DFID) and the technical expertise of foreign partners, the first microfinance institution was set up in 2019.
The insurance sector has undergone 3 development phases over the past decades. Under the first phase, from 1951 to 1970, several insurance companies, including 4 locally owned companies, offered life and non-life insurance services. However, in 1970, all the insurance companies were merged into 2 companies and then into one in 1980. It was during the third historic development phase, which began in 1999, that private insurance companies were once again authorised to operate. According to CBL data, 9 insurance companies made up the domestic market in 2013, while the insurance sector accounted for 16% of stock market activities in 2016. More recent data indicate that insurance premiums collected amounted to USD 266 million in 2018, including USD 260 million for non-life insurance premiums, i.e. a 0.6% penetration rate.
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 2018, managed assets were estimated at USD 66 billion, or 151% of GDP. As a precautionary measure and in view of the unstable political climate of recent years, the United Nations decided to freeze the assets of the sovereign fund to avoid any risk of mismanagement or abuse.
Established in 1980, the Social Security Fund (SSF) manages the pension system in Libya. However, there is a special pension plan for military personnel covering more than 40,000 retirees since 2017. The SSF provides social assistance to pensioners and insurance services against sickness and work-related injury to families and beneficiaries at risk of social distress. The legal retirement age is 65 for men, 60 for women and 62 for civil servants, while full payment of retirement benefits is based on a minimum of 20 years of service. The most recent available data date from 2011 and disclose managed assets amounting to LYD 3.34 billion, i.e. about 4% of the GDP of the same year, partially invested in various sectors of the economy (real estate, tourism, hotels) through 3 investment companies including the Social Security Fund Investment Company (SSFIF).