BMI View: Reforms to Libya's banking sector are unlikely to materialise anytime soon, as the government continues to focus on improving the security situation. Limited access to credit will continue to thwart growth in the private commercial sector, hindering the expansion of the non-oil economy.
Libya's General National Congress passed a law banning interest on financial transactions in January. If the law comes into effect, banks will no longer be allowed to pay interest to, or receive interest from individuals. The move will likely paralyze financial intermediation, and exacerbate pre-existing problems in the financial industry. Financial intermediation remains shallow compared to the standards of the Middle East and North Africa (MENA) region, particularly with lack of adequate lending opportunities in the non-hydrocarbon sector. Moreover, elevated risks to financial stability are worsened by the presence of several entities providing financial products and services outside of the formal banking system, especially currency exchange and transfers and short-term lending. Although the Central Bank of Libya (CBL) has adopted procedures with respect to foreign exchange transfers abroad through the announcement of licensing requirements for exchange operators, we believe that the size of the informal sector will remain significant. Regulatory and supervisory capacity remains limited, with measures to strengthen balance sheet resilience and prevent the build-up of excessive sectoral exposures appearing necessary to improve structural risks.
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Lack Of Reforms Will Hit The Non-Oil Economy
Although structural reforms of the industry would be key to improving efficiency and stability, these are unlikely to materialise anytime soon. Indeed, political risks in Libya are increasing as a result of growing instability in the Sahel region, while risks of increased fragmentation remain significant as regions outside Tripoli refuse to cede power to the central authority ( see our online service, January 28, 'Regional Instability Increasing Security Risks'). As the government remains focused on the security situation, it is unlikely to have the political clout to implement structural reforms on the banking system. In particular, Tripoli is highly unlikely to succeed in clamping down on the informal financial industry.
We have often highlighted that growth in Libya's non-oil economy is likely to remain anaemic going forward, given limited foreign investment and the government's lack of institutional capacity to implement reforms to the labour market. The lack of a growth-enhancing financial system compounds this situation, as limited access to credit for startups, entrepreneurs, and small and medium-sized enterprises is set to continue hindering the expansion of the commercial private sector. This reinforces our view that the oil industry, which currently comprises approximately 80% of the economy, will remain the key driver of growth going forward.