Libya explores new funding options

19 December 2012

Government seeks to unlock liquidity for projects

Efforts to open up the Libyan banking sector are gathering pace as the country seeks to unlock new sources of liquidity to fuel the country’s recovery.

There are a number of discussions taking place within the Libyan banking sector about providing a greater range of banking services, such as retail, commercial and project financing.

The use of the public issuing of investment certificates, Islamic financing and asset financing are also options being considered.  

UK-headquartered law firm Hogan Lovells is one company looking at opportunities to oversee the creation of these new finance tools.

“There are draft term sheets circulating for a couple of projects,” says Tarek Eltumi, senior associate at the law firm, who predicts an increasing flow of request for proposals in 2013.

Under the Muammer Gaddafi regime, the Libyan banking sector was dominated by a few state-owned banks, with projects funded by government-owned entities on very flexible terms.

The general population had extremely limited access to banking services such as credit cards and loans, with banks used primarily for cash deposits.

This has ensured the Libyan banking sector is extremely liquid and it is a source of financing that the new government headed by Prime Minister Ali Zidan is keen to tap into.

“Libya’s banks want to employ Islamic finance and conventional finance strategies to finance semi-state owned projects, as well as to access the local market and give local people access to finance for their daily needs,” Eltumi says.

“Income isn’t very strong and there is only so much the Libyan government can do, so opening up finance so people can buy apartments, build homes, and buy cars is a logical step and something that is going to happen,” he adds.

A new Islamic banking law was approved in May as a means of opening up a new form of financing. Islamic finance was not supported under the rule of Gaddafi.

There are still ongoing discussions on how Islamic finance will be implemented in Libya’s banking sector and it is not expected to overshadow conventional financing.

An IMF report in May noted that the Libyan banking sector remains “underdeveloped” with very large deposits held by the Central Bank of Libya and credit representing a small share of gross domestic product.

Commercial bank deposits at the central bank increased from LD43.9bn ($34.7bn) at the end of 2010 to LD46bn as of February 2012. Credit to the private sector contracted from LD8.8bn to LD8.1bn over the same period.

The IMF recommended that banks modernise their commercial operations moving away from cash-based transactions. It praised efforts by the central bank to promote payment instruments such as credit cards, and stated that “financial intermediation will be an important component of the post-revolution private sector-led growth strategy”.

Various global development agencies are now reviewing how they can support Libya’s reconstruction, with the World Bank’s IFC confirming it is working on Libya’s strategy and identifying sectors to support. The African Development Bank has also conducted missions into the country.

There are currently around $60bn-plus worth of contracts and commitments secured before the revolution being reviewed by the Libyan government.

Investment is beginning to return to Libya, with Italy’s Eni pledging in mid-December to invest $8bn in the development of ongoing production and new exploration activities over 10 years.

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