World Bank sheds light on weaknesses of financial and banking sectors in Libya

The World Bank recently issued a report on the financial and banking sector in Libya, amid a state of uncertainty and the absence of accurate information due to the turbulent situation and the state of division.

The World Bank stated, in its summary of its report, that it had finished studying the financial sector in Libya.

The study showed that even before the ongoing war since 2011, the Libyan financial sector was not developed enough, but the current political crisis has weakened financial intermediation activity and financial inclusion efforts in Libya.

It also explained that it prepared the report on the financial sector in very difficult circumstances, as the mission had to postpone its work more than once due to security tension, until the security situation improved for a short period and the work team of the Finance, Competitiveness and Innovation Sector was allowed to travel to the capital, Tripoli.

The delegation held meetings with stakeholders such as the Central Bank of Libya, the Credit Information Center, the Insurance Supervision Authority, the Deposit Insurance Fund, a number of banks, financial leasing companies and insurance companies, in addition to holding consultations with the Central Bank of Libya in Tunisia and Rome to discuss the report and its recommendations and was able to complete the study required in summer 2020.

The report concluded by reviewing the features of the financial situation in Libya, describing it as “complicated”, as there are two central banks operating in the country, and the Central Bank of Libya, “Tripoli”, is under the control of the Government of National Accord.

The rival central bank in Bayda, in eastern Libya, is under the control of the Eastern Province government. The split between these two central banks has led to a complete weakening of control over monetary policy, fiscal policy, and the performance of banking supervision of banks because each of these two central banks prints money and issues currency without coordination and in the absence of comprehensive fiscal policy controls.

The value of the Libyan dinar has dropped significantly, resulting in unequal access to foreign exchange.

The World Bank considered that the Central Bank is the largest shareholder in government banks that acquire 90% of deposits and loans in this body, and this entails aspects of conflicts of interest, including possible leniency in favor of state-owned banks, as well as granting credit to beneficiaries with ties.

Although the authorities are studying making some reforms in this area; all attempts have been temporarily suspended in light of the current crisis.

The report pointed out that banks are losing sufficient information and capabilities to make sound credit decisions.

The banking sector itself suffers from insufficient capital, and the value of assets of state-owned banks is questionable and uncertain, and the stock market has basically stopped working with the lack of public trading operations. Other forms of financing, such as financial leasing and insurance, are still in their beginning.

The report wondered about the possibility of doing something to support the development of the financial sector in Libya, asking if it is even possible under the current conditions?

It explained briefly that it was “possible,” but indicated that the current political environment poses significant challenges.

Reform/stabilization of the monetary system is a precondition for any progress in the field of financial intermediation services, but this can only be achieved after the unification of the two central banks in Libya.

It is expected that the work of the international review of the two central banks will be carried out in the near future, which is the first step towards unification.

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