Libya opens up banking sector as trade partners scramble for visas

Libya's decision to halt visa issuance to visitors from the Schengen zone this week, significantly hampering business traveller movements, contrasted sharply with a major new initiative in the country's efforts to restructure its economy.

Tuesday's Financial Times carried a back-page advertisement announcing the Libyan Central Bank's invitation to international banks to express interest in setting up a subsidiary.

The Central Bank of Libya is to offer two licenses to foreign banks which would have an ownership of up to 49 per cent in the new banks with full management control.

The remaining 51 per cent stake would be owned by domestic investors.

The Central Bank has undertaken to handle matters related to the issue of the new licences and has pledged to mobilise domestic investors.

Interested institutions are to possess a Tier I capital of over $2 billion, a credit rating of at least Baa2 by Moody's or BBB by S&P or Fitch, and a well established international presence.

Allowing foreign banks to operate in Libya is an important aspect of the country's financial sector reform strategy.

According to an information memo accompanying the Central Bank's announcement on Tuesday, the reform programme aims to diversify the economy away from oil and promote the private sector's role.

Libya's banking landscape has witnessed significant change over the last three years with deposits doubling and privatisations, mergers, IPOs and the opening of foreign banks taking place. According to the memo, out of the 16 commercial banks currently licensed in Libya, six have foreign strategic partners. Significantly, the memo said Libya's "entire banking system will be in private hands by 2011".

After the banking law was passed in 2005, the Central Bank, itself established in 1956, has implemented a gradual liberalisation of the sector while striving to modernise its own operations and upgrade the monetary policy framework.

In 2007, Sahara Bank, Libya's second largest public bank, become the first financial institution to enter a strategic partnership and has a network of 48 branches in main regions and over 1,500 staff, with a large portfolio in corporate and retail banking. BNP Paribas has a 19 per cent stake in the bank. Arab Bank similarly holds a 19 per cent stake in Libya's Wahda Bank. Both foreign partners have the option to raise their stake to 51 per cent within five years. Bank of Valletta is one of 19 foreign banks to have representative offices in Libya.

The advertisement in the FT indicates there is widespread public support for the reform of the Libyan economy.

"The prudent macroeconomic and foreign exchange reserve management has left the economy unimpacted by the global financial turmoil. Non-oil economic growth has been strong and averaged about nine per cent annually since 2005. Libya's external assets surpassed $135 billion at the end of last year," the advertisement read.

On the business front, Libya has attracted untold millions in foreign investment from all over the world - not least from Malta from where heavy investment in sorely needed infrastructure has been constant over recent years. But the country has a long way to go in terms of business friendliness.

Libya was recently ranked 173rd in the 2010 Index of Economic Freedom, a study by the Heritage Foundation and the Wall Street Journal. Ranking Libya last out of 17 countries in the Middle East and North Africa, the study said the country had one of the region's most burdensome bureaucracies despite modest improvements in business climate. Bureaucracy is non-transparent, complex, inefficient and subject to political influence.