Financial Crime World

Libyan Arab Jamahiriya: Combating Financial Crimes in the Banking Sector Amidst Fragility and Conflict

Overview of Challenges in Libya’s Banking Sector

The banking sector in Libya continues to face numerous challenges that hinder financial stability and hinder credit growth. This article provides an overview of these challenges and recommends priority reforms based on the 2012 sound principles for effective supervision issued by the Basel Committee for Banking Supervision.

Challenges Facing Libya’s Banking Sector

Underdeveloped Sector

  • Decades of socialist policies during the Gaddafi era
  • Civil war and political infighting
  • Impaired credit intermediation
  • Low private sector participation in the economy

Development of Islamic Finance Products

  • Prohibition of interest rates since 2013
  • Adaptation to an Islamic system
  • Credit growth hindrance
  • Compensation through fee income
  • Parallel foreign exchange market

Banking Sector Ownership and Competition

  • Central Bank of Libya (CBL) owns two largest banks
  • Compromised competition
  • Damaged governance
  • Conflict of interest
  • Public sector mindset

Commitment to International Standards

  • CBL’s goal to introduce international standards
  • Basel II capital accord and capital adequacy ratio above 12.5%
  • Basel III net stable funding ratio and liquidity coverage ratio
  • Lack of skilled personnel and outdated systems

Financial Crimes and AML/CFT Measures

  • Capital flow measures and macroprudential measures to protect foreign exchange reserves
  • Paved the way for a parallel exchange rate market
  • Criminal groups obtained US$ at the official rate
  • CBL now clears US$ for Libyan banks, conducts AML/CFT checks, and funds approved LCs

Priorities for Effective Banking Supervision

Conditions for Effective Banking Supervision

  • Strengthen financial stability mandate and governance architecture
  • Improve Islamic finance expertise
  • Develop a macroprudential framework
  • Ease CFMs/MPMs as conditions permit

Implementation of Reforms

  • Gradual and consultative approach
  • Support development of human capital and systems at commercial banks and the CBL

Conclusion

Effective banking supervision can help strengthen Libya’s financial sector and support economic development. By implementing priority reforms using the 2012 sound principles for effective supervision and adopting a gradual, consultative approach, the authorities can work towards a more stable and efficient banking sector.