Libyan Banking Sector Needs Strengthening, Says IMF

The International Monetary Fund (IMF) has released a report highlighting the need for reforms to strengthen the governance structure of Libya’s banking sector. The report emphasizes the importance of stricter internal separation between functions overseeing investments and banking supervision.

Governance Structure Reforms

• Every bank should have an executive committee comprising senior executives
• Establishment of committees focusing on:
  • Credit risk
  • Assets and liabilities management
  • Operational risk
  • Compliance
  • Legal risk
• Comprehensive management committee structure will facilitate implementation of board strategy, create accountability, and reduce corruption

Improved Reporting Systems

• Development of comprehensive internal and external reporting systems to strengthen management and supervision
• Requirement for banks to publish unaudited interim statements
• Gradual roll-out of a modern bank reporting system to enhance offsite analysis and risk identification

Recapitalization Needs

• Libyan banks are likely in need of recapitalization due to deficiencies in asset impairment recognition and provisioning
• Sector’s capital adequacy ratio is around 16 percent, largely due to large exposures to the Central Bank of Libya (CBL)

Non-Performing Loans (NPLs)

• Importance of improving identification, monitoring, and reporting of NPLs
• Sector’s NPL ratio stands at around 20 percent, but this may be an underestimate due to conflict and political instability
• Central Bank of Libya should request banks to undertake asset quality review and develop recapitalization plans

Pillar II Capital Add-On

• Recommendation to use pillar II capital add-on to influence bank behavior and risk profile
• Apply a capital add-on to banks with risks not fully reflected in Basel I capital, such as concentration and liquidity risks

Enhanced Credit Underwriting Framework

• Need for an enhanced credit underwriting framework to mitigate against credit losses
• Banks should adopt clear underwriting standards, exposure limits, and controls necessary for effective implementation

Credit Quality Assessment

• Importance of periodic assessment of credit quality by banks
• Identification of signs of delinquency and assignment of a credit rating commensurate to the asset’s likelihood of default
• Enable banks to allocate adequate resources to deal with deteriorating credit quality and prepare for potential losses

The IMF’s recommendations aim to strengthen the governance structure, improve reporting systems, and enhance risk management practices in Libya’s banking sector. The report is part of a broader effort by the international community to support financial sector development in the country.