UAE. The Libyan General National Congress (GNC) looks to amend regulations of the financial services sector and to introduce Islamic financing into Libya for the first time.
Changes in approach and philosophy
In the past, the banking and finance sector in Libya was very limited, and the sector was dominated by a few state-owned banks. The country was primarily a cash based society, with people generally wary of the banking system. As a result financial services have largely been limited to basic cash deposits and withdrawals to date.
The interim National Transitional Council (NTC) recognised that the country would need to have confidence in the banking sector to facilitate its future redevelopment. In order to help realise this objective, Mustafa Abdul Jalil, the head of the NTC, declared that going forward Libya’s banks would begin offering Shariah compliant financial services.
This initial announcement about the future role of Islamic financing made to the crowds in Kesh Square in Benghazi has now been followed by concrete steps; in particular, the Central Bank of Libya (CBL) obtained approval from the NTC to promulgate Law No. 46 of 2012, which formally introduces Islamic banking and finance to Libya for the first time.
The introduction and development of an Islamic banking and finance market took another major step forward on 7 January 2013 when the General National Congress (GNC) promulgated Decree No. 1 of 2013 banning the charging of interest on loans granted to individuals.
At the same time, it was further announced by the GNC that the same principles will start to apply to corporate loans, as from 1 January 2015. Additionally, under this law, a special fund was established to provide interest free loans. This fund is to be under the supervision of the CBL.
Licensing and supervisory functions
Under both Law No. 46 and the existing Libyan Banking Law of 2005, the CBL is responsible for the licensing and supervision of commercial banks, Islamic banks, lease finance/hire purchase companies, representative offices of foreign banks, currency exchange businesses and investment funds.
Most CBL powers are vested in the board of directors, which, inter alia, is responsible for issuing banking regulations; issuing permissions; determining minimum capital requirements; and approving a bank’s memorandum and articles of association. In an endeavour to ensure that all of these areas are going to be properly supervised in the future, the number of CBL’s board of directors has been increased by an additional two members to a total of nine.
The CBL Governor (the Governor) has also had his powers increased through the law. Article 26 of the new law is noteworthy in that it specifies that all regulated financial institutions are obliged to notify the Governor of their designated nominees for the positions of general managers and board directors within a week of their selection. The Governor then has two weeks from receiving such notification to either approve or disapprove such nominations.
Discrepancies and contradictions
Currently there are a number of discrepancies between the new law and some of the existing supervisory legislation. This has resulted in confusion as to which body is responsible for supervising what. We note that this is an issue that is currently under discussion between the relevant government institutions.
For example, in the case of supervision of investment funds, as of 25 January 2010, the Stock Market Authority was the relevant regulatory authority. Four days later, the General Monetary Control and Supervisory Board for Non-Banking Financial Instruments and the Ministry of Economy took over this power, on the grounds that these products were dealt with under Law No. 23 of 2010 (one of the main pieces of commercial business legislation). Law No. 46 was then promulgated clearly placing this responsibility on the CBL.
This is all very confusing and contradictory and unless greater clarity is provided quickly, it is likely to put a brake on the development of this sector, as investment companies will not be willing to develop new products if the regulatory aspects are not clear. Additionally, investors will not invest in this type of product unless the rules of the game are made clear from the outset.
A key question, therefore, is whether there should be a separation between the role of financial institution regulation and market regulation. In our view, if Libya wants to be the commercial hub of the region, this platform should be considered as a starting point, as soon as possible.
An example of this is the United States Securities and Exchange Commission (SEC). The SEC is an independent regulator which was established primarily to regulate the stock market and prevent corporate abuses relating to the offering and sales of securities and corporate reporting. The SEC has the power to license and regulate stock exchanges through five main divisions:
trading and markets;
Each division has its own responsibilities. For instance, the corporation finance division oversees the disclosure made by public companies as well as the registration of transactions made by companies. The investment management division oversees investment companies, including mutual funds and investment advisers.
As well as looking at very sophisticated markets, such as the USA, Libya might be well advised to look at how similar issues have been tackled and addressed elsewhere in the MENA region, particular in the GCC, which also started from a low regulatory base in the not too distant past.
Whilst most of the GCC countries still have some way to go in developing consistent and effective rules for the regulation and supervision of financial institutions and financial markets, most financial commentators would say that they have made good progress in the last 10 years or so.
One of the messages that GCC regulators would probably want to share with their Libyan counterparts is that effective financial market regulation and oversight as well as a strong grip on market abuse and financial fraud are difficult objectives to achieve. In order to do this, clear common objectives, separation of powers and clarity of written rules and regulations are of paramount importance.
Libya must do this if it is to raise the competitiveness of its domestic banking markets, broaden and deepen its local equity markets, develop new Shariah-compliant financing techniques and products and more broadly provide a safe and secure customer focused approach to the growing needs of a new and more entrepreneurial Libyan customer.
Disclaimer: The views set out in this article do not constitute legal advice and readers are urged to seek specific legal advice in relation to any particular issues which arise from the subject-matter of the article.
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