Opportunities in Libya - Banking and Finance

Ongoing investment in Libya is driving expansion of banking assets: 36% year-on-year in April 2009. The banking sector is dominated by the Libyan Foreign Bank (LFB) and four state owned or controlled commercial banks (85% of assets).

Banking Law of 2005 established the Central Bank of Libya’s independence and role as regulator. At present, the CBL is cautiously reforming the banking sector.

Libya’s financial services industry remains highly protected, according a recent European Union report. Shares in some of the state banks have been offered to Libyan citizens, and private banks are permitted, but the banking sector has not been opened to foreign institutions; Islamic finance is largely absent from the market.

The most significant reforms in the service sector over the past decade have occurred in banking and finance. Banking Law No.1 of 2005, along with the Anti‐Money Laundering Law No.2 of 2005, are aimed at creating a new legal framework for the banking system in Libya.

The country’s five public banks were recapitalised and its four private banks licensed. The Bank of Commerce and Development is the most substantial of the four private banks and has led the way in the modernisation of Libya’s banking sector by introducing modern services such as ATMs and credit cards. Twenty-one regional banks have been merged, banking supervision reinforced, interest rates and foreign exchange partially liberalised, and the exchange rate unified.

The year 2007 saw the start of a strategy announced by the Central Bank in 2004, to develop and modernise the banking system to meet international standards.

Minority stakes of two Libyan banks were sold to foreign investors. The first step was to sell off a minority stake in Sahara Bank, the second largest commercial bank with total assets of around $3.6 billion. BNP Paribas SA won a bid for the privatisation of Libya's Sahara Bank with 19% of the shares, for about €145 million with the option to raise their participation up to 51% in three to five years.

The Wahda Bank sale was structured in the same way as the previous deal, with the offer of an initial 19% stake.

As the EU report says, liberalisation of financial services offers potentially significant economic benefits along with high risks. Significant short term adjustment impacts are likely to be experienced as the domestic industry contracts in response to increased competition, and careful phasing will be needed to minimise these. Strong regulation and supervision will remain essential, to avoid a significant increase in the risk of financial instability and potential for major adverse economic and social impacts.

State-owned and private commercial banks offer a similar product range. Retail services include current and savings accounts, loans and money transfer. Corporate customers are offered trade finance and cash management services. Banks may open l/cs and guarantees for foreign corporates operating in the country.

The CBL has been working with the IMF to create a structured capital market and the first sovereign bond issue is expected in 1-2 years, according to observers. There has been a gradual improvement of banking supervision with centralising data and improving processes.

Historically, Libya has lacked a credit culture: banks sat on liquidity and the limited lending activity that existed was to the public sector, and was poorly controlled. In response, the CBL has been working on a central Credit Bureau for the last year.

The database has been in operation from April 2009 and 25% of individuals and corporates have been assessed.

The Credit Bureau will improve comprehension of lending risks, but also seeks to encourage lending; stimulation of economic growth and enhancing banks’ profitability. The project is supported by a team of international specialists and a

38% increase in lending is expected in 2009.

The CBL has been seeking to upgrade technology supported by international experts.

A project currently coming to fruition is the National Payment System; previously, payments were slow and unreliable, sometimes even made through another country.

Order 19 (of May 2009) allows local banks to form strategic partnerships. Up to 49% ownership by a foreign entity is permitted. Foreign branches and representative offices are now allowed. In 2008, a number of foreign commercial banks won approval to open their representative offices, including two UAE banks: Abu Dhabi's First Gulf Bank (FBG.AD) partly owned by the Economic and Social Fund of Libya and National Bank of Abu Dhabi (NBAD), one bank from Qatar Masraf al rayan, interested in the strategic geographical location of Libya as well as Egyptian investment bank Beltone Financial, also in partnership with Economic and Social Fund of Libya.

In addition, seven other foreign banks currently operate representative offices in Libya: Bank of Valleta (Malta), UBI (France), Bawag (Austria), BACB (UK), the Housing Bank for Trade and Finance (Jordan), Suez Canal Bank (Egypt) and ABC (Bahrain).

In March 2005 a new law allowed the opening of branches of foreign banks for the first time, with minimum capital of $50 million. Foreign banks have expressed interest, and HSBC and Qatar National Bank have opened branches. BACB has started discussions about the acquisition of a stake in the Bank of Commerce and Development. Others reported to be interested are Standard Chartered, Crédit Industriel et Commercial and Citigroup.

Overall, despite progress, the country’s banking system remains highly centralized. Libya has looked to a number of sources of foreign advice in pursuing reform. In October 2008, a cooperation agreement was signed between the Libyan Stock Exchange Market and London Stock Exchange, providing for training teams from the Libyan Stock Exchange in Tripoli and London to enable them to run stock market operations.

Limited deregulation of the insurance market began in 1999 with the creation of the United Insurance Company as a joint public/private venture, and approval has been given for two private sector insurance companies.

Global Arab Network

Material for this report comes from a draft final report published as part of the EU-Libya Free Trade Agreement negotiations. Additional material comes from a recent talk on Libyan banking by Michael Parr, the Chief Executive of the British Arab Commercial Bank (BACB).

This article appears in the fortnightly bulletin of the Arab-British Chamber of Commerce (02/09/2009)

Link: http://www.english.globalarabnetwork.com/200908282425/Finance/opportunities-in-libya-banking-and-finance.html

The Potential - Islamic Finance

Italy

Malta may be primarily used by Islamic Finance Institutions to reach the Islamic community in Italy. Around 1.4 million Muslims live in Italy and there are 70 thousand companies set up by citizens coming from Arab countries. However, an Islamic bank is far from appearing in Italy, despite the fact that investors are saying they are ready for it. Analysts are of the opinion that Italy does not have the tax and regulatory framework to deal with the basic products of Shariah Finance.

In this despite, Italy has seen the first Murabahah deal which has been conclded in Pavia. It featured the acquisition of an industrial building by a special purpose vehicle and its disposal to a local Muslim Association for its use as a cultural center. It seems that this will be followed by an Ijarah wa iqtina transaction. However, the double stamp issue made this transaction very costly

Malta may offer the solution to mitigate such double taxation. Given the jurisdictional rules that Malta has together with its Double Taxation agreement in Italy, the above mentioned Murabahah deal could have avoided the double stamp rules in Italy. This may have been achieved through a holding company in Malta that has a 100 percent subsidiary in Italy. Henceforth, Islamic Financing is possible in Italy through the use of Special Purpose Vehicles in Malta. It must be emphasised that the costs of maintaining special purposes vehicles in Malta is considered to be highly cost efficient.

North Africa

After years of watching from the sidelines, North Africa has begun to embrace Islamic finance. Growth could be far slower than in the Middle East given resistance from political and business elites and more flexible views on which loans and investments qualify as Islamic, analysts predict.

As previously stated, Malta has a Double Taxation Agreement with Libya. This allows Malta to act as channel for Shariah Financing in Libya. The Malta and Libya relations have been traditionally very strong with a clear mutual political sympathy and understanding. In fact Malta, has acted as a strong base for conventional banks to reap the opportunities offered by Libya. Evidence of this is the strong presence of Turkish Banks and Austrian Banks in Malta as well as the representation offices in Libya of Malta banks.

Malta can in this sense assist Islamic Finance Institutions to reap the benefits that Libya offers. Furthermore, through this opportunity Malta may be also giving a social contribution to various North Africans that do not have access to financing.

Apart from Libya, Malta is also an ideal location to reach other North African Countries such as Tunisia.

The Domestic Market
There is a tremendous demand in Malta for project financing that Islamic Financial Institutions may tap into. This is particularly so in the Real Estate as well as other Shariah Compliant projects. IFIs that are looking for investment opportunities should look to Malta as opportunities are guaranteed. In this sense, Malta can be used as a test market in the EU. Given its size IFIs can start testing the waters through smaller investments which would have the required profits and the social contribution necessary.
Malta - The Opportunity

Apart from being in the ideal strategic location Malta offers various other advantages. Given Malta’s Tax Regime, Islamic Financial Institutions establishing in Malta shall be at an advantage with respect to achieving tax efficiency as opposed to those establishing in other EU member states. This is not only with respect to various special purpose vehicles as aforementioned but also for example with respect to the registration of Islamic Funds in Malta.

Establishing in Malta also means the possibility of accessing the other 26 EU member states. Through the integration of financial markets in the EU this is becoming all the more possible. The so called EU passporting where an institution authorised in an EU country may offer products throughout the EU without the need to have a separate authorization renders Malta an even more attractive place for Islamic Financing.

Malta offers an efficient cost structure with highly trained multi-lingual professionals in financial services. The Malta Institute of Management is also training professionals in Islamic Finance to ensure that the necessary resources are available in Malta. This is being done in collaboration with International organisations.


Shariah Funds – The Malta Financial Services Authority (MFSA) is of the opinion that Shariah funds may be set up immediately as there are no major changes necessary to Maltese legislation The MFSA in its analyses has considered various types of funds including Ijarah Funds, Murabaha Funds and Commodity Funds. Particular structures through the use of special purpose vehicles or the use of mixed funds are also possible. Even in these cases the Malta tax system puts certain Islamic Funds at a level playing field.

Islamic Banking - With respect to Islamic Banking as opposed to Shariah Funds the Maltese Legislation will be going through some legislative changes in order to ensure that they accommodate the operational structure of a Shariah Compliant Bank and hence granting a fully fletched licence. Changes in the Banking Act and the Financial Institutions Act are expected shortly. Furthermore, there are Income Tax Act, Duty on Documents and Transfers Act and VAT Act changes that are being proposed in order to ensure that Shariah Institutions are not at a disadvantage.

The analysis engaged into so far by the MFSA includes various types of contracts including Musharaka, Mudaraba, Murabaha, Bai’muajjal, Ijara, Bai’Salam. The various types of bank accounts have also been analysed. The MFSA seems to see no difficulty in adapting the current legislation to enable the functionality of these contracts. The Financial Services Industry has proposed evaluation and analysis of other types of contracts as well.


Takaful and Sukuk - These are not new concepts to Malta particularly Takaful. A similar concept existed in Malta with the co-fraternities. The origins of the APS Bank (the bank owned by the Church in Malta) are actually based on similar principles as Takaful. No major changes to the legislation are expected. It is the opinion of the author that both Takaful and Sukuk are already possible in Malta. There might be certain tax implications with respect to certain structures which may be dealt with directly with the Commissioner for Inland Revenue.
Conclusion
As the legislation stands there are various Islamic Finance Transactions that can take place in Malta both in the domestic market as well as in the Euromed region. On the other hand the Maltese Authorities are actively working in order to ensure that more Shariah Compliant transactions are facilitated.

Islamic Financial Institutions establishing now may benefit of the professional enthusiasm that currently exists towards the sector in Malta and its neighbouring partners. There are various structures already possible and there will be more to come.

Malta is an advantageous location for Islamic Finance in the Mediterranean and Islamic Financial Institutions are encouraged to benefit from the opportunities this country in the Mediterranean provides.

Thanks: Reuben M Buttigieg