Libya Bank Lending Paralyzed Amid Interest Ban: Islamic Finance

Ali Gumma finally saved enough money to buy a plot of land near Tripoli and was planning to build a family home when he hit a brick wall: He couldn’t find a Libyan bank willing to lend him the money.

“I can’t afford to build it on my own,” the 52-year-old university professor said in an interview in the capital. “Traditional banks are barred from offering loans because they aren’t Islamic but no alternatives have been introduced.”

Euphoria over a law passed this year that would make Libya the third Middle Eastern country after Iran and Sudan to ban non-Shariah compliant banking by 2015 has turned into frustration and confusion. Parliament and the central bank have distanced themselves from the decision of commercial lenders to stop offering loans immediately. The law didn’t stipulate when the transition would start, according to Omar Hamaidan, a spokesman for the legislature.

“There seems to be a lack of guidelines for what banks should do with customers,” Mohammad Farrukh Raza, managing director of U.K.-based Islamic Finance Advisory & Assurance Services, who recently visited Tripoli, said in an interview. “The general feeling is that the sector has stalled.”

Loan Growth

Loans and advances in Libya, holder of Africa’s largest oil reserves, climbed 17 percent in the first nine months of 2012, according to the latest central bank data. The loan-to-deposit ratio stood at 25 percent, compared with more than 50 percent in neighboring Egypt.

Libya’s law takes efforts to promote Shariah-compliant finance a step further than Tunisia and Egypt, where Islamist groups that came to power in 2011 following popular uprisings have sought to integrate Islamic banks and debt into the financial system. The two countries are planning their first sukuk sales this year to diversify funding sources and cut borrowing costs.

The average yield on sovereign Islamic bonds has plunged 113 basis points, or 1.13 percentage points, since the start of 2012 to 2.77 percent May 14, according to the HSBC/Nasdaq Dubai Sovereign U.S. Dollar Sukuk Index. The drop helped sales in the six-nation Gulf Cooperation Council, which includes Saudi Arabia and the United Arab Emirates, triple last year to about $21 billion, according to data compiled by Bloomberg.

Fitful Transition

Unlike its neighbors, Libya has no immediate plans to sell sukuk, Central Bank Governor Saddek Elkaber said in a May 9 interview in Beirut.

Elkaber said the regulator initially wanted to promote Islamic lenders alongside so-called conventional banks. The General National Congress chose to ban non-Islamic banking outright in response to “the desires of the street and pressures,” he said, adding the law doesn’t apply to institutions.

The debacle adds to Libya’s fitful transition since the end of the armed conflict that ended Muammar Qaddafi’s rule in 2011. Authorities are struggling to rein in the militias and root out radical Islamists from the oil-producing east. A timetable for the democratic transition has been largely abandoned while the May 5 passage of a bill to purge senior Qaddafi-era officials from office threatens more delays.

Unhappy Citizens

While the 200-member GNC didn’t order banks to stop giving out loans, banning interest left lenders scrambling to find Shariah-compliant alternatives, Fathi Agoub, adviser to the governor, said. “We understand the feelings, needs and situation of the citizens who aren’t happy with these procedures,” he said.

At a Tripoli branch of Gumhouria Bank, the country’s biggest, manager Miloud Taher throws his arms up in despair.

“Customers are angry; they come every day to ask when they will be able to get loans and prepayments to solve their problems,” Taher said. The bank offers Islamic car loans, which some customers use “because as soon as they buy the car they sell it new in order to get money,” he said.

Gumhouria had assets of $6.46 billion and 142 branches before the 2011 uprising. Standing inside the branch, mother-of-two Khadija, a school teacher, said she’s been trying for two months to get a loan to finance her daughter’s wedding. “I need financial support from the bank,” she said, declining to give her full name. “It used to be very easy to get a loan and it only took a few days.”

Lives ‘Paralyzed’

Taher said he doesn’t believe banks can hold off giving out personal loans and overdrafts for as long as two years. “The lives of people are paralyzed,” he said. “That is why we urge the congress and the Central Bank to find ways to help customers to get loans and make prepayment more easier.”

The process “probably has to be reviewed and restructured to allow the system, infrastructure and resources to match the challenge,” said Raza of the Islamic Finance Advisory & Assurance Services. “Islamic banking is a priority, but probably they have bigger priorities as well, so I’m not sure if enough thought was possibly given to this challenge.”

In the meantime, the central bank plans to award about three licenses for domestic Islamic banks, Elkaber said. The minimum capital requirement is 250 million Libyan dinars ($196 million), according to Ali Shambesh, director of statistics and planning department at the central bank.

Qatar’s Masraf Al Rayan said in February it planned to buy a stake in a Libyan bank to gain foothold in the country.

Elkaber cited Libya’s oil-generated cash resources for the decision not to tap global sukuk markets in the short term, even as borrowing costs decline. The yield on Dubai’s $1.25 billion 6.396 percent sukuk maturing next year fell 10 basis points last week to 2.16 percent. The yield was little changed today, according to data compiled by Bloomberg.

“We don’t have a problem with liquidity,” the governor said. “We want to employ the liquidity properly.”

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