Islamic banking in great demand as Libyans revive war-torn economy

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A Libyan banknote with legendary Omar Mukhtar's image on it. Photo - Feb17.info

Libya’s interim government said it is introducing a law that will allow the establishment of stand-alone Islamic banks in order to attract cash and rebuild the war-torn economy.

“When the people see Islamic banks, they’ll put this money there,” Deputy Central Bank Governor Ali Mohammad Salem said in an interview in capital Tripoli. “It’s a win-win situation. The money that’s now outside the system will be circulated in the economy and used in development.”

The top banker also said that Shariah-compliant lenders in Libya may be able to attract an estimated 15 billion dinars ($12 billion) outside the banking industry. Total commercial banking assets were about 71 billion dinars at the end of 2011.

Majority of the nation’s 6.7 million people are Muslim.

The North African nation’s economy shrunk 61% due to last year’s uprising that overthrew its 42-year-old regime of Moammar Gaddafi. Violence between pro and anti Gaddafi forces and NATO bombardment caused oil production drop to virtually zero from 1.6 million barrels a day.

Libya holds Africa’s biggest crude reserves. It is now pumping more than 1.3 million barrels a day, or about the combined output of Qatar and Ecuador, data compiled by Bloomberg suggests. According to International Monetary Fund (IMF) estimates, the country’s economy is expected to grow 76% this year, the most since the last 25 years.

Islamic Recovery

IMF recently said the Tripoli does not need any assistance from world’s financial bodies in order to revive its economy.

“Islamic banks could be one of the tools of development,” Salem said. “We hope that Islamic banks will focus on real investments and not just consumer-linked products such as cars,” he added.

Islamic finance, based on Shariah, makes it vital that transactions, as well as profit and loss-sharing agreements, are based on the exchange of assets rather than interest.

Mustafa Abdel Jalil, the chairman of the Libyan National Transitional Council, announced in October last year the interim government plans to eradicate interest from the banking industry. Charging interest breeds “disease and hatred,” he said.

According to a report published on the Libyan central bank website, interest-bearing accounts, such as savings and time deposits, slid 8% and 6.6% respectively last year compared with 2010. So-called demand deposits, which don’t pay interest, increased 9.5% last year.

Rush for Islamic Banking

Gumhouria-Bank, a state-owned lender, has three branches offering Islamic banking services. Jamal Ajaj, the director of the lender’s Islamic banking project, says the institution is unable to cope with requests from companies and civil servants due to high demand for Shariah-compliant financial services. He added that the surge in demand for interest-free banking has helped “informal banks” mushroom around the country.

“It’s proof that Islamic banks will support the economy and bring out the money stored in the homes and the excess liquidity at corporates,” he said in an interview.

The Libyan central bank announced in October it plans to allow lenders to sell Islamic bonds to help develop banking services.

Egypt and Tunisia, which saw uprisings that led to the ouster of long-serving rulers, also plan to permit the sale of debt that comply with Islamic principles. Bahrain, Dubai and Ras al-Khaimah are the only sovereign states in the Arab world that sell global dollar-denominated sukuk.

According to data compiled by Bloomberg, global sales of sukuk more than doubled so far this year to $12 billion from the year-earlier period.

Priorities

The deputy central bank governor said he will help domestic Islamic lenders develop on a top priority basis during the next three years before opening the door to international banks. Libyan Central Bank Governor Saddek Omar Elkaber promised in November that bank licenses issued to foreign banks before last year’s civil war, including one given to Qatar Islamic Bank, will be honoured at all costs.

Demand for Islamic financial services in Libya is attracting attention from a wide segment of the population, many of whom withdrew their money during the revolution because of widespread looting, unrest and imposition of banking controls.

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