Libya's banks can't carry the economy alone

Libya does not suffer from banking weakness alone, but from the absence of an integrated and diversified financial system. Addressing this requires reducing reliance on banks, expanding financing channels, and building institutions and markets capable of mobilising savings and directing them towards investment.

For decades, the banking sector has been treated as though it constituted the entire financial system. This narrow view has limited the economy's capacity to grow, because banks, however important, cannot finance every need of companies, entrepreneurs and infrastructure projects, nor can they provide the right instruments for every stage of economic activity.

When savings and financing are concentrated almost entirely in banking channels, the result is a shallow financial system with limited capacity to distribute risk or provide long-term financing and funding for new ventures. The problem, therefore, does not lie in bank performance alone, but in the absence of institutions and markets that complement banks' role and prevent them from being burdened with financing the entire economy.

Building a diversified financial system

Reform requires moving from an exclusive focus on banks towards an integrated system that includes:

• Commercial and retail banks
• Investment banks
• Development and specialised financing institutions
• Insurance companies and finance-leasing firms
• Investment funds
• Private equity and venture capital firms
• Asset managers and pension funds
• A deep and effective capital market

A capital market is a practical priority, as it provides long-term financing, broadens the investor base, allows risk to be distributed, and gives companies an alternative to bank loans. Without such a market, companies and projects will remain dependent on a single source of financing, even when it does not suit their actual needs.

Financing instruments should be matched to a project's stage and scale. Start-ups may need equity financing or venture capital rather than loans. Growing companies need expansion financing, while mature companies can access long-term financing through capital markets. Infrastructure projects, meanwhile, require project financing, bonds, sukuk and other long-term financial instruments.

Banks should accordingly focus on their core functions, particularly:

• Accepting deposits
• Payment services
• Working-capital financing
• Prudent, well-assessed lending

Non-bank financial institutions, by contrast, provide long-term capital, equity financing and risk-sharing mechanisms. These institutions do not replace banks, but expand the financial system's capacity to serve the economy and channel savings into productive investment.

Priorities for building a diversified financial system in Libya:

1. Develop the capital market, beginning with improving its regulatory and technical infrastructure, then expanding trading and listing instruments.
2. Establish a clear legal framework for investment funds, private equity, venture capital and finance leasing.
3. Activate specialised and development financing institutions to fund small and medium-sized enterprises and infrastructure.
4. Support insurance companies, pension funds and asset managers as institutional investors capable of providing long-term financing.
5. Improve financial disclosure, corporate governance and credit rating to strengthen investor confidence.
6. Modernise collateral, bankruptcy and judicial enforcement systems to reduce financing risk.
7. Develop digital payment and financing infrastructure, and expand access to financial services.
8. Draw a clear line between government's role as regulator and enabler and financial institutions' role as financiers and investors.
9. Adopt oversight proportionate to the nature of each institution and instrument, containing risk without stifling innovation, provided such oversight is kept separate from the Central Bank.
10. Set out an integrated implementation plan with measurable priorities, publishing regular indicators on the volume of non-bank financing, the number of listed companies, and the share of long-term financing.

Government's enabling role

Financial diversification will not happen automatically. Government is required to create an environment built on clear rules, trust and discipline — not to finance the economy directly or substitute itself for financial institutions.

Its priorities should include:

• Restructuring and activating the loan guarantee fund
• Developing the capital market
• Requiring corporate financial disclosure
• Strengthening corporate governance
• Issuing a bankruptcy law
• Enabling institutional investors to participate
• Ensuring the independence and effectiveness of regulatory bodies

The greater the improvement in transparency, regulation and investor protection, the greater the capacity of banks, capital markets and non-bank financial institutions to mobilise savings and provide financing efficiently.

Banks alone should not be burdened with financing the economy, as this exceeds their capacity and increases the concentration of risk. The goal is to build a system in which banks, capital markets and non-bank financial institutions work together, within a government framework that ensures trust, transparency and sound regulation.

Libya's economic development requires a multi-channel financial system, capable of mobilising savings, distributing risk, and financing companies and projects according to their actual needs.