Libya looks to Islamic banks to lure deposits

Foreign construction labors work at the construction site of a new tower over looking the sea at the commercial center of Tripoli, Libya Thursday, Aug. 26, 2010. (AP Photo/Abdel Magid Al Fergany)

Ahmed Saeed, a Libyan poultry farmer, says he’s waiting for his country to open Islamic banks to deposit money for the first time. “I’m sure that Islamic banks are more in tune with my culture,” he said.

“I had a religious upbringing and I hear clerics ban dealing with current banks because of usury.”

Once a law that allows the establishment of stand-alone Islamic banks gets approved later this month, Libya’s interim government may be able to attract cash from people like Saeed, Deputy Central Bank Governor Ali Mohammad Salem said.

“When the people see Islamic banks, they’ll put this money there,” Salem said in an interview in the 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.”

Islamic lenders in Libya, where some banks offer Shariah-compliant services, may attract some of the estimated 15 billion dinars ($12 billion) outside the banking industry, he said. Total commercial banking assets were about 71 billion dinars at the end of 2011. The nation, where almost all the 6.7 million people are Muslim, saw its economy shrink 61 percent last year after an uprising that toppled its ruler of 42 years Moammar Gadhafi. Oil production dropped to virtually zero from 1.6 million barrels a day.

The holder of Africa’s biggest crude reserves is now pumping more than 1.3 million barrels a day, or about the combined output of Qatar and Ecuador, data compiled by Bloomberg show. Its economy is expected to surge 76 percent this year, the most since at least 1988, the International Monetary Fund estimates.

While Libya doesn’t need financial assistance from the IMF, it needs guidance to lower unemployment and to improve the business environment, including increasing access to finance, the fund said last week.

“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.” Transactions in Islamic finance are based on the exchange of assets rather than interest to comply with Shariah principles, as well as profit and loss-sharing agreements.

Mustafa Abdel Jalil, the chairman of the National Transitional Council in Libya, said in October the interim government plans to eradicate interest from the banking industry. Charging interest “brings about disease and creates hatred,” he said.

Interest-bearing accounts, such as savings and time deposits, fell 8 percent and 6.6 percent respectively last year compared with 2010, according to a report published on the central bank website. So-called demand deposits, which don’t pay interest, rose 9.5 percent last year.

Gumhouria-Bank, a state-owned lender, has three branches offering Islamic banking services and is unable to cope with requests from companies and civil servants, according to Jamal Ajaj, the director of the lender’s Islamic banking project. Demand for Shariah-compliant financial services helped establish “informal banks,” he said in an interview in Tripoli.

“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.

The central bank said in October that 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 sovereigns in the Arab world to sell global dollar-denominated sukuk.

The average yield on Islamic debt in the six-nation Gulf Cooperation Council, which includes Arab sovereign sukuk, fell 45 basis points so far this year to 3.86 percent Friday, HSBC/NASDAQ Dubai GCC U.S. Dollar Sukuk Index.

The yield on Dubai’s 6.396 percent sukuk maturing in November 2014 has tumbled 148 basis points in 2012 to 4.09 percent Monday. The extra yield investors demand to hold Dubai’s bonds over Malaysia’s 3.928 percent sukuk maturing in June 2015 narrowed 69 basis points in the period to 218, data compiled by Bloomberg shows. Malaysia has the world’s biggest Islamic bond market.

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

While Libya’s central bank is keen to boost the nation’s economy with Islamic banking, the new government has struggled to rein in armed militias built around regional and tribal loyalties. The groups were instrumental in toppling Gadhafi and have largely refused to disarm before the central government provides more funding and services to their respective regions.

Until the political situation in Libya is restored, Noor Islamic Bank, a lender controlled by Dubai’s government, won’t consider expanding its services to the North African nation, Chief Executive Officer Hussain al-Qemzi.

“We still feel that it’s too soon for us,” he said. “It’s still unsettled.”

The central bank’s priority in the first three years is to develop domestic Islamic lenders before opening the door to international banks, Salem said. Libya will honor bank licenses issued before last year’s civil war, including one given to Qatar Islamic Bank, Central Bank Governor Saddek Omar Elkaber said in November.

Demand for Islamic financial services is likely to appeal to a wide segment of the population, many of whom withdrew their money during the revolution because of concern that their cash was safer at home than in banks, said Essam al-Zleiteeni, an employee at the Culture Ministry. He’s waiting for an Islamic bank to open before he’ll return his savings.

“I’m more convinced with Islamic banks because they don’t deal with interest,” he said.

“I’ll put my money in an Islamic bank to have a clear conscience.”