The Islamic finance industry whether the multilaterals or the private sector have an ideal opportunity in Libya to demonstrate that the sector is not just about being fair weather friends and can actually be innovative in helping to revive a Muslim economy in adversity.
Libya is no Iraq, Afghanistan, Somalia or even Syria. The conduct and ambitions of the TNC augurs well for the future of the country. It is a prosperous oil producer with a small population whose innocence was brutally usurped through a military coup more than four decades ago.
The regime of Muammar Qaddafi was ambivalent to Islamic finance - on the one hand traditionally hostile to its very ethos because it erroneously or conveniently saw the phenomenon associated with Islamic radicalism; and on the other hand over the last few years allowing a limited number of Islamic financial deals to be effected.
Libya does not have a stand-alone Islamic banking law or any authorized Islamic bank. Libya is one of several IDB member countries that have yet to open up its financial market to Islamic finance. But last year the Central Bank of Libya allowed the local Wahda Bank, in which Arab Bank Limited of Jordan has an equity stake, to launch ad hoc Islamic financial products on the basis what risks the products have and how these products affect financial stability.
Farhat Bengdara, the governor of the Libyan Central Bank, up till the uprising, while acknowledging the phenomenal growth of the Islamic finance industry globally remained a skeptic. “There are problems with Islamic banking with the prudent regulations and there are also ethical problems because various scholars interpret what is halal (permissible) and what is not halal, so people are sometimes confused. There is not a well-established regulation system for Islamic products because a lot of Islamic products are a risky business. We have to consider the risk side,” he explained at a meeting at the London Stock Exchange during a visit in late 2009.
The good news is that the TNC is much more accommodating to a potential role for the Islamic finance industry in the future financial services sector in Libya. One Libyan banker envisages a good future for Islamic finance in the country based on the requisite legal, regulatory and supervisory frameworks.
Italy, France, Spain and Germany were by far the largest trading partners of Libya during the Qaddafi era. But Turkey had a “favored nation status” and amassed huge construction contracts in the North African country especially in the 1980s and 1990s following the rapprochement with the Middle East launched by Gen. Kenan Evren, then the Turkish president. While relations with the unpredictable Qaddafi were strained at times and payment in oil to Turkish companies even delayed on several occasions, the two countries have enjoyed a good workable relationship.
This puts Turkish banks, including the Islamic participation banking sector, in a pole position to facilitate and finance the anticipated growth in trade and reconstruction work. Asya Bank, one of the four participation banks, has strong links with Africa and has a joint venture with the Islamic Corporation for the Development of the Private Sector (ICD), the stand alone private sector funding arm of the Islamic Development Bank Group (IDB). The joint venture, Tamweel Africa, invests in equity of Islamic financial institutions and extends lines of credit and other financing to banks and companies in Africa.
Libya is an important acid test for the IDB, which should not err on the side of caution and sit on the fence, but should take its cue from its parent, the OIC, whose Secretary-General Prof. Ekmeleddin Ihsanoglu has been refreshingly candid in his support for the NTC. In his Eid message last week, Ihsanoglu expressed his sadness about the plight of Muslims in several countries including Libya and emphasized “the need to undertake reforms in the member states (of the OIC) whenever necessary, consistent with the stipulations of the ten-year program of action adopted in 2005, which called for strengthening the principles of good governance and human rights and for addressing the increasing challenges in the political, social and economic domains.” Such utterings would have been unthinkable even two years ago.
The IDB is in a unique position to help Libya especially in the short-to-medium term. Libya after all is the second largest owner of the subscribed capital of the IDB with 9.47 percent of the total subscribed capital of 17,475.6 million Islamic dinars (One Islamic dinar is equivalent to one special drawing right of the International Monetary Fund). Only Saudi Arabia has a higher share of the IDB subscribed capital at 23.61 percent.
At the end of 2010, according to the IDB, some $692.8 million of financing was approved for Libya, which is very small considering that Iran, which owns 8.28 percent of the IDB subscribed capital, had $4,753.8 million worth of financing approved by the IDB to date. The IDB similarly approved $44.09 billion worth of financing for Saudi Arabia to date.
Libya uniquely is also an equity subscriber of the four main entities of the IDB, namely the parent bank; ICD; the Islamic Corporation for the Insurance of Export Credit and Investment (ICIEC); and the Islamic Trade Finance Corporation (ITFC).
The IDB last year launched a new initiative, the member country partnership strategy (MCPS), to identify, target, allocate, implement and evaluate its financing more efficiently in member countries. This could be a good starting point for the IDB’s medium-term involvement in Libya. In addition there are the bread-and-butter facilities such as humanitarian aid, technical assistance, import and export finance and development finance.
IDB entities such as ICIEC are unfazed by the impact of the Arab Spring - the protests and demonstrations that is sweeping most of the MENA region - on its business, especially political risk and investment insurance. The events in the MENA region, maintains Abdel Rahman Taha, CEO of ICIEC, are expected to affect ICIEC’s business as similar to other insures of political risk. Nonetheless, ICIEC remains open for business in some of the affected countries where “we feel that the fundamentals are sound. Indeed, the corporation is ready to take calculated risks in countries where the political crisis is contained. However, it is inevitable that the crisis will eventually generate more business. In short, the region has both challenges and opportunities, and ICIEC will deal with them accordingly.”
But out of the chaos there will be new opportunities in export credit, investment insurance and reinsurance (retakaful). These countries have long been perceived to be stable, and that perception has been shattered by the quickly evolving situation. The natural upshot of the upheavals in the region, says Taha, is to force exporters and investors to take note of the necessity of credit and political risk insurance. And the Corporation is already seeing a rise in inquiries and applications.
He sees the trend in product uptake toward products that provide comprehensive risk cover, in the sense that they cover both political and commercial risks. “With respect to investments, there is an increased demand for non-honoring of sovereign financial obligations, which indicates unease about continuity of regimes and their ability to meet financial obligations. With respect to the export credit side, we are witnessing a skyrocketing rise in demand for contract frustration, pre-shipment and post-shipment risks. Geographically speaking, the overall perception of risk in all emerging markets has increased, and not least in the MENA region. But also due to the European debt problems perceptions of a lingering financial turmoil at the global level, have upped the country risk of the OECD usually solid region as well. Thus, the growth potential is high not only in the region but globally,” stressed Taha.
Another short-term product that is gaining popularity and that could help get vital supplies into Libya, assuming not everything can be paid in cash, is ICIEC’s documentary credit insurance policy (DCIP), under which ICIEC would cover the letters of credit (LCs) confirmed by a bank. ICIEC’s DCIP will help the bank to extend its LC confirmation portfolio to additional banks all over the world, particularly in some challenging countries where the bank would normally not confirm LCs without ICIEC’s support.
Similarly useful product for application in the Libyan market is the ITFC’s Islamic structured trade finance (ISTF), which according to the corporation, is “an innovative commodity-based financing technique designed for developing markets, including difficult ones, and a new secured solution with high impact advanced risk management techniques implemented to meet the increasing demand for Islamic financial products.”
ISTFs, which are used in import financing and pre-export financing, is essentially an alternative to conventional payment guarantees - both government and bank guarantees. The focus of ISTFs is on transaction cash flow as a source of repayment and not the beneficiary’s financial strength. The benefits of ISTF, according to ITFC, are that they are asset-backed; they are a more secure alternative to traditional lending; no government or bank or corporate guarantees are required; they can help reach out to new clients or new markets including difficult markets.
