LIBYAN PROSPECTS FOR BANKING PRIVITIZATION - TOUGH ROAD

C O N F I D E N T I A L SECTION 01 OF 02 TRIPOLI 000358

DEPARTMENT FOR NEA/MAG
LONDON FOR TSOU

E.O. 12958: DECL: 7/23/2016
TAGS: ECIN ECON PGOV LY
SUBJECT: LIBYAN PROSPECTS FOR BANKING PRIVITIZATION - TOUGH ROAD
AHEAD

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CLASSIFIED BY: Greg Berry, Chief of Mission, USLO Tripoli,
State.
REASON: 1.4 (b),(d)




1. (C) Embassy has spent several months developing a working
relationship with a Libyan banker who returned to Tripoli six
months ago to manage the office of a correspondent bank. As a
representative office, he chases large business deals and then
books the loans in London. He was educated and worked in
Britain for a number of years before agreeing to return to Libya
and has offered his insights about banking operations both in
Tripoli and outlying cities.

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FEW PROSPECTS FOR FOREIGN BANK PARTICIPATION IN LIBYA
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2. (C) "No one in their right mind would try to enter the
Libyan market under the current restrictions," was the
assessment of the bank officer manager. Banks in Libya are
simply custodians of salary payments; they are not able to
fulfill most of the banking services. For example, a bank earns
only 1.75% per annum on funds placed at the Central Bank. The
interest doesn't even cover the expense of bank operations given
the bloated employment rolls.
He estimated that more than 8000 families relied on salary
payments from the commercial banks. In the case of Sahara Bank,
it might currently have 3000 employees, but if run efficiently
by professional managers, could operate with fewer than 1000
staff members. Queried about the Secretary of the General
People's Committee for Finance (Finance Minister) position that
foreign bank participation had to be delayed unless there were
assurances the branches in remote locations of Libya would
remain open, the banker responded, "what is the point of keeping
those branches open when no services are offered? People would
be better off buying gold that might appreciate in value since
they earn so little interest on deposits. Money might as well
be stuffed under the mattress." Regarding the sale of the
Sahara Bank underway for a year, he said that at 10 dinars per
share, the price was overstated and not a good value.

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BANKING SUPERVISION LAGS IN PRACTICE
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3. (C) Asked about anti-money laundering efforts in Libya, he
said that banks were required to submit regular reports to their
head offices, which in turn reported to the Central Bank. The
weak link in the chain was implementation by poorly trained and
poorly paid staff. While the international community has been
developing standards and procedures, Libya has been trapped in
the past and required total regeneration. He estimated the
banking sector is at least 30 years behind. In his view, the
effectiveness of attempts to freeze suspect accounts would
always be hampered by innate problems with names, spellings and
birthdates in the Arabic speaking world. He also believed that,
despite the new AML law, there were still not enough safeguards
in the system. He noted the ease of evading a blocking order
through slight variations in the names on an account or through
tip-offs from bank staff. Many bank personnel were very
uncomfortable with the idea of reporting on clients.


4. (C) In terms of informal money exchange, he said that the
gold souk was the best form of hawala and also the most accurate
predictor of exchange rate levels. People used the gold
merchants to transfer money out of Libya for both legitimate and
illegitimate transactions. In general, Libyans prefer to
"avoid the eyes of the government" and make informal payments
whenever possible. He stressed the importance of not attracting
attention to oneself - inevitably someone else decides they
deserve a cut of the action or can set up a competing
enterprise.

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CONTRADICTORY, COMPLICATED POLICIES
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5. (C) The Libyan government tried last year to inject more
liquidity into the economy by reducing the interest rate on
money banks deposited at the Central Bank to 1.75%. The
Government hoped that the lower rates would force banks to offer
more attractive financing to private businesses and thereby
encourage private sector development. However, at the same
time, the Central Bank required that private businesses pledge
collateral worth 125% of the loan's face value in order to
secure a loan. The collateral rule is extremely difficult for

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most borrowers to meet. As an example, he cited a company that
had acquired land worth $2 million dinars and imported millions
of dinars worth of equipment, but the Libyan banks refused to
provide any loans to expand and develop the business because of
the 125 percent collateral rule, combined with many other
regulatory burdens.


6. (C) In his estimation, Libyans don't take risk because they
don't trust the government. There have been too many cases of
favoritism in business deals and government rulings. He said,
"the Bedouin mentality is still very strong. The tribal system
predominates. Family ties and connections are a primary
consideration in every decision. Deep seated priorities are
access to water and livestock survival - there are parallels to
modern business decisions." In addition, there is a deep
seated distrust of the government and the reform effort. People
know that the reform effort is being "managed" by Saif al-Islam
and don't think that it will bring any real benefit to the
public. They want assurances that their government salaries and
subsidized goods and services will continue indefinitely. They
have a tremendous sense of entitlement and deep seated belief
that the government owes them a regular salary for minimal work.
He also described that he sees as deep-seated resentment
towards Libya's neighbors, especially Egypt and Tunisia.
Libyans were forced to travel during sanctions and had bad
experiences with border crossings, customs formalities. They
felt disrespect from their neighbors and humiliation. There was
particular resentment of smuggling rings that profited from
Libya's isolation.

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CREATIVE CASH TRANSFER BY LAUNCHING SUBSIDIZED TRACTORS
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7. (C) In terms of smuggling, though, the Libyans seem equally
creative at finding ways to get items across borders. At one
point, the Libyan government was attempting to encourage
agricultural production by giving subsidized tractors to
farmers. The resourceful farmers made deals with smuggling
rings on the other side of the border to take possession of the
tractors in return for cash payments. In order to make the
exchange without going through customs controls, the farmers
would take the subsidized tractors with a full tank of
subsidized petrol to a remote field, rig the machine so it would
continue for miles in a straight line, and then launch the
unmanned equipment in the direction of the border. The
conspirators on the other side would eventually recover the
tractor somewhere in Tunisia or Egypt and deliver cash back
later. In the unlikely event a roving border patrol
encountered the unmanned tractor, everyone involved had some
degree of deniability: "I lost my tractor."

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HOPE IS ON THE HORIZON
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8. (C) A McKinsey employee stopped by the Embassy to inform
us that they have been hired by an individual, "who can not be
named," to prepare a comprehensive strategy for implementing
bank privatization in Libya. McKinsey planned to spend a week
interviewing all the Libyan bank officials, both state and
private, then return to Tripoli in several weeks for a second
round of meetings after the initial assessment. McKinsey's
mandate is to come up with a plan that can get foreign banks
into Libya in the near term, while at the same time formulating
a plan for dealing with the state banks and their unwieldy
payrolls of public employees as well as their nonperforming
loans.


9. (C) Embassy Comment. It is just another example of the
"state of the masses" that the Jamahiriya is not able to reach
consensus within its many committee structures to move forward
with a banking privatization plan on its own, or even to reach
consensus to hire experts to make recommendations. Similar to
the National Economic Strategy funded by Saif al-Islam, launched
with great acclaim, but still without any activity associated
with it, the challenge will be getting the McKinsey bank
privatization plans actually implemented.
BERRY