LIBYAN BANKING SECTOR REFORM: SLOW AND UNSTEADY

UNCLAS SECTION 01 OF 02 TRIPOLI 000561 NEA/MAG FOR JEN GAVITO NEA/PI FOR PATTON E.O. 12958: N/A TAGS: EFIN ECON EINV LY SUBJECT: LIBYAN BANKING SECTOR REFORM: SLOW AND UNSTEADY ¶1. (SBU) SUMMARY: Prospects for Libyan banking sector reform remain unsteady and face derailment by systemic economic flaws, according to a U.S. team working with the Libyan Central Bank on a reform strategy. Confident in the utility and relevance of their ongoing work, the professional experts at the same time have grave doubts about the viability of genuine banking sector reform in Libya. END SUMMARY. ¶2. (SBU) Pol/Econ Chief and Econoff met with McKinsey & Company Senior Advisor Gregory Wilson and his conduit to the Libyan Central Bank, Project Director Tarek Ben Halim, on September 21 to discuss McKinsey's work and the state of Libyan banking reform. McKinsey is engaged in a Central Bank-funded study for the reform of the Libyan banking system, including the potential privatization of state-owned banks, systemic changes to banking rules and opening the sector to foreign banks. -------------- -- Foreign Banks Question Libyan Market Conditions -------------- -- ¶3. (SBU) The McKinsey team assesses that the Libyan Central Bank's top priority is to draw in foreign banks to Libya, and there is moderate interest from abroad. However, prospective foreign entrants are immediately confronted by obstacles, including a dearth of data on the Libyan banking sector, uncertain terms and conditions for market entry, unclear regulatory standards and a highly politicized Central Bank with a history of policy reversals. Some foreign banks are starting to establish start-up offices in Tripoli (most recently Qatar National Bank). However, Wilson estimates that it will be at least 12-18 months before there is a significant foreign bank presence in Libya (i.e., movement beyond start-up offices). This timeframe could easily slip if the long-expected roll-out of a reformed Central Bank national payments program (now four years in the making) continues to languish. A number of foreign banks are reportedly awaiting this development before moving forward in Libya. The McKinsey team's assessment is that the current system is irretrievably broken. As an example of the "broke beyond repair" assessment, some bank managers are not facilitating a McKinsey audit ordered by the Central Bank senior leadership. -------------- Property Rights and Other Laws Require Updating to Underpin Economic Reform �A; -------------- ¶4. (SBU) The McKinsey team has been careful to conduct multiple rounds of syndications with GOL officials to solicit inputs and proposals for his study, and in order to avoid roadblocks down the road. Thus far, there have been no major obstacles thrown in the way of his findings. However, the McKinsey study will almost certainly recommend a major overhaul of the Central Bank's operations as one of its key recommendations, and the team is deeply skeptical that there is GOL appetite to implement real reform. Furthermore, Wilson estimates that at least fifty percent of the changes necessary for success lie well beyond the purview of the Central Bank. The greatest of these is the question of clear property rights. The lack of clear title for Libyan properties (due in part to the GOL's destruction of private title records in the late 1980s) greatly complicates work in the real estate, construction and tourism sectors, as well as all investment therein. -------------- Training is the Essential Element of Any Proposed Reform -------------- ¶5. (SBU) Enhanced training will be at the heart of any successful reform effort. Training is direly needed in the whole range of relevant skills, as most employees lack basic competency in financial analysis, international accounting standards, utilization of balance sheets, and basic information technology skills. Even the small team of the Central Bank's "best and brightest" seconded to assist the McKinsey effort required additional language and technical training. Overall, regional training locations may emerge as the best options for Libyan banks, and the Central Bank is leaning towards a partnership with the Bahraini Monetary Agency toward this end. [Comment: Funding Libyan financial sector training in the GCC TRIPOLI 00000561 002 OF 002 and elsewhere, if allowable, could be an effective use of MEPI Economic Reform pillar funds. End Comment] -------------- State-Run Bank Ownership Shifted From Central Bank to Development Fund -------------- ¶6. (SBU) Both interlocutors conveyed their genuine surprise and unease at a recent GOL move to transfer the Central Bank's five state-run banks under the auspices of the state-run Economic and Social Development Fund. This change was, in their view, an attempt by the GOL to give the impression that these banks enjoy some measure of independence from the Central Bank. However, the team assesses that this was a "paper move" only, and its greatest practical effect will be to sow confusion among foreign banks interested in entering the Libyan market. -------------- Aman Bank Judged Most Efficient -------------- ¶7. (SBU) One institution that has stood out during McKinsey's assessment work has been Aman Bank for Commerce and Investment (HYPERLINK "BLOCKED::http://bk.abci-ly.com/en/index.aspx "http://bk.abc i-ly.com/en/index.aspx). Succinctly described as having "the look and feel of a real bank," privately-owned Aman Bank is far ahead of the competition in its provision of modern banking services. Its entire operation is computerized, and it has placed ATMs across Tripoli and into major cities countrywide. Aman bank also provides its staff with proper training, including English language training for all employees. BERRY