Exploring and Analysing the Demand and Supply Conditions for the Institutionalisation of Islamic Banking and Finance in Libya

Exploring and Analysing the Demand and Supply Conditions for the Institutionalisation of Islamic Banking and Finance in Libya Abdulwahab Alhajam Abstract Islamic banking and finance has made important inroads into the financial systems of many countries including the major industrialised countries. However, in some other countries, such as in Libya, where there has been political unwillingness towards Islamic banking and finance (due its connotation with Islam as a religion) either there had not been any developments or very sluggish developments took place. The change in the political regimes in some of the Arab countries, including in Libya, in recent years following the so-called Arab Spring, shifted the balance of powers resulting in a certain degree of Islamisation of their respective financial systems; the Libyan transitional government adopted full Islamisation of the banks in the country indicating a radical change in the strategy compared to the previous regime. This study, hence, aims to explore and empirically examine the demand and supply conditions for Islamic banking and finance in Libya and also for the institutionalisation of Islamic finance through participants’ perceptions, opinions and understanding. In doing so, a questionnaire survey aimed at collecting data from ordinary people, business circles as well as professional bankers and financiers was administered in the early months of 2012 shortly after the i new political phase was initiated in the country. With the primary data collected, the aim has been to (1) gauge participants’ perceptions and opinions on the past performance of the Libyan economy and financial system, (2) measure individual’s awareness, understanding and expectations of Islamic finance and banking and (3) measure individuals’ understanding and support for an alternative type of institutionalisation. In addition, since this study aims to explore the supply side conditions as well, a number of individuals with various supply-related stakeholder groups were interviewed in early 2012 in relation to their understanding and expectations of Islamic banking and finance as well as its potential role in Libya alongside the potential obstacles perceived. The results of the interviews and questionnaires have shown that the people of Libya support the implementation of the Islamic banking and finance system in the country, since most of the Libyan people prefer to avoid interest-based banking transactions. However, the majority of respondents believe that the former regime has been responsible for the underdevelopment of the Islamic banking and finance sector in Libya. Although a number of studies have highlighted the social failure of Islamic banks, the results of this study on that matter can be described as inconclusive. Accordingly, some of the participants in the survey believe that Islamic banks in Libya will make a significant contribution towards social development as expressed through corporate social responsibility activities. Thus, some of the participants believe that the government should also regulate the Islamic banks in terms of their delivery on social programmes with the objective of ensuring that Islamic banking can contribute to the future socio-economic development in Libya. As part of an alternative institutionalisation, therefore, this study explored the idea of institutionalisation of Islamic social banking in Libya to serve the socially and financially excluded groups in achieving developmental and social objectives. However, the results show that only a small fraction of the participants are familiar with the concept of social banking; the majority of respondents, nonetheless, would prefer Islamic social banking and commercial banking to remain separate entities, and believe that the former should receive funding from government, NGOs and commercial banks.