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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 
 
TRIPOLI 00000358  001.2 OF 002 
 
 
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. 
 
------------------------------------------- 
FEW PROSPECTS FOR FOREIGN BANK PARTICIPATION IN LIBYA 
--------------------------------------------- 
 
¶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. 
 
--------------------------------------------- ----- 
BANKING SUPERVISION LAGS IN PRACTICE 
--------------------------------------------- ---- 
 
¶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. 
 
--------------------------------------------- ------------ 
CONTRADICTORY, COMPLICATED POLICIES 
--------------------------------------------- ----------------- 
 
¶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 
 
TRIPOLI 00000358  002.2 OF 002 
 
 
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. 
 
--------------------------------------------- --------------- 
CREATIVE CASH TRANSFER BY LAUNCHING SUBSIDIZED TRACTORS 
--------------------------------------------- ---------- 
 
¶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." 
 
----------------------------------------- 
HOPE IS ON THE HORIZON 
---------------------------------------- 
 
 ¶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