Banking, Credit, and Currency
As a result of its World War II association, Libya became a member
of the British sterling bloc when independence was established
in 1951. Shortly after independence, a national currency was created:
the Libyan pound, as it was then known, divided into 100 piastres
(of 10 millièmes each), having a par value of US$2.80. The currency
unit remained tied to sterling until the sterling devaluation
of November 1967, when the Libyan pound failed to devalue and
the direct link with sterling was terminated. Libya continued
as a member of the sterling bloc, however, until it was expelled
by the British in the aftermath of the Libyan nationalization
of British Petroleum's assets in Libya in December 1971 (see Hydrocarbons
and Mining , this ch.). Effective September 1, 1971, the currency
unit was changed from the Libyan pound to the Libyan dinar (LD),
divided into 1,000 dirhams, with no change in its par value. In
the late 1980s, the currency was still sometimes referred to as
the pound, and merchants sometimes quoted prices in piastres.
The new currency comes in banknotes of 250 and 500 dirhams and
1, 5, and 10 dinars, as well as subsidiary coins of 1, 5, 10,
20, 50, and 100 dirhams.
In the general revaluation of gold, which also took place in
December 1971, Libya retained its existing parity with gold. As
a consequence, the dollar value of the dinar rose from US$2.80
to US$3.04, where it was kept until 1974 when it moved to LD1
equal to US$3.3778. The dinar was maintained at this rate until
March 1986, when the government switched from a fixed dollar rate
to a floating rate linked to the SDR. This move resulted in a
10-percent decline in the value of the dinar.
During the years immediately after independence, an international
commission acted in lieu of a bank of issue, and the several currencies
serving as legal tender in various parts of the country were replaced
by the new Libyan currency. Pursuant to legislation of 1955 (amended
in 1958), the National Bank of Libya was established in 1956 to
replace the commission and to perform some of the functions of
a central bank under the aegis of the Ministry of Finance. The
commercial banks for the most part were branches of major international
banking institutions. In the main, they were engaged in providing
short-term international and domestic commercial credit.
In 1963 the Central Bank of Libya replaced the National Bank
of Libya. The government gave the new bank sole right of currency
issue and made it responsible for maintaining monetary stability
and the external value of the Libyan currency and for regulating
currency and credit. The bank could also make advances to the
central government up to 10 percent of estimated current revenues.
The commercial banks were required to maintain liquidity ratios
and reserves in the Central Bank against deposits as prescribed
by the Central Bank. Until 1970 the Central Bank also carried
out commercial operations, but in that year the National Commercial
Bank was founded to take over the commercial division of the Central
Bank and the operations of two small foreign banks.
The military government that took power in 1969 viewed the banking
sector as a primary object of its general program of Libyanization.
In November 1969, the new government required that all banks in
the country be Libyan controlled, and it bought out the 51-percent
control of the commercial banks that had not already converted
to Libyan control. In July 1970, the government took 100- percent
control of four of the major banks with foreign minority ownership.
In December 1970, the government purchased outright all banks
that still had some foreign minority participation and, by a process
of merging, reduced the number of commercial banks to five. Libyan
citizens were permitted to purchase minority interests in the
In addition to the National Commercial Bank, commercial banks
in operation in 1987 included the Jamahiriya Bank, known as the
Jumhuriya Bank until its present name was adopted in 1977. It
operated nearly thirty branches throughout the country. Other
commercial banks included the Sahara Bank, formerly the Banco
di Sicilia, and the Umma Bank, the successor to the Banco di Roma.
The Wahda Bank was formed in 1970 from the merger of five other
In addition to the state-owned commercial banks, Libya was home
to the National Agricultural Bank, the Industrial and Real Estate
Bank of Libya, LAFICO, and LAFB. The agricultural bank was a specialized
institution established in 1957 to provide interestfree production
loans to farmers. It also made medium-term loans for up to five
years for machinery and materials and long-term loans for up to
fifteen years for land reclamation projects, irrigation, and agricultural
construction. The agricultural bank purchased produce from farmers
at a guaranteed profit and sold them supplies at subsidized prices.
The bank has a good record; in the past, about 90 percent of all
loans have been repaid.
The Industrial and Real Estate Bank of Libya was both a development
bank, providing industrial credits, and a home finance agency,
making housing loans. Most of its loans were for home purchases.
LAFICO was created in 1972 as a joint effort of the five commercial
banks, the insurance industry, and other government agencies to
promote housing, industry, commerce, and tourism. It also made
investments outside Libya. In early 1972, the government established
LAFB as a wholly owned subsidiary of the Central Bank, but not
subject to the Central Bank's legislation, regulations, or exchange
control. It engaged in financial and banking operations outside
the country and acted as the foreign agent for the government
and Libyan commercial banks. Its main purposes were to encourage
regional development--particularly of countries friendly to Libya,
to become active in international financial markets, and to serve
as a vehicle for Libyan assistance to other countries. By 1978
LAFB had set up a worldwide chain of eighteen subsidiaries and
affiliates in which it held anywhere from 7 to 51 percent of the
equity. In 1985 LAFB had total worldwide assets of US$2.9 billion.
The insurance industry was also nationalized. In December 1970,
insurance companies were required to have 60-percent government
participation, and in 1971 they were totally taken over and merged
into two companies. Credit has generally been plentiful, although
the Central Bank's credit policy was to support the government's
development effort. This meant that at times, such as in 1977,
the Central Bank limited credit to the private sector and directed
it instead to state entities. This has also been done to halt
the rapid growth in the money supply and the inflationary rate.
The largest percentage of loans made by the banking system has
been for housing and commerce. In 1975 the government declared
interest to be usury and prohibited it, but commissions for services
rendered remained legal, and banks could charge commissions. Such
commissions generally have been kept low on items such as construction
loans. In practice, Libyan banks still charged interest on loans
and paid interest on deposits. In 1985 the prime lending rate
stood at 7.5 percent, while deposit and lending rates were set
at 5.5 and 7.0 percent, respectively.
Data as of 1987