Muftah Omar Muftah is animated and optimistic as he talks about the future. "The new system is going to transform the entire economy," enthuses the chairman of Yaqeen Bank, one of three brand-new Islamic banks due to open in Libya in the next eight months. "Islamic banking is about partnership. It will nurture small enterprises, it will create new jobs and develop skills. It will help Libya become a country that can survive without oil."
The three new lenders are part of a banking revolution that started eight months ago and, as with many of the recent uprisings in the Arab world, although the revolutionaries are passionate and the ideas are popular, the execution is proving problematic.
Libyas newly founded General National Congress passed an Islamic banking law on January 6 this year. It introduced an immediate ban on the levying of interest on retail customers, and set a 2015 deadline for the entire financial system to become Shariah-compliant.
The law has put the country in a singular situation. The only other country that has a financial system that is fully compliant with Sunni Islam is Sudan, and no country has ever managed to fully Islamize its financial system in such a short amount of time.
Few disagree that some kind of large-scale overhaul of Libyas financial system was needed. Earlier this year the IMF said reforms to the banking system were urgently required. But rather than helping to get credit to where its needed, so far Islamization has made the situation worse.
|Zayed Attallah Al Othmani, marketing sector manager at Gumhouria Bank|
Banks say they have already lost money forgiving interest on conventional loans and they are having trouble replacing them with Shariah-compliant products because Libyas central bank is yet to properly communicate the rules and regulations for the new system.
All this has had an impact on lending, undermining Libyas already fragile private sector at a time when job creation is desperately needed to help stabilize the country. After a promising increase in loans since the revolution, overall lending stagnated in the first quarter of this year, expanding by just 0.2%, while loans to companies contracted by 4.1%.
Bankers are also worried that the law has opened the door to increased political interference, by giving religious figures more power in the financial sector.
Earlier this year, Sheikh Sadeq Al-Ghariani, Libyas Grand Mufti, the senior Shariah official expounding legal opinions, sent shockwaves through the banking industry when he said on national television that some of the new Islamic products on offer in Libya were not halal, which caused confusion among consumers keen to purchase products that adhered to Shariah law.
The Grand Mufti often speaks out on politically charged issues, and has sometimes given his backing to causes championed by Libyas Justice And Construction Party, an organization connected to the Muslim Brotherhood, for example.
"In a country with a stable political system and economy, the input of Islamic scholars is not something to be concerned about," says Oliver Coleman, Middle East expert at risk analysis company Maplecroft. "But in the context of Libyas unstable political landscape, where legitimate authority is still very much up for grabs, it is far more problematic."
The new legislation might ultimately even have a knock-on effect beyond Libyas borders, in the international Islamic bond market. If the law is strictly implemented the central bank might not be allowed to receive interest from its overseas assets. This might force it to either refuse interest on its investments or sell all its conventional investments, replacing them with sukuk.
"This problem with central bank assets illustrates just how careful the authorities need to be with implementation," says Joshua Charap, the senior IMF economist in Washington working on Libya. "We dont know how to react, frankly on one hand we could be jumping up and down in panic but on the other hand were helping the central bank put in place a framework. Lets see whether this fizzles out like other initiatives.
"Libyans arent going to want to get into the realm of sukuks for their entire portfolio, and they have enough business sense that they wont stop the central bank from holding an appropriately diversified portfolio."
Critics of the Islamization process say the rapid passage of the law is a power strategy played by Libyas Islamic political groups, which are thinking primarily about shoring up their own power rather than whats best for the Libyan economy.
"The switch to Islamic banking has everything to do with politics and nothing to do with proper process," fumes Adel Dejani, a board member of Aman Bank, a conventional lender.
He says Libya should be pursuing a dual system where Islamic and conventional banks exist side by side: a model thats proved successful in nations that are considered world leaders in Islamic finance, such as Malaysia. "After the uprising we believed that the Libyan economy would move away from the Gaddafi system, opening up and become less insular, but the move to ban conventional banking has put up new barriers."