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Libya is planning to launch a new instant payment system and open banking framework, supported by the EU and part of a wider effort to boost the digitalisation of financial services in the war-worn country.
More than a decade after the Arab Spring, Libya is still struggling with the fallout from the two civil wars.
Policymakers have not yet been able to put an end to the split central bank structure that oversees the financial sector and the country is mostly a cash-based economy, with one-third of cash being outside the banking system due to Libyans’ general lack of trust in banks.
However, as part of a wider effort to drive digital transformation, the Central Bank of Libya (CBL) has announced plans to build an instant payment system, along with an open banking framework and an electronic know your customer (e-KYC) central platform for customer data.
Although the central bank has not provided further details on the planned infrastructure, an earlier communication suggests that the new infrastructure will support real-time payment processing 24/7/365 with instant settlement.
The same post reveals the position of the supplier of the instant payment system is still open and the central bank has been recently looking for an expert who could advise on the tendering process.
In addition to the instant payment infrastructure, the CBL is working to set up a “conducive regulatory environment” for fintech development to enhance financial access to digital financial services.
The initiatives are part of an EU-backed project, called E-nable, a three-year programme running between 2022 and 2025 which provides €5m support to facilitate Libya’s transition to digitalisation and set a foundation for a competitive private sector.
One of the specific goals of the project is to support the CBL to create a favourable environment for fintech.
It builds on the World Bank's analyses in 2020 that found the civil war and political fragmentation were devastating to Libya’s financial system, which had been underdeveloped even before the crisis.
The country’s reliance on oil revenues led to a highly centralised economy, with most banks being owned by the central bank.
As a result, public banks were typically used to finance government projects with depositors’ funds, and they had little incentive to develop modern banking tools and approaches.
This structure also created a conflict of interest whereby the CBL is both the majority shareholder in the country’s public banks while also being the regulatory agency of the banking sector.
Additionally, during the civil war, government institutions such as the central bank started to operate in parallel in the eastern and western parts of the country..
This dual structure is still in place today and more than two years after the ceasefire was officially signed the central bank still operates in a split structure.
This has not only impaired normal central bank functioning but also brought a dual payment system into being.
In this setup, the Tripoli-based western branch of the central bank has access to the country’s real-time gross settlement system (RTGS), while banks in the east have been cut off from the RTGS. It means that eastern banks process transactions manually and use informal private mechanisms to transfer funds, such as Western Union.
A similar divide can also ne seen in Libyans’ payment habits, local newspaper Libya Herald says. While western Libyans are more inclined to use credit cards, eastern Libyans prefer to use mobile e-wallets.
As a result, in the western part, the numbers of POS terminals and ATMs are growing quickly, while in the east, where 86 percent of electronic payments are e-wallets, around 6,000 to 8,000 merchants accept payments via a mobile app.
As an example of the quick growth in mobile banking and electronic payments, the World Bank noted that, in 2019, LYD10bn ($2bn) in payments were processed on Watba alone, a closed-loop mobile app, which was five times larger than the value of transactions processed through the national switch.
Despite these advances, reliance on cash is still heavy in Libya, partly due to the legacy of mistrust in the central government, which had frozen all Libyan’s accounts in 2011.
Cash hoarding is a particular issue, with almost one-third of cash remaining outside the banking system, although central bank data suggests a noticeable downward trend in recent years.
