Tuesday, Mar 19, 2013

By Leila Hatoum

DUBAI--The International Monetary Fund said Libya is seeking its help to develop the country's Islamic banking sector, ahead of the introduction of a law that will curb the country's conventional banking sector by banning interest payments.

In a review of the Libyan economy published Tuesday, the IMF also warned that any future ban on interest payments would be risky for the country's financial sector, unless the government moves quickly to introduce Islamic finance instruments and a regulatory framework for the sector.

Libya is in the process of rebuilding its vital financial sector following 40 years of international isolation and nearly two years after a violent uprising that toppled the former regime of Moammar Gadhafi in 2011.

The Central Bank of Libya has already taken steps towards developing a dual system of conventional and Islamic banking. But in January the government approved a law that would ban all interest payments in Libya, accelerating the move towards an Islamic banking system in the country. The law is expected to come into force in early 2015.

In its review, the IMF warned that the new law would hold back the financial sector unless Sharia-compliant instruments and institutions are fully operational when it comes into force.

The implementation of an interest ban could "pose risks to the financial sector...without the foundations of Islamic finance in place, the environment will be less conducive for financial intermediation, thereby constraining private sector efforts to invest and create employment," the IMF said. The Libyan financial authorities had requested IMF help in developing "instruments and a regulatory framework for Islamic banking," the report added.

Meanwhile, the IMF said it expects Libya's economy to grow by 20.2% this year, a large drop from the 105% growth registered in 2012 when the Libyan economy was rebounding as it restored oil output following the disruption of 2011.

The IMF said the country's near-term economic outlook remains favorable, and urged the government to work on diversifying the economy away from hydrocarbon revenues, which constitute 95% of the country's revenues and 60% of its gross domestic product.

Write to Leila Hatoum at leila.hatoum@dowjones.com

(END) Dow Jones Newswires

19-03-13 1720GMT