Economic Transition in Libya and its Impact on the Banking Sector

Economic transition is a highly controversial issue. It represents a radical shift in the arrangement of economic institutions and a redistribution of resources across society. Moreover, the country of study, Libya, is unique. Geographically, it is situated in Africa, but socially and culturally it belongs to the Arab world. Moreover, Libya is the only Afro–Arab country to have accepted a version of socialism in its economic policy, in 1969. More recently, since 2004, Libya has changed to a more open, market-based economy. Libya is not the only country to have changed from socialism to a market economy. Other countries have made this transition in recent times, although Libya is a unique case for a number of reasons. This research will examine the transition processes of these other countries, to facilitate an in-depth examination of the processes that occurred in Libya and their implications. The Libyan banking sector plays a critical role in the economic development of the country. The economic shift from socialism to a market economy affected this sector. This study will thus examine the reasoning behind, and methods used for, Libya’s adoption of socialism and, in turn, its change back to a market economy. It will also explore the positive and negative impacts these changes have had on the Libyan banking sector, especially since 2004. A questionnaire survey method was employed to collect the primary data. The questionnaire was conducted with banking employees who had banking experience. The questionnaires sought to examine the participants’ opinions about the impact of economic transition on the banking sector. A follow-up discussion was then held with the same sample, to support the validity of the data gathered from the questionnaires. A published data method was used to collect secondary data also, to support the research discussion. It was found that, before 2004, the Libyan government applied strong restrictions on the financial sectors through several laws and regulations. However, after 2004, economic transition brought positive impacts on the financial sector, such as a shift to the private sector. Overall, the study demonstrated that the economic transition towards a market economy has had significant positive effects on the Libyan banking sector, including increased liberalisation, international trade and privatisation in the banking sector. More specifically, many banking activities have been positively affected by the economic transition, including deposits, lending, foreign trade, service performance, corporate governance and competition.