The Central Bank remains the majority shareholder of public banks, which still hold 90 percent of deposits and loans in the system, while being the regulatory agency of the banking sector. This prompts obvious conflicts of interest, including potential forbearance to the benefit of state-owned banks, as well as granting credit to well-connected beneficiaries. As with many state banks, the Libyan state-owned banks act as a mechanism to artificially support employment. Pressure is strong to maintain staffing, even in unprofitable branches, to avoid further increasing unemployment.

The split in the central banks has impaired normal central bank functioning and has had an impact on the financial sector in many different ways. The split has stymied

– Control over monetary and fiscal policy as the Eastern branch of the Central Bank prints money and issues bonds without central authority. Spending of the Eastern authorities on salaries, goods and services etc. is partially financed by the government in Tripoli, while the rest is funded through money printing and borrowing independent of Tripoli.

– Performance of full bank supervision of banks headquartered in the East is not possible. The three banks headquartered in Bayda represent up to a third of banking activity.

– Management of foreign currency decisions, both due to lack of control of funds as well as inability to reach formal decisions (e.g., on dinar devaluation).

– Payment systems, as banks in the East operate independently. A dual payment system has been created: banks in the West process payments via the real-time gross settlement system (RTGS), while banks in the East perform transactions manually as the Eastern branch of the Central Bank has been disconnected from RTGS1.

– Overall control of banking functions and financial flows given the decline in the respect for the rule of law and the limited authority of the central bank amidst the political chaos.

Banking sector regulation.

- Split in the central bank resulting in 2 central banks (Tripoli and Bayda).

- Majority of banks headquartered in the West and reporting to CBL Tripoli. Banks headquartered in the East control about a third of banking activity and report to the central bank in Bayda. CBL (Tripoli) has limited visibility on their activities. All banks have operations in both East and West of the country and they hold reserves at CBL Tripoli and in Bayda.