Bradford Centre for 

International 
  Development 

ASSESSING THE IMPACT OF STOCK MARKETS ON

DEVELOPMENT AND ECONOMIC GROWTH:
CAN LIBYA HAVE A SUCCESSFUL STOCK MARKET?

By

Aboubaker Suleiman A. BADI

UB number: 07014568

Submitted to the
Bradford Centre for International Development
University of Bradford
In partial fulfillment of the requirements for the award of degree of
MSc in Development and Project Planning

September 2008

Word Count: The length of this dissertation is: 12,305 word

 
 
 Declaration

Aboubaker Suleiman A. BADI

No part of this dissertation may be reproduced without the permission of the

author.

I declare that this dissertation is substantially my own original work and has not
been submitted in any form for an award at any other academic institution.
Where material has been drawn from other sources, this has been fully
acknowledged.

Signature ........................................

Date.......................................

 
 
 ABSTRACT

The purpose of this study is to assess the impact of stock markets development on

economic growth, or rather, the role of the stock markets in enhancing growth in the

developing countries. Many research studies have concluded a significant result that stock

markets had a positive role on economic growth in both developing and developed countries.

However, some researchers have a contrary view and suggest that the financial system is

unimportant for economic growth. This study also discusses the question of whether

establishing a stock market in developing countries will have a positive role in supporting the

economic development process.

According to the analysis in this study, establishing a stock market in Libya might

help the mutual funds, pension funds, insurance companies, and households to articulate the

relevant portfolios, diversify their investment, and offer the opportunity of reducing risk,

especially in the case of having foreign listed instruments in their national exchanges and vice

versa.

I 
 
 ACKNOWLEDGEMENTS

I would like to express my special thanks to my supervisor Dr. David Potts, for his
assistant, support and advice during the research and writing of this dissertation.

I further would like to thank members of Bradford Centre for International

Development University of Bradford, for their education and assistant during my study.

A special thanks to the Gaddafi International Charity and Development Foundation

(GICDF) for giving me the opportunity to prepare my master study in UK.

Last but not least, I would like to thank my parents, and my wife for their endless love,
patience and support, without which I cannot finish my study.

II 
 
 LIST OF MAPS, TABLES AND FIGURES

Map 3.1: Libya location……………………………………………………………...24

Table 2.1: Arab stock markets compared to the world markets in 2006………...17
Table 3.1: Growth of average income per capita as percentage of gross national
product for the period 1970-1990……………………………………….26
Table 3.2: Libya: Summary macroeconomic performance 1991-2005…………..27
Table 3.3: Libya: Number of branches and agencies of commercial banks with
municipalities…………………..…………………………..……………....33
Table 3.4: Companies which currently listed in the Libyan stock market………...37

Figure 3.1: Domestic Credits, % of GDP……………………………………...…..…30

III 
 
 LIST OF ABBREVIATIONS
AMEDA African and Middle East Depository Agency
AMF Arab Monetary Fund

ANNA Association of National Numbering Agencies

ASEA Arab Securities Exchange Association
CBL Central Bank of Libya.
CDR Central Depository and Registry
DVP Delivery Versus Payment
FDI Foreign Direct Investment
GBOT Government Board for Ownership Transfer
GDP Gross Domestic Product
GODS General Data Dissemination System
IFC International Finance Corporation
IMF International Monetary Fund
LSM Libyan Stock Market.
LYD Libyan Dinar
M&A Merger and Acquisition
MENA Middle East and North Africa
OBG Oxford Business Group.
OLS Ordinary Least Squares approach

OPEC Organization of Petroleum Exporting Countries

SGF Settlement Guarantee Fund
SOEs State-Owned Enterprises
UAE United Arab Emirates
UN United Nations
US United States
WB World Bank
WFE World Federation of Exchanges
WMD Weapons of Mass Destruction
IV 
 
 Table of Contents 
 

ABSTRACT…. ............................................................................................................. I 
ACKNOWLEDGEMENT ..........................................................................................II 
LIST OF MAPS, TABLES AND FIGURES .......................................................... III 
LIST OF ABBREVIATIONS .................................................................................. IV
 

CHAPTER 1: INTRODUCTION .............................................................................. 1 

1.1 Topic and Purpose ..................................................................................... 1 
1.2 Research Objectives .................................................................................. 2 
1.3  Research Question ..................................................................................... 2 
1.4  Methodology ............................................................................................. 3 
1.4.1 Introduction ................................................................................... 3 
1.4.2 Research method ............................................................................ 3 
1.4.3 Data collection ............................................................................... 3 
1.5  Structure of the dissertation ....................................................................... 4 
 

CHAPTER 2: A REVIEW OF THE LITERATURE ON THE

RELATIONSHIP BETWEEN STOCK MARKETS
DEVELOPMENT AND ECONOMIC GROWTH ......................... 6 
2.1 Introduction .............................................................................................. 6 
2.2 Financial Development and Economic Growth ....................................... 6 
2.3 Financial Sector and its Importance in Improving the Performance of
Stock Markets .......................................................................................... 10 
2.4 Stock Markets Development and Economic Growth ............................. 14 
2.5 The Main Findings of the Studies on the Arab Stock Markets
Performance ............................................................................................ 21 
2.6 Summary ................................................................................................ 23 
 

V 
 
 

CHAPTER 3: AN INTRODUCTION TO THE LIBYAN ECONOMY .............. 24 

3.1 Introduction ............................................................................................. 24 
3.2 Background ............................................................................................. 24 
3.3 A Brief History of Libyan Economy ....................................................... 25 
3.4 The Financial Sector in Libya ................................................................. 26 
3.4.1 Modernizing Libya's Financial Sector .................................... 30 
3.4.2 Priorities in Financial Sector Reform ..................................... 33 
3.5 Libyan Stock Market (LSM). .................................................................. 35 
3.5.1 Steps of Establishment............................................................. 36 
3.5.2 Market Regulation ................................................................... 39 
3.6 Summary ................................................................................................. 44 
 

CHAPTER 4: CAN THE STOCK MARKETS PLAY A SIGNIFICANT ROLE

ON THE DEVELOPMENT OF LIBYA? ....................................... 45
 

CHAPTER 5:
CONCLUSION ................................................................................... 50 
BIBLIOGRAPHY ............................................................................... 52 

VI 
 
 CHAPTER 1
INTRODUCTION

1.1 Topic and Purpose

An important feature of the development of the financial sector in a large number

of developing economies is the very fast growth of stock-markets in these countries. It is

part of the general trend towards liberalisation, deregulation the diminution of the role of

the government and enhancement of that of the market, which for various reasons is

sweeping the globe the North and the South, and what remains the East as well as the

West. The establishment and expansion of these markets is favoured not just by the

Bretton Woods institutions, as one would expect, but also by many heterodox economists

as well as those from the centrally planned economics. Hicks suggested that one of the

main causes of improving the economic growth over the past two centuries are financial

markets development, claiming that; “The Industrial Revolution would have been

impossible without the concurrent development of financial markets.”(cited in Van-den

Berg, 2001, pp. 290-291). The World Bank, particularly through its affiliate the

International Finance Corporation (IFC), is actively involved in fostering stock-market

development in third world countries and assisting and encouraging them to open up to

foreign portfolio investment. Specifically, the IFC provides technical assistance to a large

number of countries on the legal, regulatory and fiscal issues involved, as well as on other

aspects of the institutional framework for the development of these markets.

However, some researchers such as Robinson (1952) and Lucas (1988) have

argued that stock markets have little positive impact and potentially, even a large negative

impact on economy. In developing countries, there are many questions about the link

between financial markets and both development and growth. What is the impact of these

1 
 
 markets on advancing the economic development in developing countries? In other

words, do these markets have a positive role in the restructuring and completion of the

economic structure of these countries to enable them to achieve the real highest growth

rate? Thus, the aim of this dissertation is to seek answers to these questions, and it will

focus on the relationship between stock market development and economic growth, and

how this relationship can be materialized in the Libyan economy.

1.2 Research Objectives

This study is an attempt to examine various important issues concerned with the

relation between stock markets and the economic development process. The study has the

following three specific objectives:

a) To shed light upon the relation between the performance of stock exchange and

economic development process.

b) To analyse the current situation of Libyan stock markets (achievements and

problems).

c) To forecast the development of Libyan stock market in the future.

1.3 Research Question

The essential focus of the study is on the relationship between stock market

development and economic growth, where it aims to find out whether establishing a stock

market in developing countries may have a positive role on the economic development

process. Therefore, the study attempt to answer the following core question:

• What is the relationship between stock market development and economic

growth?

2 
 
 By answering this question the study will try to address the following questions which

have strong importance relation to the Libyan stock exchange

• Does establishing a stock exchange in the developing countries have a positive

role to support the economic development process?

• Can Libya have a successful stock market?

1.4 Methodology

1.4.1 Introduction

This section shows the methodology which will be used in the dissertation. The

section explains the data collection method, data analyses that will be utilized, and the

expected results that would be generated from this study.

1.4.2 Research method

The research strategy of this paper is mainly based on library literature research

and secondary data. However, readers of this paper should be aware that research based

on secondary data involves the risk of mistakes and errors as the information and data are

not directly observed from primary resources.

1.4.3 Data collection

The sources used to search for relevant secondary resources included literature in

the library and past research papers and theses. In addition, it also involved some case

studies on world stock markets. The collection of relevant data in order to get the general

pictures for both of the stock markets gives some control over the research process.

3 
 
 Data were directly obtained through Libyan stock market reports, the Central Bank

of Libya website, and official websites such as IMF and WB, other useful online

resources include the Libya Statistical Yearbook, and the national statistics online for

Libya. Search Engines like Yahoo and Google were also used for the literature based

research to this topic.

The major advantage of using secondary data is the saving of time. It is also likely

to be good in quality as most of the data are produced by experts and professional

organizations and easy to collect. However, consideration needs to be made as most of

the secondary data are produced for a particular purpose which may not meet my need.

Thus, evaluation of the data is required.

1.5 Structure of the dissertation

This study aims to re-examines whether there is a relationship between develop a

stock market and its role on economic growth. In addition, it expects to draw beneficial

conclusions for future development of Libyan stock market.

Thus, the study will be divided into five main chapters. Chapter 2 will be the

review of the literature. It reviews the theoretical framework and empirical evidence on

the relationship between financial development and economic growth in general and the

linkage between stock market development and growth in detail. Chapter 3 provides an

introduction to the background and history of the Libyan economy. Chapter 4 explores

the possible roles of the stock market in the Libyan economy, referring to some Arab

countries stock market as an example.

4 
 
 Finally, in the last part, the implications of the analysis on the relationship between

stock market development and economic growth will be summarized in Chapter 5 tries to

answer the questions that underlie this research on the relationship between stock market

development and economic growth.

5 
 
 CHAPTER 2
A REVIEW OF THE LITERATURE ON THE RELATIONSHIP BETWEEN
STOCK MARKETS DEVELOPMENT AND ECONOMIC GROWTH

2.1 INTRODUCTION

The review of the literature will be covered in four sections. Section 2.2 will

review the literature which is related to financial development and economic growth.

The primary focus of the study is on stock markets, however, the theory suggests that to

look at stock markets without examining the role and contribution of banks and

financial sector could present incomplete results (Beck and Levine, 2001). Therefore,

Section 2.3 takes a close look at the role of the financial sector on stock markets,

particularly the role of financial intermediation while Section 2.4 reviews the literature

on stock market development and economic growth, and also reviews some of the

channels by which the stock market may influence economic performance. Section 2.5

reports the main findings of published studies and research that describe the

performance of stock markets, referring to some Arab financial markets. Finally, a

summary will be given in the last section of this chapter.

2.2 Financial Development and Economic Growth

Prior to two decades ago, governments and institutions felt that the costs of setting

up and maintaining securities markets were prohibitive for less-developed countries,

especially when viewed against the potential benefits. They felt that it was not worth the

effort (McLindon, 1996).

6 
 
 However, with the need to finance development, international economists turned

to securities markets and stock markets. The scepticism on the contribution that these

markets could potentially make to lesser-developed countries was explored. The

conclusion reached was that these markets brought sufficient benefits to justify their

establishment provided that governments developed and implemented appropriate

policies. This was particularly so as these markets could facilitate improved domestic

savings and mobilisation of these savings and improved investment, allocation (Shaw,

1973).

McLindon, (1996) who previously indicated in his work that the benefits to lesser

developed countries were not worth the costs later cites. Bencinvenga and Smith (1991)

after reviewing several studies, argued that beyond any doubt there was a close

imperfect relationship between the efficiency of an economy's capital market and its

level or rate of growth of real development.

There are two lines of researchers in this area. The first indicate that the financial

system is unimportant for economic growth. This group, ‘the sceptics’, claims that

improving the financial system is unimportant for economic growth , and argued that

economic development is the core of financial development and not the opposite. For

instance, an early study by Robinson (1952) indicated that the economic development

and what associated of high rates of the real economic growth would create demand on

several services, which requests to develop the infrastructure of the financial system in

the state in all its components, which include the financial markets.

7 
 
 Financial difficulties have been related to poor macroeconomic management since

the great depression of the 1930s. According to Shaw (1973) this depression was more

severe due to inefficiency in the financial markets in general, and the banking sector in

particular. In the light of the aforementioned, many influential economists hold

dramatically different views with respect to the link between financial institutions and

the macroeconomic act of an economy.

However, the second group argue that financial systems are crucial for economic

growth, especially for savings mobilization and distribution of capital. Many theoretical

and applied studies have discussed this subject. Its root began at the beginning of the

last century with the writings of Schumpeter (1912) on the relationship between the

growth of the financial sector and long term economical development. He concluded

that an efficient financial system supports greatly the growth of the country’s economy.

He also noted that technological innovation is the force behind the long-term

investments and economic growth, and stated that the issue of creativity is the ability of

the financial sector to provide credit to investors.

Numerous studies have dealt with the different aspects of this relationship, and

concluded that there is a positive relationship. More recently, Levine (1997) commented

that it was Schumpeter's argument that activation the stock exchange and increase of

their liquidity as in many growing markets would contribute in increasing the

qualification of the banking sector, as well as increasing the effectiveness of direct and

indirect financial intermediation to provide long term financing needed for investments.

By using data from 80 countries for the period 1960-1989, King and Levine (1993)

asserts that the financial sector could play an important role in supporting the economic

8 
 
 growth of the state. The study pointed out that the development of the banking sector in

many developing countries had a positive effect on the development process.

In addition, a study by De Gregorio and Guidotti (1995) examined the relationship

between long-term growth and financial development, by using a large cross-country

sample. The study defined the ratio between bank credit to the private sector and GDP,

and concluded that there is a positive correlation. But, this relationship changes across

countries, for instance the study shows a negative impact in panel data for Latin

America, because of the financial liberalization in a poor regulatory environment. At the

same time, the study suggests that efficiency is the main channel of transmission of

financial development for growth, rather than the volume of investment.

Moreover, there are several studies which discuss the issue of financial

development and long run growth, and the results reached by these studies suggest that

higher levels of financial development are directly correlated positively with economic

growth, physical capital accumulation and economic efficiency improvements. For

example, Arestis and Demetraides (1996) analysed in their study 12 countries as a

sample and came to the conclusion that growth and economic development of any

country depends primarily on the effectiveness of financial institutions of this country

and policies in force in the particular countries. In a further study also led by

Demetraides and Hussein (1996) they examined whether there was a relationship

detected between these variables in 16 developing countries. However, what they

discovered was that in some countries the causal link was from growth to finance rather

than finance to growth as originally posited. Hence, their study suggests that there can

be no universal conclusion that financial development contributes to growth.

9 
 
 Similarly, an analytical study of a various financial institutions by Levine and

Zervos (1996) indicated that the efficiency of banks and financial markets in terms of

providing financial services such as liquidity, and improving the efficiency of banking

operations may be the main reason for capital accumulation and increased productivity.

As clearly mentioned above and based on studies that have been done on cross-

country and individual comparisons, including an analysis of the industry and the level

of the firm, it has been found that a positive link exists between the level of

development of the financial systems and economic growth. Even though some gaps

remain and some methodologies are questionable, and the mechanism that explains the

positive relation is in question by some economists, recent literature generally supports

the view that the financial system is vital to economic growth.

2.3 Financial Sector and its Importance in Improving the Performance of Stock
Markets

Today, the financial sector may be considered as the most important sector

compared to other economic sectors in the developing countries. The financial sector

offers services through the process of buying money, financial instruments and securities

or financial services in certain situation, and then reselling these money or financial

instruments or services in another situation. The institutions that provide such services

are called intermediary financial institutions, while the places of selling and buying

money and financial instruments are known as financial markets. Accordingly, the

financial sector includes two major parts, financial markets and financial institutions,

which have different merits, functions and mechanisms (Murinde, 1996).

10 
 
 This section is devoted to the financial sector and its importance in improving the

performance of stock markets in developing economy, referring to the importance of

financial liberalization and the financial intermediation.

According to Howells, and Bain (1998) financial liberalisation is defined as a set

of measures taken, policies implemented, and legal regulations enacted for removing or

mitigating controls on demand and supply in financial markets. It is considered as a legal

framework suitable for political and administrative reforms for ensuring stability in the

financial system. Thus, liberalization of interest rates, effectiveness of markets in the

allocation of loans and foreign currency, deepening of capital and currency markets, and

increase in international capital movements are consequences of financial liberalisation.

Financial intermediaries include banks, pension funds, insurance companies,

brokerage houses, investment trusts, and stock exchanges. Financial institutions and

respected professional standards are required for a successful capital market to maintain

investor confidence. Government bonds and corporate shares are sold to the public

normally through institutions like issuing houses. New issues are offered in the Primary

Market where new capital is raised. Subsequent trading of financial instruments is done

in the Secondary Market where ownership changes. Without a secondary market it may

be difficult to get initial buyers for securities. With a range of marketable securities

available the risk of parting with funds can be reduced by setting up a diversified

portfolio (Howells, and Bain, 1998).

11 
 
 Stockbrokers and stockjobbers 1 are attached to the stock exchange where

transactions of many financial securities take place. They are the market-makers 2 who

help keep capital markets active. Brokerage firms may provide advice on shares and

other investment alternatives. In emerging capital markets with less specialised

institutions banks may dominate the primary and secondary markets.

Therefore, the first task of the financial system is settlement of the different

interests of end users, borrowers and lenders. The system itself consists of a group of

institutions and markets both of which assist investors to borrow and to lend. Financial

institutions are often described as 'intermediaries' because of their capacity to provide

liquidity for investors (borrowers and lenders); this capacity relies upon the reduction of

costs and risk and the transformation of maturity. These processes are facilitated by the

size of intermediaries. The effects of a financial system are to make borrowing and

lending cheaper as well as raising the level of liquidity; this in turn encourages

investment and may also increase the level of spending in the economy. The efficiency

with which the financial system channels funds from lenders to borrowers is also

important for resource allocation (Bain, 1992).

The financial sector is a relatively new economic sector compared to other sectors

such as the industrial and agricultural sectors, and it has mainly emerged and developed

in the last century. But today the financial sector is considered as the most develop and

expanded sector in the world economy including in developing countries and it is

                                                            
1
 “…registered dealers in specific securities usually holding stocks of the securities they deal in” (Franks & 
Broyles, 1979: 171) Modern Managerial Finance. 
2
 Firms that create a market by purchasing and selling financial securities. 

12 
 
 expanding both vertically and horizontally as expressed by a variety of institutions and

financial products (Creane, et al. 2004).

The financial sector activities work within a stated legal framework. The legal

framework is different from one state to another, which reflects the variety of the legal

entities and financial instruments existing in the world economy as well as displaying the

degree of maturity of such a sector. However, such variety mainly depends on the related

laws which organize the activities of the financial sector. The types, merits, and

mechanisms of the financial sector in any economy are determined based on the related

laws, regulations and the jurisdiction system in general. For example, some activities,

products, services, and producers belonging to the financial sector may be permitted in

one economy and not authorized in another economy (Creane, et al. 2004).

Referring to the previous studies have shown how important the financial sector

and its role in the success of the process of economic growth. The Libyan government

focus at the present time to develop the financial sector, transforming it into an open

economy rather than a planned economy. In recent years the non-bank financial

institutions like the Sarab Foreign Exchange and Financial Services, which working in

the field of securities & brokerage and online trading, as well as the International

company for financial investments have become prominent 3 . The relaxation of interest

rates controls and the appearance of new financial institutions and instruments have

contributed to greater competition in the sector. The public sector has increased

                                                            
3
 For more information see LSM annual report (2006) on: http://www.libyastockmarket.com/pdf/Ver/annual‐
Ar.pdf  
 

13 
 
 borrowing through long term and short term financial debt instruments with market

determined yield. This primary market trading has reduced the reliance on direct

borrowing from commercial banks through overdrafts and term loans. The public sector

can now manage its maturity profile of debts with more flexibility and raise funds at

more competitive interest rates (LSM, 2006).

2.4 Stock Markets Development and Economic Growth

There is no doubt that the stock market can be one of the important pillars for

growth in of emerging market economies, but the relation between stock markets and

economic growth in developing countries is still subject to investigation and variation in

opinions. The long-term financial resources that are needed to drive the economic growth

can be achieved through two essential sources, domestic financing, and foreign

financing. These two resources play an important role in forming the structure of the

stock market which provides resources for financing economic growth and the

development process (Atkin, and Dailami, 1990).

This part will discuss the most important theoretical studies that support the

hypotheses which this research is based on, that stock markets have a positive role on

economic growth, referring to the Asian, and Latin American capital markets, and some

Arab countries stock markets.

It is worth clarifying the definition of stock markets, especially emerging stock

markets. Eiteman et, al (1966) points out that the stock market is a place where shares

can be bought and sold at prices that depend upon the relation of demand and supply.

14 
 
 The financial markets include stock markets, bonds markets, money markets and

others such as gold and currency markets. In the Arab economy, the existed financial

markets may be named as the stock market or the stock exchange as trading mainly in

stocks. Thus the main function of the capital markets in the Arab economy is trading in

stocks, even in some Arab stock markets we find trading in other products such as bonds

and treasury bills (Bolbol, and Omran, 2004).

The stock market is a capital market where a share of corporate ownership is

traded. The trading of stocks occurs for various reasons, including speculations 4 ,

arbitrage between markets, short term and long term investment, hedging, reducing risk

and diversifying investment. In addition, there are other purposes such as changing the

ownership structure through hostile or voluntary takeover of a corporation. The stock

market is the most significant market in the world economy for both developed and

emerging countries. It moved from being a national market to an international market.

Stock market aims to offer the relevant environment to determine the right price of a

share as well as for implementing, and settling the related trading transactions.

Accordingly, this market is witnessing the most flourish period during a century of

trading. and it is the most vital sector among all financial markets. In addition, stock

market is the most growing financial sector in the world economy as expressed by

trading value and number of traded securities. The rapid development of financial

markets has been extending to emerging economics as well as to the Arab economy

(Khalifa, 2000).

                                                            
4
 Speculation, in a financial context, is the assumption of the risk of loss, in return for the uncertain possibility 
of a reward. For further reading see; Edward Chancellor (2000) A History of Financial Speculation. 

15 
 
 A survey by the International Finance Corporation (IFC) has carried out significant

work on capital market development in Asia, and Latin America. They have provided a

wealth of statistics on international capital markets. Information provided by the IFC

reveals that over the 10 years to 2002 the total value of stocks listed on the world's entire

stock markets rose to in excess of $32.0 trillion. In 1985 approximately 30 developing

countries had stock markets or even well defined financial sectors. Few firms, even large

companies, raised capital from a stock market. Formal sources of private equity for firms

such as venture Capital funds were unheard of in developing countries. Today, over 60

developing countries have stock markets and their capitalisation increased more than

tenfold from US $171 billion in 1985 to over US $1.9 trillion in 1997 or from less than

4% to almost 13% of the total. In 2002, as indicated above, the world stock market

capitalisation was US$32.0 trillion (IFC, 2003).

Turnover rose from 26% to 85% of emerging market capitalisation, and liquidity

has increased even faster between 1985 and 1995, or from less than 3% of the world total

to 17%. The number of domestic companies listed on emerging markets more than

doubled from 8,916 in 1985 to 19,397 in 1995. By 2002, this number had exceeded

20,000. This compared with 19,467 in developed countries. By 1997, both developed and

developing countries each had more than 19,500 companies (IFC, 1998). In 2002

approximately 40,000 companies were listed (IFC, 2003).

16 
 
 The stock market is the most significant market in the world economy for both

developed and emerging countries. It moved from being a national market to an

international market. The stock exchanges in the developing countries have played a

remarkable role in attracting increased foreign investment, and have also drawn the

attention of academics and policy makers. The share of the Arab stock market to the

world market is still limited and does not exceed 1.7% of the market capitalization, and

2.4% of the stock trading value of the total world stock markets in 2006 as shown in

(Table 2.1)

Table 2.1: Arab stock markets compared to the world markets in 2006 ($ Billions)

Stock markets Capitalization Trading value

Arab stock markets 888 1,685
The world stock markets 52,145 71,169
Ratio to the world stock 1.7% 2.4%
markets
Sources: *WFE, Focus, (2007); & *AMF AMDB, (2007).

In addition, none of the Arab stock markets is listed among the top 50 world

markets based on market capitalization, or total traded value with exception of the Saudi

Arabia market, while the Egyptian market is the only Arab market listed among the top

50 markets based on number of listed firms, and only the Saudi Arabia, UAE, and

Morocco markets are listed among the top 50 markets based on the average company

size (WFE, 2007b).

Theoretical literature suggests that the functioning of equity markets influences

liquidity. Stock market liquidity is the total value of shares relative to GDP or total

market capitalisation. In respect of this, many applied studies have been carried out

17 
 
 around the impact of the banking sector on the economic growth. A study by Levine and

Zervos (1998) on stock market liquidity and banking development shows that banking

and stock market development are correlated with the current and future rate of

economic growth and capital accumulation.

It must be recognized that many researchers suggest that there is a positive

relationship between stock market development and economic growth. In principle, a

well functioning stock market may help the development process in an economy through

increase of liquidity, risk diversification and finding an appropriate mechanism for

determining the structure of the interest rates (Rousseau. and Wachte 2000). The next

part will review the literature that dealt with the most important channels by which stock

market may influence economic performance.

Stock Markets and Liquidity: Stock markets contribute the liquidity and long-term

financing required to support the economic growth process in the developing countries.

The availability of active stock markets means the availability of high liquidity, in

addition a lower degree of risk which encourages local and foreign investors to advance

some of their financial surplus to be invested in the stock markets to buy financial

papers. The availability of this liquidity and long-term financing would encourage the

investors in various economic sectors for production and achieving high ratios of profits,

which will be distributed proportionally to the shareholders (Bencivenga et, al. 1996).

18 
 
 Levine (1991) found that the first aim of rising stock markets is to provide

liquidity, where liquid assets such as equity in a liquid stock market will be held by

investors and savers, whereas issuing equities by the listed companies may help these

companies to take advantage of the capital raised. In the meantime, when stock markets

wish to alter their portfolios it allow investors to buy and sell quickly and cheaply, as a

result it reduce the downside risk and expenditure of investing in projects that do not pay

off for a long term. More savings and investment thus may also result in more beneficial

projects, and enhance long-term economic growth. The existence of a less risky stock

market and less expensive assets for investors and easy accessibility for companies

improves the allocation of capital, and is necessary for economic growth (Bencivenga et,

al. 1995).

Although this view is reasonable. However, there are other researchers who have

an opposite view, arguing that greater stock market liquidity may weaken the

commitment of the contractors in this market to keep their funds for long-term, which

may cause a negative effect on economic growth (Levine, 1991). Moreover, a study by

Demirguc-Kunt and Levine (1996) reveals three channels by which greater stock markets

liquidity may negatively influence economic growth. The first, is that bigger stock

market liquidity might trim down savings rates by raising the returns to investment. The

second, is that given the effect of uncertainty on savings, bigger stock market liquidity

may in fact decrease saving rates through its negative impact on uncertainty since less

uncertainty might reduce the demand for precautionary savings. The third channel

operates through the euphoria and myopia that may be encouraged by highly liquid stock

markets.

19 
 
 Stock Markets and Risk Diversification: There are some studies that indicate that

more risk-sharing might support economic growth. While some other researchers suggest

the opposite. For instance, a study by Obstfeld (1994) indicated that economic growth

and resource allocation can be improved by international risk sharing through

internationally integrated stock markets. However, according to a survey by Devereux

and Smith (1994) high risk sharing through international integrated stock markets can be

the main reason for a lower savings rate. Moreover, the growth of the economy will take

long than usual, weakening the level of economic welfare.

Finding an Appropriate Mechanism for Determining the Structure of the

Interest Rates: stock markets can contribute to determining the interest rates through the

central bank by using the policy of open market, which is one of the important

instruments to manage monetary policy. The central bank starts buying and selling

government bonds in the stock market in order to influence liquidity and the structure of

the interest rates. In this matter, many studies indicate the existence of a strong

relationship between monetary policies and the level of share prices in the stock

exchange (Bossone, 1999).

Reference to a study of De Gregorio and Guidotti (1995) reveals the existence of a

direct correlation between the supply of money on the one hand, and both interest rates

and the level of economic activity on other hand. It concludes by saying that increasing

the money supply which leads to lower interest rates, will encourage the mobilization of

more investment, which naturally leads to increased production and decreases the rate

unemployment, which usually reflects the level of demand for products. This increase in

20 
 
 demand will be followed by an increase in the profits, consequently leading to an

increase in shares price in the stock markets (De Gregorio and Guidotti, 1995).

In order for Libya to have a sustained economic growth there has to be an adequate

supply of medium and long term finance. The development of the capital market is

essential to aid this supply of funds. A reached conclusion of a research survey on capital

market in Libya by Bukhatwa (1999) gives the assurance that it is possible to have a

successful capital market in Libya. The capital market has to provide savers attractive

medium and long term securities and investment opportunities. the capital market is also

to help in the efficient of fund which would be easily available for projects that would

bring good returns 5 .

2.5 The Main Findings of the Studies on the Arab Stock Markets Performance

Various studies examined the performance of Arab stock markets and reported

contradictory findings, which may be summarized as follows:

Guermat, et al. (2003) examined whether the economic and political instability of

most of the Arab countries lead their stock markets to be riskier than the stock markets in

the developed countries, and found that Arab stock markets including Egypt. Jordan, and

Morocco are less risky and that the average coverage costs were also lower than the US

stock markets. AI Janab (2007) examined the equity trading risk management in the

Casablanca stock market and found that there are individual differences that create

                                                            
5
 Chapter 4 contains more detail about requirements for the development of a successful stock market in 
Libya. 

21 
 
 unique expected return opportunities. Bolbol and Omran, (2004) stated that Arab firms

are still largely closed, family-owned with a narrow concentration of ownership.

A study by El-Erian and Kumar (1995) reported that the role of the equity markets

in developing the Arab region may be accomplished if reform policies are implemented

to reduce the country risk and to implement privatization programs, and to strengthen the

external payment regime. Girard and Omran (2007) found that despite economic,

financial and political reforms, issues related to financial transparency and political

instability are still powerful obstacles to investment in these markets. Neaime (2002)

reported that enhancing financial integration and liberalization in the Arab stock markets

will increase benefits to investors, enhance growth and liquidity in these markets and

reduce the cost of raising capital in the local market.

A survey by BenNaceur, et al. (2005) indicated the important role of economic

development in promoting stock market development and concluded that banks and

stock markets are complements and not substitutes. Finally, BenNaceur et al., (2006)

discussed the relationship between asset's price movements and monetary policy in Arab

stock markets and reported that stock market responses are negligible in most of these

countries, although in Bahrain and Saudi Arabia it appears to be more pronounced.

Accordingly, it may be concluded that the majority of the Arab stock exchanges

adopted various new practices related to stock trading mechanism and cash settlement

systems. Such new introduced practices may have significant positive aspects such as

22 
 
 reducing trading costs and transactions, increasing liquidity, increasing transparency, and

increasing information sharing between concerned parties. But, on the other side that

may bring negative aspects including the impairment of market efficiency and that may

create market fragmentation in the case of cross listed firms and use of multiple

currencies. However, these negative aspects do not exist in all periods of stock trading,

but they may be materialized during periods of deep falling prices and unstable periods

of trading. Accordingly, and to avoid the adverse affects that might accompany the new

introduced practices, several regulations, and measures need to be adopted in order to

keep the Arab markets work in a relevant environment and far from future crises.

2.6 Summary

In this chapter, literature review on the relationship between economic growth and

financial development, especially the stock markets development, was taken out; and the

important roles of stock markets were mainly explored: A liquid and efficient stock

market can affect economic growth via liquidity, reducing risk, finding an appropriate

mechanism for determining the structure of the interest rates, and easing savings

mobilization. From the previous studies, although, some researchers argue that there are

still some negative effects on economic growth, the positive effects are much greater. It

is argued by most academics that stock market development is positively correlated with

economic growth.

23 
 
 CHAPTER 3
AN INTRODUCTION TO THE LIBYAN ECONOMY

3.1 Introduction

This chapter is to provide the reader with a clear idea about the case study. Thus,

the chapter will be divided in to four sections. Section 3.2, starts with the geographical

location of Libya, while Section 3.3 will review a brief history of the Libyan economy.

Section 3.4 will take a close look at the financial sector and review the economic

developments during the past ten years. Section 3.5 will clarify the steps to be taken to

establish the Libyan stock market. Finally, a summary will be given in the last section of

this chapter.

3.2 Background

Libya or, to give its official name, The Great Socialist People’s Libyan Arab

Jamahiriya, lies between Egypt to the east, Algeria and Tunisia to the west, Sudan to the

south east, and Chad and Niger to the south (Map 3.1). With an area of approximately of

1,775,500 km2, Libya's is the fourth largest country in Africa. Its capital, Tripoli, is

located in the north by the

Mediterranean Sea. Libya's population,

according to the latest census in 2007 is

approximately 6.2 million residents

(OBG).

(Map 3.1: Libya location)

24 
 
3.3 A Brief History of Libyan Economy

Since the early seventies, the Libyan leadership have chosen the planned economy

system, which limits investment to the areas determined by the state, and imposes strict

restrictions on foreign trade. The suffocating intervention of the government in the

economy over a number of years led to a continuing deterioration in the business

climate, lowering economic growth, and the almost complete absence of the private

sector. Furthermore, falling world oil prices in the early 1980s and the impact of

economic sanctions in the 1990s caused a serious decline in economic activity (WB,

2006).

Having recently successfully achieved diplomatic rehabilitation as a result of the

Lockerbie settlement and its renunciation of Weapons of Mass Destruction (WMD) and

the lifting of the UN and US Libya-specific trade sanctions in September 2003 and 2004,

Libya is now seriously examining its economic options. The main challenge of Libya is

to promote the growth of the non-oil sector, and spur the diversification of the economy.

Hence the Libyan government began moving the economy from a planned economy to a

more market-oriented system. As a consequence, the pace of economic and structural

reforms has picked up, and some progress has been made in recent years to liberalize the

economy, such as unifying the exchange rate, issuing a new bank law to strengthen the

role of the Central Bank of Libya, opening the banking sector to local and foreign

competition, and the privatization of some state-owned enterprises. Since then, reforms

in various fields have progressed (WB, 2006).

However, because of its chronic inability to diversify the economy away from the

oil and gas sectors, Libyan fiscal policy continues to be dominated by the amount of oil

25 
 
 revenues generated for the government and the need to support the huge burden of State

Owned Enterprise (SOE) and civil service employment, and maintain the extensive

subsidy system. As at mid-2006, Libya's macroeconomic position remained strong and is

projected to remain as such over the medium term, largely of course because of the high

international price for Libya's crude oil. This averaged around US $38 for the year 2004,

US $50.64 for 2005, and US $63.05 for 2005 up to mid September (OPEC, 2005).

Income per capita: Table 3.1 shows that Libyan income per capita increased from

LYD 642 in 1970 to LYD 1582 in 1990 with average growth rate of 4.8% However, the

development of Libyan income per capita reflects the changes in the country's oil

revenues. The table also shows that the increase in the income per capita to LYD 3166 in

1980 because of the rise in oil revenues that year. By contrast, it slumped to LYD 1650

in 1988 following the declining in oil revenues; nevertheless, it increased again in the

early 1990s. following the oil revenues (LSPE, 1991).

Table 3.1: Growth of average income per capita as percentage of gross

national product for the period 1970-1990 (LYD)

Gross National Income per Income per

Year Population
Product capita (LYD) capita ($)
1970 1288.3 2006 642 2169
1975 3674.3 2683 1369 4624
1980 10277.3 3245.8 3166 10694
1985 8050.2 3668.2 2195 7414
1988 6967.5 4224.4 1650 5572
1990 6772 4848.8 1582 5221
1991 8900 5155 1727 5699
Annual average
growth during the 9.6% 4.6% 4.8% 4.8%
period 1970-1990
Source: Libyan Secretariat of Planning and Economics (1991).

26 
 
 Real GDP and Macroeconomic performance; has been shaped by fluctuations in

oil revenues. Real GDP growth was modest and volatile during the 1990s, shaped by

changes in the price of oil and reflecting the decline in oil production as a consequence

of economic sanctions enforced by the US and the UN since 1986. 6 The average growth

during that period was about 2.6 percent, with a peak of 13.5 percent recorded in 1991

and downturns in 1994, 1998, and 1999. During the 1990s, non-oil GDP growth was

slow and volatile as well, at 3 percent on average, owing to pervasive state controls and

the decline of government revenues. As sanctions were suspended by the UN in

1999,and oil prices rose, growth has gradually picked up (Table 3.2), (IMF, 2006).

Table 3.2 : Libya: Summary macroeconomic performance 1991-2005

1991- 1995- 1999 2000 2001 2002 2003 2004 2005

94 98
National income and Prices (%) 
Real GDP  3.4 1.8 -0.4 1.1 4.5 3.3 9.1 4.6 3.5
Real Non‐Oil GDP  3.7 2.6 0.9 3.0 6.8 4.7 2.2 4.1 4.6
Real per capita  1.4 -0.2 -2.3 -1.2 2.5 1.2 7.0 2.5
Balance of Payments (billion  of 
US$ unless otherwise noted) 
Current account balance  -0.04 0.8 1.6 6.5 4.1 0.6 5.0 7.3 16.0
as a % of GDP  -0.2 2.6 5.4 18.8 13.8 2.9 21.5 24.2 40.8

Central Government Finances 
(% of GDP) 
Revenue  30.6 36.5 39.8 45.7 43.1 51.4 54.4 59.1 73
Expenditure  30.7 34 32.8 31.3 44.3 41.2 44.6 44.0 41.2
Overall balance  -0.1 2.5 6.9 14.4 -1.2 10.2 9.8 15.1 31.8
Non‐hydrocarbon Overall  -16 -20.6 -10.5 -17 -30.3 -30.2 -37.6 -36.1 -36.0
Balance 
 
Source: CBL (2005); & IMF (2006)

                                                            
6
 US sanctions were introduced in 1986, prohibiting US companies from any trade or financial dealings 
with Libya, while freezing Libyan assets in the US. UN sanctions were imposed in 1992, suspended in 
1999, and lifted in 2003. US sanctions were lifted in 2004.

27 
 
 Reflecting significantly higher oil production and prices, Libya’s economic

performance has recently improved. The macroeconomic situation remains strong , with

real GDP growing at an estimated 3.5 percent in 2005, slightly down from 4.6 percent in

2004. Growth of non-oil GDP has accelerated to 4.6 percent in 2005 and 4.1 percent in

2004, up from 2.2 percent in 2003. Non-oil GDP growth was broad-based, driven by

construction and utilities, such as electricity, gas and water, but also trade, hotels,

transportation, and other services. However, growth in manufacturing and agriculture has

remained tame. Non-oil growth would need to further accelerate on a sustained basis to

absorb the labour force which is projected to grow by 3.3 percent in the years ahead

(IMF, 2006).

3.4 The Financial Sector in Libya

One of the undoubted major problems faced Libya is the lack of depth of its

banking sector and financial markets, which is important of successfully attracting

Foreign Direct Investment (FDI) . This connectivity between FDI inflows and financial

market depth is discussed at length by Omran and Bobol (2003) who examines the

Middle East and North Africa (MENA) region as an FDI recipient. His view is that "the

emerging literature on Foreign Direct Investment (FDI) now stipulates that FDI's

positive impact on growth depends on absorptive capacities. Prime among these

capacities is financial development”, and they find that "Arab FDI will have a

favourable effect on growth if interacted with financial variables at a given threshold

level of development". In his analysis of these thresholds their findings are that Libya,

Saudi Arabia, Sudan, and Yemen are below the desired threshold, whereas Syria is

28 
 
 almost equal to it. All the other countries, however, especially Lebanon, Tunisia, and

UAE, are comfortably above it (Omran and Bobol 2003, pp.231).

Promoting the financial system providing payments services, mobilizing savings,

and efficiently allocating financing for investment is a key issue of a well-functioning

market economy. Well-functioning financial systems ensure firms the ability to seize

emerging investment opportunities and reduce the reliance of small firms to internally

generated cash. They also impose discipline on firm’s thus driving efficiency, both

directly and by facilitating new investment and market entry, and according to empirical

evidence, doubling private credit as a share of GDP is associated with an increase in

average long-term growth of almost two percentage points (WB, 2004).

In Libya there is substantial room for gains, as credit to the private sector is still

very limited, and total domestic credit is a small fraction of GDP compared to other

upper middle-income countries-including oil-producing countries (Figure, 3.1). Banking

represents the backbone of the Libyan financial system, but the operation of banks has

been hampered by widespread state ownership, a long tradition of directed credit to state-

owned enterprises, controlled interest rates, and absence of credit culture. The

government has embarked on a program to strengthen the banking system, privatize the

state-owned banks, and promote the financial industry outside the banking system (WB,

2006).

29 
 
 Figure 3.1: Domestic Credits, % of GDP

Domestic credits, % of GDP
140
120
100
80
60
40
20
0

Sources: World Development Report (2004): A Better Investment Climate for Everyone, Washington DC.

3.4.1 Modernizing Libya's Financial Sector

Legislation in Libya such as Law (No. 5, 1997) 7 which provides for the promotion

of foreign capital investment, and more recently Banking Laws (No. 1 and 2, 2005) have

demonstrated the seriousness of Libya's policy makers regarding economic reform and

the privatization and deregulation of its centralized economy, the legacy of the

nationalization drive of the 1970s. Part of this process is a desire to attract FDI into

Libya, with massive amounts of investment required, especially to overhaul the ageing

and technologically antiquated hydrocarbon, refining and petrochemical sectors, the

infrastructure deficit, as well as revitalizing the tourist, service and, manufacturing

industries (CBL, 2005).

                                                            
7
 For more information on the law article see CBL website/Laws and Regulations.  
http://www.cbl.gov.ly/en/pdf  

30 
 
 A research survey by Borensztein et al (1998) shows that the weakness of

development of financial institutions and markets could impact negatively on the ability

of the national economy to take advantage of the potential benefits of the FDI. In other

words, inefficient institutions and financial markets of any state may mean that the

economy would not be able to cope with or absorb capital flows, whether short or long

term.

Since the demise of the former Soviet Union, much literature has emerged about

banking reform in transition countries, and a useful way of distinguishing and deciding

on reform methodologies is to compare two basic approaches, either new entry or

rehabilitation. Claessens (1995) Indicates that the rehabilitation approach is the re-

capitalization of banks in the state, in cooperating with an intensive programme of

institutional development and privatization in the end. This approach is particularly

exemplified in Poland and Hungary. While the new entry approach depends mainly on

privatization of the state-owned banks, and the entry of new banks, in some cases are

may require the liquidation of some old banks. This approach is exemplified from Russia

and Estonia where rapid expansion in the number of banks, for example, in Russia from

5 banks in 1989 to 2.500 in 1995 (Claessens, 1995).

In the early stages of reform it may not be evident that a consistent financial

approach at all is being practised, and the reform process may include aspects of both

approaches. In Libya, as elsewhere, the situation is even more complicated by the fact

that banking reform is not taking place in a vacuum, but is closely related to an overall

reform agenda aimed at both the privatization of many inefficient SOEs, as well as a

31 
 
 conscious effort by the government to attract FDI into such industries as tourism,

manufacturing, and agriculture. This is seen as crucial in order to diversify the economy

away from overdependence on revenue from hydrocarbons (Omran and Bobol 2003).

It can be said that, generally speaking, the financial sector in Libya has been

solidly based in law, and this applies also to the bank nationalization exercise, which

took place after the 1969 revolution. Even before this, in 1963 Law No. 4 "Promulgating

the Banking Law" was gazetted, and in Chap. 1, entitled "The Central Bank", the

National Bank of Libya was replaced by the CBL, and provisions for its establishment

and management were laid down, such as the sole right to issue currency, with the

responsibility for maintaining monetary stability and the external value of the Libyan

currency, as well as for regulating credit (CBL, 2006).

The situation up to 1987 was that in addition to the National Commercial Bank,

other commercial banks in operation included the Jamahiriya Bank (formerly Barclay's

Bank), the Al-Sahari Bank (formerly the Banco di Sicilia), the Ummah Bank (formerly

the Banco di Roma), and the Wahda Bank, formed in 1970 from the merger of five other

banks. Since the mid-1990s the Libyan government has been actively encouraging the

setting-up of regional or Ahliah banks, and several new banking licences were issued,

leading to the situation that by 2005, there were a total of 54 banks in operation,

comprising 6 commercial banks, 4 specialized banks, and 44 regional or Ahliah Banks

(Table 3.3), (CBL, 2006).

32 
 
 The acceleration of the liberalization process for the Libyan banking and insurance

sectors to allow for foreign ownership and the establishment of the Libyan Stock

Exchange are urgently required if the ongoing privatization process as well as the many

efforts made to attract FDI is to be assured (IMF, 2006)

The next section will review the measures that the Libyan government have

launched to support the financial sector reforms.

Table 3.3: Number of branches and agencies of commercial banks with municipalities.

Cities National Jamahiriya Ummah Wahda Al- Trade & Total

Commercial Bank Bank Bank Sahari Development
Bank Bank Bank
Tripoli 15 22 18 16 11 2 84

Benghazi 5 7 3 14 8 2 39

Sebha 7 7 5 1 4 - 24

Zawia 5 6 7 7 6 - 31

Sirte 7 11 9 12 4 2 45

Jebel 14 6 1 10 5 1 37
Akhdar

Jebel 5 7 7 9 1 - 29
Algerbee

Total 58 66 50 69 39 7 289

Sources: *CBL (2006) Libya annual report.

3.4.2 Priorities in Financial Sector Reform

The Libyan government and the Central Bank of Libya (CBL) have launched a

series of measures in support of financial sector reforms. A particular focus of the

program is the restructuring of state-owned banks and, for some of them, an adjustment

33 
 
 in ownership structure to include or increase private sector participation in the capital of

such banks. In this context, the authorities have already embarked on significant steps 8

in:

• Re-assessing the legal framework for the banking system, with the passing of the new

Banking Law (No. 1/2005), as well as the Anti-Money Laundering Law (No. 2/2005).

The new banking law reinforces the independence of the central bank of Libya (CBL)

and offers a good legal framework for the regulation of banking activities.

• Partial privatization through public sale of shares of the AI-Sahari Bank, and

preparation for the privatisation of the Wihda Bank.

• Re-capitalization of all five public banks, as well as licenses granted to four private

banks and one foreign bank.

• Merging of 21 regional banks into one bank.

• Reinforcing o f banking supervision capacity.

• Partial interest rate liberalization, exchange rate unification and foreign exchange

liberalization.

• Granting of independence to public commercial banks to close non profitable

branches.

• Authorizing Libyan commercial banks to lend to foreign firms operating in Libya.

• Strengthening regulatory and prudential oversight.

• Devising plans for balance sheet restructuring o f state-owned banks.

• Charting the path for privatization of state-owned banks.

• Building the legal and regulatory underpinnings for the insurance industry, and

setting-up the legal and institutional framework for the launch of the stock market.

                                                            
8
 For more details see IMF (2006) Staff report for the Article IV Consultation with Libya (CBL). 

34 
 
 This section introduced some of the measures proclaimed by the Libyan

government under the auspices of the Central Bank of Libya (CBL) and the International

Monetary Fund (IMF) in support of financial sector reforms, as well as moving the

economy from a planned economy to a more market-oriented system. As a consequence,

according to the IMF report (2006) some progress has been made in recent years to

liberalize the economy, such as unifying the exchange rate, issuing new bank law to

strengthen the role of the Central Bank of Libya and opening the banking sector to local

and foreign competition, and the introduction privatization of some state-owned

enterprises. Since then, reforms in various fields have progressed.

3.5 Libyan Stock Market.

In the last 15 years many Arab countries have embarked on economic

diversification, including the creation of stock markets and their liberalization and

privatization. Their aims have been varied to provide greater financial depth to their

economies, making available a source of finance to nascent indigenous firms for

expansion and diversification, to provide absorptive capacity for the privatization or

deregulation of many state-run telecommunications or basic infrastructure providing

state-owned enterprises (SOEs), or to improve corporate governance for an evolving

private sector.

The importance of establishing the financial markets in Libya comes for savings

and funds investment in securities to benefit the national economy and to ensure the

safety and accuracy of transactions and ensures interaction between the powers of supply

and demand to define prices and protect investors.

35 
 
3.5.1 Steps of Establishment

As part of the government monetary policy, there have been many discussions on

the role of financial institutions and markets due to the urgent need for the stock market

in Libya as a step forward to improve the financial sector and restructuring the Libyan

economy. Hence, the enabling legislation for this is already in place. Law (No. I of

2004), which amended Law (No. 21 of 2001), together with Regulation (No. 53 of 2004),

regarding the practice of economic activities. In the latter, Section. 10: Financial Paper

Markets, Article 59 states: "The rules related to the organization of the financial papers

market, determination of its competencies and body undertaking the supervision of its

works, and other relevant rules, are issued by virtue of a decision to be taken by the

Secretariat of the General People's Committee". This was followed up by the General

People’s Committee (The Interior Ministry) resolution No. 134 of 3 June 2006, which

paved the way for the establishment of a Libyan Stock Market ,and its headquarters will

be in Tripoli, but the main branch will be in Benghazi, with a capital of LYD20 million

divided into 2 million shares of LYD10 each.

Under the auspices of the Secretary of Economy, Trade and Investment. “The

market consists of nine departments; (1) Trading Department. (2) Central Depository

and Registry. (3) Membership and Production Affairs. (4) Department of Financial and

Administrative Affairs. (5) Department of Research, Studies and Development. (6)

Department of Control, Oversight and Supervision. (7) Department of Legal Affairs. (8)

Department of Communications and Information Systems, and (9) Department of Public

and Private Relations” (CBL, 2006, p. 71).

36 
 
 The Libyan stock market (LSM) is relatively young and not fully developed; there

are seven companies which are currently listed in the stock market (Table 3.4), and these

firms began to issue shares at the end of 2006. The General People's Committee for

Economy and Trade (Ministry of Economy and Trade) aims to develop the LSM to bring

it into line with developments of the modern age of communication technology and

online trading.

Table 3.4: Companies which currently listed in the stock market

Name of the Company Subscribed-in capital
(in LYD million)
AL-Srai Bank for Trade and Investment 3.0

AL-Sahari Bank 126.0

AL-Wahba Bank 180.0

Bank of Trade and Investment 33.401

United Company for Insurance 10.0

Libyan Company for Insurance 50.0

AL-Sahari Company for Insurance 15.0

Source: Libyan Stock Market report for 2007.

The government is seeking to develop the systems of the Libyan stock market,

including electronic trading, supervision and implementation of operations according to

the latest regulations in the global capital markets. However, the relations with regional

and global stock markets are vital to the development of the Libyan stock market and its

compliance with international standards and rules in this area.

Within this framework, the Libyan stock market has conducted agreements and

understandings with various Arab and global markets and benefits from training and

37 
 
 qualification courses for the market's staff. Therefore, according to International

Exhibition Organizers (2007), a cooperation agreement was signed between the Libyan

Stock market and the London stock market in London (on Feb 6th, 2007). The agreement

provides for the training of the officials in the Libyan stock market in Libya and London

in order to be eligible to manage the market, as well as development of the system from

time to time, and participation in seminars and conferences organized by the London

stock market. Below are some of the LSM cooperation agreements that have been signed

in the period between 2005 to 2007 with various Arab and global institutions 9 :

Agreement: Amman Stock Exchange

Date: 19-07-2005
Location: Amman

Agreement: Cairo and Alexandria Stock Exchanges

Date: 24-07-2005
Location: Cairo

Agreement: MISR for Central Clearance and Depository

Date: 19-07-2006
Location: Tripoli

Agreement: Talal Abu-Ghazalla College- Jordan

Date: 12-10-2006
Location: Amman

Agreement: Capital Market Authority in Egypt

Date: 20-11-2006
Location: Cairo

Agreement: Center for Research and Consultation of Garyounis University

Date: 09-01-2007
Location: Benghazi

Agreement: London Stock market

Date: 06-02-2007
Location: London

                                                            
9
 For more information see LSM annual report (2007) on: http://www.libyastockmarket.com/pdf/Ver/annual‐
Ar.pdf  

38 
 
 Agreement: Crafton College
Date: 15-10-2007
Location: London

Agreement: University of Reading

Date: 15-10-2007
Location: London

Agreement: Arab Society of Certified Accountants (ASCA)

Date: 01-11-2007
Location: Amman

As well as joining the membership of the following international organizations:

• AMEDA (African and Middle East Depository Agency).

• ANNA (Association of National Numbering Agencies).

• ASEA (Arab Securities Exchange Association).

• Association of African Exchange.

• Arab Stock Markets Union 10 .

3.5.2 Market Regulation 11

 

Establishment of the Libyan stock market (LSM) has taken into account the need to

pursue more sophisticated systems, and avoid the mistakes which faced other markets.

Therefore, it has prepared regulations governing the operation of the market to ensure the

integrity of circulation and preserve the rights of investors. In LSM the most significant

regulations for the capital market and related law acts are

• Act – Law of Public Trading on the Securities

                                                            
10
 Arab Stock Markets Union: was established to develop coordination between Arab states to achieve Arab 
markets’ common interests and to increase the efficiency of the role played by them in order to serve 
integration and common Arab social and economic development. (For further reading see;  Bolbol, A. & 
Omran, M. 2004). 
11
 This section is largely based upon the LSM report of the Regulation for the Rules for Circulation Operations 
in the Libyan Stock Market. 

39 
 
 • Act of Investment Funds

• Act of Bonds

• Companies Code

• Act of Privatization

The tasks of regulating dealing in the market is entrusted to the Legal Affairs

Department. The department has many tasks and responsibilities necessary to ensure no

violation of the rules, regulations and legislations of market operations and activities .

Accordingly, it supports the legal framework and increases the awareness of workers

and those who are dealing with the market.

The functions of the LSM departments can be summarized as follows:

3.5.2.1 The Tasks of the Legal Affairs Department:

a) Giving legal opinion for the related activities and replying to legal inquiries of the

other departments in the market.

b) Participation to prepare the rules, legislation, and regulations related to the market.

c) Preparing legal studies related to the different market operations and making out the

results and showing them to the market management committee.

d) Preparing and reviewing all the contracts and agreements drawn up for the market.

e) Following up any action brought by the market or brought against the market and

coordinating with the external advisor of the market about these actions.

f) Executing the issuing decisions of the court body relating to securities.

g) Investigating the complaints submitted by the market management to the department

from outside parties in order to respond them and remove the causes.

40 
 
3.5.2.2 The Central Depository and Registry Department (CDR):

CDR is the backbone of the Libyan Stock Market (LSM) providing clearing and

settlement service to Libyan Stock Market.

The objectives of the CDR department:

Facilitate securities trade to encourage higher level of trading activities compared to what

used to take place under the previous system.

Apply the Delivery Versus Payment principle (DVP), which is the norm in international

capital markets.

The main activities and services of the CDR department;

a) Clearing and settlement of operation executed at (LSM).

b) Management of securities accounts for custodian banks and issuers.

c) Handing corporate actions (cash and stock dividend, etc) according to the issues

assemblies’ decisions.

d) Management of a pledge system for all securities lodged into the central depository.

e) Management of the settlement guarantee fund to eliminate suspended movements due

to broker’s defaults.

The SDR department contains:

a) Settlement Guarantee Fund Department (SGF):

The Settlement Guarantee Fund is one of the new mechanisms in the Capital

Market that aims to guarantee securities obligations resulting from trading at the Stock

Exchange. SGF is a pool of money containing contributions from its member

41 
 
 participants. Its basic role is to cover any possible risk in the Capital Market of resulting

from members themselves. The SGF capital is amended every three months according to

daily activity average of the SGF members.

The main aims: Guaranteeing the execution of financial or securities obligations

resulting from trading at the stock exchange and consequently attracting local and

foreign investments to deal in the Libyan stock market by guaranteeing the rights of all

parties in due time; also achieving stability and discipline in the market with the aim of

increasing the volume of transactions.

b) Central Depository Department:

Central depository is a system substituting dealings in material securities through

book entries, for dealings through paper certificates. The system allocates an account for

each investor in which it registers the stocks and bonds which he owns. The investor can

keep abreast of the securities that he owns from a statement sent to him on a regular basis

upon request (similar to the statement which he receivers from the bank). Ownership of

the securities for which paper certificates have been issued, is registered at the central

depository by depositing the paper certificates at LSM, which is responsible for the

management of this system. The ownership registration of securities for which no paper

certificates have been issued is done through the central depository system, on the basis

of a certificate to which is attached a list of security owners drawn up by the issuing

entity. According to the system, entities wishing to issue new securities can do so

without the need to print certificates, as the share allocated to each investor is recorded in

the central depository. When the investor sells part of his securities, the balance of

42 
 
 securities sold is transferred from the account of the investor, who has sold by virtue of

the central depository system, to the account of the investor buyer by the same system.

c) Securities Central Registry Department:

Central registry is the automated and developed alternative of shareholders records

maintained by securities issuers and the related services.

The Objectives of the Central Registry:

i. Adopt a uniform system for maintaining shareholder’s records.

ii. Facilitate access to securities information related data by shareholders and concerned

parties.

iii. Facilitate for the shareholders to receive their dues.

iv. Establish an automated and secure database to include securities and shareholders

data.

The Major Services Provided by the Central Registry:

i. Managing and maintaining shareholders records on behalf of securities issuers.

ii. Issuing statistics and reports for competent parties on the centrally deposited

securities.

iii. Enforcing the decisions adopted by the securities issuers including payments related

to securities ownership such as cash and stock dividends.

iv. Providing additional sophisticated services such as automated voting in the general

assembly and using smart cards in securities transactions.

43 
 
 Finally, the main aim of the CDR is to facilitate securities trade to encourage

higher level of trading activities compared to what used to take place under the previous

system and to increase the securities rotation rate as a result of settling the dues of the

Settlement Guarantee Fund members as the SGF pays its members’ obligation in case of

not paying the settlement.

3.6 Summary

This chapter discussed the Libyan political economy. It presented the Libyan

geography location, population. The chapters also reviewed a brief history of Libyan

economy, and highlighted the financial sector in Libya and reviewed the economic

developments during the past ten years. The last part clarified the steps which have been

taken to establish the Libyan stock market. The result of this survey showed that the

reform process continues apace, to assist competitiveness in the non-oil sector, ensuring

that economic reforms and diversification keep Libyan products internationally

competitive.

To date, the government's preparations since 1997 to reform the regulatory and

institutional framework to support the transition to a market economy have been

considerable, and given time, Libya's efforts to re-connect itself with the global economy

should undoubtedly be successfully achieved. But clearly such key issues as the initial

primitive level of economic development as well as the present magnitude of long-term

economic distortions in industrial structure and trade patterns need to be analyzed and

overcome.

44 
 
 CHAPTER 4
CAN THE STOCK MARKETS PLAY A SIGNIFICANT ROLE ON THE
DEVELOPMENT OF LIBYA?

Today, in the twenty first century, it can be seen that stock market is the most

developed sector in the world economy, which is moving from being a national market to

an international market, from being an independent market to relatively a part of the

world integrated market, and from being a restricted market built on national laws, to a

cross borders market. The question that arises here is: what are the benefits of such sector

which is witnessing the most significant growth. To answer such question we found

contradictory views, due to the fact that the relationship between stock markets and

economic development and growth is one of the most debated issues in the recent

literature, which always tries to answer many questions such as; what is the role and

continuation of stock markets in developing the national economy, what is the direct and

indirect impact of opening a stock market on the national economy?.

However, it should be noted that the majority of studies discussed these issues and

reported evidences of strong positive correlation between stock market development and

economic growth due to the functions offered through the stock markets. Accordingly,

this section will explore the possible roles of the stock market in the Libyan economy, by

review of studies which conducted using some Arab stock markets which may be

summarized as follows:

45 
 
 First, a place for trading secondary equity market: The financial market is a place

to trade financial securities between agents who need money such as investors and

borrowers, and those who have excess cash as savers and lenders. Financial markets

produce the efficient place for financial intermediaries, and other concerned parties who

need to execute their trading, and to exchange funds and financial instruments based on

stated right prices (Abdurrahman, 2006).

The Arab stock markets are mainly dealing with secondary equity markets. The

value of the secondary market reached a new record in 2005 as expressed by the ratio of

market capitalizations to the national GDP of the Arab states. The share of market

capitalization to the GDP reached more than 100% for some Arab states including

Amman market. Doha market, Saudi market, Bahrain market and Kuwait market. In

general the average ratio of the Arab stock market to the GDP was about 97% in 2005-

2006, which is acceptable regarding other emerging economies; even if it is below

average for about four Arab stock markets. However, it might be considered as a

moderate level compared to the developed economies such as Hong Kong stock

exchange which had about 528% of the GDP in 2006 (WFE, 2007b).

Second, A place for trading the primary market: The second important function of

stock markets includes generating new investment and initiating new corporations. The

channels of primary markets are varied and may occur inside or out-side the stock

exchanges, primary market raised funds of about $ 15 trillion between 1991 and 1995 in

thirty two countries (Aylward and Glen, 2000). However, the traded value of primary

46 
 
 stocks as well as the new issues in the primary markets are still limited as expressed by

face value of total securities compared to the Arab secondary stock markets for the

majority of Arab states (AMF, 2006).

Third, other functions: The financial markets help the mutual funds, pension funds,

insurance companies, and households to articulate the relevant portfolios, diversify their

investment, and offer the opportunity of reducing risk, especially in case of having

foreign listed instruments in their national exchanges and vice versa. In addition, it may

introduce new financial instruments such as options, futures, warranties, indexed options

and indexed futures products. Finally, stock exchanges may serve the financial

intermediaries and institutions such as commercial and development banks, and

insurance companies, through offering the liquidity when needed and providing the

opportunity to invest any surplus when it is available.

In order to say whether Libya can have a fully functioning stock market comparing

with countries like Egypt, Tunisia, Morocco, Jordan and Saudi Arabia, which have an

active stock markets. Some requirements for the development of a successful stock

market in Libya are in place while others are not which may slow down the process.

However, the conditions that need to be achieved can be summarized as follows 12 :

                                                            
12
 This part is largely based upon the IMF Staff Report for the 2006 Article IV Consultation. 

47 
 
 Political, Economic and Legal Environment: It is essential that a legal framework

be quickly established and enforced to protect stock market participants and build up

confidence in Libyan stock market.

Libya seems to have a sufficient number of high income individuals who could

participate in the capital market. However, the institutional investors do not have good

alternatives sources of investment. More securities and physical investment opportunities

are needed in the economy. Additionally, the institutions involved in the capital market

need to have qualified staff. Thus, there is a need to increase the awareness of the staff. It

is doubtful whether the public is fully aware of why government is trying to develop the

capital market. Public awareness programme are required as soon as possible so that the

general public knows the aims of the capital market development.

The government participation is essential to develop the capital market in Libya.

The volume of shares in the market can be increased rapidly through the privatisation of

public sector bodies. Government would also have to provide incentives to the private

sector to encourage firms to go public, as well as needs to be greater promotion of the

advantages of raising long term capital through equities and bonds to the private sector.

There are a sufficient number of financial intermediaries for the current needs of

the Libyan economy. But there are no stockbrokers and dealers in the market.

Information gathering and analysis is a necessary part of a successful capital market .

48 
 
 Brokers and dealers help keep trading on the stock exchange active. Thus, existing

financial institutions need to be encouraged and perhaps assisted to train brokers and

dealers.

Tax Policies and Incentives: The tax changes implemented will assist free

enterprise and help capital market development The general reduction in taxes could

increase personal income and savings that could be converted to investment funds by

financial institutions. The tax review underway to simplify and standardize tax

requirements for companies in Libya would further assist capital market development.

Foreign ownership of local companies should be allowed but government could restrict

the ownership of assets deemed strategic to the national interest.

Finally, capital market development could help Libya to develop it is not sufficient

on its own for economic growth. It is only one of the many inputs necessary. Some

others are political stability, improved technology, positive real interest rates, a favorable

macro-economic environment and quality human resources. Income inequality could

intensify if the capital market is not monitored and adverse effects restrained early.

Nevertheless significant resources can be mobilized in the economy if there is a fully

functioning capital market with a corresponding high growth rate and suitable investment

alternatives.

49 
 
 CHAPTER 5
CONCLUSION

The primary focus of the study is on the stock markets, and whether there is an

association between stock market development and economic growth. Chapter 2 has

reviewed the literature on the relationship between stock markets development and

economic growth, referring to the financial sector and its importance in improving the

performance of stock markets.

Theoretically complex models have been developed to show the many channels

through which the development of financial markets affect and are affected by economic

growth. These studies have largely demonstrated a strong link between the financial

sector and economic growth. Moreover, research results regarding to the relationship

between stock market development and economic growth have been obtained from

cross- country growth regression, and provide a general picture of the relationship

although the details of may reasonably be expected to vary considerably across counties,

depending on specific institutions and circumstances. Generally, most of the literature

concludes that there is a positive relationship between stock markets and economic

growth. Also this chapter reviewed the main findings of the studies on the Arab Stock

Market performance.

Chapter 3, started with the geographical location of Libya, and reviews a brief

history of Libyan economy. It takes a close look at the financial sector and reviews the

economic developments during the past ten years, clarifying the steps that have been

50 
 
 taken to establish the Libyan stock market. In this connection, both for international

credibility and for self-assessment of the efficacy of economic reforms, it is crucial that a

system such as the IMF's General Data Dissemination System (GODS) is adopted and

practiced in Libya. This is a structured process through which countries regularly

upgrade and improve the quality of the data compiled and disseminated by their national

statistical systems over the long term, to meet the needs of macroeconomic analysis. In

this way Libya can gauge its progress in making major economic reforms in comparison

with other countries, as well countering present international criticism of the current lack

of transparency within the Libyan Government.

It is therefore of crucial importance that the establishment of a Libyan stock market

is treated as a matter of priority by the Libyan authorities. If not, there is a danger that

many legal reforms for the banking and commerce sectors recently approved and in

process, the formation of the Government Board for Ownership Transfer (GBOT) and

the Libyan privatization initiative itself, the devaluation of the LYD and tariff

liberalization, will all fail in their efforts to reform and modernize the Libyan economy.

Libyan policy makers themselves might ponder why the recent legislative and

privatization blitz have so far yielded so little dividends in terms of foreign investment

into Libya. Undoubtedly, one answer is that it is still very early in the reformist process

to expect tangible long-term results. But until the Libyan stock exchange is fully

operational, it is difficult to envisage the flow of FDI into Libya on the scale visualized

and planned by the Libyan policy makers.

51 
 
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