What If Banks Financed the Economy Instead of the Government?

The problem in Libya is not a shortage of money, but the weak direction of it.

The Libyan economy relies on government spending, while the banking sector holds substantial liquidity that does not reach the real economy in sufficient volume. As a result, banks remain closer to being deposit-holding institutions managing salary disbursements than financiers of productive companies and projects.

The solution does not lie in increasing spending, but in rebuilding the relationship between banks and the private sector: placing limits on central bank financing of the government deficit, developing credit products for companies, and reducing risk through collateral, data and an effective judiciary. In this way, banks could be turned into an engine for growth, diversification, job creation and reduced dependence on oil.

A banking sector: from financing the deficit to financing production

When the government borrows to finance current spending, the funds typically return in the form of salaries and purchases, sustaining existing activity without adding productive capacity. Financing a factory, an agricultural project or a technology company, by contrast, creates a productive asset that generates income and jobs for years.

Financing government consumption sustains current activity, whereas financing investment creates new activity.

Financing of current expenditure must therefore be separated from investment projects, with a gradual ceiling placed on government borrowing from the banking sector to finance the deficit, and new financing directed towards projects with a clear and measurable economic return.

Credit is not reaching companies sufficiently

According to the IMF's 2025 report, banks' claims on the private sector reached around 30.6 billion dinars in 2024, but growth in private credit relied heavily on consumer instalment financing (murabaha) and salary advances, while financing for companies remained limited.

An increase in credit does not necessarily mean an increase in investment; a consumer loan may temporarily raise demand without creating productive capacity. The shift must therefore be from financing consumption to financing production, through long-term investment loans linked to a project's cash flows, and by developing financing for working capital, equipment, leasing and supply chains, with terms suited to the production cycle.

The Central Bank of Libya should work with commercial banks to establish a national framework for productive financing that gradually raises the share of financing directed to companies and productive projects to 25–30 per cent over several years, prioritising industry, agriculture and storage, refining and petroleum derivatives, technology, renewable energy, small and medium-sized enterprises, and productive housing.

This does not mean financing weak projects, but making good projects financeable through improved risk assessment. The Central Bank could publish quarterly indicators on credit distribution and link incentives to job creation, production and local content, rather than simply to loan growth.

Capital markets should also be developed to allow capable companies to raise financing through the issuance of shares, bonds and sukuk, rather than relying entirely on bank loans. Organised platforms could be established to finance small and medium-sized enterprises, alongside the development of investment funds and venture capital, enabling financing for start-ups and high-growth projects that lack sufficient real-estate collateral.

A productive economy cannot be built by relying on banks alone. Capital markets provide a channel for financing companies and long-term projects, give savers investment opportunities, and help price and distribute risk rather than concentrating it within banks' balance sheets.

The business environment and collateral

Redirecting banks will not be enough if lending risk remains high due to the absence of a property registry and a credit registry, weak contract enforcement, slow commercial courts, and unclear bankruptcy rules.

Libya needs an effective nationwide credit registry, a modern collateral system, fast commercial courts, a clear bankruptcy law, reliable financial statements, corporate credit ratings, digitised payments, insurance companies, and a reactivated property registry.

Restructuring the loan guarantee fund

The loan guarantee fund needs to be restructured and reactivated so that it guarantees a portion of the lending risk directed towards eligible small and medium-sized enterprises and productive projects, without extending loans directly. In this way, every dinar of government guarantee mobilises several dinars of private financing, turning the state into a catalyst for investment rather than a direct provider of it.

To prevent uncontrolled subsidy, the fund should operate under published standards, cover only part of the loss (no more than 20 per cent) rather than all of it, charge risk-linked fees, and publish reports on guaranteed loans, default rates and the jobs created by the projects financed.

Government financing should be directed solely towards investment

The government needs financing for infrastructure and strategic projects, but financing government investment differs from financing current expenditure. Financing salaries and recurring expenses does not create added value.

The IMF's 2026 report noted that the banking system suffers from a liquidity surplus, while credit to the private sector remains constrained. The problem, therefore, is not a shortage of funds, but weak financial intermediation, a lack of company evaluation tools, high debt-collection costs, and excessive reliance on real-estate collateral.

Addressing this may require establishing specialised banking units, training credit officers in cash-flow analysis, using tax, sales and payments data, and developing invoice-, contract- and supply-chain-based financing, so that growth-capable companies can obtain financing without large real-estate assets.

Converting bank liquidity into real investment would generate production, jobs, stronger companies, tax revenue and potential exports, while reducing imports and dependence on oil. But it requires changing banks' incentives, reforming the business environment, and providing collateral, data and an effective judiciary, alongside limits on government deficit financing.

Six steps need to work together:

1. Reducing government crowding-out of the private sector
2. Reactivating the property registry
3. Developing corporate financing products
4. Activating capital markets and non-bank financing instruments
5. Restructuring and reactivating the loan guarantee fund
6. Building a legal and informational infrastructure that reduces lending risk

Oil finances the state, banks finance the economy, and the private sector creates growth.

This is where the shift from an economy by spending to an economy of production begins.