Role of CBL in Promoting Effective Governance in the Banking System in Libya - Research Proposal Example

Role of CBL in promoting effective governance in the banking system in Libya Introduction The banks have long been seen as an that facilitates trade and commerce and helps people to improve their socio-economic status. The same holds true for Libya where the government’s economic policies and fiscal programmes are implemented directly or indirectly through the banks that promote socio-economic development and provide economic stability. The various functions and facilities of the bank are designed for the benefit of the general public and businesses and extend them financial help when they need it and at the same time, provide them with a secured deposit for their hard earned money. The working of various banks and financial institutions are supervised for compliance with government rules and regulation by the government’s premier banking The Central Bank of Libya. The role of Central Bank becomes crucial in promoting an effective governance module within the banking system in Libya primarily because the banks have various stakeholders like shareholders, debt holders, board of directors, competitors, common man whose savings can be used or misused by banks if not monitored closely. 2. Libyan Economy and CBL Since its independence from the colonial rule in 1951, the state controlled socialism of Libya has largely been responsible for closed economy that had shunned global trade. Despite the oil wealth and Colonel Qaddafi’s semi liberal economy, the eleven years long global sanction against Libya had further corroded the development processes within the country. While ‘the decentralized system has distributed power to the various committees and departments to overseas the daily running of the administration efficiently’, the reforms in 2004 became the main propeller for change that brought in foreign partnership in various industrial and non industrial areas of Libyan economy and a new reformed banking system that was headed by the Central Bank of Libya (BBC News). Banks have become integral part of development processes of the nation and accountable to their various stakeholders. The reforms in the Banks in 2004 had considerably increased the responsibilities of CBL vis-à-vis the commercial banks, including the foreign banks that have their branches in Libya. Presently, there are 5 commercial banks, including NBC where 21 regional banks were merged in 2006, few special banks like agricultural bank etc and 18 foreign banks operating in Libya (Monetary policy, cbl.gov). In CBL has the major duty to act as a banker to the commercial banks and provide them with guidelines for sound practice of functioning. It supervises and monitors commercial banks so that do not violate the stipulated provisions of law or the decree issued by CBL in pursuance of the same. It also overseas the same for foreign banks which have their head office, located outside Libya. 3. Statement of the problem The banks are integral part of national economy. The banks facilitate mobilization and allocation of funds to various firms and development agencies that boosts capital formation and stimulates growth. Good and strong governance of banks is vital to the performance index of the national economy primarily because weak governance has wide ranging adverse ramifications on the economic development. The lack of effective control mechanisms and weak governance of banks by the appellate authority often results in wide ranging irregularities that are detrimental to the interests of the various stakeholders of the bank. Hence, lack of effective controls vis-à-vis malpractices in accounts and auditing, security of confidential information, corrupt practices in the higher hierarchy of management, disparity in rules and regulation etc. have become crucial risks factors in the banking industry. The emerging economy of Libya, with its recent liberalization policies and banking reforms has made it imperative that CBL must become more stringent in monitoring the various commercial and foreign banks in Libya so they conform to the regulations of banking laws in Libya. 4. Purpose of the study Central Bank of Libya is the premier body that monitors commercial and foreign banks and overseas that they follow good governance practice in their banking operation conforming to the state rules and regulations. Corporate governance can be broadly defined as the creation of business environment within and outside the organization that would effectively meet the challenges of the time and improve and improvise the productivity of the performance outcome. The research would be studying the role of CBL in the effective governance of commercial banks and how it encourages corporate governance in the banking system in Libya as an essential parameter of effective governance. 5. Research question 1. How crucial is the role of Central Bank of Libya in promoting better governance strategies and policies in the banking system in Libya? 2. How can Central Bank help safeguard the interests of various stakeholders and shareholders of the banks in Libya? 6. Hypotheses It is observed that the banks in general are more opaque in their operation than other corporate entities and have greater government regulations. These factors hinder implementation of effective corporate governance within the banks and require liberal policies that would facilitate the same within the banking system. The recent poor governance in some Western Banks and financial institutes like CitiBank, Lehman Brothers, Merrill Lynch, AIG etc., resulting in near collapse of the local economy, has sent a shock wave across the globe. Indeed, cases of misuse and abuse of shareholders rights in the corporate world have catapulted the role of corporate governance into the prominence. The increased risks to the interests of the stakeholders have prompted the governments to promote effective corporate governance modules with the managerial and operational strategies so that stakeholders’ interests can be safeguarded. Risks have been defined as ‘the possibility of loss as a result of the combination of uncertainty and exposure flowing from an investment decision or a commitment’ (Boritz, 1990). The close relationship between the banking system and rapid industrialization has necessitated development of strategies that promote transparency in their work methodologies. The banking system of Libya is rapidly incorporating the global values and fast evolving business paradigms within its business strategy. CBL as a premier state body acts not only as a banker to the state, but its functions also encompass supervision and monitoring of other banks. But it is also assumed that if sound corporate governance is not followed, effective supervision may not be possible. Hence, the role of CBL becomes critical in ensuring that the banking system within Libya follow good governance practice and become proactive participant in the Libyan economy. The corporate governance would encourage creative productivity and inter personal relationship which would promote confidence building among various stakeholders within the banking system in Libya. 7. Significance of the study With huge market potential and relatively low competition, global community is looking forward to tapping the emerging new market with zeal and interest. Libya, as the emerging new economy has created potential in a wide ranging areas of business concerns that include construction, telecom, technology, consumer goods etc. The recent times have seen a floodgate of foreign investors and business houses, eagerly exploring the opportunities there. In the new economic scenario, the banks would be playing a vital role. A transparent system of work methodology in banking system would increase their credibility amongst their various stakeholders and improve performance outcome. Looking at the wide scope of the research topic, the study would facilitate evaluation of the role of Central Bank of Libya in promoting corporate governance in the commercial and foreign banks, especially with relation to the adoption of Basel II, which is an international arrangement and takes cognizance of credit risk and operation risk within the banking system. The implementation of Basel II paradigms within the local regulation would greatly boost the credibility of the Libyan banks and improve and improvise the overall performance quotient of the banking system in Libya. 8. Review of the literature In the recent past, the world has witnessed great slide in the standard of corporate governance that has considerably damaged the goodwill of the public. The lack of strategic control mechanisms and effective regulation has been responsible for the decline of the overall performance of the banks, making them an easy target for the unscrupulous elements, both within and outside the organization. The liquidation of German Harstatt Bank in 1974, led to the formation of Basel committee on banking supervision, under the aegis of Bank of International Settlement in order to form a uniform cross jurisdictional banking regulation, acceptable across the world. In 1988, Basel I became a standard banking supervision guide but was found to be risk insensitive primarily because it did not differentiate between credit risk and other type of risk. This resulted in banks holding lower quality of assets in their balance sheet and offloading high quality assets which were less risky (Chami, Khan, Sharma, 2006). Basel II, the new capital adequacy framework came formally into existence in 2004 and was primarily ‘three naturally reinforcing pillars; the first pillar Regulations – aligns the minimum capital requirements more closely with bank’s actual underlying risk’ (Caruana, 2006). Various studies have shown that the government and regulators ‘do not maximise social welfare; they maximize their own welfare (Hamilton, et al., 1788; Buchanan and Tullock, 1962). Some social scientists have gone so far to state that with the rich and powerful people as client, the banks are often induced to look at their own interests rather than in the best interest of the societies (Becker and Stigler, 1974). The sound risk management postulates of good governance and conforming to Basel II framework would facilitate better supervision and managerial strategies within the banking system. ‘Disclosure is critical to the functioning of an efficient capital market’ (Solomon, 2007, 144). Accessibility to information is vital to promote trust amongst the stakeholders. But the studies have found that banks are not only opaque but they are also plagued with more informational asymmetries that make supervision more complex (Furfine, 2001; Morgan, 2002). Under the codes of corporate governance, the disclosure mainly relates to the policy of the company to disclose relevant information about its loans, budgets, annual financial statements and short term and long term management forecasts and other mandatory information that gives indication of the bank’s positioning in the market. ‘The lifeblood of market is information’ (Cadbury Report, 1992, p33). Thus disclosure policy of the banks would encourage confidence building amongst the stakeholders and make it easier for CBL to supervise them. Financial accounting information is one of the most important aspects of corporate governance that has significant element of risks that can effectively damage the investors’ trust. The financial system along with effective auditing provides an easy means for the stakeholders to monitor the performance of the company or organization. CBL supervises the banks through regular auditing and monitoring of their financial statements. Owen Report explains that ‘..the point of an audit is to provide independent assurance of the integrity of the way in which the company has reported’ (Owen Report, 2003, vol.1 6.1.1). Many scholars have affirmed that ‘accounting information may be regarded as public good because existing shareholders explicitly pay for its production but have no means of exacting a share of this payment from new shareholders’ (Leftwich, 1980; Watts & Zimmerman, 1986; Beaver, 1989). Internal control is one of key factors that have the power to put the stakeholders’ interests at risk. The Turnbull report says that the aim of framework of internal controls is to ‘reflect sound business practice whereby internal control is embedded in the business process’ (Turnbull Report, 1999a, para. 8). The risk management is extremely important part of corporate governance within the banking system. Basel II Accord aims to align bank’s capital with their basic risk profiles (Shamshad, 2006). The major purpose of Basel II framework is to reduce and promote efficient, equitable and fair allocation of financial resources. Looking at the various literature reviews, t becomes imperative that role of Central Bank of Libya is examined more closely vis-à-vis effective governance in the banking system. 9. Methodology and Procedure In order to meet the aims and objectives of the research proposal, the research methodology would mainly concentrate on the empirical research mainly based on qualitative research methodology. The proposed research study would be qualitative in nature but encompass elements of quantitative research also so that better and more accurate conclusions could be achieved. Qualitative research demonstrates and facilitates deeper understanding of the problem and helps to investigate the context in its entirety. 9.1 Data collection and Sample Measurement techniques would comprise of questionnaires and interview schedules. Since the research involves the study of the factors that have far reaching impact on the various stakeholders and depositors of the banking system in Libya, a large sample size comprising of people who have been directly and indirectly involved with the banks in Libya, would be considered. The sample would primarily be collected from people who do businesses directly or indirectly in the Libya and have regular interaction with the banks. The study would be taking into account the conceptual model as well as the theoretical model. The samples selection and the questionnaires would be prepared as per the theoretical model of survey and a wider conceptual model of the research would be used to analyze the data. Primary data collection would be collected through detailed and qualitative and quantitative questionnaires prepared, keeping in mind the need for appropriate negotiating techniques and the facilitating factors that would promote and improve business activities. Special interview Schedules would also be used to gauge the responses of the people towards global business practices and the improvisations that are needed to be made in the current circumstances of conducting business in the emerging economies. Secondary information sources such as libraries, commercial bibliographic databases for peer review, internet resources and e journals would be used for literature review. 9.2 Data Analysis The ‘typology method’ of data analysis would be adopted. ‘It is a classification system, taken from patterns, themes or other kind of group data’ (John Lofland & Lyn H. Lofland, 1995). In this case, the literature contents would be segmented according to pre-defined criteria of theme, pattern and issues to develop and predict pattern that best reflect the sentiments of the people. The data taken from questionnaire and interview schedule would be synthesized puts them into coherent form by applying appropriate statistical techniques and developing patterns. Software like SPSS would also be used to analyze the data using different techniques and interpreting the data in the wider context to understand the intricacies of corporate governance paradigms that influence negotiations. 10 Scope and Limitations of the study Comprehensive sampling with wide ranging issues which influence the business outcome would be introduced in the questionnaires and interview schedules so that the scope of study is large enough to ensure the success of the research’s aims and objectives. The empirical method of the research is appropriate mainly because the aim and objectives of the research need a survey requiring qualitative analysis of the factors that have significant impact on the business strategies with various business partners. The study would be limited to the framework of Libya’s economic paradigms that have significant impact on the national and international communities who have business interests and hence the sampling would be limited to the individuals and domestic and international businesses that are directly or indirectly linked with business negotiations with their counterparts in Libyan banks. Some people have criticised these methods because of lack of absolute validity of obtaining proof. The limitation of sample size because of financial constraints is also one of the reasons cited for accurate and efficient analysis of the factors that may have significant impact on the negotiations. 11. Ethical consideration Ethical consideration is most prominent part of the qualitative research. The covert and overt dimension of the research where the subjects’ right to privacy and the public’s right to know, clash over the ethical issues. The delicate line between the two is often contentious and it is important that the researcher does not transgress his ethical boundary to commit any serious offence that might lead to criminal proceedings. The researcher must at all times, remember that confidence building and mutual trust are foundation for the generation of an authentic and socially relevant theory that must stand the test of time. Reference BBC News. Libya. Available from: [Accessed 24 August, 2009]. Becker, G. and Stigler, G.(1974). Law enforcement, malfeasance, and the compensation of enforcers. Journal of Legal Studies 3, 1-18. Buchanan, J.M. and Tullock, G. (1962) The Calculus of Consent. University of Michigan Press. Beaver, William H et al. (1989). Financial Reporting and the Structure of Bank Share Prices. Journal of Accounting Research (Autumn, 1989), 157-178. Boritz, J Efrim. (1990). Approaches to Dealing with Risks and Uncertainty. CICA. Cadbury Report. (1992). Financial Aspects of Corporate Governance. The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd. p.33 Caruana, Jemie. (2006). The Implementation of Basel II, Central Banks and the challenges for development. Bank International Settlements. Chami, Mohsin S. Khan and Sunil Sharma. (2003). Emerging issues in Banking Regulation. IMF Working Paper 03/101. (International Monetary Fund). Central Bank of Libya. Available from: [Accessed 24 August, 2009]. Furfine, C.H. (2001). Banks as monitors of other banks: Evidence from the Overnight Federal Funds Market. Journal of Business 74, 33-57. Hamilton, A., Lay, J. and Madison, J. (1788). Federalist Papers (In C. Rossiter, Ed., New York: New American Library, 1961). ICEAW.(1998). Internal Control – Guidance for Directors on the Combined Code [Turnbull Report], London: Institute of Chartered Accountants in England and Wales. Leftwich, Richard.(1980). Market Failure Fallacies and Accounting Information. Journal of Accounting and Economics, 1980, 2(3), pp. 193-211. Lofland, John & Lofland, Lyn H. (1995). Typological Systems: Analyzing social settings, 3rd ed. Belmont, Cal.: Wadsworth. Monetary Policy. Available from: [Accessed 22 September, 2009]. Morgan, D., (2002). Rating banks: Risk and uncertainty in an opaque industry. American Economic Review 92, 874-88. Owen Report. (2003). Report of HIH Royal Commission. Vol. 1[6.1.1]. Available from: [Accessed 24 August, 2009]. Solomon, Jill.( 2007). Corporate Governance and Accountability. Second Edition. By John Wiley & Sons, Ltd. p. 144. Shamshad, Akhtar. Governor of the SBP. (2006). Basel II Implementation: Issues, Challenges and Implications. 56th Annual General Meeting – Institute of Bankers Pakistan. The Turnbull Report. (1999a). Internal Control: Guidance for Directors on the Combined Code. ICAEW; London. para 8. The Turnbull Report. (1999b). Internal Control: Guidance for Directors on the Combined Code. ICAEW; London. para 17. Watts, R. L. and J. L. Zimmerman. (1986) Positive Accounting Theory. Prentice Hall, Englewood Cliffs, NJ. Read More