The Effect of Foreign Direct Investment in the Banking Sector on the Libyan Banking Industry - Research Proposal Example

Effect of foreign direct investment in the banking sector on the Libyan banking industry Introduction. Foreign direct investment refers to the commitment of funds by a foreign company in a new market with the aim of increasing profitability. For any investment to be termed as a foreign direct investment there must be “physical development of infrastructure in the new market” (Froot 19). An investment in a foreign market can also be referred to as a FDI if the foreign company acquires a significant stake in an already existing firm. The acquired stake must enable the foreign firm to have a controlling interest in the company. This means that the foreign investor can “alter the way of doing business” for the new company including change of name, nature of doing business or the products on offer (Froot26-27). According to Barclay, firms mostly multinationals engage in Foreign Direct Investment with the aim of “increasing profitability and also increasing its global presence” (101). It is also aimed at minimising risk that is inherent in international business operations. A firm that engages in FDI stands a better chance of surviving in turbulent economic times if it operates in more than one market. A firm may also engage in FDI to “check the expansion of a local competitor into a new market” (Barclay 77). The aim is to prevent the local competitor from gaining a foothold in a foreign market and then using its newly acquired status and resources to destabilize the local market. Martinez says that Libya is a country in the African continent with a “fairly complicated history” (81). It has evolved from decades of misrule, revolutions among other national evils. It has for a long time been accused of sponsoring terrorist activities, and was listed among the axis of evil by the American government. Libya was put under the microscope by the United Nations after it was accused of sheltering the suspects accused of the Lockerbie bombing. Consequently it was put under UN sanctions and this severely affected its economy. Today Libya is one of the “emerging economic giants in Africa courtesy of its abundant oil resources” (Ham 35). It has also normalised its relations with the west and the UN lifted its economic sanctions after the Arab state complied with the set demands. Libya has a population of around 6 million people and a GDP of $21 billion. It has carried out extensive private and public sector reforms to encourage foreign investors so as to spur the local economy. “The banking industry in Libya is fairly complicated” (Collard 71-72). Due to the embargo that was put by the UN and other western nations, the banking industry has for a long time been dominated by state owned banks such as the National Commerce Bank and the Libyan Arab Foreign Bank. In total there are five banks in which the state has majority share holding. The Central bank of Libya certainly regulates the banking sector and is no doubt owned by the state. There are also some other 48 banks which operate in Libya and with the opening up of the Libya economy, new foreign investors are warming up to the banking industry in Libya. Rawle points out that the year “2009 will have a significant impact on the banking sector in Libya” since the sector will be open doors to foreign investors (129). This research proposal will therefore assess the banking sector in Libya and try to find out the effect of Foreign Direct Investment in this critical sector. Appropriate conclusions will then be made and recommendations presented. Rationale of the study The banking sector is critical to the success of any economy whether in a developed or developing economy. “Any economy is prone to collapse” if its banking sector is not well regulated (Barclay 189). The recent economic crunch which hit giant economies around the world was as a result of the sub-prime mortgage crisis in the United States which hit the banking industry hard. Individuals took huge loans and mortgages from some of the world’s biggest banks but soon failed to pay them back. Naturally this created a problem since banks lend money which is deposited by the general public. Failure to pay these loans and mortgages therefore creates a jam and could even lead to the collapse of an economy. This therefore shows the importance of a well regulated and effective banking sector. Green and Demoss argue that the role played by the banking industry in the success of an economy can never be underestimated. “This explains why every government keeps a close watch over the banking sector through the Central bank” (189-190). The central bank enables the government to have a firm grip of the banking sector and this helps in curbing crimes associated with the banking sector such as money laundering, tax evasion as well as cyber crime. According to Green and Demoss, the banking sector in Libya has been largely dominated by state owned banks and a few privately owned banks. However the government of “Libya has shown willingness to open this crucial sector to foreign investors” (180). Sahara bank one of Libya’s state owned banks has already given up at least 19 percent shareholding to a strategic foreign investor from France called BNP Paribus. This is just the beginning since other banks such as First Gulf Libyan Bank which is based in the UAE is already operating in Libya. Will this be good for the local economy or will it be a channel through which foreign multinationals edge local banks and dominate the Libyan economy. Could the entrance of these foreign banks lead to a new and more effective banking sector in Libya? These are some of the questions that this research will seek to answer. Objectives of the study 1. To determine the effect of foreign direct investment in the baking sector in Libya. 2. To identify the entry methods used by foreign investors in the Libyan banking industry. 3. To establish potential pitfalls faced by foreign investors venturing into the Libyan market 4. To assess the level of competition in the Libyan banking sector 5. To make recommendations based on the findings. Literature Review The themes of Foreign Direct Investment, the banking sector in Libya as well as the emergence of Libya as a major economic force have been discussed widely by various writers and economic experts. A report published by the World Bank notes that the transformation of the Libyan economy into a market based economy has played a key role in rejuvenating an otherwise faltering economy. The reports notes that this followed the lifting of sanctions by the UN after the Arab nation agreed to halt its nuclear program and also reached a compromise on compensation of the relatives of the victims of the Lockerbie bombing. The report notes that at least $ 7.5 billion in foreign direct investment has been invested in Libya by the year 2008. While the state still holds a firm grip on the economy, this trend is changing and the near socialist state is slowly embracing the ideals of capitalism. Writing in the Wall Street Journal, Florence and Fiona examine the recent trends in FDI inflows around the world. The two writers note that while FDI investment in other Arab states such as Qatar, UAE and Oman has been on the rise, very few countries can match the rate of FDI growth in Libya. The major reason behind this phenomenon is that the state has opened the economy particularly the banking sector and this has given additional confidence to international investors. Another factor that has contributed to the rise in Foreign Direct Investment in Libya is the significant amounts of oil deposits in the Northern Africa country. A research carried out by Otman and Erling and published in the Middle East Economic Digest magazine highlights some of the reasons why FDI has been on the rise in Libya. The research also takes a keen look at how the banking sector has changed in Libya and how this has affected the way of doing business in the oil rich country. According to Otman and Erling, Libya expects Foreign Direct investment worth an estimated $2 billion in the year 2009 alone. To further show its thirst for FDI, the Libyan government formed the privatization and investment office under the ministry of finance. The office is tasked with the responsibility of promoting investments in Libya. It has achieved relative success and since its inception, it has spearheaded the structuring of major investment laws. Investors can now own up to 100% of their investment in most industries. However this is limited to 49 % in the banking sector. The research concludes that the entry of foreign banks has already had a positive impact on the economy since it has attracted other related investments. A report of the International Monetary Fund published in the Journal of Development and Economic Policies magazine and the Wall Street Journal notes that Libya is one of the countries in Africa with the highest levels of liquidity. Whatever way you interpret this situation, it presents a good investment opportunity especially in high end products. IMF top economists say that the government should avoid injecting more funds in the economy to check on inflation. The report finally concludes that the banking sector in Libya has been given a much needed boost after its partial liberalization. Martinez carried a research on the possible effect of changes to the banking sector to the economy of Libya. He notes that after the law was changed to allow foreign investors to invest in the Libyan banking sector, a number of banking giants have shown their interest. HSBC a UK based bank had shown interest in buying shares in Sahara bank but was outwitted in the process. “However it clearly states that its thirst in the Libyan market is far from over” (Martinez 105). The bank is just waiting for another opportunity to invest in the lucrative Libyan market and if the recent past is anything to go by then its chances are good. The main reason why international banks are paying more than a passing glance in the Libyan market is to follow other multinationals which are investing in the oil and infrastructure market. Some of the notable multinationals which have invested in Libya after the wave of privatization includes British oil giant BP and its American counterpart Exxon Mobil. Research Methodology A descriptive study best fits this type of research since it is aimed at describing a given phenomenon. In this case the researcher will try to describe the effect of Foreign Direct Investment on the banking sector in Libya. The evidence on the ground suggests that there has been increased activity in the banking sector. The question that the researcher will answer is how this has affected the local economy. Has banking been made easier and more effective or its just business as usual? These are some of the questions that the research will answer. Target population. The target population for this study will be the top management of various private organizations. The researcher settled on this target population because they interact with the banking industry frequently and in large scale. This group is also highly learned and can easily spot any variance in provision of services by various banks. This includes the interest rates charged by banks, availability of loan facilities as well as the ease in international banking transactions. Sampling design The researcher will use non probability sampling technique to capture the data from the respondents. The researcher settled on this method since it is easy to administer and it is also cost effective. Using the directory and other leading business magazines, the researcher will identify at least 60 top business organizations and seek to get their views on the effect of FDI in the Libyan banking sector. Data collection procedure and instruments. The manner in which data is collected is crucial and could affect the overall outcome of the research. Taking this into consideration, the researcher will use both structured and non structured questionnaires. Personal interviews with managers of different companies will then be used to capture the data and fill out any other necessary information Data analysis and presentation. Both quantitative and qualitative data will be collected for the purpose of this study. Quantitative data will be analyzed using measures of central tendency while qualitative data will be analyzed using pie charts and appropriate conclusions drawn. Recommendations will then be analyzed and put forward. The research is expected to take three months. Reference: Barclay, Anne Lou. Foreign Direct Investment in Emerging economies. London, UK: Routledge, 2000. Collard, Elizabeth. The Middle East economic digest. Michigan: The University of Michigan Press, 1971 Florence, Eid. Fiona, Paua. “Foreign Direct Investment in the Arab world; The Changing Investment Landscape” Wall Street Journal, 26 May 2008, 16-17 Froot, Kenneth. Foreign Direct Investment. Chicago, IL: University of Chicago Press, 1993. Green, Wilson Andrew. Demoss, M Philip. The money and banking system of Libya: Its structure and History. Madison, FL: Green 2002 Ham, Antony. Libya. San Francisco, CA: MTH Multimedia, 2006. Martinez, Luiz.The Libyan Paradox. New York, NY: Columbia University Press, 2007. Metz, Chapin Helen. Libya: A country study. Whitefish, MT: Kessinger Publishing, 2004. Otman, Waniss. Erling, Karlberg. “Quenching the thirst for FDI in Libya” Middle East Economic Digest. May 2008, 22 Rawle, Farley, Planning for development in Libya: the exceptional economy in the developing world. Santa Barbara, CA: Praeger Publishers, 1991. Rick, James. “Foreign Direct Investment, Capital outflows and Economic development in the Arab world”. Journal of Development and Economic Policies. June 2000 22-25 Robert, Muller. The Middle East and North Africa 2004. London UK, Routledge 2004 Simmons, Leslie Geoffrey. Libya and the West: from independence to Lockerbie. London, UK: I.B.Tauris, 2003. The World Bank Group. “FDI patterns in the Arab states” 20 Nov 2005 10 Aug 2009. Vandewalle, Dirk J. A history of Modern Libya Columbus, OH: Wiley Blackwell publishing, 2006 Wallace, Jonathan. Wilkinson, Bill. Doing business with Libya. London: Kogan Page Publishers, 2004. Read More