A Research Proposal in Partial Fulfillment Of the Requirements of
Implications of the Economic Globalization on the Development Banking Sector: case study of the Central Bank of Libya
1. Introduction
In the macro setting, there is an apparent need for supervisions, restrictions and regulations of economy. In the micro setting of a company, the regulating body is the management of the company. In the macro setting, there is a need to have a much more powerful body of regulators that has the ability to maintain the smooth activities of business within an economy. One of the most powerful regulating bodies of an economy is the central banks.
Central Banks are entities having the responsibility to maintain economic well-being and stability by issuing and implementing monetary policies. To be specific, the primary tasks of central banks are to maintain the stability of money supply in an economy and to maintain the stability of national currency. These organizations are the bodies providing oversight and supervisory functions to ensure that financial institutions within an economy do not behave recklessly (Blinder, 2001).
However, in the era of globalization that demands corporations to trade internationally, eliminating the borders, one major issue raises as whether government should maintain the Government Regulated economics or conduct the Free Market economics. The two great ideas, in their nature to be opposite, created a significant enhancement in the world of economics discussion.
The battle of these two ideas continues emerging in some countries. Libya is one example of a country that continues opening their economy to foreign institutions including their banking sector. After 30 years of acting as socialist country, Libya evolves to deal with the challenge of globalization by conducting a series of privatizations in their banking sector by permitting the setting up of the foreign bank branches in Libya and the privatization of Libya’s state-owned local banks. This decision marks the economic reformation of Libya as they continue dealing with the challenge of globalization.
2. Background Case Study
2.1 Socialist Economy
2.1.1 Absence of Individuality
Theoretically, the Socialist Economy evolves based on the belief that proper regulation is the key of a well organized nation. Individual desires to own stuffs and becoming wealthier than others is considered poison in the extreme practice of the theory. People are working for the state and the state will be the one distributing wealth to each member of the society, equally. The theory made enemies of individualism. Every member of society is expected to work unselfishly for the wealth of the nation. The nation will go rich or poor together as one.
2.1.2 Lack of Motivation
Unfortunately, the theory has proven to be imaginative, as the people in the nations that applied that theory have strived their way to get out of the country. Individualism is a part of every person; it is the part that gave them the motivation to strive for the better. Efforts trying to put them down will be considered a large amount of pressure upon a person. The application of the theory has proven to make the economy weak and unmotivated.
2.2 Banking Sector Reformation of Libya
Realizing the unfavorable impact of socialist economy and the increasing demands for coping with globalization, Libya finally ends the 30-year of becoming a socialist country and gradually adopts a free-market economy. The decision to become more opened starts when the country carries out a series of privatizations in their banking sector that composes of two major actions: permission of the establishment of foreign bank branches and the privatizations of state-owned banks (Business Intelligence Middle East, 2007).
The decision to perform free-market economy underlies the country to sell minority share in state-owned commercial banks and also the privatization of other banks. This includes the sell of minority shares in Sahara Banks, one of the country’s five state-owned commercial banks in order to encourage the bank to become a leading international financial body (Business Intelligence Middle East, 2007).
In addition, Central Bank of Libya also starts the privatization of Wahda Bank. After the initial financial offering of the privatization of Wahda Bank on February 13, 2007, finally, Central Bank of Libya announces that Arab Bank plc become the winner of the bid with the offer reached €210 million for 19% of the Wahda Bank stake. The decision to award Arab Bank plc as the winner is due to the Arab Bank already become the universal bank in the Arab world, thus in line with the objective of Libyan CBL to have leading international bank through privatization (Central Bank of Libya, 2007b).
3. Aims and Objective
a. This paper intends to present some facts Libya government in get rid of being a socialist country to adopt free-market economy to be in line with the challenge of globalization era.
b. Using the non-participant observation method, collecting data and analyzing qualitative information from journal, books, magazine and other online materials, this paper is to conduct analysis on the implications of the economic globalization on the development and reformation of banking sector in Libya.
c. In addition, the paper aims at discussing the role of Central bank of Libya (CBL) and its role in helping the country’s privatization on banking sector through the issue of resolutions of privatization on Bank Sector.
4. Theoretical Framework
After 30 years of acting as socialist country, Libya make a strategic move in order to cope with the challenge in the globalization era by performing a sequence of privatizations in their banking sector.
Regarding the decision to reform the banking sector in Libya, therefore the research statement or question is
“As Libya starts adopting free-market economy as part of their strategy to meet the challenge of globalization, does the decision of Central Bank of Libya (CBL) to permit the privatization of Libya’s state-owned local banks and allow the establishment of foreign banks branches become the winning strategy for the country’s economy?”
I choose this research question since it could be completely different from others that may only discuss only the reformation of banking sector in Libya without discussing each action that Central Bank of Libya (CBL). Instead of discussing the partial discussion, I decide to discuss the larger scale of banking sector reformation and the implication of globalization in order to favor me in providing the complete discussion and recommendation on appropriate action of economic reformation in Libya.
5. Literature Review
5.1 Economic Globalization
The term of globalization has been around within the past decades to show how important to target overseas market is. While each market in specific countries has different set of rules of conduct, there is a believe that the aim of globalization is to be a matter of taking a superior business model and extending it geographically, with necessary modifications, to maximize the firm’s economies of scale.
The sentence above implies that a firm in one country can expand its presence in another country. This is made so in order to give opportunities for the company to expand into foreign market once the local market is saturated. This situation is especially giving benefits for developed countries such as United States where the competition within the country is fierce and the market is towards saturated.
In order to smooth the objective, the developed country establishes bilateral or multilateral agreements in order to promote sometime force the implementation of free trade agreement. Under such agreement, each member of the bilateral or multilateral organizations can exchange their products or services freely without having charged by additional taxes. This situation seems benefit the develop country since their products seems to be more competitive than developing countries’ products are.
One of the results of such agreement is privatization. By definition, privatization is the change of ownership from state to the private sector. The private sector could be local companies, foreign companies, or even the company’s employee itself.
One of the goal of such privatization is to enable foreign companies to acquire a company in other countries so that it helps the foreign companies, especially from developed countries, to enter local market easily.
We witness during the economic crisis in Asia several years ago, one of the recommendation of IMF is to privatize some key companies in a country like Indonesia. While IMF says it is for the good of Indonesian’s competition, we witness that this is the stairway to acquire local companies. Today, the ownership of some key banks, telecommunication companies and many other have bee changed from government to foreign companies. In terms of international political economy, globalization is simply the new face of imperialism.
5.2 Central Bank of Libya (CBL)
Like other central banks in the world, The Central Bank of Libya (CBL) is also fully owned by the country’s government. This status is important in order to maintain the stability and fairness of economic in the country and to support the sustainable development of Libyan economy, which is in line with the country’s economic policy (Central Bank of Libya, 2007a).
The Central Bank of Libya (CBL) also acts as the monetary authority in The Great Socialist People’s Libyan Arab Jamahiriya and they possess the status of autonomous corporate institution (Central Bank of Libya, 2007a).
To be precise, the role of The Central Bank of Libya (CBL) has grown since their establishment. Currently, the CBL has twelve major roles as following:
1) Control the Libyan banknotes and coins
2) Maintain the Libyan currency stability
3) Managing and supervising the country’s reserves of foreign exchange and gold
4) Control the quality, number (quantity), costs of credit in order to deal with the economic growth
5) Deciding the suitable action to cope with foreign or local economic issues
6) Perform as a banker for the Libyan commercial banks
7) Monitoring and control commercial banks in Libya to ensure their hood of financial position and to safeguard the rights of shareholders and depositors
8) Performing as a banker and fiscal agent for the state and individuals
9) Becoming advisor for the country government regarding the decision on financial and economic policy
10) Monitoring the stability of foreign exchange
11) Performing other common roles of central banks that regulated by Libyan Law of banking and currency
12) Controlling and issuing all state loans
(Central Bank of Libya, 2007a)
5.3 Reasons for Privatization on Bank Sector in Libya
The series of privatization on banking sector in Libya is based on several factors. Central Bank of Libya (CBL) reveals that the decision to conduct such strategic move is based on the objective to modernize the country’s financial sector and to put the Libyan financial market becoming more attractive to both foreign and domestic inventors (Business Intelligence Middle East, 2007).
The supporting actor behind the country modernization on financial sector cannot be separated from the role of McKinsey, a US well-known management consultancy, and Rothschild, a French investment bank that acts as the supervisor on the banking sector privatization (Business Intelligence Middle East, 2007).
The results of first decision on the reformation on banking sectors start with the privatization of Sahara Bank that already has 44 branches in the Libya. Other banks that are on the list of next privatization includes Wahda Bank (that recently acquired by Arab Bank plc), Umma Bank, Gumhouria Bank, and National Commercial Bank of Libya (Business Intelligence Middle East, 2007).
6. Methodology of Study
In general, there are two approaches to research: Qualitative and Quantitative. Qualitative approaches are research that is carried out through interviews and observations. This kind of research enables a researcher to investigate in little more detail on the individual perceptions of a phenomenon. Since the research deals with the personal, therefore, such an investigation is limited in its scope.
Moreover, observation becomes an important technique for collecting data concerning what occurs in a real-life situation. This method also helps us to reach an understanding about the perceptions of those who are being studied, in that situation. To be specific, we employ non-participant observation method especially by analyzing qualitative information from journals, books, magazines and many more.
In addition, the data retrieval was performed through indirect approach, which means that the information obtained is secondary in nature. The data used within this study is generated from direct observation performed by a member of the organization which we are about to discuss. This approach is appropriate because a direct observation would provide a more detail and more accurate information about the object of study.
The most important of conducting observation is it provides researchers with an understanding about the perceptions about things or people we observe. However, since observation deals with someone’s perception, we plan to avoid preconceptions since it would provide this research with some bias.
In addition, to provide comprehension, I will do some researches in my company using the data and observation of the working environment. In this situation, I will employ various sources including electronics journals and surceases investigations and books that relate to the topics of banking sector reformation and privatization.
7. Limitations of Study
The method does not involve direct interviews which will slightly reduce objectivity and the accuracy of information. We are retrieving more reliable data from experts’ analysis, journals and various publications from available media. Using the data resources above, we hope to present an independent and objective analysis toward the contemporary issue on banking sector reformation in Libya.
8. Tentative Time Table
Table 1 Time Schedule of Finalization of my Research
No.
Actions
Time Schedule
Note
1
Proposal Finalization
May 2008 – June 2008
The proposal will have finalization on several aspects including the aims and objective, literature review, recommendation etc.
2
Composition of Literature Review
July 2008 – October 2008
Once the proposal is accepted. I will start composing the literature review based on topics accepted in the proposal
3
Data Collection
November 2008 – March 2009
Collecting data from various sources both primary and secondary data
4
Data Analysis
April 2009 – June 2009
Composing data analysis from the findings I obtain in the data collection
5
Formulation of Recommendation to Environmental Policy
July 2009 – August 2009
Formulating recommendation based on the previous findings and drawbacks in the past policy
6
Conclusion
September 2009
9. Conclusion
The series of privatization on banking sector in Libya is based on the country’s objective to modernize the financial sector under the auspices of McKinsey, a US well-known management consultancy, and Rothschild, a French investment bank that acts as the supervisor on the banking sector privatization.
Although the privatization is still in the early stage, The Central Bank of Libya (CBL) reveals that their decision to conduct such strategic move is based on the objective to put the Libyan financial market becoming more attractive to both foreign and domestic inventors
Reference:
Business Intelligence Middle East. (2007). Libya makes fundamental changes with disposal of state banks, mobile licenses. Retrieved May 19, 2008 from http://www.bi-me.com/main.php?id=8202&t=1&c=34&cg
Central Bank of Libya. (2007a). About us. Retrieved May 19, 2008 from http://cbl.gov.ly/en/
—. (2007b). Press release – Central Bank of Libya. Retrieved May 19, 2008 from http://cbl.gov.ly/en/news/index.php?cid=75&id=642
Ghemawat, Pankaj. (2004). Globalization: The Strategy of Differences. Harvard Business School Working Knowledge. Retrieved May 19, 2008 from http://hbsworkingknowledge.hbs.edu/item.jhtml?id=2732&t=globalization
