Inefficiency of Foreign Exchange Distribution Mechanisms via Commercial Banks and its Impact on Exchange Rate Stability: An Applied Study on the Libyan Economy (2016-2022)

Abstract

This study investigates the impact of operational and administrative inefficiencies within commercial banks on the stability of the Libyan Dinar's exchange rate from 2016 to 2022. The research addresses a critical gap by shifting focus from macroeconomic variables, such as oil revenues and government spending, to the micro-level performance of commercial banks as the primary transmission channel for monetary policy. Utilizing a descriptive-analytical approach, the study evaluates data on letters of credit and individual foreign exchange allowances, comparing these figures with parallel market price fluctuations. The findings reveal that commercial banks have functioned as a "bottleneck" in the foreign exchange distribution process. Results indicate a strong positive correlation between banking procedural complexity, technical system failures, and the widening price gap in the black market. Furthermore, the study identifies a unique monetary distortion where the failure of banks to manage liquidity effectively led to multiple exchange rates based on payment methods, specifically a "check rate" versus a "cash rate". These technical and administrative frictions have eroded public confidence, driving importers and citizens toward the parallel market to secure their needs. The study concludes that achieving monetary stability requires more than just central bank policy adjustments; it necessitates comprehensive reform of the commercial banking sector. Recommendations include a full transition toward digitalization to minimize human intervention and eliminate nepotism, as well as mandating banks to accept all electronic payment methods to bridge the price gap and restore financial sector credibility.