The study investigates the impact of the credit crunch and shadow economy on economic growth in the Libyan banking sector using an autoregressive distributed lag (ARDL) approach for hypotheses testing. The proxy for economic growth is GDP in current price growth; the annual negative change of ratio for total credit in a commercial bank to GDP in current value is the indicator for credit crunch; and complete economic transactions or activities outside of conventional banking system as a ratio to GDP as a proxy for shadow economy. We transform the dataset into log-linear before data analysis for standardisation and consistency. The empirical evidence from this study shows the existence of a credit crunch and shadow economy in the banking sector in Libya. Results from ARDL analysis reveal that there is a profound impact of the credit crunch and shadow economy on economic growth. We also find that the shadow economy is thriving in the existence of a credit crunch despite the effort by the government to increase the money supply M2 in the banking sector. The liquidity problem caused by the credit crunch in the banking sector is significantly related to the shadow economy. Though the shadow economy contributes to economic growth without government intervention, it can deprive the money supply and the people's trust in the banking sector.