A bill that proposes using assets frozen during Libya’s civil war to compensate victims of the IRA would hinder the country’s efforts to rebuild, the head of its sovereign wealth fund has said.

London banks hold an estimated £12bn of Libyan funds after the UN ordered that they be frozen in 2011 to prevent their theft or misuse during the war that toppled Col Muammar Gaddafi.

Under proposals in a bill scheduled for debate in the House of Commons on Friday, some of the funds would be diverted to victims of the IRA from the period when it was funded and supported by Gaddafi’s regime.

The chief executive of the Libyan Investment Authority (LIA) has written to Alistair Burt, the minister for the Middle East, insisting the money belongs to the Libyan people.

Dr Ali Mahmoud Hassan Mohamed said the bill would “put at risk LIA funds that were frozen under international sanctions, not as a punishment for wrongdoing but simply to safeguard the funds from being stolen or misappropriated at a time when Libya was suffering widespread violence and political uncertainty, and did not have a functioning government.”

He said there was “no lawful basis” for seizure of the funds, pointing to a UN security council ruling that the assets, once unfrozen, must be used for the benefit of Libyans.

“As you no doubt realise, the importance of the LIA’s assets to the Libyan people is very great at a time when Libya is stabilising and recovering after a long period of unrest and discord,” Mohamed said.

“To date, the international community has sought to safeguard Libya’s foreign assets from misuse, pursuant to the UN security council resolutions. As the country is moving forward, these funds will be sorely needed to assist in the regeneration of the Libyan economy. We hope that we can count on the British government to support the LIA in this matter and in rebuilding Libya’s future.”

The private members’ bill – introduced by the former UUP leader Reginald Empey, the Conservative MP Andrew Rosindell and Labour’s Jim Fitzpatrick – aims to secure a percentage of the Libyan assets held in the UK, estimated to be worth £12bn.

Lord Empey said the Libyans were taking the bill “too literally”. He said it was mainly intended to kickstart debate and convince Libya to negotiate over compensation.

“I fully accept that the money is primarily for the Libyan people but I’m equally clear that they have a moral responsibility under international law to acknowledge that their former head of state harmed many people in this country through support for the IRA, via Semtex in particular. We can link incidents where people were killed and injured to semtex supplied by him.”

In the early 1970s and in the 80s, Gaddafi’s regime supplied the Provisional IRA with tonnes of weapons including semtex explosive, which was made in the Czech Republic.

The odourless semtex was used as a powerful booster for bombs that devastated parts of the City of London as well as other British cities during the latter days of the Troubles.

Corporation Street, Manchester after an IRA car bomb exploded in the city centre.

Photograph: ANL/REX/Shutterstock

Empey said the UK could put pressure on Libya by using its UN security council veto to block any plans to unfreeze assets, although he stressed he would prefer compensation to be agreed via negotiation.

Although the bill is scheduled for debate on Friday, it is understood that a long list of parliamentary business means it may not be discussed, prolonging uncertainty over the funds’ destiny.

A Northern Ireland select committee report published last year found that successive Labour and Tory governments had not done enough to seek compensation from Libya for IRA victims.

The committee recommended that frozen Libyan assets be used as bargaining chips to extract compensation directly from the government in Tripoli.

In 2016 the former home secretary Jack Straw told a select committee that Tony Blair’s government had not set aside compensation demands in order to preserve commercial relationships with the Gaddafi regime.