The ISIS group has exploited the chaos engulfing the oil-rich North African nation since the 2011 revolution to gain a foothold and expand its influence.
Last June, it seized Kadhafi's coastal home town of Sirte -- 450 kilometres (280 miles) east of Tripoli -- and has since transformed it into a training camp for Libyan and foreign militants.
"The Islamic State likely sees Libya as the most favourable country in which to establish a regional hub of its caliphate," Ludovico Carlino of the IHS Jane's think-tank said.
With a port and airport, there are growing fears that ISIS -- which seized large parts of Syria and Iraq in 2014 -- may try to use Sirte as a base from which to attack Europe.
Despite the jihadist threat, there are also signs of hope on the political front.
On Monday, a UN-backed council of rival factions announced the formation of a revised government of national unity line-up to be put to lawmakers.
Approval of the cabinet -- headed by prime minister-designate Fayez al-Sarraj -- would be a vital step in resolving Libya's political disarray, capping off months of difficult diplomacy.
"The journey to peace and unity of the Libyan people has finally started," UN Libya envoy Martin Kobler wrote on Twitter.
Africa's largest oil reserves
Beyond Libya's current political and security vacuum, "the availability of large stockpiles of weapons and porous borders, made it the main transit point for North African militants seeking to reach Syria and Iraq to wage jihad there," Carlino said.
The country also sits atop the largest oil reserves in Africa, estimated at 48 billion barrels, although output has slumped since 2011.
"The presence of large oil assets, the existence of well-established and lucrative smuggling routes to sub-Saharan Africa, and porous borders all make Libya as attractive as Iraq and Syria to the Islamic State, if not more so," Carlino said.
Last month, the group launched attacks from Sirte on facilities in the "oil crescent" along the coast.
The Soufan Group think-tank in a report last month said jihadists existed in Libya under Kadhafi, but have thrived in the turmoil since his downfall.
"Libya has a long violent jihadist tradition dating back to the Soviet Afghan War, though the oppressive and authoritarian Kadhafi regime was largely able to keep militant jihadist activities in check," it said.
"With the collapse of the regime, the long-suppressed militant Islamist factions sought to fill the resulting vacuum."
Since a coalition of Islamist-led militias overran Tripoli in August 2014, the country has had two administrations.
Living day to day
An Islamist-dominated legislature, the General National Congress, sits in Tripoli while the internationally recognised government has been driven to the country's far east.
As Libya on Wednesday marks five years since the uprising began, its people are still waiting for a panel elected in February 2014 to draft their first constitution since Kadhafi seized power in 1969.
With anniversary preparations under way in Tripoli's Martyrs Square, the mood remains gloomy among many residents.
"The last five years have been nothing but one mistake after another," said Karima Leguel, a bank employee in her fifties.
"Our daily lives have become increasingly difficult. We have to plough on despite the high prices, no proper health care, long power cuts and -- recently -- no cash at the bank."
Libya's conflict has left 1.9 million people with serious health needs in a country that lacks medical professionals, medicines and vaccines, the World Health Organization said last month.
No foreign airline has flown to Tripoli since its airport was destroyed in summer 2014, and few countries allow Libyan aircraft to land on their soil.
Libyans who want to travel abroad struggle to obtain the required visas as most foreign missions have been closed for 18 months.
Florence, a Frenchwoman in her fifties who is married to a Libyan, said the cost of living was increasing and cashpoints were empty.
"We live day to day," the mother-of-two said. "But if things don't get better we'll leave."
"My greatest fear is that IS will reach Tripoli."