Sharia-compliant financial services expand in underserved Algerian market

The shadow of Algeria’s civil conflict in the 1990s and the authorities’ subsequent reluctance to be seen as empowering political Islam has delayed domestic growth in sharia-compliant finance. Further, the economic slowdown brought on by weak oil prices has been a big factor behind the drying up of liquidity in the banking system. In turn, this has encouraged the government to explore alternative sources of funding, both for the banking system and its own operations. Much of Algeria’s commercial transactions continue to take place outside the formal banking system, not least because of the cultural preference of the majority-Muslim population to conduct business in cash and avoid financial products contrary to their faith.

Thus, there is significant untapped potential for the provision of a wider range of sharia-compliant products. Experts estimate that the pool of savings in the informal economy could amount to $90bn. “Islamic finance is still relatively small scale in Algeria, accounting for less than 4% of all assets across the banking system. However, there is big potential for Islamic banks to capture a greater share of household savings that are currently held outside traditional banks,” Rachid Sekak, senior consultant at BRS Consultants, told OBG. “On the lending side, utilising sharia-compliant financial products to fund home purchases could be a big growth area.”

First Movers 

While Islamic finance has not developed as rapidly in Algeria as elsewhere, it is far from a new phenomenon. Although private banks represent a smaller portion of the country’s banking sector (see overview), many already offer sharia-compliant products in some form.

Bahrain-based Al Baraka was incorporated as the first Islamic bank in Algeria in 1991. It focuses primarily on retail and commercial banking, and has a 30-branch network in the country. Al Salam Bank, also a Bahraini institution, began operations as Algeria’s second Islamic bank in 2006. It works mainly in the commercial and trade finance segments, but it is aiming to significantly increase its presence in consumer and housing finance by 2020.

Elsewhere in the private sector, Jordan’s Housing Bank and Gulf Bank of Kuwait have opened Islamic windows, while France’s BNP Paribas created its own sharia board in 2012 and has been offering sharia-compliant products since 2014. In July 2017 another French bank, Société Générale, said it was planning to follow suit by providing participatory deposit accounts, and it now offers the Tawfiri 0% account with no interest or fees. These and other entities have also provided sharia-compliant leasing products for a number of years.

Regulations & Bank Services 

The end of 2017 into early 2018 should see efforts to establish a national sharia board, with the six state-run banks signalling their intentions to begin offering Islamic financial services over the same period.

“Three major public banks – Banque de l’ Agriculture et du Développement Rural (BADR), Banque de Développement Local and Caisse Nationale d’Epargne et de Prévoyance – will launch Islamic products before the end of 2017, and the rest will follow in 2018. This will allow the sector to meet existing needs of customers and increase financial inclusion rates,” Boualem Djebbar, CEO of BADR, told OBG. “2018 will be the year of Islamic finance generalisation in Algeria,” he added. It is expected that the banks’ expanded services will include murabaha (cost-plus financing), ijara (leasing services) and musharaka (joint-venture) partnerships.

To oversee implementation of the new offerings, the government aims to establish a national sharia board by the first quarter of 2018. This marks a significant step forward for the Islamic finance segment, which has so far lacked a dedicated regulatory framework. Indeed, although the banks appear eager to tap new sources of funds by offering sharia-compliant products, there is not yet widespread expertise outside the country’s two dedicated Islamic banks, nor a suitable regulatory environment. “Public banks opening Islamic windows is an important development, but we still don’t have a dedicated regulatory framework for Islamic finance,” Sofiane Djebaili, commercial director of Al Salam Bank Algeria, told OBG. “This will be important to ensure the segment can develop fully.” Members of Parliament that were elected in May 2017 will be working to address this regulatory gap.

Inclusion 

These moves are important to reach Algerians who remain unbanked and bring them into the fold of financial inclusion. According to the World Bank, the share of adults with an account at a financial institution was 50% in 2014, leaving a significant portion of the population that chooses to keep money out of the financial system.

If the government proves successful in reaching this segment of the population and providing suitable services, it could have a significant impact on the state banks’ customer base, as these institutions already overwhelmingly dominate the market. As of end-2015 the six state banks accounted for 88.3% of total sector deposits (see overview).

Participative Bond 

Broadly speaking, the Algerian financial authorities have been reluctant to label Islamic financial products as such, preferring to use the term “participative” to appeal to a wider investor base. However, the attitude of officials could be beginning to shift. The government’s move to consider offering sukuk (Islamic bonds) followed criticism of the state’s issuance of an interest-bearing bond sold directly to retail investors in 2016, through which the government raised $5.86bn.

While no sukuk had been listed on the exchange as of the end of 2017, offering alternative products remains a key part of the government’s action plan to attract more investors, which seeks to “ensure the development of the capital market as well as the stock exchange to offer alternatives to financing of investment and capital increases”.

Sovereign debt could play a pioneering role; in addition to expanding bank services, Prime Minister Ahmed Ouyahia spoke about the government’s plans to introduce non-traditional savings products by issuing sukuk on the local stock exchange, the Bourse d’Alger, at some point in 2018. The move, which aims to improve liquidity on the market by bringing in a more diverse range of funds and investors, has been on the agenda for some time.

Working with international partners is also part of the government’s growth strategy. In October 2017 Abderrahmane Raouya, the minister of finance, headed to London to discuss areas of collaboration within the financial services industry. Areas related to Islamic financial services were among the issues discussed at the meeting, which covered Islamic finance and sovereign bonds, public-private partnerships and financial technology.

Further capital market expansion would be a welcome development for the country. Despite having a larger GDP and population than both Morocco and Tunisia, Algeria’s total market capitalisation – AD43.6bn (€361.6m) as of October 2017 – is smaller than that of its neighbours. The Casablanca Stock Exchange’s market cap stood at Dh625.7bn (€57.7bn), while the Bourse des Valeurs Mobilières de Tunis recorded TD21.3bn (€8.3bn).

Despite relatively low volumes in terms of trade and number of investors, Algeria’s capital market is rapidly developing. Combined capitalisation increased by some 195% between 2014 and late 2017. Furthermore, in April 2016 the government issued its first bonds since 2010, giving the market new momentum that could be sustained though next year, particularly if plans to issue sukuk go ahead.