Long-term rewards: Initiatives to boost lending and expand networks are being enacted

High levels of liquidity and a total loan book that accounts for just half of deposits characterise the Algerian banking sector. The industry remains dominated by publicly owned banks, which constitute around nine-tenths of deposits and loans, though foreign-backed private banks are major players in trade finance and are highly profitable. Penetration is roughly in line with neighbouring countries and well above that of the wider North African region, but the level of banking sophistication and financial intermediation remains low, with relatively few retail clients borrowing money from banks or using debit cards.

STRUCTURE: The banking system is comprised of six Algerian state-owned banks (public banks) and 14 private banks. Public banks account for 88% of banking assets (89% in 2010), with the largest two public banks accounting for about 47% of sector assets in 2011. The Banque Algérienne de Développement, a state-owned institution, was transformed in 2010 to the Fonds National d’Investissement in charge of the firm’s capital and helping their development. All of the private banks currently active in the country are owned by foreign institutions; eight are affiliates of banks from other Arab countries ( mostly Gulf states, as well as Lebanon), four are backed by French banks, and the remaining two are subsidiaries of US and British banks. While there have been private banks backed by Algerian capital in the past, all have since gone out of business (most notoriously Khalifa Bank, which collapsed in 2003 when it was found that funds were being diverted to other companies and a number of important figures were implicated), and several have lost their licences for failing to follow regulations. Tight restrictions on the amount that banks can lend to their own shareholders have also discouraged Algerian conglomerates from entering the sector. The principal business lines of private banks are mortgages, corporate loans and trade finance, while lending is still underdeveloped and retail business faces heavy competition from state-owned banks.

As of January 2012 there were seven non-bank financial institutions licensed by the Bank of Algeria (BoA), the central bank. These included three specialised leasing firms, lender Cetelem (which is 100% owned by French global banking group BNP Paribas), mortgage refinancing firm Société de Refinancement Hypothécaire, Sofinance (a non-deposit-taking lender and provider of leasing that was created to finance the modernisation of local industry as well as the development of new financial products) and the Caisse Nationale de Mutualité Agricole-Banque (CNMA-Banque), the cooperative savings and loan arm of the mutual insurer CNMA.

PENETRATION: Defined by the percentage of adults with an account at a formal financial institution, penetration is roughly in line with Maghreb regional standards at 33% in 2011, according to the World Bank, lower than 39% in Morocco but just above Tunisia’s figure of 32%, and well above the average of 18% for developing countries in the Middle East and North Africa as a whole.

However, intermediation is low; only 1% of adults took a loan from a bank in 2011, a fraction of the figures for Morocco, Tunisia and the greater region, which were 4%, 3% and 5%, respectively, and highlighting the low level of credit provision by the banking sector. As of 2010 there was around one bank branch for every 25,000 inhabitants, compared to one per 7000 in neighbouring countries and one per 2000 in the developed world.

KEY INDICATORS: Total deposits stood at AD7.8trn (€74.8bn) in 2011, up 18% from AD6.6 (€63bn) in 2010. The figure includes roughly AD1trn (€96bn) of deposits at the BoA, the treasury and the post office, in addition to bank deposits. The value of deposits was equal to 53.6% of GDP in 2011, slightly up from the previous year. Non-hydrocarbons deposits comprised 65% of the non-hydrocarbons GDP, up from 59% in 2010, partly due to factors such as increased civil service wages.

Meanwhile, household and private sector deposits accounted for 49.6% of all deposits, with 34% belonging to households and the remainder to private business, while the public sector was responsible for 45.8%. In 2011 61% of deposits were in the form of demand deposits (up slightly from 58% in 2010), versus 39% for fixed-term deposits.

The value of loans stood at AD3.73trn (€36bn) in 2011, around 27% of GDP. This represented 14% growth from the previous year’s figure of AD3.27trn (€31bn), a lower rate than that achieved by deposits. Loans to the private sector stood at 53%, down from 55% in 2010, including 8% (of total loans) to households. As consumer credit other than mortgages has been banned since 2009, all new loans are mortgages. Long-term loans constituted 63% of all credit, which was up from 60% the year before, versus 37% in short-term loans.

The non-performing loan (NPL) rate stood at 11% as of mid-2011. This was down from 22% in 2007. NPL levels are significantly higher in the public banks – at around 12.8% – than in the private sector, where they account for a mere 2.3% of total loans.

In 2008 the regulatory authorities raised the minimum paid-up capital requirements for Algerian banks four-fold from AD2.5bn (€24m) to AD10bn (€96m). In its most recent Article IV consultation for Algeria, the IMF described Algerian banks as being adequately capitalised and not representing a risk for economic stability. The banking sector’s capital adequacy ratio stood at 24% in 2011.

LOW LENDING LEVELS: The ratio of loans to deposits stood at 52% in 2011, pointing to ample liquidity that the banks are failing to turn into credit. The IMF has blamed the reluctance of banks to lend on the “difficulty of assessing credit risks” due to the “absence of a reliable credit reporting system”. However, the situation is set to improve as the BoA is in the process of establishing a new credit register, aimed at facilitating improved risk management on the part of the banks, which may enable them to step up lending (see analysis). The project began two years ago, though a new BoA regulation regarding it was issued in February 2012. The credit register is provisionally due to become operational in 2013, with the BoA having already selected an American supplier for the register’s IT system. Unlike previous registers, which did not cover credit with a value less than AD2m (€19,000), the new one will cover all loans, including those to households; banks will also update the register each month. This is an improvement on the past requirement to update every two months.

BARRIERS: However, lending growth also faces other constraints, including a shortage of business projects. “There are lots of plans but there aren’t enough viable projects,” said André Dieu, the head of the operations department at French corporate and investment bank Natixis. “What we need today are bankable projects,” echoed Youcef Mounir Meghlaoui, the senior relationship manager for global banking and markets at HSBC Corporate in Algeria. “The private sector needs to trust in the stability and potential of the country and to invest and innovate.” Part of the problem, say some bankers, is the red tape they encounter when trying to establish new industrial firms and projects. Other obstacles to loan expansion are the restrictions on lending amounts to individual firms or groups (risk division ratio), and the lack of industry cooperation. Banks are barred from lending more than 25% of their funds to any individual client, but clients often request more.

POTENTIAL SOLUTIONS: Syndication is the obvious answer to this, but industry players say that banks are frequently mistrustful of each other and that when they do try to arrange syndications the process can be slow, trying clients’ patience. A large part of the problem is distrust between the public and private banking spheres; some private bankers accuse public banks of unfairly sanctioning clients who also open accounts with private players. Lending growth is similarly restricted by a ban on consumer credit (excluding mortgages) that has been in place since 2009. The main impetus behind the ban appears to have been government concerns regarding consumer indebtedness, as well as the fact that such credit was largely being used to buy imported rather than locally produced goods. In February 2012 the Ministry of Finance suggested that the ban could be partially lifted after the new BoA credit registry was put in place (see above), though credit would only be allowed for goods made in Algeria. Given the limited level of development of the local consumer goods manufacturing industry, this suggested that credit levels would remain low.

REGULATION: Regulatory and supervisory duties are divided between two main institutions within the BoA. The Money and Credit Council, whose president is also the governor of the BoA, is responsible for awarding banking licences and for issuing all regulation for banks, including regulatory requirements such as minimum capital levels and prudential ratios. The Banking Commission, presided over by the governor of the BoA as well, is responsible for supervising banks, ensuring they follow industry regulations and monitoring their financial situation.

Some restrictions can be beneficial say certain industry players. “Regulation is good – the country is an Eldorado for banks but not a banana republic,” said Nafa Abrous, deputy director-general of Lebanese-owned Fransabank El Djazaïr. “In most respects the country’s regulations are up to international standards; we are currently on Basel I and should soon move to Basel II or III.”

DIFFICULTIES: Nevertheless, the heavily regulated nature of the sector can pose challenges for banks operating in the country. One frequently cited problem is the time it can take to get permission from the authorities to open new bank branches; some industry figures say the process can take up to two years. The problem is exacerbated by the fact that the current process obliges banks to acquire a location for the branch and recruit staff for it before applying for a licence, incurring significant expenses while they await regulatory approval.

Certain industry players believe that the situation has been improving since 2011. “Requests for licences related to new branches are being processed much faster than they used to be,” said Laurent Dupuch, the director of BNP Paribas El Djazaïr. In June 2012 the local media reported that the BoA was restricting some private banks from opening more branches in the capital – which it views as already being well-served – until they expanded their networks elsewhere in the country. However, some banks say that maintaining branches outside of the largest cities is often not sustainable or practical.

SANCTIONS: Banks also complain that they can face punitive sanctions for making administrative errors in account management, including what can amount to large fines for violations of the country’s exchange rules. Banks additionally argue that this amounts to further constraints on lending and helps explain the low level of credit to the economy.

IMPROVEMENTS: Nevertheless, industry players say that with patience, the system can work well and that the profitability of operating in the country compensates for such problems. “In Algeria it is less a matter of risk and reward than patience and reward,” said Meghlaoui. “Banks would like to be able to do a lot more , such as be able to open branches , where they want to,” said Dieu. However, if the aim of banks is to be established in Algeria, they should know that the market is difficult and it is necessary to implement and respect the accepted rules and procedures applied by the BOA.” To improve oversight of the industry, the BoA is currently establishing a framework to implement a ratings system for Algerian banks in 2013. It is based on criteria devised in 2011 by the BoA in conjunction with the IMF and the US Treasury and is currently being piloted by BoA on two banks, one public and one private. It has yet to be decided who will provide the ratings; the options being considered by the BoA and the Professional Association of Banks and Financial Institutions (l’Association Professionnelle des Banques et Établissements Financiers, ABEF) include a local agency, a partnership between a local and a foreign agency, and more than one agency. The measure should ease the evaluation of banks’ risks, prevent failures and help establish interbank interest rates.

SME FINANCING: The government is seeking to diversify the economy away from hydrocarbons, on which it is overwhelmingly reliant, by boosting the struggling small and medium-sized enterprise (SME) segment. Part of th is effort involves boosting the ability of SMEs to access loans; with bank lending low (see above), access to credit is one of the main challenges to doing business locally. According to the Ministry of Industry, SMEs, and Investment Promotion, SMEs represent 52% of non-hydrocarbons private sector production and 35% of national value added. Leading bank officials believe that the future of the banking sector will be SMEs and that a suitable strategy must be created to give adequate support to their activities and sustainable development.

Various government initiatives to try to boost financing opportunities for SMEs have been in place for some time; most notably, an SME Credit Guarantee Fund has been set up since 2002. In 2010 the government launched a four-year initiative to further boost activity in the segment; it included measures such as subsidised loans enacted in the 2011 finance law with reduced interest rates (the government pays for two percentage points worth of interest on 5.5% interest loans). The project has a budget of AD380bn (€3.65bn) and has a target of helping 20,000 companies. However, there have been calls for the state to do more to facilitate access to credit. In early 2012 the country’s employers association, the Forum des Chefs d’Entreprises, called for the creation of specialised banks dedicated to SME financing, stating that previous efforts such as the development of guarantee funds had not been enough and that SMEs had been continuing to experience problems accessing credit because of difficulties providing the guarantees demanded by banks.

ROADBLOCKS: Part of the banks’ reluctance to lend to SMEs stems from classic concerns regarding the transparency and reliability of their accounting. “A lot of companies are family businesses and the transparency of financial information can be a challenge,” said Meghlaoui. “However, the authorities understand the problem and imposed auditors on even small companies several years ago, which has had an effect,” he said. Meghlaoui added that plans to allow SMEs to list on the bourse could further improve standards of transparency in the segment. Banks may also be reluctant to lend on the basis of state guarantees because of factors like the requirement to explore avenues of restitution, including the legal system, and the time it can take to receive payment. These factors can give rise to delays, during which time the debt remains on the bank’s books as bad loans. The fact that the market is under-banked additionally reduces the incentive for banks to lend on the basis of guarantees, given that there is plenty of other available business. However, the low level of lending to SMEs is not merely a result of reluctance to lend; some banks say that despite the existence of subsidies and government guarantees for SME loans, they have had few applications for projects.

CARD TRANSACTIONS: According to World Bank data, 14% of Algerians have a debit card, compared to 22% and 21%, respectively, in neighbouring Morocco and Tunisia, and 9% in the wider Middle East and North Africa. Speaking in late 2011, Mohammed Laksaci, governor of the BoA, said that around 10% of payments in the country were made by card. The only interbank ATM and electronic payment terminal network is managed by the Société d' Automatisation des Transactions Interbancaires et de Monétique (SATIM), a company formed in 1995 as part of a BoA initiative and co-owned by the six public banks, the agricultural mutual CNMA-Bank and public-private Islamic bank Al Baraka. The company launched its interbank ATM network in 1997, and it currently encompasses the six public banks, nine private banks and Algérie Poste, the post office. ABEF is also at work on a project to modernise payments, with the aim of putting in place a new card system. The number of ATMs and electronic payment terminals using the interbank system in the country was 1350 and 3047, respectively, in 2011. Transactions and the number of cartes interbancaires in circulation have grown rapidly; cards nearly trebled to 979,933 from 2008 to 2010 – however, they fell back to 850,008 later in 2010. Transaction figures rose 71%, from 3.77m in 2010 to 6.45m in 2011.

CARD CIRCULATION: SATIM is targeting 25% annual growth in card circulation and the installation of 200 new ATMs a year, as well as reaching a total of 10,000 electronic payment terminals within two years. The director-general of SATIM, Newel Benkritly, argued that the country needed to increase card transactions in order to move away from a dependence on cash in transactions. “The reliance on cash is becoming a big problem at the end of each monthly pay period because of the volumes involved,” she said. The IMF puts the currency in circulation at around 26% of non-hydrocarbons GDP. The level of use of the banking system, in terms of number of accounts opened, reached about 2.6 working age person in 2011, compared to 2.5 per person in 2010.

LIMITS: One significant constraint on the expansion of electronic payment terminals is the immense size of the informal economy and the reluctance on the part of a large number of merchants with regards to the increased transparency involved in electronic payment. “Many people do not want to accept traceability,” said Abderrazak Trabelsi, the executive director of ABEF. “Nevertheless,” Trabelsi argued, “there is also a very large formal economy that wants and needs such systems, and there are enormous opportunities in the utilities sector, for example. The increasing use of electronic payment in the formal economy will accustom people to it and help it spread as clients choose merchants with payment terminals, helping to decrease informality.” The lack of domestic credit cards is also a constraint on the growth of transactions. However, reports that the government may relax the ban on consumer credit could boost card uptake. “The future of the card business is credit. If the consumer can pay more using a card than cash, he or she will use it more,” said Benkritly.

MORTGAGES: According to ABEF, around $2.7bn worth of mortgage lending took place in 2011. This was up about 25% from 2010. The market leader is the state-owned Caisse Nationale d’Epargne et de Prévoyance (CNEP-Banque), which previously had a near monopoly on the sector. In 2010 the government launched a programme of subsidised mortgage lending and lowered interest rates, primarily via CNEP. Rates depend on the type of housing being purchased and can go as low as 1% in some cases; the CNEP made around 13,000 subsidised loans at 1% and 3% under the scheme in 2011. Mortgages have the potential for continued rapid growth as the country faces a severe housing shortage, a situation that has given rise to protests and even rioting in the past. However, the sector faces a serious challenge given the lack of available land on which to build housing, especially in large towns.

LEASING: The leasing sector, largely focused on the corporate market, is beginning to take off. “Leasing activity is starting to take place on a very large scale; previously it was not well known and not really part of the local culture, but now Algerians are increasingly seeing that it can be financially unwise to buy equipment when leasing is available,” said H Amina Zouaoui, the director of the Dely Brahim branch of Arab Leasing Corporation (ALC).

ALC is one of three firms working in the sector, alongside Maghreb Leasing and Société de Leasing, but banks are entering the market, increasing competition. “One of the advantages of leasing is that it is considered an Islamic product, so some clients will take it on that basis,” said Abrous of Fransabank, which is preparing to launch leasing products soon. Chedly Zaoun, the executive manager at MLA, told OBG, “Leasing is the best way to develop SMEs in Algeria, but due to the absence of a real bond and monetary market, leasing may not develop the savings to build the bridge between SMEs and funding sources. Leasing represented only 0.7% of the gross fixed capital formation in 2011, whereas it was 15-20% in neighbouring countries. Leasing in 2011 funded AD20bn (€192m) to SMEs." Zouaoui believes that one of the most promising areas for the segment is property leasing, which the firm started offering in 2012. “Mining and quarry equipment is also starting to take off as it requires so much equipment that it would be difficult to finance entirely by credit and the government is beginning to give out a lot of permits.” One of the main challenges for the industry is the availability and delivery of equipment from suppliers, partly as a result of the lack of free zones and problems with Customs in regards to importing equipment. “The availability of material and equipment, not demand, is the main constraint on growth,” Zouaoui told OBG.

The outlook for the sector is heavily dependent on public works, which have been one of the main engines of growth. “The East-West Highway is nearly finished, so some clients are now winding down activity. The future of public works projects depends in part on the price of oil, so that is one of the key risks for the industry,” said Zouaoui.

OUTLOOK: Public banks are expected to continue to dominate the industry for the foreseeable future, but the private sector should gain further market share on the back of such factors as network expansion and product innovation. Profitability is likely to remain high, though this will depend a great deal on the extent to which the sector is opened to new entrants and on wider growth in the economy and trade levels, which are in turn partly tied to international oil prices. Measures to help boost lending such as the new credit registry and subsidised loans should have an impact on the industry, though wider private sector growth and an improved business climate will also be necessary to achieve rapid progress.