Getting stronger: Taking steps to reduce NPLs, boost penetration and improve stability

In February 2013 the IMF called on the Algerian authorities to take a number of measures to strengthen the financial system, including boosting banking intermediation and further tackling non-performing loans (NPLs) at public banks. The country benefits from a sizeable and liquid banking sector, but key indicators for activity and usage remain limited. Some of the measures suggested are already being implemented, such as efforts to modernise the credit bureau. Authorities have also been taking other steps to achieve goals like increasing the banking penetration rate and combatting money laundering. Bankers themselves are seeking additional reforms, including an end to the ban on consumer credit (also suggested by the IMF) and the relaxation of restrictions on foreign exchange, though it is not clear if or when these will take place.

CALLS FOR REFORM: In its latest Article IV consultation report for Algeria, published in February 2013, the IMF called for the modernisation of the country’s financial sector. The Algerian financial system is generally regarded as very stable, due to factors such as the country’s low exposure to the international financial system and the high ratio of reserves to short-term debt, as noted by the fund. However, NPL levels in public banks remain high (though they are well-provisioned and falling) and there are concerns that banks are not facilitating wider economic growth. In line with such concerns, the fund called for particular attention to be given to increasing the level of bank intermediation. To achieve this it advised the authorities to undertake a variety of reforms including further modernising the credit bureau, developing the mortgage segment and lifting the consumer credit ban in place since 2009.

Efforts to modernise the credit bureau are already under way. In June the governor of the Bank d’Algérie (BoA), Mohammed Laksaci, announced plans for a new tender to select a company to undertake the project, after the bank cancelled the result of a previous tender because of what it described as delays on the part of the winning firm. It has yet to be decided whether the project will entail updating and modernising the existing credit bureau or creating a new one from scratch. The process will include the launch of a new household credit risk register; however, the current public register only covers loans from companies worth more than AD2m (€19,000). The level of activity overseen by the credit bureau, once operational, is as of yet uncertain, given that a consumer credit ban remains in place, part of a push to reduce the non-oil trade deficit. Previously, the authorities stated that the creation of the new bureau was one of a number of necessary conditions for lifting the ban.

Other measures suggested by the IMF included establishing a mechanism to take “old and fully provisioned NPLs” off banks’ books and expanding the range of bank stress tests, the results of which it said should be published in a financial stability report. The fund also called for branch opening procedures – which banks sometimes complain are slow and costly – to be simplified, and for “large transactions with the public sector be systematically carried through checks or wire transfers” to reduce the amount of currency in circulation. In 2010 the authorities announced plans to require the use of cheques or bank transfers for all transactions of more than AD500,000 (€4750).

FACILITATING ACCOUNT OPENINGS: The authorities have also been taking other measures on their own initiative to increase the banking penetration rate and improve transparency. In December 2012, following consultation between the government and representatives of employers and unions (the so-called tripartite mechanism), Prime Minister Abdelmalek Sellal issued a directive reducing the number of documents needed to open a bank account, allowing individuals to do so by providing just a form of identity and a residence certificate. Banks are also obliged to provide any rejected applicants with certificates of refusal; the applicant can then send this to the BoA, which must refer him or her to another institution within five days. To facilitate the opening of business accounts, the directive also gives banks access to various databases, such as the national central commercial register.

Account openings have also been affected by new regulations aimed at combatting money laundering and criminal financing. Under the new rules launched in March 2013, all banks must establish a clear framework to detect and block laundering, implement “know your customer” programmes (including confirming account holders’ identities and addresses, knowing the nature of their activities and monitoring their transactions) and train relevant staff regarding the problem.

The directive also called for the country’s various state social security and pensions funds to make payments into bank and post office accounts to boost bank usage and on state-owned banks to expand their branch networks, amongst other measures. In addition, it called on the Ministry of Finance to reduce the time it takes banks to process credit applications for small and medium-sized enterprises (SMEs) by standardising procedures and making them clear to would-be borrowers.

POSTAL BANK: Another project set to increase the banking penetration rate is a plan to create a bank at the national post office, Algérie Poste. The organisation already offers basic deposit services, in cooperation with Caisse Nationale d’Epargne et de Prévoyance; however, a new draft law to create a fully functioning postal bank was submitted to parliament in April 2013. The project should help increase the penetration rate by bringing full banking services to remote parts of Algeria’s vast interior not currently served by banks, via Algérie Poste’s network of more than 3400 branches.

RATINGS SYSTEM: The authorities are also working to create a new bank ratings system to enhance the stability and transparency of the country’s banks. The system was originally due to have been in place by 2011, but it has faced delays. However, a version of it has now been applied on a pilot basis to two banks, with support from the IMF and US Treasury. The authorities are currently working with the World Bank to expand it to all banks; as of June 2013 the two were in the process of appointing experts to take part in the project. The BoA is expected to consider three different options for the system, namely a fully Algerian system, a joint venture with a foreign ratings company and a system under which several ratings firms would operate locally.

BANKS’ WISH LIST: Some banks themselves would like to see other reforms, in particular in relation to restrictions on foreign exchange transactions. Given the large size of the country’s foreign exchange reserves, which stood at just under $190bn as of the end of March 2013, the potential is immense. While it is not clear when some of the proposed reforms will take place, the Algerian authorities have so far taken a number of steps to tackle issues such as NPLs and increase banking penetration, and these should paid dividends in the years ahead. The creation of the postal bank will likely go a long ways towards expanding access to financial services throughout the country, greatly benefitting the sector.