Algeria's financial sector ready to tackle upcoming economic challenges

While it has only been modestly affected, Algeria’s financial sector has not been immune to the effects of the global oil price shock, which is unsurprising given the impact it has on Algeria’s broader macroeconomic climate over the past two years. The excess liquidity that had insulated the banking industry from external shocks was eroded substantially as oil prices began to drop, increasing banks’ exposure to volatility in the wider economy. The six state-owned banks that dominate the market, alongside their 14 private sector peers, are currently seeking new revenue sources by expanding their product lines and working to boost traditionally low penetration and intermediation rates.

Regulation

The sector is overseen by the central bank, the Bank of Algeria (BoA), with public bank oversight and some regulatory functions handled by the Ministry of Finance. The BoA has come under new leadership, and in June 2016 the new governor, Mohamed Loukal, succeeded Mohamed Laksaci. Loukal formerly headed the state-owned Banque Extérieure d’Algérie (BEA) for a decade and is credited with diversifying its lending portfolio and product offerings and streamlining its management. Both the BoA and the Ministry of Finance have redoubled ongoing efforts to integrate Algeria’s sizeable informal economy into the formal financial system, combat fraud and modernise the sector’s electronic payments infrastructure.

The IMF’s Article IV consultation for Algeria, released in May 2016, concluded that the impact of depressed hydrocarbons revenues on the banking sector’s overall stability “has been moderate so far”. Many actors in the sector agree with that assessment. Boualem Djebbar, president of the Association of Bank and Financial Institutions (Association des Banques et Etablissements Financières, ABEF) and of Banque de l’Agriculture et du Développement Rural (BADR), told OBG, “The role of banks’ has always been to accompany and support companies in their activities, and we continue to fill that role, as the sector’s growth in this period attests. The circumstances do impose additional challenges upon banks, but also opportunities, of course.”

Key Indicators

According to the BoA, total banking assets climbed 4.4% in 2015 to reach AD12.51trn (€103.5bn), a growth rate more in line with that of previous years than with the exceptional 16.3% spike observed in 2014. Bank assets for 2015 included AD3.6trn (€29.8bn) in loans to the public sector, AD3.59trn (€29.7bn) in loans to the private sector and AD863.7bn (€7.14bn) in government bonds. Lending grew strongly during 2015, with credit to the public sector expanding by 9% and to the private sector by nearly 15%. Credit to the public sector had grown at twice that rate throughout 2015, but buyback of non-performing loans (NPLs) to state enterprises later in the year resulted in a sharp downward adjustment. In total, bond swaps for NPLs totalled AD305.3bn (€2.6bn) in 2015, according to BoA figures.

State-owned banks have long carried the overwhelming majority of the banking sector’s NPLs, though the ongoing buyback programmes for bad debt have allowed the BoA to alleviate these burdens on banks’ balance sheets to a substantial degree in recent years. According to the IMF, in 2015 NPLs accounted for 9.5% of public banks’ loan volumes, of which 63.4% were provisioned. NPLs accounted for just 8.7% of private banks’ portfolios, but just under half (44.9%) of these were provisioned at the end of 2015.

Credit & Debt

Credit to the economy reached nearly 53.7% of non-hydrocarbons GDP in 2015, according to BoA statistics, up 1.9 percentage points from 2014, but still well below intermediation rates in neighbouring Morocco and Tunisia, both of which regularly surpass 75% of GDP, according to IMF figures. The World Bank’s 2017 Doing Business index ranked Algeria 156th out of 190 countries overall, but 175th for ease of obtaining credit. Short-term credit represented 23.5% of overall credit to Algeria’s economy at year-end 2015, down slightly from 24.7% in 2014, per BoA figures. Household credit accounted for AD465.1bn (€3.8bn), or just 6.39% of that overall lending by the end of 2015, as the longawaited consumer credit facility was relaunched in early 2016. Lending to households had been a highly lucrative revenue stream for Algeria’s banks, particularly private ones, until authorities froze it in 2009 out of concern over rapidly rising import bills and debt.

On the liabilities side, at the end of 2015 banks held AD3.89trn (€32.2bn) in demand deposits, a 12.2% drop from the previous year, after substantial growth of 25.1% in 2014, according to BoA figures. Banks also held AD4.44trn (€36.7bn) in fixed-term deposits in 2015, representing an 8.8% rise over 2014. Deposits in foreign currency, worth the equivalent of AD496bn (€4.1bn), held steady, appearing to show more than 22% growth primarily because the dinar depreciated substantially against most major currencies over 2015.

Algeria’s account penetration stood at around 50% in 2014, the latest year for which World Bank data are available. At the end of 2014 Algeria had just 5.1 bank branches per 100,000 residents, compared to 24.6 for Morocco and 18.2 for Tunisia.

Statist Origins

The state has been at the centre of Algeria’s banking sector since its earliest days and remains so today, even if no longer exclusively. In the mid-1960s the newly independent country nationalised the local holdings of French banks and relaunched them as three state-run banks: BEA, Banque Nationale d’Algérie (BNA) and Crédit Populaire d’Algérie (CPA). In the 1970s the state sought to put the banks to work as instruments of the centrally planned economy, with each specialising in designated domains of activity. BEA financed international commerce, primarily on behalf of Algeria’s largest enterprises. BNA handled agriculture, industry and trade, and CPA covered pharmaceuticals, craft trades, tourism and niche sectors. Caisse National d’Epargne et Prévoyance (CNEP), created in the 1960s as a non-bank financial institution, served as a household savings and mortgage lender, and has since been converted into a bank to continue to fill this role.

Restructuring operations in the mid-1980s gave rise to two new state-run players: BADR, which was spun off from BNA to finance agriculture and agribusiness; and Banque de Développement Local (BDL), spun off from CPA to finance enterprises managed by local governments. Amid widespread economic reforms instituted in the late 1980s, the banks witnessed a partial liberalisation that allowed them to diversify their activities across the economy. While still state-owned, the banks were converted to joint-stock companies in 1989 and freed to make their own lending decisions.

By that time, however, years of loan issuances to state-run enterprises had led to a large accumulation of bad debt. In 1990 non-performing assets represented two-thirds of total banking assets, according to the IMF, obliging the government to invest in multiple rounds of debt swaps and capital injections.

Private Entrants

In the 1990s the government relaxed restrictions on ownership, allowing the creation of both private and foreign-owned banks for the first time. Algeria’s first private bank, Al Baraka, a joint venture between Bahraini Al Baraka Banking Group and BADR, launched in 1991. In total 14 foreign-owned private banks were established, including local affiliates of French banks Société Générale, BNP Paribas, Crédit Agricole and Natixis, alongside CitiBank, HSBC, Trust Bank, Jordan’s Arab Bank and Housing Bank for Trade and Finance, Bahrain’s Arab Banking Corporation Algeria (ABCA), Fransabank and Al Salam Bank, and Gulf Bank, which is part of a Kuwaiti banking group.

A number of locally owned private banks were also registered, but all folded in the early 2000s, including Khalifa Bank, which authorities began liquidating in 2003 after discovering AD3.2bn (€26.5m) missing from its books. Prosecutions against the bank’s executives were finally resolved in 2015, but the episode prompted stringent reforms. In late 2008 authorities began to heighten the barriers to entrants seeking access to the banking sector. The capital requirement for launching a new bank was raised from AD2.5bn (€20.7m) to AD10bn (€82.8m) in late 2008, and the 2009 complementary finance law imposed a 49:51 domestic ownership requirement on all new joint ventures. No new banks have been licensed since that time. The freeze has left Algeria’s banking sector with the configuration it has today, in which all 14 private banks are foreign-owned.

Sector Structure

Though no such separation is imposed by current regulations, state-run enterprises tend to borrow primarily from public banks, while foreign banks’ business relies heavily on private sector corporate finance and lending. While the six public banks today hold over 85% of the sector’s assets and three quarters of its branch network, according to the African Development Bank’s “African Economic Outlook 2016”, in recent years the 14 private banks have played an outsized role in driving product innovation in the sector. Rapid expansion into profitable niches like trade financing, leasing, Islamic finance, household consumption credit and bancassurance in recent years has allowed private banks to capture as much as 30% of the sector’s annual profits, despite holding only about 15% of its assets, according to a July 2016 report by London-based monthly The Banker.

Other Players

The six public and 14 private banks are all members of the ABEF, which serves as a platform for studying issues arising in the sector and proposing legal or regulatory solutions to the Ministry of Finance and the BoA. Nine other financial institutions, of which six are public, are also represented by the ABEF and fall under the BoA’s oversight, including state-owned mortgage refinancer Société de Refinancement Hypothécaire, public investment firm SOFINANCE, private household credit provider Cetelem and a mutual insurer Caisse Nationale Mutualité Agricole, among others. They are joined by five leasing companies, including the Arab Leasing Corporation and Maghreb Leasing Association, which are the largest operators in a sub-sector that has seen strong profits and growth.

Though not represented in the ABEF and barred from conducting commercial transactions directly, five liaison offices of foreign banks are also registered to operate in Algeria by facilitating business between local clients and their foreign headquarters, including the British Arab Commercial Bank, Union des Banques Arabes et Françaises, Crédit Industriel et Commercial, Banco Sabadell and Banca Monte dei Paschi di Siena.

Postal Bank

Algérie Poste, the country’s postal service, is not technically a bank or financial institution, but since 2001 it has offered basic checking accounts and money transfer services to retail clients, who today number over 18m. Authorities first floated the idea of converting Algérie Poste into a full-fledged postal bank in 2011, but did not take action until August 2015, when the Ministry of Post and ICT established a working group to prepare a revised telecommunications law. Authorities have indicated that the bill, which is anticipated in 2017, will include measures to license an official postal bank. With over 3600 locations across Algeria, the postal service appears well placed to significantly expand financial inclusion. Such was the case in neighbouring Morocco, where the introduction of a postal bank in 2007 is credited with boosting account penetration rates from 34% to 52% in just three years.

Tightened Liquidity

The banking sector has managed to navigate recent challenges relatively well, although the sharp decline in hydrocarbons receipts has affected banks’ liquidity situation (see analysis), which has had broader ramifications for bank financing opportunities. The government has enacted a number of policies to reduce the impact of low oil prices on the economy and minimise the risk of large structural imbalances, which in turn has slowed income streams. For example, when authorities began requiring letters of credit for imports in 2009, but left commissions unregulated, it proved highly lucrative for many banks. By the time the government authorities began tightening foreign liabilities limits in 2014 to cut down on a burgeoning import bill, multiple banks were reaping more than two-thirds of their revenues from trade financing, according to both Jawad Sacre, deputy chief executive and chief banking officer of Bank ABC, and Farid Adrar, network and commercial director at Fransabank.

The government has also enacted “rationalisation” measures intended to limit public deficits in the wake of the oil price shock. The 2016 state budget included a 9% cut, and while the government has stressed that several billion euros worth of priority projects will still be executed, there is the potential that financing opportunities for the state’s infrastructure and construction projects may shrink. “The budgetary restrictions put in place by the state are an obstacle in the short term,” Adrar told OBG. “Apart from the ‘strategic projects’, we are seeing a slowdown in public orders, which has affected some of our clients who provide construction services and materials. In the medium and long term, these restrictions may be necessary for the Algerian economy in order to ensure fiscal balance, but in the short term it is having an impact on our business, which will now focus more on other productive sectors.”

Private Sector Credit

In spite of the ripple effects that low oil prices have had on lending activity, the sector remains in relatively good form. Concerted efforts to expand credit to the economy allowed banks to remain profitable in 2015 despite the difficult conditions. Thanks to 11.9% aggregate lending growth, according to BoA figures, private banks managed a 3.1% return on assets and public banks earned 2.1% in returns, according to the IMF. The average capital adequacy ratio remained relatively constant, finishing 2015 at 17%. Among the promising signs for the industry, new lending opportunities are opening up. Rachid Belaid, delegate general of the ABEF, cited government efforts to spur investment through credit rate subsidies, tax exemptions and land concessions for new projects in agribusiness, industry and tourism.

Future Privatisation

One of the IMF’s 2016 Article IV consultation recommendations to Algerian authorities was to consider privatising state-owned enterprises. In September 2016, as the government worked to prepare the 2017 finance law, Reuters reported that the legislation would include measures to facilitate the listing of the six public banks on the Algiers stock exchange. The move would not have been unprecedented. Previously, CPA had nearly seen its capital opened up to outside investors in 2007, although the public offering was cancelled before bidding closed. Since then privatisation of public banks has rarely been discussed. The final version of the 2017 law, published in October 2016, did not include provisions for privatisations; however, the topic is likely to remain under consideration as the government continues to explore partial divestment from select state-owned enterprises. The 2017 law does allow state firms to float up to 66% of their shares, though ownership is limited to Algerians.

Product Diversification

As a result of evolving macroeconomic conditions and the changes to some of the sector’s more prominent revenue streams, lenders have increasingly sought to diversify. Sacre said, “You have to be ready to move, you have to be flexible.”

The relaunch of consumer credit in 2016 is one potential opportunity. Lending to households had been a highly lucrative income stream for banks until the government froze it in 2009 to reign in import spending and growing household debt. But the new credit plans have proved much more limited. Credit is available only for Algerian-made products, of which just several dozen have received approval, and loan values are capped at 30% of household income, which is tracked via a new credit registry. Many banks began offering loans in January 2016, but in a March 2016 interview with economic new site Algérie Eco Algerian economist Belkacem Boukhrouf said they have seen few customers due to the limited selection of eligible items, high interest rates and the public’s wariness of household debt amid so much talk of belt-tightening.

SME: Small and medium-sized enterprises (SMEs) are another focal point. While local private banks are the primary financiers of SME growth in many other regional markets, none exist in Algeria, and SMEs have traditionally been underserved. However, there are signs of change. In announcing a four-fold profit increase for 2015, Mohamed Krim, director-general of BDL, credited strong gains from small business lending, and others are likely to try to replicate this success. The government appears to be behind such a shift, having proposed legislation in July 2016 that would make more companies eligible for SME benefits and expand SMEs’ options for financing. Given an alleged liquidity squeeze within BADR, which primarily serves the agriculture sector, there are also measures under way to establish a new mutual agricultural bank specialising in micro-credit loans to farmers.

Alternative Finance

Sharia-compliant financial products are another area that banks have been eyeing of late. Algeria is already home to two sharia-compliant banks, Al Baraka and Al Salam, and many conventional banks offer a growing slate of competitive products through so-called Islamic windows and other workarounds. While Islamic finance products are experiencing slower global growth in 2016, with credit rating agency Standard & Poor’s forecasting the sector would see single-digit growth compared to an average of 10-15% over the past decade, the sector is expanding rapidly elsewhere in the Maghreb and remains underdeveloped in Algeria. Reuters reported in June 2016 that the ABEF had established a committee to study “alternative finance” products (as they are known in Algeria) and to recommend regulatory changes to facilitate their expansion. The BoA must approve all financial products before their launch by banks, and sharia-compliant products currently inhabit a legal grey area as there is no specific legal framework governing them.

Cashless Economy

The banking sector hopes to soon begin cashing in on a significant investment made in recent years to modernise electronic financial systems. Algeria’s payment infrastructure has long lagged behind other countries in the region, relying on cash and cheques for most transactions, hampering economic activity and growth. But in mid-2014 efforts piloted by the ABEF led to the creation of the Economic Interest Group (Groupe d’Intérêt Economique de la Monétique, GIE), which includes all of Algeria’s banks and is charged with bringing the financial ecosystem fully into the digital age. The GIE has worked to help banks distribute debit cards and payment terminals, and educate customers and merchants on the advantages of cashless payment. Assia Benchabla Queiroz, director of studies and development at the GIE, told OBG that by 2016 banks had issued over 1.5m bank cards, but 75% of these had never completed a payment transaction and were being used exclusively for ATM withdrawals.

According to Benchabla Queiroz, Mouatassem Boudiaf, deputy minister for the digital economy and modernisation of financial systems, is working to prepare a series of laws on the digital economy, which includes an e-commerce bill that was submitted to parliament in September 2016 for review. Passage of the proposed e-commerce law will open the door for full-fledged online commerce, but in the meantime, the GIE has managed to enable a “soft opening”.

Taking Off

In October 2016 five private banks joined the six public banks in launching online payment services with a select group of approved merchants, including the national telecoms and water companies, all three mobile phone operators, national carrier Air Algérie and private insurer Amana Assurances. For now, transactions are limited to simply paying bills for goods and services already received; the anticipated e-commerce law will open up options for genuine commercial transactions. Also announced at the October 2016 roll-out was a new online platform, bitakati.dz (meaning “my card” in Arabic), and a public media campaign by the GIE to inform consumers and build wider understanding of cashless payment. “The banks are now competing to advance banking services by introducing new digital tools in order to satisfy their clients’ demands,” Benchabla Queiroz told OBG. “This will drive development of the online business ecosystem.”

In the second half of 2016, banks started to upgrade their client databases, issuing unique passwords to all customers with debit cards, and participating in system-wide tests led by the GIE. Belaid confirmed bankers are fully behind the project. “The banks have long invested in training and upgrading their IT systems,” He told OBG. “Now their focus is on increasing transaction volume.” To build volume and generate return on their investment, banks are working to install more payment terminals in shops and expand the e-payment network.

According to Benchabla Queiroz, the GIE is in discussions with Visa and MasterCard to determine how to better connect Algeria to international electronic payment networks, and enable e-payment for other government services and private companies. Algérie Poste is a GIE member and has issued 7m ATM cards to customers; upgrading these to bank cards and enabling electronic payments in the near future could substantially increase access to e-payment. “I am convinced that Algerians will adapt rapidly to this new technology,” Belaid told OBG. “Just look at how quickly mobile phone technology has evolved and been adopted. Why shouldn’t e-payment follow the same course?”

The campaign to encourage cashless commerce complements other ongoing efforts. In January 2016 Algeria tightened reporting restrictions on international wire transfers to combat illicit or criminal flows. Belaid told OBG that the ABEF has worked closely with Algerian Customs officials to establish an information-sharing platform to combat import-export fraud and money laundering. In February 2016 Algeria was removed from the Financial Action Task Force’s Anti-Money Laundering/Combatting Terrorist Financing watch list.

Outlook

Digital payment and e-commerce, if allowed to develop without excessive regulatory burdens, should see an explosion of growth in 2017, along with a modest uptick in consumer lending and increased activity from SMEs – all of which should continue to allow banks to further navigate past the broader macroeconomic challenges of low oil prices. There are still plenty of short-term issues to navigate – amid further public budget rationalisations, liquidity will continue to shrink – but this should put positive pressure on banks to expand investment and carefully evaluate risks.