Access to finance can be difficult in any emerging market, as indicated by low levels of financial intermediation in the Middle East and Africa, and Algeria is no exception. For small businesses and households, which often face the greatest challenges in accessing credit, lending levels are low in Algeria, even by regional standards. Yet credit to the private sector has been growing, and the authorities are taking measures aimed at boosting credit provision further, including reintroducing consumer credit, establishing a more comprehensive credit registry and providing incentives to offer loans to more customers.
Intermediation rates in Algeria’s economy are low by regional standards – the bank-credit-to-deposits ratio stood at 32% in 2011, according to the World Bank Global Financial Development Database, compared to 80% and 131% for regional peers Morocco and Tunisia, respectively. Credit to the private sector was equivalent to 16.7% of GDP in 2013, according to the World Bank, compared to 69.8% in Morocco and 75.5% in Tunisia.
The availability of credit appears to be well below demand; respondents to the World Economic Forum’s “2014-15 Global Competitiveness Report” rated access to financing as the most problematic aspect of doing business in Algeria. Among the factors behind the problem is the fact that some aspects of the current banking regulatory framework discourage lending. “Banks can face criminal charges for bad loans, meaning there has been an effective suppression of risk-taking behaviour in the market. There is currently a committee discussing reforming this law, but it is progressing very slowly”, Ramzi Hamzaoui, the managing director of Citibank Algeria, told OBG.
As a result, small and medium-sized enterprises (SMEs) can find it particularly difficult to secure loans, as they tend to be a riskier prospect for loans than corporates, and they often lack collateral. Lending to households has also been stymied in recent years by a ban on consumer credit and by strict criteria for mortgages, including a maximum loan-to-value ratio of 70% and a debt-to-income ratio of 40%. Such challenges prompted the IMF in October 2014 to call on the authorities “to improve access to finance, especially for SMEs and households”.
However, the situation is improving, and credit provision has been growing rapidly. Total lending to the economy stood at AD5.76trn (€53.6bn) at the end of March 2014, up from AD5.16trn (€48bn) at the end of 2013 and AD4.29trn (€39.9bn) at the end of 2012; the increase between the end of 2012 and 2013 represented year-on-year growth of 20%. Most impressively, given the tendency towards short-term lending in most emerging markets, Algeria’s medium-and long-term lending has seen much stronger growth than short-term lending, up 123% since 2009. Short-term lending is barely changed. As of June 2014, 26.2% of lending to the economy consisted of short-term credit, while the remaining 73.8% was accounted for by medium- and long-term loans, accordingto the Bank of Algeria (BoA).
While the figure have varied in recent years, over the longer term lending to the private sector has been growing significantly; the average proportion of GDP accounted for by such lending for the five-year period between 2009 and 2013 stood at 15.5%, up from 12.4% in the previous five years and 8.6% for 1999-2003. 47% of outstanding loans were to the public sector at the end of the first quarter of 2014, while 53% went to the private sector, more or less unchanged on 2009 levels.
The bank-credit-to-deposits ratio is also on an upwards long-term trajectory; although the figure for 2011 was down slightly on the two previous years, levels have risen strongly since the government began to liberalise the economy in the 1990s.
The government is currently taking measures to further boost credit provision. In order to encourage lending to underserved categories of borrowers, such as SMEs and households, new regulations introduced by the BoA in October 2014 allow banks to give reduced weight to some types of loans when calculating their solvency ratios, effectively increasing the amount of such loans they are able to offer. Under the new regime, residential mortgages will be weighted at 35%, and loans to small businesses and commercial mortgages will be weighted at 75%, subject to conditions.
As part of wide-ranging economic reforms introduced in 2009, the government banned all consumer credit except mortgages. The ban was due to concerns that household borrowing was encouraging a flood of imported consumer goods, particularly foreign-made cars, negatively impacting the current account and household debt levels, and potentially damaging domestic industry. Prior to the ban, consumer loans in the country were worth around AD100bn (€930m) annually.
However, in February 2014 the “tripartite” – a regular meeting between representatives of the government, employers and trade unions – recommended that the ban be lifted, and in August the governor of the BoA, Mohammed Laksaci, announced that consumer lending would be reintroduced in the second quarter of 2015. “The end of the ban on consumer lending will have a major impact on the industry, though it will be restricted to those banks with large retail branch networks,” Nafa Abrous, the deputy general manager of Fransabank Algérie, told OBG.
To address continuing concerns over the country’s import bill, consumer lending under the new regime is likely to be limited to purchases of goods produced in Algeria, or at least containing a high proportion of locally produced content; the tripartite committee examining the topic recommended that the minimum local content proportion of goods eligible for consumer loans should be set at 40%.
While this will restrict the extent of new lending, the range of locally produced consumer goods is increasing, allowing for much greater credit provision than was possible in recent years. Indeed, given that much previous consumer borrowing was used for car purchases, the move has been in large part facilitated in part by the opening in November 2014 of Algeria’s first major car plant in Oued-Tlelat, southwest of Oran, which produces vehicles under French carmaker Renault’s budget Dacia brand.
A key step that the Algerian government is introducing to mitigate the financial risks associated with consumer lending and encourage safe credit provision is the establishment of a new public central credit registry. Unlike the previous registry, which only covered businesses and loans of over AD2m (€18,600), it will cover loans of all sizes, and will include household debt; it will also be updated more frequently than the previous registry.
“The new registry will have a major impact on the sector as it will be up-to-date and reliable,” Abrous told OBG. “Previously an individual could take out loans from multiple banks without them knowing about it, as the registry was not up-to-date.” As with the lifting of the consumer credit ban, the registry’s launch is due in the second quarter of 2015.
In addition to regulations hampering lending, some Algerian customers can be reluctant to borrow; in particular, a significant obstacle to SMEs accessing credit is the opposition of many small businesses to taking interest-bearing loans on religious grounds. Although two sharia-compliant banks – Al Baraka and Al Salam – operate in the country, the authorities have been working to increase the availability of Islamic finance to micro, small and medium-sized enterprises (MSMEs) through a joint project that is run by the Ministry for Industry, SMEs and Investment Promotion and the German Society for International Cooperation to provide small-scale Islamic loans, based on the musharaka or shared risk-taking model. The partners initially ran a pilot project that extended loans to 167 MSMEs in southern Algeria’s Ghardaïa Province, and in 2013 has focused on providing more types of loans to the segment.
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