The banking industry in Algeria is characterised by a high level of stability and ample liquidity, which owe much to the country’s robust hydrocarbons revenues. Lending to the economy has been growing strongly, albeit from a low base, and while intermediation rates are low, plans to relax a government ban on consumer credit and launch a new credit registry in 2015 should help facilitate more lending in the coming years.
The banking sector has already undergone several regulatory changes in 2014, including measures to incentivise lending and further boost stability, such as increasing minimum solvency requirements. A large proportion of domestic banking activity is the result of a handful of state-owned institutions, although foreign and private lenders have made significant inroads in sub-segments such as trade finance.
There were 1409 bank branches in the country at the end of 2013, equivalent to one for every 25,600 Algerians. According to the Bank of Algeria (BoA, the central bank), total banking assets grew by 6.9% in 2013 to €96bn, following growth of 7.2% the previous year. At the end of the first quarter of 2014 this had risen to €100.4bn. Total lending to the economy stood at AD5.76trn (€53.6bn) at the end of March 2014, up from AD4.29trn (€39.9bn) at the end of 2012. Medium- and long-term lending has seen strong growth, up 123% since 2009. As of June 2014, 23.8% of loans were short term, 22.7% medium term and 48.6% were long term, according to the BoA.
The minimum capital level for banks is AD10bn (€93m), having been raised from AD2.5bn (€23.3m) in 2008. The sector’s capital-to-assets ratio stood at 7.9% in 2012, unchanged from 2011 but up from 5.8% in 2009. Average sector return on capital is 19%, while the return on assets is 1.7%, according to figures cited in the local press in late 2014. Private banks’ dominance of profitable areas such as trade finance has helped them generate a disproportionate share of industry profits; they account for around 30% of net banking income, more than double their share of sector assets. Yet recent regulatory reforms are serving to reduce profits generated by trade finance, pushing banks to seek new profit streams.
Low lending rates (see analysis) have traditionally resulted in high levels of liquidity in the system, particularly in the state-owned sector; banks held liquid assets amounting to 108% of short-term liabilities at the end of 2012. However, there are signs of this changing as a result of a push to raise loan volumes.
The sector consists of six publicly owned banks and 14 private banks, all of which are foreign-owned, though Banque Al Baraka d’Algérie is co-owned by the state-owned Banque Algerienne de Développement Rurale (BADR) and Saudi Arabia’s Dallah Al Baraka. The post office also offers basic retail banking services, in conjunction with the state-owned Caisse Nationale d’Epargne et de Prévoyance (CNEP). Also active are five leasing companies, three finance firms and one specialised housing finance company. Banks are represented by the Professional Association of Banks and Financial Institutions, membership of which is compulsory for all banks.
Publicly owned banks dominate in terms of assets and retail lending. As of June 2013 private banks accounted for 13.9% of total banking assets in the country, with the remaining 86.1% held by state-owned institutions. The latter also have the majority of branches, with 78% of the total, as well as the bulk of the retail market – many private banks are concentrated in operational areas, such as corporate banking and trade finance. However, the private sector’s market share in terms of assets was up from 12.3% 18 months previously, suggesting a steady rise in activity in the corporate sector. Eric Wormser, the chairman of Société Générale Algérie, said, “Although Algerian public companies have been able to legally turn to private banks since 2009, the vast majority tend to prefer dealing with state-owned banks.”
The outsized role of publicly owned banks is partly a result of the fact that the large state-owned enterprises – such as Algérie Télécom and Sonatrach, the oil company that is one of the continent’s largest corporate bodies – often bank with public banks. This is in part a legacy of an older – but since annulled – legal requirement to do so that was put in place after the collapse of the privately owned Khalifa Bank in 2003. According to figures cited in the local press, private banks have concentrated their activity, and around 70% of credit extended by private banks in the country now consists of short-term loans to provide working capital and finance imports, predominantly to the private sector.
The two largest banks are the state-owned Banque Nationale d’Algérie (BNA) and Banque Exterieure d’Algérie (BEA), together accounting for more than 40% of sector assets. In 2013 BNA recorded total assets of AD2.19trn (€20.4bn), up from AD2.06trn (€19.2bn) the previous year and AD1.62trn (€15.1bn) in 2011. BEA’s assets stood at AD2.11trn (€19.6bn) in 2013, down from AD2.31trn (€21.5bn) in 2012, when it was the largest bank in the country, and AD2.64trn (€24.6bn) in 2011. In 2013 BEA increased its capital to AD100bn (€930m), up from AD76bn (€707m) previously.
The next largest bank is Crédit Populaire Algérie (CPA), with assets of AD1.36trn (€12.6bn) in 2013. CPA is one of eight state-owned enterprises in which the authorities plan to float a stake on the stock market in the near future, likely of 20-30% of its equity (see Capital Markets chapter). A previous plan to privatise a 51% stake in the bank was called off in 2007. CPA is followed in size by BADR, with assets of AD1.12trn (€10.42bn) for 2013, up from AD921bn (€8.57bn) in 2011. The other two state-owned banks are Banque de Développement Local (BDL) and CNEP, which specialises in mortgages (accounting for 60% of local mortgages by value), savings products and loans to the construction sector. CNEP made AD122bn (€1.13bn) of loans in 2013, of which AD46.2bn (€430m) were mortgages for private individuals.
All of Algeria’s private banks are foreign-owned. A number of domestically owned private banks were established following the liberalisation of the economy in the early 1990s, but several collapsed or were closed down in the early 2000s; these included the largest private bank in the country, Khalifa Bank, which went out of business in 2003. The lack of an indigenous, privately owned local institution is noticeable. “What is holding back the growth of the Algerian economy is the lack of a homegrown private bank, which is strange because every emerging market has at least one local player,” Ramzi Hamzaoui, the managing director of Citibank Algeria, told OBG. Algeria’s private banks are all much smaller in terms of assets than their major state-owned counterparts. The largest private banks by network are the local subsidiaries of French institutions Société Générale, which had 85 branches at the end of 2013, and BNP Paribas, which had 70. In comparison, CPA currently has around 300, and BEA around 100.
The newest foreign-owned bank is HSBC, which began operations in 2008. No new banks have since been granted a licence to operate; while a number of foreign banks are thought to be seeking one and several have representative offices in the country, the 2009 law limiting foreign ownership of new companies to a maximum stake of 49% is likely to have reduced foreign interest in the sector. There are also two sharia-compliant banks operating in the market: Al Baraka Bank and Al Salam Bank Algérie, which is owned by various Middle Eastern investors. In July 2014 the BoA told the local press that it was appointing an administrator to run the latter institution.
The past year has seen several regulatory changes affecting the sector, one of the most prominent being the rollback of an import credit requirement introduced five years ago, which, while giving a fillip to the broader economy, is expected to alter revenue streams. The requirement allowing all imports to be paid in advance by documentary credit was a boon for banks, particularly trade-focused private institutions, which earned substantial fees for arranging letters of credit. However, in April 2013 the BoA issued a new regulation that allows firms to pay for imports using documentary remittance in additional to documentary credit, as well as putting a cap on trade finance-related commissions.
The rules came into effect on January 1, 2014 and have dented private banks’ income streams. “The impact of the changes has varied by bank, but it likely runs at between 10% and 40% of net profits,” said Nafa Abrous, the deputy general manager of Lebanese-owned private bank Fransabank Algérie. However, he added that banks would alter their business profiles to mitigate the impact of such reductions in their bottom line. “Banks will change their commercial policies to focus more on other segments, such as lending,” he said. Plans to allow the return of consumer credit may help in this respect.
The authorities remain intent on assuring the sector’s stability; in October 2014 the BoA introduced regulations increasing the mandatory minimum solvency ratio – defined as regulatory equity capital as a percentage of credit, operational and market risks – for banks to 9.5%, up from 8%. A new minimum solvency ratio for core capital was also created, at 7%.
Most banks are already running solvency ratios well above these levels, with the industry average standing at 15.5% of core capital and 21.5% of regulatory capital at the end of 2013, according to the BoA. However, the new rules also authorise the BoA to impose higher solvency requirements than the industry minimum on institutions of “strategic importance”. The regulations also provide a new definition of core capital, and require banks to establish a “safety cushion” covering 2.5% of risk-weighted assets.
In addition, the BoA issued new rules tightening the amount of money banks can lend to individual clients, setting the maximum combined amount of “major risks” (defined as risks incurred on a single client that are each individually worth more than 10% of the bank’s regulatory capital) at a maximum of eight times the bank’s regulatory capital.
The new framework revised accounting standards for the classifying and provisioning of loans. State-owned banking, in particular, was historically characterised by very high levels of non-performing loans (NPLs), which accounted for 65% of all bank debt in 1990. However, NPL levels have fallen sharply since, and continued to do so in recent years; according to the World Bank, the proportion of NPLs fell from 21.1% in 2009 to 11.5% in 2012, breaking down into an NPL rate of 12.7% at state-owned institutions and 4.7% for private banks – very competitive figures among African emerging markets. Additionally, 70% of bad loans are provisioned.
The fall in NPL rates is partly due to government support to state banks in the form of loan swaps and restructurings, rather than write-offs of bad debt by banks themselves. The IMF noted in its financial stability report that the current regulatory framework makes it difficult and time-consuming for banks to write off bad loans, though it also warned that repeated purchases of bad debt by the government risk creating moral hazard. In particular, the value of NPLs purchased by the Treasury shot up in 2010 and 2011.
However, recent falls in the international price of oil may put upwards pressure on NPL rates, as a result of the economy’s dependence on hydrocarbons. According to a June 2014 IMF report on financial stability, a stress test it conducted on the country’s financial system, a fall in oil prices to $80 a barrel could result in an increase of 10 percentage points in the country’s NPL rate. In mid-December 2014 the price of Brent crude stood below $60 a barrel, following a sharp fall in oil prices in the second half of the year.
Cash is king in Algeria, and its banking sector has been defined by brick-and-mortar transactions, even for basic services such as transfers and payments. However, as in many other emerging markets, the rapid expansion of mobile and data penetration is encouraging providers to offer new mobile and electronic banking applications. In Algeria this could yield dividends for the large proportion of unbanked individuals, which was estimated at 67% in 2011 by the Global Financial Inclusion Database. Nawel Benkritly, managing director of Société d'Automatisation des Transactions Interbancaires et de Monétique, told OBG, “The benefits of electronic payments in regards to fiscalisation and fraud prevention are clear.”
Indeed, more and more banks have begun offering e-banking services to their clients in recent years, including BDL and CPA. However, it is not without challenges. “Electronic banking and transactions have a big future in Algeria, as the country has a young population that is eager to embrace technology,” said Abrous of Fransabank, which launched an online banking service in 2014. “However, at the moment uptake is lower and the prerequisites for its development are not in place. Banks have invested in software but the country remains a cash society, and the government needs to invest in security measures for the sector.”
The development of e-commerce is hampered by the lack of a generalised system allowing for online payments using debit cards; local banks have been working on establishing such a system for several years but it is unclear when it will be launched, and Algeria lacks a regulatory and legislative framework covering online retail. Banking card usage also remains low, bank transfers – a potential alternative method of payment – are difficult to carry out online, despite the growing availability of e-banking services, and cheques cannot be used for small transactions.
A local online payment system called ePay, based on the use of prepaid vouchers, has allowed for the emergence of a small local e-commerce segment. The service, which takes a commission of 3-5% on sales, was launched in 2011. The country’s first online retailer – eChrily.com, which specialises in food and drink products – launched in 2012, and has been followed by a number of other sites, such as Nechrifenet.com, which sells household equipment such as white goods, and online electronics retailer Tbeznyss.com, both of which began operating in January 2013. Kaymu.com, an e-commerce site operating in 14 countries in Africa that sells a broad range of goods, also launched operations in Algeria in August 2014.
Leasing activity has been growing rapidly in Algeria in recent years, albeit from a low base. Total assets stood at AD31bn (€288m) in June 2013, up from AD22bn (€205m) at the end of 2011. While comprehensive figures for 2014 are not available, it appears to have continued to perform well; Chedly Zaoun, the president of Maghreb Leasing Algeria (MLA), told OBG that the firm’s turnover for the first half of the year was up 25% on the same period in 2013, to approximately €50m. MLA is looking at new products, including operational leasing or fleet management, for which Zaoun said the outlook is very good in Algeria. “Unlike other markets in the region that are saturated, leasing in Algeria is growing rapidly. There is an infrastructure boom, with the government having resumed large-scale investment and launched lots of new projects, and as a result companies have a sufficient budget to spend on leasing,” said Zaoun. He added that he believed the current rapid expansion of the sector is likely to last at least another five years. “Leasing only constituted 2% of private investment in Algeria at the end of 2013, compared to around 15% in neighbouring countries, so the outlook for the sector is very promising.”
Unsurprisingly in light of such rapid growth, competition is rising, with recent years bringing the establishment of several new dedicated leasing companies; there are now at least five such firms active in the market. The two most recent entrants are Ijar Leasing Algérie – a joint venture between BEA and Portugal’s Banco Espírito Santo launched in March 2013 – and El Djazaïr Idjar, which was established in 2012 by its main shareholders CPA and BADR (which each have a 47% stake) and Algerian-Saudi Investment Company (which holds a 6% interest).
Prior to the opening of these two firms, the most recent leasing company to have been established in the country was Société Nationale de Leasing. Owned by public banks BDL and BNA and launched in 2010, it targets small and medium-sized enterprises (SMEs). The other two firms active in the segment are MLA, which is owned by Tunisie Leasing, and Arab Leasing Corporation, the main shareholder in which is ABC Bank (41%), followed by CNEP (27%) and The Arab Investment Company (25%).
Among the main reasons for the segment’s rapid growth are difficulties for smaller businesses in accessing credit. Respondents to the World Economic Forum’s “2014-15 Global Competitiveness Report” rated access to financing as the most problematic factor for doing business in Algeria. Some aspects of the current banking regulatory framework discourage lending and risk-taking behaviour, and banks can face criminal charges for bad loans. Leasing targets the underserved SME market in Algeria, which is largely ignored by the banking sector on the grounds of not being able to provide collateral. The sector also tends to respond to applications for leases much more quickly than banks do to loan applications – though leasing is usually a more costly option than bank loans. Opportunities for expansion into new niches further bolster the segment’s growth prospects. The leasing market mainly serves the public works and real estate sectors, but some players are looking at new areas. MLA itself is looking at new products, including a long-term rental option.
One of the main constraints on the segment’s expansion is the availability of finance. “Debt issues are practically the only financing option available to leasing firms,” said Zaoun. However, local financial markets regulator the Commission for the Organisation and Oversight of the Stock Market (Commission d’Organisation et de Surveillance des Opérations de Bourse, COSOB) requires companies issuing bonds to provide bank guarantees as collateral. Zaoun said that MLA had arranged guarantees for a five-year, AD2bn (€18.6m) coupon bond that it plans to issue before the beginning of 2015, demonstrating that such obstacles are not insurmountable. Furthermore, Yazid Benmouhoub, CEO of the Société de Gestion de la Bourse des Valeurs, which operates the Algerian stock exchange, told OBG that COSOB is considering dropping the requirement for bank guarantees to back bond issues, which could significantly increase the availability of financing for the industry.
The leasing segment is set to see particularly strong growth over the coming years, thanks in large part to the difficulties faced by SMEs in obtaining credit. If mooted plans to loosen restrictions on bond issues materialise, allowing leasing firms to more easily finance expansion, the sector could grow even faster. The end of the requirement for companies to pay for imports with documentary credit has removed a lucrative source of income for private banks, but the planned lifting of the ban on consumer credit will help some banks to develop new revenue streams in other areas. New regulations will also maintain the stability of the sector.
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