While the recent government’s decision to develop Islamic finance is seen as a positive step for an industry that has real potential in a conservative country like Algeria where an estimated DZD2.7 trillion (US$23.97 billion) is kept outside of the country’s banking system partly for religious reasons, market players remain relatively cautious on how successful the authorities’ plan will be. MARC ROUSSOT reports.
In a bid to plug its budget deficit caused by the lower price of the barrel and increase the country’s bancarization rate, recorded at 50% of the population in 2014 according to the World Bank’s data, the Algerian government has authorized its state-owned banks to offer Islamic products, a decision that will certainly attract a portion of the money kept outside of the country’s banking system, but how much?
“It is relatively complicated to predict how the public is going to react as we do not have studies or information on this topic. However, based on our experience, there is a real potential for Islamic finance in Algeria especially in small business and the retail market,” says Karim Said, the head of marketing and communication at Al Baraka Bank Algeria, the oldest of the two Islamic banks (the other is Al Salam Bank) currently operating in Algeria.
As an example, in 2015, the government decided to reintroduce consumer credit, a segment worth DZD10 billion (US$86.82 million) in which Al Baraka Bank Algeria was leading with a market share of more than 50%, affirms Karim.
However, Algerians have a complicated relationship with their banks, characterized by a strong distrust due to the Khalifa Bank scandal — Khalifa Bank went bankrupt in 2003 — qualifies Boubkeur Ajdir, a project director at the Islamic Finance Advisory & Assurance Services, who is advising one of the three banks, namely Banque de l’agriculture et du developpement Rural, Caisse Nationale d’Epargne et de Prevoyance and Banque de Developpement Local, that will start offering Islamic products by the end of the year.
“Algerians are very reluctant to put their money in banks. As an example, many Algerians who buy a house pay it in cash. So the question is: are Algerians going to be attracted by Islamic banks because they are Islamic? It is difficult to answer this question. Cyclical problems, political instability, tax issues and the fact that Algerians have been living without banks for dozens of years have to be taken into consideration as well. In the end, are Islamic banks going to increase the bancarization rate? I am not too sure,” says Boubkeur.
Regulatory framework? Absent
Algeria has no dedicated legal framework for Islamic finance. As a result, Al Baraka Bank Algeria faces tax issues due to the structure of certain financing products. “Everything has to be built and this includes the regulatory framework and the tax legislation,” confirms Boubkeur, “but if the government does not want to shoot itself in the foot, it will have to achieve the required adjustments,” he says.
So, is it reasonable to launch a Shariah compliant offering when rules are not in place? “This is a chicken and egg situation. Besides, Islamic banks have been working in Algeria for the past 20 years, which shows that it is possible,” Boubkeur asserts.
In the case of Al Baraka Bank Algeria, the lack of a particular regulatory framework has been offset by Al Baraka Banking Group, one of the bank’s shareholders, mandating to follow certain rules, including regarding Shariah compliance matters.
Overall, the government’s agenda is positive as it will democratize Shariah compliant concepts and even though a regulatory framework does not emerge immediately, it will banalize Islamic finance, according to Karim. “We also consider the arrival of new competitors in a very positive manner because Islamic finance is finally recognized by the authorities and the emergence of new competitors will push us in improving our offerings and capacities,” he states.