Algerian banking is dominated by six state-owned banks that control the vast majority of the country's banking assets, even taking into account a recent fall in market share. However, it is the country's 14 foreign-owned private banks that dominate profitable lending.
Until recently, times were good. While managing just 14% of the sector’s assets, private banks accounted for 30% of banking income. But according to Rachid Sekak, the former chief executive of HSBC Algeria, these profits were driven by “huge opportunities” in trade finance that have now all but disappeared.
“I would say the period 2009 to 2013 was something of a free lunch for banks because of trade finance. Documentary credit created a kind of rent-seeking situation and everything revolved around it. There were real opportunities for banks to make big money,” he says.
Tight liquidity
However, the attractiveness of trade finance is now greatly diminished, leaving Algerian banks facing tight liquidity. In July 2013, the authorities put a cap on commission for trade finance and then in November 2014 went on to bring in regulations restricting the level of trade finance overall.
The new regulations have come with decreasing financial performance and profitability, a state of affairs Mr Sekak believes will continue unless business models are readdressed. “For some of the foreign banks, trade finance constituted 75% or 80% of revenue. It was the only reason for high profitability. They will have to think again and may have to go back to [more basic] banking – only some of them will succeed,” he says.
“In fact, what will happen in my opinion is that it will be hard to manage liquidity and retail banking will again open up new opportunities, as for the moment it is the only way to collect secure resources and finance the balance sheet.”
Oil decline
The removal of documentary credit profits may well pale in comparison with another trend affecting Algeria's banks. A drastic fall in oil prices has hit the country hard and revealed just how exposed Algeria’s economy is. Hydrocarbons are responsible for up to one-third of Algeria’s gross domestic product (GDP), two-thirds of budget revenues and about 98% of exports.
Usually in surplus, Algeria’s balance of trade swung to a $341m deficit in the first two months of 2015, and because the Algerian economy is directly connected to the price of oil, the impact on banks is considerable.
“Oil is quite simply the main variable of the Algerian economy," says Mr Sekak. "It is a huge part of exports, fiscal revenues and GDP. Oil is everywhere and has big implications for government spending, the level of investment and consumption. Oil is Algeria,” says Mr Sekak.
According to Mr Sekak’s projections, if the price of oil remains low, the Algerian government will have to borrow large sums locally. Were oil to stick at a price of $60 or even $70 per barrel, the government would have to borrow billions from Algerian banks. The fear of low oil prices is leading some to ask where the state will find the lending it needs and who will be willing to buy Algerian government bonds.
Easy credit
Due to changes in regulation and the oil price, many of Algeria's banks have turned to credit activity on reduced interest to find profits. However, should the cost of credit increase, this business line will also be in danger and there are questions as to where private banks will have access to refinancing.
Officially the rate at which private banks can access refinancing is 4%. However, no bank is known to have accessed the facility since 2003. Even if they are able to refinance at 4%, such a window will be a shock for banks that for years have had access to plenty of easy credit.
The only upside Mr Sekak sees is that the new conditions for Algeria’s banks might themselves promote long-term reforms.
The outlook for private banks will depend on how business models can be adapted, particularly towards retail banking and personal banking, whereas public banks will need to look at the basics: improving management tools, information systems and client relations.
“[Public banks] will have budget concerns but it could be a moment to improve,” says Mr Sekak. “If you have no budget concerns you act without responsibilities, but now they will be forced to do so.”
Sovereign funds
For Kamal Benkoussa, one way to address the problems in Algeria's banking sector is to set up an Algerian sovereign wealth fund that he claims would be “a major step towards fighting corruption and improving investment allocation”.
Mr Benkoussa, a presidential candidate in Algeria's 2014 election who ran on economic reform and who has more than 10 years’ experience as a trader at London-based macro fund Goldenberg Hehmeyer, says fixing the banking system is vital to avoid recession.
“Big companies with a lot of cash flow are worried they won't have funding from state banks in Algeria,” says Mr Benkoussa. “They want to invest but banks won't give them the same capital every year. We are not even an emerging economy but without reform we will be in recession.”
One answer is the establishment of a sovereign wealth fund that would serve to promote transparency and fight corruption in a country that has “never been as corrupt as it is today”, according to Mr Benkoussa. “Naturally there are many in power in Algeria who do not want this, such as government ministries that unfortunately are taking shares,” he says.
In a presentation Mr Benkoussa gave to the economic department of Algeria’s intelligence service in March 2013 on the consequences of global economic tightening for Algeria, he explained that merely exploiting hydrocarbon reserves would not be enough to stabilise the economy. “We explained that a sovereign wealth fund in Algeria – especially one run by a committee independent of the central bank and ministry of finance, [similar to] the fund Singapore runs – is a solution to many problems: portfolio management, diversifying risk, transparency and so on,” he says.
State control
But not all are convinced a sovereign wealth fund is the answer. “It's a good idea on paper. In the Algerian context, however, I have some doubts,” says Laurent Gonnet, a senior financial sector specialist for the Middle East and Africa at the World Bank. “There are many wealth funds around the world which do a decent job from large projects investment to small and medium-sized enterprise financing, but governance remains an issue for all state-owned entities where the lack of autonomy and accountability leads to poor performance and frequent bailouts.”
Mr Gonnet believes that in the end the poor performance of Algeria's banking sector traces back to public ownership. “The dominance of state banks is a real problem. However, it is not a disease and it is something you can fix,” says Mr Gonnet, who has recently returned from leading a joint World Bank and International Finance Corporation (IFC) mission to Algiers.
The World Bank and International Monetary Fund (IMF) have been engaged in discussions with the Algerian government on what Mr Gonnet calls “tremendously improving state bank governance” for many years. “It may not be as good as privatisation, but you can have public banks that have a good impact on financing the economy so long as there are improvements to the competitiveness and autonomy of these banks,” he says.
Loan boost?
Algeria's government is expecting to receive as much as $1bn in World Bank and IMF loans in 2015, according to a speech given by finance minister Mohamed Djellab in Kuwait on April 7.
On February 25, the World Bank signed an agreement with Algeria's ministry of finance that would see it provide technical assistance in reforming corporate governance. As a result, the government is implementing a new selection process for bank board members based more on experience and is also introducing new independent board members.
In addition, an initial public offering is planned for one of the major state-owned banks, Crédit Populaire d'Algérie. There has been talk of a partial privatisation of the bank for nearly 10 years, but listing it is a highly significant step for a government that has always maintained tight state controls on the economy.
“There is much talk that falling oil prices are accelerating the desire for reform, but I am not convinced that this is the main reason,” says Mr Gonnet. “These discussions have been taking place since 2012 and ultimately everything takes a long time in Algeria.”
Among the package of technical assistance that is now under discussion is finance for small businesses. The IFC has vast experience in this area and is working with Algerian banks to develop training, methodology and products.
“If the government continues on the direction of reforming the state-owned banks, we could see some clear improvements down the road. However, like everything in Algeria, it is going to take more time,” says Mr Gonnet.
