Global Arab Network

Ahmed Gamal

Global Arab Network – A new ratings system for Algeria’s financial sector along with increased regulatory oversight, are expected to keep the country’s banks functioning smoothly and help further reduce the vulnerability of the sector to both exogenous and domestic crises, Global Arab Network reports according to OBG.

The Algerian banking system came through the recent international financial turmoil relatively unscathed and is characterized by both profitability and a high degree of liquidity, according to the International Monetary Fund (IMF). Nevertheless, in order to ensure the continued healthy functioning of the sector as it expands and as international banks enter the country, the government has stepped up the powers of the Bank of Algeria, the central bank, to monitor financial institutions.

In a further step, Mohamed Laksaci, the governor of the Bank of Algeria, announced plans in late June to launch a new ratings system as part of efforts to monitor the financial health of Algerian banks to better assure the stability of the sector.

Under the system, which is to be launched before the end of this year, the central bank will monitor the solvency of each bank and financial institution in the country based on a wide range of indicators and ratings, such as solvency ratios and liquidity and risk management ratings, to anticipate potential weaknesses and prevent the emergence of crises in the sector. Laksaci described the system as representing a more operational approach to the supervision of financial risk in the country.

The Bank of Algeria has been working on establishing the new regime for the last three years together with the IMF and the US Department of the Treasury. Under the new system, which is also reportedly aimed at detecting money laundering and other illicit activities, the various bodies responsible for overseeing the financial sector – including the central bank, the Banking Commission and the insurance and capital market regulators – will step up information sharing. Legislative changes made in August 2010 gave the Bank of Algeria greater power to monitor local institutions and carry out investigations at banks and other financial establishments.

Overall, the banking sector is moving forward at a healthy pace: in its most recent Algeria Article IV consultation, published in February, the IMF noted that the sector was characterized by high levels of liquidity, in part thanks to oil receipts, and well-capitalized, profitable banks. It also noted a substantial fall in the non-performing loan (NPL) ratio, from a peak of 22.1% in 2007 to 14.9% as of June 2010, though it noted ongoing substantial NPL levels in public banks.

However, the report also pointed to low lending levels in the sector due to credit risk. Local businesses complain that access to credit remains difficult and expensive in the country, and Algeria ranked 138th out of 183 countries in the “getting credit” category of the World Bank’s 2011 Doing Business rankings.

To combat this, Algerian President Abdelaziz Bouteflika said in early August that the government intended to develop the small and medium-sized enterprise (SME) sector, create jobs and promote and diversify local investment through banking and financial reform measures. To increase lending, the government is planning to launch a credit registry this year that will help banks better assess the ability of customers to repay loans. Measures to make mortgages available to individuals and to increase the level of credit to SMEs are also under way. The government is also taking measures to improve the availability and cost of credit, while foreign investment in the sector is helping it to expand.

Efforts to increase loans in general, and to SMEs in particular, are already having an impact. Lending to the economy grew at an effective rate of 16% in 2010, to AD3.27trn (€31.8bn), following similar growth levels in the three previous years. Bank loans to SMEs grew by 29% to AD830bn (€8bn), or 25.4% of total lending to the economy. Medium- and long-term loans as a share of all loans rose from 57% in 2009 to 60% in 2010.

With a new ratings system forthcoming and efforts to increase lending opportunities under way, the government is taking a pro-active stance at maintaining the banking sector’s stability, which should lead to even stronger and healthier banks.

Source: Global Arab Network.