The banking sector in Algeria is still in its development stage. As a major contributor to an economy’s growth, the Algerian government is seeking the adoption of many reforms on the sector, some of which have already occurred and others are still under process.
After the nationalization of French banks in 1986, the banking sector in Algeria consisted of 5 public commercial banks, an investment bank and the National Fund for Provident Savings. As of 2006, the banking sector in Algeria constituted of 21 banks and 7 lending institutions. Private banks amounted to 15 banks, including domestic and international players. Nevertheless, the market is dominated by the state-owned banks, which contributed to 95% of the aggregate assets of the banking system in 2007. Of late, Deutsche Bank and HSBC announced their intention to operate in Algeria, which indicates that there are potential opportunities inherent in the market.
This positive sentiment comes from the fact that the banking sector in Algeria is deemed to be unexploited, with around 15% of the population holding ATM cards. Also, there is a rising need for expanding branch network, as currently a branch serves on average 30 thousand people, which entails the establishment of new banks or branches to satisfy the unfulfilled demand, which is expected to increase even more with the growing population, around 34mn in 2007.
The treasury repurchased some of the Non Performing Loans (NPLs) extended by state-owned banks to public enterprises over the period from 1990 to 2002, which accounted for around 4% of GDP annually. One of the reforms made on the banking sector was to replace banks’ loans to public enterprises with subsidies granted to them in the government budget of 2005. It is worthy to note that NPLs in 2007 reached 38% of the public banks’ loans books. Other reforms included improving banks’ management, transparency and improving surveillance on banks.
Of the important reforms that occurred on the banking system in 2006, was the establishment of the Algerian Real Time Settlements system, which is responsible for urgent electronic transfer of large payments. In addition, the banking system witnessed the launching of Algerie Telecompensation interbancaire, which is an interbank electronic clearing system. Other ways of reforms were the privatization of some public banks, however this process is still dawdling and is not yet completed.
Over the 5-year period from 2002 to 2007, the aggregate liabilities of the deposit money banks grew at a CAGR of 14.4%, reaching AD6,508.8bn in 2007, compared to AD3,323.7bn in 2002. Meanwhile, they inclined by 24.5% y-o-y, as they represented AD5,228.9bn in 2006. This y-o-y rise was mainly caused by
the acceleration in demand deposits, contributing to 39.0% of total liabilities, as they rose by 45.2%, from AD1,750.4bn in 2006 to AD2,541.5bn in 2007. Provisional data published by Banque d’Algerie indicates that these deposits reached AD2,933.7bn in June 2008.
Time deposits at deposit money banks witnessed a slight decline of 0.1%, as they reached AD1,763.8bn in 2007, down from AD1,766.2bn a year before. Meanwhile, the contribution of these deposits to total liabilities declined from 33.8% in 2006 to 27.1% the following year. These deposits have a provisional balance of AD1,869.3bn in June 2008. It is worth mentioning that deposits in local currency represented 86.4% of total time deposits in 2006 and their contribution remained stable in the following year, as it reached 86.9%.
On the other hand, the 24.5% y-o-y rise in total assets of the deposit money banks was mainly caused by the 14.5% increase in the credit to the economy, constituting 33.5% of total assets, as it reached AD2,180.7bn in 2007, up from AD1,904.1bn the previous year.
Credit to the economy is composed of short term credit, with a share of around 46%, equivalent to AD998.7bn, implying a y-o-y increase of 9.1% over 2006, while the medium and long term credit grew by 19.6%, from AD989.7bn in 2006 to AD1,183.5bn the following year. As for the distribution of credit to the economy, the two years 2006 and 2007 witnessed similar shares, as around 56% went to the private sector, while the rest went to the public sector.
Loans/Deposits Development
*Provisional
Source: Banque d’Algerie and Global Research
The loans to deposits ratio indicates a declining trend over the period from 2002 to 2007. The ratio including credit to the government and government deposits went down from 96.0% in 2002 to 69.2% in 2007. By excluding the government balances, we find that the ratio moved from 59.5% in the beginning of the period to reach 50.7% in 2007, which is still too low compared to the approximate worldwide average of 80%.
The banking sector in Algeria offers promising opportunities. Given the small percentage of population using banking products and services along with the growing population, of which 69% are between the age of 15 and 64 years old, we expect higher demand on banking services in the years to come. In addition, prospective projects are expected to take place, spurred by ample hydrocarbons reserves in the country. These projects would represent profitable lending opportunities for the banking sector, which would easily fulfill lending needs, given its low loans/deposits ratio.
