The banking sector today is unrecognizable from that of 10 years ago. Futher changes – including possible privatization – are still to come

When Algeria‘s prolonged recession began in the mid-1980s, the banks‘ continued financial support of the country‘s SOEs – many of them loss-making – undermined the enterprises‘ financial credibility. 

Continued restructuring of the country's banks is needed: Mr. Abdelwahab Keramane Governor, Bank of Algeria

Today the situation has changed a great deal, although the consequences of decades of centralized control have proved very difficult to overcome quickly.  The sector still remains largely state owned and is dominated by three major commercial institutions: Banque Nationale d‘Algérie (BNA), Banque Extérieure d‘Algérie (BEA), and Crédit Populaire d‘Algérie (CPA). Other commercial state-owned banks include Banque Algérienne de Développement (BAD), currently undergoing restructuring, and Caisse Nationale d‘Epargne et de Prévoyance (CNEP), the national savings bank. In the 1980s, the government also focused on creating banks to serve particular sectors, such as Banque de l‘Agriculture et du Développement Rural (BADR) and Banque de Développement Local (BDL). In a bid to address the mounting problems in the sector, a new money and credit law was passed in 1990. The Bank of Algeria - the central bank - was handed operational autonomy and charged with overseeing the sector‘s reform and subsequent regulation.

The key to reforming the banks was to address their massive portfolios of bad loans to the country‘s non-performing SOEs. As a result, public banks experienced a large influx of liquidity during the 1990s as the government implemented re-capitalization and debt-takeover procedures at enormous cost to the treasury. The IMF estimates that the total cost between 1991 and 1999 represented 45% of GDP. However, due to low 1998 oil prices and continued restructuring of the industrial sector, the treasury has not entirely completed the process. According to the governor of the Bank of Algeria, Mr. Abdelwahab Keramane, only BNA and CPA have reached the capital adequacy ratio of 8% set by the central bank. 
Besides cleaning up the sector‘s bad loans, further efforts at reform came in 1997, when the government approved a new strategy to improve the financial sector‘s performance. The policy has allowed and encouraged, 1) the establishment of new private banks and the opening of the capital of existing state-owned banks to private minority participation, 2) the gradual entry of foreign banks into the domestic market, 3) the establishment of a securities market, and 4) the pursuit of the organizational restructuring of state-owned banks. 
The fruits of this policy are present in 2000. Although the public commercial banks still have significant restructuring to complete before they will be ready for privatization, the government‘s reform agenda has made them increasingly different beings from what they were in the past. Mr. Mohamed Terbeche, CEO of Algeria‘s biggest bank, Banque Extérieure d‘Algérie (BEA), argues that the country‘s public banks have put in place more changes than they have been given credit for. “Given that most economic discussion and attention in Algeria has been focused on the price of oil and the debt,” says Mr Terbeche, “it is not very well known inside or outside Algeria that there have been huge reforms in the banking system. At the beginning of this process, no bank was in the position to know what the financial situation was; now they have transparent accounts and are in agreement with the central bank‘s regulations, which are of international standards.”
Mr. Terbeche has focused his efforts within BEA to ensure that the bank is professionally managed and able to function correctly under international standards. BEA, with a capital of AD5.6 billion ($75 million) and pre-tax profits of AD429 million ($6 million) in 1998, was established in1967 to take care of Algeria‘s oil and gas business and foreign trade. With these two objectives still foremost in the bank‘s plans, BEA is the primary financing tool for the Algerian hydrocarbons industry and has branches throughout Europe, America, Asia, and the Middle East along with 3,500 international correspondents. Although BEA has no immediate plans for privatization, Terbeche is adamant that the bank must be prepared. “Because if tomorrow there is the possibility to open up the capital of the bank or to introduce a partner, then BEA needs to be ready.” 
The reform process has also transformed the financial sector in the last few years by allowing the proliferation of private Algerian banks and encouraging a steady and ever-increasing flow of foreign financial institutions such as Société Générale, Citibank, Natexis, and soon Arab Bank. Since 1997, the Bank of Algeria has issued six licenses to foreign banks and 10 to local private banks. The public banks still dominate the sector with a 95% share of total assets and deposits and over 1,000 branches, but the private entrants are making a strong impact with new products and international standards of service. 
One recent entry has been Bahrain-based Arab Banking Corporation. Established in 1998 and completing is first full year of commercial operations in 1999, ABC-Algeria is majority owned by its Bahraini parent with minority shareholdings from both local and foreign investors, including a 10% share held by the World Bank‘s International Finance Corporation. With one branch in Algiers, the bank is initially open to corporate clients only, although it will expand its client base in tandem with the development of its branch network; the bank intends to be present in all major cities with a network of 16 branches within the next five years. ABC-Algeria‘s President, Mr. Mustapha Achour, is pleased with the bank‘s first-year results – a net profit of AD309 million ($4.1 million) on an operating income of AD575 million ($7.7 million) – which has prompted it shareholders to increase the capital from $20 million to $40 million. “This is a very good capital for a bank of this size,” he says. “Algeria is a virgin market and the opportunities are there.” In order to develop a full range of products and services, ABC-Algeria – along with the other banks in the sector – is awaiting the promised modernization in the country‘s telecommunications network, which will not begin in earnest until next year (see infrastructure page). 
The insurance sector is also undergoing changes. As with the banking sector, the biggest companies are state owned, and include, among others, Société Nationale d‘Assurance (SAA), CAAT Assurances, Compagnie Algérienne d‘Assurance et de Réassurance (CAAR), and the industry‘s reinsurance vehicle, Compagnie Centrale de Réassurance (CCR). But after the government ended state monopoly over the sector between 1996 and 1997, the state institutions have had to compete with four private Algerian insurance companies that sprung up in the last two years via backing from domestic and international investors. One of the new entrants is Compagnie Internationale d‘Assurance et de Reassurance (CIAR). CEO Mr. Hadj-Tahar Soufi started the company at the beginning of 1999 hoping to grow the company by offering a more innovative range of products not provided by the big state-owned firms, along with providing better customer service than the public had been accustomed to in the past. “The future of insurance in Algeria lies in the private sector,” says Mr. Soufi. “Until now, the state-owned companies have realized very good annual income, yet they have only penetrated around 10% of this market. So for 2000, we have 90% of this sector that is not yet exploited and, as a private company, we don‘t have a rigid mentality and can adapt quickly to all kinds of new situations.”