With the severe oil-price slump and the prolonged recession, the sector came under increasing pressure in the 1980s. Their continued support for the country’s failing SOEs – often to the benefit of corrupt political or military leaders – fundamentally undermined the banks’ financial credibility, racking up massive portfolios of bad loans. The Bank of Algeria – the central bank and then a toothless regulator under the thumb of the Ministry of Finance - proved unable to prevent the worsening situation.
Real change came in 1990 with the money and credit law. This handed the Bank of Algeria greater independence to oversee the sector’s reform and subsequent regulation. The key objective was to restore the banks’ finances, setting a capital adequacy ratio of 8%. As a result, the sector experienced a large influx of liquidity in the 1990s as the government implemented recapitalization and debt-takeover procedures at enormous cost to the treasury, with the total cost between 1991 and 1999 estimated to represent 45% of GDP.
Structural reform followed in 1997 to dismantle the monopoly of the public banks. The establishment of private domestic banks was permitted while the capital of the state-owned banks was opened to private minority participation. The sector was opened to the entry of foreign banks and the Algiers Stock Exchange was established.
The result is that the face of the sector has changed quite substantially. Private Algerian banks have proliferated while foreign banks, such as Société Générale, Arab Banking Corporation, and Arab Bank, have entered the market, offering more sophisticated products and services.

Yet much also remains the same. Despite the rapid increase in private entrants into the sector, the same six state-owned banks are still overwhelmingly dominant, responsible for over 90% of total bank assets. And even though the banks have been attempting to implement internal restructuring of their operations, the IMF stated in late 2001 that profitability remains low, efficiency is inadequate and solvency is uncertain. In addition, cleaning up the banks’ balance sheets – a process started in 1990 – is yet to be completed, with estimates stating the overall cost to the treasury will run to another 8% of GDP. Majority privatization of the public banks has also yet to be authorized by the government, reflecting what many believe to be the reluctance of political elites with entrenched interests in state companies.

Number of banks in 1995:   Number of banks in 2002:

6 31

Still fighting the legacy of 30 years of socialism, the banking sector has faced much bigger challenges than its Tunisian or Moroccan counterparts in modernizing prudential rules and accounting standards, while also resolving the issue of enormous portfolios of bad loans to the country’s failing public sector.

 
WHAT’S COMING
Capital injections. The treasury will make new efforts to stabilize the balance sheets of the state-owned banks in 2002. The External Bank of Algeria will benefit from a capital increase of $86 million, while Popular Credit of Algeria will receive a $105 million increase. An additional $249 million is also to be allocated for the recapitalization of the public banks in 2002, according to the Minister of Finance, Mr. Mourad Medelci.

WHAT’S NOT
Privatization. Although most other sectors are open, Algeria’s public banks are still not on the list.

The onus is therefore still on the government and the banks: complete the restructuring of the banks’ balance sheets, improve bank operational efficiency and reform the relationship between the banks and SOEs.

At the forefront of this process are the state-owned banks themselves. Traditionally the most important has been the National Bank of Algeria (Banque Nationale d'Algérie), which since its creation served both the private and public sectors and held the bulk of total bank deposits. It was the first bank to be accredited with conformity to the new monetary and credit regulations established by the Bank of Algeria in 1990 and has since focused on modernizing its operations and introducing new banking technologies.
BNA has sought to emphasize its corporate activities, with a particular interest in public firms in textiles, iron and steel manufacturing and mechanical products. However, according to Mr. Mourad Chikhi, the bank’s CEO, BNA’s key strategy has been to access the new and growing private sector. Its 2001-2005 strategic plan calls for enlarging the bank’s portfolio of private enterprises that are producing added value. Since 1996 it has built its private sector resources to $1.5 billion.
The Foreign Bank of Algeria (Banque Extérieure d'Algérie) is another of the large state banks. Created as the bank of the hydrocarbons sector and of firms involved in foreign trade in 1967, BEA has the most international experience of all the state-owned banks in Algeria.

The bank’s General Director, Mr. Boualem Benaissa, argues that the changes that took place in the 1990s transformed the way the bank operates. “In 1998, BEA was given managerial autonomy via its transformation to a shareholding company. Now we can operate according to the laws of the market economy, especially in the area of competition, prudential procedures and stabilizing our loan portfolio.”
The bank’s direction in 2002, Mr. Benaissa says, will be to focus on the areas that have traditionally been the weak links in Algeria. “The main challenge facing BEA today,” he says, “is its transformation from a cash desk to a bank – a client-based organization.”

Cleaning up the banks’ balance sheets, a process started in 1990, is yet to be completed

Popular Credit of Algeria (Crédit Populaire d'Algérie), which traditionally financed smaller sectors, makes up the triumvirate of state banks created after independence. With 120 branches and 4,200 employees, it is Algeria’s third largest bank. According to the Bank of Algeria, CPA has satisfied the capital adequacy ratio of 8%, although Mr. Hashemi Meghaoui, who has been CEO since 1997, argues that it is urgent that loans to liquidated or loss-making SOEs be resolved by the government as quickly as possible. Mr. Meghaoui has pushed the bank to engage the private sector, moving its business from 90% public sector several years ago to 55% today.
Mr. Meghaoui is also keen to open the capital of the bank by forming a strategic partnership with a foreign investor. “We need a first-class partner that will allow us to modernize. Going it alone will be too difficult.” The bank has already invested $25 million in its information technology system across its branch network.

Attempted decentralization in the 1980s led to the establishment of more specialized financial institutions. The National Fund for Provident Savings (Caisse Nationale d'Épargne et de Prévoyance) specialized in savings and housing loans, while the Bank of Local Development (Banque de Développement Local) was formed in 1985 to finance communal development projects.
The Bank for Agriculture and Rural Development (Banque de l'Agriculture et du Développement Rural) was established to provide loans to the farming and food processing industries. Created in 1982, BADR remains the bank most specialized in the agricultural sector, although it is free to service all sectors of the economy. It is well placed to do so. With 286 agencies and 31 branches (with a combined workforce of just under 7,000), it has the largest and most widespread network of any of the banks in Algeria. In order to exploit its logistical and geographical strength, Mr. Farouk Bouyacoub, the bank’s CEO since early 2000, established an internal committee to make an assessment of the bank’s relative strengths and weaknesses, with the objective of developing international levels of operations and services within five years.
“We did it as an act of self-criticism,” says Mr. Bouyacoub, “to know if we are capable of fulfilling our mission.” The biggest issue, he says, is the environment the bank is working in. While BADR is the only bank to have fully computerized its operations, the limited Algerian telecommunications network has prevented the bank from connecting all its agencies to a single network and fully dematerializing its payment process.