Algeria’s battle for modern banking
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A properly functioning financial system has long eluded the country. As it moves on from Abdelaziz Bouteflika’s 20-year leadership, can the financial system finally overcome its many problems?
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| IMF SPECIAL: THE PLACES FINANCE FORGOT |
Speaking to Euromoney on the morning of July 31, Djemaa, one of the country’s most experienced bank auditors and a former employee of BDL, pointed to its chief executive’s close ties to Algeria’s recently fallen political regime.
Less than two hours later, Djemaa called back to share the latest: Mohamed Krim, BDL’s CEO, had just been dismissed.
Such quick-fire news is now commonplace in Algeria. One day a senior financier is rumoured to be under threat, the next he is dismissed or behind bars. Aboud Achour, chief executive of Banque Nationale d’Algérie (BNA) and head of Algeria’s banking association, was detained in June on corruption charges, as was Omar Boudieb, former CEO of Crédit Populaire d’Algérie (CPA), who had already been dismissed by the bank’s board a year earlier, reportedly over allegations of fraud.
Also in June, Karim Djoudi, Algeria’s finance minister from 2007 to 2014, was placed under court supervision in relation to a corruption investigation.
In April, just weeks after being made finance minister, Mohamed Loukal appeared in court on suspicion of having stolen public funds. Loukal was previously central bank governor from 2016, and before that had led the country’s largest bank, Banque Extérieure d’Algérie (BEA), for 15 years.
BDL, BNA, CPA and BEA all belong to the state. Alongside Banque de l’Agriculture et du Développement Rural (BADR) and Caisse Nationale d’épargne et de Prévoyance (CNEP), both also state-owned, they dominate Algeria’s banking sector, with close to 90% of all credits and deposits in the country.
Each has been accused of wrongdoing at some point over the last two decades. But this year has seen an unprecedented number of prosecutions and dismissals at these institutions, as the protest-driven fall of Abdelaziz Bouteflika, Algeria’s president for two decades, made possible an extensive purge of officials throughout the government, finance and the broader economy. BDL’s Krim, for example, is a nephew of Bouteflika.
The arrests and dismissals may be largely driven by the political interests of the new acting government, which is unelected and backed by the army. Some of the detentions, including that of Algeria’s richest individual, the businessman Issad Rebrab, have raised concerns that a broad authoritarian crackdown on the public and private sector is under way.
Karim Djoudi, Algeria’s former finance minister, is being investigated in relation to corruption allegations
As Slim Othmani, one of the country’s most outspoken private-sector businessmen, tells Euromoney: “Everyone thinks they might go to prison. When they see a police car drive by their office, they think it’s to take them away, even if they haven’t done anything wrong.”
That fear persuaded many of those approached to decline to talk to this magazine, or agree to do so only on the condition of anonymity.
Yet, for all of their reservations about the purge, many commentators say Algeria’s banking sector is in dire need of a clean-up and wide-ranging regulatory reform. They say the previous regime infused the state-owned banks with nepotistic incompetence, while punitive laws hindered the growth of private-sector banks.
Because of this, they say, Algeria’s banking system is one of the least sophisticated and most unreliable on the continent, in spite of the country’s great economic potential.
Only one in two Algerians had an account with a financial institution in 2014, according to the World Bank. Cash still dominates the economy, banking technology is years behind what can be found in neighbouring Morocco and Tunisia, while regulatory compliance leaves much to be desired.
'Rose with many thorns'
“Money can be made in Algeria, but it is not for the faint of heart,” noted Robert Stephen Ford, US ambassador to Algeria from 2006 to 2008, in a confidential diplomatic cable published by WikiLeaks.
Personal connections, whether to help cut through red tape or outright corruption, are critical to doing business, Ford wrote, adding that Algeria’s financial sector is one of the least developed in the region. The market is “a rose with many thorns”, he concluded.
Foreign banks have long reckoned with that reality. A separate diplomatic cable recounts a late 2008 meeting with Kamel Driss, then general director of Citibank Algeria, a small yet profitable subsidiary of the global bank.
Speaking in confidence to the then US ambassador, Driss opened up about the challenges Citi faced. The financial system was in serious need of reform, Driss argued, noting that banks were particularly affected by ill-equipped regulators and an untrained judiciary.
He recounted that Citi had been the object of intense scrutiny from central bank auditors, who had reviewed every document pertaining to the clearing of clients’ imports through customs, and that the bank now faced the prospect of huge fines and criminal liability.
Citi countered these claims, the cable noted, but not without great expense at both the magistrate and appeal courts.
Driss also told the ambassador of a recent dinner he had had with the presidents of “two leading French banks” in Algeria, during which they both complained that the public banks, although flush with liquidity, refused to lend to foreign-owned financial institutions, thereby hindering their ability to extend retail banking services to Algerian consumers.
State-owned banks “maintain a tight grip on banking practices,” the Citi banker explained.
If the banking system opened up, it would be greatly beneficial to ABC Algeria and other banks, as well as to the end consumer and the Algerian economy at large- Sael Alwaary, ABC
A decade on, the situation is fundamentally unchanged. In spite of the difficulties, Citi never left. Today it is one of 14 foreign banks – half of them Middle Eastern, the other half western – active in the country. The largest are Kuwait’s Gulf Bank and France’s Société Générale, BNP Paribas and Natixis, which all offer universal banking services.
Bahrain’s Bank ABC, one of the first foreign banks to enter Algeria some 24 years ago, also has a relatively large presence, with around 30 branches. Others, including Citi, HSBC and Crédit Agricole, have a single branch in the capital Algiers, from which they cater almost exclusively to large corporate clients.
The subsidiaries of foreign banks are widely acknowledged to be the most sophisticated financial institutions in Algeria. They process payments in hours, where national banks can take weeks, offer basic internet banking, where the nationals offer none, and boast of the country’s most rigorous compliance practices.
“It’s night and day,” says Djemaa, who knows both the private and public-sector banks, having worked at Crédit Agricole Algeria as well as BDL. “The private banks are far more sophisticated.”
Othmani, whose food company NCA-Rouiba has banked with private and public financial institutions, agrees: “There is a clear difference between the two. The public banks, for the most part, are very backward.”
However, the foreign banks’ overall contribution to the country’s economy is tiny. Société Générale, the leading foreign bank, accounts for just 3% of all deposits and 2.5% of all loans.
In 2017, the combined net profit of all foreign-owned banks was just over $200 million.
For a country with a population of over 40 million, with Africa’s third-largest oil reserves and a GDP close to Egypt’s, such small returns may come as something of a surprise.
For Rachid Sekak, founding chief executive of HSBC Algeria, these paltry numbers owe much to the business models adopted by foreign banks in the country. Most decided to focus on working capital credit, says the Franco-Algerian banker, who now leads his own financial consultancy. That left substantial, long-term financing to public institutions.
HSBC Algeria, which Sekak led from 2007 to 2013, is an example of a foreign bank that did not fulfil its potential in the country. In the early years of HSBC’s presence in Algeria, the bank’s profits rose rapidly, as it came to understand the market. But more centralized direction across the whole firm from HSBC’s group management appears to have side-lined country experts and been followed by a decline in revenues. Sekak left the bank shortly after.
HSBC Algeria’s early experience suggests lucrative work is there for whoever is willing to seize the opportunity.
But Driss’s candid remarks to the US ambassador speak to another reality: that the country’s regulatory environment and business culture impede foreign banks, even when they want to invest in the country.
Banking law, for example, is poorly drafted and frequently amended. A key 2009 piece of regulation prohibited foreign companies from owning more than 49% in any new Algerian investment, thereby preventing other foreign banks from following HSBC, Citi and the rest in setting up fully owned subsidiaries in the country. No foreign bank has entered Algeria since then.
According to Sekak, that is not because foreign banks necessarily oppose co-owning an Algerian bank with a local partner.
“Many would still like to come,” he says.
The issue, in his view, is that the law was poorly drafted, making it unclear which local partners foreign banks could co-own with. No foreign banks wanted to fall foul of unclear rules; faced with doubts, they never came.
Such examples abound in Algeria. In the late 2000s, Bank ABC decided to make a big push into Algerian retail banking, opening branches throughout the country and developing an extensive offering. But in 2009, in an effort to curb over-indebtedness, parliament passed a law banning consumer credit. With only mortgages still permitted, retail lending was virtually killed overnight.
“If the banking system opened up, it would be greatly beneficial to ABC Algeria and other banks, as well as to the end consumer and the Algerian economy at large,” says Sael Alwaary, deputy chief executive of ABC. “We invested heavily in retail; three months later, there was no consumer loan [business].”
However Alwaary says he remains optimistic about the potential of the Algerian market.
In Algeria, there are often businesspeople who go to prison for falling foul of foreign exchange controls. That includes bankers- Senior ABC source
More recently, in an effort to reduce the percentage of the population that is unbanked, authorities told financial institutions – both public and private – to accept deposits in any amount, without asking questions. That led some bankers in the country to considering the tricky situation of customers arriving with large bags of cash to deposit, their provenance unknown.
Public banks, which answer to the state, readily implemented the new rule. But foreign banks, once again, found the local regulation troubling. To implement the new rule would put them in a good position with Algeria’s authorities and it might indeed reduce the amount of cash in circulation, but it would simultaneously weaken their efforts to fight money laundering.
Alwaary welcomes the goal of the central bank’s initiative and its commitment to overcoming the financial inclusion challenge. But he says that ABC rejected the policy outright, as did other foreign banks. The bank still applies strict checks to any cash deposit over $6,000, he says, because large banking groups such as his must apply consistently strict standards wherever they operate. They don’t just report to the local regulator of course: any practices need to be compliant with some very stringent authorities in the rest of the world.
“We can’t compromise our policies in Algeria,” he says. “Our policies are in compliance with best international practices.”
Either way, the rule further eroded foreign banks’ confidence in the Algerian regulatory framework, while doing little to bring money into the formal economy.
Concerns around regulation are compounded by the heavy penalties imposed on those who stray. In Algeria, managers can be held criminally liable – and often are – for falling foul of the country’s arcane financial regulations.
A senior ABC source says one of the bank’s branch managers was detained for several months before being cleared, while other employees of the bank had to hand in their passports and check in at a police station weekly, all for allegedly minor errors of management.
“In Algeria, there are often businesspeople who go to prison for falling foul of foreign exchange controls,” the source says. “That includes bankers.”
Meanwhile, an open-air black market, where foreign currencies are bought and sold for prices far higher than the official rates, is allowed to operate in central Algiers, in a public square adjacent to the central bank and stock exchange, although the practice is wholly illegal.
This unbalanced implementation of the law and the constant threat of prosecution deter many foreign banks from making Algeria a priority. Bankers often cite decriminalization of mismanagement as the reform they most wish to see enacted.
Ostracism
Perhaps the greatest obstacle to foreign banks’ growth is their ostracism by state-owned enterprises. Driss’s comments in the diplomatic cable alluded to this, noting that state-owned banks refused to lend to foreign-owned ones.
In itself, that may not be too big an obstacle, but combined with the lack of a local capital market and rules forbidding borrowing from abroad, foreign banks can quickly find themselves in an intractable situation.
Without access to long-term capital, foreign banks cannot finance long-term investment in, for example, infrastructure.
“To do medium and long-term work, if you don’t have access to long-term resources, it gets too risky,” says Sekak. “Whereas the state banks can be refinanced pretty much endlessly by the central bank.”
Other state-owned enterprises also refuse to do business with foreign banks. Public companies, which make up eight out of Algeria’s 10 largest firms and a large portion of the country’s overall economy, deal only with the public banks.
The reason for this dates back to the El Khalifa scandal, which shook Algeria’s banking sector 16 years ago. In 1990, Algeria’s parliament passed a law allowing the formation of private-sector banks, ending three decades of state monopoly. Private banks slowly entered the market, and in 1998, a 32-year-old Algerian businessman, Rafik Khalifa, founded a bank bearing his name, with initial capital provided by BDL.
People gathered outside an Algerian courtroom at the start of the 2007 trial that followed the collapse of El Khalifa Bank
El Khalifa Bank was, for a time, the pride of Algeria’s young private sector. It was part of a broader group, which included an airline and television channel and was said to be Algeria’s first private business empire. By 2002, the bank boasted 700,000 customers and 74 branches, only a little under BNA’s network of 100 branches. It offered services, such as credit cards, that Algerian depositors had never previously had access to.
But El Khalifa was also deeply opaque, never releasing its accounts or disclosing the full list of its shareholders. Soon it emerged that the bank was nursing heavy losses, having made generous loans to family and related businesses, and sent millions abroad on the basis of fake contracts.
In late 2002, the central bank suspended all international transfers from the bank. Early the following year El Khalifa was placed under administration. There followed the biggest banking trial Algeria had ever seen, featuring 104 defendants, 150 lawyers and some 300 witnesses.
The Algerian media called it “the scandal of the century”.
The bank was shut down, billions were lost, depositors were compensated for only a portion of their savings and Khalifa himself went into hiding to avoid the consequences of his guilty verdict. The former central banker Abdelouahab Keramane was sentenced, in absentia, to 20 years in prison for offences related to the bank’s collapse.
Bankers in Algeria still debate responsibilities in the El Khalifa case today. In an April post on LinkedIn, Sekak said it was time to: “Reopen the file and repair one of the greatest legal errors of the past 20 years”, that is, Keramane’s forced exile.
Others argue that president Bouteflika and those nearest to him were behind the wrongdoing. Many say the whole truth did not come out in the trial.
But one thing is certain: the bank’s collapse had a dramatic impact on the sector that continues to be felt. In August 2003, just months after the crisis at El Khalifa was made public, the government issued an ordinance requiring state-run enterprises to bank exclusively with public banks.
For private banks, that meant huge swathes of the economy were now off limits. State-owned enterprises still follow this rule, although it is believed to have expired years ago.
The El Khalifa scandal also led authorities to outlaw home-grown private banks. Since then, every private bank in Algeria has been foreign-owned.
What lies below is terrible, terrible- Nabil Djemaa
More generally, the collapse of El Khalifa put an abrupt end to Bouteflika’s declared liberalization programme. Plans to modernize the banking sector were shelved, as was the privatization of three national banks, beginning with CPA.
With El Khalifa, the whole concept of privately owned banks fell into disrepute. Ill-equipped regulators scrambled to unearth other cases of wrongdoing at private banks, often in a haphazard way, and the system as a whole reverted to one dominated by publicly owned institutions. The only difference: the state banks would now control 90% of the market, rather than all of it, with foreign banks sharing the scraps.
Considering how poorly Algeria’s first foray into privately owned banking had gone, having a predominantly state-run banking sector might not have seemed like such a bad idea. But in reality, public banks shared many of El Khalifa’s more opaque qualities.
Soon it emerged that BADR had lent some €750 million to paper manufacturer Tonic Emballage, allegedly on the basis of a single phone call and without any evaluation of the borrower’s financial health.
When Tonic was unable to pay back the debt, both the borrower and lender required state intervention to recover.
The Tonic case is just one of many scandals at public banks over the last decade and a half.
“The sums at play today are even more significant,” says Sekak, comparing today’s public bank failings with those of El Khalifa at the turn of the century.
According to Djemaa, who left BDL in 2006, these scandals, which cost the state billions of dollars in losses, are just the tip of the iceberg.
“What lies below is terrible, terrible,” he says.
Handing out big loans to hand-picked customers, without due diligence, was common practice during the Bouteflika era, sources say.
“When you see a big project that is being funded by public banks, that means it has at least been recommended by someone who is part of the system,” says the senior source at ABC.
Sekak puts it more bluntly: “If you’re the chief executive of a bank and named by government, you execute the instructions you get. If you don’t, you’re removed.”
Othmani agrees: “The bank chief executive would get a phone call from the Bouteflika clan saying: ‘This person gets a credit’. There was no discussion to be had.”
Djemaa says he heard of similar examples, such as a construction company looking for a big credit line. A director at the bank involved blocked the transaction, he claims, on the basis that there were insufficient guarantees against it.
According to Djemaa, the director was told by a senior executive: “We didn’t name you in that job to block clients of the Algerian presidency. You have to give them the credit.”
Observers say that some state-owned firms have had virtually unlimited access to credit.
In a 2011 academic paper, economist Lyazid Kichou went so far as to say government-owned corporations had confiscated monetary power in Algeria. Public banks weren’t so much acting as commercial entities, independently assessing the viability of business projects, but rather as mindless vehicles, transferring funds from one part of the state to another.
While certain companies and individuals got preferential treatment through their links to government, the vast majority of depositors were offered punitive rates. The elite could borrow at interest rates below the rate of inflation; depositors, meanwhile, would earn less than the rate of inflation.
“That’s financial repression,” says Sekak. “The interest rates don’t encourage deposits, even as borrowers earn a steady wage.”
The boards of public banks have been populated by civil servants with little direct experience of commercial banking, often unable to apply rigorous scrutiny to the institutions they are meant to supervise. Managers are expected to keep their heads down and show little initiative, sources say.
Othmani says that certain public banks have not been independently audited in years. Sekak describes the accounts of many state-owned enterprises as “muddy waters”, cautioning that: “Everything is drowned in one balance sheet” – meaning that the information disclosed makes no distinction between legitimate business ventures and political injunctions.
And when the authorities do inspect accounts, they frequently display little understanding of the principles at work. On one occasion, Djemaa says, public auditors accused BDL of having lent thousands of times more than it was allowed to.
The standoff ended when it became clear that they had mistakenly added up all of the bank’s credits over 20 years, regardless of whether or not these had been paid back.
Djemaa has long been one of the most outspoken voices in Algerian banking and has paid a price for it.
In the mid 1990s, while at BDL, a banking manual he wrote angered his superiors, he says. The dry guide was designed to educate his peers as to the complex rules governing the financing of international trade.
But instead of applauding his work, the bank held a disciplinary hearing, during which it was decided that he would reimburse the bank for every sheet of paper he had used to print the book.
Pushing the humiliation even further, he says that bank staff removed the desk from his office, leaving only a chair. For months he came in to work, with nothing to do.
The reason for the bank’s reaction, in his view, was: “They want opacity.” The less is understood of banking regulation, the less public banks can be held to account.
In 2015 Djemaa found himself in hot water once again, when he wrote in an article for the Algerian newspaper El Watan that “the banks are ill, and their leaders too”.
In that piece he pointed to the poor education of bankers, the archaic state of Algeria’s banking technology and the lack of financial expertise among regulators. Nepotism, he added, was the primary driver of appointments in public banks.
Demand
Today Algeria bears the marks of these decades of stalled development. On payday at the end of every month, long queues form outside public bank branches as customers withdraw their wages in one go.
The country has 1,500 bank branches, or one for every 25,000 inhabitants. In neighbouring Tunisia, there is one for every 6,000.
Across the country, even in Algiers, payment by bank card is seldom accepted. Tens of billions of dollars in cash are thought to be held by the country’s unbanked. Bank deposits are equivalent to just over half of the country’s GDP.
The stock market, although small and illiquid, is the most vibrant part of an otherwise defunct capital market. The independence of the central bank, meanwhile, is in question, having been heavily eroded over the course of Bouteflika’s time in office.
The demand is there for better services. When ABC launched its mobile banking application in Jordan, the pick-up was “very slow”, Alwaary says. When the bank launched it in Algeria, he continues, 2,000 signed up in the first 10 days.
Natixis Algeria’s launch last year of Banxy, a basic mobile bank, suggests other foreign banks, too, are eager to bring modern tools to the country.
These examples give Alwaary hope that efforts to promote financial inclusion can be successful. But he is also wary of the changes taking place. His monthly calls with the bank’s Algerian management team have morphed into weekly ones since Bouteflika’s fall, as he attempts to keep abreast of the fast-evolving situation on the ground.
ABC is curbing its lending in Algeria this year, he says, to reduce its exposure to the country’s current political and commercial risk. Other private banks are also contracting their operations.
The same is true of the state banks, which are fearful of lending to anyone who may be on the new regime’s list of suspects.
But even as the bad news accumulates, many hope change may yet come. Already, more people are speaking out about the flaws of Algeria’s banking sector, the need for reform and a genuine clean-up. On social media, some Algerian bankers have opened up in recent months about the misconduct of certain senior financiers and the incompetence of certain judges.
In late August, Sekak launched a conversation on LinkedIn about how banking regulation should be transformed. Bankers at Société Générale and BNP Paribas were among the first to contribute their ideas.
A general election, which is due at an unspecified date, may also bring the subject of banking reform to public attention, though for the time being, as Djemaa puts it: “Protestors aren’t thinking about the banks.”
In the short term, there seems to be little political impetus for a shake-up of the financial system, beyond a broad-brush campaign to remove the old guard.
Until a profound change takes places, bankers say, Algeria’s public and privately owned banks will remain incapable of serving the country’s needs.