Algeria: Rating the banking system

Long-awaited plans to set up a ratings agency that will gauge stability levels in Algeria’s banks look to be back on track, with the process for selecting a monitoring system now gathering pace.

Algeria will be hoping that the launch of the new ratings system for its banks will boost confidence in the sector, while paving the way for increased lending, in line with the country’s bid to diversify its economy.

Efforts to introduce a ratings system for the banking sector have been slow to get off the ground, with the Bank of Algeria (BoA) taking time to decide how the process will be implemented. The launch has already been put back from a scheduled date at the end of 2011, while Central Bank Governor Mohamed Laksaci said last year that bank ratings should be in place from 2013.

A representative from the Association des Banques et des Établissements Financiers (Association of Banks and Financial Institutions, ABEF) told the Algeria Press Service (APS) in August that work on the pilot project had now reached a “technical elaboration” stage.

ABEF general delegate Abderezak Trabelsi also highlighted the importance of having a ratings system in place for the financial services industry. “There must be a bank rating tool, agency or company, regardless of the name, since there is a need for creating a scoring tool for companies and insurance companies because the information is crucial in a market economy,” he said.

The governor of the Central Bank, Mohamed Laksaci, added that the rating system would help in the early detection of banks’ vulnerabilities, while playing a part in maintaining stability in the sector and protecting depositors.

The BoA has yet to decide what mechanism it will adopt for the monitoring process, according to Trabelsi. However, it is understood that three options are being considered; a local ratings mechanism using locally qualified staff, a joint venture with a foreign ratings agency, and a system that would see several separate ratings agencies operating in Algeria.

Reports have suggested that a foreign partner is likely to be brought in to implement the system and train staff employed by the new organisation.

The BoA has already set up a ratings system in partnership with the IMF and the US Treasury that is currently being piloted in two banks. However, the new ratings system is expected to monitor all banks and financial institutions in Algeria on a range of criteria, such as liquidity, risk management and solvency ratios, while assessing them on a scoring system and establishing rules for intervention. The system should increase detection of money laundering and other illegal activities in the banking sector, while creating a more practical and transparent means of monitoring banks’ resilience.

Nour Nahawi, the director general of ABC Bank, an Algerian subsidiary of Manama-based ABC Bahrain, told OBG that the new rating system should produce a positive outcome for the country’s banks. “With a new ratings system forthcoming and efforts to increase lending opportunities under way, the government is taking a pro-active stance in maintaining the banking sector’s stability, which should lead to even stronger and healthier banks,” he said.

The Algerian banking system has remained stable through the global financial crisis. However, levels of lending to the private sector remain low. The country’s six state-owned banks, which account for around 85% of all assets, are known for adopting a highly cautious stance towards lending, after incurring losses on loans to inefficient public companies. As a result, the banking system retains a large quantity of liquidity that could be driving growth in the private sector, where capital is much in need.

With most state banks also lacking the sophisticated risk-management technology used by the private sector, the government will be hoping that the introduction of an independent ratings agency encourages strong-performing banks to lend more freely.

Aymeric de Reynies, the senior country manager at Calyon Bank, part of France’s Crédit Agricole Group, told OBG that a strong private sector was a prerequisite for development. “The future of the banking sector will be small and medium-sized enterprises, and a proper strategy should be put in place to bring sufficient support to their activities and development,” he said.

In the longer term, the development of the Algerian banking system is likely to be characterised by greater participation from private-sector lenders, following a trend that emerged a few years ago.

Andre Dieu, the head of division at the Algerian branch of French bank Natixis, believes international interest in the North African country is well founded. “Algeria is a growing market in terms of potential, the market is not yet fragmented and there is still a relatively low rate of use of the banking system compared to some neighbouring countries,” he told OBG. “This offers great potential for any international banks interested to invest.”

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