Incompetence without alternative ?
What 40 Million Algerian don't know about !
International Finance Organization said: ''Banking supervision 19. There has been progress in improving banking supervision, though significant challenges remain. While some aspects of the Algerian banking legal framework still need follow up actions from the relevant authorities,7 prudential authorities have adequate authority and regulatory powers for establishing a sound framework for banking activities. The prudential framework has been strengthened in 2015 by new regulations on internal control and risk management as well as on liquidity risk. Nevertheless, certain aspects remain underdeveloped, especially the corporate governance framework, consolidated supervision, and interest rate risk management.''
Serrai Invest Capital Ltd resume the situation in the study below:
Given the small size of Algeria’s financial system, significant state ownership, and its limited integration into international financial markets, there are no pressing financial stability concerns.
Instead, the immediate challenge is to harness the financial sector’s potential to support diversification and economic growth. This will be helped by a broad range of reforms to promote financial deepening, as well as greater Intertemporal smoothing of hydrocarbon revenue, a more strategic role for the state, and careful phasing out of restrictive exchange measures.
The global crisis has had virtually impact on Algeria’s financial system, which remains instable overall and thoroughly underdeveloped. Pervasive exchange controls, widespread public ownership, and an abundance of domestic funding have protected banks from external shocks. Financial sector reforms have been pushed to the backburner by the emergence of global financial and regional political turmoil, with privatization of banks halted and consumer lending suspended. The authorities have made progress in a number of areas implementing the recommendations of the 2013 FSAP update. Banking supervision was improved by introducing a risk-based bank rating system, and by tightening and adopting internationally accepted prudential standards. In addition, the central bank has taken on additional responsibilities in the area of financial stability, and has published its first financial stability report. Moreover, the team’s stability analysis suggests only moderate vulnerability of the financial system to shocks. Stress tests indicate that credit and specifically loan concentration are the main banking sector risks, and that public banks are most vulnerable. In particular, the public banks are highly exposed to large state-owned enterprises involved in the manufacturing, construction, and commerce sectors, which leaves them exposed to firm- and sector-specific shocks. However, Algeria’s external and fiscal buffers are substantial, owing to high oil prices, and past experience has illustrated that the state is able and prepared to provide a backstop to the banks. However, a number of important recommendations from the 2007 FSAP remain valid. Governance of public banks still needs to be enhanced, and the operations of the judicial system, including for extra-judicial procedures for debt workouts, requires further strengthening. Public banks have not been privatized, and a well-defined yield-curve based on an interest rate-centered monetary policy is still lacking. Even closer coordination between the BA and the MoF is needed to enable better liquidity management. And besides these measures, a broader reform strategy is needed to better enable the financial system to support economic growth: · Modernizing the financial sector: Measures are needed to facilitate financial deepening, including further improving corporate governance in state banks, implementing the public credit registry modernization plan, improving the collateral regime and strengthening insolvency rights, boosting the financial sector safety net and introducing a dedicated bank resolution regime, enhancing risk-based banking supervision and other financial sector supervision and oversight, strengthening the AML/CFT regime by addressing the strategic deficiencies identified by the FATF, and promoting access to finance.
Intertemporal smoothing of hydrocarbon revenues: In particular, establishing a sovereign wealth fund and a withdrawal rule on the oil fund would reduce the risk of financial instability, ease the depressing effects of Dutch disease on savings and investment, and provide greater scope for developing the government securities market and enhancing monetary policy transmission. · Transforming the role of the state in the financial sector: Government priorities continue to be executed through state-owned enterprises (including banks) that are embedded in a complex regulatory environment ill-suited to financial development. A thorough reform of the business environment—including resolution and collateral frameworks as well as criminal code related to commercial activity—and the abolition of various restrictive measures would create the conditions for stronger creditor rights and financial intermediation, and enhance efficiency in the economy. · Phasing out exchange controls: Extensive exchange controls seem to provide little benefit yet impose high costs, including by enabling negative real interest rates on dinar assets to persist and thus preventing the development of core financial markets. The withdrawal of these controls could begin with a gradual liberalization of the foreign exchange (FX) market, including for forward contracts.
Countries that are large producers of commodities have frequently been subject to the resource curse—meaning lower growth than resource-poor countries. Several explanations exists: Financial development is also often held back, and risks to the financial system increase: (i) greater availability of funding reduces demand for finance, starting with the sovereign; (ii) entrepreneurs are driven towards rent seeking, and less to starting new productive firms that would require capital; (iii) the reduced investment in institutional frameworks that support private property rights, enforcement of contracts and transparency, has negative long-term consequences for the institutional set-up needed to encourage finance in the longer-run; and (iv) lending may become riskier, as resource booms are typically followed by busts. Algeria has so far tried to deal with oil fluctuations through fiscal rules, with limited success. There is currently an oil savings fund (FRR) designed to save for future generations and smooth short-term volatility, but the design is flawed as the savings are not ring-fenced by a withdrawal rule or (equivalently) by a limit on the primary structural deficit. Under the current system, government deposits in the Fund equal the hydrocarbon proceeds beyond a unit price of US$37 per barrel; withdrawals are left to the discretion of the authorities, which may lead to boom-bust cycles that have repercussions on the financial sector.
A more fully-fledged oil saving scheme that would include a binding rule for draw-downs would help disconnect the macroeconomic and oil cycles, and assign a greater role to public debt management, potentially boosting the fixed-income market. While the FRR allows for budget smoothing, a fully fledged SWF would structurally insulate the economy from the hydrocarbon-induced volatility shocks and possibly provide a higher rate of return on investment. A Sovereign Wealth Fund—a government investment vehicle that invests long-term and overseas— have helped in other countries in a number of ways : (i) the Dutch disease effect is reduced, as less resources are spent domestically; (ii) transfers to the SWF reduces the revenue available for immediate consumption, and boosts savings with long-term and higher returns; (iii) SWF resources can be used to fund counter-cyclical policy to smooth the resource cycles; (iv) monetary policy is facilitated by lower volatility in liquidity related to resource revenue. The effects would also improve conditions for the development of capital markets, and lending in general.
Supporting the nascent Early Stage Financing / Venture Capital industry: There are only a few private equity-houses serving the needs of higher-end market. The authorities have committed approximately DA 50 billion to finance SMEs by setting up 48 regional funds (most of which are managed by public banks), one state-owned specialized financial institution and one government-owned specialized private-equity firm.
Modernizing the public credit registry: the BA, with the support of the World Bank and the IFC, has adopted a detailed modernization plan to overhaul the existing credit registry, and launched a procurement process to implement the plan. Currently, the publicly operated system does not provide banks with sufficient information to conduct a comprehensive credit risk assessment or conduct monitoring, suffering from limited coverage, insufficient data quality, limited historical track record and an obsolete IT system.
The ban on consumer lending put in place in 2015—to contain indebtedness of consumers—has been harmful for financial deepening. The ban has a number of adverse effects: it deprives small firms—many of which are operating in the informal sector—from an important source of credit, obstructs households’ consumption smoothing and does not allow individuals to build up credit history. It encourages informal lending (for emergencies) and borrowing from friends and families. The authorities and banks should be able to prevent excess indebtedness through better monitoring-supported by an improved public credit registry which collects and disseminates reliable data on individuals-and appropriate prudential rules. It is also important to introduce a personal bankruptcy framework-protecting both creditors and consumer debtors in the event of a personal bankruptcy.
Algeria does not have a conventional microcredit sector comparable to its regional peers. There are a number of government programs that are targeting microenterprises (ANGEM), young self-employed individuals (ANSEJ) and unemployed adults (CNAC), all heavily subsidized and partially implemented in cooperation with public banks, leaving little space for conventional microfinance providers or private banks. These lending and business training programs have scaled up significantly since 2014, but a number of challenges have emerged: their rapid growth has brought to light managerial strains, and the heavily subsidized interest rates and reduced personal contribution of beneficiaries have raised concerns about the quality of the portfolio. While there are no contingent liabilities a priori from these policies—the sovereign explicitly only pays the subsidy—it is important that the authorities monitor this type of lending, which could potentially be riskier than other forms of previous lending.