Algeria edges towards Islamic finance as energy income dips

Islamic finance may help tap huge informal economy

ALGIERS: When experts in Islamic banking gathered earlier this year at a state-run hotel in Algiers to share their experiences on sharia-compliant finance, no one from the government showed up. But despite this hesitancy - government officials are reluctant even to refer to Islamic finance by that name - Algeria is edging slowly towards offering banking services to suit more religiously conservative investors.

The object is to attract funds from a huge pool of cash held outside the formal banking system as Algeria looks for more ways to offset the sharp fall in oil prices and its energy revenues. Finance Minister Hadji Baba Ammi has already announced plans for the country’s first local bond that is interest-free, complying with sharia law which forbids interest payments - although he called the scheme “participative” rather than Islamic.

Now six state-run banks plan to start Islamic financial services by the end of the year or in early 2018, and a national sharia board that would oversee Islamic banking is also planned by the end of 2017, banking and government sources told Reuters. Algeria’s Islamic finance plan still faces huge barriers. It lacks a legal framework and technical expertise, and officials must navigate sensitivities over any perceived revival of political Islam after a 1990s war with armed Islamist militants in which 200,000 people died.

On top of such concerns, any kind of reform is often delayed in Algeria by heavy bureaucracy and inertia, but bankers are keen to push ahead with the idea. “Financial institutions must be more dynamic and aggressive in the market by allowing Islamic products to grow,” said Nasser Haider, head of Bahrain-owned Al-Salam Bank Algeria. “Regulation has not been a hurdle for Islamic finance in Algeria, but a legal framework would help its development.”

With the economy emerging from decades of centralized control, Algeria badly needs alternatives to the energy revenues that have traditionally financed 60 percent of the budget.

The plunge in global crude prices from mid-2014 halved earnings from exports of oil and gas. In 2015 the budget deficit shot up to 16 percent of Algeria’s annual gross domestic product (GDP) and the government is estimated to have narrowed the gap only to 15 percent last year.

A state fund intended to cover such deficits plunged 59.5 percent over the course of last year while foreign exchange reserves are estimated to have dropped to $114 billion by the end of 2016 from $178 billion in 2014. The government has approved a 14 percent cut in spending for 2017 and higher taxes.

Algeria issued a conventional, interest-bearing bond on the domestic market last year. But the amount raised, $5.86 billion, fell short of expectations after religious leaders - and even the government’s own ministry of religious affairs - gave the operation a chilly reception. One well-known preacher told the finance minister: “You will suffer inside your tomb.” —Reuters