Algeria relies on Islamic finance to shore up its economy

Algeria uses Islamic finance to attract money from the informal market, according to AFP. The fall in oil prices and the pandemic have hit the country hard and the authorities are trying to find new ways of financing, although economists warn that more action will be needed to overcome all the challenges facing the country in the coming months. Since the beginning of this month, Algeria's National Bank has begun offering nine Islamic financial services, which have received a certificate from Muslim clerics that they are compatible with Islamic law. Only two other private banks, Bank Baraka and Bahrain-based Bank Al Salam, made these products available to consumers in Algeria.

However, the other banks in Algeria, all state-owned, are expected to follow suit by the end of the year. Most foreign banks also plan to sell Islamic financial products. This financial modality promotes the provision of services in accordance with religious laws and many Muslim countries have adopted it in recent years. This industry is based on profit and loss sharing and the payment of interest is prohibited, as it is qualified as usury. Investments in companies related to tobacco, alcohol, pork or gambling are also banned.

Algeria hopes to take advantage of significant revenues from the informal market, estimated at between 30 and 35 billion dollars, according to Abderahmane Benkhalfa, a former finance minister and former head of the country's banking association. "It is not only necessary to extract these resources, but also to inject them into the banks in order to strengthen the economy," Benkhalfa said in a report gathered by the AFP agency, although he warned that Islamic finance is not a "miracle solution". Only a small part of the cash in the informal economy circulates because of people's religious beliefs. The solution, Benkhalfa argues, is to take steps to modernise the traditional banking system - to make it more responsive - and to develop it in parallel with Islamic finance.

Economist Abderrahmane Mebtoul has been even more cautious and has indicated that it is only viable if inflation can be controlled and households have confidence in the government's management of the economy. According to several studies, Islamic financial products tend to be more expensive than those provided by the traditional banking sector.

By the end of the year, Algeria's state-owned banks are expected to launch new Islamic financial products, including "murabaha", "ijara" and "musharakah". The murabaha, or cost price financing, is one of the most popular products, and is used to finance credits for the purchase of cars or houses. It involves the bank buying on behalf of a customer a property or other product, which it then sells back to the customer at a certain profit in lieu of an interest rate. Ijara is a way of buying a house through a lease and subsequent ownership, rather than through a mortgage. The musharakah is considered a way for a buyer to avoid taking an interest bearing loan, although some Islamic scholars say it is too similar to charging interest. The Algerian authorities are also considering issuing Islamic bonds.

Algeria hopes that the new financial products adjusted to Islamic rules will attract new investors to its market, following the success that Islamic financial products have enjoyed over the past decade among other countries, especially in the Gulf and Malaysia. Algeria's neighbours, Tunisia and Morocco, have also launched Islamic finance. In Tunisia's case, development in the private sector began in 1980, although the numbers in this industry are very modest. In Morocco, they were introduced from 2017 onwards, although they have not yet recorded profits.