Andrew Mayen worked in the banking sector in America before he came back home, together with thousands of others, to South Sudan after the 2005 peace agreement. His new place of work is very different. Buffalo Commercial Bank opened in February 2008, the third and newest of the South’s indigenous banks in a very small sector hoping for considerable growth over the next few years. Buffalo, owned by a group of southern entrepreneurs, has dreams of branches across the war-torn South’s ten states and providing southerners with their first bank cards and the South’s first ATM machine, but Mayen knows that it will be some time before that becomes a reality.

Currently, indigenous banks are forced to fly cash around in chartered planes and organize transfers through emails and sometimes satellite telephone text messages after they have been entered in giant, dusty ledgers: there is not much precedent for Buffalo’s envisaged “state of the art” banking.

For Mayen and the Buffalo team, even turning a former furniture shop into their bank’s headquarters was a major achievement. Everything needed to be imported, from laptops to desks, to door handles. Staff with very little previous experience had to be sent overseas for training.

Building new branches in much of the swampy south — without sand or stones let alone cement supplies — is hard work and four or five times as expensive as similar work in East Africa. There are few roads and many of these are unusable during the long rainy season. Without a steady supply of fuel, no generator, no VSAT and business grinds to a halt. 

The hard road ahead

These are the kinds of challenges that also have NGOs and government service providers up in arms. Change has been hard, even with the new peace and renewed accessibility. But at Kenya Commercial Bank (KCB) the South Sudan manager John Ndungo thinks that they made a difference to the nascent economy just by appearing, presenting a challenge to the South’s still-large black market in cash. “Everyone was charging whatever they wanted. We stabilized the market by having a stable rate of exchange,” he said.

KCB, with some 40 staff, is the only international bank and is generally perceived as the safest bet for deposits by many southerners and foreigners in the capital Juba. The Kenyan bank has done well out of its time in the South, with $15 million in capital paid up in the Bank of Southern Sudan and around $100 million in customer’s deposits held in its accounts, Ndungo said. Customers pay $10 a month for the privilege of just having an account there, and one percent of any transaction in or out. But despite costs many would consider unacceptable elsewhere, the queue half an hour before the bank opens is sometimes 30 people long. “We have had much faster growth than we expected, now we have more than 3,200 customers,” Ndungo said, adding that the Nairobi-listed bank is looking for larger premises but like other businesses is struggling to find an office or land to purchase.

KCB’s success is partly due to its history in — or rather for — the South. Already stationed in Nairobi’s United Nations headquarters, KCB provided banking for much of the agencies in Operation Lifeline Sudan, the wartime humanitarian effort that was, prior to the peace deal, the world’s largest. When all the agencies moved into the South’s capital Juba it was natural for KCB to come too.

Another bank might find the South, with most of its estimated 10 million inhabitants living with little if any cash, intimidating. But in contrast to many post-conflict African nations, the South has developed oil fields that provide it with up to $1.7 billion every year. Ndungo thinks that with the growing peacetime economy and his bank’s slowly increasing business clients there is room in Juba for more international banks to move in.

But the Kenyan bank has already made sure that it keeps risk down to a minimum. For the sake of sensitivity, all deposits in the southern branch are kept there and are not invested elsewhere. “If people found out that we are investing their money in Kenya for example, they could think we are trying to rip them off,” Ndungo said.

KCB is only now beginning to organize loans, and is proceeding with caution. Under Bank of Southern Sudan rules KCB’s $15 million will have to be invested in the South, or else the bank will pay a $1.5 million fine, the BoSS head Elijah Malok said. “We are telling them now that they have to begin investing here.” But KCB is in no hurry to start spending in the South that many analysts say could return to war with the North at any time. “We have not yet really started investing here, we are still watching,” Ndungo said.

According to Buffalo’s Mayen the bank sees itself as the “people’s bank” but they too are proceeding with caution on lending. “We are not yet giving any loans but that is a priority,” Mayen said. The pressure on banks to provide lending services to cash-starved prospective businessmen and women is increased because so far very little money has been made available for microfinance. The government will add another $1 million (enough for microfinance for around 5,000 people) to the World Banks’ $1 million set aside that BoSS head Elijah Malok called “a joke.” Buffalo has a paid up capital of around $6 million and a staff of around 35. Although its owners will put up more capital over the next years — up to $20 million — the experience of another indigenous bank may caution it to take loans and other investment slowly. Because top rebel leaders were so involved in Nile Commercial Bank’s origins it is often thought of as government-owned. But Acting Managing Director Charles Whyte said NCB is privately-owned with only 5,000 of its 43,360 shares owned by members of the South’s former rebel movement that now leads the semi-autonomous government.

Bailing the ship

Whyte was brought in together with a life-saving injection of cash into the southern bank after it over-spent on loans, many of which could not be repaid. “We lent a lot of money to the public, around 15 million Sudanese pounds, and to state government… which basically bankrupted us,” said one of the bank’s officials in July 2007, adding that NCB had also incurred unaffordable costs while setting up 23 branches across the South. How much cash the bank received is not clear, but BoSS officials said that they expect to have spent $10 million on shoring up the bank’s capital by the end of this year.

Four years after foundation, NCB’s shareholders have capital of around $4.5 million according to Whyte. “We need to expand that rapidly,” he said. Although the 22 branches remaining are expensive, and eat up capital furiously, they are crucial to the bank’s significance as they are often the only way to get cash moved from one part of the South to another bar hand-carrying, still the preferred method for many who sometimes get onto planes with hundreds of thousands of dollars.

But getting money around the country so that these branches work is a continuous struggle, Whyte said. Expensive charter planes — one of which recently crashed in the middle of the South, killing at least 23 people — sometimes cannot fly in bad weather and that means no cash at the other end. Sudden large demands can shake the whole system.

Lending is also problematic. Like many aspects of banking in the South, laws still have not been passed. Over the past three years the southern parliament has passed only some ten laws and has dozens more stacked up, including a land law. “Who owns the land? There are not title deeds, no registry,” Whyte said. “If it is community land, then who can bond or mortgage that land?”

Like other laws, the current corporation law will be re-written as soon as possible. But just like the current labor law and numerous others, the legislation is inappropriate for the South. “The law says that you have to send out a copy of the annual report to every shareholder within 14 days. How can you do that here where there’s no postal service?” Whyte said. But the lack of regulations goes beyond a lack of laws. Like KCB and Buffalo Bank, Whyte said he is running the bank using international best practice.

There are some regulations: as a branch of Sudan’s central bank, the BoSS should be using Khartoum’s regulations. But the South only allows conventional banking and Khartoum’s regulations apply to Islamic banking, explained BoSS head of banking operations Othom Ajak Rago. “We need rules for opening an investment account,” Rago said, adding that at the moment the BoSS plays a more informal regularizing role. “We can ask them, please change your interest if it is too high,” he said.

In banking, as in so much else in the South, the complexities of ‘one country, two systems’ may have provided a political solution but created technical complexities. The ambiguity over current and future regulations and what will be done with them exists because the BoSS is wearing two hats, explained Mayen. “Conventional systems in the South are licensed and supervised by the BoSS. But when it comes to regulations, we are under the Central Bank of Sudan.”

During the Cold War, Egypt’s centralized, state-directed economy served as a model for other countries looking to adopt a socialist system. All commercial banks were state-owned, and bank employees were part of the massive Egyptian bureaucracy. Yet since the early 1990s, Egypt has embarked on an ambitious reform that has progressively made it one of the region’s most attractive markets for growth in banking.

Egypt’s heavy-handed state-directed economy was slowly liberalized beginning with a series of reforms in 1991 that brought the state fiscal deficit under control. In 1996, the government announced a program to begin privatizing public industries, including banks. The government’s reform plans were stalled from 2000 to 2003, when the Egyptian pound (LE) was severely devalued, leading to low economic growth and high inflation rates.

Egypt began to take steps to correct the pound’s devaluation and limit inflation in 2003. The current government, headed by Prime Minister Ahmed Nazif, came to office in 2004 with an agenda for economic reform, and liberal reformers were appointed to key economic posts. The Central Bank of Egypt (CBE) actively changed its monetary policy to curb inflation. As such, the CBE has now begun to float interest rates in an effort to achieve price stability and to encourage investment through a coherent, predictable and transparent monetary policy.

The reforms have been sweeping and have breathed new life into a banking sector that was previously dominated by four public banks that offered few retail banking services. Indeed, the current government targeted the banking sector specifically with an aggressive plan to decrease the number of banks in Egypt from 59 in mid-2005 to 37 by the end of 2007. The Unified Banking Law of 2003 represented the government’s first and most important measure in consolidating the Egyptian banking industry. It raised the paid-up capital requirement more than five fold, from LE 85 million ($15 million) to LE 500 million ($89 million).

Consolidating the sector

The new minimum capital requirements encouraged a frenzy of mergers among Egyptian banks as well as acquisitions by foreign banks. Yasser Hassan, the managing director of Al-Watany Bank of Egypt, referred to this as a “very healthy consolidation wave… whereby the smaller banks have disappeared or were bought by much stronger and more solid institutions.” Citibank, HSBC, Société Générale, BNP-Paribas, Piraeus Bank and Barclays have all since entered the Egyptian market. This rapid consolidation of the banking sector and the entry of foreign banks have greatly enhanced the management structure and technological infrastructure of the Egyptian banking industry.

In 2006, the government began the privatization of state banks that had been planned since the mid-1990s by selling 80% of the Bank of Alexandria to the Italian Sanpaolo-IMI and selling another 15% of the bank’s shares through an IPO on the Cairo and Alexandria Stock Exchanges (CASE). Similar plans are currently underway for Banque du Caire. By late 2007, the number of banks stood at 41, and the CBE had stopped granting licenses for new banks. Foreign banks looking to enter the Egyptian market can now only do so by merger or acquisition.

The Egyptian government decreased income taxes and reduced import tariffs in parallel to the banking reforms, which served as a major stimulus for business development. The results of this stimulus package, coupled with the stability of the Egyptian pound, have fueled foreign banks’ interest in expanding their operations into Egypt. GDP increased from $1,000 per capita in 2003 to $1,700 per capita in 2007, and private consumption has thus increased dramatically.

Financial services now represent 5.7% of the Egyptian GDP but will likely grow significantly in the coming years as commercial banks expand new services into the rapidly developing Egyptian market. Recent reforms have put money into consumers’ pockets and confidence in the banking sector and the Egyptian economy is significantly higher now than in recent years. As such, many wealthy Egyptians and Egyptian expatriates who formerly kept their money outside the country are again beginning to save and invest in Egypt.

Foreign banks have recently introduced American and European banking services to a market where retail banking was nearly nonexistent. Indeed, state-run banks previously focused on supporting the government’s economic strategy and public companies to the detriment of corporate and household banking. As such, only 10% of Egypt’s 76 million citizens today have bank accounts, only 4% have debit cards, and only 1.9% have credit cards. Even basic electronic services, such as online banking access and phone banking, have only been recently introduced in the country, and still are only offered by 12 banks.

As basic banking services expand and improve, Egyptian banks hope to expand the lending market in the country significantly. Lending increased by 8.7% between 2006 and 2007, driven largely by demand in the private sector. Indeed, banks see individual customers as their largest opportunity for growth, as increased consumer purchasing power has driven demand for certain products, especially homes and cars, very high.

While car loans have already taken off — a recent boom in car sales in Egypt was fueled largely by the novel availability of car loans — the booming real estate sector, coupled with state reforms, is encouraging Egyptians to explore borrowing options when purchasing their homes.

Growing the mortgage market

Mortgages are a relatively new concept in Egypt, and the government has thus taken steps to encourage Egyptians to borrow to buy homes. Property can now be counted as collateral, and a new mortgage authority was established in 2005. In order to encourage banks to lend to individuals, the government has made it easier to foreclose on homes of debtors and will soon establish a credit bureau that provides banks with potential borrowers’ credit history.

Yet even faced with soaring real estate prices, the mortgage market remains modest; in 2007 outstanding mortgages only totaled $356 million. While this represents impressive growth from 2005, when banks lent only $34 million, it is still nowhere near its potential in a country where a stream of new real estate ventures have been over-subscribed even before their formal launch. This is likely largely because Egyptians have traditionally purchased their homes in cash. A large segment of the population is likely uncomfortable with borrowing to finance their homes. “People are still a bit reluctant to borrow to finance their houses. There is an awareness effort that has to be done. The culture is starting to change and to move,” Hassan said.

Banks are also increasingly looking to lend to the private sector. Traditionally, public Egyptian banks lent to the government, state-owned companies and well-connected individuals. As a result, the percentage of loans that went unpaid was very high, which has led banks to be especially conservative in selecting their borrowers since deregulation. Though the rate of bad loans still remains high at approximately 25%, the government is using revenues generated by privatization to pay the debts of public companies.

Private corporate loans now represent nearly half of the loans made in Egypt. While this figure remains relatively low, it is up from 42.7% in June 2006. Likewise, individual loans have increased to 11.1% of total borrowing from 9.5% over the same period. The Egyptian government has signaled that it is slowly abandoning its long-held policy of borrowing only from Egyptian institutions; public borrowing fell from 28.1% to 4.5% from 2006 to 2007 and the government has announced it will finance its short term debt caused by the cuts in income taxes and tariffs through Eurobonds. The decrease in state borrowing should free up liquidity for increased lending to the private sector.

Despite these reforms and the potential for growth in lending to individuals and private businesses, Egyptian banks remain conservative, generally lending to larger, more established corporations. While financing options are available for small business through government programs, medium businesses have been left out of the equation. As an official at the American Chamber of Commerce in Egypt said, “Banks are not distributing their credit in a uniform way. Small and medium enterprises are having problems getting credit from banks. This is a bottleneck in terms of financial intermediation.”

In addition to retail banking and an expansion in lending activities, banks offering Islamic financial services are likely to see growth in the coming years. The government’s hostility to the Muslim Brotherhood has meant that Islamic banking services never took off in Egypt as they did in other Muslim countries; even the Islamic banking services in London are more advanced than those in Cairo. As the Egyptian people become increasingly religious, there may be stronger demand for Islamic banking, despite al-Azhar’s fatwa that commercial banking is permissible.

Challenges ahead

Despite the flood of reforms that has brought Egypt in line with international banking standards, the growth of the financial services sector in the past several years and the recent surge in demand for consumer products, there still remain serious obstacles to the banking sector’s continued growth.

Banks have already largely penetrated the approximately five million households wealthy enough to need sophisticated financial services. As they continue to grow, banks will need to find ways to segment the Egyptian market and offer services to fragments of the population that are unfamiliar with banking and have never held a bank account.

Yet Hassan is optimistic that banks will be able to enter the market at all levels of Egyptian society. “You can segment this market in different ways. Banking services are not only made for the upper class. There are different banking services that suit different segments of the market.” He suggested that retail banking services such as traditional savings, unique lending schemes and payroll services would be useful across class lines. This means that banks will also have to branch out of Cairo and Alexandria to educate rural Egyptians on the benefits of banking. “Egypt is characterized as overbanked, but most of the banks are in Cairo. Banks have to try to increase their base by attracting more people to open accounts, by doing something with post office authorities and getting down into the governorates and [reaching] people who aren’t educated on how to open a bank account. This is good for their business,” the American Chamber official said.

Yet even an especially effective education campaign may not persuade Egyptians to trust their money in the hands of financial institutions. The Egyptian economy remains largely cash-based, and using bank accounts would require many businesses currently operating outside of the government’s view to pay taxes.

Moreover, many Egyptians saw their savings disappear when the pound depreciated against the dollar in the early years of this decade and are thus weary about keeping their savings in local currency. Indeed, interest rates in Egypt are currently very low to encourage investment, but are so low that they actually discourage savings, especially with high inflation rates. As such, many Egyptians are bypassing traditional savings programs to invest their money in real estate or the stock market.

As banks expand their services and open additional branches throughout the country, their greatest obstacle remains recruiting qualified staff for their banks. Since the retail banking services were largely non-existent before 2004, there is little knowledge in the country. Moreover, the country’s brightest graduates often choose not to work in Egypt, opting instead for more lucrative positions in the Gulf or in Europe. “Banks need to invest more in the people, in the younger generation — spending on training is a must,” Hassan said.

As such, banks are thus devoting huge resources to ongoing internal training programs. Some foreign banks have also brought middle-and- upper management teams with them from abroad. While the level of expertise is thus quickly improving in private banks, public banks remain over-staffed and under-trained.

Finally, though the highest levels of government have shown the political will to liberalize Egypt’s economy, there are limits to the government’s liberalization plan. Egypt’s two remaining public banks, the National Bank of Egypt and Banque Misr, will not likely be privatized in the near future. Combined, the state banks control between 45-50% of the market, and their poor performance relative to private banks drags down national banking indicators.

The face that Egyptian banks present to consumers has changed dramatically in a remarkably short period of time. As they continue to expand, banks operating in Egypt will need to find ways to grow their base beyond the Cairo and Alexandria elite. At the same time, banks will have to find ways for their profits to trickle down to all levels of society. As the polarization between rich and poor in the Arab world’s most populous country becomes more and more pronounced, private commercial banks can play an important role in encouraging development. Banks could “have a more positive contribution [to the economy] through the private sector giving the private sector access to credit,” the American Camber official said.

Egyptian banks are transitioning: in the near-term, further consolidation and expansion of retail services, especially in the household market, is likely. As Hassan said, “The economy in Egypt is going through structural changes. As we progress in these reforms, banking develops as well.”

Although storm clouds of a deteriorating external economic environment loom ahead, the Tunisian economy preserves a sunny outlook, posting promising signs of sustained growth and continuing open market reforms. Foreign investment from Europe and Arab countries is energizing the financial sector, with GCC investors specifically targeting real estate, telecom and petrochemical industries. The agricultural, energy, manufacturing and services sectors performed well in 2007, leading to the highest level of economic growth the country has experienced in the past ten years: 6.3%. The International Monetary Fund predicts that real GDP will continue to grow at over 6% during the next five years.

However, the banking sector could prove the Achilles heel of the developing Tunisian economy. The state controlled the economy according to a socialist model for the first three decades after independence. In 1986, a balance of payments crisis coerced the government to realize economic liberalization programs sponsored by the World Bank and IMF. These measures succeeded in stabilizing economic growth and guarding low inflation. But the government has largely retained control over the banking sector, even in the face of continued IMF and World Bank pressure to liberalize and privatize.

Although privatization efforts have been swift and decisive in industries like tourism and cement, the state’s strategic interests in the telecommunications and banking industries are slowing their privatization. Acknowledging that privatization stimulates foreign investments and increases competition, Tunisia has been gradually privatizing the large quantity of state-owned enterprises that peaked in the socialist 1960s. President Zine El Abidine Ben Ali has implemented gradual free-market economic reforms since the early 1990s, including more caution in fiscal restraint, privatization of SOEs, and the simplification of the tax code. The country’s privatization program is implemented through the selling of shares, public tenders, concessions, and the transfer of assets.

Privatization priority

The government privatized the Union Internationale des Banques in 2003, following up with the privatization of Banque du Sud in 2005. The state remains the controlling shareholder, however, in four banks that together control more than 50 % of assets. Thus privatization remains a priority if Tunisia wishes to bring banking practices up to international standards within the near future. Entry by foreign investors would allow for more rapid and efficient infrastructural improvements in the banking sector. The country’s five major banks are either under exclusively Tunisian ownership or have European and Arab entities as only minority shareholders. While the IMF recommends consolidation, in the interest of increasing foreign entry and competition, concentration efforts are proceeding very slowly.

Recent reforms indicate that Tunisia may finally be willing to reconsider its position, especially in light of the upcoming transition to Basel II by 2010. These measures give commercial banks greater autonomy to conduct transactions by de-emphasizing the regulatory role of the central bank. For instance, banks are no longer required to transfer their end-of-day foreign exchange balances to the central bank. The interbank exchange market stands to benefit from the recent authorization of banks to manage 20% of residents’ foreign exchange holdings not subject to surrender requirements. Certain credit institutions have had the cap removed on their foreign borrowing, and banks will soon be authorized to quote and execute transactions involving exchange rate and interest rate hedging instruments.

As for developing the money market, the interest rate for special savings accounts will no longer be capped, to allow the rate of remuneration on savings with banks to be market determined. Capital transactions still face many controls and restrictions, although current and capital account liberalization made some progress in 2007, with a raise on the remaining ceilings on the allocation of foreign exchange for current account transactions. Also, nonresident investments in Tunisia are no longer subject to the requirement of an exchange authorization. However, the persistence of non-performing loans remains a problem. While NPLs declined from 24% to 19.2% as a ratio of total loans in the period 2003-2006, they remain very high and a drag on the economy.

Commercial banks, which provide short and mid-term credit, include Banque International Arabe de Tunisie (BIAT), Banque Nationale Agricole (BNA) and Amen Bank. Global banking markets are increasingly international as a result of financial liberalization and general economic integration. Whether the entry of foreign banks can make national banking markets more competitive, recent studies indicate that foreign banks tend to have greater profits, higher interest margins, and higher tax payments than local banks in developing countries. High state ownership of banks is generally associated with lower quality and more instability in financial systems. In Tunisia, foreign shareholders tend to be Arab, such as the Tunisian Qatari Bank, with the Qatar National Bank holding a 50% share. The Arab International Bank (BIAT) counts Moroccan and Italian investors among its minority shareholders.

Mortgages for homeowners

An area in which state presence in banking is proving useful to the national economy is financing housing opportunities. The Tunisian president has recently delivered on a 2004 campaign promise to increase housing possibilities for average-income citizens through new means of financing. Banque de l’Habitat has the dual structural objectives of increasing the Tunisian economy’s finance possibilities and of competing to promote, develop and finance housing. It is 56.7% public, 43.3% private and has a social capital of $77.4 million. In March of this year, the president authorized the Banque de l’Habitat to reduce interest rates on housing loans, while maintaining the same rate when the reimbursing period for direct loans exceeds 15 years. Taoufik Baccar, governor of the Central Bank of Tunisia, cited improved financial indicators as the reason for this reduction.

Due to low competitive levels and the relatively recent entry of foreign banks into the market, banking services remain inefficient and inadequate for customers needs. Customers face few options and high, irrational banking fees. Loan approvals are subject to excessive restriction, and only a limited range of banking services and products are currently available. One expatriate complained of yearly fees on a debit card that was advertised as free. Also, he is only allowed to conduct transactions at the branch where he opened his account. The government has chosen bureaucracy over liberalization to correct these inadequacies. In 2006, a Banking Services Watch was set up with the mandate of improving the quality of banking services and cutting down customer expenses. This year, the president inaugurated a measure designed to cut financing costs for customers. An index will be set up to monitor trends in banking service costs, requiring banks to inform customers, whenever they adopt a variable interest rate, about the impact of the money market increase on monthly installments. The government is also inducing banks to develop services geared towards financing small-and-medium-sized businesses.

With its engagement to adhere to international norms embodied in Basel II by 2010, Tunisia’s banking system will try to accelerate reforms and the modernization of the sector. The nationalistic approach to banking, while guarding capital and power in the hands of Tunisian bankers, could prove to be more of a weakness in coming years, as Arab banks, including those is nearby Morocco, achieve higher profits and greater stability with the help of international partners and investors.

Among all North African countries, Algeria continues to have the best excuses for the state of its economy. Under foreign control until 1956, the country faced nationalization schemes for several decades before conflict reemerged within its own borders during a civil war between Islamists and the secular government. Recent years saw a return to at least a semblance of normality, but the obstacles on the macroeconomic level are also apparent across domestic industries, most notably the country’s banking sector. While its troubled past might serve as an excuse for delayed development it does not free Algeria from following its own regulations and standards, however new or developing.

While much of Algeria’s industry remains in the hands of the state, new liberalization and privatization schemes, buoyed by strong macroeconomic growth from increased prices in natural resource commodities, will encourage and necessitate a strong industry and market of financial intermediaries, including banks able to offer several dynamic services, enabling clients and lenders to share information, while further regulations can nurture gains made.

Kamil Sari, a financial expert on Maghreb banking reforms, accuses Algeria of dillydallying with foreign firms entering the country’s domestic market, officially justified as “market reorganization.” While some firms have successfully launched branches and product offerings in Algeria, restrictions remain tight and will affect the ability of many firms to gain a foothold in a potential very lucrative market.

In addition to domestic impediments governing foreign firm entry/expansion in Algeria, a number of problems are occurring with the slew of privatization plans, most obviously seen in the problems associated with the continued delay in privatizing Algeria’s own state-owned bank Credit Populaire d’Algerie (CPA). Opinions and feelings are mixed on the deal and the numerous delays holding up its passage, but it is clear that something more than just hard line money and banking theory is involved.

Presidential lambasting

Other critics have singled out Algerian banks, blaming them for not offering enough capital to business development, sitting on their hands with comfortable, state-run growth, instead of the entrepreneurial impetus inherent to developing a free-market system. Even Algeria’s President Abdelaziz Bouteflika has staunchly cited examples of banks, including Bank of Algeria, the country’s central bank, of keeping more-than-necessary reserves in safe coffers offering excessively high interest rates nearing eight percent.

While interest rates have been pushed down, bank complacency has been a source of discontent for business leaders looking to finance expansion plans or new endeavors while the government is looking to develop stable, market-based industries in diverse fields with a slew of privatizations set.

And even though banking is just one sector being liberalized and privatized, Algerian banks will be the key to growth for privatized companies in other financial and service industries. It is for this reason that the Algerian president railed against lazy banks in the past, noting that “since 1999, one hears talk of banking reforms” but that all the talk is really about the mismanagement of such reforms. In 2006 he had already stated that “delay is no longer acceptable in this sector,” and emphasized the necessity to make capital grow through investment and reinvestment, duties of financial intermediaries, whether held by the government or privately run.

Unpopular plans for a popular deal

CPA’s stalled privatization is the sine qua non example of the challenges remaining for Algerian bankers, but shares many of the characteristics harming all of North Africa. The $1.5 billion deal was stalled in November 2007 with the government citing subprime concerns. Watchers hold that it the reason was nervousness by those involved but press reports affirm the steadfastness of the deal partners, which include such market giants as Spain’s Banco Santander, America’s Citigroup, France’s Banque Populaire Group, BNP Paribas and Societe Generale, all of whom have established presences in other North African states and whose earnings are buoyed by operations in diverse developed and developing markets.

However stable these firms may be internationally, some may lose the sales momentum if there are further postponements. As it is, CPA’s privatization is unlikely to take place before a presidential election in 2009. Lamri Haltalli, representative of the British Arab Commerce Bank in Algeria, noticed that if indeed the subprime crisis was the reason for stalling the process, further delays are expected as global financial markets continue to be affected by the crisis, its effects continuing to turn up on the balance sheets of banks ever since the warnings occurred in 2006. Algeria’s Minister Delegate for Financial Reform Fatiha Mentari maintained that after July 2008 existing bids will be invalid, leading to a fresh launching of the privatization process which first began in 2005. It is unlikely that firms will wait much longer for the process to truly begin.

Yet Algeria’s despondency with the CPA privatization is not holding up continued progress in banking privatization, although the CPA deal does not bode well in the business news feed. Algiers is also pressing ahead with other privatizations, opening negotiations to sell off a 30% stake in Banque de Développement Locale (BDL). CEO of Citigroup Algeria Kamal Driss noted that Algeria’s high bar for the CPA deal, screening only those with AAA credit ratings and having four hundred branches in one country will not apply as criteria for the BDL sale, “so smaller regional banks will have much more opportunity to show interests.” It will be interesting to see how the BDL privatization works and if it will beat CPA to the punch.

Finding a structure and sticking to it will inevitably take up time before it can be used to amend procedural policy. All decisions in the country pass through several committees, requiring one’s approval before moving to the next committee, delaying decisions by months in some cases.

Market entry from foreign banks

Europe is not the only foreign partner. The Algerian Gulf Bank, owned by KIPCO Group of Kuwait and United Gulf Bank, recently entered the coastal governorate of Oran. Since 2005, when the firm began in-country operations, AGB has aimed high, setting out to establish twenty branches in Algeria before the end of 2008. In 2006, AGB recorded $4.5 million in profits, which by 2007 had grown to $7.8 million. The path of organically growing a bank in Algeria might take root if the privatization path continues to see delays. The relatively low competition and ease with which foreign firms can introduce efficiency might well make for further moves of this sort instead of large multinationals taking the privatization route.

AGB is not alone in developing organic business in Algeria. Al Salam Bank acquired a license to launch Islamic banking services in Algeria, after paying up capital of $100 million. The wide range of Islamic finance products offered will appeal to a strong segment of the population who, similar to Moroccans, opt for sharia-compliant products from the underlying idea of Islamic finance and financing structure. For Al Salam’s Deputy Head of the Founder’s Committee Hussein Mohammed Al Meeza, “Algeria is pursuing a very aggressive role in modernizing the economy and supports the initiatives of both the private sector and foreign investors.”

Putting pillars in place

Encouraging further market entry by private firms is necessary to restructure the banking dynamics in Algeria. Several ideas toward structural improvements are offered by the International Monetary Fund’s (IMF) Juls Erik J. Vrijer, a division chief of the IMF, who explained the necessary ingredients for relaxing the public-private banking partnership. The first is ending the practice of public banks to finance loss-making public enterprises followed by enhancing transparency, intensifying efforts to strengthen banking supervision, and formulating privatization action plan, which, ironically, Algeria attempted to follow in bringing in partners with know-how into a large part of the market.

These policies, as outlined by the IMF, should increase the proper functioning of banks and the efficacy they offer. With a public set of banks dominating aggregate share of assets and considerable amounts of non-performing loans to public companies, reforms are needed now.

Enacting a series of regulations and sticking to them is perhaps the only way Algeria can firmly establish the structure necessary to wean public banks from state funds. A few measures, like refusing to recapitalize failing banks could force managers to adopt more stringent credit policies and a firm system for regaining receivables.

An IMF Financial System Stability Assessment notes that “because of hydrocarbon funded state support to borrowers and lenders alike, the financial system appears stable, although this kind of stability has been costly for taxpayers. However the way this ‘stability’ is achieved distorts right pricing and governance and leads to unsound banking.” In the period 1991-2002, an average of 4% of GDP has been spent on repeated recapitalizations, making banking and financial stability a “hostage to hydrocarbon-induced liquidity and credit cycles.” With a volatility ranking second among other petro-states such as Nigeria, Gabon, Venezuela, Ecuador, and Indonesia, Algerian stability is something of a fairy tale.

Further international support is aimed at properly valuating banking operations to “reveal intrinsic value to current and prospective shareholders” before privatizations. What makes matters worse is that half of public reports on banks and their operations are filled with unavailable details, doubtlessly because public banks are ill-incentivized to keep one solid set of accurate records.

According to data assembled by the Financial Standards Foundation, Algeria scored a low 9.17 out of 100 in its Standards Compliance Index. For Algerian banking, there was insufficient data to rate the state’s compliance level, but on the categories data, monetary, insolvency, accounting, and auditing standards – some of the most important to ensure a smooth functioning economy if not a strong banking climate, the country was coded as to have no compliance. Subscribing to a general data dissemination system would prove wise, but the Financial Standards Foundation noted the poor progress of the state in moving forward with important reforms as “Algeria not only does not subscribe to the IMF’s Special Data Dissemination Standard, but is deteriorating in its statistics reporting.”

Inability to tighten operations and increase supervision and reporting will keep domestic Algerian banks shunned on international financial markets, maintaining the the government as the continued patron of Algerian banking, rather than international credit markets and overseas lending lines, both of which are important for a sector focused on growth and stability.

As it is, data presented by the Bank of Algeria is outdated by eight months and lists only the most essential variables in the context of a limited timeframe, rather than a full display of year-to-year figures. What little data is available shows a near stagnation of many economic indicators, but with a horizon of only one year, it is hard for investors or bankers to properly analyze monetary policy and Algeria’s economic situation.

A weak governmental will to move forward with privatizations, coupled with weak internal standards, do not make Algeria’s current banking situation one of particular strength. However, the system’s weaknesses coupled with a low market penetration by international banks make the country a target for much improvement down the line. In the next year, Algeria will demonstrate if it has the will to privatize properly, welcome foreign firms, and enforce stricter standards as part of its continued drive toward the global trading order.

If the country finds itself with more efficient banking and better access to credit for the general population, then Algeria need not worry so much about its development situation as entrepreneurs will take root within the possibilities and constraints of the market to grow new businesses within new industries unrelated to the country’s hydrocarbons sector, which currently accounts for 97% of GDP.

While North Africa is not normally known for acuteness in financial management, lately Morocco’s banks have been earning competitive ratings, as well as partnerships with some of the world’s most powerful financial institutions. With low inflation, booming real estate and tourism, and its first-ever budget surplus, the strengthening economy is improving the national outlook as the financial sector now looks hungrily to Africa and Europe.

The opening of the Moroccan economy and increased international investment in the country cannot proceed without the support of sound financial institutions. With globalization increasing financial risks in emerging markets and record-high prices for oil and foodstuffs fueling social unrest, the financial sector has its work cut out for it. But is the banking sector up for the challenge?

In 1983, Morocco began liberalizing its banking practices, with support from the International Monetary Fund (IMF). Since then, reforms have focused on increasing openness to foreign competition and improving the system of intermediation by the central bank. Successive waves of reform in the early and mid-90s reformed the intermediation system by making the dirham fully convertible, de-partitioning capital markets, and creating a coherent legislative and regulatory framework to oversee credit institutions. To tap into the vast economic potential of international trade, reforms also removed barriers to foreign investment, income transfer, foreign technical assistance and tourism.

Liberalization reforms have largely succeeded in opening the economy, with Morocco recently signing free trade agreements with America, Turkey, Egypt, and Jordan. It will become a free trade partner with the European Union in 2012. At this crucial juncture, the banking sector’s principal challenge is to accompany the opening of the Moroccan economy, according to Assem El Adaoui, Deputy Manager of the Research and International Relations Department at the central bank, Bank Al-Maghrib. “In order to accompany this opening, it must develop its regional and international dimensions,” he said, and in recent years, the banking sector was doing just that.

Modernization through liberalization

European banks like Santander, Société Générale, and BNP Paribas have entered the country, injecting the sector with a healthy dose of competition. These banks have modernized the financial sector by taking advantage of liberalization measures to become partial owners of or partners with local commercial banks. In turn, local banks are subject to increased competition and corporate takeovers, creating larger institutions with more regional influence and higher capital assets. Although there are currently 14 commercial banks in Morocco, experts predict that consolidation over the next few years will reduce this number to between four and ten.

Three large banks currently control around three quarters of Moroccan banking assets and deposits. Attijarwafa Bank is a partner of Spanish Bank Santander, the second largest shareholder with 14.57%. Created by a merger in 2004, it is now the leading financial group according to total assets. The second-largest, BMCI (Banque Marocaine pour le Commerce et l’Industrie), is a subsidiary of BNP Paribas, one of the most important European banks which owns a 64.67% share. Banque Centrale Populaire, rounding out the trio, was wholly owned by the government until 2002 and now has only Moroccan shareholders. The entry of these global financial powerhouses may raise the standards, but BCP is holding its own against the tough competition.

These three banks are spearheading the internationalization of the Moroccan banking system, as well as looking to expand their operating potential through national and regional mergers and acquisitions. In 2005, Attijariwafa Bank Group acquired a majority share in Tunisia’s Banque du Sud, opening branches in Senegal the following year. In April 2008, the Moroccan group concluded its acquisition of 79.15% of the capital of the Compagnie Bancaire de l’Afrique Occidentale (CBAO), acting on its promise to promote development in West Africa. Its expansion plan also specifically targets MREs (Moroccans Living Abroad), aiming to become their leading bank by 2010. BMCI acquired ABN Amro Bank Group’s Moroccan subsidiary in 2001, buying a 99.4% stake. Banque Centrale Populaire signed an agreement in 2007 to acquire a 43.53% stake in insurance company La Marocaine Vie from the Société Générale group. All three banks European branches and will face heated competition for MREs.

Commercial banks face the immediate challenge of complying with international standards, as Basel II was instituted in June of 2007, and International Financial Reporting Standards (IFRs) in January of 2008. “The banks are preoccupied right now by this work and are arranging for the technical and human resources to confront these challenges. The implementation of Basel II means a new vision of management, internal organization, and long-term stability,” said Ahmed Lahrache, Deputy Director of Banking Supervision.

As liberalization and internationalization measures stimulate the banking sector, increasing deregulation will need to be balanced with effective risk-management. Bank Al-Maghrib, the central bank, is wary of the risks of globalization, in particular with regard to the liberalization of capital accounts. Capital account liberalization, which eases limitations on various capital flows (mainly FDI, portfolio flows, and bank borrowing) across a country’s borders, has been known to prove disastrous when implemented in conjunction with a fixed exchange rate, most notably resulting in the Asian bank crisis.

The Asian lesson

“The crisis has shown the utmost importance of supervision of the banking and financial sector to ensure its soundness and stability in the face of the problem created by the sudden decline in banking system cash liquidity,” asserted former Finance Minister Fathallah Oulalalou at a World Bank seminar on globalization. “The unexpected decline in capital flow to the Asian crisis countries, and the accompanying sharp drop in exchange rates and sharp rise in interest rates, revealed the weakness and fragility of many banking systems there and the lack of adequate supervision of such systems.”

Financial analysts attribute the Asian crisis to the fixed exchange rate, as the affected countries had pegged their currencies to the US dollar. “When they were opened, the capital accounts were completely opened and they had a crisis because of this. So now we are very conscious of this and we are preparing to avoid this kind of risk. In parallel, as we increase openness, we move towards more floating and flexibility,” said Mr. El Adaoui of the Bank Al-Maghrib. Affiliations with European banks translates into the best risk-assessment evaluations at the international level, safeguarding the Moroccan banking system.

In addition to skillfully managing risks, the Moroccan banking industry faces the challenge of more effectively extending credit to consumers overburdened with high income taxes and job insecurity. A survey of young professionals in Casablanca found a pronounced reluctance to borrow from banks, with high interest rates and job insecurity cited as the principal reasons. Many Moroccans are more likely to ask a family member for a short-term interest-free loan than to contract with a bank.

Extremely high taxes reduce rates of return and incentives for saving and investing, particularly making potential borrowers wary of risk taking and entrepreneurship. “The country and the banking sector need to improve access of domestic investors to foreign capital and financial markets in order to increase returns and lower risks. This will increase competitive pressures on domestic banks,” stated John Tatom, Director of Research at the Networks Financial Institute at Indiana State University and an expert in Moroccan banking. He suggests  strong capital inflows from abroad, especially from the GCC, create the ideal context for deregulating capital accounts, allowing Moroccans increased access to foreign investment  and joint venture partners.

Some banks are channeling their new wealth into economic development for poor and rural communities. In April BMCI signed a partnership agreement with the powerful Confédération Générale des Entreprises du Maroc (CGEM) to promote corporate social responsibility. The bank will offer special services to enterprises that earn CGEM’s seal of approval, certifying that they conform to “the fundamental principles of the constitution and to international conventions and recommendations relating to the fundamental rights of the individual, protection of the environment, healthy government, and loyal competition.”

Other banks are active players in the flourishing microcredit industry. Banque Populaire’s Foundation for Microcredit is rated 12th in Forbes’ 2007 listing of the top 50 microfinance institutions. In May 2008, Banque Marocaine du Commerce Extérieur (BMCE) loaned $12.5 million to Moroccan microfinance institution FONDEP, whose mission is to extend microcredit to the poor, particularly women and youth.

The banking sector will be an able support for the development challenges Morocco faces in the coming years. Opponents of public spending, who promote liberalization and openness at all costs, fail to recognize the contradictions in Moroccan society, where extreme wealth and extreme poverty do not balance easily. Regarding this, the banking sector has chosen to proceed with cautious and heightened risk management, while emphasizing openness to the international markets and welcoming international standards for banking practices.

Five years ago a snapshot of North Africa’s banking industry would have revealed feeble attempts at changing public perception. Constituents of Algeria, Libya, Morocco, and Tunisia remained hindered from realizing their financial goals through an archaic mental block to keep their savings — what little was available — within the confines of their jalabas. Family firms served as a popular choice for a financial intermediary if an entrepreneur had the right connections and net worth. For the less fortunate individuals on the economic ladder, credit lines were few and far between, discouraged by extensive decentralization, lack of necessary infrastructure, and low net worth per head, making the majority of credit scores unsubstantial to justify extensive credit, especially to fuel business development.

Intransigent in their myopia, governments eventually reckoned that national development goals could only be realized through a paradigm shift on the subject of financial intermediaries, the most prominent of which are banks although loan officers, credit associations, and informal networks can continue to serve as middle man during the continued development of North Africa’s financial system. Across the board, countries have opened their economies, with Morocco and Tunisia enjoying trade links as members of the World Trade Organization (WTO), as well as extensive bilateral treaties and formalized trading partnerships with the European Union (EU). Algeria is set to join the international trading regime later in the year and Libya is being considered for accession in the coming years. All are opening up their economies to foreign firms, especially from Europe, as well as investment from Arab neighbors. With increasing international links, North Africa must grow its financial services industry, whether through foreign firm acquisition and rearrangements or through organic growth from current country leaders.

Fresh landscape

Today’s picture shows the changes to the landscape since earlier in the decade. Central bank figures have shown a growing monetary base and growth in commercial deposits with banks. But central bank activism is not the only area where change can be noticed. Commercial banks are looking to expand in the Maghreb and other institutions are looking for possibilities in Libya. With macroeconomic liberalization policies translating to privatization schemes aimed at filling government coffers and making industries more efficient, foreign firms are looking to get a piece of the action.

New product offerings and banking infrastructure is turning banking institutions into attractive places to store one’s capital or seek financing to fund new operations. Foreign and domestic firms alike are creating new branches, attracting new account holders and financing individual businesses. More automated teller machines (ATMs) and new product offerings, like Islamic finance products, are better engaging rural populations in saving and investment schemes. Governments will continue to support banking sector development as an impetus for growth and eventual top-down development schemes as North Africa is building social infrastructure aimed at attracting even further levels of foreign direct investment.

On the country level, Libya remains the least developed, with only recently-initiated plans to privatize financial intermediaries and a banking sector which is just beginning to shed the vestiges of the country’s economy, which was once essentially closed to most of the world until 2004. Libyan bankers have seen a tightening body of regulation in the past four years, reflecting a growing role of the Central Bank of Libya, which was once a weakened Libyan Currency Committee whose mandate was confined to ensuring the stabilization of sterling assets against the Libyan pound.

Balancing control

Heading westward, Tunisia’s economy and banking sector are being hampered in their path to privatization. With a majority of banks still in the hands of the state, Tunisia offers onlookers a market with too much government control for the moment but a tremendous opportunity in the future, especially as banks support growth industries such as tourism and textiles. As with banks in its western neighbor, Tunisia will have to wait out privatization plans and frequent delays sprouting up in the process.

Algeria presents banking analysts with the most potential as the government-wide privatization program will have large effects on the country’s financial sector. Further moves toward the encouragement of private sector development and entrepreneurship are stirring the situation on the demand side with trustworthy and reliable banks needed for credit operations. A host of banks from Europe and the Gulf are considering expanding operations in a country with known international players with more experience in the country, including Banque Nationale de Paris (BNP) Paribas, Societe Generale, and other institutions with minority stakeholders.

Anchoring the sector in the region is Morocco, which already hosts several foreign banks as well as home-grown success stories like Attijariwafa and Banque Marocaine du Commerce Extérieur. In addition to a relatively diverse banking scene, Morocco’s economy is larger but more diversified than regional rivals Algeria and Libya, who generate over 90% of their exports, and thus foreign exchange revenues, from the sale of their natural resources.

Internationally, the adhesion of North Africa with more multilateral institutions will assist in maintaining synergy between international pressure and key domestic reforms in the region’s banking climate. Fortunately, the lending policies of banks are no longer tightly constrained by national wills or the sentiments of political minorities. Unfortunately, firms must exercise extensive tact in mounting or expanding in these developing markets as no regulatory relations are yet firm enough to cement medium-term prospects.

Banking could very well serve North Africa in addressing the region-wide macroeconomic distresses, from low living standards to unemployment. By inviting international players, North Africa is essentially asking for assistance with efficiency and growth, both of which will make other industries dependent on capital tighten up their operations as lending becomes more diverse. In the long term, strong credit lines matched with strong oversight will enforce a new style of efficiency on North Africa’s firms of various sizes to better record finances, disclose earnings, and improve profitability.