The new Algerian government action plan recently adopted by both chambers of the government introduces Islamic finance for the first time in Algeria. The most significant development of 2020 is the promulgation of a regulation governing Islamic finance by the Bank of Algeria.
Review of 2020
Regulation No 20-02 of the 15th March 2020 published in the Official Journal No.16 on the 24th March 2020, states that the Bank of Algeria has defined the operations and conditions relating to the provision of Islamic financial services by banks and financial institutions in country. The main condition is that any Islamic finance transaction does not give rise to the collection or payment of interest. Eight products that constitute Algeria’s Islamic banking operations are: Murabahah, Musharakah, Mudarabah, Ijarah, Salam, Istisnah, deposit and investment accounts.
Banks and financial institutions planning to offer Islamic finance products in Algeria are required to first have prudential ratios in accordance with regulatory standards and to meet strict compliance with the requirements for the preparation and transmission deadlines. Regulatory reporting underscores the regulation. The Bank of Algeria requires prior authorization to allow banks and financial institutions to market Islamic finance products. Before applying for this authorization, the bank or financial institution must obtain certification of Shariah compliance issued by the national Fatwa authority for the Islamic finance industry.
In addition, the bank or financial institution is required to create a Shariah control committee, composed of at least three members, appointed by the General Assembly. The mission of this committee is to ensure the Shariah compliance of the bank’s products and to control the activities of the financial institution relating to Islamic finance. To obtain authorization from the Bank of Algeria, the financial institution must also clarify the procedures to be followed to ensure the administrative and financial independence of the Islamic finance window from the rest of the activities.
The Islamic finance window must be financially independent from other structures of the bank. The accounting of the Islamic finance window must be completely separate from the accounting of other structures of the bank or financial institution. According to the regulations of the central bank, this separation must, in particular allow the establishment of all financial statements, exclusively dedicated to the activities of the Islamic finance window.
Bank of Algeria specifies, in this sense, that the independence of the Islamic finance window is ensured by a dedicated organization and staff including at the level of the bank or financial institution network. The regulation also requires banks and financial institutions that have secured authorization for the marketing of Islamic finance products to inform their customers of the rates and minimum and maximum conditions applicable to them. They must inform depositors, in particular those holding investment accounts, of the specifics related to the nature of their accounts.
Preview of 2021
For 2021, the National Economic and Social Council (CNES) considered that Bank of Algeria Regulation 20-02 on Islamic finance in Algeria “was not sufficient to meet the conditions for the success of Islamic finance in Algeria” citing in this regard the need to develop new skills trained in in-depth finance and big data in order to be able to analyze and control risks, especially commercial risks.
The new government will allow the establishment of financial markets contributing to the management of liquidity between Islamic banks emphasizing the urgency of creating institutions of legislative and regulatory control to support Islamic financing with a social dimension and to provide legal facilities to Algerian citizens.
The imperative is to revise Bank of Algeria laws and the Currency and Credit Law “to be in tuned in line with Islamic finance”, adding that traditional banking, unlike Islamic banking, benefits from a state contribution of 3% in the coverage of the profit margin.
Miloud Benadjemia is the Islamic finance consultant at Kairos Consulting. He can be contacted at [email protected]