The International Monetary Fund's (IMF) 2004 Financial System Stability Assessment (FSSA) reports that clear improvements have been made in the area of on-site and off-site supervision through intensive technical assistance from the IMF. The report found Algeria's banking supervisory framework to be compliant or largely compliant with 11 of the 25 Basel Core Principles (BCPs). The 2004 IMF assessment points to several major shortcomings, the most important of which is the lack of effective implementation of prudential regulations. However, the report notes that the authorities have implemented substantial reforms in this area since the IMF's last assessment in 2000, so much so that, by 2004, only one of the principles relating to prudential regulations was not being observed. Building on the IMF's 2004 FSSA recommendations for the banking sector, the authorities have conducted comprehensive on-site inspections and are considering privatizing a number of public banks, as stated in a 2004 IMF Consultation IV report. The World Bank's 2004 Financial Sector Assessment report notes that, since the end of the 1980s, Algerian authorities have embarked upon a wide-ranging and credible modernization of laws and regulations governing financial intermediation. As part of a World Bank Country Assistance Strategy for Fiscal Years 2004 -2006 in Algeria, launched in 2003, efforts are in process to improve the operational efficiency of banks in credit and financial risk management and credit monitoring and loan recovery. The strategy further seeks to strengthen corporate governance and to ensure "arm's length" relations between business groups and the government. Nevertheless, in spite of the efforts undertaken by Algerian authorities, the IMF's 2004 Consultation IV report finds that banking supervision remains weak. Ultimately, there is little information publicly available clearly identifying Algeria's compliance with the Basel Core Principles.

General Overview

The International Monetary Fund's (IMF) 2004 Financial System Stability Assessment (FSSA) notes that, following its earlier (2000) Report on the Observance of Standards and Codes on Banking Supervision, clear improvements have been made in the area of on-site and off-site supervision through intensive technical assistance from the IMF. Resources and techniques for banking supervision are also being developed within the Bank of Algeria (Banque D'Algérie, or BoA). Per the same report, Algeria's banking supervisory framework is compliant or largely compliant with 11 of the 25 Basel Core Principles (BCPs). The 2004 IMF assessment points to several major shortcomings identified by the 2000 report, however. The most important of these was in the area of implementation of prudential regulations related to management standards and risk surveillance. However, the 2004 report notes that the authorities have since implemented substantial reforms, so much so that, in 2004, only one of the principles relating to prudential regulations was not observed. Resource shortages and the lack of timely sanctions against banks that fail to meet their obligations further undermine the full effectiveness of the prudential system.

The 2004 IMF assessment recommends "improving control and surveillance resources and tools, raising the operational capacity of the public banks, improving the legal and accounting environment, and privatizing one or more of the large state-owned banks" (p. 30). Building on the IMF's 2004 FSSA recommendations for the banking sector, the authorities have conducted comprehensive on-site inspections and are considering privatizing a number of public banks, as stated in a 2004 IMF Consultation IV report. Inspection reports have also been finalized and submitted to the Banking Commission (Commission Bancaire, or CB), which is part of the BoA. In a subsequent 2004 Financial Sector Assessment (FSA), the World Bank notes that since the end of the 1980s Algerian authorities have embarked upon a wide-ranging and credible modernization of laws and regulations governing financial intermediation. The modernization program has also led to important changes to the Commerce Code, including the reform of creditors and shareholders' rights. As part of the World Bank's Country Assistance Strategy for Fiscal Years 2004 -2006, launched in 2003, improvements are planned for the operational efficiency of banks in credit and financial risk management and credit monitoring and loan recovery. The strategy further seeks to strengthen corporate governance, as well as ensure "arm's length" relations with business groups and the government. Despite these efforts, however, the IMF's 2004 Consultation IV report states that banking supervision remains weak.

The main laws governing the banking sector in Algeria include the 1990 Money and Credit Law (hereafter referred to as "Banking Law"), and the 2003 Ordinance on Money and Credit which has amended the 1990 Banking Law. According to the World Bank's 2004 FSA, the Banking Law is generally satisfactory. However, the removal of the article establishing a fixed term of office for the Governor, and members of the Council on Money and Credit (Conseil de la Monnaie et du Credit, or CMC, part of the BoA) and the grounds for dismissal of the Governor are not in line with international standards. The 2003 Ordinance on Money and Credit brings some improvements to the Banking Law, such as the tightening of bank licensing conditions, the requirement for bank capital to be paid fully in cash, and the requirements for periodic reporting. Nonetheless, it also includes provisions that reinforce the Ministry of Finance's (MoF) influence on banking supervision. This could undermine the banking supervisory authority's financial and operational autonomy.

Banking supervision in Algeria is established under the Banking Law and is divided into three separate agencies, all operating under the umbrella of the BoA: the CB, the CMC, and the BoA. The 2004 IMF report states that these agencies enjoy operational independence in practice. The CB is in charge of off-site and on-site supervision and has jurisdiction for imposing sanctions. The CMC licenses lending institutions and exercises regulatory authority. Finally, the BoA prepares banking regulations and carries out audits, either directly or as delegated by the CB. The Governor of the BoA chairs the three agencies, and assumes ultimate responsibility for policy implementation.

As noted in the World Bank's 2004 FSA, the Algerian financial system is dominated by the banking sector. Furthermore, public banks account for 90 percent of total banking assets. According to a 2007 U.S. Department of Commerce Doing Business report, there are six major public banks, and 17 foreign banks in Algeria. Up until 2005, seven private banks were shut down and the remaining private banks tend to struggle with changing banking regulations, including minimum capital requirements. In 2005, per the same report, the government of Algeria began privatizing three public banks, and expected to complete the first privatization by the end of 2007. A 2007 report by the World Bank continues to consider the Algerian banking system "oligopolistic and nearly entirely state-owned... [and] the state banks were undercapitalized, and according to government estimates, non-performing loans reached DZD [Algerian Dinar] 200 billion, or 6% of GDP" (p. 1).

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

II

Banking supervision in Algeria is established under the Banking Law. The work is divided into three separate agencies, the CB, the CMC, and the BoA. According to the IMF's 2004 assessment, all three agencies enjoy operational independence in practice. Responsibilities among the different authorities are clearly established by law. The CB is in charge of off-site and on-site supervision and has jurisdiction for imposing sanctions. The CMC licenses lending institutions and exercises regulatory authority. Finally, the BoA prepares banking regulations, and carries out audits, either directly or as delegated by the CB. Per the IMF's 2004 Consultation IV report, the BoA's supervisory powers have been strengthened through continuous technical assistance from the IMF. The Governor of the BoA chairs the three institutions and assumes ultimate responsibility for policy implementation. According to the IMF's 2004 assessment, the law does not establish the duration of terms or revocation criteria for the Governor and members of the CMC. Furthermore, the authorities do not conduct periodic comprehensive public reporting on their activities. Despite the above description on the supervisory agencies and their roles, there is scant information publicly available addressing Algeria's actual compliance with this principle.

1.(2) Operational independence and adequate resources.

II

Insufficient Information

According to the IMF's 2004 assessment, the three banking supervisory authorities enjoy operational independence in practice. However, as noted in the 2004 World Bank FSA, resources and budgets allocated for banking supervision are insufficient. Per the same report, the BoA lacks a "permanent system to detect difficulties in individual institutions and scrutinize prudential returns in a formalized way" (p. 6). In its 2004 assessment, the IMF notes that although the 2003 Ordinance on Money and Credit contains some improvements, it nonetheless includes provisions that reinforce MoF's influence on banking supervision. This could undermine the banking supervisory authority's financial and operational independence. Although the 2004 assessment by the IMF indicates 'operational independence in practice' for the supervisory agencies, the report also points to the lack of resources of these agencies, and does not clearly identify Algeria's compliance with this principle.

1.(3) A suitable legal framework for authorization and ongoing supervision.

II

In its 2004 FSA, the World Bank notes that, since the end of the 1980s, Algerian authorities have embarked upon a wide-ranging and credible modernization of laws and regulations governing financial intermediation. Nonetheless, there is little information publicly available addressing Algeria's compliance with this principle. The main laws governing the banking sector in Algeria include the 1990 Banking Law and the 2003 Ordinance on Money and Credit. Per the same report, the Banking Law is generally satisfactory. The removal of the article establishing a fixed term of office for the Governor and CMC members, as well as grounds for dismissal of the Governor, is not in line with international standards. Furthermore, although the 2003 Ordinance on Money and Credit brings some improvement to the Banking Law, such as the tightening of bank licensing conditions, the requirement for bank capital to be paid fully in cash, and the requirements for periodic reporting, it also includes provisions that reinforce the MoF's influence on banking supervision. This could undermine the banking supervisory authority's financial and operational autonomy. In its 2004 assessment, the IMF recommends specifying clear timeframes for the terms in office of the governor and members of the Council as well as giving an indication of the criteria under which they may be removed from office.

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

II

Refer to Principle 1.3

1.(5) Legal protection for supervisors.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

NC

According to the IMF's 2004 assessment, there are no arrangements covering the exchange of information between the three authorities, BoA, CMC, and CB.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

II

Although the licensing process has been strengthened, it should be kept under close scrutiny, as noted in the 2004 World Bank FSA. Nevertheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

II

In its 2000 ROSC on banking supervision, the IMF recommends strengthening licensing procedures. As noted in a subsequent 2004 IMF assessment, "often only a quarter of the minimum capital is paid up when an institution's license is granted, and often they must wait one or even more fiscal years for the full amount" (p. 31). The IMF report recommends requiring that the minimum capital be paid in full when licenses are granted. According to the World Bank's 2004 FSA, the 2003 Ordinance on Money and Credit addresses these shortcomings through the tightening of bank licensing conditions, and the imposition of a requirement for bank capital to be paid fully in cash. Nevertheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

4. Authority to review and reject transfer of ownership.

II

According to the IMF's 2004 assessment, information on direct and indirect shareholders is not provided periodically and is incomplete. The IMF report recommends acquiring detailed information on direct and indirect stockholders and keeping it up-to-date. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

5. Authority to review major acquisitions and investments.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

II

According to the IMF's 2000 ROSC on banking supervision, Algerian banks are required to maintain a minimum level of capital and an 8 percent risk-weighted minimum capital adequacy ratio. However, the ratio is not calculated on a consolidated basis and does not include the Basel Capital Accord norms related to market risks. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

II

According to the IMF's 2004 assessment, provisions related to lending policies of the major banks are not adequately based on loan loss risks. Furthermore, inspections systematically fail to evaluate asset quality, guarantees, provisions, or related-party activities, as noted in a subsequent 2004 World Bank FSA. In its 2004 assessment, the IMF recommends introducing regular on-site supervision to evaluate "credit policies, loan portfolio quality, and the adequacy of provisions" (p. 32). The World Bank report further advises improving the operational efficiency of banks in credit monitoring and loan recovery. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

9. Prudential limits and management information system on concentration of exposure.

II

The 2004 IMF assessment points to several major shortcomings, the most important of which is the effective implementation of prudential regulations related to management standards and risk surveillance. Provisions related to lending policies of the major banks are not adequately based on loan loss risks and concentration of exposure. Furthermore, off-site audits are inadequate in assessing financial institutions' exposure. Per the same report, the authorities do not routinely verify that banks have adequate tools with which to monitor and evaluate their exposure. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

10. Arm's length rule and monitoring for connected lending.

II

According to the IMF's 2004 assessment, connected lending is not clearly defined and reporting requirements are often not met. The IMF report recommends clarifying the term "loans to related parties." It further advises requiring institutions to remit the returns prescribed under the law. In a subsequent 2004 FSA, the World Bank prioritizes "arm's length" relations with business groups and the government. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

11. Policies and procedures for country risk and transfer risk.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

13. Comprehensive risk management processes.

II

The 2004 IMF assessment points to several major shortcomings, the most important of which is the effective implementation of prudential regulations related to management standards and risk surveillance. In a subsequent 2004 FSA, the World Bank's main objective is to improve the operational efficiency of banks in credit and financial risk management and credit monitoring and loan recovery. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

14. Adequate internal controls.

EN

According to the IMF's 2004 assessment, prudential regulations on internal controls have recently been adopted but are not yet implemented. The IMF report recommends overseeing the implementation of new regulations on internal controls.

15. Strict "know-your-customer" rules and high ethical and professional standards.

II

In its 2000 ROSC on banking supervision, the IMF recommends adopting the Financial Action Task Force's principles on money laundering. As noted in a subsequent 2004 IMF assessment, there are no practical arrangements that require banks to conduct supervision of money laundering issues. The IMF report recommends adopting regulations establishing banks' obligations under existing legal provisions. On February 5, 2005, as noted in a 2007 U.S. Department of State (DoS) International Narcotics Control Strategy Report, Algeria enacted a new Law on the Prevention and Fight against Money Laundering and Financing of Terrorism. This replaced the 1994 Ordinance No. 95/11 and brought Algerian law into conformity with international standards and conventions. Per the same report, the Law offers guidance for anti-money laundering and combating the financing of terrorism issues, institutional and judicial cooperation, and penal provisions. According to the 2007 U.S. DoS report, the Cellule du Traitement du Renseignement Financier (CTRF), Algeria's Financial Intelligence Unit (FIU), was established in 2002 within the MoF as an independent legal entity. The new legislation strengthens the powers of the CTRF, and extends money laundering control to non-bank financial institutions, including insurance agents, lawyers, accountants, stockbrokers, pension managers, and dealers of precious metals and antiquities. The Law also provides the CB with the authority to inform CTRF of suspicious or complex transaction, and exchange information with foreign government counterparts. . Despite this, however, there is scant information publicly available addressing Algeria's actual compliance with this principle.

16. Effective supervisory system consisting of on-site and off-site supervision.

II

Clear improvements have been made in the area of on-site and off-site supervision through intensive technical assistance from the IMF, as noted in its 2004 assessment. However, off-site audits are inadequate in assessing financial institutions' exposure. The IMF report recommends further strengthening resources and methods for off-site supervision to bring Algeria's banking regime into full observance of this principle. It also advises improving coordination between off-site surveillance and other departments' measures. It further recommends developing the methodology for analyzing banking supervision documents, and establishing early warning systems. Building on the IMF's 2004 FSSA recommendations for the banking sector, the authorities have conducted comprehensive on-site inspections, which the 2004 IMF Article IV Consultation report notes have been finalized and submitted to the CB. Despite the above information, however, there is scant information publicly available addressing Algeria's actual compliance with this principle.

17. Regular contact with bank management and understanding of bank's operations.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

II

According to the IMF's 2004 assessment, there are no procedures for consolidated audits. Furthermore, available information on direct and indirect owners of bank stock is irregular. The IMF report recommends clarifying banks' obligations regarding consolidation. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

19. Independent validation of supervisory information through on-site examination or external auditors.

II

There is insufficient information publicly available addressing Algeria's compliance with this principle.

20. Ability to supervise on a consolidated basis.

II

According to the IMF's 2004 assessment, there are no procedures for consolidated audits. The IMF report recommends clarifying banks' obligations regarding consolidation. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

II

In its 2000 ROSC on banking supervision, the IMF recommends improving the reporting process of banks through coordination with external auditors. The supervisory authority should also be informed immediately by banks of "any matters of material significance to the bank concerned." As noted in the IMF's 2004 assessment, the exposure and financial condition of banks is difficult to assess due to inadequate accounting systems. Furthermore accounting standards do not require the preparation of consolidated financial statements, and financial statements are often not submitted to the supervisory authorities in a timely manner. The chart of accounts also needs to be completed. The IMF report recommends ensuring the timely delivery of documents to the supervisory authorities and involving external auditors in accounting controls. It further advises updating the chart of accounts. As a follow-up to the IMF's 2004 FSSA recommendations for the banking sector, accounting systems are in progress and should facilitate the BoA's conduct of banking supervision, as noted in the IMF's 2004 Article IV Consultation report. Implementation of the accounting reform project is planned for end of 2007. Nonetheless, there is insufficient information publicly available addressing Algeria's compliance with this principle.

22. Adequate supervisory measures to ensure timely corrective action.

II

In its 2000 ROSC on banking supervision, the IMF rated Algeria as being largely compliant with this principle. However, in a 2004 assessment, the IMF notes a lack of timely corrective actions against institutions that fail to comply with prudential regulations. In this regard, the IMF report recommends accelerating the adoption of corrective measures and establishing appropriate sanctions to ensure compliance with prudential regulations and requirements. Despite the positive compliance level assigned to Algeria in its 2000 report, the IMF in its 2004 assessment calls into question Algeria's competence in applying this principle. Apart from these two digressing conclusions from the two IMF reports, there is little further information publicly available addressing Algeria's compliance with this principle.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

NC

In its 2000 ROSC on banking supervision, the IMF rated Algeria as being non-compliant with this principle.

24. International exchange of information with other supervisors.

NC

In its 2000 ROSC on banking supervision, the IMF rated Algeria as being non-compliant with this principle. In its 2004 assessment, the IMF recommends establishing exchange-of-information agreements with counterparty countries.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

NC

In its 2000 ROSC on banking supervision, the IMF rated Algeria as being non-compliant with this principle. In its 2004 assessment, the IMF recommends establishing exchange-of-information agreements with counterparty countries.