Banking sector reform: efforts made prior to the strengthening of the legal framework in 2010  Within the broad framework of the economic reforms undertaken in the late 1980s (overall reform of the economic regulation, including that of price systems), the banking reform has been implemented since 1990, following the enactment of the law on money and credit (1990) establishing a two-tier banking system. This major monetary reform reemphasized the role of money and monetary policy- through indirect tools- in macro-financial regulation, thereby enabling a gradual shift from the “financial repression” paradigm. Since the year 1990, and after assessing the vulnerabilities of the Algerian public banking system, a number of reforms have been undertaken to improve the functioning of public banks, reinforce the banking activity operating framework- especially through the opening of the sector to private investors- and promote the development of non-bank financial institutions. Based on institutional audits, action plans aiming at improving public banks functions have been launched during the first half of the 1990s and pursued during the 2000s. In order to improve their governance, performance contracts between the public banks’ managers and the State as the owner, took effect in the beginning of 2007. At the same time, and on the basis of their financial statements audits undertaken by international firms, cleaning up operations of the public banks’ balance sheet started in the beginning of 1991 with the repurchase of non- performing loans (NPLs) and capital increases.

This important and costly bailout program enabled public banks to meet the prudential regulation requirements in terms of solvency ratios and risk-distribution, in line with international standards. With the sustained implementation of the new banking regulatory framework for banks and financial institutions during the 1990s, especially with regard the rules and conditions for the establishment of new banks and financial institutions, the second half of the 1990s recorded the first phase of effective opening of the banking activity to the private sector. However, violations and breaches in some private banks led the Banking Commission – the supervisory authority – to withdraw the licenses of seven banks and two financial institutions between 2003 and 2009, a number of which being in bankruptcy conditions between 2003 and 2006 and having risks concentrated on entities of their group. Against this background, the deposit guarantee scheme was activated in 2003 in accordance with the prevailing regulatory framework. In August 2003 and in light of these failures, the 1990 banking law was revised to strengthen the licensing conditions, increase the minimum capital requirement, which also became fully due in cash, and strengthen the Banking Commission missions. In particular, the Commission was given exclusive competence to exceptionally extend the deadline for the publication of banks and financial institutions’ financial statements. In parallel, the supervisory capacities of the Bank of Algeria have been significantly reinforced since the beginning of the 2000s; Bank of Algeria’s corps of inspectors being legally in charge of implementing the supervisory program set up by the Banking Commission.