By: Economic Analysis
In the midst of successive global financial turmoil—from the 2008 subprime mortgage crisis to the repercussions of inflation and supply chain disruptions—a fundamental question arises: Do we have a more stable and ethical alternative to the traditional financial system? This is where Islamic Finance comes into focus, garnering increasing international attention, not only in Muslim-majority nations but also in global financial hubs like London and Singapore.
Algeria, which inherited a traditional (interest-based) banking system from the colonial era, has since 2020 embarked on a clear path to support Islamic banking. It is betting on this sector to become a lever for economic development and a strategic way out of chronic financial crises. But what is the reality of this experiment? Is it truly successful? And most importantly, can Islamic Finance be the "global path" out of recurring financial crises?
The Essence of Islamic Finance and Its Origins in Algeria
Islamic Finance is not merely "interest-free" banking; it is an integrated system based on profit-and-loss sharing (PLS) , linking finance to real underlying assets, and prohibiting Riba (usury/interest), Gharar (excessive uncertainty), and Maysir (gambling).
In Algeria, Banque Al Baraka (1991) pioneered the experience, followed by Banque Assalama (2008). However, the real breakthrough came with Law 20-02 of March 15, 2020, which regulates banking operations related to Islamic finance and defines the rules for their practice by banks and financial institutions. This law allowed traditional banks to open "Islamic windows" alongside their conventional branches. Today, major public banks such as the Banque Extérieure d'Algérie (BEA) and the Caisse Nationale d'Épargne et de Prévoyance (CNEP) offer Islamic products like Murabaha (real estate and auto financing) and Ijarah (equipment leasing).
Advantages of Islamic Finance: Why is it Important for the Algerian Economy?
The role of Islamic Finance extends beyond the religious aspect to encompass macroeconomic advantages that could potentially restructure the national economy:
Linking Finance to the Real Economy: Unlike conventional banks that create money against interest-bearing debt, Islamic banks finance specific goods and assets. This means every injected Dinar corresponds to a real commodity or service, curbing inflation and reducing the systemic risks that lead to crises.
Fair Distribution of Risk: In the conventional system, the borrower alone bears the loss even if their project fails, while the bank remains secure in its interest. In the Islamic system, the principle is "no risk, no reward" (Al-Ghunm bil-Ghurm); whoever shares in the profit must also bear the loss. This encourages more rigorous feasibility studies and fosters a genuine partnership between the bank and the entrepreneur.
Attracting National Savings "Outside the Banking System": A significant segment of Algerians refrains from dealing with conventional banks due to the prohibition of Riba. Opening Islamic windows helps integrate these substantial funds into the formal economic cycle, thereby increasing banks' capacity to finance investment.
Stability in the Face of Crises: Studies have shown that Islamic banks demonstrated greater resilience during the 2008 global financial crisis compared to their conventional counterparts, as they were not involved in the derivatives market and toxic debt.
Is the Algerian Experiment Successful? (Assessment and Reality)
The reality confirms that Algeria is moving in the right direction, but the road is still long:
Indicators of Success
Legal Framework: The enactment of Law 20-02 was a qualitative leap, followed by the establishment of the Fatwa and Sharia Supervisory Board for our Islamic bankers to ensure Sharia compliance.
Institutional Adoption: Most major public banks (BEA, CNEP, BNA, Badr) have opened Islamic windows, broadening the range of available products from real estate and car financing to business financing.
Public Demand: There is significant public uptake of these products, reflecting a shift in banking culture.
Existing Challenges
Weak Equity-Based Financing: Most Islamic Finance products in Algeria focus on "Murabaha" (cost-plus sale), which resembles debt financing. There is a notable absence of genuine Musharaka (partnership) and Mudaraba (profit-sharing) contracts that fund new productive projects based on actual profit-and-loss sharing.
Human Infrastructure: There is a severe shortage of banking personnel specialized in Islamic Sharia and accounting standards (such as AAOIFI standards).
Marketing and Awareness: The average citizen still confuses "Murabaha" with an interest-based loan, requiring greater outreach and educational efforts.
The Call to Follow the Global Path: Islamic Finance as a Solution to Crises
Examining the recent global financial crisis reveals its primary cause was speculation in debt, traded separately from real assets. This brings us to the global call, echoed by prominent economists like Muhammad Umer Chapra, to return to a financial system grounded in ethics and risk-sharing.
Today, Islamic Finance represents trillions of dollars globally, with an annual growth rate between 10% and 15%. Countries like Malaysia and the UAE have not only implemented Islamic finance domestically but have become global hubs for it, utilizing instruments like Sukuk (Islamic bonds) to finance massive infrastructure projects without falling into the trap of conventional debt.
Algeria at a Crossroads:
If Algeria aims to overcome its economic crisis and build a diversified economy beyond hydrocarbons, global Islamic Finance could serve as a bridge through:
Issuing Sovereign Sukuk to finance major projects (roads, railways, renewable energy) without resorting to interest-based debt.
Financing SMEs, the backbone of the economy, through suitable Musharaka contracts.
Attracting Foreign Direct Investment from Gulf and Asian Islamic investment funds seeking Sharia-compliant environments.
Islamic Finance in Algeria is not a religious luxury but an economic necessity and a historical imperative. The experiment is young but promising, having successfully established a legal foundation and opened the market. However, true success lies in transforming this financing from merely consumer-focused "Murabaha" into genuine funding for productive projects through Musharaka and Mudaraba.
The call to follow the global path in Islamic Finance is a call to adopt a model proven to withstand financial storms and create genuine added value for the economy. Algeria, with its position and potential, is capable of becoming a beacon for this industry in the Arab region and Africa if it seizes this golden opportunity.