How Can the Algerian Central Bank Improve the Algerian Banking Sector Targeting Its Main Problems? (Dissertation Sample)

How Can the Algerian Central Bank Improve the Algerian Banking Sector Targeting Its Main Problems?
Name
InstitutionAbstract
Algeria is one of the fastest growing economies in the Northern Africa. The country requires good financial market to complement the rapidly growing economy. The Algeria banking sector has remained underdeveloped despite the restructuring effort that has been made from early 1990s. The country lacks modern financial services as compared to other developing nations within the same level of the economy. This has been contributed by the state economic policies that are geared towards the need of public enterprises, many of which are loss making. The banking sector in Algeria is dominated by state owned banks, which have more than 90% of the market share, and they are forced to lend under non-commercial conditions to generally loss making public enterprises. This has affected other banks by compromising their profitability through low lending rates and this has made the sector unattractive to many investors. The banking law, which was passed in 1990, gave the Central Bank the mandate to supervise and regulate the banking activities in the country. The law also enabled private and foreign banks to venture in the banking sector. However, despite the reform effort done by the central bank, the Algeria banking sector requires more improvement to ensure effective delivery of services. This study covers the main problems facing the Algeria banking sector and also that of developing countries in general. The paper outlines what the Algerian Central Bank has been doing to ensure bank reforms have been carried out effectively and the challenges that have been facing the Central Bank in implementing the reforms. The paper ends by giving recommendations on what the Central Bank can do to improve the banking sector in relation to the problems in the banking sector.
Table of Contents
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Abstract  PAGEREF _Toc365878336 \h
2
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Introduction  PAGEREF _Toc365878337 \h
3
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Statement of the Problem  PAGEREF _Toc365878338 \h
6
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The Objectives of the Study  PAGEREF _Toc365878339 \h
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Research Questions  PAGEREF _Toc365878340 \h
7
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The Scope and Limitations of the Study  PAGEREF _Toc365878341 \h
7
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Literature Review  PAGEREF _Toc365878342 \h
8
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Bank Reforms  PAGEREF _Toc365878343 \h
10
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Current Banking System in Algeria  PAGEREF _Toc365878344 \h
10
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Banking Systems in Developing Countries  PAGEREF _Toc365878345 \h
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Challenges Affecting the Development of Banks in Developing Countries  PAGEREF _Toc365878346 \h
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Major Problems/Crisis Affecting Banks in Emerging Countries  PAGEREF _Toc365878347 \h
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Factors behind Banking Crises  PAGEREF _Toc365878348 \h
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Compliance/Regulation in Developing Countries  PAGEREF _Toc365878349 \h
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Central Bank Policies in Emerging Countries  PAGEREF _Toc365878350 \h
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Reserve Requirement Policy  PAGEREF _Toc365878351 \h
24
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Open Market Operations  PAGEREF _Toc365878352 \h
24
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Inflation Target  PAGEREF _Toc365878353 \h
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Exchange Rates  PAGEREF _Toc365878354 \h
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Methodology  PAGEREF _Toc365878355 \h
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Research Method  PAGEREF _Toc365878356 \h
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Research Design  PAGEREF _Toc365878357 \h
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Sampling and Study Setting  PAGEREF _Toc365878358 \h
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Sampling Techniques  PAGEREF _Toc365878359 \h
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Data Collection  PAGEREF _Toc365878360 \h
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Data Analysis  PAGEREF _Toc365878361 \h
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Research Findings and Discussion  PAGEREF _Toc365878362 \h
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Introduction  PAGEREF _Toc365878363 \h
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Problems Facing Algeria Commercial Banks  PAGEREF _Toc365878364 \h
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Actions of the Central Bank to Tackle the Problems  PAGEREF _Toc365878365 \h
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Comparison between Private and Public Banks in Developing Countries and Algeria  PAGEREF _Toc365878366 \h
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Conclusion  PAGEREF _Toc365878367 \h
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Recommendations  PAGEREF _Toc365878368 \h
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Increase the Bank Minimum Capital Requirement  PAGEREF _Toc365878369 \h
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Increase Competition in the Banking Sector  PAGEREF _Toc365878370 \h
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Strengthening Supervision and Regulatory Measures  PAGEREF _Toc365878371 \h
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Encourage Banks to Use Modern Technology  PAGEREF _Toc365878372 \h
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Adopt Basel III Principles  PAGEREF _Toc365878373 \h
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Privatizing the State Owned Banks  PAGEREF _Toc365878374 \h
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Creation of a Stock Market  PAGEREF _Toc365878375 \h
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Suggestion for Further Research  PAGEREF _Toc365878376 \h
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List of References  PAGEREF _Toc365878377 \h
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How Can the Algerian Central Banks Improve the Algerian Banking Sector Targeting Its Main Problems?
Introduction
The banking sector of Algeria consists of the Central Bank Banque d’Algerie, six state owned commercial banks, fourteen private and foreign banks and fourteen other financial institutions. The banking activities are regulated by the government through the Central Bank. Despite Algeria being one of the richest countries in North Africa due to the exportation of oil, the banking sector remains underdeveloped. The country lacks modern financial services as compared to other developing nations within the same level of the economy. This has been contributed by the state economic policies that are geared towards the need of public enterprises, many of which are loss making. The banking sector in Algeria is dominated by state owned banks which have about 90% of the market share, and they are forced to lend under non-commercial conditions to generally loss making public enterprises. This has affected other banks by compromising their profitability through low lending rates (Joffé 2002, p. 33).
The banking sector in Algeria started in 1962, soon after its independence (Werenfels 2002, p. 9). Banks were established by the state government as financial needs, such as funding development programs, increased. The banks were fully owned and were controlled by the state. Established banks were required to give loans to public enterprises regardless of their financial performance or their ability to pay the loan. The lending rates were controlled by the government, and they were usually very low. Werenfels (2002, p. 11) argues that although the banks helped in development of the public sector, they continued operating at a loss since most of the enterprises were not able to pay the loan in the appropriate time and some did not pay at all since most of public enterprises in the country were operating at a loss. There were also regulations on the part of the government prohibiting private banks and foreign banks to invest in the country. This left the government to control and regulate all banking activities in the country.
By 1990, the banking sector in the country had gone down with all public banks suffering from heavy debts and loans they had lent to the public enterprises. The government decided to reform the banking sector by allowing both the private banks as well as the foreign ones to enter the banking industry (Joffé 2002, p. 36). The aim of the reform was to introduce competition and modernization in the banking sector, to move the banks from giving direct loans, to strengthen banking supervision, and to reduce state dominance in the banking industry as well as ensure that the lending rates are determined by the market forces of demand and supply. The reforms were supported by the passage of the banking law 90-10 of 10 April 1990, which outlined the regulation and supervision of Algeria banking sector. According to the law, the responsibility of regulating and supervising banks in Algeria were divided between three institutions: the money and credit council which are responsible for licensing and regulation, the banking commission which has power and jurisdiction to take sanctions, and the Central Bank which is responsible for implementation. The money and credit council is also the Executive Board of the Bank of Algeria (Werenfels 2002, p. 16).
Despite efforts to reform and restructure the banking sector in Algeria for more than two decades, the sector still remains underdeveloped with very few private and foreign banks being established in the country (Jbili, Enders & Treichel 1997, p. 35). The banking sector is still dominated by the public banks which have more than 85% of the market share. Operating commercial banks are not able to...