Sharia-Compliant Finance for MSMEs in Algeria

Like many of its neighbors in the Arab world, Algeria hopes to stem high unemployment rates among its young population by promoting the development of micro, small and medium sized enterprises (MSMEs)—small businesses that can provide income-generating opportunities for women and youth while boosting the country’s overall economic health.

Key to that effort, of course, is the provision of financial services—access to credit, safe places to save, and affordable insurance. Since many youth in Algeria are reluctant to use financial products that charge interest (a violation of Islamic financial principles), the Algerian government set out to to make available a Sharia-compliant product that is both affordable and scalable.

Working with the Algerian Ministry for Industry, SME and Investment Promotion, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) partnered with Al Baraka Bank to pilot one such product in the Ghardaia region of Algeria. Four years later, this musharaka product—a profit- and loss-sharing scheme that emphasizes shared risk between financier and borrower—has provided new opportunities for 167 MSMEs. In fact, based on that successful experience, the product is now being offered at the national level.

Getting there took a multi-faceted approach to product development as well as capacity-building at Al Baraka Bank. At the request of the Algerian Ministry for Industry, SME and Investment Promotion, GIZ worked through our Programme Développement Economique Durable (DEVED) project to ensure that Al Baraka had the tools to structure its musharaka product as well as to market it effectively and to analyze its performance.

This included setting up a specialized MSME department within the bank. The department worked with branch managers to identify viable potential clients—many of whom lacked a formal credit history—by setting up a council of local leaders to vet applicants. This innovation helped ensure remarkable results: Of Al Baraka’s 167 musharaka contracts with MSMEs in Ghardaia, only 2.3% have a portfolio-at-risk of greater than 90 days.

Given the success of the Ghardaia pilot, musharaka is now available through Al Baraka branches nationwide. And having gathered data in the pilot phase on the characteristics of successful musharaka clients, the bank can now assess applicants in-house, making product delivery more efficient.

Through its MSME department, Al Baraka is now working with its nationwide branches to test other Sharia-compliant products, including, murabaha (a “cost plus mark-up” sale contract often used to finance goods needed as working capital) and qard hassan (a “loan” usually funded by charitable donations).

The latter, in particular, is proving especially attractive for female entrepreneurs. They can launch a business with a small, no-fee qard hassan offered through a cooperative, and then—as the business grows—access murabaha or musharaka products, which involve either a fixed asset or a risk-sharing venture. Based on this successful experience in Ghardaia, GIZ is also studying the feasibility of Sharia-compliant micro-insurance products for Algerian MSMEs. This phased approach to developing and rolling-out products may offer insights into how to further develop—and diversify—the fledgling market for Sharia-compliant microfinance.

----- The authors work for Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ), which supports the German government in achieving its objectives in the field of international cooperation for sustainable development.