Harnessing Algeria’s Multifaceted Potential in Islamic Finance

Lotfi Zairi, Associate Manager, Operations, Sovereign Risks at ICIEC, considers the important supportive and technical role that the IsDB Group and ICIEC could play in developing the Islamic finance industry in Algeria by enhancing its existing cooperation in trade and project finance and credit and political risk policy cover for Algerian entities through the Group’s Country Engagement Framework (CEF) and ICIEC’s pioneering Green Sukuk Insurance Policy.

Economic Context

In last July 2024, Algeria has gained back its position within the uppermiddle income category under the World Bank’s country income classification. The merits of this classification invoke the advances made by the country in “economic and human development, investing in infrastructure projects and introducing redistributive social policies that alleviated poverty and significantly improved human development indicators.”

A recent World Bank report highlighted Algeria’s “strong” economic performance in 2024. Growth in the first half of the year reached 3.9 percent, driven by “resilient” agricultural output.

Algeria is the largest country in Africa and the third largest economy in the Arab world. Aiming at addressing the predominance of the hydrocarbons in the economy which counts for almost 95 % of exports and 14% of GDP, Algeria has taken major steps to diversify its sources of revenues and improve employment prospects since 2020.

New laws on Hydrocarbons, on Investment, and on Money and Credit have been promulgated, lifting restrictions on the foreign ownership of domestic firms, to boost foreign and domestic investment. The country has clearly adopted a transition strategy towards private sector-led growth, rationalized public-spending, optimized imports and further developed non-hydrocarbon exports.

The government is optimistic about the economic and financial situation, guided by an expected increase in the exports of goods and hydrocarbons and a forecasted growth in non-oil economic activity around 5% during the next three years 2025-27. The 2025 budget amounts to a projected USD126bn with 4.5% growth forecast compared to 4.2 percent in 2024. Public spending includes the revitalization of the oil sector both in terms of exploration and recovery. In addition, the 2025 Budget includes several infrastructure projects and other socially oriented sectors such as health, education, transportation, housing, and support for vulnerable communities accounting for 35.3%.

The country has brought its debt down from the highs of recent years and now has relatively low levels of external debt. To optimize its external debt, the government is exploring new funding channels to cover the growing budget deficit estimated at USD62bn, compared to USD45bn in 2024. In that respect, Algiers is arranging to promote the sustainable financing of strategic projects and to stimulate local investment. The Treasury is authorised to issue sovereign bonds, to let investors participate in the financing of infrastructure programs.

Islamic Finance Sector Development

While the international market offers significant potential, the government is focusing in the first instance on reintegrating the USD90bn parallel market, a sizeable shadow market that is hindering growth. The Islamic Finance industry is seriously considered by the Government for that purpose, counting on its efficient role in achieving a maximum financial inclusion of Muslim populations. Developing the Islamic banking sector, Takaful and Islamic Capital Market seems to be the battle horse in that respect.

The Finance Ministry expressed firm intention to issue Sukuk in early 2025 as part of the country’s budget. In that regard, Algeria can benefit from the services of ICIEC, which offers a Sukuk Insurance Policy (SIP) in full compliance with the Islamic Shariah.

Sukuk is an efficient financial instrument for resource mobilization from the international capital market, in full compliance with Islamic finance principles. Member Countries are using it for the funding of their infrastructure projects and other developmental initiatives including renewable energy and environment friendly projects. For these latter categories, ICIEC has also developed a Green Sukuk Insurance Policy. As such, the Sukuk Insurance Policy will contribute to the economic and social development of Member Countries.

The development of the Sukuk Insurance Policy has been widely appreciated by Member Countries as well by Islamic finance organisations, financial institutions and international reinsurance companies. It is expected to create an additional flow of Sovereign Sukuk issuances in the Islamic capital market based on the ICIEC third-party guarantee structure, in full compliance with Shariah principles.

Thanks to its AA- credit rating and to its remarkable track record in covering the risk of Non-Honouring of Sovereign Financial Obligations, ICIEC can provide a strong credit enhancement to Sukuk issued by Member Countries such as Algeria, lowering their dividend and cost, and facilitating their subscription across the international capital market.

IsDB Group Technical Assistance

The government is preparing a comprehensive legal framework for the Shariah-compliant finance industry, aiming to position Algeria as a regional hub for sukuk issuance within African, Arab, and European free trade zones, thereby increasing its financial importance in the Algerian economy.

In 2021, the Islamic Development Bank Institute (IsDBI) and the Central Bank of Algeria signed a technical assistance agreement valued at USD270,000 to develop the legal and regulatory framework for Islamic banking in Algeria. This project, once completed, will lay the foundation for the development of Islamic banking in Algeria. The technical assistance is in an advanced stage of implementation, and once completed, Algeria will have a comprehensive framework conducive for the development of Islamic banking activities and with the required tools for the central bank and regulators to supervise the system.

Furthermore, a second technical assistance grant of USD272,000, signed in 2022, is being provided to the Ministry of Finance to assist the country in issuing sovereign Sukuk. Algeria is trying to tap the Islamic Capital Market with sovereign Sukuk, and this technical assistance is intended to update the legal framework to accommodate Sukuk structures and to guide the country through the process of Sukuk issuance.

In addition, in collaboration with the Government, the Islamic Development Bank Group launched the first Country Engagement Framework (CEF) for Algeria in the period 2025-2027. This framework is designed to develop a short-term country engagement strategy and interventions in support of Algeria’s development programme.

Under its Re-aligned Strategy 2023-2025, the IsDB will support priority development projects and initiatives under two strategic pillars:

A. Enhancing the competitiveness of the economy and the private sector for an efficient renewal and diversification of economy
B. Partnering for capacity development and south-south cooperation

The envisioned CEF would provide a robust platform that would enable not only the IsDB, but also the Group entities to align and intervene, in complementarity, to contribute to the implementation of Algeria’s Development objectives. The CEF would thus be at the nexus of (i) national development priorities as highlighted in the Government Action Plan, and (ii) IsDB’s realigned strategy.

Pillars 1 and 2 complement each other and include both hard and soft interventions for the comprehensive development of the pre-requisites for Algeria’s Economic Development Programme. In addition, they will be supported by the cross-cutting pillars of:

• Islamic Finance.
• Women & Youth Empowerment.
• Climate Change adaptation and mitigation.
• Capacity Development to address the needs.

ICIEC Support to the Economy

ICIEC has insured a total amount of USD10 bn in Algeria since inception. ICIEC has facilitated USD5.3bn for imports of strategic goods, USD3.2bn for exports, and USD1.5bn for foreign investment inflows.

ICIEC provides reinsurance support to CAGEX, the Algerian national ECA, for the export and domestic treaties. To boost Algerian exports, CAGEX and ICIEC are closely cooperating in offering required support to Algerian Non-Oil exports allowing them to diversify the Algerian economy.

Furthermore, ICIEC has been insuring several Jordanian pharmaceutical companies having established separate legal entities in Algeria. This allowed the transfer of know-how especially Jordan’s remarkable comparative advantage in the pharmaceutical sector.

Furthermore, it helped to accommodate the market needs in terms of good quality generic products at affordable costs and helped at later stage to create a good platform for Algerian pharmaceutical exports to African countries.

Lately, ICIEC insured financing provided by ITFC and a pool of commercial banks to STEG Tunisia to import gas from Sonatrach, Algeria. The cooperation with Algeria is characterized by the close coordination between ICIEC and CAGEX under the framework of the AMAN Union, which is an association of commercial and non-commercial credit insurance providers in the OIC member countries. In this regard, ICIEC, as the responsible entity for managing the AMAN Union Secretariat General during the years 2023-2024, organized in partnership with CAGEX the 14th Aman Union Annual Meeting in Algiers, in December 2024.

In addition, ICIEC catalysed a Foreign Investment in Algeria for the expansion of Tosyali Steel Factory, a large steel production project promoted by Turkish Investors.

ICIEC Support to Tosyali Steel Project -Algeria

The collaboration between Tosyali Holding and ICIEC demonstrates the potential for successful large-scale industrial projects supported by robust financial and insurance frameworks. This partnership not only benefits the involved parties but also serves as a model for other companies and investors looking to explore opportunities in emerging markets, taking advantage of ICIEC support in terms of risk mitigation as well as capacity building.

In 2018, Tosyali Holding, a prominent Turkish steel manufacturer, received substantial support from the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC). ICIEC issued a 5-year equity investment insurance policy to back Tosyali Holding’s ambitious 3rd phase of development for its steel factory project in Algeria, valued at USD 450 million.

This project represented the largest foreign investment ever made by a Turkish company, highlighting Tosyali Holding’s significant role in the global steel industry. It was the most substantial Foreign Direct Investment (FDI) in Algeria outside the petrochemical sector, underscoring its strategic importance for the country’s industrial diversification.

The support from ICIEC not only provided financial security to Tosyali Holding as a foreign investor but also demonstrated a high-level confidence in the capability of quality investors from the Organisation of Islamic Cooperation (OIC) to execute large-scale international projects. This collaboration marked a landmark milestone in strengthening economic ties between Türkiye and Algeria, paving the way for future investments, industrial growth, regional economic integration and more Intra-OIC Investments.

By securing the production of 70% of Algeria’s building materials needs, Tosyali steel project has largely contributed to reducing the country’s imports of steel, enabling remarkable currency savings. In addition, the project has provided over 4,000 direct jobs and thousands of indirect jobs.

Tosyali Holding initiated its Algerian operations in 2013 through affiliate company Tosyali Iron Steel Industry Algerie A.Ş. (Tosyali Algerie). The complex covers 4 million square meters and has easy access to the Mediterranean Sea.

Phase 1 included a 1.5 Mt/y EAF steel meltshop and a 1.2 Mt/y rolling mill. The initial production capacity of reinforcing bar (rebar) was 1.2 million tons and represented 28% of demand at this time. Like reinforcing bars, wire rods are in high demand and a vital product for development.

Phase 2, which was completed in 2015, added a 0.5 Mt/y wire rod mill, which met 60% of the total needs of Algeria at that time. Wire rods are used for the manufacture of dozens of products such as wire mesh, wire, nails, and screws.

The third phase of development started in 2018 aimed at completing the integration of iron ore into the finished product process. In this phase, Tosyali Algerie set up a 4 Mt/y iron ore plant and a 4 Mt/y pellet production unit to transform iron ore fines into iron oxide pellets.

Phase 4 of the Tosyali Algerie steel complex, a DRI-EAF integrated flat steel production facility, began in 2022. In July 2021, Tosyali Holding awarded Midrex and its partner Paul Wurth a contract to build a second DRI plant at the Tosyali Algerie steelworks. The new DRI plant is to produce 2.5 million tons of HDRI and CDRI with the capability to operate with increased percentages of hydrogen in the future. HDRI will be fed via a hot transport conveyor to the new 2.4 Mt/y EAF melt shop, providing greater EAF productivity and energy savings. During melt shop outages, the MIDREX Plant can continue producing CDRI up to full capacity.