Algeria embraces sovereign sukuk financing in 2025

The move toward sharia-compliant sovereign financing is designed to ease liquidity and draw cash back into the formal banking system. If it works, Algeria could become a major player in the industry

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There is growing demand for Islamic bonds in Algeria so the government has approved the first national sukuk issuance for 2025.

Algeria embraces sovereign sukuk financing in 2025

Rabia Abdul Salam

last update on 01 Jan 2025

Algeria’s government is preparing to issue the country’s first sukuk sovereign bond, taking its government debt into the global market for Islamic finance.

Unlike conventional bonds, sukuk certificates do not pay interest, since doing so would not comply with traditional Islamic religious law (sharia).

Instead, a sukuk offers investors a share of profits from their partial ownership of an underlying asset, providing a bond-like stream of incremental income until the principal amount is paid back on maturity.

Aims of the scheme

Sukuk financial products issued through state-run lenders have been offered to investors in Algeria for around four years. The country has now approved its first sovereign sukuk under its Finance Law 2025.

Public borrowing via these instruments would represent the first time that Algiers had used sukuk to raise money directly. Leaders hope the Islamic finance initiative will help establish the country as a leading expert in fast-growing area of regional and international finance, potentially worth up to $650bn for Algeria by 2030.

The initial aims of the scheme are domestic—to bring the substantial parallel market for sharia investment out of the parallel, or shadow economy, and back into the mainstream financial sector.

While the international potential is significant, the government hopes in the first instance that using sovereign sukuk to draw cash back into official financial channels will provide a lifeline for Algeria’s economy, where a sizeable shadow market has hindered growth.

At a speech inaugurating the Economic and Social Council in late December, President Abdelmadjid Tebboune said around 10tn dinars (around $90bn) were washing through Algeria’s the parallel market.

Public borrowing via these instruments would represent the first time that Algiers had used sukuk to raise money directly

While some experts have questioned that figure, it would make it far larger than the country's formal market if it were correct, but gauging it is difficult, because much of that informal economy is hidden, since it involves illegal activity, including forging.

Prof. Cherief Djamel Eddine Noufel at the University of Algiers told Al Majalla that is was "very difficult to ascertain the real size due to intermittent currency printing and the presence of counterfeit money". In agreement was Abderrahmane Raouya, a former finance minister, who said size estimates were merely "statements" without basis.

Infrastructure investment

Whatever else, successfully opening a new means of lending to the government will help to finance state projects, reduce reliance on foreign debt, and may make the terms on offer to Algeria from international investors more appealing.

The country has brought its debt down from the highs of recent years and now has relatively low levels of external debt. New ways of tapping domestic capital via sukuk could still help, however, as Algeria seeks to increase spending to stimulate growth. On the infrastructure wish-list are roads, bridges, hospitals, schools, to name but a few.

Experts warn that the development of sukuk investment opportunities may not be easy. Dr Sulaiman Nasser, a researcher in state-run banking and Islamic finance, told Al Majalla that success depends on setting up a dedicated panel to ensure Sharia-compliance.

Shutterstock — Entrance to the Central Bank of Algeria in the city of Setif.

"A significant segment of Algerians refuses to engage with traditional banks as they operate on interest, which violates Islamic law prohibiting usury, speculation, and investment in forbidden activities," said Nasser. "Islamic law also mandates the sharing of both profits and losses between the bank and the client".

He stressed the need to establish "a body that issues fatwas on the conformity of Islamic bonds with sharia so that the Algerian authorities can succeed in integrating the monetary mass outside the official framework into the official circle".

Becoming a sukuk hub

While taking sukuk into government financing comes with its challenges, the swift growth of sharia-compliant investing in the private sector is clear.

According to a February 2024 report from the Bank of Algeria, Islamic banking deposits rose by more than 14% in the last two years, from around $4bn in 2022 to $4.7bn by June 2023, when there were 12 licensed providers operating in Islamic banking (six state-run, six private).

In a report titled The Algerian Economy: A Regional Hub for Islamic Financial Services, Prof. Salah Salhi at Ferhat Abbas University in Setif explained the potential.

"There is an opportunity to increase the current 0.2% share of Islamic finance in Algeria's economy—equivalent to $6bn—to 1% (or $50bn) in the short term and 2% ($150bn) by 2027," wrote Salhi. "In the long term, this share could grow to around 5%, with Algeria's contribution exceeding $650bn by 2030, positioning it among the top ten global players in the Islamic finance market."

Islamic banking deposits rose by more than 14% in the last two years, from around $4bn in 2022 to $4.7bn by June 2023

To achieve this, Salhi suggests upgrading Algeria's relative position in Islamic banking assets, which amounted to $3.7tn globally at the beginning of 2024. He envisions an increase from the current $5bn to $60bn in the medium-term.

This would require developing institutional and procedural frameworks for Islamic banks, transitioning a state-run bank into a fully Islamic bank in partnership with the private sector to build confidence in the Algerian banking system, and implementing the existing part of financial law allowing the use of monetary policy instruments tailored to the unique features of Islamic banking, such as diverse partnerships.

Salhi also proposed integrating sukuk into Algeria's financing tools, arguing they have proven their value across various regions in the Islamic finance industry, where total assets top $870bn, spread across 5,300 types of conventional sukuk.

Global potential

Transitioning to a new economic reality centred on sukuk financing and mobilising financial resources to support investments in the real economy (outside the state budget) targets two primary goals.

First, it aims to channel a significant portion of the resources circulating in the parallel market into the formal economy. Second, it seeks to capture a share of the Islamic investment market in regional and international markets.

If it succeeds, Algeria's share of total sukuk issuance in active Islamic finance regions could reach 5% ($40bn) in the coming years, from around 200 types of the certificates.

The government is preparing a comprehensive legal framework for the sharia-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.

Salhi recommends incorporating Islamic investment funds into the Algerian economy to attract money from small savers, domestic markets, and international Islamic investment funds currently valued at around $260bn and projected to reach $400bn by 2028. For Algeria, the year 2025 may be the year it branched out.

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