* Oil price drop forces Algeria to adapt financing
* First local bond issue criticized by conservatives
* Gov't has already trimmed budget, cut energy subsidies
By Lamine Chikhi
ALGIERS, Feb 28 (Reuters) - Algeria plans to raise money from an interest-free local bond, using a model the government hopes will draw more participation from the public and help it offset a huge fall in its energy earnings.
The North African OPEC member has already cut public spending, introduced new taxes and reduced government subsidies on fuel to help it cope with the halving of its income from oil and gas due to a long slide in international energy prices.
Finance Minister Hadji Baba Ammi told state news agency APS on Monday the new bond would not bear interest, which may help attract a greater number of Algerian buyers after a previous interest-bearing bond issue drew fire from religious conservatives.
Islam bans the use of interest, and many countries are opening up to Islamic finance, based on religious principles such as prohibiting interest on credit and creating sharia-compliant banking.
"We are about to launch a bond sale, but free of interest this time, if the government allows this approach," Algeria's finance minister has been quoted as saying to official APS.
"I would not use the word 'Islamic' but rather more 'participative'", he said when asked about the type of operations that would conform with sharia law.
The minister said bondholders would receive a share in projects that the issue would finance as an incentive. But he did not give further details about the structure of the bond or how it would differ from sukuk or Islamic, interest-free bonds.
The government launched its first local bond last April, but it was harshly criticised by the religious community made up of imams, academics and even the religious affairs minister, who said he had not been consulted over the bond issue.
While many Algerians are religiously conservative, the country is emerging from a 1990s decade-long war with armed Islamists that left 200,000 dead, and issues involving conservatism and political Islam are sensitive.
When the first local debt operation was announced, Sheikh Chemssedine Bouroubi, a well-known imam who preaches daily on local TV, openly attacked the finance minister.
"You don't have the right to transform an illicit action into a licit one.... You will suffer inside your tomb," he said.
While neighbours Morocco and Tunisia are developing laws for Islamic finance, Islamic banks and sukuk bonds, Algeria still has no legal framework for such operations.
"You have to be very cautious when it comes to handling religious issues," Islam analyst and editor of religious books Mohamed Mouloudi told Reuters.
The new bond will be launched by the end of April, APS said, quoting the finance minister. The government must first approve the bond issue.
Algeria raised $5.86 billion from its bond sale last year.
Long reliant on its oil and gas revenues, the economy is still emerging from a centralised model following its independence from France, and the state controls most strategic sectors.
Heavy bureaucracy and regulation requiring that Algerians own 51 percent of companies in the country has made investors wary of putting money into Algeria. Government attempts to open up the non-oil economy in sectors such as health, agriculture and industry are moving slowly.
Still, the dramatic fall in oil prices has hit Algeria hard, prompting the government to look at more flexible ways to improve revenues. Algeria's energy revenues were at $27.5 billion in 2016, less than half the $60 billion it earned in 2014. (Writing by Patrick Markey; Editing by Hugh Lawson)