Expected regulatory changes and measure to address tight liquidity are set to bring Tunisia's banking sector back to health

While it is a crowded market, 11m-person Tunisia has long had one of the most developed banking sectors in North Africa, with a range of commercial banks, offshore lenders, leasing companies, sharia-compliant institutions and microfinance firms targeting a wide variety of segments.

The Tunisian financial services industry, of which banking is by far the largest component, accounted for 3.7% of the country’s GDP in 2014. Sector activity rose by 3.3% in real terms during the first nine months of 2015 compared to the same period a year earlier, and by 3.8% in 2014.

The sector’s trajectory is largely positive, with lending and leasing activity growing rapidly in recent years, but the stability and profitability of the sector has been negatively affected by poor performance at several large state-owned banks as well as by market fragmentation. However, year 2015 saw several of these institutions recapitalised alongside changes made to their management structures, which in addition to putting them back on a surer footing should also help to improve the tight liquidity situation prevalent in the market since the 2011 revolution.

With access to financial services remaining difficult for many Tunisians, the authorities have also made the development of microfinance a priority in recent years. A passage of a 2011 law on microcredit now allows private companies to enter the market, with the law also establishing a regulatory body to oversee the segment (see analysis).

Market Structure

There were 22 onshore banks in Tunisia at the end of 2014, according to the Central Bank of Tunisia (Banque Centrale de Tunisie, BCT), as well as two investment banks and seven offshore banks based in the country. Another bank, Wifack International Bank, joined the sector’s ranks in August 2015, having converted itself from a leasing company to an Islamic bank. Tunisians can also open savings accounts and make payments and remittances at the Tunisian National Post Office, which has a 45% share of accounts once inactive accounts are excluded. Of the 22 onshore banks, nine were majority owned by foreign investors, seven were controlled by the state, three were privately owned by Tunisian entities, and three had a mix of major local and foreign shareholders.

Good Governance

In a 2012 assessment of financial stability in the Tunisian banking sector, the World Bank argued that, despite the large number of players, the sector was uncompetitive, in part attributing this to a weak supervision framework which, it argues, has resulted in Tunisian banks competing for a limited pool of low-risk, high-collateral clients.

However, in years since this report was published, a number of significant reforms have been undertaken to strengthen banking supervision including, but not limited to, establishing rules of good governance for all banking institutions; raising the minimum solvency ratio, first from 8% to 9% at the end of 2013 and then to 10% in late 2014, with the introduction of a minimum Tier 1 capital ratio in accordance with Basel III; strengthening the prudential framework on bank liquidity through the implementation of a liquidity ratio, in compliance with Basel III, to provide banks with an effective prudential instrument to measure and manage the liquidity risk; and strengthening the disciplinary power of the BCT by implementing monetary and prudential sanctions, through capital requirements, for non-compliance with prudential standards.

Furthermore, the BCT has also developed a five-year action programme to strengthen banking supervision from 2016-20, enhancing sector conformity and addressing risk. Objectives include adapting the legal and supervisory framework to accord with international standards as set out by Basel II and III, and setting up an effective framework for monitoring the operations of all credit institutions.

Assets

The assets of the Tunisian banking sector were worth TD86.8bn (€39.8bn) as of August 2015, according to latest available data from the BCT. The figure stood at TD82.9bn (€38bn) at the end of 2014, up 9.9% on the previous year. The Tunisian Professional Association of Banks and Financial Institutions (Association Professionnelle Tunisienne des Banques et des Etablissements Financiers, APTBEF), the sector representative body, put total assets lower at TD69.3bn (€31.8bn) at the end of 2014. The discrepancy in figures is largely down to different calculations of “other assets” held by banks (after items such as loans, central bank deposits and securities have been taken into account).

Lending

Total lending by the (onshore) banking sector to the economy stood at TD57.8bn (€26.5bn) as of September 2015, according to latest available BCT figures, up from TD56bn (€25.7bn) at the end of 2014 and an increase of 5.6% compared to September 2014. Lending had risen 9.4% over the course of 2014 and grew at a compound annual growth rate (CAGR) of just under 12% between 2009 and 2014 – not taking inflation into account. Of total lending covered by the country’s lending risk register, TD27.4bn (€12.6bn), or 60%, went to the services sector; TD16.2bn (€7.4bn), or 35.4%, went to industry and TD2.07bn (€949.3m) – 4.5% of the total – went to agriculture and fishing.

While lending to the corporate sector is strong, the syndicated loans market remains extremely small in scale, with lending worth around TD11.7m (€5.4m) as of August 2015, according to the BCT. In addition, lending to small and medium-sized enterprises (SMEs) is also weak (see analysis).

Retail lending, the value of which stood at TD18.2bn (€8.3bn) in September 2015, has helped to drive growth; the value of outstanding retail bank loans (defined by the central bank as non-professional loans to individuals) increased at a CAGR of around 14.5% over the five years to 2014, faster than overall lending by banks. Some TD7.97bn (€3.7bn), or 43.9% of the September 2015 total, was accounted for by mortgages for housing, while most of the remainder (TD7.45bn, €3.4bn) was for the purposes of furnishing and refurbishing houses, and consumer credit (TD2.44bn, €1.1bn).

Deposits

Monetary deposits were worth a total of TD14bn (€6.4bn) as of August 2015, increasing from TD13.1bn (€6bn) at the end of 2014 and TD12.3bn (€5.6bn) a year before that, according to BCT figures. Quasi-monetary deposits (largely consisting of forward deposits and special savings accounts) stood at around TD31.6bn (€14.5bn).

Costs & Profitability

A 2014 World Bank report notes that Tunisian banks have among the highest overheads in the region – which it attributes to a lack of economies of scale resulting from the fragmentation of the market and inefficiencies at the major state-owned banks – though it reports that medium-sized banks have performed better on this measure than their smaller and larger counterparts.

Profitability in the sector can also be low, which the World Bank blames on poor efficiency rather than strong competition. Industry return on assets and return on equity stood at just 0.3% and 3% in 2013, according to IMF data, though the figures had recovered to 0.9% and 11.2% the following year.

Liquidity

Liquidity in the banking system fell following the 2011 revolution, and levels have remained tight in the years since then, pushing banks to seek refinancing from the BCT. “The main reason for the tightening has been the rise in the current account deficit due to factors such as reduced tourism revenues as well as falls in phosphate and oil production,” said Mohammed Salah Souilem, director-general of monetary policy at the BCT. “Following the revolution there was also a flight to cash as political uncertainty affected all areas of the economy,” he told OBG.

Other factors cited by industry figures include the growth of the informal economy since the revolution and increased government scrutiny of the origin of bank deposits as part of recently stepped-up measures to reduce tax avoidance. The situation is improving on some fronts. For example, Souilem said that annual cash circulation growth had returned to normal levels in recent years and would likely remain under control in 2016. The IMF has also noted that the recapitalisation of several major public banks in 2015 should also help improve the liquidity situation.

However, some other factors are moving in the opposite direction – for example, agricultural exports are unlikely to perform as well in 2016 as they did in 2015 (see Economy chapter), which will add to current account pressures. Kmar Zawedi, director of planning and management control at Banque de l’Habitat (BH), said she believed liquidity was likely to remain tight in 2016.

Major Players

The largest bank in the country in 2014 was Banque Internationale Arabe de Tunisie (BIAT), with an market share in terms of assets of 12.6% (based on total sector assets as calculated by the APTBEF). As of the end of June 2015 its assets stood at TD9.19bn (€4.2bn). The institution’s largest shareholder is local conglomerate the Mabrouk Group, which has a 39.1% ownership stake; another local holding firm, Aziz Milad, has a 12.9% share.

The second-largest bank by assets is Banque National Agricole (BNA), in which the Tunisian state is the major shareholder with a 65% stake, via a variety of government entities. The bank had an 11.7% market share in 2014, on assets of TD8.1bn (€3.7bn). Just behind it is the privately owned Amen Bank, with assets of TD7.99bn (€3.7bn) as of the end of 2014, equivalent to a market share of 11.5%. The bank is part of local conglomerate Amen Group. Insurance company COMAR, which is also part of the group, owns a 27.7% stake in the bank, while PGI Holding directly owns a 20.2% share.

The fourth- and fifth-largest institutions are, like BNA, both public banks. These are Société de Banque Tunisienne (STB), which had 2014 assets of TD7.34bn (€3.4bn), and BH, with assets of TD6.25bn (€2.9bn). Prior to their recapitalisation in 2015, the state had respective holdings of 51% and 57% in the two banks.

Regulation

In recent years the regulatory authorities have taken a number of measures to strengthen the stability of the country’s banking system. These have included a move in mid-2012 to raise the minimum capital adequacy ratio from 8% to 10%; the introduction of increased provisioning requirements for non-performing loans (NPLs) in December 2013; and a new liquidity ratio of 70% beginning from the 1st of January 2016, up from 60% previously, brought on the first of January 2015.

Further regulatory changes are imminent, with the authorities working on a new draft law on banks and financial institutions. While the law is yet to be finalised, the local press in June 2015 reported that a draft contained provisions to raise banks’ minimum capital requirements to TD50m (€22.9m), from TD25m (€11.5m) currently, as well as changes to various mandatory prudential ratios and provisions to create a fund that would guarantee sight deposits. These changes should help move the sector towards international risk-management best practices. Some segments are ahead of others in terms of capacity, with a number of private sector banks complying with Basel requirements.

Strengthening Public Banks

However, the financial position of public banks is substantially weaker, in part due to what the World Bank has described as political pressure on state-owned banks in the pre-revolutionary era to make loans to associates of the regime of Zine El Abidine Ben Ali as well as to struggling state-owned enterprises. For example, NPLs at public banks amounted to 23.9% as of March 2015, according to figures from the IMF, compared to 9.9% for private institutions. Capital adequacy ratios, meanwhile, stood at 3.5% for public banks in March 2015, well below regulatory limits and the 12.7% ratio seen in the private sector.

The industrial and tourism sectors between them accounted for half of overall NPLs (at both public and private banks) in 2013, on 27.7% and 22.4% of the total, respectively. Tourism is disproportionately responsible for NPLs given that the sector made up only 6.5% of total bank lending that year. The sector is particularly indebted to public banks.

In order to put the state-backed banking sector back on an even keel, in August 2015 the Tunisian parliament approved the recapitalisation of two of the major state-owned entities, namely BH and STB, to the tune of TD110m (€50.4bn) and TD757m (€347.2bn), respectively. The two banks raised the new capital through share sales (most of which were taken up by the government) the following month.

A smaller state-owned bank, Banque de Financement des Petits et Moyens Entreprises (BFPME), was also recapitalised earlier in the year (see analysis). BNA is also likely to be recapitalised, but may be able to achieve this by selling assets – such as several stakes it holds in major Tunisian companies – rather than through an injection of money from shareholders and government funds.

Structural Changes

The World Bank attributes some of the challenges in the public banking sector to the fact that major state-owned banks have been recapitalised in the past without simultaneous reforms being applied to their governance structures, effectively allowing them to continue along similar lines, and which it says has distorted competition and undermined other banks.

However, the recapitalisations that occurred in 2015 were also accompanied by changes to the management of the public banks in question, including moves designed to increase the number of representatives of the private sector and independent administrators on their boards, as well as to separate the positions of CEO and chairman of the board, which augurs better than previous recapitalisations have done in terms of avoiding past mistakes.

There is scope for further reform, according to Lilia Kamoun, senior analyst at stock brokerage Tunisie Valeurs. “The banks’ rules and management were lightly reformed but there have been no other major changes beyond the recapitalisations, and if the style of management at the institutions does not change they could find themselves back in a difficult position in a few years’ time,” Kamoun said. In April 2015 Slim Chaker, the Tunisian minister of finance, said that the government was planning to sell stakes of between 10% and 15% in a number of unnamed state banks; however, sales of larger stakes or the full privatisation of any of the banks have yet to be announced.

Stress tests carried out by the IMF found that the banks could find themselves short on capital within a year, in part because their business plans had been undermined by the current crisis in the tourism sector. The government has acknowledged this and has called for the banks to submit new business plans, as well as mooting sales of assets held by the banks to address any such shortfalls. BH’s Zawedi told OBG that the bank had put together a new business plan based around the diversification of the bank’s clientele, the development of the institution’s information systems and human resources, and a branch expansion programme, with the aim of reaching a total of 150 branches by 2019.

Sharia-Compliant Banking

One of the main areas of focus of the pending draft law is the establishment of a full regulatory framework for the country’s rapidly growing Islamic banking segment, including what some reports say are plans to make banks and leasing companies to choose between offering conventional and Islamic products.

The Islamic banking sector is young, with the first Islamic bank – Banque Zitouna – founded in the country in 2009. The institution is currently majority owned by the state-backed El Karama Holding company, which was established to take control of assets confiscated from ousted president Ben Ali and his associates, including the bank’s former owner, Ben Ali’s son-in-law. Banque Zitouna had assets of TD1.32bn (€605.4m) at the end of 2014, equivalent to a market share of 1.9% and up 33% in size from TD991.6m (€454.7m) a year earlier.

The next onshore sharia-compliant institution to open its doors was Al Baraka Bank Tunisia. The institution, which is majority owned by the Bahrain-based Al Baraka Banking Group, was founded in 1983 as an offshore bank, but the institution obtained regulatory permission to become an onshore universal Islamic bank in 2013. In 2014 Al Baraka Bank Tunisia had assets of TD1.39bn (€637.5m).

August 2015 saw the arrival of a third sharia-compliant institution in Tunisia when leasing firm El Wifack Leasing transformed itself into a full-fledged Islamic bank, Wifack International Bank. Some conventional banks are additionally thought to be considering opening Islamic windows, though there have been reports that the new banking law being worked on by the government will mandate the separation of conventional and Islamic banking. “In the coming years, the Tunisian Islamic finance segment could account for around 20% of the banking sector,” Ezzedine Khoja, the CEO of Banque Zitouna, told OBG. “However, growth could be slow, especially because many households have long-term mortgages with conventional banks which prevent them from moving toward an Islamic bank.”

Leasing Segment

There are eight leasing firms in the country, the largest of which is Tunisie Leasing, with a market share (based on assets) of 20.3%, according to APTBEF data for 2014. The total value of loans to the economy by companies in the leasing sector stood at TD3.26bn (€1.5bn) as of September 2015, according to BCT figures. This included leasing operations of TD2.77bn (€1.27bn), an increase from TD2.75bn (€1.26bn) at the end of 2014. The value of leasing transactions by local firms in the segment rose by a CAGR of just over 13% a year between 2009 and 2014, not taking into account inflation.

Habib El Amri, CEO of Modern Leasing, said that vehicle and construction equipment leasing currently accounted for the bulk of business in the segment. “Those products have always worked well and are likely to remain the main drivers of growth, while there remains little in the way of major new investment or enterprise creation in the country,” he told OBG. “Medical equipment is also emerging as a potentially promising segment, but it is risky, as the firms involved are often start-ups and leasing firms can be left stuck with niche equipment that is difficult to get rid of if they fail,” he added.

While posting strong growth, leasing firms are facing strong competition not only from each other – El Amri described the market as overcrowded – but also increasingly from banks. Until recently banks had largely eschewed the segment, but leasing operations by the nation’s lenders grew by a CAGR of around 56% between 2009 – when they stood at just TD40.2m, (€18.4m) – and 2014, going on to reach TD490.7m (€225m) as of August 2015. “Banks have captive corporate clients and can also borrow money at lower interests rates than leasing companies, which allows them to offer cheaper prices,” Amri said. “Islamic banks in particular are offering very low rates, at around 7.5%, whereas leasing companies cannot afford to go lower than 9%.”

Dedicated leasing companies nonetheless retain several key advantages, most notably greater risk appetite, although competition from the banks does have the potential to impact margins. “Leasing companies are much faster and more flexible as regards offering loans than banks, and also work with clients that are not considered bankable such as small shops and artisans,” said El Amri.

However, financing is also a challenge for the segment given factors such as low levels of liquidity in the financial system and the fact that bank loans to leasing companies are not refinanceable by the BCT. According to El Amri, the segment had called on the authorities to allow leasing companies to diversify their funding base by letting them take customer deposits, but he noted that the requested changes had not been included in the draft law on the banking sector currently being worked on.

Outlook

The recapitalisation of key public banks is set to return the sector to comparative health as well as help to address the wider issue of tight liquidity in the market. While it is uncertain if management changes at the banks can ensure they do not again start to build up poor loan books, the improvement of the democratic environment should reduce pressures for politically-connected lending that occurred in the past. This should in turn help to bolster financial sector stability, as should plans to raise prudential ratios under the new banking law, which will also help to support continued rapid growth in emerging niches including Islamic banking and leasing.