Nabil Ghalleb, Chairman and CEO, Zitouna Tamkeen

On developing microfinance in Tunisia

What is the role of microfinance in the development of the Tunisian economy?

GHALLEB: While microfinance activities have taken place in Tunisia since the 1980s, the country lacked a national policy strategy for the segment until the adoption of the 2011 microfinance law. Before this, the segment was controlled by microcredit associations and financed by the Tunisian Solidarity Bank.
Microfinance in Tunisia has been emerging in earnest since private companies, also known as microfinance institutions (MFIs), appeared in the market in 2014. Currently, there are six companies in operation, with Zitouna Tamkeen the only one involved in Islamic microfinance.
Microfinance offers a unique opportunity for financial inclusion in the country, which currently stands at 36%. Both the government and the private sector need to coalesce their efforts around a shared vision to make microfinance a priority. Public-private partnerships would help reduce barriers as well as promote the access and use of microfinance services. Given that two-thirds of Tunisians do not yet have access to any financial services, microfinance could be especially helpful in involving more people in banking and insurance activities.

What reforms are necessary to encourage the growth of microfinance beyond microcredit?

GHALLEB: The microfinance law has remained untouched sine 2011, but a heavy revision would help foster the development of the segment. First, microcredit is currently the only product allowed by the microfinance law, so an expansion of the range of services offered by MFIs is needed. Legislation should allow for the introduction of new products such as micro-insurance, micro-deposits and micro-savings. By ensuring free or low-cost sources of refinancing, MFIs will be better able to finance micro-projects at a reasonable cost.

A second priority is the creation of a national guarantee fund dedicated to the microfinance segment. Such a fund has never existed for various reasons, including court proceedings being too expensive in relation to the loan amount. However, a guarantee fund would represent additional insurance for projects developed by MFIs. Furthermore, the development of a favourable tax system for MFIs is essential to enhancing the segment. In particular, there should be grant tax benefits for MFIs working in regional development zones in order to encourage projects in the interior of the country and less-favoured areas.
Lastly, crowdfunding should be allowed in Tunisia in order to increase the sources of microfinance and give small investors the opportunity to put their savings into small but profitable projects.

How can Islamic microfinance succeed in the Tunisian market, and what are the main challenges that need to be overcome?

GHALLEB: The Islamic microfinance market is growing internationally, and it looks promising for Tunisia, where there is significant demand for various Islamic finance instruments. Islamic financial products are equitable because they are based on the principle of sharing losses and profits, and are also competitive, price-wise, compared to conventional microcredit. Additionally, there is no risk of misappropriation of funding for projects, given that Islamic microcredit is in-kind financing.

Murabaha, a contract through which the MFI buys assets from the seller and then sells the asset to the client at a predetermined profit margin, is currently being used in the Tunisian market. Salam, an agriculture-specific financing mode, has also been approved, but has yet to be implemented in Tunisia.
However, in order to establish fair competition between Islamic and non-Islamic microfinance products, there must be a reform of the legislative framework to take into consideration the specificities of Islamic financial products.

The biggest challenge MFIs face is refinancing, as the current rate of debt is 8%, and with administrative and transaction costs, as well as risk, the exit rate is sitting at 15-18%. For Islamic MFIs, donor sourcing for refinancing is even more difficult as funders usually require a pre-guaranteed return on investment, which is contrary to the fundamental principle of sharia law on profit and loss sharing. Therefore, the possible funders available for an Islamic microfinance institution are even fewer; Islamic MFIs must look to international markets for financing, as well as expertise, to develop the segment in Tunisia.