The May visit by IMF Deputy Managing Director Murilo Portugal saw him deliver a combination of praise for efforts to strengthen Tunisia’s banking sector, with warnings regarding the continuing worry over non-performing loan (NPL) levels in the system. Banking sector reform was highlighted as a priority in the 11th Presidential Plan, which started this year and will conclude in 2011.
The Central Bank, Banque Centrale de Tunisie (BCT), is working to implement Basel II requirements across the banking system and driving up standards of transparency and governance, as well as tackling the high levels of NPLs.
As Portugal from the IMF stated: “I share with the authorities the view that strengthening the financial sector is a priority. In particular, efforts are underway to reduce the level of NPLs. I am encouraged by the progress in the implementation of most of the recommendations of the Financial Sector Assessment Program conducted in collaboration with the IMF and the World Bank.”
In a report in March, the IMF highlighted lowering the NPL ratio and ensuring better provisioning for them as a “key priority.”
The banking system in Tunisia is well-developed by regional standards and geographically extensive. Institutions present include clearing banks, development banks, merchant banks and offshore banks, and specialist financial establishments such as factoring companies, debt collection agencies and leasing companies. Tunisians have a choice of 20 commercial banks, eight offshore banks and two investment banks, and more than 900 banks give population coverage of around one bank for every 11,000 people.
BCT is currently working to ensure the banks adhere to international standards for debt and reserves. As part of this drive, the Basel Committee’s capital adequacy recommendation of a minimum risk-weighted capital/asset ratio of 8% has been made a requirement for the banks.
Next year, Tunisia joins the World Trade Organization (WTO), meaning that banks will be required to adhere to international norms, which could prove costly in the short term but will help them manage risk and reduce costs.
The authorities have also moved to bring down the level of NPLs, which have hamstrung the development of Tunisia’s financial sector, and improve provisioning. Tax legislation has been altered to incentivise banks to meet the BCT’s 70% provisioning objective by 2009, which the IMF has said “must be considered a minimum.” Meanwhile, public-private organisations known as Sociétés de Recouvrement de Créances (debt recovery agencies) have been founded to purchase non- and under-performing debts from commercial banks. However, in March, the IMF reported that “Up to now the amount recovered on the loans transferred (TND 1.3 billion [$1 billion]) has been modest.”
There have also been changes in procedures for realizing real estate collateral, and the rules regarding the writing off of bad debt have been made clearer, while a new NPL bureau will provide data on total NPLs by debtor and the classification attributed according to prudential regulations.
Contentious issue
NPLs have long been an issue for Tunisia. In 1993, they totalled 34% of credit. While the ratio dropped to 18.8% in 1999, it has since risen to 20.9%. The reason for the malaise is attributable to high levels of lending to the tourism sector in the 1980s, fueling a boom in construction outstripping demand. The thinner margins that resulted caused a glut of defaults. Another area that received a lot of funding was agriculture. Both sectors are mainstays of the Tunisian economy, and vulnerable to geopolitical problems in the former and climatic factors in the latter – the terrorist attacks and droughts of recent years have not helped.
NPLs are a particular problem in the state-owned banks, which average over 20%, while most private banks have ratios below 10%, some close to zero. Provisioning is also higher in the private sector, at 82%, while the national average is 57%.
Consumers are being encouraged by BCT and the government to rein in their personal debts, not allowing them to exceed 40% of their gross salaries, and the bank is keen to limit lending on consumer goods (excluding houses and cars) to three years.
The IMF reports both praised the Tunisian authorities’ efforts to reform the banking sector and highlighted areas in which serious improvements are still needed, notably NPLs. In this area, as in others, progress is being made, albeit from a weak situation. If targets are met, Tunisia should be on the way to meeting international banking norms.
