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.

Morocco’s Central Bank, Bank al-Maghrib (BAM), is joining the growing trend in embracing sharia-compliant finance. For some time, regulators had outlawed banks from offering such products. However, earlier this year, the Central Bank announced that it would be legal for banks to offer a range of “alternative finance” options to their clients from July.

There has been a considerable amount of pressure from the private sector for the Central Bank to allow sharia-compliant, or “Islamic” finance, a fast-growing sector worth $500 billion a year internationally according to Standard & Poor’s. sharia-compliant finance is particularly popular in the Gulf Cooperation Council (GCC) region, the largest investor group in Morocco, but institutions also exist in many non-Muslim countries. More than 270 sharia-compliant finance institutions operate in 80 countries, and Standard & Poor’s estimates that compliant banks have around a 12% market share in Malaysia and 17% in the GCC area.

A recent report by Standard & Poor’s highlighted the growth of sharia-compliant banking, describing “mounting demand” and “buoyant expansion” in the sector. Many of the world’s largest banks are now moving into the market. ABN Amro opened its first sharia-compliant scheme in Pakistan this year, and Citibank has also confirmed that it will start looking into providing sharia-compliant products over the next two years.

‘Alternative’ products

BAM’s governor, Abdelattif Jouahri, has now given the go-ahead to sharia-compliant financing on the proviso that the products are referred to as “alternative” rather than “Islamic.” The 2004 banking law made the offering of “alternative” products legal, but it was not explicitly specified that this could include what are essentially sharia-compliant finance offerings.

The basis of the new products will be the same as those used in other parts of the world: interest, or riba, is forbidden, as are investments in companies involved in alcohol, gambling, armaments and pork.

Three such products have been authorized by the Central Bank and comply with regulations issued by the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions: moucharaka, mourabaha and ijara.

Moucharaka operates rather like private equity, with the bank purchasing a stake in an unlisted company with potential, and retains it until an agreed date, or sells off the share bit-by-bit. In moucharaka, the bank takes on a share of the potential losses of the company, as well as potential profits.

Mourabaha involves the bank acquiring an asset and selling it on to a client incrementally for a profit, while ijara entails renting a property to a client, sometimes with the option to buy at the end of the contract.

It is likely that many international banks which already offer Islamic products in other countries will transfer them to Morocco, getting the scheme off to a flying start.

“We see a significant potential demand for these alternative products,” said Rachid Marrakchi, director-general of Banque Marocaine du Commerce et de l’Industrie, a subsidiary of BNP Paribas. “Our colleagues from BNP Paribas in the Gulf already have long experience with this type of product, and we are actively preparing ourselves for its introduction to the Moroccan market.”

The new products still await authorization from the Groupement Professionnel des Banques Marocaines (GPBM) and the Association Professionelle des Sociétés de Financement (APSF), the two banking trade associations.

Financial-service professionals in Morocco hope that the offering of sharia-compliant products will help drive up banking penetration rates, which have stayed at around 24% for several years, to parts of the population to which traditional banking does not appeal. They hope that this will help bring more of the informal economy out of the cold, as well as provide investors from the Gulf with the sharia-compliant products they prefer.

“The introduction of ijara, moucharaka and mourabaha should allow a widening of banking services and contribute to a higher rate of banking in the economy,” the Central Bank said in a statement.

BAM last year signed a memorandum of understanding with its counterpart in Bahrain, which has been a leader in sharia-compliant banking. The compact will allow the Moroccan institution to tap into the expertise of its partners on areas including the Islamic sector.

With an under-banked population of 33.75 million, Morocco offers interesting opportunities for players in the Islamic banking sector.

The proposed privatization of Credit Populaire d’Algerie (CPA) has shown the government’s renewed confidence in the private sector, with several international players bidding. Four years after the collapse of Khalifa Bank, the government has finally shown willingness to reduce its ownership of one of the smaller state banks. A successful privatization could build momentum for the sell-off of other state banking assets.

On May 21, the Algerian government began reviewing the candidates for a 51% stake in CPA, the country’s fifth largest financial institution. Algerian Financial Reforms Minister Delegate Karim Djoudi said the process would also help bidders become better acquainted with CPA’s structure, credit policy and the local banking environment. The offer will be studied in July, while privatization is expected to be completed by end-2007. The government is set to retain a 49% stake in CPA for the foreseeable future.

The CPA sale is seen as a test case for privatization in Algeria’s banking sector, which is overwhelmingly dominated by state-owned banks such as the Banque Exterieur d’Algérie (BEA), Banque Nationale D’Algérie (BNA), Caisse Nationale d‘Epargne et de Prévoyance (CNEP), and Banque de l’Agriculture et du Développement Rurale (BADR). In 2005, state banks accounted for 92.6% of credit and 93.3% of deposits, despite the fact that they represent only seven of Algeria’s 17 commercial banks. It is expected that the CPA sale will be the first of a handful of privatizations in the pipeline over the next few years.

CPA is an attractive proposition for investors, with a 15% share of the local market and 135 branches nationwide. Six banks have registered interest in bidding for the bank: France’s Natexis (part of the Banque Populaire Group, BPG), BNP Paribas, Crédit Agricole, and Société Générale are complemented by Spain’s Banco Santander, and US giant Citigroup. An acquisition by BNP or Société Générale would give those banks an immediate extension to their limited presence in the market, while the other banks would gain their first foothold in the growing Algerian banking sector.

The government has decreed that bidders must have a minimum $3 billion in capital and an extensive branch network internationally.

Proposals to privatize CPA were first floated in 2000, and initial plans were scheduled to be completed by the end of Q1 2007. However, in the wake of the Khalifa Bank scandal, the government has prioritized structural reform and attacks on corruption. The 2003 collapse of Khalifa, then Algeria’s largest private bank, led to an investigation that revealed endemic corruption and poor accounting practices, with similar issues, albeit on a smaller scale, affecting the rest of the banking sector. Khalifa Bank collapsed with $1.5 billion in debts, and investigators found evidence of graft and corrupt deals with public bodies and in Khalifa Bank’s dealings with its sister companies, seriously damaging confidence in private banking. Further investigations revealed irregular practices at Banque Comercielle et Industrielle d’Algérie (BCIA) – where $187 million of government funds were embezzled – and at BNA. BCIA was later liquidated. The government then banned public bodies from working with private banks, retarding their growth.

In March, former Khalifa boss Abdelmoumen Rafik Khalifa, currently in exile in the UK, was convicted in absentia and given a life sentence. Another 55 executives were also convicted.

While the Khalifa affair may have put the privatization of state banks on hold, the increased presence of foreign banks has injected some dynamism into the sector.

However, some enthusiasm for privatization has been renewed, with other banks expected to follow CPA’s lead. The next to go on offer is expected to be Banque de Développement Local (BDL), a relatively young institution founded in 1985, and recommended for privatization by the World Bank as early as 1994. The bank’s focus on the booming private small and medium-sized enterprise (SME) sector gives it good access to a growing customer base.

The sale of the two banks could take the private sector’s share of the Algerian banking market to 35% to 40%.

There remain no plans to privatize the largest state banks, BEA, BNA, CNEP and BADR. This has led to criticism in some quarters, as public banks have proved less efficient than their private counterparts. The former suffer from non-performing loan (NPL) rates of around 38%, compared to 5.8% in the private sector. The state-owned banks also struggle with a lack of human and physical resources and poor information systems, though the latter is being remedied in part by the introduction of the Algeria Real Time Settlement (ARTS) and the Algérie Télécompensation Interbancaire (ATCI, Algeria Interbank Clearing) systems, which have cut transaction times.

However, the CPA privatization shows that the government has lost its aversion to private players on the market and the ghost of Khalifa has, by and large, been laid to rest.

In the last few years, leading Lebanese banks – Byblos Bank, Fransabank, Bank of Beirut and Audi Saradar – have set up shop in Khartoum. The expansion of Lebanese banks in Sudan was built on personal relations linking Lebanese bankers to the Lebanese community  in Sudan and later with the Sudanese financial community. “It’s a relationship that can be traced back to the 70s,” said Laurent Hawath, head of the international banking division at Byblos Bank.

In a world where globalization has become a way of life, the move was also part of a broader development strategy. “The Lebanese banking sector boasts a total balance sheet amounting to 3.5 times the Lebanese GDP. In such a saturated market, Lebanese banks are simply bound to expand abroad. In our case, it materialized through Fransabank Aljazaer in Algeria as well as Sudan and Syria, where we are scheduled to open in 2008,” said Mansour Bteish, Fransabank’s general manager. According to Fouad Chaker, assistant general manager at Bank of Beirut (BOB), “Expansion in Sudan is mainly driven by lucrative business opportunities as well as regional expansion concerns.”

Besides historical commercial ties linking Lebanon to the country, Lebanese banks are also attracted by its size and enormous resources. Sudan occupies over 2.5 million square miles and is home to around 36 million people. Ravaged by a 23-year-old conflict that has pitted the Muslim north against the Christian south, the country ended its civil war in 2005, with the signing of the Comprehensive Peace Agreement (CPA). Since then, the economy appears to be on the fast track, driven by the need to rebuild a tattered infrastructure. “The country looks like Saudi Arabia did 50 years ago,” says Georges Andraos, deputy head of the international department at Fransabank. 

Huge potential

Sudan encompasses vast areas of cultivatable land, has gold and oil reserves and huge untapped minerals. “Other core export materials are Arabic gum, sesame seeds and live stock,” said Dr Imad Itani, general manager at Bank Audi and chairman of Al Ahli Bank, its National Bank subsidiary.

According to Nassib Ghobril, head of Byblos bank’s economic research department, “The large expat community living in the Gulf accounts for massive yearly remittances, while the burgeoning oil industry in 2006, produced around 492,000 barrels per day – up from 312,000 barrels in 2005 and appears to be steering the economy.”

The surge in revenue stemming from the oil bonanza has translated in an average 8% growth as well as inflated foreign reserves increasing by 45% in 2006, from 40% in 2005, reaching around $5 billion. In 2007, they were equivalent to 4.3 months of import cover, a key indicator. “Growing foreign reserves have given the Central Bank the possibility to support the local currency, which has steadily strengthened in the past few years, picking up from 255 to 210 Dinars against the dollar,” said Ghobril.

With sound macroeconomic policies underway and public companies restructuring and privatizing – such as the Worker’s Bank and the Agricultural Bank – the Sudanese banking sector is opening up. Sudan underwent an IMF reform program that came into effect in 1997, introducing a number of strengthening measures, such as tightening capital adequacy ratios and classification and provisioning against bad loans, establishing new capital minimum requirements, relaxation of strict credit allocation rules, and rising internal liquidity ratios.

“The Central Bank is also encouraging mergers and foreign capital investment,” said Chaker. With Sudan ranking 11th out of the 17 Arab countries on the IMF banking sector developing index, there is definite room for improvement. “Another good indicator to market potential is the level of loan portfolio to GDP, which is around 15% compared to 80% in Lebanon,” said Hawath. The sector has recently witnessed rapid growth, as the reconstruction effort progresses and production from Sudan’s oil fields steps up. According to Nassib Ghobril, banks assets increased in 2005 by 47% to the equivalent of $6.63 billion.

Common language and culture is another important factor for Lebanese banks. Byblos was the first to step into the Sudanese market in 2003, with Byblos Bank Africa Ltd. It owns 65% of Byblos Bank Africa’s $25 million capital, in partnership with the Organization of Petroleum Exporting Countries (OPEC) and the Islamic Corporation for Development, which own  20% and 10%, respectively; the remaining 5% belongs to a local Sudanese businessman. The bank offers tailor-made products to Sudanese corporations and private clients and features a wide range of services, such as commercial, correspondent and private banking as well as investment products. “We have one head office for now and are planning three more branches in the coming few years,” pointed out Hawath.

Fransabank owns 20% of Sudan’s Capital Bank in partnership with Kuwaiti and Egyptian financial institutions. The bank boasts a paid-up capital of $55 million and focuses mainly on wholesale banking, financing major projects and investment funds as well as capital markets, share placement, deposits and investor services and targeting real estate, infrastructure, services, industries and the agriculture sector. “We’re focusing on wholesale and corporate finance. We’re not expecting to open any branches in the near future,” said Bteish.

Bank of Beirut (BoB) recently acquired 17.76% of the Sudanese French Bank’s $40 million capital, the second largest privately-owned bank in Sudan and the third largest among public and private banks. As for Bank Audi, it purchased 75% of the National Bank of Sudan in September 2006.

The National Bank of Sudan  owns 17 branches in Khartoum and in other areas – except in the south and Darfur – with five branches set to open in the next few years as Audi National bank. Run by a Lebanese general manager, the bank is backed by 12 permanent Lebanese staff members and supported by 280 employees. “We will offer traditional retail, commercial and corporate banking. We are currently geared toward the industry sector, shying away from the agriculture, which requires a more specialized approach. Trade financing is also another area we intend to capitalize on,” said Itani.

Burgeoning opportunities

In a country where retail banking remains in its nascent stage, several banks seem to be directing their attention on wholesale and corporate activities. However, advances of commercial banks by sector show that agriculture accounts for 7%, industry 15%, exports 6%, imports 3%, local trade 32% and others 37%.

“In 2006, growth in credit expansion, in the form of advances to the private sector increased by 79% and stock of domestic advances increased by 60%, the latter being a good liquidity indicator. Of course we have translated these indicators in conventional banking layman terms, as we cannot really talk in Sudan about credit or interest, because of the Islamic system,” said Ghobril.

The Sudanese banking sector is Islamic, except for the southern area, where conventional banking is common practice. “The dual system between the north and south is challenging and could result in some policy incoherence,” underlined Ghobril. 

Under the CPA, the Sudanese banking sector follows sharia law, and is placed under the jurisdiction of the Central Bank. “In the south, however, the sector is monitored by the local Central Bank,” said Itani. “There is a big debate about implementing a dual system, but I don’t think it will ever be finalized. Operating under sharia law, however, provides us with an excellent opportunity to expand into other lines, such as Islamic banking, which has witnessed dramatic growth recently,” said Itani.

Bank of Sudan has continued to play its role as the bank for the central and regional governments, and for government and governmental institutions, contributing to their capital formation and keeping their accounts in both local and foreign currencies.

According to several institutions, the central bank has often tried to direct investment efforts toward specific sectors, such as craftsmanship and agriculture.

Underlying the Sudanese banking sector is the political risk that is dovetailing the country’s economic progress. Although the CPA has created great opportunities and given hope to potential investors, the Darfur problem still puts a heavy toll on the economy. “Political instability is limiting growth and liquidity and creating an non-conducive environment,” said Hawath, who sees volatility as another by-product of the emerging market. For most banks, political risk, legal risk and operating under an Islamic system are inherent to Sudan’s market risk.

“Another main issue was the staffing and human resource aspect, a matter of importance in an operation comprising 57 employees. After all, banks are built on reputation, people and systems,” added Hawat. For Itani, the high correlation between oil prices and Sudan’s potential growth is another risk factor, in addition to corrective reforms the political system is willing to undertake in an effort to ward off corruption. Last but not least is the non-performing loan (NPL) ratio, which has fallen from 9% in 2004 to 6.9% in 2005. As the rise of commercial banks into the sector increased, the ratio of actual loan provisions to bad loans increased to 32% in 2005, from 26% in 2004. “From an international standard perspective, NPLs are still quite high,” underlined Ghobril

Regardless of positive prospects in Sudan, the Darfur question and its possible negative consequences on the country’s fragile economy remains of essential importance. The country is at risk of falling victim to sanctions as well as from concerted efforts of activist organizations, such as Save Darfur and others. Recently, Fidelity Investments and Berkshire Hathaway, which both own shares in Chinese oil companies operating in Sudan have been under attack from activist groups. “We do not know anything yet about the nature of the sanctions regarding the Darfur issue or when they will ever be implemented,” said Ghobril. 

Meanwhile, the race seems well underway in the Sudanese banking sector. Lebanese banks are not alone in seeking to carve out a bigger piece of the cake, with Arab Gulf banks spending their oil revenue surpluses in Sudan. According to Andraos, Kuwait alone has invested around $6 billion in the African country. “Sudan is also witnessing an assault of emirate banks, which are entering the market en force,” said Chaker.

Within the MENA region, Sudan offers promising business opportunities, though tainted by political risk. “Management of the peace process has given us hope on how the Sudanese government will go about the Darfur question. Based on the type of investment we’ve made, our management approach and our balanced expansion strategy, we expect to reap the benefits presented by the market,” concluded Itani.