The banking system and bank financing

3.1. The banking system and bank financing.

Structural characteristics of the system.

50. In 1997, the Central Bank of Tunisia (BCT) launched a program to upgrade financial institutions and the banking sector. In particular, the 2001 enactment of a banking law on credit institutions created a more open environment by removing the distinction drawn between the former development banks and deposit banks. In 2006, a law on the establishment and organization of the BCT strengthened the sector by giving the central bank new prerogatives, which included keeping a register on the risks and uncertainties of check, credit/debit card payments and other future means of payment. Lastly, in 2007, the Economic Initiative Bill authorized the BCT to require debt recovery companies to provide it with the statistics and information that make it possible to track changes in credit and the economic situation.

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  Although the situation is improving, Tunisian banks are still burdened by the level of non-performing loans on their balance sheets. These non-performing loans decreased from 24.2 percent of total credits in 2003 to 15.5 percent in 2008 while loan-loss provisioning increased from 44.1 percent to 56.8 percent over the same period (Chart 17, first two diagrams). Compared to European levels of roughly 2 to 3 percent (about 6 percent in Morocco) for non-performing loans and 70 to 75 percent (75.3 percent in Morocco) for provisioning, Tunisia is still below international standards. The Tunisian government aims to bring the rate of non-performing loans down to 15 percent and loan-loss provisioning to 70 percent by end 2009. However, even if the non-performing loan rate is effectively brought down to 15 percent, the Tunisian banking system will remain vulnerable to possible shocks. In this context that is not conducive to risk taking, there is some concern that Tunisian banks will continue to remain on the sidelines of SME financing for a while longer, or even turn from it altogether in the current climate of economic slowdown and resurgent corporate default risk.
  

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  The level of operational costs²⁹ of Tunisian bank is however not excessive, either compared to regional competitors or OECD banks. The cost to income ratio is around 43 percent in 2007 and 2008 (Chart 17, diagram 3). However, it must also be noted that the share of personal expenditures is the highest for the main Tunisian banks, whether compared to regional competitors or the OECD banks (Chart 17, diagram 4).
  

Chart 17. Comparative data on the main banks.

Data for the 10 largest banks (on an assets basis) active in each country.

Source: Bankscope and IMF (2009c).

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  Finally, net interest margins and RoEs follow a positive trend in recent years (diagrams above), since 2003. In 2008, net interest margins in Tunisia are therefore among the highest in the region. This high level of NIM, although consistent with a financial system trying to reduce NPLs, implies however that the cost of financing is higher for firms. The latter is always mentioned by firms during recent surveys and by representatives of the private sector as an important constraint to access financing.