While the structure of Tunisia’s banking sector prevents it from adequately financing the economy at large, recent developments in the microfinance segment are helping to attract customers. The impact of these new players is especially being felt among the small business community.
Despite the fact that multiple microfinance associations were active beforehand, it was only after Tunisia’s 2011 popular uprising that the segment’s development accelerated. One significant facilitator in this regard was the opening of the sector to private operators. Competition among private microfinance institutions, in conjunction with regulatory oversight, has created the necessary conditions to effectively expand financial inclusion among segments of the population that were previously untouched by the traditional banking sector.
This is bringing growth opportunities to business owners and entrepreneurs, especially given the tight macroeconomic conditions of recent years. Although the number of private microcredit institutions continues to grow steadily, industry players have a long way to go before they exhaust the market. The microcredit segment expanded by 24% between 2017 and 2018, and as of March 2019 the total loan portfolio of the market’s microfinance providers had surpassed TD1bn ($347.3m), servicing approximately 600,000 customers. Sector players are confident in the potential that microcredit offers. “This is a new sector that is growing and bringing a lot of dynamism to the Tunisian economy,” Sehl Zargouni, the CEO of Baobab Tunisie, a local microfinance provider, told OBG.
The potential of the segment remains attractive, and several studies have attested to the appetite for microfinance services in Tunisia. In 2015, for instance, a World Bank report noted that the potential market for microcredit ranged from 950,000 to 1.4m individuals. The report emphasised ever larger demand for broader microfinance services, with up to 3.5m potential customers. The World Bank further found that between 245,000 and 425,000 small and medium-sized enterprises operating in the formal sector had financing needs that were not being addressed by regular banking mechanisms. The Microfinance Supervisory Authority (Autorité de Contrôle de la Microfinance, ACM) is currently undertaking a new study to collect more detailed and up-to-date information about latent potential in the segment, in part to prevent having a number of microfinance operators that exceeds what the market can absorb.
The current vitality in the market arose from extensive regulatory reforms – chief among them, the passing of the Microfinance Law in 2011, which led to a reshuffling of the microfinance offer. For years, the sector was serviced by hundreds of non-profit microfinance cooperatives that were mostly financed by the Tunisian Bank of Solidarity, including Enda Tamweel, a national lender. At the time that the law was approved, approximately 280 of these associations were still active. Their real impact on the market, however, was blunted by the political motivations behind some of these associations under the regime of the now deposed president, Zine El Abidine Ben Ali.
With the enactment of the 2011 law, the authorities created a dedicated watchdog for the segment, the ACM, charged with segment oversight and allocating operating licences to private institutions that want to offer microcredit services. The establishment of an independent regulator working under the Ministry of Finance was in large part a response to challenges the country was facing at the time.
“The Central Bank of Tunisia did not want to dedicate too many resources to regulating the segment because it already had so many issues to deal with regarding the traditional banking sector,” Mahmoud Montassar Mansour, president and managing director of the ACM, told OBG. Following the regulatory overhaul, Enda Tamweel was transformed from a non-profit organisation into a private microcredit institution in 2015, and an additional seven players have joined the market in the intervening years.
Although the measures taken by the central bank clearly demonstrate its desire to facilitate microfinance growth, the 2011 reforms also included measures designed to avoid overleveraging: specifically, a TD20,000 ($6950) maximum value on loans provided by microcredit institutions.
The establishment of a risk bureau in 2016 has similarly helped to manage the segment more effectively. “The risk bureau provides greater visibility of the customer, including their full exposure to microfinance loans, as well as other loans they might have in the banking sector at large,” Montassar told OBG.
In the years since the 2011 reforms, however, local microfinance players – eager to spur more rapid growth – lobbied the regulator to increase the lending cap, and in April 2018 a decree from the Ministry of Finance loosened the ceiling on microcredit loans to TD40,000 ($13,900).
The higher limit came with a few conditions. Not only do loans of this size require additional authorisation from the ACM, but companies can only do so after a minimum of two years operating in the market. Furthermore, microcredit operators lending the maximum amount need to ensure that at least half of their loan portfolio is made up of customers with loans of TD20,000 ($6950) or less. “We must always ensure that microcredit institutions can handle risk before they begin lending at higher levels,” Montassar told OBG. As of March 2019 four microcredit institutions had received the regulator’s permission to increase their loan limits to the new cap.
Although more liberal lending regulations are seen by many as a step in the right direction for the segment, operators are hoping to see further increases. “While the regulator is cautious about raising limits further, due to the risk of over-indebtedness, thanks to the risk bureau we know very well how much a customer owes,” Zargouni told OBG. “The TD40,000 ($13,900) limit refers to the client’s total exposure to the microfinance segment, so the sum of the client’s loans has to remain below that threshold. As such, there is not a real risk at the moment.” If the sector continues to operate with its current low levels of risk, it is possible that the authorities could progressively loosen limits for microcredit loans even further.
This is especially relevant given the high levels of inflation caused by the depreciation of the Tunisian dinar in recent years. “In many regions of the country, TD40,000 ($13,900) is not a lot of money,” Zargouni added. “Especially when you consider depreciation and the fact that microcredit loans are often used to buy equipment from abroad, which is therefore paid for in euros.” As of December 2018 the average value of a microcredit loan in Tunisia was TD2522 ($876), representing a 12.8% increase from December 2017, according to figures from the ACM.
Along with the possibility of looser lending caps, the regulator will likely need to consider allowing microcredit institutions to expand the range of products that they can offer to fully leverage their economic impact.
While operators await any further regulatory changes to facilitate growth, their impact on the broader economy is likely to be determined by how well they are able to expand regionally, as this is where much of the country’s untapped potential lies. As of August 2019 Baobab Tunisie had its two largest microcredit agencies located in Jendouba and Gafsa, and another 16 spread across the country. By expanding into lower-income regions that have lacked adequate government investment in the past, microcredit providers are likely to continue to expand at a rapid pace, in turn helping to fuel broader and more inclusive development.
In April 2018 a decree from the Ministry of Finance loosened the ceiling on microcredit loans to $13,900 However, in the short and medium term, microfinance providers will likely face more challenging access to credit due to higher interest rates and the fact that credit allocated by banks to leasing companies or microfinance providers is not presently refinanced by the central bank. “Refinancing is the biggest risk to the microcredit industry in Tunisia today,” Mohamed Taha Allani, director of operations at Zitouna Tamkeen, a domestic Islamic microfinance provider, told OBG. And although providers are in theory able to access international financing, this is limited to TD3m ($1m) and is subject to a high degree of foreign exchange risk given the weak dinar.