Tunisia is experiencing a lengthy and problematic process of negotiations over a third IMF bailout for a rescue package, in the context of mounting debt and diminishing foreign reserves in conjunction with inflationary pressures driven by a commodity price increase and local currency depreciation. Meanwhile, Tunisia’s president is imposing a new constitutional and electoral order based on a referendum voted exactly a year after the constitutional crisis of the 25th July 2021 and new changes in voting of parliamentary elections to be held on the 17th December.
At least, a staff-level agreement on the requested access of US$1.9 billion is now subject to the IMF’s executive board discussion and decision in December.
The economic policies and reforms to be supported by this new 48-month extended fund facility and other multilateral and bilateral financial loans are supposed to attenuate the damage caused by the direct impact of the COVID-19 crisis and the indirect impact of Russia’s invasion of Ukraine, but Moody’s Investors Service placed Tunisia’s ‘Caa1’ ratings on review for downgrade, showing that “an economic recovery to its pre-pandemic level is not likely before 2024”.
On the banking sector side, the rating agency expected profits to remain “subdued” and negatively affected by the current economic turmoil. Also, Fitch Ratings considered that Tunisian banks are among the most vulnerable in Africa to the Russia–Ukraine war through second-order risks. In the same way, S&P Global Ratings confirmed that the banking sector in the case of Tunisia is among the most exposed emerging markets to external funding stress through the indirect impact of potential failure of discussions with the IMF.
This comes in the context of continued expansion of the Islamic finance industry in 2021, but the macroeconomic crisis could affect Islamic banks’ as well as conventional banks’ performance.
Review of 2022
At the end of the 2021 financial year, Al Baraka Bank’s net profit more than doubled to TND36.4 million (US$11.4 million), after being stable at TND16 million (US$5.01 million) in 2020 and TND15 million (US$4.7 million) in 2019, against TND4.2 million (US$1.32 million) generated in 2018 while net banking revenue rose by 37.5% reaching TND137.1 million (US$42.93 million) but remained about half as much as Zitouna Bank. The combination of profit margin improvement, risk and operational expenses control simultaneously contributed to this historical performance.
In the same way, but far from the historical growth of the previous year, Zitouna Bank’s net profit continued its increase, by 17% to TND60.1 million (US$18.82 million) against TND51.4 million (US$16.1 million) in 2020 while the bank’s net banking revenue grew by 15.2% to TND290.8 million (US$91.06 million) against TND252.4 million (US$79.04 million) a year earlier.
Finally, Wifak International Bank realized its first net profit of TND5.3 million (US$1.66 million) after the cumulated losses of TND7.8 million (US$2.44 million), TND23 million (US$7.2 million) and TND3.8 million (US$1.19 million) incurred respectively in 2020, 2019 and 2018, caused by continued investment in opening branches and recruitment and also driven by its risk cost. The bank confirmed the signal of recovery thanks to a much better increase of its net banking revenue by 70% which stood at TND49.7 million (US$15.56 million).
Compared with the sector, Islamic banks relatively performed as well as their peers (16 banks having so far published their financial statements) which accumulated a net profit of TND1.26 billion (US$394.56 million), recording an improvement of 22.3% compared with 2020, but outperformed them compared with 2019 as their peers remained below 11.8% of profits generated in 2019.
On another note, the Takaful sector continued a slight but steady expansion and increased performance.
Moving to the Takaful sector, Zitouna Takaful’s net profit became stable at TND5.6 million (US$1.75 million) in 2021, after an increase by more than half to TND5.4 million (US$1.69 million) in 2020 and the net Takaful revenue continued its increase by 9% to TND18.8 million (US$5.89 million) against TND17.2 million (US$5.39 million) in 2020. El Amana Takaful’s net profit and net Takaful revenue grew by 21% and 35% to TND2.3 million (US$720,222) and TND10.8 million (US$3.38 million) respectively, after being stable at TND1.9 million (US$594,966) and around TND8 million (US$2.51 million) in 2020 respectively. At-Takafulia started to realize a net profit of TND2 million (US$626,280) and an increase of net Takaful revenue which grew by 31% to TND8.1 million (US$2.54 million) against TND6.2 million (US$1.94 million) a year earlier
Preview of 2023
The dynamic changes in the structure of Islamic finance are expected to continue, as shown by the 2022 trend through the creation of banks’ subsidiaries: Al Baraka created, in addition to the first Islamic mutual risk fund (FCPR) ATID Fund launched in March 2009, its own venture capital investment company (SICAR) Al Baraka SICAR in 2021 followed by Wifak Bank (WIB) which created El Wifak SICAR in October 2022.
Moreover, following the approval of the General Insurance Committee, WIB also acquired 95.9% of the capital of At-Takafulia Insurance Company. In the same way, payment institution Zitouna Payment, which was approved by the central bank in November 2021 among four approved institutions (the last one in October 2022), launched its mobile payment application in 2022.
Other changes related to the ownership structure are supposed to move forward, after Hedi Ben Ayed Group became the reference shareholder in February 2022 by acquiring more than 30% of the capital of WIB, consequently exceeding the stake held by the Islamic Corporation for the Development of the Private Sector, reminiscent of the changes in Zitouna Bank’s ownership structure in October 2018 followed by acquisition of its entire ownership by Majda Group in July 2019.
Conclusion
To cope with other challenges related to Islamic finance ecosystem gaps in terms of non-traditional channels of the Sukuk market, Zakat funds and including crowdfunding platforms and credit bureaus among other platforms, the long-awaited regulatory frameworks were finally published in the official journal implementing decrees and orders related to:
1. Credit bureau announced by the decree of the 4th January 2022
2. Management companies and the prospectus scheme (standard prospectus) in the event of a public offering of Sukuk implemented by the amendments introduced to the regulation of the Financial Market Council and ordered by the minister of finance dated the 16th May 2022, and
3. Crowdfunding decrees of the 21st October 2022 organizing the self-collection crowdfunding component (solidarity loan and donation) and the savings crowdfunding component (private equity and commercial loan) related to Law No 2020-37 of the 6th August 2020.
Thus, Islamic finance products are not expressly mentioned by the law except for Sukuk and it would be interesting to explore donation- and reward-based solutions in the case of Zakat collection as there is no legal base for Zakat in Tunisia and to explore also matters concerning credit bureaus.
Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.
Mohamed Araar is the director of control at the General Directorate of Corporate Services at the Central Bank of Tunisia. He can be contacted at [email protected].