During the last two years, the failure to form a national unity government, exacerbated by wrangling among political parties amid the deadliest wave of COVID-19 of the last summer, led to a constitutional crisis provoked by the president of the Republic by dismissing the head of government and suspending parliament on the 25th July 2021. Even after the president designed a new government and with improvement in the pandemic situation as the vaccination rate increased and death cases reached very low levels, economic recovery is far from being achieved. This is a warning of the risk of a default if significant funding is not secured, in the context of the delay in negotiations with the IMF and the downgrade of Tunisia’s sovereign credit rating by Fitch Ratings and Moody’s Investors Service.

Consequently, Moody’s decision to lower Tunisia’s macro profile score to ‘Very Weak’ from ‘Very Weak+’ reflected the increasingly difficult operating environment for banks in Tunisia and resulted in a downgrade of banks which received a rating uplift for government support. Also, Fitch mentioned that “the improved profitability in H121 [first half of 2021] hides several impending risks”. Even more, S&P Global Ratings conducted a hypothetical sovereign default to calculate these risks which could cost banks 55–102% of their total equity.

Likewise, the resilience of the three Islamic banks, with a market share of total banking assets below 6%, remains under pressure: despite the increasing positive performance of Zitouna Bank, the performance of Al Baraka Bank remains acceptable while Wifack International Bank (WIB) is still suffering from losses but showing recovery signs in 2021.

Review of 2021
At the end of the 2020 financial year, Zitouna Bank’s net profit more than doubled to TND51.4 million (US$17.84 million) against an increase of 55.6% realized in 2019, following the increase of its share capital from TND175.4 million (US$60.87 million) to TND265 million (US$91.96 million) and the bank’s net banking revenue grew by half to TND252.4 million (US$87.59 million), mainly thanks to its revenues from leasing activities.

Al Baraka Bank’s net profit, which was one-third that of Zitouna Bank’s net profit, was at TND16 million (US$5.55 million) compared with TND15 million (US$5.21 million) generated in 2019 and against TND4.2 million (US$1.46 million) in 2018, but net banking revenue rose by 18.1% reaching TND99.7 million (US$34.6 million).

Last but not the least, WIB’s net loss was reduced to TND5.9 million (US$2.05 million) against its huge loss of TND23 million (US$7.98 million) incurred in 2019 due to continued investment in opening branches and recruiting but remained higher than the loss of TND3.8 million (US$1.32 million) in 2018 and was mainly driven by its risk cost despite the increase in its net banking revenue by 41.5% which stood at TND31.7 million (US$11 million). As a signal of recovery, its loss was close to zero in the first half of 2021 due to a much better increase in its net banking revenue, with TND23.6 million (US$8.19 million) against TND13.2 million (US$4.58 million) a year earlier.

In the money market context, the central bank increased its refinancing operations to refinance two maturities during the summer, as the government resorted to turning to domestic banks and in slight part to Islamic banks by providing six-month Wakalah securities, at a time when there are no sovereign Sukuk likely to be admitted as underlying assets.

With regard to this lack of a Sukuk market, WIB launched, on the 23rd July, a third Sukuk issuance and succeeded in raising another TND10 million (US$3.47 million) similar to 2020 but which was less than the amount of TND15.2 million (US$5.27 million) raised in 2019, which was the first successful Sukuk issuance, through a public offering using a portfolio of Ijarah financing as the underlying asset.
On another note, two other components of the Islamic financial landscape have embarked on developing new areas of expertise with the opening of new subsidiaries, namely Zitouna Capital (Zitouna Bank Group) in 2019 which is the only management company dedicated to Islamic mutual funds specializing in private equity (three mutual funds: Zitouna Moucharaka I in 2019, Mourafik in 2020 for the financing of SMEs impacted by COVID-19 and Zitouna Moucharaka II in 2021) and United Gulf Sukuk Services (UGFS Group) in December 2020 which is the only management company dedicated to managing Sukuk funds.

In the development context, another US$1.5 billion framework agreement covering 2021 to 2023, similar to the 2018–2020 one, between the International Islamic Trade Finance Corporation, a member of the IsDB, and the government of Tunisia was signed to support Tunisian state-owned companies to finance the importation of essential commodities such as energy and industrial products, among others.

Preview of 2022
The establishment of United Gulf Sukuk Services as a management company to manage Sukuk funds will raise the opportunity of creating a nascent Sukuk market that will overcome the failure to issue an inaugural sovereign Sukuk facility and explore other avenues for the sovereign borrower and companies to diversify their sources of funding.

Particularly, the efforts made by the Financial Market Council (FMC) in 2020 to standardize the regulation related to management companies and the prospectus scheme (standard prospectus) in the event of a public offering of Sukuk will finally lead the sovereign and institutions to make further steps toward a successful implementation of a Sukuk market by fixing the technical characteristics relating to the types of Sukuk and easing the regulations governing the public offering Sukuk and reducing the complexity of the Shariah component.

These efforts should remain to complete the regulatory framework, by defining the Sukuk types according to the contracts attached to them.

Conclusion
It is essential for the Islamic finance ecosystem to generate new products and mechanisms that should consider the following aspects and measures:
• Transposition of the leasing system and Ijarah
• Equity investments in concession projects
• Tax advantages and new regulations for these types of instruments compared to the traditional instruments to encourage investors, and
• Support from public funds and/or through international donors specializing in the matter, which should make the product less risky for the investor.

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 deputy director of external private financing and international relations at the General Directorate of External Financing and Settlements at the Central Bank of Tunisia. He can be contacted at [email protected]