Following the parliamentary elections, 2020 was marked by the failure to form a national unity government to face the economic and pandemic crises, exacerbated by wrangling among parties forming the first government and a transformation in the coalition of political parties supporting the second one: neither the first president of the political government nor the second one of the technocratic government succeeded in unifying the diversified political landscape, despite the fact that they were appointed by the president of the Republic who was elected by a powerful majority of Tunisians and intending to unify all of them.
Also, during the first pandemic wave, the difficult period of regional instability neither facilitated the improvement of the business climate nor enabled the attenuation of external vulnerability, even though Tunisia was classified among the safest places in the world, and consequently the sovereign credit rating of Tunisia was downgraded by Fitch Ratings and placed on review for downgrade by Moody’s Investors Service. Besides, the slowdown in economic activity accelerated disruption in the operating environment and diminished buffers to sustain the resilience of both conventional and Islamic banks during 2020.
In particular, the resilience of the three Islamic banks is still under pressure: the positive performance growth of Zitouna Bank and Al Baraka Bank is diminishing and Wifack International Bank (WIB) is still suffering from losses but showing recovery signs in 2020.
Review of 2020
At the end of the 2019 financial year, Zitouna Bank realized an increase by 55.6% in net profit to TND24.3 million (US$8.84 million) against TND15.6 million (US$5.67 million) in 2018, as the bank’s net banking revenue grew by 21.3% to TND169.4 million (US$61.62 million), mainly thanks to US$605 million-worth of revenues from leasing activities representing 14% of market share. In February 2020, its share capital increased from TND175.4 million (US$63.81 million) to TND265 million (US$96.4 million), following the issuance at par (without premium) of new shares fully paid-up in cash.
Moreover, Al Baraka Bank generated a net profit of TND15 million (US$5.46 million) against TND4.2 million (US$1.53 million) in 2018, thus multiplying its profit from the previous year by 2.5 times, but net banking revenue rose only by 21.3%, as much as Zitouna Bank, reaching TND84.4 million (US$30.7 million), half as much as Zitouna Bank.
However, Wifak International Bank (WIB) incurred a huge loss of TND23 million (US$8.37 million) in 2019 after the loss of TND3.8 million (US$1.38 million) in 2018, as a result of the bank’s continued investment in opening branches and recruiting. But this big loss was mainly driven by its risk cost which has increased in addition to a fall by 8% of its net banking revenue which stood at TND22.3 million (US$8.11 million).
In the first half of 2020, its net banking revenue seems to be increasing much better than before, with TND13.2 million (US$4.8 million) against TND9.6 million (US$3.49 million) a year earlier and its net loss was reduced to TND3.1 million (US$1.13 million) against TND14.9 million (US$5.42 million) in the first half of 2019.
In the money market context, the only access for Islamic banks to central bank refinancing operations is six-month Wakalah securities which helped them partially in the pandemic period, at a time when there are no sovereign Sukuk likely to be admitted as underlying assets.
On another note, WIB launched, at the time of writing, another Islamic bond issuance, aiming during this second pandemic wave to raise TND10 million (US$3.64 million) which is less than the TND15.2 million (US$5.53 million) raised in 2019, which was the first successful Islamic bond issuance, through a public offering using a portfolio of Ijarah ﬁnancing as the underlying asset.
In the development context, the IsDB Group approved a funding agreement of US$279 million for Tunisia to deal with the COVID-19 health crisis.
Preview of 2021
It was not until December 2019 that the Financial Market Council (FMC) launched two public consultations on:
• The draft regulation related to Sukuk funds (standard prospectus) and management companies of Sukuk funds.
• The proposed amendment to the regulation related to the public offering and particularly the prospectus scheme in the event of a public offering of Sukuk.
The success of the consolidation of the existing legislative framework related to Sukuk must not only generate the enthusiasm of Islamic banks in the future, but must also, above all, pave the way for all companies to explore the Sukuk market and diversify their sources of funding. It is crucial for the sovereign borrower to overcome the failure to issue an inaugural sovereign Sukuk facility, in particular after the announcement of an expected public deficit in 2020 of nearly 14%.
The economic and financial pressure in this pandemic period will encourage both investors and borrowers not only to generate new products and mechanisms but also to explore Islamic financial alternatives more seriously and in-depth to overcome the lack of backing from supranational and governmental programs, and the multiplication of several initiatives will finally lead sovereigns and institutions to make further steps toward a successful implementation of an Islamic finance ecosystem.
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]