World Bank Country Director for the Maghreb, Marie Francoise Marie-Nelly answers six questions on the critical issue of the reform of public Banks in Tunisia.
This interview first appeared in La Presse.
1- Why place the restructuring of public banks at the heart of the banking sector reform?
Marie Francoise Marie-Nelly, World Bank Country Director for the Maghreb: That is a question that we’re often asked. However, before I reply, I must put this question in its context. While the reform of public banks is an immediate priority, it is only one of about a dozen reforms involving the entire financial sector. The World Bank is in discussions with the Ministry of Finance about corrective measures to be undertaken in the sectors of micro-finance, insurance and capital markets, all of which have been performing poorly. The infrastructure and legal framework that governs - directly or indirectly - the financial sector, is a holdover from a bygone era. More than ever, Tunisia needs to have a financial sector that is modern, efficient and innovative, one that can meet the challenges of growth and economic inclusion. These are the reforms that we want to support.
But, to get back your question. Why indeed should we focus only on the public banks, whereas private banks have also been blamed for their large volume of dubious loans? Their financing of small-to-medium-enterprises (SMES) has also been deemed insufficient and the quality of their services woefully inadequate. The first reason is because public banks account for one third of the market and by that token, have an influence over the entire banking sector. Secondly, a careful analysis of the dynamics of the banking sector reveals that there is a race to the bottom within the sector. This must be stopped. This phenomenon occurs when, in a given market, a handful of businesses can continue to under-perform, without having to bear the consequences of their mismanagement. This is what happens when all the actors, including the worst-performing ones, benefit from a loose regulatory framework, as has long been the case for public banks in Tunisia. This has meant that the rules applied are well below international prudential standards. For example, public banks need not submit complete records of their losses, even despite a large number of unpaid loans. The private banks have also benefitted from this system, since the same regulations apply equally across the board. In short, up until now and thanks to these regulations, public banks have managed to survive, while private banks have been able to make a comfortable profit with minimal effort, even in a sharp economic downturn, as is the case at present. That is what is known as “lazy banking.”
2- So you are calling for the reform of regulations, but not without the reform of public banks?
It is necessary to introduce more stringent banking regulations, not to please international bodies such as the World Bank or the International Monetary Fund, but to raise the level of professionalism of public and private banks and to increase the competitive pressure amongst them, while maintaining an acceptable level of risk-taking. This aim has been fully understood and embraced by the Central Bank of Tunisia, which, immediately after the revolution, began to advocate for stricter Banking regulations. Will the public banks resist change? Already, changes to regulations on capital requirements introduced by the Central Bank of Tunisia have had an impact on the balance sheets of the public banks. This summer, almost 700 million Dinars had to be injected, in the form of capital, into the public Banks BH and STB. With this recapitalization, public banks have managed to cling in extremis to the periphery of change. However, they still need to make major efforts to modernize their information systems, their range of products and services, their organizational systems and their banking culture. Because the pace of modernization will not slow down.
3- What are the key reforms for public banks?
Once the core of the problem of competitiveness in the banking sector had been identified; namely, the mismanagement of public banks, the authorities were faced with several choices: 1- return deposits to their clients and close the banks; 2- sell the banks to private investors, or 3- carry out radical restructuring to make them competitive and place them in a better position to finance the economy. This last option was the one chosen by the Ministry of Finance. It was not a default position, but rather an audacious and voluntary choice made after an in-depth analysis of the strengths and weaknesses of these banks. It is a choice underpinned by the idea that with a new form of governance, which makes better use of private sector best practices, the banks can once again perform well. The Ministry of Finance can draw on examples of successful restructuring of public banks (for example, in Turkey). In fact, all our current discussions with the Ministry of Finance are centered around the best way to bring in this private sector know-how. Our idea is to have a strategic partner, whether national or international, provided that it is competent. It could play an active role in helping these banks move towards recovery, in particular the STB, which seems to be in the most difficult situation. We think that this is the best way to guarantee that the money used for the recent recapitalization will indeed be put to good use. But the public banks must also be held accountable for their actions and cases of abuse by well-connected persons and businesses should be settled in the courts. Failing this, the restructuring process may never come to fruition and the modernization of the banking sector may never be achieved.
4- What is the status of public bank reform?
The radical changes that I just alluded to are now underway. New boards of directors, with new skills have been appointed, while new Directors General will soon take over the reins. We have been informed that these directors have accumulated successful experience in the private banking system and this should help to consolidate the restructuring process. It will then be up to these banks to quickly form teams of competent and dynamic top managers to implement the restructuring plans as soon as possible, while the Ministry strengthens the unit for monitoring the restructuring plans (The General Directorate of Participation). These changes must proceed quickly and be fully implemented through to completion. A half-hearted reform would raise the risk of having to make fresh capital injections within the next two to three years. That is why, more than ever, the Ministry must clearly opt in favor of private management and a reinforced monitoring unit to ensure that plans for restructuring public banks do not veer off course. It is also for this reason that we are urging that a capable technical partner be brought in to oversee the transition towards better governance.
5- Does the recapitalization of the public banks mean that the people of Tunisia are being asked to wipe out the debts of unscrupulous businessmen?
No. The cost to the budget is first and foremost the result of past mismanagement by the public banks. For a long time, they lacked modern tools and a performance-driven business culture. The underlying losses were simply masked by regulations and the lax application of these rules. But that is already ancient history. The restructuring plans are precisely intended to change this state of affairs. There have also been instances of abuse by well-connected clients and as I said before, these cases are now before the courts. The sums involved in these fraudulent activities have not been translated into profits and losses. As far as I am aware, the State and the Boards of Directors are fully committed to continuing their efforts until all the unpaid loans have been repaid.
6- What should one really expect from these restructuring plan?
The goal of the reform of public banks is to remove the banking system from the downward spiral it is now caught in, which is ultimately so detrimental for the financing of Tunisia’s economy. Better-equipped and well-governed public banks should be better able to stay the course and thus help to increase the competitive pressure among them, to the greater benefit of Tunisian businesses and households. However, restructuring the public banks cannot solve everything. The State must change the credit environment to make loans more accessible, especially to small and medium-sized enterprises. This will be achieved through the eagerly-awaited reform of the system for managing businesses in difficulties, the establishment of a credit bureau and through the easing of rules for calculating maximum interest rates. The World Bank believes that all of these reforms should, if implemented in their entirety, help to drive the engine of Tunisia’s economy and generate more than 38,000 new jobs each year.