Progress and Impacts of Microfinance Regulation in Tunisia

In Tunisia, the microfinance sector has experienced a real boom.

Indeed, according to the Barometer of the Microfinance Control Authority (ACM) of June 2019, supervisory body of the Microfinance sector in Tunisia, there are 9 accredited Microfinance Institutions (MFIs), including 7 MFIs in the form of a limited company (SA) with a total network of 155 agencies and 2 MFIs in the form of an association with a total network of 6 agencies and 287 MicroCredit Associations (MCA) unlicensed, operating under the former regulations prior to 2011.

In addition, the overall volume of microcredit granted by MFIs (MFIs SA and Associative MFIs) in 2018 increased almost fivefold from that of 2011, reaching the sum of TND 1150 million against TND 220 million.

Consequently, an evolving regulatory framework adapted to the needs of the microfinance sector is undoubtedly a necessity to continue to support its development. Thus, understanding the evolution of Microfinance regulation is essential to being able to measure progress and identify persistent challenges and regulatory developments to be undertaken.

In this paper we present the main developments in the regulation of microfinance in Tunisia to date, while illustrating their impacts and proposing other regulatory changes that will further support the development of this sector of activity for the benefit of financial inclusion.

• What about the maximum amount of microcredit?

The regulatory framework on microcredit has taken a new step. One of the main contributions of this new reform according to the Minister of Finance’s decree of April 13, 2018 concerns the increase of the maximum amount of microcredit granted by MFIs.

From TND 20 000 to TND 40 000 for MFIs (SA) and from TND 5 000 to TND 10 000 for MicroCredit Associations (AMC), for a maximum repayment term of 7 years and 5 years respectively, the microcredit ceiling that can be granted by MFIs has literally doubled.

It should nevertheless be noted that a prior agreement should be obtained from the Microfinance Control Authority (ACM), to grant micro-loans under this new regulation.

==> Impacts and issues:

Generally, microcredit has a positive impact both economically and socially. This instrument has proven its worth by increasing incomes, improving living conditions and ensuring the transition from the informal economy to the formal economy.

Thus, the increase in the ceiling of microcredits granted by MFIs will on the one hand offset a galloping inflation observed since 2011, whose rate rose from 3.5% to 7.3% in 2018 and on the other hand to expand the circle of Micro-entrepreneurs supported by microfinance and excluded from the traditional banking system, while probably contributing to the reduction of the unemployment rate which remains high (around 15% in 2018).

Moreover, this increase in the ceiling will allow MFIs to develop their offerings of new products and services that are vital elements of any institution, which will help to ensure a certain dynamic of the sector and to promote competition in the market.

Although the positive impact of this regulation is indisputable, a challenge has to be met at this stage of reflection which is related to the MFIs; to find the right business model that will not distract MFIs from their societal role and that will allow them to control the risks associated with increasing the amounts of micro-loans.

• What answer for customer protection?

The Order of the Minister of Finance of 24 August 2016, relating to the protection of clients, is undoubtedly important for the promotion of transparency and for the protection of the interests of Microfinance users.

Several rules have been introduced through this reform. For example, FMIs must:

• Post required documents related to microcredit applications in all their branches and agencies.
• Display the turnaround time for a microcredit request.
• Provide any beneficiary of a microcredit with an amortization schedule that is an integral part of the contract

==> Impacts and issues:

An initiative to be commended given that Microfinance is aimed at people who are generally vulnerable and who have difficult access to information. Strong enforcement of these rules would certainly contribute to the growth of the sector.

However, progress still needs to be made in terms of customer protection, particularly in terms of financial education. In fact, according to a study conducted by the World Bank, only 45% of adults received a minimum level of financial education.

Consequently, the strengthening of this system is essential so that any user can be able to adopt the right behaviors in the matter by developing,, for example, innovative financial education tools, organizing public information campaigns on the diversity of financial services or strengthening the technical capacities of MFIs to join the Smart Campaign; an international initiative to ensure that clients of financial institutions are treated fairly and respectfully. Note that only one Tunisian MFI is certified by the latter to protect the client.

• Towards the path of “good governance”?

In recent years, reforms have been made by the ACM in terms of governance and financial transparency. The emergence of these reforms can be explained by the increase in the number of MFIs, mainly MFIs in the form of SA, and the observed dynamic development of the sector. Hence the importance of establishing a regulatory framework setting standards for good governance.

The main provisions of these new measures concern the following:

• Adopt a governance system based on a board of directors and a managing director or a supervisory board and a management board for MFIs formed in the form of SA. For associations, the governance system must consist of a management committee and an executive director (Order of the Minister of Finance of July 26, 2017).
• Conduct an external audit of the accounts of MFIs in associative form and MFIs in the form of SA (Order of the Minister of the Economy and Finance of 17 November 2014).
• Set financial management and financial transparency rules and standards for MFIs: communication of financial statements and annual reports through, for example, the implementation of strategic planning including the implementation and execution of a financial plan. for a minimum period of three (3) years, updated annually (Order of the Minister of Finance of December 23, 2016).
• Combat money laundering and terrorist financing through the institution of, for example, a system for detecting suspicious transactions and transactions: the obligation to report (ACM Note 13).

 ==> Impacts and issues:

The introduction and adoption of these measures will contribute to improving the level of transparency in the microfinance sector and to strengthening the sustainability and solvency of the MFIs, this will attract investors who have reliable and relevant information. Necessary measures that will guide us towards the path of “good governance”.

However, the first challenge faced by microfinance governance is generally linked to the firm application of regulatory texts, particularly as regards mainly MFIs in associative form.

• Is microcredit the only tool used in the microfinance sector in Tunisia?

The new regulations allow an MFI to diversify its products by offering micro-insurance products, in addition to micro-credit and non-financial services. Indeed, in terms of regulation, MFIs can offer micro-insurance products if they sign a framework agreement with the insurance industry, through a single organization that would represent them all (SA as MCA). Thus, to answer this question, microcredit is not the only product offered by MFIs in Tunisia.

• Impacts and issues:

For an MFI, product diversification is necessary to the extent that such diversification can help reduce the risks it faces. It should be noted that half of the MFIs in the form of SA offer micro-insurance products. A positive finding as the sector is growing.

Furthermore, the new regulation clearly shows the ambition to reorganize the market, but it does not yet allow MFIs to collect public savings, which deprives them of an additional source of financing.

Conclusion:

The establishment of appropriate and evolving regulation for the microfinance sector is a necessity as it is important to avoid a crisis in the sector, improve the performance of MFIs, attract donors and investors and improve the competitiveness and efficiency of MFIs.

The continued development of the Tunisian regulatory framework for Microfinance represents the main strength of the sector, which allows to create new opportunities that contribute to its development accordingly.

However, several challenges are still to be met, as mentioned above in terms of governance, microinsurance and financial education. Moreover, the Tunisian regulation on microfinance does not allow the collection of deposits, despite the existence of a strong demand for such a product. According to a study conducted by the World Bank/Cawtar, 2015, 81% of Tunisians are interested in micro-savings.

Thus, the establishment of a regulatory framework favoring the promotion of other inclusive financial services that will sustain microcredit such as microinsurance and micro-savings, will thus make it possible to devote the true shift from microcredit to microfinance.

Furthermore, the establishment of a comprehensive regulatory framework for digital finance is also a key factor in promoting economic inclusion in order to develop full and effective interoperability between different stakeholders of the Tunisian payment system: a need to support the development of the microfinance sector.