Islamic Finance in Tunisia: achievements despite a legislative framework that tramples

HISTORICAL OVERVIEW :

Let us first recall that Islamic Finance is a global concept that covers financial activities that respect the principles of Shariah and that generally extends to the areas of banks, microfinance institutions, leasing companies (Ijara), insurance companies (Takaful), Islamic Sukuk and Islamic investment funds.

In the case of Tunisia, Islamic Finance first appeared in the early 1980s in the banking sector with the creation in June 1983 of the offshore bank called BEST Bank (Beit Ettamouil Saoudi Tounsi) between Sheikh Salah Abdallah Kamel and the Tunisian State. This alliance was carried out as part of the implementation of the giant real estate project for sanitation and development of the Berges du Lac de Tunis area.

This appearance was therefore a simple one-off action that shows no strategic direction on the part of the Government. Moreover, no legislative framework specific to Islamic Finance has accompanied the creation of the BEST Bank which continued its activities under a hybrid law (Law No. 85-108 of 6 December 1985) which limits its fields of action and slows down its expansion.

It took fifteen years for a second experience to appear in the field of Ijara with the creation of the company BEST LEASE in April 1999 which will in turn exercise in the absence of any legislative framework that is interested in near or far Islamic Finance.

The end of 2009 saw the emergence of the first resident Islamic bank authorized to operate without restrictions as an Islamic bank under the laws governing conventional banks, but still in the absence of a legislative framework that would regulates the field of Islamic Finance. It’s Zitouna Bank.

It is worth noting that until the end of 2009, the market share of Islamic Finance, in terms of deposits collected, can not exceed 1% of the banking market. This was due, first of all, to the fact that BEST Bank was prohibited from exceeding this threshold (Law 85-108), secondly because Zitouna Bank did not start its activities until February 2010.

INNOVATIONS IN THE AFTER REVOLUTION

After the revolution, Tunisia embarked on several projects of economic reforms. Among them, that of the banking and financial sector whose objective is to modernize the sector and fill the existing regulatory gaps, including that concerning Islamic Finance.

      1. ON THE TAX PLAN

The finance laws for the years 2012, 2014 and 2016 have introduced the tax regime of the various Islamic financing instruments. These are the Ijara, Murabaha, Istisna’a, Salam, Moudharaba and Sukuks contracts.
In this regard, the Ministry of Finance published on March 31, 2016, Joint Note No. 28-2016 which was a field of application of great importance for Islamic Finance.
Indeed, this note had the merit of formalizing the instruments used until then by the 3 operators in Islamic Finance (Al Baraka Bank – ex-BEST Bank -, Bank Zitouna and BEST Lease) and to recognize them as banking products subject to the same rights and obligations as those of conventional finance. It also had the merit of defining the other main Islamic products and extending to them the tax advantages accorded to products of conventional financial institutions.
Given the importance of the resolutions and the innovations it brings, the joint note n ° 28-2016 deserves to be summarized as follows:

     a) CONTRIBUTIONS FOR FINANCIAL ESTABLISHMENT

• The tax advantages enjoyed by the customer in terms of VAT, turnover taxes and registration fees are sent to the financial institution
• The withholding tax is not due on the acquisitions covered by the Murabaha sales contract carried out on behalf of persons not entitled to withhold the tax.
• Products on operations, except commissions, made under Islamic finance contracts, other than Ijara, are exempt from VAT.

     b) CUSTOMER CONTRIBUTIONS

Registration fees:

The Ijara contract:

•  Registration at the fixed rate of 20 dinars per page of each copy of the act, in addition to the fixed duty of 8 dinars in return for services provided by the Conservation of Land Ownership.
• Registration of property acquisitions at the fixed rate of 20 dinars per page of each copy of the deed, in addition to the property registration fee of 1% of the residual value.

The Murabaha contract:

• Registration at the fixed rate of 20 dinars per page of each copy of an act with exemption from the property registration fee, if applicable

The Istisnaa contract:

• Registration at the fixed rate of 20 dinars per page of each copy of an act with exemption from the property registration fee, if applicable.

The Salam contract:

• Exemption from registration fees

The Moudharaba contract:

• Registration at the fixed rate of 20 dinars per page of each copy of an act

Value added tax (VAT)

The VAT due on the amount of rents covered by the Ijara contracts and the VAT charged on acquisitions by the financial institution for the other contracts and transmitted identically to the customer is:

• fully deductible for the total VAT
• partially deductible for the partial taxable person. The deduction covers VAT due on passenger cars that form the object of the customer’s operation

Withholding tax in respect of the IS and VAT

Amounts paid pursuant to the aforementioned Islamic financing agreements are not subject to withholding tax under the SI or withholding tax of 25% for VAT purposes.

      c) TAX REGIME OF OPERATIONS SUBJECT OF SUKUKS

• Contracts relating to real estate transactions are recorded at the fixed rate of 20 dinars per deed. These transfer contracts are exempt from the proportional right in respect of land registration or transfer and sharing of unregistered buildings and are subject to a fixed fee of 100 dinars.
• The amounts paid in the context of operations covered by Sukuks in accordance with the legislation in force, with the exception of commissions, are exempt from VAT.
• Movable capital income and the net profit of the Sukuks and their income as well as the liquidation proceeds of the Sukuks are subject to withholding tax in accordance with the general law or the double taxation agreements and are exempt from this withholding tax. source if Sukuk are issued in foreign currency.

      2. REGULATORY AND LEGISLATIVE

At least 4 fundamental laws have emerged since 2013 and have consolidated the gains made by the financial laws following the year of the Revolution:

Law No. 2013-30 of July 30, 2013, relating to Sukuks

Article 1 of this law aligns with Sharia norms and defines Sukuk as being negotiable securities that represent common shares of equal value in the ownership of property, usufruct, services, rights, existing or to be created or a mixture of assets, usufruct, services, currencies and receivables from the proceeds of the subscription. They are issued under a contract in accordance with charatic standards and on the basis of the principle of sharing profits and losses.
Article 2 of the same law considers the Sukuks to be transferable securities within the meaning of Article 1 of Law No. 2000-35 of 21 March 2000 on the dematerialization of securities.

Law No. 2013-48 of December 9, 2013, on Islamic Investment Funds

Under this law, the provisions of the code of undertakings for collective investment promulgated by Law No. 2001-83 of July 24, 2001, Law No. 2005-58 of July 18, 2005 on seed funds, the Act No. 88-92 of 2 August 1988 relating to investment companies and the code for the provision of financial services to non-residents promulgated by Law No. 2009-64 of 12 August 2009, are applicable to Islamic investment funds .

Law No. 2014-47 of July 24, 2014, amending and supplementing the Insurance Code

Under this law, it was inserted in the insurance code promulgated by Law No. 92-24 of 9 March 1992, a seventh title entitled “Takaful insurance” and comprising Articles 201 to 217, constitutes a legislative framework specific to Islamic Insurance.

Law 2016-48 of July 11, 2016 on Banks and Financial Institutions

This law, published in the JORT of July 15, 2016, is one of the laws that has been the subject of much publicity and which, prior to its final adoption, has led to various appeals for unconstitutionality to the Provisional Body for the Review of the Constitutionality of Project Proposals. law.
In fact, the majority of the experts who participated in the development of his project and a large part of the professionals who were impatient for his appearance were unpleasantly surprised by the choices and orientations contained in the final text of the law as regards Islamic Finance. Which directions were below expectations in more than one respect:

• The law did not opt ​​for the strategic choice of specialization, suggesting a banalisation of Islamic banking products and a lack of respect for its specificities. From now on, all the banks can distribute products of Islamic Finance after presentation of a request and obtaining the authorization of the Central Bank of Tunisia (BCT) in accordance with the provisions of article 22 of the new law.
• By promoting “compliance with the standards of finance” instead of “complying with charaical standards”, the law has moved away from the references adopted by the various international bodies of Islamic Finance.
• By delegating the charaique monitoring mission to the supervisory bodies of the BCT, the law has neglected the role that can play a national charalic compliance body (Central Chariaa Board) and hindered its creation.
• By leaving free choice to banks engaged in Islamic financial transactions to constitute or not constitute “internal charaic committees”, the law has flouted the charaic norms that consider these committees as the pillars of good governance.
• The law has moreover reserved more than 7 articles to the Islamic Finance which remain since 3 years not passable for lack of application notes which are delayed to appear.

At the moment when one wonders what impact this law, which has appeared for three years now, has had on the development of Islamic Finance, one can only express some concern about a law that lags behind to be implemented, with limited space. especially when we realize that in neighboring and non-neighboring countries, laws have already been promulgated and that the mill of Islamic finance is already starting to turn after a single year of reflection.

IMPACT OF REFORMS

Despite the persistent lack of a real legislative framework specific to the Islamic banking sector, lack of implementing texts relating to the banking law 2016-48, Islamic Finance has achieved significant progress and consolidated its achievements during the Last 8 years.
These achievements have provided a solid foundation for a recovery that was soon successful in a number of ways:

• A steady growth in the market share which passed between 2010 and 2018 from a rate lower than unity for the various business units, to 4.3% for accumulated assets, 6% for allocated funding, 6 , 9% for deposits collected and 12% for the number of bank and leasing agencies created.
• A dynamic in the sectors of training and higher education where there is a confirmed orientation towards targeted training cycles, professional masters and seminars aimed at spreading the culture of Islamic Finance and responding to the explosion of specialized skills needs in the different financial institutions.
• The birth of a genuine awareness of civil society. Several associations (Tunisian Association of Islamic Finance, Islamic Finance Council of Tunisia, Sfax – International Forum Islamic Finance, etc.) have been launched in recent years for the same purpose: to push for the integration of Islamic Finance in the Tunisian financial system.