TUNISIA: 2021 REGULATORY RETROSPECTIVE OF THE FINANCIAL SECTOR
Banking regulation
The Central Bank of Tunisia published in 2021, thirty-four Notes and nine Circulars on various subjects. If we focus on the circulars in particular, the following main provisions emerge:
Two circulars dealt with seasonal credits, namely circulars n°2021-06 of September 16,2021 and n°2021-07 of September 01,2021 relating respectively to the revision of the scales of cereal crop credits as well as credits for arboriculture and market gardening.
In addition, within the framework of the financial provisions resulting from the pandemic linked to Covid-19, circular n°2021-04 of July 06,2021 has come to specify the conditions of the benefit and the methods of management of the endowment line intended for the refinancing. rescheduling loans granted by banks for the benefit of SMEs affected by the repercussions of the spread of the Coronavirus “Covid-19”.
Article 1 repealing and replacing the provisions of the first indent of Articles 6 and 8 of Circular No. 2020-14 as follows – a fixed annual interest rate equal to the key interest rate of the Central Bank of Tunisia in force on the date of registration of the credit agreement, increased by 2%.
In terms of risks, the Central Bank also published two circulars: the first circular n°2021-01 of January 11, 2021 relating to the division, risk coverage and monitoring of commitments in which the Central Bank invites banks and financial institutions to set aside general provisions, known as “collective provisions”, to cover latent risks on current commitments (class 0) and commitments requiring special monitoring (class 1) within the meaning of article 8 of circular no. 91-24.
The second circular n°2021-02 of May 31,2021 dealing with hedging instruments against exchange rate, interest rate and commodity risks
Through 54 articles, the Central Bank enacts a number of provisions relating to forward exchange transactions, exchange options, exchange swap transactions, interest rates and currencies as well as instruments allowing hedge against the risks of fluctuating commodity prices.
With regard to the governance of banks and financial institutions, circular n°2021-05 of August 19,2021 to address through 70 articles a set of provisions aimed primarily at protecting the interests of depositors, creditors, shareholders and staff, secondly to ensure sound, prudent and transparent management of the bank and the financial institution, based on a solid culture of risk and compliance and finally, thirdly to ensure the conditions of integrity, honorability and loyalty of the members of the administrative body, managers and employees of the bank and the financial institution.
In terms of the implementation of monetary policy by the Central Bank of Tunisia, circular n°2021-08 of September 08,2021 specified the methods of mobilization of negotiable assets generating coupon payments and accepted as collateral.
Two other publications focused on the organization and functioning of the domestic currency markets (circular n°2021-03 of May 31,2021) which through 60 articles deals with the foreign exchange market, the money market in foreign currencies and the related risk management rules and on the other hand on the conditions of authorization for subscription in foreign currency by residents to the assets of funds, investment funds and specialized investment funds (Circular n°2021- 09 of December 30,2021).
Banking supervision report
It should also be noted the recent publication (January 2022) by the Central Bank of Tunisia of its 2020 Report on Banking Supervision which through five chapters successively addresses the evolution of the regulatory and prudential system of banking supervision, the activity of banking supervision, financial stability and macro-prudential supervision, the structure and appearance of the banking and financial sector as well as the activity and financial situation of banks and financial institutions.
Banking Mediation Report
It should be noted that the last Annual Report of Banking Mediation dates back to 2019 and provides a certain amount of information on the legal framework of banking mediation as well as the analysis of the activity of banking mediators.
This is in the context of monitoring the reforms undertaken, particularly since 2006, with the aim of improving the quality of banking services.
Credit Bureau
The “Credit Bureau” project, which has been in the making for several years, is finally seeing the light of day in legal terms with the publication in the JORT of January 5, 2022 of Decree-Law No. 2022-2, on the organization of credit information and which aims to regulate the creation of credit information companies and the exercise of their activity and to set the rules for the exchange of credit information in order to strengthen their quality with a view to contributing to the improvement financial inclusion.
Green Bond
In order to promote the role of the financial market in the development of Green Finance, the Financial Market Council (CMF) has developed in collaboration with the International Finance Corporation (IFC, World Bank group) a first guide for issuing green bonds, socially responsible and sustainable (GSS)
These bonds are distinguished by the commitment of the issuing company to use the funds raised to finance green, socially responsible and sustainable projects, thus contributing to the achievement of sustainable development objectives.
The guide published in October 2021 establishes a uniform framework of requirements for evaluation, selection of projects to be financed, reporting and external assurances. More generally, it provides specific guidance on compliance with the recommendations and principles published by the International Capital Markets Association (ICMA) in the context of issuing GSS bonds in Tunisia.
1. What is Climate Finance?
According to the United Nations Framework Convention on Climate Change (UNFCCC), Climate Finance refers to any local, national or transnational financing, regardless of its public, private or alternative source, which aims to support mitigation or adaptation to combat climate change.
In other words, Climate Finance is a financial activity whose objective is to support the fight against climate change that is harmful to the Earth and People. This is done through the financing of two main types of actions or projects:
- Actions that reduce the negative effects of activities of all types on the climate – mitigation actions (for example: producing with less energy consumption allowing the quantity of greenhouse gases emitted to be reduced)
- Actions that make it possible to change our ways of life and production preserving the Climate – adaptation actions (for example: use of solar energy in the production of electrical energy or to heat water)
Note the importance of developing a precise, common and broad taxonomy relating to Climate Finance to strengthen the confidence of investors and the various stakeholders in this finance. In this regard, we can mention the taxonomy established by the European Union for Sustainable Finance adopted in June 2020.
Taxonomies are classification systems for sustainable finance. They aim to be more exhaustive and to have a systemic approach, compared to simple definitions of sustainable financial products. From simple definitions to more comprehensive systems of taxonomies, defining what sustainable finance is can bring economic benefits. These include improving market transparency. More precise and consistent definitions of “green” and “sustainable” finance can facilitate investment by giving investors more confidence and certainty. In addition, these definitions can make it easier to measure sustainable financial flows, so as to monitor their evolution, or to implement economic policy instruments supporting an increase in these flows. (source OECD: Building definitions and taxonomies of sustainable finance)
2. The challenges and objectives of Climate Finance
Climate Finance has developed to better mobilize and direct financial resources at all levels towards actions and investments that preserve the climate against harmful, even destructive changes. This supports the achievement of the Paris Agreement target of limiting the average temperature increase to 1.5°C in the 21st century, compared to the pre-revolution industrial period.
The main challenge of Climate Finance is to redirect a large part of financial resources towards the financing of investments that preserve our environment and our climate against harmful and irreversible change. This will ultimately lead to a reduction in the emission of greenhouse gases and a reduction in carbon intensity[1].
3. Efficient collaboration between different stakeholders
The development of Climate Finance requires both collective and global awareness and mobilization of the various parties concerned of all kinds. It goes without saying that this requires the commitment of public authorities and regulators to prioritize the protection of the environment and the climate.
However, public financial resources are insufficient to reverse the trend. Thus, it is essential to also mobilize the private sector and its financial resources to direct them towards all that mitigates the risks on the environment and preserves it. Finally, civil societies and people also play an important role in pushing both public and private operators towards this path, while imposing this on them through a change in behavior in terms of consumption patterns (consuming Bio– using green means of transport – …).
4. Mobilization of financial resources
Keeping the increase in average temperature below 1.5°C requires a lot of investment in mitigation and adaptation, the realization of which requires very significant public and private financial resources. However, green investments are still low today. Indeed and according to a recent study published by Novethic in November 2021, entitled “the limits of green funds in Europe”, the share of green investments represents only 1.3% of total assets as of June 30, 2021, with an amount of 202 billion euros.
In addition, several initiatives and mechanisms to direct more financial funds towards green investments have been developed at the regional level, including in particular:
- Green Climate Fund [2]
This fund was created in 2010 as part of the Cancun agreements in Mexico (COP 17). It is a financial vehicle dedicated to developing countries in the global climate approach, as a financial mechanism for the implementation of the United Nations Framework Convention on Climate Change and the Paris Agreements. Since its inception, this fund has been able to raise approximately USD 10 billion to date. - Green – sustainable Bonds
For the mobilization of many resources for Climate Finance, it was appropriate to mobilize the financial partners for this activity. It is with this objective that several parties have worked on the development of bond issue manuals/guides in relation to Climate Finance:
o Green Bonds
o Social Bonds
o Sustainable (Green & Social) Bonds
This has enabled the mobilization of significant resources for Climate Finance via the financial markets. Thus, the global green bond market has grown strongly since its inception in 2007. Over the period 2014-2020, there were 6,984 green bond issues (deals) for a total amount of USD 945 billion [3]. - UNEP-FI
The United Nations Environment Program Finance Initiative (UNEP FI) is a partnership between UNEP and the global financial sector for the mobilization of the private financial sector in sustainable development.
UNEP FI works with over 450 banks, insurance companies and investors to develop a financial sector with a positive impact for people and the planet.
UNEP FI has enabled alone or in collaboration with other institutions and programs to establish frameworks for a positive and significant contribution of the financial sector in the sustainable development of economies. Examples include the following frameworks:
The Principles of Responsible Banking: Launched with over 130 banks collectively holding USD 47 trillion in assets, a third of the global banking industry.
The principles of sustainable insurance: established in 2012 by UNEP FI and applied today by a quarter of global insurers.
The principles of responsible investment: established in 2006 by UNEP FI and the United Nations Global Compact, applied today by half of the institutional investors in the world (USD 83,000 billion).
5. Regulatory and prudential framework
To direct more and more financial resources towards financing projects that preserve the environment and limit negative climate change, it is absolutely important to enact laws and regulations that both encourage and penalize financial institutions by in relation to the subject of climate change.
These regulations are also of a protective nature for financial institutions against the financial risks induced by climate change. It is in this sense that several financial sector regulatory and supervisory institutions and bodies have created the Network of Central Banks and Supervisors for Greening the Financial System – NGFS.
This network was created in 2017 by 8 central banks and supervisors during the “One Planet” summit that took place in Paris. Since then, the number of members of this network has evolved to stand today at 105 members and 16 observers.
The objective of this network is to contribute to strengthening the global response required to achieve the objectives of the Paris Agreement and to strengthen the role of the financial system to manage risks and mobilize capital for green and low-emission investments. of carbon in the broader context of environmentally sustainable development. To this end, the Network defines and promotes best practices to be implemented within and outside NGFS members and conducts or commissions analytical work on green finance. Through its 5 working groups, NGFS has developed several reference documents for the development of Climate Finance.
6. Climate Finance in Africa
In its latest report “The Finance in Africa”, the European Investment Bank dedicated an entire chapter to Green Finance in Africa. We discuss below the main elements developed in this EIB report:
The African Climate Policy Center has calculated that a 1°C rise in global temperatures would lead to a 2% contraction in Africa’s gross domestic product.
The green bond market in Africa remains small compared to other regions. Africa represents only about 0.2% of the global green bond market.
African banks are making green investments, although these still represent a small share of their portfolios. African banks consider the low demand for green finance and the lack of technical capacity of their staff to be the main constraints to investing in this sector.
Although microfinance institutions represent lower volumes of green financing than banks, they contribute to meeting market needs in terms of financing green investments
Private Equity can support investments ranging from large infrastructure projects to high growth start-ups, although in practice infrastructure absorbs the largest volumes. Green investments in 2020 alone totaled at least $450 million, or 12% of total private capital invested in Africa.
Several African countries are implementing initiatives to promote Green Finance. Central banks are generally the main policy makers and implementers of the financial sector, including in the area of Green Finance.
The GCF has a particular focus on Africa. As of March 2021, it has committed about $3.1 billion (37%) of its total portfolio to projects in African countries.
Active greening of the financial sector is already underway in Africa. However, the green finance sector in Africa is still relatively underdeveloped
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In summary, Climate Finance is taking better and better shape and is developing from one year to the next despite all the obstacles and hesitations it encounters at all levels. Overall, its genesis was essentially at the end of the Paris Agreements within the framework of COP21.
As a Consulting, Technical Assistance and Training firm, AMEF Consulting has developed its expertise and its offer in the field of Green Finance through several missions of studies, Consulting, Technical Assistance or Training carried out since 2015. We continue to capitalize on our experience in this area and to offer our clients our support services for the development of their Climate Finance activity, both for the good of their Clients and for their own sustainable and profitable development. .