Microfinance Regulation in Post Revolution Tunisia

Tunisia was one of the first Arab countries to have a microcredit law, back in 1999. That law put a very low ceiling on interest rate (5% declining inclusive all commissions and fees) which prevented any of the Tunisia’s 280+ microcredit associations which were established by the Governmental Tunisian Bank of Solidarity (BTS) to become sustainable. Only Enda Inter-arabe (Enda-IA) managed to become sustainable in 2003.

Enda-IA, part of the Enda Third World network, as an international NGO, is not constrained by the ceiling on interest rates since the law is only applicable to local associations. These associations receive free loans and heavy subsidies from the BTS. Enda-IA benefits from a special permit which allows it to charge high enough interest rate to cover its costs and to borrow from the banks (since 2005). Today, Enda has more than 160,000 active borrowers and 65 branches all over Tunisia and employs 800+ staff. In September 2010, the special permit for Enda was extended to any NGO or association which provides micro-crédit from resources other than BTS subsidized loans.

The need for a new microfinance law came up at a recent conference in Tunisia. Below are some of the issues which I think the new law should take into consideration:

1. Interest rate cap: The new law/regulation should remove the cap on the interest rate which will allow new players/providers to enter the market
2. Microfinance and not microcredit only: We are talking about microfinance and not microcredit and should focus on developing a financial inclusive system which allows all Tunisians to have access to all kinds of financial services including savings, insurance, money transfer and credit for different purposes such as enterprises, housing, education etc.
3. Different types of institutions: The new regulation should allow for different kind of institutional types. Associations, not-for-profit companies, for-profit companies, microfinance banks and commercial banks, and cooperatives can all play important and complementary roles in providing access to financial services to the poor. Limitations can and should be put on the kind of services each institutional type is allowed to provide. It would also allow for institutions to work on the national level, regional level or only governorate level. Furthermore, they should allow transformation from one institutional type to another assuming that certain conditions/criteria are fulfilled.
4. Social responsibility: The new regulation should highlight the social responsibility by insisting that all the providers have to respect and implement client protection principles.
5. Client information sharing: A credit bureau should be established as soon as possible and the new regulation should make it mandatory for all the players to participate in that bureau and to check on each new client. These regulations also should have limitations and guidelines on the level of over-indebtedness for the client in order to avoid over-indebting poor clients.
6. Instead of rushing into a new law and to develop the process with sufficient deliberation, a legal amendment which appoints the central bank as the regulator of the sector would be best. That way the central bank could take its time to develop appropriate regulation: it is far easier to change the regulation than to change a law.