Tunisia underwent the International Monetary Fund's (IMF) Financial Sector Assessment Program (FSAP) in 2001, the results of which were published in the IMF's 2002 Financial System Stability Assessment (FSSA). The report, although not entirely critical of Tunisia's financial sector supervision, did find Tunisia noncompliant with several of the Banking Core Principles (BCPs) for Effective Banking Supervision. Subsequently, in 2007, the IMF released a report on the findings of its FSAP Update on Tunisia conducted in the same year. This report concludes that Tunisia is compliant or largely compliant with 21 of the 30 BCPs (observing that BCP 1 is divided into 6 sub-principles). The IMF's 2007 report also observed that the legal and regulatory framework in Tunisia is largely consistent with international rules. In conducting its 2007 assessment, the IMF took into account Tunisia's 2006 amendments to the 2001 Law Relating to Loan Establishments and the 1958 Law on the Creation and Organization of the Central Bank of Tunisia (BCT). The 2007 FSAP Update also considered the 2006 BCT's Circular on Internal Controls, which was expected to be implemented in early 2008. The IMF's 2007 report added that improvements implemented by the Tunisian authorities include the regulation of licensing, tighter investment criteria, better information sharing, and the introduction of consolidated supervision. However, the report recognized that weaknesses remain regarding credit and provisioning policy, consolidated supervision, remedial measures, and supervision of foreign banks.

General Overview

Tunisia underwent the International Monetary Fund's Financial Sector Assessment Program (FSAP) in 2001, the results of which were published in the IMF's 2002 Financial System Stability Assessment (FSSA). The report, although not entirely critical of Tunisia's financial sector supervision, did find Tunisia noncompliant with several of the Banking Core Principles (BCPs). Subsequently, in 2007 the IMF released an FSAP Update on Tunisia in 2007. This report concluded that Tunisia is compliant or largely compliant with 21 of the 30 BCPs (considering that BCP 1 is divided into 6 sub-principles). Moreover, the IMF's 2007 report did not find Tunisia noncompliant with any of the BCPs as it did in its 2002 FSSA; however, the IMF does rate a few principles as materially non-compliant in its 2007 report. The 2007 report acknowledged that the legal and regulatory framework in Tunisia is largely consistent with international rules and that Tunisia has made considerable progress toward full compliance with the BCPs.

Following the IMF's 2001 FSAP mission's visit, Tunisia adopted a new banking law in 2001 called the Law Relating to Loan Establishments No. 2001-65 (henceforth referred to as the 2001 Banking Law), and accounting standards related to consolidated accounts entered into force. In 2006, the Central Bank of Tunisia (Banque Centrale de Tunisie, or BCT) amended the 2001 Banking Law and the 1958 Law on the Creation and Organization of the Central Bank of Tunisia (henceforth referred to as the 1958 Law No. 58-90). Similarly, BCT circular No. 2006-19 on internal controls was adopted in 2006 and is expected to be implemented fully in early 2008. All these regulatory changes were taken into account by the IMF in its 2007 assessment, which listed post-2002 improvements in the regulation of licensing, tighter investment criteria, better information sharing, and the introduction of consolidated supervision. However, the IMF recognized that weaknesses remain regarding credit and provisioning policy, consolidated supervision, remedial measures, and supervision of foreign banks. As to the anti-money laundering (AML) and combating the financing of terrorism (CFT) regime, the FSAP Update found that Tunisia had adopted a comprehensive AML/CFT law in 2003 and important related directives in 2006, but noted that a number of additional steps were needed in order to implement an effective AML/CFT framework.

Banking supervision in Tunisia falls within the jurisdiction of the Directorate General of Banking Supervision (Direction Générale de la Supervision Bancaire, or DGSB) within the BCT. The DGSB's predecessor was the Inspectorate of Banks, which was the supervisor at the time of the 2002 FSSA report. The main laws regulating banking supervision in Tunisia are the 2001 Banking Law and the 1958 Law No. 58-90. According to the 2007 IMF report, these laws have not been abrogated but only modified by the 2006 amendments.

According to the 2007 U.S. Department of Commerce (DoC) Doing Business report, the banking system in Tunisia is generally sound and has been improved by the imposition of strict new requirements. The banking sector, however, is still characterized by a large share of non-performing loans in the total stock of loans outstanding. Furthermore, while two main banks have been privatized in 2002 and 2005, the banking sector is still predominantly controlled by the government. As of 2007, per the same report, the five largest banks in Tunisia account for about US $10 billion of total assets. Foreign participation capital has also significantly increased, and now exceeds 20 percent.

The Principles

1. (1) Clear responsibilities and objectives for each supervisory agency.

FC

According to the 2007 FSAP Update, Tunisia is "compliant" with this principle. Per the same report, banking supervision is conducted by the DGSB within the BCT. Under Law No. 2006-26, amending the 1958 Law No. 58-90, the mandate of the BCT is to supervise credit institutions. The 2001 Banking Law further states that the BCT is responsible for on-site and off-site supervision of credit institutions. In its 2007 assessment, the IMF advised the BCT to publish a separate annual report on banking supervision.

1.(2) Operational independence and adequate resources.

FC

Tunisia is "compliant" with this principle, as stated in the IMF's 2007 FSAP Update. The IMF report noted that staff available for on-site and off-site inspection has been adequate. An increase in staff was nonetheless suggested, to enable the DGSB to deal with future regulatory changes in the area of risk monitoring, internal controls, consolidated supervision, and AML/CFT issues. The drafting of a code of conduct would also enhance the ethical rules that apply to the DGSB staff. In its 2006 FSSA Update, the IMF stated that the BCT has sufficient resources to carry out its mission, adding that its staff is qualified and trained on a regular basis. Furthermore, the 2006 IMF assessment advised enhancing BCT's independence by "specifying grounds for removal from office of members of its governing body" (p. 29).

1.(3) A suitable legal framework for authorization and ongoing supervision.

FC

According to the 2007 FSAP Update, Tunisia is "compliant" with this principle. The 2007 IMF report noted that while the 2001 Banking Law grants the Ministry of Finance (MoF) the authority to license credit institutions, the MoF always follows the BCT's recommendations on licensing decisions. The revocation of licenses falls within the purview of the MoF. Under the 2001 Banking Law, per the FSAP Update, the BCT has the legal powers to establish operational rules and prudential standards. The law further establishes that credit institutions are to be licensed as "banks" or "financial institutions."

1.(4) A suitable legal framework to address compliance with laws as well as safety and soundness concerns.

FC

In its 2002 assessment, the IMF rated Tunisia as being "largely compliant" with this principle. The IMF's 2007 FSAP Update observed that Tunisia has become "compliant" with this principle. The FSAP Update noted that the 2001 Banking Law and the 1958 Law No. 58-90 were revised in 2006, requiring banks to establish an executive credit committee as well as a compliance control system under the supervision of the board of directors. According to the IMF's 2006 FSSA Update, the revised Banking Law tightens the rules on investments and bank licensing, and increases the minimum capital requirement. Furthermore, the law tightens banks' exposure limits and requires the submission of external auditors' reports and certified financial statements to banks for borrowers above a certain loan threshold. In its 2007 FSAP Update, the IMF noted that the BCT Circular on the Establishment of a System of Compliance Control No. 2006-06 was issued on July 24, 2006. The Circular on Internal Controls No. 2006-19 was also adopted on November 28, 2006. The Circular is expected to be implemented fully in early 2008.

1.(5) Legal protection for supervisors.

FC

According to the 2007 FSAP Update, Tunisia is "compliant" with this principle. Per the same report, the BCT "protects its staff against any threats and attacks to which they may be exposed in carrying out their functions, and compensate them for any harm that could occur" (p. 17). The IMF report recommended specifying the legal status of on-site inspectors as a complement to the proposed code of conduct.

1.(6) Arrangement for sharing of information between supervisors and protection of confidentiality of shared information.

CP

In its 2002 assessment, the IMF rated Tunisia as being "materially noncompliant" with this principle. The IMF report recommended establishing formal arrangements for sharing of information between supervisors. According to the IMF's subsequent 2007 FSAP Update, however, Tunisia is "largely compliant" with this principle. Law No. 2006-26, amending the 1958 Law on the Creation and Organization of the BCT, allows the BCT to cooperate with the financial and insurance regulatory authorities in the area of information sharing, training, and joint supervisory operations. The law also enables the BCT to establish bilateral cooperation agreements with foreign supervisors on the exchange of information. Nonetheless, Tunisia still lacks legal provisions to sign agreements with either the supervisors of other financial sectors or foreign bank supervisors. Furthermore, agreements that have been signed with countries such as Guinea, Palestine, Syria, and Indonesia do not include a clause on the protection of confidential information. In its 2007 FSAP Update, the IMF recommended reaching an information-sharing agreement with the Financial Market Board (Conseil du Marché Financier). Prudential information-exchange agreements should also be established with foreign supervisors.

2. Clearly defined permissible activities for banks and control of the use of the word 'bank'.

FC

According to the 2007 FSAP Update, Tunisia is "compliant" with this principle. Further, the report indicated that permissible banking activities are clearly defined in the 2001 Banking Law and the use of the terms 'bank,' 'banker,' 'credit institution,' or 'financial institution,' are restricted to licensed individuals and companies only.

3. Criteria for structure, directors, operating plan, controls, financial condition and capital base.

FC

In its 2002 assessment, the IMF rated Tunisia as being "largely compliant" with this principle. According to the IMF's 2007 FSAP Update, Tunisia is "compliant" with this principle. The 2002 report noted that the 2001 Banking Law establishes the terms on the granting and withdrawal of licenses. Furthermore, the BCT has the authority to examine license applications, and request any information when deemed necessary. Under the 2001 Banking Law, per the same report, the minimum capital must be paid in full when the credit institution is established. Furthermore, Law No. 2006-19, amending the 2001 Banking Law, has raised the minimum capital for banks from TD 10 million to TD 25 million.

4. Authority to review and reject transfer of ownership.

FC

In its 2002 assessment, the IMF rated Tunisia as "largely compliant" with this principle. The IMF report noted that the BCT has the authority to review and reject transfers of significant ownership or controlling interests in banks. Furthermore, the 2001 Banking Law defines thresholds above which the BCT should be informed. The IMF's 2007 FSAP Update found that Tunisia had become "compliant" with this principle. In this more recent report, the IMF noted that any acquisition above the defined thresholds, as well as direct or indirect acquisitions leading to a controlling interest, must be authorized by the MoF. Law No. 2006-19, amending the 2001 Banking Law, has also introduced the concept of "reference shareholder" (p. 20).

5. Authority to review major acquisitions and investments.

FC

Tunisia was rated as "largely compliant" with this principle in the IMF's 2002 assessment. The IMF report noted that the BCT has established criteria for the review of major acquisitions by banks. Furthermore, the new banking law defines clear assessment criteria for authorizations and waivers. The IMF's 2007 FSAP Update noted that Tunisia is now "compliant" with this principle. Under the 2001 Banking Law, per the 2007 report, the MoF must review "any act that might lead to the transfer of a significant portion of the assets of a credit institution that could induce a change in its financial structure or in the nature of its activities" (p. 21). The 2007 assessment further recommended establishing a cumulative ceiling (i.e. 60 percent of the capital base) for non-financial investments by credit institutions.

6. Minimum capital adequacy requirements (meet Basle Capital Accord for internationally active banks).

CP

According to the 2007 FSAP Update, Tunisia is "largely compliant" with this principle. Under the 2006 BCT Circular on Internal Controls No. 2006-19, credit institutions are required to monitor their consolidated risks. The Circular is expected to be implemented fully in early 2008. The IMF report noted that there is a lack of consolidated prudential ratios, as well as capital adequacy requirements for risks other than credit risk (e.g. market and operational risks). Moreover, there are no sanctions in place if a credit institution's capital base falls below the minimum capital requirement. In its 2007 assessment, the IMF recommended calculating the capital adequacy and solvency ratios on a consolidated basis. As noted in the 2007 U.S. DoC report, the required minimum capital adequacy ratio in Tunisia has been raised to 8 percent, consistent with the Basel Capital Accord.

7. A method exists for the evaluation of procedures related to loans, investments and portfolio management.

NC

According to the IMF's 2002 assessment, while loan classification rules were in line with best practices, loan evaluation and loan loss provisioning needed to be strengthened. As stated in the IMF's 2007 FSAP Update, Tunisia remains "materially noncompliant" with this principle, due to a lack of regulatory provisions specifically addressing credit risk management by credit institutions. The BCT Circular on Internal Controls No. 2006-19 has established regulatory provisions on credit risk monitoring, and specifies the obligations of credit institutions regarding lending procedures. The Circular is expected to be implemented fully in early 2008. The IMF report recommended verifying the effective implementation of the provisions by credit institutions through on-site and off-site supervision.

8. Policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and reserves.

NC

As stated in the 2007 FSAP Update, Tunisia remains "materially noncompliant" with this principle. The BCT Circular on Internal Controls No. 2006-19 has introduced the obligation to review exposures periodically. The Circular is expected to be implemented fully in early 2008. The IMF report noted that credit institutions have not clearly established appropriate procedures and resources for "ongoing surveillance of doubtful loans and recovery of loan arrears" (p. 27). In its 2006 FSSA Update, the IMF further stressed that "the provisioning system should take into account actual recovery prospects and the time factor in estimating future recovery flows" (p. 32). The BCT should also ensure compliance with off-balance sheet exposure provisioning.

9. Prudential limits and management information system on concentration of exposure.

FC

Prudential regulations have been reinforced, and legislation on the control of concentration of exposure is generally adequate, as noted in the IMF's 2002 assessment. According to the IMF's 2007 FSAP Update, Tunisia is "compliant" with this principle. Large exposure limits are established by the BCT Circular No. 91-24, as modified by Circular to Banks No. 2001-04 and Circular to Banks No. 2001-12 regarding the diversification of risks and the monitoring of exposures. The 2007 IMF report noted that the implementation of the BCT Circular on Internal Controls No. 2006-19 will require credit institutions to establish ratios and risk monitoring systems on a consolidated basis. According to the 2007 FSAP Update, credit institutions should establish internal limit systems as provided under the BCT Circular on Internal Controls No. 2006-19. The Circular is expected to be implemented fully in early 2008.

10. Arm's length rule and monitoring for connected lending.

CP

Tunisia is "largely compliant" with this principle, as noted in the subsequent 2007 FSAP Update. The IMF report noted that credit institutions are required to submit an annual report on connected lending to the BCT. Per the same report, while the 2001 Banking Law defines connected parties as "persons with connections to the credit institutions" (p. 28), other regulations provide different definitions. Furthermore, the ceilings on connected loans are substantially higher than for other loans. As stated in the 2007 FSAP Update, these shortcomings should be addressed following the implementation of the BCT Circular on Internal Controls No. 2006-19. The Circular is expected to be implemented fully in early 2008.

11. Policies and procedures for country risk and transfer risk.

II

According to the 2007 FSAP Update, this principle is not applicable to Tunisia because bank portfolios do not contain cross-border bank and non-bank credit, and hence are not exposed to country risk.

12. Measuring and monitoring market risk. Limit and/or specific capital charge on market risk exposure.

CP

As stated in the 2007 FSAP Update, Tunisia is "largely compliant" with this principle. The IMF report noted that market risks are limited in Tunisia. Furthermore, the BCT Circular on Internal Controls No. 2006-19 includes specific provisions on market risk. According to the 2007 FSAP Update, developments in the market risks should however be monitored closely.

13. Comprehensive risk management processes.

CP

According to the 2007 FSAP Update, Tunisia is "largely compliant" with this principle. The IMF report noted that Law No. 2006-19, amending the 2001 Banking Law, provides for the establishment of "an appropriate internal audit system, the creation of an executive credit committee, and of a permanent body for compliance control" (p. 31). Furthermore, the BCT Circular No. 91-24 establishes a prudential standard for liquidity risk. While credit institutions have greatly improved their information systems, the IMF report recommended conducting more frequent inspections of information systems to monitor other banking risks.

14. Adequate internal controls.

CP

According to the 2007 FSAP Update, Tunisia is "largely compliant" with this principle. The IMF report noted that Accounting Standard 22 from the National Accounting Board (Conseil National de la Comptabilité, or CNC), which is supplemented by many BCT circulars, is the main legal reference for internal controls. Furthermore, the 2001 Banking Law requires credit institutions to have an internal controls system, and to establish an internal audit committee. Internal control requirements have been enhanced through the adoption of Law No. 2006-19, amending the 2001 Banking Law, and the BCT Circular on Internal Controls No. 2006-19. However, audits are not always timely and based on adequate risk assessments. The IMF report recommended requiring credit institutions to apply the rules of the BCT Circular on Internal Controls No. 2006-19 to strengthen the obligations imposed on banks in this regard.

15. Strict "know-your-customer" rules and high ethical and professional standards.

ID

In its 2002 assessment, the IMF rated Tunisia as being "noncompliant" with this principle. The IMF report recommended establishing legal provisions to prevent money laundering. According to the IMF's 2007 FSAP Update, Tunisia remains "materially noncompliant" with this principle. As noted in a 2005 U.S. Department of State (DoS) International Narcotics Control Strategy Report, a comprehensive AML/CFT law was adopted in December 2003, and was expected to significantly improve Tunisia's AML/CFT framework. Tunisia's financial intelligence unit within the BCT -- the Tunisian Commission of Financial Analysis (Commission Tunisienne des. Analyses Financières) -- also adopted two related directives in April 2006, as stated in the 2007 FSAP Update. Per the same report, the BCT has begun to train its staff in the area of AML/CFT. Weaknesses remain, however, in the legal framework with regards to the freezing of funds, international cooperation, the identification of beneficial owners, and suspicious transaction reporting, as noted in the World Bank's 2006 Financial Sector Assessment. Furthermore, the implementation of the AML/CFT law is still at an initial phase. In its 2007 FSAP Update, the IMF recommended effectively implementing the regulations mentioned above and enhancing the sanctioning powers of the BCT. The Tunisian government should also adopt specific provisions that require credit institutions to inform the BCT of suspicious transactions.

16. Effective supervisory system consisting of on-site and off-site supervision.

FC

According to the IMF's 2002 assessment, the off-site and on-site supervision functions of the BCT have been merged into the same department to enhance coordination. As noted in the IMF's 2007 FSAP Update, Tunisia is "compliant" with this principle. The same report recommended providing the BCT president with a full inspection report following each examination. It further suggested re-auditing the DGSB to evaluate the effectiveness of its on-site and off-site inspections.

17. Regular contact with bank management and understanding of bank's operations.

FC

Per the IMF's 2007 FSAP Update, Tunisia is "compliant" with this principle.

18. Analytical reports and statistical returns on solo and consolidated basis.

CP

As stated in the IMF's 2002 assessment, Tunisia was "noncompliant" with this principle. The IMF report advised analyzing financial information on both individual and consolidated basis. While there is still no consolidated ratio, notable improvements have been made regarding consolidated supervision, and Tunisia is now "largely compliant" with this principle, according to the IMF's 2007 FSAP Update.

19. Independent validation of supervisory information through on-site examination or external auditors.

FC

According to the IMF's 2007 FSAP Update, Tunisia is "compliant" with this principle. Under the 2001 Banking Law, the BCT is authorized to remove external auditors that are appointed to a credit institution.

20. Ability to supervise on a consolidated basis.

NC

According to the IMF's 2002 assessment, Tunisia was "noncompliant" with this principle. The 2007 IMF FSAP Update later found that, although the BCT has been closely monitoring consolidated accounts since 2004, effective consolidated supervision has yet to be implemented. Hence Tunisia remains "materially noncompliant" with this principle. In its 2007 Update, the IMF recommended establishing consolidated ratios and concluding information-sharing agreements with other financial sector supervisors.

21. Consistent accounting policies and practices that provide a true and fair view of the financial condition of the bank.

FC

According to the IMF's 2002 assessment, Tunisian accounting practices are generally adequate, and in line with international principles. However, the same report found Tunisia only "largely compliant" with this principle, due to a lack of consolidation in accounting practices. The 2007 IMF Update found that, since the 2002 assessment, accounting standards related to consolidated accounts have entered into force and Tunisia is now "compliant" with this principle. The Update noted that the Tunisian Accounting Standards (NCTs), which are established by the CNC, are applicable to credit institutions. Furthermore, Accounting Standard 22 from the CNC, which is supplemented by many BCT circulars, is the main legal reference for internal controls, and the structure of accounts in credit institutions. The 2007 report also found that on-site inspections are carried out solely by the BCT inspectorate.

22. Adequate supervisory measures to ensure timely corrective action.

NC

Although the BCT has adequate powers to take corrective action when banks fail to meet prudential requirements, the IMF's 2002 assessment found that it does not systematically use them. According to the IMF's 2007 FSAP Update, Tunisia remains "materially noncompliant" with this principle, again citing the lack of effective enforcement as enabled by the 2001 Banking Law. The IMF report recommended effectively implementing the sanctioning mechanism and reviewing the system of penalties applicable to credit institutions. It further suggested the permanent installation of the Banking Commission and according it sanctioning powers.

23. Banking supervisors must practice global consolidated supervision over their internationally-active banking organizations.

II

According to the IMF's 2007 FSAP Update, this principle is not applicable to Tunisia because Tunisian banking organizations are currently not active internationally.

24. International exchange of information with other supervisors.

II

According to the IMF's 2007 FSAP Update, this principle is not applicable to Tunisia because it only has one institution abroad.

25. Supervision of local operation of foreign banks and information sharing with home country supervisors.

NC

According to the IMF's 2007 FSAP Update, Tunisia is "materially noncompliant" with this principle due to a lack of agreements on information sharing with other supervisors.