Financial Sector Assessment Program Update: Detailed Assessment of Compliance of the Basel Core Principles for Effective Banking Supervision

This paper discusses key findings of the Detailed Assessment of Compliance of the Basel Core Principles for Effective Banking Supervision for Tunisia. The findings reveal that the Central Bank of Tunisia (Banque Centrale de Tunisi/BCT) monitors closely the supervised institutions. Its monitoring consists of examining prudential reports and the numerous documents that the external auditors of the credit institutions have to submit at the close of each year, extracting information from inspection reports. Direction Générale de Supervision Bancaire (DGSB) staff are trained in economics, accounting, and finance.


This paper discusses key findings of the Detailed Assessment of Compliance of the Basel Core Principles for Effective Banking Supervision for Tunisia. The findings reveal that the Central Bank of Tunisia (Banque Centrale de Tunisi/BCT) monitors closely the supervised institutions. Its monitoring consists of examining prudential reports and the numerous documents that the external auditors of the credit institutions have to submit at the close of each year, extracting information from inspection reports. Direction Générale de Supervision Bancaire (DGSB) staff are trained in economics, accounting, and finance.

I. Basel Committee Principles for Effective Banking Supervision

A. Background

1. The updating of the 2002 FSAP assessment of compliance with the Basel Committee’s 25 Core Principles for Effective Banking Supervision was conducted on during two missions on January 16-31 and March 27-31 by Mr. Jean-Luc Couetoux, Banque de France Inspector, and Mr. Didier Debals, financial sector expert of the World Bank.

2. However, Principle 15 pertaining to anti-money laundering and combating the financing of terrorism has not been assessed by the mission, but by a team of World Bank experts led by Mr. Jean Pesme. This second mission, conducted in January 2006, focused on the assessment of conformity of the Tunisian system with international standards in these two areas, and prepared a separate report. Thus, the assessment of Principle 15 has been carried out by that mission, which has also prepared the comments in Table 2 for this principle.

Table 1.

Tunisia: Results of the Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

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The different assessment levels used for the 2006 FSAP Update are based on the Basel Core Principles for Effective Banking Supervision (October 1999 version).

Table 2.

Tunisia: Detailed Assessment of Compliance with Basel Core Principles

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3. The Banque Centrale de Tunisie (BCT) cooperated fully with the assessment and provided extensive clarifications in the form of documents and oral explanations. The assistance of all the staff of the BCT, and in particular of the Directorate General of Banking Supervision is gratefully acknowledged.

4. The first FSAP for Tunisia was conducted in 2001 with two missions ; the first during the period February 20- March 2; the second during May 2-15. As the report was presented to the IMF Executive Board in June 2002, the year 2002 is considered the reference year. It is to be noted that at the time of the two 2001 missions the law 2001-65 concerning credit institutions, which quoted several times in this report and that has been revised in 2006, had not yet been adopted.

B. Information and Methodology Used for the Assessment

5. The review and assessment of Tunisia’s application of the Basel Core Principles took the form of interviews and examination of the documents placed at the mission’s disposal by the BCT. Numerous interviews were conducted with senior staff at the DGSB performing both off-site and on-site audits. Several meetings also took place with the Director General. In addition, meetings were arranged with several banks, an external auditor working for an international accounting firm commissioned to audit several credit institutions, and representatives of the Financial Markets Board (CMF).

6. The mission carried out a detailed examination of laws passed since the previous assessment, the proposed amendments to the law on the BCT (Law 58-90) and to the “Banking Law” (Law 2001-65), which have been adopted in May 2006, compendia of regulations and accounting rules, and the BCT’s circular on internal controls, which was still in a draft form in March 2006. This circular, 2006-19, has been adopted on November 28, 2006, eight months after the mission. However the implementation of these measures will become compulsory only on January 2, 2008, has credit institutions have a one year delay to adopt them. The mission also reviewed standard statements that supervised institutions are required to submit. Finally, the mission was able to review an inspection report and the complete set of end-2004 documents sent to the BCT by the external auditor of a credit institution.

7. Following the March 2006 mission, the legislation revising Law 58-90 on the establishment and organization of the BCT and Law 2001-65 on the credit institutions has been adopted:

  • Law 59-90 has been amended by Law 2006-26 of May 15, 2006; and

  • Law 2001-65 has been amended by Law 2006-19 of May 2, 2006.

The basic documents remain Laws 58-90 and 2001-65, which have not been abrogated but only modified by the laws 2006-26 and 2006-19. In the remainder of this report, when one of the two laws is quoted, it is specified whether the relevant provisions have been introduced or modified in 2006. When reference is made to Laws 58-90 or 2001-65 without other specification, this means that the relevant provisions existed before the 2006 revisions, and have not been subject to any revision in 2006.

In the regulatory area, in addition to the above-mentioned circular on internal controls, two other circulars have been adopted after the March 2006 assessment mission;

  • Circular 2006-06 of July 24, 2006 on the establishment of a compliance control system; and

  • Circular 2006-07 of July 24, 2006 on the executive credit committee.

8. Prior to the January 2006 mission, the BCT had conducted its own assessment of compliance with the Basel Committee principles, although it restricted its evaluation to those principles with which a “noncompliant” assessment had been made in 2001. This document, which the BCT commented on in its discussion with the mission, listed the changes that had taken place in the past five years and indicated the BCT’s overall assessment for each principle considered, in respect of both the essential and the additional criteria.

C. Organization of Banking Supervision

9. Banking supervision is carried out, within the BCT, by the Directorate General of Banking Supervision (DGSB). Since 2001, it handles both off-site and on-site audits, whereas at the time of the 2002 FSAP the Inspectorate of Banks, which was responsible for on-site inspections, had been an autonomous directorate. The staff of the DGSB consists of some 50 officers, 15 of whom are deployed in the Inspectorate, which reports directly to the Director General.

10. To strengthen synergies between these two types of supervision, inspection teams now regularly include the staff member in charge of off-site audits in the institution concerned. In addition, the six team leaders responsible for conducting investigations have undergone specialized training for different types of credit institution.

11. The BCT monitors closely the supervised institutions. Its monitoring consists of examining prudential reports and the numerous documents that the external auditors of the credit institutions have to submit at the close of each year, extracting information from inspection reports, and holding periodic meetings with the managers of supervised institutions. There are two such meetings each year for the major banks, and one meeting a year for the other institutions.

12. DGSB staff are trained in economics, accounting, and finance. If necessary, the DGSB also draws on specific BCT experts for on-site missions. These are mainly information technology specialists, who are enlisted on the somewhat infrequent occasions when an audit includes a review of the institution’s information system or information technology procedures. Sometimes an officer from the Foreign Exchange Directorate or the Credit Directorate may also assist the inspection team.

13. The DGSB has requested a strengthening of its staff (additional three staff per year between 2006 and 2008), as well as some experts in risk management, in order to deal with the changes in the banking system and regulations expected to take place in the next few years, including new regulations on internal control and on combating money laundering and financing of terrorism, as well as the implementation of Basel II.

14. Off-site supervision is organized in the same way as in 2001; the institutions are assigned to different sets of supervisors according to the type of business they perform or statute, (public banks, private banks, former development banks, off-shore banks, leasing and factoring companies, and investment banks).

15. The DGSB’s organization chart reflects this work distribution, with two directorates handling off-site audits:

  • the Directorate of Banks, which supervises public and private banks; it also includes a modernization and regulations department, which is principally responsible for drafting regulations; and

  • the Directorate of Financial Institutions, which supervises leasing and factoring institutions, merchant banks and the former development banks.

16. These two directorates also prepare licensing files and draw up a report on each license application for the Minister of Finance, who makes the decision. The Inspectorate reports directly to the Director General of the DGSB. Over the past three years, the major institutions have had at least one on-site inspection. On the other hand, neither the two factoring companies nor the investment banks have been inspected.

17. There is no methodology manual for off-site supervision, and that covering on-site inspections has not been revised since 2001.

II. General Preconditions for Effective Banking Supervision

18. The Basel Committee recognizes that the exercise of effective banking supervision requires sound and sustainable macroeconomic policies, as well as a developed public infrastructure, effective market discipline, and procedures for effective resolution of problems in banks. While these preconditions are beyond the control of the central bank, weaknesses or shortcomings in these areas may impair its ability to implement effectively the Basel Core Principles.

A. Macroeconomic Environment

19. For several years now, Tunisia has been committed to an economic liberalization program, mainly affecting the banking sector. The modernization of that sector forms part of a long-term, so-called upgrading plan, composed of several components. Not least among these is the modernization of information systems.

20. As regards ownership, the preponderance of the public sector has diminished and the ownership of the banks is split into three ways: approximately one-third under majority government ownership, another third owned by private Tunisian investors, and the remaining third owned by foreign private banks. Two public banks have been privatized after being put out to tender, while Banque Franco-tunisienne (BFT) was in the process of being privatized at the time of the mission.

21. With respect to the organizational structure of the banking system, the development bank category was eliminated in 2004; the institutions that used to fall under that category were authorized to engage in all commercial bank activities.

22. In addition, a bank specializing in small and medium-scale enterprises financing (BFPME) started its operations in March 2005. Its function is to provide cofinancing and co-participation to supplement that provided by other banks and financial institutions, including the venture capital investment companies (SICAR).

23. Various steps have been taken to enhance the operational autonomy of the banking sector. Thus, the prior authorization procedure for equity investments in other credit institutions has been eliminated in 2001, and Law 2006-19 modifying the law 2001-65, makes the opening of bank branches in Tunisia conditional to a simple specification by the BCT of terms and conditions, rather than a license.

24. Money market instruments for banks and liquidity management have been modernized, in particular through the introduction of repurchase agreements.

25. Payment systems are also being modernized, with the a new large-value payments system on a gross basis close to enter into operations. These developments also pose new risks for the banks, which need to put in place their own appropriate control procedures. The BCT should examine the effectiveness of those procedures during its on-site inspections.

26. The Tunisian banking sector is characterized by the large share of nonperforming loans (NPLs) in the total stock of loans outstanding. The problems affecting the tourist industry since 2001 have contributed to increase the NPL ratio. While a sharp decline took place in 2005, the ratio remains close to 20 percent.

27. Several measures have been adopted in recent years to deal with the NPLs problem. These include a change in the procedures for realizing real estate collateral, more favorable tax deductibility rules for NPL provisions and write-offs, and the establishment of asset recovery companies. Specifically, procedures for sale of real estate under judicial supervisions have been simplified, the tax-deductible portion of provisions against NPLs has been raised to 85 percent in 2004 and 100 percent in 2005, and the conditions for writing off fully provisioned bad debt have been clarified, although they remain rather strict.

28. Most banks have established asset recovery companies, to which they have transferred their olds NPLs, which, in the most part, were fully provisioned. Up to now the amount recovered on the loans transferred (D 1.3 billion) has been modest.

B. Public Infrastructure: The Legal and Regulatory Framework

29. The legal and regulatory framework governing banking supervision broadly follows the French model, albeit with some marked differences, especially as regards the way the sanctioning and penalties mechanism is structured and the classification and provisioning of NPLs. It is now largely consistent with international rules and has been supplemented in the area of internal controls by the adoption of a circular in July 2006, which was still at the draft level in March 2006..

30. Two laws on the supervision of credit institutions have been promulgated since 2001:

  • Law 2001-65 of July 10, 2001 on credit institutions, which has been revised by Law 2006-19 of May 2, 2006; and

  • Law 2005-96 on strengthening the security of financial transactions requires companies raising funds from the public, including credit institutions, to appoint two external auditors to certify their financial statements.

31. With regard to banking regulations, the BCT has strengthened the credit culture by requiring credit institutions to obtain financial statements certified by an external auditor whenever banking exposure to a single enterprise exceed D 5 million, together with a recent rating if exposure reach D 25 million and the company is not listed on the stock exchange.

32. The requirements on internal controls have been significantly strengthened. Thus, Law 2006-19 revising Law 2001-65 requires credit institutions, on the one hand, to establish an Executive Credit Committee, distinct from the Credit Committee, to be chiefly responsible for examining credit activities and submitting proposals regarding the institution’s lending policy to the Board, and, on the other, to establish a compliance control system designed to determine and assess the risks of noncompliance with laws and regulations, and with sound practices. To implement these provisions the BCT has adopted on July 24, 2006 Circular 2006-06 “concerning the implementation of a system of compliance control in credit institutions.”

33. Furthermore, the BCT circular 2006-19 on internal controls, largely inspired by the French regulation 97-02, has been adopted in November 2006.. It establishes a very large number of obligations in this area. While some of these appear to be somewhat ambitious, such as the requirement that each customer be assigned a rating, or that stress tests be carried out to assess capital adequacy in case of shocks that could lead to large losses, these are fully in line with the mechanism of Basel II which represents the international standard in the area of risk monitoring and assessment.

34. Other circulars, mentioned in paragraph 7, were under preparation at the time of the March 2006 mission. They have since been adopted: Circular 2006-06 on outsourcing, and Circular 2006-07 on the executive credit committee. The first circular was adopted at the time of the March 2006 mission.

35. Accounting rules in effect for credit institutions are broadly modeled on internationally recognized standards. Several of them (NC 35 to 39), which are close to the International Financial Reporting Accounting Standards (IFRS), were adopted in 2003 by the National Accounting Council in order to establish the rules for compiling the consolidated accounts that institutions have been required to produce starting with the 2004 financial statements. However, in the area of loan classification and provisioning, the rules established by BCT Circular 91-24 do not envisage the estimation of the present value of annual expected cash flows, either paid by the borrower or recovered in the framework of a restructuring procedure. Since in Tunisia the delays in recovering overdue loans are long, and the amounts recovered under judicial procedures are low, the absence of a present value framework is inconsistent with the provisions of IAS 39, which is the international standard.

36. In the area of guarantees, the Tunisian legislation regarding movable collateral needs to be modernized, in order to be consistent with international standards. There are also delays in real estate and mortgages registration procedures which are considered excessive by banks. Reforms are therefore needed in this area.

37. As regards relations with customers, Laws 2006-26 and 2006-19 modifying Laws 58-90 and 2001-65, introduce numerous provisions designed to enhance the quality of banking services, such as the appointment of an ombudsman and the creation of a banking services monitoring unit in the BCT. The revisions in the laws will be accompanied by implementing circulars.

C. Market Discipline

38. In order to improve the information available to credit institutions for credit risk analysis and to enable the BCT to better monitor it, the Bank has over the past few years embarked on the establishment of various information bureaus that credit institutions can consult. Thus a risk bureau was formed to monitor the indebtedness of enterprises, while a balance sheet bureau was set up to make companies’ financial statements available to banks; the requirement that banks submit to the BCT the annual financial statements of clients with loans above a threshold will gradually enrich this database. Another information bureau is scheduled to come on stream shortly, namely the nonperforming loans bureau, which will provide data on total NPLs by debtor and the classification attributed according to the prudential regulations1 On the other hand, there is no credit bureau, as such, which would report the score assigned by the various lending institutions to a single counterparty.

39. The role assigned to the external auditors of credit institutions in the supervisory process is significant because every year they have to submit several reports to the BCT, detailing, in particular, any adjustments made to financial statements, internal controls and management, the loan portfolio, and ratios at December 31. In addition, they attend the periodic meetings organized by the BCT with the supervised banks. The four largest international audit firms audit half the institutions, but currently none of them audits public banks.

40. As regards the reporting of financing information, most credit institutions publish their annual financial statements. However, the quality of the information on risk exposure, internal control mechanism, nonperforming loans and their recovery could be improved. The quality of information in the annual report varies widely across banks. With regard to accounts auditing, on the basis of the recent law on financial security, all credit institutions are required to have two external auditors.

41. The BCT devotes several pages in its annual report to banking supervision. Consideration is currently being given to the possibility of producing an annual report specifically dedicated to this area. Indeed it would be advisable to publish every year a BCT report dedicated to banking supervision, which is the practice followed by a large number of bank supervisory authorities. This report should include a description of the banking developments in the previous year in the area of profitability, solvency, risks, and banking organization, as well as a description of the inspections and controls carried out by the BCT. The report should also describe the sanctions adopted, together with an explanation of the reasons for taking such actions.

D. Resolution Framework for Problem Banks

42. The BCT does not currently have a (CAMEL-type) system for identifying those banks which are running into difficulties and providing a basis for taking corrective measures. It would be worth establishing one.

43. Although Article 41 of Law 2001-65 on credit institutions stipulates that all banks must belong to a deposit guarantee scheme, such a mechanism has not yet been put in place. Before introducing such a mechanism the BCT is waiting until the recapitalization of the banks recently privatized has been completed, so as not to start the guarantee scheme before the whole banking system is on a solid basis.

III. Main Findings

44. Table 1 contains the for each core principle, but only for the essential criteria, and the assessment given in 2006, compared with that of 2002. In 2006 more than half the principles have been assessed as “compliant” or “largely compliant” and in no case “non-compliant.” The 2006 assessment for the essential and additional criteria is reported in Table 3.

Table 3.

Tunisia: Summary Compliance of the Basel Committee Principles

(Essential and Additional Criteria)

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* C = Compliant; LC = Largely Compliant; MNC = Materially Noncompliant;NC =Noncompliant; NA = Not Applicable.Shading indicates that there are no additional criteria for that principle.The vertical strikethrough indicates that compliance with Principle 15 was not assessed.

45. A comparison of the 2002 and 2006 assessments with respect to the essential criteria (Table 1) shows that Tunisia has made considerable progress toward full compliance with the Basel Committee principles. Indeed, no principle is marked “noncompliant” and the number of those marked “compliant” has increased. Thus the BCT is now compliant with Principles 1-4, 3, 5, and 21, which were marked “largely compliant” in 2001. The 2006 assessment reflects the promulgation of Law 2001-65 and the entry into force of the accounting standards applicable to consolidated accounts.

46. The principles for which the mission reached a “materially noncompliant” assessment refer to credit and provisioning policy (Principles 7 and 8), consolidated supervision (Principle 20), remedial measures (Principle 22), and supervision of foreign banks (Principle 25). Principle 15 pertaining to anti-money laundering and combating the financing of terrorism has also been assessed as “materially non-compliant.” However, as previously indicated, this assessment has been given not by the BCP team but by the World Bank team which examined this subject.

47. As regards Principles 7 and 8, the legal and regulatory requirements will be observed, once the provisions of the BCT circular on internal controls will have been implemented. In this regard, it should be noted that this circular, adopted on November 26 2006, includes nine articles on the credit risks. However, while credit institutions have to get ready to conform to these norms, these requirements enter into force only on January 2, 2008. The implementation of this circular will make it possible to complete regulatory provisions on credit risk monitoring. However, the terms on which banks extend loans and the insufficient provisioning make it impossible to consider the Tunisian banking system compliant with these two principles. NPLs still made up 20.9 percent of outstanding loans at end-2005. Most bank loans continue to be granted on the basis of collateral, rather than as the result of an in- depth financial analysis aimed at assessing counterparty risk factors, such as the quality of the project and its ability to generate cash-flow. As regards provisioning, a substantial effort is still needed to achieve reasonable coverage of NPLs, given that the collateral taken into account in determining the provisioning requirement is subject to valuation uncertainties. Moreover, the rules governing provisioning do not take into account the time frame for recovering sums owed by debtors, despite generally long, drawn-out legal proceedings.

48. Regarding Principle 15, if some progress has been registered, much remains to be done to bring the anti-money laundering and combating financing of terrorism system in conformity with the Basel Committee criteria.

49. Although the BCT carries out a consolidated analysis of the credit institutions’ financial accounts, starting with the accounts for 2004, effective consolidated supervision still has to be implemented. To that end, it is necessary to introduce consolidated ratios and to establish a supervision of the banking groups, in conformity with the provisions of the circular on internal controls, which requires these groups to establish by January 2, 2008 a system of evaluation and surveillance of the risks assumed by the parent company and all the financial subsidiaries, as provided by its article 5.

50. As for remedial measures (Principle 22), the “materially noncompliant” assessment has been maintained, owing to lack of effective enforcement of the penalties system provided in the law.

51. The lack of agreements on information sharing with other supervisors explains why Principle 25 is assessed as “materially noncompliant.”

IV. Detailed Assessment of Observance of the BCPs

A. Principle-by-Principle Assessment

52. Table 2 contains the detailed assessment of compliance with the 25 Basel Committee Principles. The assessment is based on the Core Principle Methodology of the Basel Committee on Banking Supervision, October 1999. The methodology makes a distinction between “essential” and “additional” criteria. Essential criteria should be present in order for supervision to be considered effective. Additional criteria further strengthen supervision and countries should strive to implement as many additional criteria as possible. The assessment takes both the essential and additional criteria into consideration.

53. The 25 Basel Principles have been revised in October 2006, after the BIS issued in April 2006 two consultative documents. This assessment is based on the methodology in effect in March 2006.

54. The rating scale in the current methodology distinguishes five degrees of compliance: compliant, largely compliant, materially noncompliant, noncompliant, and not applicable.

55. A principle will be considered compliant, whenever all essential criteria are generally met without any significant deficiencies. A largely compliant assessment is given whenever only minor shortcomings are observed, and these are not seen as sufficient to raise serious doubts about the authority’s ability to achieve the objective of the principle concerned. A materially noncompliant assessment is given whenever the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance, but substantive progress has been made or actions undertaken. A “non-compliant” assessment is given when no substantive progress towards compliance has been achieved or if the information available is insufficient to determine with certainty whether substantive progress toward compliance has been made. Finally, the term “not applicable” is used if, for any reason, a given principle is deemed to be irrelevant for Tunisia.

B. Authorities Response to the Assessment

56. The review of compliance with the Basel Committee’s Core Principles for Effective Banking Supervision was carried out in January and March 2006, during the updating of the 2002 FSAP. It was discussed in depth with representatives of the DGSB. An initial version of that document, without assessments, was sent to the BCT for comments in mid-February 2006, and these comments were incorporated in the final version. The updated assessment for each principle, supplemented, where appropriate, with comments and recommendations, was transmitted to the BCT for comments in mid-March 2006, and discussed with the BCT during the second FSAP Update mission in the last week of March 2006. To the extent that the mission was informed, before the finalization of the report, of the legislation prepared which amends the Laws 58-90 and 2001-65, and of the draft BCT circular on internal controls, these have been mentioned. However, the implementation of their provisions by credit institutions remains to be achieved.

57. The BCT broadly agreed with the assessments and recommendations, and expressed their appreciation for the work carried out by the assessment team. It has transmitted some comments on the last version prepared by the mission which took into account the adoption of the circular on internal controls; these comments have been for the most part incorporated in the final draft.

58. The BCT noted that on Credit Policy (CP 7) the implementation of the circular on internal controls, which was still in draft form in March 2006, will cover current regulatory gaps in credit decisions. This circular, adopted on November 28, 2006 as circular 2006-19, includes a number of provisions on credit risk. The BCT also noted that they are taking measures to strengthen consolidated supervision (CP20), and that the law 2006-26 amending the law 58-90, which was not yet adopted at the time of the mission will authorize the central bank to enter into information sharing agreements with other domestic and foreign financial supervisors. This will also permit compliance with CP 25 (supervision of foreign banks establishments) as soon as these agreements are fully operational. With regard to Principle 22, the BCT did not agree with the recommendations regarding the reorganization of the sanctions system, namely (i) the transformation of the Banking Commission in a permanent body, noting that it can be convened rapidly when needed, and (ii) the devolution to this commissions of all sanctioning powers, currently split under the banking law between the Governor and the Commission, which they consider appropriate.

C. Recommended Action Plan

59. The key actions that must be implemented in order to achieving full compliance with the Basel Committee Principles are indicated below.

Improve lending policy and monitoring portfolio’s quality

60. It is essential to put in place a lending policy based on analysis and monitoring of counterparty risk. All the banks now have a credit evaluation section separate from the commercial section, as well as a credit committee. However, the decentralization of functions could be improved to ensure that the level of delegation of authority is tailored to the risk incurred, since excessive centralization could run counter to the objective of improving the analysis of counterparty risk.

61. Credit institutions must assess the profitability of the loans they grant, regularly monitor the quality of their loan portfolio, and have at their disposal adequate instruments to recover nonperforming loans.

Strengthen provisioning of NPLs and reduce their share in total loans

62. Increasing the NPL provisioning ratio must be a key priority for the banking sector. The authorities’ objective of achieving a 70 percent provisioning ratio by 2009 must be considered a minimum, and any effort over this target should be encouraged. This objective should be accompanied by a substantial reduction of the NPL ratio.

Strengthen risk control and internal control mechanisms in credit institutions

63. The liberalization of the Tunisian banking sector and measures adopted by the BCT in recent years have heightened credit institutions’ awareness of risks and of the need to boost their internal control mechanisms. It would be advisable to reinforce this trend by ensuring that credit institutions implement the provisions of the BCT circular on internal controls, and by focusing more sharply during on-site supervisory work on the organization of internal controls and the identification of possible shortcomings.

64. In the credit institutions, the internal audit department will now report directly to the Office of the General Manager, as is advisable. However, internal audits are not systematically based on an assessment of risks, without a clear mapping of such risk. Risk assessment requires that credit institutions build adequate capacity to monitor and control them, which in turn the BCT will have to assess.

65. With respect to on-site inspections, evaluation of internal control mechanisms should place greater emphasis on any flaws encountered in the definition of responsibilities, separation of functions, and the quality of permanent and periodic controls. It would also be advisable to conduct more frequent audits of I.T. systems.

66. The quality of information systems varies markedly from one credit institution to another. Not all of them—especially the banks, which have the highest exposure to credit risk—are equipped to monitor risks on an ongoing basis. Thus, with respect to credit risk there is no reasonable assurance that the authorizations granted—or the ceilings on exposures for economic groups and branches of economic activity—are respected. In addition, the institutions need automatic reconciliation tools to be able to handle suspense account items, which not all of them have. Steady modernization of data processing and information systems is a priority for the banking system, both to achieve productivity gains by reducing the volume of manual operations, and to improve operations monitoring and control

Establish consolidated supervision

67. Establishing consolidated supervision is an important objective for both banks with equity holdings and the BCT.

68. The BCT’s circular on internal controls imposes new obligations on bank groups, which from now on will be required to monitor their risks on a consolidated basis and to establish consistent internal control mechanisms in their financial subsidiaries.

69. For its part, the BCT should introduce consolidated ratios, so that existing supervisory rules apply to banking groups. While at present banking groups are limited in numbers and do not control many subsidiaries, these may generate additional risks. For instance the SICARs (private venture capital firms) may take exposures on a client already heavily indebted to the bank controlling SICAR. Furthermore, sales of claims on which the bank retains a risk must not lead to a lower minimum capital requirement than that originally set.

70. As for equity holdings in financial institutions, it would be advisable—even before publication of regulations on the establishment of consolidated ratios—to deduct equity investments of banks in other financial institutions from the separately calculated capital base of each institution, in order to avoid double counting the capital base.

Adapt the BCT inspections to the new provisions established by the circular on internal controls on connected lending, and limit the ceiling of such lending

71. The BCT circular 2006-19 on internal controls prescribes that the credit institutions identify connected lending in their information system, and specifies particular norms for extending such credit. It would be advisable that the BCT incorporates these provisions in its inspections. Moreover, it would be advisable to make use of a revision of the Circular 91-24 of the BCT to modify its Article 3, so as to lower the ceiling applicable to this type of lending, currently set at tree times capital, which appears high.

Implement the system of sanctions

72. Full implementation of the sanctions mechanism is essential, because it is key to the credibility of the supervisory authority. Until now, the BCT has not applied formal sanctions, nor injunctions, toward any credit institutions which has been in breach of the regulations. These breaches are mostly related to excess credit concentration and equity participation in non financial companies. With the modernization of the banking system, the entry into effect of the circular on internal controls, and the adoption of other envisaged regulations, it is recommended that identified breaches, including those pertaining to the organization of the internal control system, be monitored rigorously by the BCT. Any violations of the regulations should be promptly corrected, or should be the object of a waiver in duly justified cases. In the case of persistent violations, sanctions should be adopted.

73. Concerning the organization of the sanctions system, the mission recommends to conferring sanctioning powers exclusively on the Banking Commission, while the Governor of the BCT should have the power to issue injunctions.

Establish information exchange agreements with other supervisors

74. To enable the BCT to carry out consolidated supervision, it has to be able to exchange information with the country’s other oversight bodies: the Financial Markets Board (CMF) for the mutual fund institutions (SICAV, SICAF and FC); the Ministry of Finance for insurance companies, the SICAR, and the asset recovery companies, which under present conditions constitute an extension of banking activities.

75. Agreements with foreign supervisors should also be established, especially with those agencies supervising banking groups that hold shares in recently privatized Tunisian banks. Furthermore, the need for cooperation among supervisory authorities will increase following implementation of the Basel II agreement.

Strengthen the independence of the Governor of the BCT

76. The grounds on which the Governor may be removed from office should be specified in the Law and subject to publication. This would achieve compliance with the additional criteria of Principle 1-2.


Circular 91-24 of the BCT requires credit institutions to divide their loan portfolios between current and classified loans; the latter include four classes; class 1, assets requiring close monitoring; class 2: uncertain assets; class 3: worrisome assets; class 4: compromised assets. Each of the classes from 2 to 4 involves a provisioning rate, that goes from 20 to 100 percent.

Tunisia: Financial Sector Assessment Program Update: Detailed Assessment of Compliance of the Basel Core Principles for Effective Banking Supervision
Author: International Monetary Fund