Executive summary
This policy brief focuses on the need for the review of the Excessive Interest Rates Act. This brief advocates for enforcing a limit on the interest rate threshold by the Central Bank of Tunisia (BCTBanque Centrale de Tunisie ) and for reforming the current legislation to clarify the profit rate threshold of Islamic finance operations within the framework of “Islamic banking.” This brief provides recommendations based on a review of Law No. 39-2017 amending Law 99-64 of July 15, 1999 relating to excessive interest rates, and Law No. 2016-48 of July 11, 2016 relating to banks and financial institutions.
Introduction
Loan operations[1] represent the main source of financing in Tunisia, at 76% of financing operations[2]. Through a loan agreement, the lender agrees to make available to the borrower a certain amount of money which will be repaid with interest within a time limit set by both parties[3]. The rate of remuneration fixed at the time of granting a loan is the Percentage Rate of Charge[4], which includes all that is owed to the bank as a loan, namely the rate of calculated interest plus fees and commissions[5]. For any type of contract, the role of legislation in ensuring the rights of the different parties is undeniable. In this case, legislation is particularly effective in protecting the borrower, as the more vulnerable party of the contract, while safeguarding the economy to ensure that it continues to align with the state’s financial and economic policies. Law No 39-2017[6] has been proposed to the Assembly of People’s Representatives (ARPAssemblée des Représentants du Peuple ) since 2017 to modify and complete Law 99-64 of July 15, 1999 relating to excessive interest rates, but it has yet to be adopted. This risks enabling potential abuses in financial transactions, which in turn threatens the economic stability of the country. Another pressing problem since 2016 is that of “Islamic finance,” which is not regulated by the law of July 1999 and whose lack of a legal framework leads to a legislative vacuum; in fact, Islamic finance operations are not subject to an interest rate threshold. It is urgent that these two problems be the subject of serious debates within the ARPAssemblée des Représentants du Peuple and other institutions responsible for ensuring economic stability, in view of the precarious situation in Tunisia caused by the consequences of debt, inflation, and covid-19.
Lack of implementation of standards regulating financial operations
Evolution of the legislative framework relating to the remuneration of banking transactions
Tunisia shifted towards free trade, based on free competition in the early 1990s. Banks were therefore able to freely set the interest rate for loan operations with the condition of not exceeding the money market rate (MMR) by more than three points. This condition applied to any type of loan according to a Central Bank memo dating December 17, 1991. The ceiling which limited the freedom of banks was later repealed by a memo dating July 7, 1994.
Subsequently, this policy of liberalizing interest rates quickly failed because, in practice, the banks abused this freedom to inflict high interest rates on customers, using their power over those in need of loans to achieve high interest rates and exorbitant profits at the expense of borrowers[7]. As a result, the legislative intervened to restrict banks’ leeway in setting interest rates through the law of July 15, 1999[8] on excessive interest rates.
Islamic financial operations were governed for the first time[9] in Tunisia by Law No. 2016-48 dating July 11, 2016 relating to banks and financial institutions. Article 11 of this law specified the various operations contained in Islamic finance[10].
Draft law No. 39-2017[11], currently under discussion in the ARPAssemblée des Représentants du Peuple ‘s Finance, Planning and Development Committee[12], seeks to amend the 1999 law currently in force. This draft law was was requested by the International Monetary Fund (IMFInternational Monetary Fund ) following the letter of intent sent by Tunisia to the IMFInternational Monetary Fund [13] on May 2, 2016, requesting a new loan. In this letter, Tunisia commits to reviewing the rules that determine the remuneration of financing operations following the recommendations of the World Bank[14].
Gaps in draft law No. 39-2017 amending law 99-64 dated 15 July 1999 relating to excessive interest rates
Draft law No 39-2017 advances three primary proposals:
- The first proposed modification concerns the abolition of the prison sentence for bankers who enforce excessive Percentage Rate of Charge[15] based on a calculation of loan components. The abolition of this prison sentence risks giving rise to multiple excesses which already exist despite the current possibility of sanctions. This is because the financial incentive trumps the risk of sanction for bankers, as Jean Carbonnier stated “the civil route is sometimes insufficient and of low social return”[16]
- The second proposal aims to modify the method of calculating the legal threshold and proposes its fixing by government decree according to the category of funding granted and according to its beneficiary.
Currently, the formula is set by the Central bank as follows:
Legal threshold = 1/5 of Average Effective Rate = 1/5 (the simple arithmetic sum of the Percentage Rate of Charge of the previous semester)[17]
What is problematic in this new proposal is the degree of government intervention, as successive governments may have different policies which could influence the calculation of this threshold. This would disrupt the stability of an important sector of the financial system, in addition to destabilizing the borrower through inconsistent thresholds.
- The third modification concerns an important point which is to subject Islamic finance operations to a legal threshold, which would be beneficial. However, setting this threshold through government decree raises the same issues as those mentioned above regarding the influence of successive governments’ policies
How does the notion of Islamic financing exacerbate the problem?
The core activity of a bank is to make a profit by collecting interest on loans and charging for services and services provided, that is to say that it rents money and sells services. This makes Islamic banks different in the following ways:
- They lend money for projects in which they are a partner and therefore benefit from the interest earned by the project (moucharaka);
- They buy real estate at a lower price than the selling price (mourabaha)[18];
- They act as an investor and commit to financing projects. In return, the borrower manages the project while sharing the profits with the lending bank[19].
- They make the movable or real estate asset available to the customer for a fixed period in return for the payment of rent (Ijara)[20], which is also called Leasing.
Taking into account these four activities, the financial operations of Islamic banks do not differ in practice from those of conventional banks. The distinction is rather theoretical. The key distinction of this so-called Islamic brand of financing is the fact that it does not allow the practice of “Riba” (usury) in its institution. However, this point remains debatable.
The 2016 law is the first to govern Islamic finance operations. Unlike the (now repealed) law of 2001[21] which included all banking operations in the same regulations, law 2016 differentiates between loans and Islamic finance operations. The legislator no longer subjects the two types of operations to the same conditions.
Theoretically, the guiding principle of Islamic banks is the prohibition of speculation. However, in practice they seek to make a profit through alternative means, namely through profit-and-loss sharing arrangements[22]. This theoretical principle in no way excuses the lack of control over the possibility of speculation. Statistics show that Islamic banks increased their assets by 110% against 5% for conventional banks in 2010[23]. Islamic bank Zitouna made a profit of 24.3 million dinars in 2019[24]. These profits greatly exceed those made by conventional banks. This contradicts the principle that Islamic financing is based primarily on an ethical and ideological perspective which seeks to avoid excess gain[25].
Solutions
Necessary amendments to the law No 39-2017 for a threshold protecting the interest of the citizen
In theory, the proposed amendments aim to provide more flexibility for setting thresholds in relation to Average Effective Rate and adjust the excessive Percentage Rates of Charge according to the risk incurred according to the type of borrower: very small enterprises, small or medium-sized enterprises (SMEs), large companies, and individuals. Nevertheless, submitting this threshold to a government decree amounts to submitting it to the will of the political forces, dictated for example by their obligations towards the IMFInternational Monetary Fund .
However, the threshold of one fifth of the Average Effective Rate can better respond to economic fluctuations, in addition to being consistent with the variation in the evolution of the key rate (which is the reference rate in a market[26],it is fixed by the central bank. There are three types of interest rates: the refinancing rate, the rate at which the deposits of other banks will be paid and the discount rate which is the rate fixed on a day-to-day basis at which the central bank lends liquidity to the bank. The key rate is the central indicator for the evolution of interest rates on bank loans).
Concerning the penalization of exceeding the interest threshold, it is advisable to keep the prison sentence in addition to increasing the amount of the current fine, as hefty fines act as a deterrent to financial institutions.
Redefining Islamic banking and the need to unify the banking system:
The prices of Islamic finance operations services are comparatively higher in Tunisia than those of conventional banks[27], which explains the high profits made by Islamic banks. In a meeting held on 2/2/2018, the Board of Directors of the central bank planned to allow banks and financial institutions to provide Islamic finance services in addition to conventional finance In a meeting held on 2/2/2018, the Board of Directors of the central bank planned to allow banks and financial institutions to provide Islamic finance services in addition to conventional finance services, in accordance with the 2016 law of 2016[28]. However, the Board did not mention the need to subject Islamic finance services to the same interest rate threshold as conventional loan operations.
The profit rate threshold should not be reserved to loan operations. It will be beneficial to subject all Islamic finance operations to the same threshold in order to protect the financing applicant, as the vulnerable party. This threshold would align with the principle of prohibiting “Riba”, defined as “an illicit profit or gain resulting from an imbalance in the value of reciprocal services.”[29]
It would therefore be advisable to unify the legal rules which govern these two types of operations and to subject them to the same threshold calculated and controlled by the central bank (which is granted the power to do so in the 2016 law and the 1999 law currently applied). This measure can guarantee equality and equity between applicants for funding in accordance with article 21 of the Constitution which stipulates that “citizens are equal in rights and duties. They are equal before the law without discrimination.” Alternatively, two clearly distinct banking systems should be established. However, this would raise the issue of the existence of “Islamic finance” in a country whose constitution affirms in its second article that “Tunisia is a civil state based on citizenship, the will of the people and the rule of law.”
Recommendations
The Assembly of People’s Representatives: Finance, planning, and development committee
Amending law No 2016-48 dated 11 July 2016 relating to banks and financial institutions to ensure:
- Governing all banking operations under the same regulation through adopting a new law that subjects the rate of profit to the same threshold for all banks. This will guarantee protection and fairness to loan applicants.
- Establishing the profit threshold of Islamic finance which must be calculated and published by the BCTBanque Centrale de Tunisie in a manner similar to the calculation of the Average Effective Rate in the event that this system of Islamic finance remains valid.
Revising draft law No 39-2017 amending and completing law No 99-64 dated 15 July 1999 relating to excessive interest rates
- The method for calculating the Percentage Rate of Charge should remain the same as that stipulated by the law relating to excessive interest rates. The central bank is a more competent authority than the government on technical aspects of the banking sector
- The prison sentence should not be removed since it forces banks and financial institutions to respect the terms of the law relating to excessive interest rates, namely the legal threshold (the fifth of the Average Effective Rate). It is also recommended to increase the amount of the fine.
Media and civil society
- Publicly disseminate the debate on the law in order to involve other competent institutions in the financial sector, therefore shedding light on various governmental positions.
[1]Defined in Article 6 of Law 2016-48 dated 11 July 2016 relating to banks and financial institutions as “all act by virtue of which a person or legal entity makes or promises to make funds available to another person or entity or makes a commitment in the interest of the latter by signature” [2] Central bank report on financial activities, March 2017, p.48 [3] Bonneau (TH), Banking law, 12th edition, Ed Précis Domat, 2017, p.384 [4] Dekeuwer-Défossey (F), Banking law, Ed Dalloz, Paris, 1986, p.18. [5] Duclos (TH), Dictionnaire de la banque, 3éme Ed, Séfi, 2002, P333.[6] Draft law n°39-2017 https://majles.marsad.tn/fr/legislation/2017/39[7] Fakher Ben Salem, Loans with exorbitant interest, Legal News, September 2006, p.12 [8]Law dating 15 July 1999 http://www.legislation.tn/sites/default/files/fraction-journal-officiel/1999/1999F/057/TF1999651.pdf [9] Law n°2011-7 dating 31/12/2011 relating to the finance law of 2012 in its articles 28 to 37 was limited to providing a specific tax regime for a few Islamic finance contracts namely: Ijara, Mourabaha, Istisnaa and salam sale.[10] These are moudharaba, moucharaka, mourabaha, ijara, salam, istisna and investment deposits.[11]Draft Law n°39-2017 amending law n°99-64 dating 15 July 1999 relating to excessive interest rates (https://majles.marsad.tn/fr/legislation/2017/39)[12]According to Marsad Majles (https://majles.marsad.tn/fr/legislation/2017/39).[13]https://www.imfInternational Monetary Fund .org/external/np/loi/2016/tun/fra/050216f.pdf [14]Werimi (S), Review of law relating to excessive tax rates: towards liberalizing banking interest rates in Tunisia, Legal News, November 2017, p.25 [15]The Percentage Rate of Charge includes the interest rate, fees, and commissions, according to decree No 2000-462 dated 21 February 2000, defining the modalities of calculating the Percentage Rate of Charge (http://www.finances.gov.tn/sites/default/files/4.pdf).[16]Carbonnier (J), Civil Law, Volume II, Paris, 1997, p.105. [17] According to Article 5 of Decree No 2000-462 dated 21 February 2000 [18] Article 12 of law No 2016-48 dated 11 July 2016 relating to banks and financial institutions[19] Ibid. Article 16 [20] Ibid. Article 13 [21]Loi n° 2001-65 du 10 juillet 2001, relative aux établissements de crédit (http://www.droit-afrique.com/upload/doc/tunisie/Tunisie-Loi-2001-65-bancaire.pdf [22] Bitar Mohamed, Madiés Phillippe, Les banques islamiques sont-elles si islamiques que cela ? conséquences en matière de fonds propres réglementaires, Revue d’économie financière, CAIRN, 2017. [23] Ibid. [24] Hadidane Moez, La banque Zitouna annonce un bénéfice net de plus de 24 millions de dinars en 2019, 2020, IlBoursa.com. [25] Guéranger (F), Finance islamique une illustration de la finance éthique, Ed DUNOD, Pais, 2009, PP 25-26. [26]Duclos (TH), Dictionnaire de la banque, 3éme Ed, Séfi, 2002, P333. [27] Ben Gara (Z), Ajili (W), Quel avenir pour la finance islamique en Tunisie ? Etude en économie islamique, V7 N1, Juin 2013, p.43.[28] Any bank can submit a request to the central bank to offer Islamic finance services as defined in law 48 dated 11 July 2016 relating to banks and financial institutions. [29]Saleh (N), Unlawful gain and legitimate profit in Islamic law, cité par Guéranger (F), Op. Cit., p.34.
