Competition Market Study of Tunisia's Retail Banking Sector

Executive summary

This report investigates the state of competition in Tunisia’s retail banking sector and, where relevant, provides suggestions to improve it. The report focuses on three broad sectors:

• current accounts for individuals and businesses, used to store money and access it quickly, to make and receive payments and access short-term credit using overdraft facilities.

• bank finance to micro, small and medium-sized businesses (MSMEs), focusing on bank loans.

• mobile payments, including opening payment accounts, cash payments and withdrawals, and money transfers.

Key findings

Competition in Tunisia’s retail banking sector needs to be effective to promote financial inclusion and support private sector investment. However, the findings of this report highlight several areas in which competition is not working as well as it could.

Customer engagement in the current account sector is low

For competition to work well, customers must be sufficiently well-informed to buy products or services offering the best value for money. Customers must be able and willing to access and understand information about products’ characteristics, and they must be able to choose their preferred products. If they do not engage with products and if banks expect them not to act, incentives to compete are weakened, which may result in higher prices and poorer quality products and services.

Customer engagement in the current account segment is low. Surveys of consumers and MSMEs carried out as part of this study found that four in five consumers and two of three small businesses did not compare fees when opening accounts, and two in every three consumers said they did not know how much they paid. Only 3% of consumers and 4% of small businesses had switched current accounts in the previous year, and they tended to stay with their providers for a long time. When seeking finance, businesses tended to use only their current account providers.

Consumers and small businesses find it costly to gather, understand and act on information about financial products. Banks in Tunisia do not make it easy for consumers to find meaningful and comparable information on fees. For example, banks create monetary and non-monetary barriers to closing accounts that ultimately reduce the ability of customers to switch providers, undermining competitive pressure on banks to lower prices and improve service levels. Low customer engagement also represents a barrier to entry and expansion by making it harder for banks to attract new customers.

Limited lending to micro, small and medium-sized enterprises

Small businesses in Tunisia struggle to access finance, and the OECD’s analysis highlights the importance of relationship banking. Among micro, small and medium-sized enterprises, 45% use financial products supplied only by their current account providers, and more than half do not compare offers across banks.

The analysis identified several factors that increase barriers to shopping around. For example, the lack of a private credit information bureau reduces the information available to banks to assess new borrowers’ risk profiles, exacerbating the effects of banks’ information advantages relating to existing customers. The cap on lending interest rates further reduces the ability of banks to assess and price credit risk accurately, which may lead them to rely disproportionately on collateral. Lengthy legal proceedings to take ownership of collateral when borrowers default and the lack of a registry for movable assets further increase banks’ risk aversion.

Stakeholders interviewed by the OECD shared concerns about banks favouring borrowers with which they have corporate relationships. The 2022 OECD Peer Review of Competition Law and Policy in Tunisia found that in 2019, five industrial groups controlled more than 60% of the turnover of the country’s most important private companies. These five groups also have direct links to banks. This has the potential to reduce access to credit for firms unrelated to the five groups. Given the lack of granular data, the OECD has not been able to analyse the effects of this issue in detail but notes the significant potential for links between banks and industrial companies to affect lending in the broader economy.

Unnecessary regulatory restrictions for payment service providers

Several legal provisions create unnecessary barriers to entry for payment service providers and hinder competition. The licensing process for payment service providers includes minimum capital requirements that are between 12 and 76 times higher than in other countries for similar services. Moreover, ad hoc provisions and lengthy processes reduce transparency and increase costs for applicants. In practice, the licensing process has favoured affiliates of existing banking groups and excluded independent fintech companies.

In other jurisdictions, fintech companies have played an important role in boosting competition and financial inclusion by providing innovative and cheaper alternatives to traditional banks’ services, but regulation in Tunisia deters new firms from entering the retail banking sector and reduces the ability of the country’s many unbanked individuals to access payment services.

Market structure and regulatory framework stifle competition

Several other factors may weaken competition across the markets that form the focus of this report. A number of legal provisions and market practices, alongside banks’ ownership structures, may facilitate the sharing of commercially sensitive information and monitoring of price strategies, increasing the risk of co‑ordinated conduct. The presence of the Tunisian state in the banking sector as a majority shareholder in three of the country’s largest banks further undermines competition. State‑owned banks have fewer incentives to improve efficiency and to innovate, and management is insulated from incentives to reduce costs and increase profits.

Competition and choices of suppliers are restricted by the limited take‑up of online banking and the role of branch networks. Consumer choice is limited, especially in rural areas, where branches are rarer, and building an extensive branch network represents a significant cost for banks wanting to expand their customer base.

Market outcomes are consistent with weak competition. Fees and revenues on current accounts, and the overall profitability of banks, have increased steadily over the past decade, and innovation in the financial sector is low, as shown by the very low take‑up of mobile payments, for example.

Key recommendations

The report identifies a suite of recommendations to improve the effectiveness of competition. It is possible to quantify the benefits for only a subset of the recommendations, but the OECD estimates that implementing even this subset would yield around EUR 325 million annually in the form of lower prices and interest rates for consumers and businesses, which corresponds to 0.8% of Tunisia’s 2021 GDP. These figures are likely to underestimate the benefits because it was not possible to quantify the effects of all individual recommendations due to the limited availability of detailed data. The estimates also exclude the dynamic benefits of competition, which can be substantial, but are difficult to measure.

In summary, the OECD makes four packages of recommendations:

• Measures to increase customer engagement: These include recommendations to empower consumers to access, assess and act on information, and to reform the mediation mechanism to provide consumers and businesses with an effective tool to make complaints.

• Measures to improve competition in the market for MSME finance: These include recommendations to increase the ability of MSMEs to make informed decisions about lending products and to encourage the creation of a credit information bureau and of a registry for movable assets.

• Measures to eliminate unnecessary regulatory provisions stifling competition in the payment services sector: These include recommendations to adopt a risk-based approach to lower regulatory barriers to entry.

• Measures to strengthen incentives for banks to compete: These include recommendations to reform the Conseil Bancaire et Financier (CBF), or Banking and Finance Council, to strengthen the role of the Competition Council, to increase the independence of banks’ board members and to reconsider the role of the state in the retail banking sector.

In addition, the OECD reiterates the recommendations it made in the 2022 OECD Peer Review of Tunisia’s Competition Law and Policy, aimed at increasing co‑operation between the Competition Council and the country’s finance sector regulators.