7. Barriers to entry and expansion
Significant barriers to entry and expansion exist in Tunisia’s retail banking sector. One of the main challenges for new and smaller banks is acquiring new customers. The weak customer responses observed in the current account and micro, small and medium-sized enterprise lending markets make attracting new customers difficult and expensive. The cost of expanding branch networks is another significant barrier to entry. The limited use of online banking services makes branches essential for attracting and serving customers, but opening new branches is expensive and branch network growth rates have fallen during the past decade.
The entry, or the prospect of entry or expansion, by firms in a market can stimulate competition and mitigate market features that weaken competition. Thus, barriers preventing new firms from entering or smaller firms from growing can significantly harm competition. After discussing recent entries, expansions and exits in Tunisia’s retail banking sector, this chapter presents several barriers to entry and expansion. First, it addresses regulatory requirements put in place by Tunisian authorities that providers must satisfy, focusing on authorisation processes. Second, it examines organic barriers that any firm entering the market will face, such as the need for a branch network. Other potential organic barriers to entry in the sector are the cost of IT equipment and access to payment systems (although the OECD did not have access to information to assess whether these represent a significant barrier for new firms). Third, it looks at strategic and first-mover advantages, such as the cost of acquiring new customers.
In the past decade, a number of firms have entered Tunisia’s retail banking sector. Three Islamic banks have entered the market (Banque Zitouna, Al Baraka and Wifak International Bank) and have organically acquired customers in the current account and micro, small and medium-sized enterprise (MSME) finance markets, although only Banque Zitouna has achieved a significant share of the market. One non-Islamic bank, Banque Franco-Tunisienne, was liquidated. This section provides a brief description of entry and exit trends.
Banque Zitouna obtained a banking licence in 2010 and offers banking services that are consistent with Sharia law. Despite only 1% of respondents to the OECD consumer survey saying that they had chosen their personal current account (PCA) provider based on religious factors,1 Banque Zitouna quickly acquired a significant share of customers in both the personal current account (PCA) and business current account (BCA) markets. It also built one of the country’s largest branch networks, comprising 177 branches in 2022.2
Al Baraka Bank Tunisia was an offshore bank until 2013, when it obtained an onshore banking licence. Al Baraka Bank Tunisia offers banking services consistent with Sharia law.
El Wifak Leasing was a leasing company that obtained a banking licence in 2015 and changed its name to Wifak International Bank. Wifak International Bank offers banking services consistent with Sharia law.
No market entry by a conventional bank has occurred in the past decade. The OECD understands that the Central Bank of Tunisia is reluctant to grant new banking licences because of the large number of banks currently operating in Tunisia, which may affect the likelihood that new players will attempt to enter the market. The BCT’s rationale for authorising Islamic banks in the past decade was to fill a perceived gap in the banking sector and because some consumers and small businesses may prefer to bank with them. La Poste unsuccessfully applied for a banking licence in December 2018.
March 2022 saw the first exit from the Tunisian banking sector since the country’s independence in 1956, when Banque Franco-Tunisienne, which was nationalised in 1964, was liquidated.3> Free entry and exit are an important feature of a competitive market and exit rates are used to measure competition. In fact, in a competitive market, new challengers enter, and inefficient providers leave. However, failures in the banking sector may have significant negative effects on financial stability and directly impact consumers, who may lose their savings, and non-financial markets.
The OECD is not aware of any recent mergers in the banking sector. Nevertheless, there have been several significant changes in the shareholder structure of some banks. In 2018 the then state-owned Banque Zitouna was sold to a foreign investor. Between 2020 and 2022, Tunisian investors connected with large industrial groups became the main shareholders of three publicly listed banks that had previously been owned by foreign entities.
Given the importance of branch networks, expansion of networks is a key factor in a bank’s customer acquisition strategy and an important driver of competition, as new branches increase consumers’ choice of suppliers, especially in areas where only a few banks have a presence. However, the aggregate growth of branch networks has slowed significantly in recent years, from around 7% in 2013 to less than 1% in 2021 (see Table 7.1). This may be consistent with a weakening of competition in the retail banking sector.
Banking activities are subject to a licence granted by the BCT’s Commission d’Agréments.4 Licence applications follow a two-step process involving a preliminary authorisation and a final authorisation.5 Conditions include, for instance, minimum capital of TND 50 million for banks and TND 25 million for other financial institutions (see Article 32 of Law No. 2016-48). The Commission d’Agréments can impose a minimum capital requirement higher than that prescribed by law, depending on the applicant’s business plan.
In addition to the initial licence, Commission d’Agréments Decision No. 2017-04 requires banks to seek preliminary authorisations from the Commission d’Agréments in circumstances involving:
changes of category and the nature of their activities (Annex 2 of the decision)
transactions involving the sale of a substantial portion of assets or liabilities, resulting in substantial changes to financial structure, category or nature of their authorised activity (Annex 4 of the decision)
transactions exceeding capital thresholds (Annex 6 of the decision)
concerted action between shareholders resulting in one of the thresholds provided for in Article 34 of Law No. 2016-48 being exceeded (i.e. acquisition of control, or acquisition of 10%, 20%, 33%, 50% or 75% of voting rights; Annex 7 of the decision)
changes in “sizeable shareholders” following the sale of their stakes of capital (Annex 8 of the decision).
A significant number of banks and financial institutions are active in Tunisia, and a few licences have been granted in recent years. Moreover, legitimate prudential and financial stability objectives appear to largely justify licensing regulation, meaning that the process and conditions for obtaining banking licences do not seem to constitute significant regulatory barriers to entry. However, discussions with stakeholders suggest that the licensing process gives the BCT a level of discretion that may result in delays to decisions on licence applications for certain entities.
Tunisia’s banks rely heavily on their branch networks to attract new customers and serve existing ones. Consumers and small businesses use branches to open accounts, make payments, handle cash and obtain advice. Several banks offer online banking services, although these services typically involve extra fees, and some services, such as account opening, are not always available.
The number of bank branches in Tunisia increased from 1 774 in 2016 to 1974 in 2020. La Poste had 1 053 branches in July 2022. At the end of 2019, two banks each had around 11% of branches and the ten largest branch networks (which broadly correspond to the ten largest banks) accounted for around 81% of all branches.
7.3.1. Conditions for opening and operating branches
Circular No. 2006-05 prescribes a list of detailed conditions for already licensed banks to open subsidiaries or branches. These conditions include specific requirements for premises, including a minimum floor area of 75 m2, an ATM, and a location not in proximity to risky buildings or equipment such as fuel or gas depots. Moreover, branch managers must meet educational and professional experience requirements, while staff should include at least three employees, at least two of whom must always be present during opening hours. These requirements increase the costs of opening branches and may limit the ability of providers to do so. Given the importance of branches to competition, as discussed in Chapter 4, this provision reduces the ability of smaller or newer banks to build branch networks and compete effectively in the market.
7.3.2. The importance of branches to customers
Table 7.2 shows that most current accounts are opened at bank branches (95% of individuals and 98% of MSMEs).
Also, the most common way to access current accounts is at branches (64% of respondents to the OECD consumer survey).6 For individuals, preferences on how to access current accounts varied significantly across demographics. For example, younger consumers were more likely to access current accounts using smartphones (see Figure 7.1).
Source: OECD consumer survey (Q16 and D1, N=1086).
Proximity to branches was also an important factor that consumers considered when deciding which providers to use, especially among individuals, 35% of whom said the most important reason for choosing a PCA provider was the vicinity of a branch.7 However, this varied by age, and for younger consumers the most common reasons for choosing providers were fees and the conditions applied to current accounts. The consumer survey also asked whether individuals would like online access to services currently available only at branches, to which 80% said that they would not be interested.8 Among those saying they would like more online services, 66% said they would like to make and receive payments online and 17% said they would like to be able to open an account online.9
Finally, when asked a hypothetical question on what they would do if their most-used branch closed, 46% of respondents to the consumer survey said they would stay with their bank, 34% said they would certainly change banks, and 17% said they would consider changing banks. Just 4% said that they would close their accounts and not open new ones.10
7.3.3. The importance of branches to banks
Given that proximity to branches is the most important factor determining customers’ choices of providers, banks are unlikely to have customers in areas where they lack branches. Three banks the OECD spoke to said that branch networks were a very important element of their strategies for acquiring new customers and growing market shares in the current account segment. Stakeholders told the OECD that banks made significant investments to build extensive networks. For example, when Banque Zitouna entered the market in 2010, it announced a plan to open 20 branches annually.
There is a high correlation between banks’ shares of branches and their shares of the PCA market. However, it is not possible to identify any causal relationship as the banks with the largest shares of the PCA market are also the banks that have been in the market the longest and which have thus had the greatest opportunity to build large customer bases.
Several stakeholders told the OECD that building and maintaining extensive branch networks is expensive. For example, the Conseil Bancaire et Financier and several banks said that the salaries of bank employees working at branches are one of the most significant drivers of costs. This represents a barrier for banks entering the market or seeking to grow their business.
7.3.4. Conclusions on branches
Banks rely on branches to serve existing customers and attract new ones. Consumers and small businesses use them to open and manage their accounts. The limited take-up of online banking in Tunisia makes branches the only meaningful distribution channel, and they are expensive to open and manage. This increases costs, especially for smaller or newer banks that want to attract new customers.
Several supply- and demand-side factors may contribute to this. The results of the survey suggest that consumers may prefer using branches to manage their accounts. However, these responses need to be treated with caution, as it may be difficult to assess ways to use current accounts that are rare or unavailable. Figure 7.1 shows that younger generation customers are more likely to use online banking services, but the pace of change is slow. The factors that weaken competition described in the previous chapters are likely to reduce incentives to innovate and offer newer and alternative ways to access banking services. This is consistent with the limited take-up of mobile payments. Finally, the OECD is not aware of any regulatory provisions requiring customers to use branches.
Acquiring new customers is one of the main challenges for new and smaller banks due to the small size of Tunisia’s market, its low banking penetration rate, and low consumer engagement. The factors described in Chapter 4 show that the markets for current accounts are characterised by low consumer engagement and that customers have only limited ability to respond to changes in price or quality.
Chapter 4 identifies many barriers to customers shopping around and to closing and switching accounts. Awareness of fees is low and the tools available to customers to shop around and compare providers are limited. Customers also face significant barriers when closing accounts and switching to new providers. Current account providers may make it difficult for customers to close accounts and some banks may also charge fees (for example, consumers typically need to repay their loans when switching current account providers, and banks typically charge early repayment fees on loans). These factors make individuals and MSMEs less likely to respond to differences in prices or quality, reducing incentives for banks to compete. As a result, it is costly for new entrants and small banks to acquire new customers, and the high cost of acquiring new customers represents a barrier to entry and expansion.
The challenges of building branch networks and low consumer engagement are the most significant barriers to expansion in Tunisia’s retail banking sector. Given the importance of branches to consumers and the relatively scarce use of online banking, building extended branch networks is an essential part of banks’ growth strategies and a key driver of competition. For example, Banque Zitouna has gained significant market share by building an extensive branch network. However, this represents a significant cost for newer and smaller banks.
Low consumer engagement is also a significant barrier. Chapter 4 shows that consumers possess limited tools for accessing and comparing information on prices, and that they face barriers to closing and switching current accounts. This makes it hard for a new and smaller bank to attract customers.
References
[1] Banque Centrale de Tunisie (2022), Rapport Annuel sur la Supervision Bancaire - Exercice 2020.
[2] Banque Centrale de Tunisie (2021), Rapport Annuel sur la Supervision Bancaire - Exercice 2019.
[3] Web Manager Center (2022), BFT-Liquidation : Le Fonds de Garantie des Dépôts Bancaires peut indemniser les clients dans un délai de 20 jours, https://www.webmanagercenter.com/2022/03/01/481489/bft-liquidation-le-fonds-de-garantie-des-depots-bancaires-peut-indemniser-les-clients-dans-un-delai-de-20-jours-khatteche/ (accessed on 23 May 2023).
Notes
← 1. OECD consumer survey (Q10, N=1086).
← 2. Meeting with Banque Zitouna.
← 3. Its 7 500 customers and depositors are covered up to TND 60 000 by the Fonds de Garantie des Dépôts Bancaire (FGDB), or Bank Deposit Guarantee Fund; (Web Manager Center, 2022[3]).
← 4. Article 25 of Law No. 2016-48.
← 5. The conditions for obtaining licences are set out under Section 2 of Law No. 2016-48 and further detailed in two decisions by the BCT’s Commission d’Agréments: Decision No. 2017-04 and Decision No. 2019-20.
← 6. OECD consumer survey (Q16, N=1086).
← 7. OECD consumer survey (Q10, N=1086).
← 8. OECD consumer survey (Q17, N=1086). This question is hypothetical, so the interpretation of the responses must be cautious.
← 9. OECD consumer survey (Q18, N=215).
← 10. OECD consumer survey (Q45, N=850).