Tunisia's banks should be booming. The economy is growing at 5 per cent a year, the stock exchange index has risen by 20 per cent since the start of 1995 and local debt has an investment grade rating from Moody's Investors Service.

Tunis-based banks are indeed reporting profits again after a difficult period in the late 1980s and early 1990s. But only recently have many begun to wake up to the implications of increasing deregulation and Tunisia's steady integration into the European economic area.

Liberalisation

A band of more innovative and aggressive commercial banks, such as the Amen Bank group, Banque Internationale Arabe de Tunisie (BIAT) and Arab Tunisian Bank (ATB), are setting the pace, pushing for an increased share of a market dominated by traditions and the maintenance of gross margins.

Government liberalisation efforts were enshrined in the 1994 banking law, which made capital requirements a priority for many banks. The regulatory role of Banque Centrale de Tunisie (BCT - central bank) was reinforced, while the banks acquired more freedom, within stricter prudential limits, to take deposits and make loans. The 1994 budget obliged banks to set aside at least 50 per cent of their profits to cover bad debts, estimated at $3,000 million.

Most recapitalisation has come from existing shareholders, but as the Tunis bourse grows, so will the attraction of public offerings.

Coming to the market means that often secretive local banks will have to be more transparent. This has proved no problem for relatively dynamic institutions, like ATB, which increased its capital by TD 25 million ($26.8 million) in May through a rights issue to meet the Bank for International Settlements (BIS) capital adequacy requirements. ATB's new capitalisation is TD 35 million ($37.5 million).

The state continues to dominate the economy and bureaucrats predominate in many banks. The state-owned Banque Nationale Agricole (BNA) remains by far the largest local bank with assets of TD 3,113 million ($3,333 million) in 1993. Second largest is another state-owned institution, Societe Tunisienne de Banque (STB), with TD 1,928 million ($2,064 million) assets, followed by BIAT with TD 1,362 million ($1,458 million).

'Now is the time for banks to show they can respond to the changes under way in the economy - until now too many have been content to sit back and do little,' a senior development bank manager says. 'There have been some success stories: Ahmed El Karm moved out of the central bank to shake up the Ben Yedder group and his Amen Bank is moving ahead. But in many cases our bank managers remain civil servants at heart. They will only take orders from the top and play it safe.'

'We have had to adapt to meet a changing economy,' says Mohamed Taoufik Maaref, a senior executive with Banque de Developpement Economique de Tunisie (BDET). 'Over 90 per cent of BDET credits now go to private operators and we have evolved our operations to meet this demand. We can say without false modesty that we are very well equipped to analyse a project and make it work.'

Developments

BDET is a peculiarly Tunisian hybrid in which the state holds 41 per cent of capital directly and over five per cent indirectly. Another 36 per cent is held by international partners including the International Finance Corporation (IFC), French and German aid agencies, and European and Arab banks. Local investors have the rest.

No fewer than seven development banks are chasing viable projects to support. 'We help to develop a project, look to see where investment is possible and identify partners,' Maaref says. 'From the studies stage we calculate that two out of ten projects succeed.'

The presence of the IFC and bilateral agencies on local bank boards points to a continued reliance on international support, for all Tunisia's claims to be North Africa's strongest economy.

The IFC is also a partner in International Maghreb Merchant Bank (IM Bank), which officially opened on 9 June. IM Bank is Tunisia's first merchant bank with a remit to focus on project and corporate finance, and privatisation and stock market activities. The IFC has taken a 10 per cent stake in the bank's paid-up $3 million equity. The other shareholders include France's Societe Marseillaise de Credit; the Milan-based Creditanstalt Finanziaria, a subsidiary of Austria's Creditanstalt Bankverein; the local Maghreb Finance Group; and private Saudi investors. Chief executive Adel Dajani is a director of the UK-based London Court Securities, the project sponsor.

IM Bank is a new breed of institution and raises hopes that more international banks may move in. In recent years the only foreign interest has come from the US' Citibank, which runs onshore and offshore operations, and Arab Banking Corporation (ABC).

There have been false dawns before. Tunis pitched itself as an offshore banking centre in the early 1980s, hoping to replace Beirut and rival Bahrain. Offshore banking units and local/Arab development banks were established, but the debt crisis of the mid-1980s saw business nose-dive and banks become weighed down with public sector debt.

Payments problems and a loss of momentum saw most of the banks with Arab capital in crisis in the early 1990s. Tunisia's perceived sympathy for Iraq during the Kuwait crisis created difficulties with Kuwaiti, Saudi and other Gulf investors.

Recapitalisation, management changes and other measures to clean up balance sheets have brought new life to the six Tunis-based Arab development banks. There has been a revival in financing, notably by the part-Saudi-owned Societe Tuniso-Saoudienne d'Investissement & de Developpement (Stusid), which has invested in developments around Tunis lake.

Arab banks are also turning to the local market for funds. Banque de Tunisie & des Emirats (BTEI) - a joint venture between the government and the Abu Dhabi Investment Authority - is set to increase its capital by 80 per cent to TD 90 million. BTEI is incorporating TD 20 million of reserves and issuing preferred shares with a nine per cent fixed annual dividend through the Tunis stock market.

Banks may now branch out into all sectors of banking activity, but most still operate in their niche markets, ranging from funding local real estate investment to arranging trade finance for neighbouring Libya and Algeria. The size of the local market remains a constraint on operations. IM Bank, the newcomer, is set on developing a regional role, working out of Tunis to tap the wider Maghreb market.

As the economy continues to grow and local corporates turn to the market for capital, business should develop. Banque du Sud broke new ground by acting as financial adviser for the takeover of the UK's Vivat holdings, which owns Lee Cooper International, by the local Jilani Group.

Talk in Tunis is now of more international bond offerings, to be raised, for the first time, by local banks. As the state slowly and gradually disengages from more areas of the Tunisian economy, local banks will be forced to show more maturity - or lose out to increasingly assertive competitors.