Anatomy of an Institutional Failure: Tunisia's Lending Program to SMEs

Mohamed Bechri, Tijani Najah and Jeffrey B. Nugent

Abstract

This paper studies a case of institutional failure in a popular lending program in Tunisia. The program is a special public lending fund known as FOPRODI created in 1974 for the promotion of small and medium manufacturing enterprises (SMEs) and for the decentralization of industry. FOPRODI's announced aim was to help new entrepreneurs with insufficient capital to start their businesses and thereby to create new jobs. Because of an extremely low repayment rate, the program has failed, is unsustainable and finally collapsed in 1997. The sources of the institutional failure are traced to inappropriate incentives attributable both to the institutional structure surrounding FOPRODI and its own rules. These findings from the Tunisian experience are then used to generate policy recommendations on ways in which similar programs could be better designed and transaction costs reduced.

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