range of 10-15 percent in the rest of the region.<sup>39</sup> However, the structure of the sector poses a limit to competition and a truly diversified investor base. In Morocco, in 2008 NBFIs owned 60 percent of mutual funds’ assets, accounting for 23 percent of GDP. Thus, there is a partial double accounting in the final NBFIs figures. Additionally, the largest NBFIs are State-owned and there is a high concentration of assets. While Morocco’s large NBFI segment is a major achievement in terms of financial sector development, its structure limits the benefits of a diversified and competitive investor base.

# **<u>Mutual Funds</u>**

**An active mutual fund industry provides an efficient channel of savings into debt markets.** Mutual funds offer professional management and asset diversification with high liquidity and low cost.<sup>40</sup> Positive spill-over effects to bond markets include enhanced demand for government securities and diversified trading and portfolio management strategies according to the specialized investment objective of each type of fund.

**Mutual funds are a competitive threat for banks’ liability base, therefore, there needs to be a strong business case (e.g. regulatory arbitrage, tax incentives, competition) for them to develop in financial systems dominated by banks.** Country cases in both EMEs and advance economies provide examples of this process41. Once mutual funds take off, even if it is with the wrong business triggers (e.g. regulatory arbitrages), they can become a very relevant player in debt market development if the right policies and regulations are applied.

**Morocco, Egypt and Tunisia provide three different examples of a developing mutual fund industry, all of them bearing a wholesale profile tightly linked to banks.** While all three mutual fund models are valuable developments and likely to be a seed to support a long-term mutual fund industry, there are also vulnerabilities to be addressed as explained in the next sections. A hypothesis to be tested is that mutual funds in these three markets may be playing the role of addressing some of the existing markets inefficiencies, specifically, lack of liquidity of public debt and thin money markets

# **Morocco: mutual funds and regulatory arbitrages**

**There are three key features of mutual funds in Morocco that help understand why they are so large in international comparison.** First, financial institutions hold 74 percent of mutual funds’ assets, indicating that they serve to bypass market inefficiencies or regulations.<sup>42</sup> Insurance companies and pension funds hold 50.5 percent of mutual

> 39 Source: November 2009 World Bank Development Policy Loan to Morocco. Real figures should be smaller as there is partial double accounting of assets, given that many contractual schemes and some banks invest in mutual funds. However, the importance of mutual funds is still well above it peers in the region.

> 40 See World Bank and IMF (2001), “Developing Government Bond Markets: a Handbook.”

> 41 E.g., the development of money market funds in the US as a result of the caps on the remuneration of banks’ deposits in the 1970s, tax incentives in Brazil and Spain for investments in mutual funds, lower bank intermediation spreads vis-à-vis fund management fees in a number of European countries in the 1990s.

42 As of end of 2008, mutual funds accounted for 23.5 percent of GDP, 75 percent of national savings and held 28 percent of public debt. NBFIs held 60 % of assets and 32