The regulatory regime applicable to banks
The main legislation governing the banking sector and entities engaged in banking activities in Egypt is the Banking Law and its executive regulations issued by virtue of Presidential Decree No. 101 of 2004. The Banking Law appoints the Central Bank of Egypt (CBE) as an autonomous regulatory body supervising the banking sector and assuming the authorities and powers vested therein by the Banking Law. In addition to the provisions of the Banking Law, the banking sector is governed by the provisions of the banking supervision regulations (Supervision Regulations), as well as the circulars and decisions published by the CBE on a regular basis and which govern the various aspects of the banking industry and the entities operating within the sector.
The CBE's paid capital is 4 billion Egyptian pounds, which can be further increased through direct contributions from the Egyptian Central Treasury by virtue of an agreement between the Governor of the CBE and the Minister of Finance. The Banking Law stipulates that the funds of the CBE are considered private funds. According to the Banking Law, the main objectives and functions of the CBE are as follows:
- realising price stability and ensuring the soundness of the banking system;
- formulating and implementing monetary, credit and banking policies;
- issuing banknotes and determining their denominations and specifications;
- supervising the banking sector;
- managing the gold and foreign currency reserves of the country;
- regulating the functioning of the foreign exchange market;
- supervising the national payments system; and
- recording and following up on Egypt's external debt (public and private).
In addition to the above-stipulated functions, the CBE is entrusted with the role of financial adviser and agent of the government. Moreover, the CBE shall, in accordance with the provisions of the Banking Law, act as the government's bank, and shall charge for the services it renders to both the government and public legal persons based on a fee list for said banking services as determined by the board of directors of the CBE (Board). Additionally, the CBE shall extend to the government, upon its request, the financing required to cover seasonal deficits in the state's budget, provided that such financing does not exceed 10 per cent of the average revenue of the state's budget for the previous three years.
With respect to the structure of the CBE, the Governor of the CBE and the Governor's two deputies are appointed directly by the President of Egypt for a renewable four-year term. The CBE has three subcommittees, which are the MPC, the Investment and Capital Markets and Banking Reform Committee, and the Audit Committee. Moreover, the Board is the authority responsible for the realisation of the objectives of the CBE, in addition to formulating and implementing monetary, credit and banking policies. The Board comprises nine members, including the Governor of the CBE, the Governor's deputies, a representative of the Ministry of Finance and the Chair of the Egyptian Financial Regulatory Authority. To these ends, the Board is vested with the necessary powers, particularly regarding:
- determining the means and instruments pertaining to the adopted monetary policy, and its implementation procedures, as well as determining credit and discount rates and the fees applicable to banking operations as carried out by the CBE;
- determining the regulatory and supervisory standards to guarantee the sound financial positions of banks and their efficient performance, as well as issuing the necessary decisions for their implementation, and evaluating the efforts exerted in connection with guaranteeing the soundness of bank credit, and ensuring the application of standards of credit quality and financial soundness;
- approving the budget, financial statements and reports to be prepared by the CBE on its financial position and the outcomes of its activities;
- approving the organisational structure of the CBE. Such structure may encompass units of a special nature, enjoying technical, financial and administrative independence; and
- issuing the internal by-laws and procedures pertaining to the financial, administrative and technical affairs of the CBE, the regulations governing auctions and tenders, and the regulations pertaining to the CBE's personnel.
With respect to undertaking banking activities in Egypt, Article 31 of the Banking Law defines banking activities as 'any activity comprising, basically and habitually, the acceptance of deposits, the obtainment of finance, and the investment of these funds in providing finance and credit facilities and contributing to the capital of companies, and all that is considered by banking tradition as a banking activity.' A general prohibition is placed on engaging in any banking activities inside Egypt without obtaining the necessary licence from the CBE in accordance with the provisions of the Banking Law. Accordingly, banks and entities engaged in the provision of banking services and operating in Egypt are required to abide by the provisions of the Banking Law, the Supervision Regulations and circulars and decisions issued by the CBE, and are required to obtain the necessary licences from the CBE prior to engaging in any banking activities in Egypt.
Article 32 of the Banking Law outlines the requirements to be met by entities wishing to undertake any banking activities in Egypt as follows.
A bank shall adopt any of the following legal structures:
- Egyptian joint-stock companies, all shares of which are nominal shares;
- public legal persons, encompassing within their purposes the exercise of banking activities; or
- branches of foreign banks, the head office of which enjoys a defined nationality and is subject to supervision by a monetary authority in the country where its head office is situated.
In addition to the above outlined structures, a foreign bank can set up a representative office in Egypt. However, the activities that can be undertaken by representative offices in Egypt are limited to market studies and the study of potential investment opportunities in Egypt. Representative offices are not authorised to engage in the provision of any banking or commercial services in Egypt.
Banks' issued and fully paid-up capital shall not be less than 500 million Egyptian pounds, and the capital appropriated for the activities of the branches of foreign banks in Egypt shall not be less than US$50 million or its equivalent in free currencies. However, significant changes in the minimum capital requirements are expected to be introduced by the new banking law, which is expected to be issued throughout 2019.
The Governor of the CBE, following the Board's approval, shall approve the statute of a bank, and the management contracts to be concluded with any party entrusted with its management. Such approvals shall also be required in the event of any renewal or modification to the statutes or management contracts.
Furthermore, the executive regulations of the Banking Law as well as the Supervision Regulations outline in more detail the exact procedures and the necessary documents required for the setting up of banks, branches, subsidiaries or representative offices in Egypt. The branches and agencies of licensed banks shall be registered with the CBE in the register maintained for that purpose. The current market practice reflects a toleration on the part of the CBE with respect to lending into Egypt from offshore to the extent that such lending is undertaken on a non-recurring basis or on a low-profile basis to targeted entities, and without any visible marketing or solicitation. Such toleration on the part of the CBE remains largely subject to the CBE's discretion, and may therefore vary depending on the prevailing social, economic and political conditions.