An extract from The Banking Regulation Review, 11th Edition
The growth and gradual diversification that the Egyptian economy has witnessed throughout the past year has been coupled with and simultaneously sustained and reinforced by a number of developments in the Egyptian banking sector that have, in turn, reflected the country's general economic reform agenda. The expansion of the banking sector has been and remains to be one of the central pillars on which economic growth in Egypt has been based. Moreover, and as an indicator of an increased sense of confidence in the banking sector in 2018, Moody's Investor Services Limited (Moody's) changed the outlook for Egypt's banking system from stable to positive. This change in outlook came as a response to Egypt's growing economy, strong loan demand and improved operating environment. In 2019, Moody's maintained its positive outlook on the Egyptian banking system. According to Moody's, banks in Egypt will continue to have good access to stable, deposit-based funding, and hold large volumes of liquid assets, especially in local currency. More notably, a report published by Moody's during the first months of 2020 further confirmed that the outlook for Egypt's banking system over the coming 12 to 18 months is stable as banks operating in Egypt continue to maintain high liquidity amid an expanding economy that will help them generate more loans and business.
The move towards adopting internationally recognised banking standards has been driven largely by the desire to create a more stable and safe banking industry that will in turn serve the greater social goal of achieving financial stability in Egypt. The Central Bank of Egypt (CBE), acting as the sole regulatory body governing the Egyptian banking sector, has continuously reaffirmed its objective of ensuring the safety, soundness and efficiency of the banking system. In line with the move towards adopting international banking standards, the CBE issued a circular dated 24 February 2019 on the regulations governing the implementation of International Financial Reporting Standard 9 accounting standards by banks operating in Egypt starting from January 2019. A recent circular issued by the CBE, dated 7 April 2019, outlines the requirements and procedures for the management as well as calculation, evaluation and mitigation of concentration risks by banks, including branches of foreign banks, operating in Egypt, which were to be implemented from March 2019. The circular represents a step towards augmenting the implementation of the second pillar of Basel II (Supervisory Review). Moreover, the circular outlines the means of calculating the additional capital requirements for banks necessary for facing concentration risks (both for individual as well as sectoral concentration risks). Moreover, a more robust set of laws and regulations, particularly the new Banking Law, are expected to be introduced during 2020 with the aim of further reforming, as well as restructuring, the Egyptian banking sector. The draft of the new Banking Law (the Draft Banking Law) is currently being reviewed by the Egyptian Parliament and is expected to be ratified in early 2020. Once ratified, the new Banking Law is expected to become the central pillar on which the restructuring of the Egyptian banking sector will be based with the aim of enhancing the principles of independence, accountability and transparency. It is expected that the new Banking Law will further augment the CBE's supervisory role over the banking sector in Egypt as well as extend the supervisory umbrella of the CBE to entities engaged in, among other things, financial technology and electronic payment activities.
The cuts introduced to the CBE's prevailing interest rates during 2019 represent the most significant change to the banking sector, and are a visible reflection of a move towards a more liberalised banking industry. The latest cuts to the CBE's interest rates were introduced by virtue of a press release issued by the Monetary Policy Committee (MPC), which is a sub-committee of the CBE, whereby the MPC decided to cut the CBE's overnight deposit rate, overnight lending rate and the rate of the main operation by 100 basis points to 12.25 per cent, 13.25 per cent and 12.75 per cent, respectively, as well as cut the discount rate by 100 basis points to 12.75 per cent.
More recently, a press release dated 16 January 2020, and published on the CBE website, stipulated that the MPC had decided to maintain the CBE's overnight deposit rate, overnight lending rate and the rate of the main operation at the rates stated above. According to the press release, the discount rate was also kept unchanged at 12.75 per cent. The press release further stipulates that the MPC will continue to closely monitor all economic developments and will not hesitate to resume its easing cycle subject to further moderation of inflationary pressures.
Moreover, and in light of the improvement of Egypt's economic indicators and the noticeable increase in its GDP, the CBE, by virtue of a circular dated 19 December 2019, raised the debt burden ratio (DBR) of retail banking clients to 50 per cent of their monthly salary, up from the 35 per cent ratio previously set in January 2016. The DBR includes personal loans, credit card payments and car loans, while housing loans' DBR of 40 per cent was unchanged.
With respect to the operations of banks in Egypt, a report published by the CBE in September 2019 stipulated that the top 10 largest banks in Egypt, other than the CBE, held a total amount of E£4,373,221 million in assets, whereby the total balances held with banks abroad amounted to E£255,361 million. The total deposits made with the 10 largest banks amounted to E£3,083,730 million. According to the report and the income statements for each of the top 10 banks, the net profit for all 10 banks amounted to E£42,130 million, while the accrued net interest amounted to E£70,722 million. However, the report did not disclose the names of the 10 largest banks operating in Egypt on whose financial and income statements the report was based.
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 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 (the Supervision Regulations), as well as the circulars and decisions published by the CBE on a regular basis, which govern the various aspects of the banking industry and the entities operating within the sector. However, the regulatory regime governing banks operating in Egypt, particularly in relation to the entities that fall under the supervision and direction of the CBE, is expected to witness significant restructuring with the introduction of the new Banking Law. Notably, the Draft Banking Law, in its current state, which is yet to be approved by the Egyptian Parliament, proposes to extend the regulatory and supervisory umbrella of the CBE to include foreign exchange companies, companies engaged in credit rating and information services, and companies engaged in money transfer activities, as well as operators of payment systems and entities engaged in the provision of payment system services. The Draft Banking Law sets out the requirements and procedures for entities to obtain the necessary licence from the CBE to engage in any of the activities detailed above. The inclusion of financial technology and electronic payment activities in the Draft Banking Law reflects a shift by the Egyptian regulators towards accommodating major global technological developments.
The CBE's paid capital is E£4 billion, 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. It is expected that the new Banking Law will further expand on the objectives and functions of the CBE, as well as vest it with wider discretionary powers for the purpose of achieving its objectives and functions and, more importantly, for the purpose of maintaining financial stability in Egypt.
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.
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 in which 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 E£500 million, 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.
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 and 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.