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.2 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.3
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.4 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.
II THE REGULATORY REGIME APPLICABLE TO BANKS
The main legislation governing the banking sector and entities engaged in banking activities in Egypt is the Banking Law5 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.6
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'.7 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.
iii PRUDENTIAL REGULATION
i Relationship with the prudential regulator
As further detailed in Section II, one of the main functions of the CBE is determining the regulatory and supervisory standards necessary to guarantee the sound financial positions of banks operating in Egypt as well as their efficient performance. The CBE is also vested with substantial powers pertaining to the evaluation of efforts exerted in connection with guaranteeing the soundness of bank credit and ensuring the application of standards of credit quality and financial soundness.
The provisions of the Banking Law grant the CBE various roles that enable it to directly supervise as well as monitor the various aspects of the banking sector, particularly with respect to the supervision of the management and boards of directors of banks. To this end, banks operating in Egypt are required to disclose to the CBE any changes introduced into their founding documents or their statutes, and changes to any of the information provided by banks in their registration forms as received by the CBE. Such changes to any of the above-mentioned documents shall not take effect until they are approved by the CBE. Moreover, banks operating in Egypt are required to disclose to the CBE on a regular basis, as detailed further in Section VI, the names of the shareholders who own more than 1 per cent of the bank's capital. With respect to a bank's day-to-day operations, banks are obligated to present to the CBE monthly data reflecting their financial position as well the required financial and audit-related data. The CBE retains the right, as provided for under the Banking Law, to examine the books and registers of banks operating in Egypt whereby it ensures the obtainment of the data and clarifications it deems necessary for realising its purposes.
For the purpose of ensuring the continuous provision of banking services to customers in Egypt, the prior approval of the Board must be obtained by any bank operating in Egypt and wishing to cease its operations and activities. Moreover, any bank may merge into another bank only after having obtained the required licence for such merger from the Board and after having met the requirements for such as issued by the Board.
To this end, and for the purpose of ensuring the efficient operations of the various types of banks in Egypt, Article 56 of the Banking Law stipulates that the Board shall determine:
(1) the minimum capital adequacy requirements; (2) the maximum limits of concentration of a bank's investments abroad; (3) the maximum limits of the debt due abroad and the limits on guarantees provided against any finance payable abroad; (4) the maximum limits of the lending value of the collateral/guarantees provided against finance and credit facilities, and the determination of maturities; (5) a determination of the liquidity and reserve ratios; (6) the maximum limits of a bank's investments in securities, in real estate finance, and in credit extended for consumption purposes; (7) the regulations governing the opening accounts, and conducting banking transactions; (8) the standards followed in determining the value of each type of the bank's assets; (9) the rules governing disclosure, and the data to be disseminated, as well as the means of dissemination; (10) the rules concerning the maximum limit of the bonds each bank may issue or guarantee, and the conditions governing the issuance of bonds and guarantees; and (11) the maximum limits of exposure to one customer and his connected parties.
Additionally, the Board shall determine the standards to be upheld by banks in classifying the finance and credit facilities extended to customers. The Board shall also determine the liquidity ratios to be upheld by banks operating in Egypt, in addition to determining the fields in which banks can invest and those fields in which banks are prohibited from investing.
The aim of the CBE's supervisory process is to sustain an attentive approach and develop an early warning system. This allows the CBE to take proactive approaches to ensure the safety and soundness of the banking system, that banks comply with the Banking Law and Supervision Regulations, and that banks develop risk management systems and enhance their internal control practices. To this end, the banking supervision sector of the CBE is composed of a number of units that are collectively responsible for implementing the CBE's supervisory objectives and principles to ensure the stability, integrity, soundness and efficiency of the banking system.
The banking supervision sector is comprised of the following units:
- on-site supervision unit;
- off-site supervision unit;
- licensing supervision unit;
- macroprudential unit;
- regulations unit;
- central credit registry and legal cases unit; and
- Basel II implementation unit.
ii Management of banks
With respect to the corporate governance requirements formulated by the CBE, the Banking Law stipulates that 'the Governor of the CBE shall be consulted on the appointment of the chairman and members of the bank's boards of directors, as well as the executive directors in charge of credit, investment, portfolio management, and external transactions including swaps; and internal inspection.' Moreover, the Governor of the CBE may request the removal of one or more of the persons nominated by the bank in question to fill any of the aforementioned positions. Such a request for removal shall be issued by the Governor of the CBE in the event that the investigation undertaken by the CBE reveals that such banks are in violation of the rules pertaining to depositors' safety and those pertaining to the bank's assets.
The Supervision Regulations include two chapters dedicated to an extensive overview of the internal audit requirements in addition to the governance standards and regulations to be upheld by banks operating in Egypt.
The CBE published a number of circulars outlining the corporate governance as well as internal audit requirements to be adhered to by banks operating in Egypt. The most extensive of these was the circular published by the CBE, dated 23 August 2011, which was further amended by a number of more recently issued circulars. The aforementioned circular issued in 2011 provides a comprehensive set of requirements, procedures and standards pertaining to, among other things:
- banks' board of directors, their composition and their obligations, as well as the evaluation of boards' efficiency;
- the relationship between a bank's board of directors and the bank's upper management, including a clear division with respect to the powers and obligations of each;
- transparency and disclosures; and
- the relationship between a bank's board of directors and the bank's shareholders.
Moreover, the aforementioned circular requires that banks operating in Egypt disclose to the CBE the net amount (based on a monthly average) received by the 20 most highly paid (including both wages and bonus payments) employees in the bank.
For the purpose of ensuring the efficient operation of a bank's management, the CBE issued a circular in September 2018 increasing the frequency of a bank's board meetings to 12 per year and permitting board members to attend up to four board meetings per year by way of video conference or teleconference. In January 2019, the CBE issued a circular amending the frequency of board meetings to eight times per year, with board members permitted to attend up to two board meetings per year by video conference or teleconference.
iii Regulatory capital and liquidity
With respect to the capital adequacy requirements (CAR), which is the ratio of banks' minimum capital requirements in relation to their risk-weighted assets to be maintained by banks operating in Egypt, the CBE dedicated a chapter in the Supervision Regulations to outlining the minimum CAR to be maintained by local banks as well as those requirements to be maintained by branches of foreign banks. The circular stipulates that Egyptian banks are required to maintain a minimum CAR of 10 per cent.
To further ensure that banks operating in Egypt hold adequate capital to cover any losses as well as support the relevant risks, particularly in times of financial and economic crisis, the CBE issued a circular on 17 April 2016 outlining the capital conservation buffer (CCB) ratio to be applied by banks operating in Egypt starting from 2016. The aforementioned circular introduced a new CCB of 0.625 per cent, raising the minimum Tier 1 ratio to 6.625 per cent (from the previous 6 per cent) and the total CAR and CCB to 10.625 per cent (from the previous 10 per cent). Moreover, the circular stipulated that the CCB would be raised gradually every year to reach 2.5 per cent by January 2019, thus raising the minimum total CAR and CCB to 12.5 per cent, and the minimum Tier 1 to 8.5 per cent.
A circular issued by the CBE on 2 July 2016 outlined the Basel III requirements pertaining to the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) to be upheld by banks operating in Egypt, starting from July 2016. The circular stipulated that the minimum LCR to be maintained by banks for both local and foreign currency was 70 per cent in 2016, increasing to 100 per cent in 2019.
To this end, the implementation of the LCR and the NSFR has been finalised in Egypt.
iv Recovery and resolution
For the purpose of ensuring the continuous and efficient operation of banks as well as safeguarding the rights of banks' depositors, the Banking Law requires that banks maintain with the CBE a credit balance as reserve, whereby such balance represents a ratio of the total reserves held by a bank as determined by the Board. Additionally, the Banking Law stipulates that a bank operating in Egypt is required to have funds inside Egypt equivalent to its total payable obligations in addition to an amount of no less than the bank's minimum issued and paid capital requirements stipulated under the Banking Law. The aims of the requirements are to ensure that banks, at all points in time, are able to meet their obligations as they become due and payable, thus limiting the possibility of failure. Moreover, the Banking Law further stipulates that in the event that a bank operating in Egypt is believed to be facing financial difficulties that may affect the bank's financial position, the Board shall intervene and require that the bank's board of directors make available the necessary financial resources in the form of an increase in paid capital or through the injection of support funds. Moreover, the Board shall determine the procedures for such increase in paid capital or injection of funds as well as determine the time limit for undertaking such procedures. In the event that such procedures are not undertaken by the bank within the specified period of time, the Board shall determine the increase in capital that it deems necessary and offer it for subscription; issue a decision for the merger of the bank into another bank after having obtained the approval of the bank with which it will be merging; or delist the bank facing financial difficulties in accordance with the regulations governing said delisting.
To this end, Article 79 of the Banking Law stipulates that:
a bank shall be considered exposed to financial difficulties upon occurrence of any of the following events: (1) the insufficiency of the bank's assets to cover its liabilities in a way prejudicing the funds of depositors; (2) a tangible drop in the bank's assets or revenues, due to a violation of the laws, or as a result of engaging in any risky practices not in accordance with the bases of banking business; (3) the pursuance of improper methods in managing the banks' activity, which result in a tangible reduction of the shareholders equities, or affect the rights of depositors and other creditors; (4) the existence of strong evidences establishing that the bank will not be able to meet the depositors' demands or fulfil its obligation in normal conditions; or (5) a decline in the value of the equities of the shareholders at the bank below the provisions required to be formed.
Banks operating in Egypt shall, according to the provisions of the Banking Law, be delisted by virtue of a decision issued by the Board in the event that:
- it is established that the bank is in violation of the provisions of the Banking Law or its implementing regulations, and has not removed the violation during the period and under the conditions set by the Board;
- the bank adopts policies that would harm the general economic interest or the interests of depositors or shareholders;
- the bank ceases its operations;
- the bank becomes bankrupt or undergoes liquidation; or
- the bank's licence is found to have been based on erroneous data submitted to the CBE.
iv CONDUCT OF BUSINESS
There are a number of requirements to be met by banks wishing to engage in the provision of banking services to customers in Egypt. However, and despite the existence of such requirements and procedures, the CBE has not issued a new banking licence to any entity in the past 20 years, and has, therefore, restricted engagement in banking activities to banks already licensed and operating in Egypt. It is expected that with the anticipated introduction of the new Banking Law in early 2020, the CBE will likely begin issuing new banking licences, particularly to foreign banks wishing to provide banking services to customers in Egypt. With the increased sense of confidence in the Egyptian economy coupled with stronger loan demand, it is expected that a number of renowned international banks will begin to look towards setting up branches in Egypt.
A chapter in the Banking Law is dedicated to the obligations placed on banks operating in Egypt with respect to maintaining the confidentiality of accounts. Moreover, the Draft Banking Law, in its current state, which is yet to be approved by the Egyptian Parliament, provides for more stringent obligations to be placed on banks, 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 in relation to maintaining data protection and customer privacy.
The activities that can be undertaken by banks operating in Egypt and through which banks usually fund their activities are outlined in the provisions of the Commercial Code issued by virtue of Law No. 17 of 1999. Banking activities, as stipulated under the Commercial Code, are:
- monetary deposit-taking;
- debentures deposit-taking;
- leasing of safes;
- pledging of securities;
- bank transfers;
- issuing letters of credit;
- issuing letters of guarantee; and
- opening of current accounts.
vi CONTROL OF BANKS AND TRANSFERS OF BANKING BUSINESS
i Control regime
Several regulatory requirements and procedures govern persons controlling or having significant stakes in banks operating in Egypt. The Banking Law stipulates that Egyptians as well as foreigners shall have the right to own stakes in banks operating in Egypt whereby there is no maximum limit on the ownership of such stakes. Such requirements are put in place with the aim of maintaining efficient and undisrupted banking operations. On the one hand, the Supervision Regulations issued by the CBE require that banks disclose to the Audit Committee, a subcommittee of the CBE, on a monthly basis the names of all shareholders who own more than 1 per cent of the banks' capital. Shareholders who own less than 1 per cent of a bank's capital are to be grouped together under the title 'miscellaneous'. On the other hand, the prior approval of the Board is to be obtained by persons, whether legal or natural, wishing to own more than 10 per cent of a bank's issued capital or any percentage that would lead to achieving actual control over the bank in question. The person wishing to acquire the shares is required to obtain the approval of the Board at least 60 days before the date of acquisition of the shares. The application to be presented by a person wishing to acquire 10 per cent or more of a bank's issued capital shall be accompanied by a detailed report outlining the reasons for the acquisition, the goals and objectives of the acquisition, the person's plan with respect to the management of the bank and the policy to be adopted for the management of the bank's affairs.
In reviewing applications presented by persons for the acquisition of 10 per cent or more of a bank's capital, the CBE is required, as per the provisions of Article 12 of the Banking Law's executive regulations, to ensure the following prior to approving the acquisition:
- the non-existence of any conflict of interests between the applicant and the bank;
- the degree of the influence and actual control provided for by such ownership over the bank with respect to the appointment of members of the board of directors, or over the decisions issued by the board or the general assembly;
- the extent of participations by the applicant and the connected parties in the bank to which the applicant applies for ownership of its shares, as well as its participation in other banks and financial institutions in Egypt;
- the applicant's ability and readiness to provide the bank with the necessary financial or technical support, or both, in the event that he or she owns more than 10 per cent of the issued capital, or any percentage leading to actual control over the bank, according to what is determined by the board of directors of the CBE;
- such ownership shall not decrease competitiveness or lead to disturbances in the banking market;
- there is no final court ruling passed against the applicant for an offence involving honour or trust, or any of the crimes prescribed under the Banking Law or the anti-money laundering law; and
- the existence of legal capacity, efficiency and practical experience.8
The Banking Law further stipulates that the calculation of shares owned by the natural persons in question shall include those shares held by their relatives to the fourth degree. With respect to the calculation of shares owned by legal persons, such calculation shall include shares held by any member of its board of directors as well as those held by any of its shareholders.
ii Transfers of banking business
No regulatory restrictions are placed on banks wishing to transfer all or part of their business (comprising debts, and possibly loan arrangements and other assets) to another entity without the consent of the customers concerned. However, the approval of the regulator is usually sought, and is highly recommended for good relations. The existing market practice in the Egyptian banking sector is that banks incorporate an article in all agreements executed with customers by virtue of which banks are granted the unilateral right to transfer their rights and obligations under the executed agreements to another entity without the need to obtain the prior approval of the concerned customers.
vii THE YEAR IN REVIEW
The banking sector in Egypt has witnessed a number of important developments in banking and banking regulation throughout the past year. Such changes and restructuring processes have largely been introduced by circulars and decisions published by the CBE that govern the various aspects of the Egyptian banking industry. The introduced changes have been particularly geared towards achieving internationally recognised standards with respect to governance and internal audits. The most recent example of such changes is the introduction by the CBE of new regulations requiring banks operating in Egypt to undertake quality assurance tests with respect to internal auditing procedures at least once every five years.
Since the liberation of the exchange rate in 2016, the CBE has maintained a policy of non-intervention in the foreign exchange market. However, one of the most significant changes to the banking regulatory regime in Egypt was the very recent termination of the CBE's repatriation mechanism, meaning that the CBE will no longer be responsible for the repatriation of any foreign currency outside of Egypt for any fresh foreign currency portfolio investments wishing to enter the local currency Egyptian T-Bills, T-Bonds market and the stocks listed on the Egyptian Stock Exchange. The termination of the CBE's repatriation mechanism reflects an increased sense of confidence in the market's liquidity as well as the position of the foreign currency reserves.
The past year witnessed a significant move towards achieving higher levels of financial inclusion, whereby an initiative to create a joint database for all banks operating in Egypt was introduced by virtue of a circular published by the CBE, dated 2 September 2018. The most recent development in banking regulations pertaining to governance and management of banks was introduced in 2019 by virtue of a CBE circular requiring that the board of directors of any bank operating in Egypt hold meetings at least eight times per year to ensure sound and effective governance procedures in banks. In 2020, we expect to witness a number of new initiatives, requirements and procedures applicable to the boards of directors of banks operating in Egypt. With the upcoming introduction of the new Banking Law, it is expected that the banking sector in Egypt will witness significant changes during 2020, which will ensure the adoption of best international banking practices.
viii OUTLOOK and CONCLUSIONS
The banking sector in Egypt is expected to witness very profound reform and restructuring processes throughout 2020, particularly with respect to the creation of a more diversified, resilient and efficient banking industry geared towards achieving financial stability in the country. The anticipated reform will largely be driven by the new Banking Law, which is expected to be approved by Parliament in early 2020. The new Banking Law will revoke Law No. 88 of 2003, and is expected to restructure the current banking regime as well as introduce a number of new requirements to which licensed banks operating in Egypt will be required to adhere. The new Banking Law is expected to confer onto the CBE a much broader supervisory role over the banking sector and over entities engaged in the provision of banking services in Egypt. The Draft Banking Law, in its current state, which has not yet been approved by Parliament, stipulates that its provisions will extend to govern the activities of banks operating in Egypt, as well as the activities of foreign exchange companies, companies engaged in credit rating and information services, companies engaged in money transfer activities, operators of payment systems and entities engaged in the provision of payment system services. According to the provisions of the Draft Banking Law, each of these entities must obtain the required licence from the CBE prior to engaging in such activities in Egypt. More notably, the Draft Banking Law proposes raising the minimum capital requirement for banks operating in Egypt to E£5 billion from the current E£500 million and the capital earmarked for branches of foreign banks operating in Egypt to US$150 million (or its equivalent in foreign currencies) from US$50 million.
Moreover, and with the upcoming introduction of the new Banking Law, it is expected that the CBE will change its long-standing negative stance on the issuance of new banking licences to entities, particularly branches of foreign banks wishing to engage in banking activities in Egypt, thus allowing for a more diversified banking sector. The potential move towards the issuance of new banking licences represents a clear move towards increased levels of confidence in the Egyptian banking industry. However, and due to the fact that the Draft Banking Law remains under review by the Egyptian Parliament, the exact role to be conferred by the new Banking Law onto the CBE, as well as the scope of restructuring to the banking sector in Egypt, remains largely unknown.
1 Hossam Gramon is a partner and Karima Seyam is an associate at Nour & Partners in association with Al Tamimi & Company.
2 Moody's Investor Services Limited (2019), www.moodys.com/research/Moodys-Buoyant-Egyptian-economy-drives-Moodys-positive-outlook-for-the--PBC_1161341.
4 Central Bank of Egypt, Banking Supervision, 2019, www.cbe.org.eg/en/BankingSupervision/Pages/Reports.aspx.
5 Law No. 88 of 2003 on the central bank, the banking sector and the monetary system.
6 The Banking Law, Article 14.
7 id., Article 31.
8 The Banking Law, Article 12.