Background
Since 1997 factoring was mentioned in Egyptian Law as one of the investment fields stated in the Investment Law Number 8 of 1997, at the time subject to tax exemption. But in spite of the fact that this activity had been stated in Egyptian law since that time, it was never properly activated and only slim rules were issued by the Investment Authority with respect to it. Later, in 2009, with the creation of the new Egyptian Financial Supervisory Authority (“EFSA”), Law Number 10 of 2009 stated that factoring was one of the activities which would fall under EFSA’s jurisdiction and supervision. Accordingly, EFSA finally issued the first comprehensive set of rules pertaining to this activity which came out as Decree No. 120 of 2010, published in the Egyptian Gazette on December 6th, 2010. Following are its main provisions. It is important, however, to note that the Decree has stated that the companies currently operating must rectify their status in accordance with its provisions no later than six months following their coming into force, i.e. prior to July 6th, 2011.
What is Factoring?
The new Decree defines factoring as the act of a company purchasing future financial claims from the sellers of goods and services who transfer those claims to the factoring company which also provides to them other related services. Factoring is local when the transfer of claims is between two local parties and is international when one of them is a foreign party.
General Conditions
Generally speaking, the Decree states that the transfer of claims is subject to the provisions of the Egyptian Civil Code, hence the transfer is not effective until the original debtor has been notified thereof. The Decree further states that as a condition, the debtor has to be a merchant and not a final consumer. In other words, factoring can not occur as a result of transfer of claims due on the sale of goods and services to final consumers. Moreover, the Decree requires the debt to be specific and to be accompanied by full information. And finally, it allows the transfer of claim to be guaranteed by the client (full recourse).
Company Requirements
The factoring company needs to fulfill the following requirements:
- Be a joint stock company.
- Register in the Factoring Companies’ Registry with EFSA.
- To have among its founders a financial institution.
- To have a minimum paid-up capital of five million pounds.
- To undertake no activity other than factoring, unless so authorized by EFSA.
- To have a managing director with minimum ten years experience in financial activities.
Requirements for Undertaking the Business
- To have in place a full documentary process and supervision thereon.
- To have an organizational structure.
- To install a system of control from head office over branches.
- To implement a risk management policy.
- To keep regular books for the activity.
- To become - within the first year of operation - a member of one of the international factoring organizations.
Conditions in the Claims Being Transferred
- They must be the result of commercial transactions.
- They may not be the result of extending credit.
- They may not be subject to mortgage or Lien.
- They must be supported by full documentation, and the client selling the claim must provide such documentation to the factoring company.
The Factoring Agreement
The Decree states that the factoring company must submit to EFSA the standard agreements it intends to use in undertaking its business, in order to ensure that they contain certain minimum requirements. The Decree further spells out those requirements as follows:
- The determination of the transferred claims and of the documents related thereto.
- The conditions of transfer, and whether they include any guarantees.
- Other services provided by the company, including collection, follow-up and guarantee.
- The term of the agreement and its renewal and termination.
- Terms of settlement of accounts related to the factoring.
- Whether there are any other securities submitted by the client.
- Terms for dispute settlement.
- Rules for maintaining the secrecy of accounts.
Capital Adequacy
- The capital base of the company must be at least 10% of the purchased claims.
- Shareholders’ rights must be no less that 75% of the capital base of the company.
- Total exposure to the final not exceed 20% of the company’s capital base or 25% in the case of related parties.
Accounting obligor
The Decree states that the factoring company’s financial statements must be prepared in accordance with the Egyptian Accounting Standards, and that EFSA is provided with quarterly reviewed statements and yearly audited statements within ninety days from end of the year.
The company auditor must be registered with EFSA and the company’s financial statements must include an undertaking by the auditor that the company has fulfilled its adequacy requirements.
Conclusion
The new Decree fills a major regulatory gap in financial services in Egypt and is accordingly an important and valuable addition. It also deals with various legal, accounting and operational aspects and is therefore a comprehensive piece of regulation which provides much needed clarity in this business. Whether companies will resort to this type of financing or not remains to be seen, but in all cases the Decree is a step forward.
Background
Since 1997 factoring was mentioned in Egyptian Law as one of the investment fields stated in the Investment Law Number 8 of 1997, at the time subject to tax exemption. But in spite of the fact that this activity had been stated in Egyptian law since that time, it was never properly activated and only slim rules were issued by the Investment Authority with respect to it. Later, in 2009, with the creation of the new Egyptian Financial Supervisory Authority (“EFSA”), Law Number 10 of 2009 stated that factoring was one of the activities which would fall under EFSA’s jurisdiction and supervision. Accordingly, EFSA finally issued the first comprehensive set of rules pertaining to this activity which came out as Decree No. 120 of 2010, published in the Egyptian Gazette on December 6th, 2010. Following are its main provisions. It is important, however, to note that the Decree has stated that the companies currently operating must rectify their status in accordance with its provisions no later than six months following their coming into force, i.e. prior to July 6th, 2011.
What is Factoring?
The new Decree defines factoring as the act of a company purchasing future financial claims from the sellers of goods and services who transfer those claims to the factoring company which also provides to them other related services. Factoring is local when the transfer of claims is between two local parties and is international when one of them is a foreign party.
General Conditions
Generally speaking, the Decree states that the transfer of claims is subject to the provisions of the Egyptian Civil Code, hence the transfer is not effective until the original debtor has been notified thereof. The Decree further states that as a condition, the debtor has to be a merchant and not a final consumer. In other words, factoring can not occur as a result of transfer of claims due on the sale of goods and services to final consumers. Moreover, the Decree requires the debt to be specific and to be accompanied by full information. And finally, it allows the transfer of claim to be guaranteed by the client (full recourse).
Company Requirements
The factoring company needs to fulfill the following requirements:
- Be a joint stock company.
- Register in the Factoring Companies’ Registry with EFSA.
- To have among its founders a financial institution.
- To have a minimum paid-up capital of five million pounds.
- To undertake no activity other than factoring, unless so authorized by EFSA.
- To have a managing director with minimum ten years experience in financial activities.
Requirements for Undertaking the Business
- To have in place a full documentary process and supervision thereon.
- To have an organizational structure.
- To install a system of control from head office over branches.
- To implement a risk management policy.
- To keep regular books for the activity.
- To become - within the first year of operation - a member of one of the international factoring organizations.
Conditions in the Claims Being Transferred
- They must be the result of commercial transactions.
- They may not be the result of extending credit.
- They may not be subject to mortgage or Lien.
- They must be supported by full documentation, and the client selling the claim must provide such documentation to the factoring company.
The Factoring Agreement
The Decree states that the factoring company must submit to EFSA the standard agreements it intends to use in undertaking its business, in order to ensure that they contain certain minimum requirements. The Decree further spells out those requirements as follows:
- The determination of the transferred claims and of the documents related thereto.
- The conditions of transfer, and whether they include any guarantees.
- Other services provided by the company, including collection, follow-up and guarantee.
- The term of the agreement and its renewal and termination.
- Terms of settlement of accounts related to the factoring.
- Whether there are any other securities submitted by the client.
- Terms for dispute settlement.
- Rules for maintaining the secrecy of accounts.
Capital Adequacy
- The capital base of the company must be at least 10% of the purchased claims.
- Shareholders’ rights must be no less that 75% of the capital base of the company.
- Total exposure to the final not exceed 20% of the company’s capital base or 25% in the case of related parties.
Accounting obligor
The Decree states that the factoring company’s financial statements must be prepared in accordance with the Egyptian Accounting Standards, and that EFSA is provided with quarterly reviewed statements and yearly audited statements within ninety days from end of the year.
The company auditor must be registered with EFSA and the company’s financial statements must include an undertaking by the auditor that the company has fulfilled its adequacy requirements.
Conclusion
The new Decree fills a major regulatory gap in financial services in Egypt and is accordingly an important and valuable addition. It also deals with various legal, accounting and operational aspects and is therefore a comprehensive piece of regulation which provides much needed clarity in this business. Whether companies will resort to this type of financing or not remains to be seen, but in all cases the Decree is a step forward.