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Banking Law: New Central Bank Rules

Banking Law: New Central Bank Rules to Encourage SME Lending: Reserve Requirement Exemption for Banks Lending to SMEs
On December 16th, 2008 The Central Bank of Egypt issued a new regulation (Number 2408 of 2008 published in the Egyptian Gazette on December 28th, 2008) aimed at encouraging bank lending to small and medium enterprises and companies. This comes as expectations for tough economic conditions during 2009 resulting from the international financial crisis have generated an interest by the Egyptian Government and the Central Bank of Egypt in encouraging SMEs. Moreover, the new regulation comes within a broader framework, which is the need to improve access to finance by SMEs in general.
Following are the key provisions of the new regulation:
  • SMEs are defined in various ways in Egyptian Law. The Central Bank of Egypt, however, has chosen to rely on a new definition, which is consistent with the purpose of the new regulation. Two criteria are used here: business annual turnover and paid-up capital. For a project to qualify for the new exemption, it must have an annual turnover of between one million and twenty million Egyptian Pounds, in addition to a paid-up capital of between quarter of a million and five million Pounds. It is important to stress that both criteria must be met for the project to qualify.
  • The new exemption is from the reserve requirement which is deposited with the Central Bank and currently amounting to 14% of deposit. It is crucial to observe, however, that the exemption is not stated in the new regulation to be for the benefit of the small or medium enterprise, but rather for the lending bank, and that the latter is not obliged to transfer it back to the borrowing project. In other words, the advantage granted in this regulation is for the bank and not the SME. The reason behind this is that the purpose of the new regulation is to encourage banks to lend SMEs rather than encourage the enterprises to borrow.
  • The exemption granted in the new regulation applies to credit granted as of January 1st, 2009 not prior to this.
  • The new regulation will require further clarification of details and executive guidelines which shall be issued by the Central Bank of Egypt Department of Banking Supervision.
It is worth noting that the new regulation also provides for a wider framework for the Central Bank to encourage SME lending, thus it includes other provisions dealing with the establishment of a specialized SME finance unit in the Egyptian Banking Institute which will provide technical assistance and advisory for banks wishing to establish SME lending departments, and with a new Central Bank role in coordinating with other interested parties to improve the overall environment for SME finance including credit bureaus, credit rating, credit guarantee and so forth. Finally, the new regulation encourages coordination between the Central Bank and other competent entities in proposing and participating in the legislative reform of SME finance.
Conclusion
The Central Bank regulation comes at an opportune moment for the encouragement of SME finance. But it is important to note that the fact that the incentive it provides shall be for the benefit of the lending bank and not the borrower will generate some confusion whereby SMEs will demand that they become the direct beneficiaries. On the other hand, the Central Bank’s interest in SME access to finance is a positive step and will send a signal that more attention should be given to this type of financial service.
On December 16th, 2008 The Central Bank of Egypt issued a new regulation (Number 2408 of 2008 published in the Egyptian Gazette on December 28th, 2008) aimed at encouraging bank lending to small and medium enterprises and companies. This comes as expectations for tough economic conditions during 2009 resulting from the international financial crisis have generated an interest by the Egyptian Government and the Central Bank of Egypt in encouraging SMEs. Moreover, the new regulation comes within a broader framework, which is the need to improve access to finance by SMEs in general.
Following are the key provisions of the new regulation:
  • SMEs are defined in various ways in Egyptian Law. The Central Bank of Egypt, however, has chosen to rely on a new definition, which is consistent with the purpose of the new regulation. Two criteria are used here: business annual turnover and paid-up capital. For a project to qualify for the new exemption, it must have an annual turnover of between one million and twenty million Egyptian Pounds, in addition to a paid-up capital of between quarter of a million and five million Pounds. It is important to stress that both criteria must be met for the project to qualify.
  • The new exemption is from the reserve requirement which is deposited with the Central Bank and currently amounting to 14% of deposit. It is crucial to observe, however, that the exemption is not stated in the new regulation to be for the benefit of the small or medium enterprise, but rather for the lending bank, and that the latter is not obliged to transfer it back to the borrowing project. In other words, the advantage granted in this regulation is for the bank and not the SME. The reason behind this is that the purpose of the new regulation is to encourage banks to lend SMEs rather than encourage the enterprises to borrow.
  • The exemption granted in the new regulation applies to credit granted as of January 1st, 2009 not prior to this.
  • The new regulation will require further clarification of details and executive guidelines which shall be issued by the Central Bank of Egypt Department of Banking Supervision.
It is worth noting that the new regulation also provides for a wider framework for the Central Bank to encourage SME lending, thus it includes other provisions dealing with the establishment of a specialized SME finance unit in the Egyptian Banking Institute which will provide technical assistance and advisory for banks wishing to establish SME lending departments, and with a new Central Bank role in coordinating with other interested parties to improve the overall environment for SME finance including credit bureaus, credit rating, credit guarantee and so forth. Finally, the new regulation encourages coordination between the Central Bank and other competent entities in proposing and participating in the legislative reform of SME finance.
Conclusion
The Central Bank regulation comes at an opportune moment for the encouragement of SME finance. But it is important to note that the fact that the incentive it provides shall be for the benefit of the lending bank and not the borrower will generate some confusion whereby SMEs will demand that they become the direct beneficiaries. On the other hand, the Central Bank’s interest in SME access to finance is a positive step and will send a signal that more attention should be given to this type of financial service.