CBE Consolidating Mortgage Finance

On 27 November 2016, the Central Bank of Egypt (“CBE”) issued a decision that referenced the 2014 CBE Mortgage Finance Initiative for Low- and Middle-income Individuals and the subsequent CBE regulations either explicating or amending it (the “Decision”).[1] It also referenced the latest CBE decision issued on 17 February 2016 where it attempted to allow for more cooperation between banks and mortgage finance companies.

Background

Mortgage finance is a non-banking financial instrument where a loan is secured by the collateral of a stipulated real estate property to finance certain activities listed in the Egyptian Mortgage Finance Law.[2] These activities include (a) the purchase, construction, renovation, or development of real estate intended for housing, administrative units, service instalments, trade purposes (b) real estate rent (c) usufruct of real estate (d) purchase of real estate with Islamic methods of financing (ijara, musharaka, and murabaha) and (e) mortgage re-financing.[3] Mortgage finance is mostly guaranteed through the property that is the subject of the funding, yet because most real estate in Egypt is not registered, the law allows for other properties to be used as collateral so long as the financed property is viable for future registration. Being a part of the non-banking financial market, mortgage finance thus falls within the Egyptian Financial Supervisory Authority’s (“EFSA”) supervisory purview.[4] EFSA is, accordingly, the main entity responsible for regulating mortgage finance activities carried out by mortgage finance companies, the Egyptian Mortgage Refinance Company, securitization authorities, auditors, as well as mortgage finance intermediaries, appraisers, and agents.[5] Nonetheless, the Mortgage Finance Law allows for some CBE-licensed banks to engage in mortgage finance activities.[6] In the latter case, mortgage finance activities are then governed by a separate set of regulations issued by the CBE. As part of the government’s plans to reform its financial sector back in 2004, special emphasis was given to developing the legislative framework regulating mortgage finance.[7] This involved both EFSA- and CBE-governed mortgage activities as it included amending the Mortgage Finance Law’s Executive Regulations in 2005[8] and the CBE Law No. 88 of 2003.[9] Moreover, a new chapter to the Capital Market Law’s executive regulations was added which strived to activate the secondary market – the market where securities are traded between investors as opposed to between investors and companies – by allowing for mortgage securitization activities.[10] These efforts were halted in the aftermath of the 2011 Revolution and it was not until 2014 that a serious effort at retackling the issue was initiated. In July 2014, the Mortgage Finance Law and the decree regulating Mortgage Finance Guarantee and Subsidy Fund were amended in an effort to expand the reach of mortgage finance to low-income borrowers. For more information on the relevant legislations, please refer to our December 2014 issue of Egypt Legal Update. Perhaps more significant were the amendments to the Law’s Executive Regulations in February and April of 2015, which we covered in our March and May 2015 issues of Egypt Legal Update. Among other things, the amendments consolidated all responsibility related to mortgage finance for low-income borrowers with one entity: The Mortgage Guarantee and Subsidy Fund. They also introduced mortgage re-finance companies and established the Egyptian Federation of Mortgage Finance. Yet perhaps the most notable alteration achieved by these amendments is that they put EFSA in charge of setting rules and standards when formerly they were set in the Executive Regulations and could only be changed through a Prime Ministerial Decision. With its new expanded powers, EFSA embarked on its mission to revamp the mortgage finance institutional framework issuing a string of decisions regulating everything from the Egyptian Mortgage Finance Federation to real estate valuation standards and mortgage finance licensing rules. In parallel to EFSA’s efforts, the CBE also embarked on its own mission to facilitate access to the mortgage finance market. Back in February 2014 and prior to the aforementioned legislative reforms, the CBE launched a Mortgage Finance Initiative for Low and Middle Income Individuals (the “Initiative”).[11] The seven-point Initiative involved allocating EGP 10 billion for mortgage finance activities in favour of low- and middle-income individuals for a period of 20 years. The banks were to re-lend the allocated amount to targeted beneficiaries through a reduced interest rate of 7% per annum for low-income individuals and 8% per annum for middle-income individuals where the money would primarily finance the purchase of housing units in new urban communities. Moreover, the CBE Initiative identified the conditions on which banks were to offer mortgage finance and it specified the characteristics of the clients intended to benefit from this initiative. It also allowed banks to direct their funds to mortgage finance companies, as long as these companies fulfilled certain conditions. The Initiative also amended the basis for assessing a client’s credit score by assessing the value of their real estate collateral such that they are assessed every 5 years instead of every 3. One of the more significant facets of the Initiative is the fact that it explicitly affirmed that low-income individuals were eligible for both the CBE Initiative and the Mortgage Finance Guarantee and Subsidy Fund (the “Fund”). The Fund was first established by virtue of Presidential Decree No. 4 of 2003, yet it was never properly employed, which prompted its amendment in 2014 by Presidential Decree No. 405 of 2014 as part of the comprehensive renovation of the legislative framework governing mortgage finance in Egypt. We covered these amendments in our December 2014 issue of Egypt Legal Update. The Fund is one of the cornerstones of the institutional framework created by Law No. 148 of 2001 to govern the mortgage market in Egypt. It purports to (a) guarantee mortgage lending in a manner which reduces the risk borne by the lender and (b) subsidize low-income borrowers in order to improve access to finance and low-income housing. The CBE February Initiative was followed by its issuance of a detailed memo in March 2014 and another one in May amending the February Initiative and regulating the issuance of and trade in mortgage finance treasury bills. No other regulations on the subject were issued until February 2016 when the CBE amended the Initiative by adding two more categories of benefactors (those with income below EGP 1400 and the category of “earners of above average income”). The amendment also allowed mortgage finance companies to be directly involved in the Initiative thereby enabling cooperation between banks and companies involved in mortgage finance to ensure the achievement of the Initiative’s objectives. This CBE amendment was covered in our March 2016 issue of the Egypt Legal Update. While the 2016 attempt by the CBE to alleviate some of the regulatory pressure off of banks by incorporating the specialized mortgage finance companies is worthwhile insofar as it attempts to bring both sectors closer to achieving the higher goal of financial inclusion, it nonetheless created regulatory confusion.

The Decision

The various amendments to the original 2014 CBE Initiative have resulted in a contradictory web of regulations, which prompted the CBE to unify the conditions for mortgage finance specifically for low-income individuals in its latest Decision in November 2016. Moreover, the Decision addressed two particular groups that have continued to struggle under the amended system governing mortgage finance, namely, pensioners and self-employed individuals. The Decision included a table with conditions consolidated from former decisions. These conditions need to be met for banks to be authorized to fund low-income borrowers using the EGP 10 billion allocated to them by the CBE as part of the 2014 Initiative. The table specifies that the target is to have banks accept funding requests from all occupations. Moreover, although May 2015 amendments to the Executive Regulations had required that mortgage financing not exceed 90% of the value of the property, this Decision lowered that percentage to 85%. The Decision also stated that proof of employment is valid for a year from the date of issuance so long as the Fund's inquiry into it has not exceeded 6 months. It also required that a person be employed a minimum of 6 months for individuals in the private and public sectors, and a minimum of one year for self-employed individuals. The Decision incorporated other regulations pertaining to bank’s requesting governmental guarantees as well as banks’ issuance of insurance policies. It also allows for an individual to include their spouse’s income when calculating the funding value.   Moreover, it defined “additional income” and regulated the situation in which proof of income does include net income. Interestingly, the Decision allows for compounding interest for the entire duration of the funding which ranges between 10 and 20 years. As to its regulation of pensioners’ access to mortgage finance, it indicated that the clients are to pay a maximum of 40% of the value of the property, including the housing unit subsidy and in accordance with the Social Housing Program. Separately, as for occupations whose income is difficult to prove - including electricians, tailors, and plumbers - the Decision allows banks to fund them as long as they meet certain criteria. For example, if their proof of income has been authenticated by an accountant registered with the Egyptian auditors and accountant, the bank has to cover the risk of default through group insurance policies while the client has to pay a maximum of 40% of the value of the property, excluding the housing unit subsidy.

Conclusion

The CBE decision comes along a regulatory trend directed at helping revamp the legislative institutional framework governing a notoriously underperforming financial market, namely that of mortgage finance. This, in turn, falls within the government’s commensurate goal of broadening financial inclusion in Egypt by allowing access to various forms of finance to individuals who were formerly barred from such access. Both EFSA and the CBE are trying to contribute to facilitate such access. The latest CBE Decision comes to regulate a niche area that lies at a juncture between both sectors: banks offering mortgage finance, an otherwise non-banking form of financial instrument.   [1] Central Bank of Egypt’s Circular dated 27 November 2016 on the unified conditions for low-income individuals under the mortgage finance initiative, Available through this link (Arabic). [2] Mortgage, Investopedia, Available through this link. [3] Law No. 148/2001 on Mortgage Finance, Official Gazette, Issue No. 25 (bis), 24 June 2001, Art. 1. [4] Law No. 148/2001 on Mortgage Finance, Art. 2. [5] Mortgage Finance, Egyptian Financial Supervisory Authority, Available through this link. [6] Law No. 148/2001 on Mortgage Finance, Art. 3. [7] Reform Phase II, Central Bank of Egypt, Available through this link. [8] Prime Minister’s Decree No. 465/2005 amending certain provisions of the Executive Regulations of the Mortgage Finance Law, Official Gazette, Issue No. 64 (cont.) (a), 22 March 2005. [9] Law No. 93/2005 amending certain provisions of Law No. 88 of 2003 on the Central Bank and the Banking Sector, Official Gazette, Issue No. 24 (bis), 21 June 2005. [10] Law No. 143/2004 amending certain provisions of Law No. 95/1992 on Capital Market among others, Official Gazette, Issue No. 25 (cont.) (a), 17 June 2004; Secondary Markets, Investopedia, Available through this link. [11] Central Bank of Egypt’s Circular dated 19 February 2014 on Mortgage Finance Initiative to Low- and Middle-income individuals, Available through this link (Arabic), which was amended by the Circular dated 24 February 2014, Available through this link (Arabic).