Combining Financial Leasing, Factor

The Egyptian Financial Supervisory Authority (“EFSA”) recently issued a decision allowing some companies to combine more than one non-banking financial activity in a single company (the “Decision”).[1] The recent Decision allows mortgage finance, factoring and financial leasing companies to practice one or more of these activities through one company after obtaining the relevant license from EFSA.

Background

Legislation governing financial leasing, mortgage finance and factoring in Egypt do not actually explicitly prohibit combining more than one of these activities in one company. Nonetheless, prior to EFSA’s recent Decision, the process of combining more than one activity, and the conditions that a company must satisfy to be authorized to do so were unclear. For instance, Article 28 of the Executive Regulations of the Mortgage Finance Law gave EFSA the power to authorize a mortgage financing company and other related non-banking financial activities. The Executive Regulations only explicitly prohibited mortgage re-financing companies from undertaking any additional activities.[2] This was later echoed in EFSA’s permit rules for mortgage finance companies.[3] Thus, while no clear regulations were available, the concept of combining more than one non-banking finance activity was not outright prohibited. Similarly, Article 5 of the Executive Regulations of the Financial Leasing Law stipulates that a company seeking permit must be a finance company that has financial leasing “as one of its purposes”. This indicates that the Executive Regulations did not limit financial leasing companies from undertaking other non-banking financial activities.[4] With respect to factoring, the general rule imposed by EFSA is that the purpose of a company requesting a license must be “factoring”, but that other activities may be added after obtaining EFSA’s approval.[5] Nevertheless, while governing legislation did not generally prohibit a company from undertaking more than one of the relevant non-banking financial activities, EFSA’s latest Decision clarifies the rules and conditions that companies would have to abide by, and the process they need to follow to obtain EFSA’s authorization to undertake more than one of these activities.

Latest Amendments

It should be noted that EFSA’s latest Decision only applies to companies that already have a license to undertake one of the three relevant activities (financial leasing, mortgage financing and factoring). Only such companies (with existing license for one activity at least) may apply for a license to combine several activities at once. This means that a new applicant with no prior license may not apply for a license to combine more than one activity, and that it may only apply for one license. The Decision stipulates a number of conditions and requirements that a company must fulfil to be granted a license to combine more than one activity. To start with, a company must fulfil the licensing requirements for each financing activity that it wishes to undertake. Thus, if a company is applying for a license to perform mortgage financing and financial leasing, for example, it would have to fulfil all requirements for each activity. In addition to the separate requirements, however, the new Decision adds several additional requirements that an applicant must fulfil, including:

• That the purpose of the company is exclusively one or more of the three non-banking finance activities in question – i.e. that the company does not have a purpose beyond these activities;
• That juristic persons have 50% or more of the company’s equity, with financial institutions having not less than 25% of the equity; and
• That the company’s capital is not lower than the minimum requirement for all relevant activities combined.

In addition, the Decision requires an applicant company to maintain separate accounts for each activity and to include in its disclosures the classification of the funds it receives divided according to the activity for which it was allocated. The Decision also includes a few provisions concerning risk management, stipulating that transactions with a natural person (and spouse and minor children) may not exceed 10% of the property rights, nor should it exceed 20% if the client is a juristic person and 25% in the case of related parties. Procedurally, the Decision gives EFSA thirty days to decide on an application, explaining that EFSA must not only consider the intrinsic situation of the applicant and its previous record, but the general market conditions and needs.

Conclusion

While regulations governing financial leasing, mortgage financing and factoring, did not prohibit a company from undertaking more than one of these activities, the process and conditions for such process was previously unclear. Such lack of clarity could have potentially hampered companies, had a negative impact on the recipients of financing, and the market more generally. Thus, EFSA’s Decision clarifying the process and the conditions that companies need to fulfil to be able to combine more than one activity is a welcome development.   [1] EFSA Board of Directors’ Decision No. 60/2017 authorizing companies to combine financial leasing, factoring and mortgage finance, Egyptian Gazette, Issue No. 119, 24 May 2017. [2] Cabinet of Ministers’ Decision No. 1/2001 enacting the Executive Regulations of the Mortgage Finance Law No. 148/2001, Official Gazette, Issue No. 282 (cont.), 9 December 2001. [3] EFSA Board of Directors’ Decision No. 64/2015 on the conditions for authorizations of mortgage finance companies, Egyptian Gazette, Issue No. 144, 23 June 2015. [4] Minister of Economics Decision No. 846/1995 enacting the Executive Regulations of Law No. 95/1995 on Financial Leasing, Official Gazette, Issue No. 291 (cont.), 21 December 1995. [5] EFSA Board of Directors’ Decision No. 72/2013 on Factoring Regulations, Egyptian Gazette, Issue No. 9, 12 January 2014.