CBE Circular on Microfinance

On 23 May 2017, the Central Bank of Egypt (“CBE”) issued a circular[1] containing guiding standards for banks to apply when conducting credit studies in providing microfinance to non-governmental organizations, associations and microfinance intermediaries that have received licenses from the Egyptian Financial Supervisory Authority (“EFSA”).

Background

The past few years have seen efforts to create a legislative and supervisory framework that promotes and regulates the microfinance industry with an aim of providing Small and Medium Enterprises (“SMEs”) with sources of funding and proper protections. The first Microfinance Law[2] was passed in November 2014 to bring the industry under the supervision of EFSA. Additionally, three Decisions[3]^,[4],[5] were issued by EFSA in 2015 that relate to licensing requirements and costs, as well as financial statement preparation. A consumer protection guide issued by EFSA in a November 2016 Decision[6] attempted to fill in standard gaps and provide a more comprehensive code. As for the CBE, a January 2016 circular[7] required banks to direct 20% of their lending portfolio to SMEs within the following four years, in another effort to ease their access to funding. On 28 February 2017, another circular[8] amended the definitions of micro, small and medium enterprises, in an attempt to ease funding conditions and the maximum amounts that can be granted to a single client by a single bank. The CBE has issued the latest circular in a similar vein.

The Decision

Banks that have directly provided microfinance loans to individuals and companies must update their internal policies related to such loans according to their nature and the risks associated with them. These types of loans will now be recognized by both the CBE’s department of collection of credit risk and the credit information company I-Score, as microfinancing and not personal loans. Furthermore, in light of the Microfinance Law, banks are allowed to provide credit facilities to companies, foundations, and civil associations that have received licenses from EFSA, taking into account the introduction of the internal ratings system for those entities. In all cases, SME financing provided to individuals and companies, or to foundations, civil associations or microfinance companies, will be counted towards the 20% specified in the CBE circular requiring banks to allocate this percentage of their total credit portfolio towards SME financing within four years of the issue date. Finally, the recent decision sets out a list of guiding standards for banks to apply when conducting credit studies in providing microfinance to non-governmental organizations, associations and microfinance companies. The company, institution or, association must satisfy certain standards concerning organizational requirements, such as that its governance structure should include an internal auditor, a head of risk department, an internal audit committee, and that it must be compliant with EFSA decisions. In addition, the company or association must satisfy a standard of over 3 years of experience in the microfinance field, and with respect to its Board Members and executive management. Companies have a business plan and financial projections for at least two years for, and at least one year for associations. Variance from the business plan should not exceed 15% for budgeted figures versus actual financial statistics. With respect to credit policy and operations, these should include: criteria for granting credit, customer credit history, collection procedures, policy for writing off bad debt, basis for a provisions account, and compliance with EFSA microfinance rules. The decision also contains standards for profitability and operations ratios including a return on assets that is greater than 6%, operational self-sufficiency that is greater than 1.3%, and a return on total portfolio that is greater than 25%.  This is in addition to standards concerning asset and liability ratios, and productivity and efficiency.

Conclusion

The above standards were issued in application of the CBE’s initiative of 11 January 2016 which contained reference to providing guidance on the means of promoting financing to micro companies and enterprises in a separate decision.   [1] CBE Circular dated 23 May 2017 on the Microfinance Initiative. [2] Presidential Decree-Law No. 141/2014 on Microfinance, Official Gazette, Issue No, 46 (cont.), 13 November 2013. [3] EFSA Board of Trustees of the Microfinance Activity Supervision Unit’s Decision No. 1/2015 on the Licensing Requirements for Civil Associations and Foundations, Egyptian Gazette, Issue No. 137, 15 June 2015 [4] EFSA Board of Directors’ Decision No. 172/2014 on the Licensing Requirements of Microfinance Companies, Egyptian Gazette, Issue No. 10, 10 January 2015 [5] EFSA Board of Trustees of the Unit for the Supervision of Microfinance Activities of NGOs and Civil Associations’ Decision No. 1/2014, Egyptian Gazette, Issue No. 20, 27 January 2015 [6] EFSA Board of Directors’ Decision No. 123/2016 issuing the Guide on Protecting the Customers of Microfinance Companies, Egyptian Gazette, Issue No. 252 (cont.) (a), 9 November 2016 [7] CBE dated 11 January 2016 encouraging Banks to Grant Loans and Credit Facilities to Small and Medium-sized Enterprises. [8] CBE Circular dated 5 March 2017 containing Board of Directors decision of 28 February 2017 amending the SME initiatives.