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New Rules and Standards for Mortgag

New Rules and Standards for Mortgage Finance
The Board of Directors of the Egyptian Financial Supervisory Authority (“EFSA”) has recently issued a decision that deals with the rules and standards governing the engagement in mortgage financing activities (the “Decision”).[1] This decision comes in light of the significant legislative interest to further develop the legal structure regulating the mortgage financing sector, which is embodied in the recent issuance of many important EFSA decisions related to this sector. This interest is mirrored in higher levels of government, as manifested in the promulgation of significant amendments to the Executive Regulations of the Mortgage Finance Law, which we previously reviewed in the March and May issues of Egypt Legal Update. The new rules and standards have focused on the Islamic financing instruments/systems that were developed recently. They also include general conditions and requirements relating to: the obligations of the lender/financier and borrower/investor, data and conditions that must be met upon signing any mortgage financing agreement, registration conditions of the mortgage, required guarantees for financing, and terms of insurance of the property subject to the mortgage.
Rules and Standards for Ijara, Murabaha, and Musharaka
On April 2015, a number of significant amendments were introduced to the Executive Regulations of the Mortgage Finance Law. These new amendments expanded the scope of lending in which mortgage finance companies and banks may engage to include – in addition to the conventional methods of mortgage financing – the Islamic alternatives to financing which are Ijara, Murabaha and Musharaka. The recent rules organize these transactions in more detail and determine the standards of engaging in mortgage financing activities using these alternative financing systems. In short, the recent Decision defines the three new financing systems as follows:
  1. Ijara (Lease Ending with Ownership): a system in which the mortgage finance company or bank (the financier) buys or builds the property/asset then leases it to the investor (the lessee). The lessee owns the leased asset during or at the end of the lease period.
  1. Murabaha: a contract by which the financier purchases a property and then sells it to the investor at a cost that includes a profit margin.
  1. Musharaka (Participation): a system in which the financier has an equity stake in the property as a partner of the investor. The investor gradually acquires the financier’s share until he/she owns it fully by the end of the contract. The financier’s share can also be sold to a third party upon the request of the investor.
Sharia Supervisory Committee
The recent rules and standards adopted in the Decision stipulated that the mortgage finance company has to obtain a prior approval from a Sharia Supervisory Committee which is formed especially for this purpose. EFSA’s BOD has formerly issued decision No. 8 of 2014 that regulates the membership and composition of the Sharia Supervisory Committee responsible for reviewing and approving any financial products which is announced or promoted as compatible with Islamic sharia. The 2014 decision stipulated that the composition of the committee must be of an odd number of no less than three members, one of which should be an expert in fiqh/jurisprudence and another an expert in economics, finance or accounting. The new addition adopted by the latest Decision is that it gave the Egyptian Federation for Mortgage Finance the right to form a Sharia Supervisory Committee for the same purpose. The Decision has also added many rules and standards for each of the three alternative instruments/systems, which included the obligations of both the financier and the investor, insurance guarantees, and expiry of the mortgage financing agreement. Thus EFSA has attempted to achieve a balance between allowing an external entity (the Sharia Supervisory Committee) to dictate some rules related to the financing systems, yet maintaining a level of supervision by ordering these new systems to comply with specific rules and standards imposed by EFSA.
Conclusion
The Executive Regulations of the Mortgage Finance Law used to stipulate specific regulations for mortgage financing, such as imposing a cap on the percentage of the loan to the value of the asset and requiring the borrower to sign a statement stating that he/she read the conditions of financing. This Article was replaced, in the latest amendments to the Executive Regulations introduced in April, by a new rule which requires that mortgage financing be conducted “in accordance with the rules and standards stipulated by EFSA’s Board of Directors in accordance with the nature of each activity”. The new rules and standards that were recently issued by EFSA did not, in fact, stray too far from the Executive Regulations’ provisions. However, the real significance of the change is that EFSA has now greater flexibility to modify those rules which could previously only be changed by way of a Prime Minister Decision amending the Executive Regulations. The issuance of the latest rules and standards is a positive point and an important step in completing the legislative structure regulating mortgage financing which EFSA gives special attention to.   [1] EFSA Board of Directors' Decision No. 111/2015 on the terms and conditions for practicing mortgage financing, Egyptian Gazette, Issue No. 241 (cont.), 26 October 2015. This issue of the Egyptian Gazette was published on 11 November 2015 even though the decision was issued on 26 October 2015.
The Board of Directors of the Egyptian Financial Supervisory Authority (“EFSA”) has recently issued a decision that deals with the rules and standards governing the engagement in mortgage financing activities (the “Decision”).[1] This decision comes in light of the significant legislative interest to further develop the legal structure regulating the mortgage financing sector, which is embodied in the recent issuance of many important EFSA decisions related to this sector. This interest is mirrored in higher levels of government, as manifested in the promulgation of significant amendments to the Executive Regulations of the Mortgage Finance Law, which we previously reviewed in the March and May issues of Egypt Legal Update. The new rules and standards have focused on the Islamic financing instruments/systems that were developed recently. They also include general conditions and requirements relating to: the obligations of the lender/financier and borrower/investor, data and conditions that must be met upon signing any mortgage financing agreement, registration conditions of the mortgage, required guarantees for financing, and terms of insurance of the property subject to the mortgage.
Rules and Standards for Ijara, Murabaha, and Musharaka
On April 2015, a number of significant amendments were introduced to the Executive Regulations of the Mortgage Finance Law. These new amendments expanded the scope of lending in which mortgage finance companies and banks may engage to include – in addition to the conventional methods of mortgage financing – the Islamic alternatives to financing which are Ijara, Murabaha and Musharaka. The recent rules organize these transactions in more detail and determine the standards of engaging in mortgage financing activities using these alternative financing systems. In short, the recent Decision defines the three new financing systems as follows:
  1. Ijara (Lease Ending with Ownership): a system in which the mortgage finance company or bank (the financier) buys or builds the property/asset then leases it to the investor (the lessee). The lessee owns the leased asset during or at the end of the lease period.
  1. Murabaha: a contract by which the financier purchases a property and then sells it to the investor at a cost that includes a profit margin.
  1. Musharaka (Participation): a system in which the financier has an equity stake in the property as a partner of the investor. The investor gradually acquires the financier’s share until he/she owns it fully by the end of the contract. The financier’s share can also be sold to a third party upon the request of the investor.
Sharia Supervisory Committee
The recent rules and standards adopted in the Decision stipulated that the mortgage finance company has to obtain a prior approval from a Sharia Supervisory Committee which is formed especially for this purpose. EFSA’s BOD has formerly issued decision No. 8 of 2014 that regulates the membership and composition of the Sharia Supervisory Committee responsible for reviewing and approving any financial products which is announced or promoted as compatible with Islamic sharia. The 2014 decision stipulated that the composition of the committee must be of an odd number of no less than three members, one of which should be an expert in fiqh/jurisprudence and another an expert in economics, finance or accounting. The new addition adopted by the latest Decision is that it gave the Egyptian Federation for Mortgage Finance the right to form a Sharia Supervisory Committee for the same purpose. The Decision has also added many rules and standards for each of the three alternative instruments/systems, which included the obligations of both the financier and the investor, insurance guarantees, and expiry of the mortgage financing agreement. Thus EFSA has attempted to achieve a balance between allowing an external entity (the Sharia Supervisory Committee) to dictate some rules related to the financing systems, yet maintaining a level of supervision by ordering these new systems to comply with specific rules and standards imposed by EFSA.
Conclusion
The Executive Regulations of the Mortgage Finance Law used to stipulate specific regulations for mortgage financing, such as imposing a cap on the percentage of the loan to the value of the asset and requiring the borrower to sign a statement stating that he/she read the conditions of financing. This Article was replaced, in the latest amendments to the Executive Regulations introduced in April, by a new rule which requires that mortgage financing be conducted “in accordance with the rules and standards stipulated by EFSA’s Board of Directors in accordance with the nature of each activity”. The new rules and standards that were recently issued by EFSA did not, in fact, stray too far from the Executive Regulations’ provisions. However, the real significance of the change is that EFSA has now greater flexibility to modify those rules which could previously only be changed by way of a Prime Minister Decision amending the Executive Regulations. The issuance of the latest rules and standards is a positive point and an important step in completing the legislative structure regulating mortgage financing which EFSA gives special attention to.   [1] EFSA Board of Directors' Decision No. 111/2015 on the terms and conditions for practicing mortgage financing, Egyptian Gazette, Issue No. 241 (cont.), 26 October 2015. This issue of the Egyptian Gazette was published on 11 November 2015 even though the decision was issued on 26 October 2015.