FRA Issues Procedures and Requireme

The Financial Regulatory Authority (“FRA”) recently published its Board of Directors decision No. 121 of 2018 dated 30 July 2018 with respect to the conditions, rules, and procedures for licensing companies that undertake microfinance activity. The recent decision – (“Decision 121/2018”)[1] – abolishes a previous FRA Board decision regulating the same matter that was issued in 2014.[2] It further states that the new microfinance regulations shall come into effect one day following the publication of Decision 121/2018 in the Egyptian Gazette (not yet published).

Background

On 13 June 2018, the Egyptian Gazette published FRA Board of Directors Decision No. 53 of 2018 (“Decision 53/2018”)[3] which comprehensively re-organized the regulatory regime for the establishment and licensing of companies operating in the Licensing financial field. It redefined what is meant by companies undertaking non-banking financial activities as those practicing in: (1) securities and capital market, (2) insurance, (3) mortgages, (4) financial leasing, (5) factoring, and (6) microfinance. Decision 53/2018 provided that approval of establishment of new companies that practice any of the above activities will be conditional on market need based on a study that the FRA Board of Directors must ratify. Alternatively, the company’s activities must entail offering new products, or the development of existing ones in the market. Article (4) of Decision 53/2018 listed the requirements for obtaining FRA’s preliminary approval to incorporate a non-banking financial company, as well as approvals (for incorporated companies) to undertake a non-banking financial activity. These requirements are:

1. Submitting a technical and economic feasibility study of the company and its products/services;

2. That at least 50% of the company’s capital be held by corporate persons, with at least 25% by financial institutions (with exceptional capital requirement rules for financial advisory companies, insurance brokerages, damages experts, insurance consultants, real estate appraisal companies, and real estate brokerages);

3. That the license application contains a statement of the ultimate beneficiaries of the company’s shares;

4. That the company’s bylaws mandate the use of cumulative voting for the election of board members;[4]

5. That the company’s bylaws mandate proportional representation of capital on the company’s board;[5]

6. That incorporation is undertaken within six months from the date of the FRA’s preliminary approval of incorporation (which can be extended for three more months by the FRA);

7. Fulfilling all requirements for licensing within three months at the most from the date of the company’s registration on the commercial register;

8. That commencement of actual operation is undertaken within six months at most from the date of licensing (can be extended if justifications are presented to the FRA).

In addition, Article (4) of Decision 53/2018 provided requirements that must be fulfilled in legal and natural persons that participate in the establishment of a non-banking financial company. These include: (i) that the individual or company is not in financial distress/bankruptcy; (ii) that no legal proceedings were commenced against the individual, entity, its main shareholders or board members, and they were not convicted of a crime; and (iii) that they have not been reprimanded by a regulator within the past three years (with the exception of warnings, notices, and issues that were overcome). On 24 July 2018, a correction[6] was issued in the Egyptian Gazette, which referred to both Decision 53/2018 and Decision 93/2018[7] that amended it. Prior to the correction, the obligation to use cumulative voting and proportional representation was not applicable to companies that had obtained a preliminary approval from the FRA at the time of the issuance of the Decision(s). The effect of the published correction is that this obligation will now apply to those companies that had obtained a preliminary approval. In addition, following the correction, companies that were already established at the time of the issuance of the Decision(s) now have a year to comply with its rules.

FRA Decision 121/2018 on Licensing Requirements for Microfinance Companies

In its recent Board decision, the FRA issued rules, procedures and requirements that specifically apply to the licensing of microfinance activities. The new rules repeal older rules that were issued by virtue of FRA Decision No. 172 of 2014 (“Decision 172/2014”) on the same subject. Decision 121/2018 refers to Microfinance Law No. 141 of 2014 and its licensing requirements for the undertaking of microfinance activities, which must be fulfilled prior to submitting an application to FRA to obtain a preliminary approval of incorporation or licensing of non-banking financial activity. It also re-iterates the requirement under Decision 53/2018 that licensing of incorporation be in light of market need for new companies. Article (1) of the recent decision states that microfinance companies must fulfil the requirements stated under Article (4) of Decision 53/2018, in addition to a list of requirements that are specific to microfinance activity and which mirror the requirements contained under FRA’s repealed Decision 172/2014. These requirements include: (1) that the company must take the form of a joint stock company; (2) that it must exclusively undertake the activity of micro financing and related services; (3) the majority of its capital must be owned by corporate persons; (4) that its minimum issued share capital is not less than EGP15 million, 50% of which at least must be paid within three years; (5) that the CEO/managing director and risk and finance officers fulfil FRA requirements of experience and reputation; (6) that the company submits an undertaking to comply with FRA activity-specific rules and regulations; (7) that the company has the necessary technical capabilities, information technology, risk management, payment collection, and customer care systems, in accordance with FRA regulations, and (8) that the company has at least one auditor that is listed on the FRA microfinance auditors registry.[8] The only variation from repealed Decision 172/2014 is the removal of a provision which used to allow the issuance of a temporary license against the payment of 25% of the minimum issued capital requirement, given that the full amount must then be paid prior to the issuance of a final license. Instead of that provision, current Decision 121/2018 explicitly prohibits a company from conducting any activity prior to the issuance of the license. It also states that any activity outside the scope of the license is prohibited. License fees remain to be at a rate of 1% of the paid-up capital with a cap of EGP 100, 000. In the event of an increase of issued capital, the rate is calculated on the difference (up to the maximum threshold), or the FRA may undertake one of the punitive measures listed under Microfinance Law 141 of 2014. Furthermore, the Decision also remains to require a fee to be paid to the FRA every quarter inconsideration for the authority’s monitoring and supervision. The fee is equal to 0.5 per 1000 of previous quarter finance operations, (calculated based on an average of financing credit during that period) and payable within six weeks of the end of the quarter. Finally, Decision 121/2018 also reiterates the previous restriction of the ownership by a natural or corporate person, or a group of related parties of 50% or more of the issued capital of a microfinance company except upon FRA’s non-objection.   [1] FRA Board of Directors Decision No. 121/2018 on the conditions, rules, and procedures for licensing companies that undertake microfinance activity, dated 30 July 2018, available through this link (in Arabic). [2] FRA Board of Directors Decision No. 172/2014 on the conditions, rules, and procedures for licensing companies that undertake microfinance activity, Egyptian Gazette, Issue No. 10, 14 January 2015. [3] FRA Board of Directors Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares, Egyptian Gazette, Issue No. 136 (cont.) (a), June 13, 2018. [4] Amended by virtue of FRA Board of Directors Decision No. 93/2018 amending Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares. [5] Amended by virtue of FRA Board of Directors Decision No. 93/2018 amending Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities and the rules for trading their shares. [6] Correction to FRA Board of Directors Decision No. 93/2018 amending Decision No. 53/2018 regulating the issuance of licenses to companies undertaking non-banking financial activities, Egyptian Gazette, Issue No. 166, 24 July 2018. [7] FRA Board of Directors Decision No. 93/2018 particularly amended Article (4) of Decision No. 53/2018 introducing the cumulative voting and proportional representation requirements, and defining what is meant by these two concepts. [8] In accordance to FRA Board of Directors Decision No. 161/2014 on the requirements for listing and continuation of listing of auditors in the auditor registry for microfinance companies, and non-governmental and civil society organizations that are authorized to undertake microfinance activities.