A New Law Regulating Financial Leas

A new law No. 176 of 2018 (the “Law”)[1] regulating two main activities of the non-banking financial activities, namely financial leasing and factoring, was issued mid-this month. Financial Leasing is an activity that allows companies and individuals to lease productive assets while retaining the right to purchase them at the end of the lease term. This is an important means of financing the purchase of properties, vehicles, equipment and other assets – as long as they are for productive purposes – or acquiring the right for their use for a certain period. Factoring, on the other hand, is buying current and future financial rights thus providing current financing to traders, manufacturers and service providers in return for a transfer of debts or receivables that are often due in the future, enabling these traders, manufacturers and service providers to recapitalise. It should be noted that these two activities are not newly introduced in the Egyptian law. Rather, the new Law replaces a previous one on financial leasing which was issued 23 years ago and has been amended several times (Law No. 95 of 1995). Factoring was not governed by an independent law but by virtue of a prime ministerial decree (Decree No. 1446 of 2003) and various resolutions issued for its implementation. Given the importance of the subjects regulated by the new Law, it was not appropriate to regulate them in a single legislative text, though this is a formality and does not affect the substance of the legislation. The following is a review of the main provisions of the new Law:

Financial Leasing Activity

• Scope of the Law

As previously mentioned, financial leasing is an activity that allows a company or an individual (lessee) to lease productive assets from a leasing company or another entity licensed to engage in such activity (the lessor) for periodic instalments to be paid over a specific period of time and with the lessor retaining the ownership of those assets. The lease agreement, however, must include the lessee’s right to purchase the asset during or at the end of the contract for a predetermined price. According to the Law leasing activities do not include the following:

1. Operating lease, i.e. a contract that allows for the use of an asset but does not convey rights of ownership of the asset at a predetermined date and price.

2. Lease of non-productive assets.

3. Lease of exploration rights of natural resources.

• Entities Licensed to Undertake Financial Leasing Activities

Financial leasing can only be conducted by companies that have been authorised by the Financial Regulatory Authority ("FRA"), as well as NGOs engaged in the microfinance activity after they obtain FRA’s approval. It is worth mentioning that the previous law issued in 1995 allowed banks to engage in financial leasing activities, a provision that is not included in the new Law and therefore is no longer valid. The new Law also provides the conditions that must be met by companies that wish to undertake financial leasing activities, the most important of which are:

1. The company must be a joint stock company.

2. The minimum of its paid-up capital is EGP 10 million.

3. It shall be limited to engaging in financial leasing activities unless it is authorised by FRA to undertake other non-banking financial activities.

4. The board of directors, the CEO/managing director and executive managers must fulfil certain requirements of experience and competence.

The Law also added that FRA has the right to issue additional requirements in the future. In addition, the approval of establishment of new companies that practice such activity will be conditional on market need; a condition that in our view is unnecessary and restricts competition. The Law also stipulated that the companies must comply with the financial leasing activity requirements issued by FRA which include governance rules, organizational structure, mechanisms for guaranteeing the rights of creditors and customers, internal control, financial adequacy, technological requirements, opening of new branches, anti-money laundering rules, and confidentiality of bank accounts.

• Finance Leasing Contract

The finance leasing contract is of great importance and therefore the Law sets out its basic structure. FRA has the authority to issue the contracts forms that financial leasing companies are obliged to use and adhere to. Companies are also required to register each financing contract list entered into with their customers. The Law specified the main elements that must be met in a finance leasing contract. The most important of which is stating the parties of the contract, the description of the asset, its value, the purpose of the lease, the rental premium and the right of the lessee to purchase the asset. Companies are required to register all lease agreements in a special register at FRA for a fee that does not exceed EGP five hundred pounds per contract. Stakeholders can have extracts of those registers. In our opinion, this is the main weakness of the Law. Obligating the companies to register their contracts is unjustified, increases the cost of financing procedures and gives FRA the power to intervene in the activity and not to just supervise it.

• Other Important Provisions of the Law

In addition to the above, the Law provides for other important provisions that help to regulate the financial leasing activity in a much better way than before. These include:

1. Allowing financial leasing companies to be added to the importers' register without having to comply with the company's shareholders nationality requirement in order to import the assets that they rent.

2. Introducing legal regulations for the transfer of agreements and their termination.

3. Organising the right of the lessor to inspect the asset to be leased.

4. Non-compliance with the limits imposed on interest rates included in the Egyptian Civil Law.

5. Allowing a usufruct right be treated as a finance lease.

6. Subjecting disputes resulting from financial leasing to the jurisdiction of economic courts.

7. Existing companies must comply with the new Law within six months from the date of its coming into force, i.e. before February 15, 2019. FRA may extend the compliance period by an additional year.

Factoring Activity

As for the factoring activity, the Law introduced additional provisions, the most important of which are the following:

1. Distinguishing between local factoring whose parties are Egyptian and international factoring where one of the parties is a foreigner or resides abroad.

2. The factoring company may provide insurance and collection services.

3. The financial right to be factored must be linked to a business and not to monetary financing.

4. Including notification rules of the transfer of the financial right in question.

5. Setting out the information that needs to be included in a factoring contract.

6. Rules pertaining to claims by the factoring company on the seller.

Conclusion

There is no doubt that the issuance of a new comprehensive law for financial leasing is an important and positive step to regulate this activity, one that has witnessed an increase in demand in the past years as it has become one of the financing alternatives recognized in the Egyptian market, especially for small and medium enterprises. The Law also provides an adequate coverage for various aspects and issues that were not clearly regulated before. However, it is unclear why financial leasing and factoring were regulated by a single law, despite the difference between their subject matters. The Law also obliged financial leasing companies to list all their agreements in a register kept by FRA which is a restriction and an intervention that would have been better dispensed with, like other financial and banking transactions whose activities are subject to supervision without having to be kept in a register.   [1] Law No. 176/2018 regulating financial leasing and factoring activities, Official Gazette, Issue No. No. 32 (bis) (c), 14 August 2018.