CBE Issues Circular for Regulation

On 6 September 2018, the Central Bank of Egypt (“CBE”) issued a new circular with regulations for banks on offering finance to companies operating in the field of instalment sales.[1] The circular mandates banks to abide by the following rules when offering finance to these companies:

1. That the bank only offers finance in Egyptian currency;

2. That the company’s financing is compatible with its cash flows;

3. That banks ensure that companies and retailers do not offer financing for the purchase of goods and vehicles where the monthly repayment instalment exceeds 35% of the client’s monthly income (which is the same rate which banks have to comply to when offering financing to bank clients), given that the amount may not exceed 40% of the client’s monthly income in the case of real estate financing;

4. That the company submits an annual auditor report which shows a clear and effective internal policy for monitoring client income to financing ratio, as well as a quarterly report showing compliance with that ratio;

5. That contracts between banks and instalment sale companies mandate that the company conducts credit score checks at i-score;

6. That the bank submits quarterly data on total facilities granted to instalment sale activities.

Conclusion

In its introduction, the circular states that it was issued to regulate bank financing of companies that operate in the field of instalment sales because it is an unregulated activity, and so represents a financial risk, especially if the default rate increases. Regulating this activity, termed “consumer finance” in some jurisdictions, is no doubt a necessary step, given that it is a form of financing that is well known and widely used in the Egyptian market. Albeit that it is not subject to any regulation or standards, and thus could constitute a risk, not just to the market and financial institutions, but to consumers and the national economy at large. Nevertheless, the recently issued circular does not constitute sufficient regulation to this activity from all its angles. Rather, a separate law would be a better legislative tool to govern this activity and subject it to the supervision of the Financial Regulatory Authority as the competent entity for overseeing all non-bank financial activity – a step the FRA has indeed announced. As to its content, it is worth noting that the CBE circular obligates bank to ensure that consumer finance companies to which the bank offers financing complies with the 35% ratio from client monthly income (40% for real estate financing). This would be an extremely difficult endeavour in practical application which might stall the implementation of the circular, or hinder the consumer finance market as a whole.   [1] CBE Circular dated 6 September 2018 with regulations for banks on offering finance to companies operating in the field of instalment sales, available through this link (in Arabic).