FRA Regulations for Licensing Finan

Following the Financial Leasing and Factoring Law No. 176 of 2018,[1] which was issued last August, the board of directors of the Financial Regulatory Authority (“FRA”) issued the rules for offering licenses for the practice of these activities in its meeting on September 13. The rules include the requirements for obtaining the initial approval for establishing the related companies. The decision specifies that financial leasing and factoring should be undertaken through an Egyptian joint stock company that works in either of the two activities, but which could also combine working in multiple financial activities such as financial leasing, factoring, and real estate financing upon obtaining the necessary permits. Companies wishing to engage in financial leasing and factoring must either establish a new company for these activities or undertake the necessary amendments in accordance with the new regulations if they are already operating within six months from the date of the Law on Financial Leasing and Factoring coming into effect, i.e. prior to 15 February 2019.

 Background

Financial leasing allows companies and individuals to lease productive assets while retaining the right to buy them at the end of the lease term as long as the lease was for productive, rather than consumptive purposes. Factoring, on the other hand, is the purchasing of financial rights, both current and future. It allows for providing current funds to traders, manufacturers, and other service providers in exchange for waiving future debts or receivables, thus enabling traders, manufacturers, and service providers to refinance their activities. Egyptian law has previously dealt with both activities, as Law No. 176 of 2018 replaced the previous Law on Financial Leasing No. 95 of 1995 while Prime Ministerial Decree No. 1446 of 2003 regulated factoring. The FRA pays particular attention to both activities due to their significant growth rates in the past years. Factoring investments have increased from EGP 3 billion to EGP 9 billion over the past three years while registered companies engaging in financial leasing have increased to 226 companies that jointly invested EGP 28 billion in 2017 alone.[2]

FRA Decision No. 137 of 2018 on the Rules for Licensing Financial Leasing and Factoring Companies[3]

• Conditions on the Shape and Form of Financial Leasing and Factoring Companies

The FRA gives initial approval for the establishing of non-banking financial companies according to certain conditions, as stipulated in FRA Decision No. 53 of 2018 which regulates the licensing of non-banking financial activities in general. The new FRA Decision No. 137 of 2018 (“Decision 137/2018”) elaborates on such conditions as specifically related to the two activities of financial leasing and factoring. At least 50% of the capital of financial leasing and factoring companies at establishment must be owned by legal persons/corporations, and at least a quarter of that must be owned by financial institutions.[4] If the share of any single founder or shareholder exceeds 10% of capital, then he or she must not have been sentenced in a felony or have a penalty restricting his/her freedom due to an offense against honour, and he/she must not have been declared bankrupt in the five years preceding the licensing application. In addition, there must not have been any precautionary measures or administrative sanctions against any founder or shareholder, irrespective of their share in capital, during the three years preceding the licensing application. Decision 137/2018 also specifies that the board of directors must include at least two independent members, who are defined by the decision as non-executive members who are not shareholders and who do not have any familial, contractual, or work-related relations with any of the members of the board of directors or with the managing director. It also places specific criteria for top rank positions, including that the managing director (or the executive manager) must have at least 10 years of experience in the legal, banking, or non-banking financial sectors, with the appropriate educational qualifications. As for department managers, they must have at least seven years of experience in their respective areas of expertise and they must pass a personal interview, although the decision did not specify the form or procedures of the interview. The decision also emphasizes the necessity of maintaining a workplace with an accompanying technological infrastructure that is suitable for the activities of financial leasing and/or factoring.

• Obtaining an Initial Approval for Establishing the Company

The company’s representative must present a completed application form requesting the establishment of the company; the documents regarding the power of attorney from the founders to their representative(s); the draft contract of the company, its statute, name, and legal form; and a feasibility study and a preliminary work plan to clarify the company’s strategy and its contribution to the Egyptian market before being issued an initial approval for establishment. Other documents to be presented include a declaration regarding the establishment of the company in accordance with Law No. 176 of 2018; a statement of the authorized capital, its sources, and what has been spent from it; declarations stating the absence of any precautionary measures against the founders; a list of the names, nationalities, and shares of each founder; and proof of paying the application fees.[5] In addition, Decision 137/2018 sets rules regarding microfinance companies, associations, and NGOs that wish to add financial leasing to their activities. The portfolio of these companies must be at least EGP 5 million, and their record must be free from FRA violations or precautionary measures for at least three years prior to submitting a request for adding these new financial activities.

• Obtaining a License for the Activity

Upon receiving FRA’s approval for initial establishment, the company must apply for a license by filling out a license application form and attaching a number of documents including the company’s articles of association, its commercial register, and proof of ownership of the headquarters. Proof and an attestation that none of the shareholders have any precautionary measures or bankruptcy-declaration court orders against them must also be submitted in addition to a list of the shareholders who own more than 10% of the company and those who own more than 10% of the shares of any other financial institution. The board of directors, the chairman, and the managing director must also attest to dedicating their full time to working in the company and must submit statements of compliance with the rules and regulations for the activity in question, and of completing the organizational structure and internal work policies of the company within six months at most from the date of the issuance of the license. Departmental directors (especially for the finance, credit, risk, and financial auditing departments) and branch managers must submit similar statements of their availability to work on a full-time basis in the company. Finally, the receipt of paying the licensing fees­­ – which amount to EGP 100,000 to be paid through any of the FRA’s bank accounts – must be included in the license application documents.

• Licenses for Multiple Financial Activities

Companies that are licensed to practice a particular financial activity are prohibited from engaging in other non-banking financial activities. If a company wishes to practice more than one financial activity, it must obtain an FRA license to combine such activities as it specifies in its application. The FRA board of directors elaborated on the conditions to obtain such a license. These include that each financial activity—whether financial leasing, factoring, or real estate financing—must have an independent management to oversee its activities and that the capital of the company must be above the minimum amount required for practicing the intended financial activities combined. In addition, an extra EGP 10,000 are added to the licensing fees of each activity. To obtain the license, the necessary information and documents required for obtaining a license for each of the individual financial activities must be submitted in addition to a feasibility study and a work plan for the company. The FRA decides on all applications within 30 days from the company’s fulfilment of the necessary requirements and submission of documents.

FRA Decision No. 138 of 2018 on Financial Statement Rules for Financial Leasing and Factoring Companies[6]

During the same meeting of the FRA board of directors, another decision was issued. Decision No. 138 of 2018 stipulates the regulations for licensed financial leasing and/or factoring companies on how to prepare financial statements and disclosures. The companies must follow the Egyptian Auditing Standards when preparing their financial statements and must also prepare separate financial statements for each of their licensed activities. In addition, Decision 138/2018 sets the costs to be deducted from net incomes. The company must submit a copy of the annual financial statements within six months from the end of the fiscal year and a copy of the quarterly financial statements within 45 days from the end of the financial period.   [1] This Law has been covered in the Egypt Legal Update Issue of August 2018, Week 4. [2] The Financial Regulatory Authority Annual Report, 2017, available through this link (in Arabic). [3] FRA Board of Directors Decision No. 137/2018 on the rules for licensing financial leasing and factoring companies, Egyptian Gazette, Issue No. 213 (cont.), 27 September 2018. [4] According to Law No. 176 of 2018 regulating financial leasing and factoring activities, the minimum capital is EGP 10 million. [5] Decision 137/2018 specifies the fees at EGP 10,000. [6] FRA Board of Directors Decision No. 138/2018 on the rules of preparing and presenting financial statements by financial leasing and factoring companies, Egyptian Gazette, Issue No. 213 (cont.), 23 September 2018.