FRA Regulates Microfinance Electron

A cluster of decisions by the board of directors of the Financial Regulatory Authority (“FRA”) were recently published, detailing the prerequisites and regulations for microfinance companies, associations, and NGOs (“microfinance institutions”) to use electronic payment systems (“e-payment systems”) in funding and collection transactions. Four of these decisions were published in the Egyptian Gazette throughout the first week of March 2019, although they have been passed by the FRA Board during last year: Decisions No. 3,[1] 4,[2] 156,[3] and 157[4] of 2018. A fifth decision – No. 8 of 2019[5] – was published on the FRA website but is still to be published in the Egyptian Gazette, after which it comes into effect. The decisions jointly lay out the requirements for obtaining FRA’s approval to use e-payment systems in microfinance transactions in addition to the technical standards to be followed when conducting these financial transactions, regulating in particular the relationship among microfinance institutions, their clients, and the e-payment service providers (“service providers”).

E-Payment Systems for Microfinance Institutions

E-payment systems for microfinance institutions were previously provided for in the original decisions with the rules and regulations for the undertaking of microfinance activities by companies (FRA Board Decision No. 173 of 2014) and associations and NGOs (FRA Board Decision No. 31 of 2015). In both decisions, e-payment systems were one of the methods that the institutions could use when providing funding or collecting dues from microfinance clients, alongside cash, bank transfer, postal order, and mobile payments. FRA Board decisions No. 3 of 2018 and No. 4 of 2018 elaborate on the option of using e-payment systems for microfinance companies and for microfinance associations and NGOs respectively, and both are identical in their regulations and requirements. To begin with, microfinance institutions could use e-payment systems, as provided through e-payment service providers, in providing microfinance funding and/or collecting microfinance dues after first obtaining the FRA’s approval to do so. To obtain this approval, an application must be submitted and a list of prerequisites must be met, which includes, among other things, periodic and punctual regulatory reporting by the institution during the year prior to the application, and submitting to the FRA (for companies) or the supervisory unit (for associations and NGOs)[6] copies of: (a) the contract signed with an e-payment service provider, (b) the Central Bank of Egypt’s approval to the service provider for providing such services (if required),[7] and (c) the outreach guidelines related to the e-payment services to be provided and which clarify the method of using such services and responding to inquiries. Both decisions No. 3 of 2018 and 4 of 2018 also outline the regulations for using e-payment systems in microfinance funding and collection after obtaining FRA’s approval. Microfinance institutions must secure each microfinance client’s approval before using these systems with him/her in addition to informing them of their rights and obligations and the means of filing complaints regarding these systems, and providing a copy of the instructions for using such systems. Microfinance institutions must also securely keep reports on the e-payment transactions rendered up to a year after the transactions’ completion and they must submit the relevant periodic reports on the e-payment services on a quarterly basis.

Standards for Conducting Financial Transactions through E-Payment Systems

FRA Board Decision No. 8 of 2019 sets down the technical standards and regulations that must be followed by microfinance institutions when contracting e-payment companies to provide for e-payment systems for microfinance-related funding and collection. It specifies the different types of contractual agreements that could be entered between the microfinance institutions and the service providers, and these are based on three models: direct technical connections between the institution and the provider; software as a service (through which an e-payment gateway is formed); or the provision of technical support for the connections between the institutions and the providers by a third-party (such as IT or fintech companies). The decision also lists client protection regulations and mechanisms to be followed by both microfinance institutions and the service providers when granting and collecting funds, which include the usage of one-time passwords and one-time authorization codes, the complete disbursement of funds in one transaction rather than in instalments, and the possibility of the client repaying in instalments or in full amount (depending on the agreement between the microfinance institution and the service provider). Finally, Decision No. 8 of 2019 also deals with the protection of client data; financial settlements between the microfinance institutions and the service providers; dispute resolution mechanisms; risk management; the implementation of pilot e-payment systems before its actual launch; and outreach mechanisms to be followed by both the microfinance institutions and the service providers to clarify to the clients the e-payment systems implemented.

Conclusion

In keeping with the government’s efforts to move towards a cashless economy and with the FRA’s recent regulatory endeavours regarding microfinance and microfinance-related activities, the series of FRA decisions recently published attempt to facilitate microfinance transactions by elaborating on one of the methods that could be used in funding and collection while at the same time working towards maintaining client protection and payment security. This could potentially contribute to increased financial inclusion, as the literature on microfinance traces a link between the use of IT and the creation of new business models for financial inclusion. In other words, a calculated and effective overlap between microfinance and digital technology, and which adopts a customer-centric approach, could offer flexibility, mitigate cash risks, streamline operational efficiency, and establish partnerships with telecommunications and fintech companies that bring about a wider range of financial service providers, both banks and non-banks, in the economy.[8]   [1] FRA Board of Directors Decision No. 3/2018 amending certain provisions of Decision No. 173/2014 on the rules and regulations for companies to undertake microfinance, Egyptian Gazette, Issue No. 50, 2 March 2019. [2] FRA Board of Directors Decision No. 4/2018 amending certain provisions of Decision No. 31/2015 on the regulations and standards for associations and NGOs to undertake microfinance, Egyptian Gazette, Issue No. 53, 5 March 2019. [3] FRA Board of Directors Decision No. 156/2018 amending certain provisions of Decision No. 3/2018 on the e-payment systems in funding and collection for microfinance companies, Egyptian Gazette, Issue No. 54, 6 March 2019. [4] FRA Board of Directors Decision No. 157/2018 certain provisions of Decision No. 4/2018 on the e-payment systems in funding and collection for microfinance associations and NGOs, Egyptian Gazette, Issue No. 52, 4 March 2019. [5] FRA Board of Directors Decision No. 8/2019 on the technical standards related to the regulations of implementing financial transactions in microfinance through e-payment companies, available through this link (in Arabic). [6] By virtue of the Microfinance Law No. 141/2014, the supervisory unit is a unit at the FRA which regulates microfinance activities for associations and NGOs. [7] FRA Board Decision No. 156/2018 amends Decision No. 3/2018 by clarifying that the Central Bank of Egypt’s (“CBE”) approval must be submitted as part of the application only if an approval is required by the CBE. Similarly, FRA Board Decision No. 157/2018 amends Decision No. 4/2018 by clarifying the conditionality of obtaining CBE’s approval. [8] The World Bank, “Transforming Microfinance Through Digital Technology in Malaysia”, Djauhari Sitorus, 8 March 2017, available through this link; CGAP, “6 Ways Microfinance Institutions Can Adapt to the Digital Age”, Greta Bull, 9 April 2018, available through this link.