Regulations for Microfinance Instit

Earlier this month, the board of the Financial Regulatory Authority (“FRA”) published its decision No. 87 of 2019 (the “Decision”)[1] on its website with the regulations for companies, NGOs, and associations licensed to undertake microfinance activities (collectively “microfinance institutions”) to become P(“PSPs”) to banks as part of the latter’s provision of prepaid card services. The Decision specifies five kinds of transactions that microfinance institutions qua PSPs can undertake and the procedures and fees for obtaining FRA’s approval for undertaking prepaid card PSP services in addition to the requirements thereafter. The Decision is yet to be published in the Egyptian Gazette; however, it went into effect a day after its issuance (i.e., on 17 July 2019).

Background

As part of the move towards a financially inclusive and cashless society, the Central Bank of Egypt (“CBE”) recently published on its website its regulations on the usage of prepaid cards in Egypt (“CBE Regulations”).[2] The 31-page document delves into the system related to this payment method within the banking sector. Among other things, it provides a comparison among the different kinds of prepaid cards (open loop cards, semi-open loop cards, semi-closed loop cards, and closed loop cards) in addition to specifying risk management procedures related to the usage of prepaid cards (including the roles of bank boards and higher management in strategy preparation and risk management policy planning), the rules for anti-money laundering and combating terrorist financing, consumer security procedures, different rules regarding payments through prepaid cards (including the issuance of these cards by licensed banks, the management of prepaid card accounts, confidentiality rules, and working with a service provider), and licensing procedures for banks to provide prepaid card payment services. With regards to the provision of the prepaid card services itself, the CBE Regulations allow for outsourcing to external parties. The Regulations define a “service provider” as any entity that a bank enters into contract with, upon CBE’s approval, to provide part or all of the services related to prepaid cards. Certain conditions must be met by the service providers, including that they deposit local currency or provide appropriate guarantees to the bank and that they possess a good reputation and a good financial position, among other requirements. Service providers for prepaid cards include cell phone companies licensed to work in Egypt; registered postal offices; government or public entities; FRA-licensed microfinance institutions; and other service providers. With regards to microfinance institutions in particular, the CBE Regulations require them to hold valid commercial registers and tax cards (for microfinance companies) or bylaws approved by the Ministry of Social Solidarity (for microfinance NGOs and associations) and FRA’s approval for the undertaking of PSP activities in addition to the limiting of the provision of such services to the PSP’s microfinance consumers. In all cases, the CBE Regulations maintain that banks, not third parties, remain wholly responsible towards prepaid card users, that contracted PSPs cannot further outsource their assignments to others, and that detailed regulations would be issued for the outsourcing processes. Finally, the CBE retained the right to suspend or cancel the licensing given to PSPs found non-compliant with CBE’s regulations.

The New FRA Decision: Microfinance Institutions as Prepaid Card PSPs to Banks

The new FRA Decision details the system for microfinance institutions to undertake prepaid card PSP services, reiterating the transactions that they could provide on behalf of the banks while stipulating new provisions related to the obtaining of approvals and regulations to abide by thereafter.

1. Services that Microfinance Institutions Could Provide as PSPs

The Decision mainly reiterates what has been provided for in the CBE Regulations on this matter. Thus, generally, banks can contract microfinance institutions as prepaid card PSPs to undertake one or more of the following five procedures (with their microfinance consumers):

• Identification: providing consumer identity verification services;
• Application: receiving and registering prepaid card issuance request forms and other related requests;
• Awareness-raising: raising awareness and providing guidelines on the usage of prepaid cards;
• Collection: receiving money in local currency from card users, within the limits set for the microfinance institution acting as PSP; and
• Distribution: offering local-currency credit to card users that is deducted from the card’s balance.

2. Approvals for Microfinance Institutions to Undertake Prepaid Card PSP Services

To obtain FRA’s approval (or the approval of the Supervisory Unit on Microfinance NGOs and Associations (the “Unit”)) for undertaking PSP services, an application form must be submitted, along with a specified fee of EGP 5,000 for microfinance companies or EGP 3,000 for microfinance NGOs and associations. Certain prerequisites must be met, including the timely submission of periodic and annual financial statements; the regular submission of periodic supervisory reports; and compliance with regulatory observations resulting from field or office inspections. FRA or Unit is to decide on applications within five working days.

3. Post-Approval Regulations for Microfinance Institutions Qua PSPs

Microfinance institutions must submit a copy of the contract signed with the banks to FRA or the Unit. In addition, these institutions must submit all requested information or special reports concerning the PSP services rendered to FRA or the Unit. Relevant data and reports must be maintained for at least a year after the end of transactions or until the issuance of a final judgment in case of judicial proceedings related to these documents. Finally, any amendments to the contracts with the banks must be reported to FRA or the Unit within 15 days from the date of the amendment.   [1] FRA Board of Directors Decision No. 87/2019 with the rules and regulations for microfinance companies, NGOs, and associations to provide prepaid card payment services, available through this link (in Arabic). [2] Central Bank of Egypt, “The rules regulating payment services through prepaid cards in the Arab Republic of Egypt”, available through this link (in Arabic).