CBE Instructions to Banks on Exposu

On 13 October 2019, the Central Bank of Egypt (“CBE”) issued new instructions to banks in its Board of Directors meeting that took place on 9 October 2019.[1] The instructions relate to the financing of single obligors and their related parties. The importance of the CBE decision lies in the fact that the Egyptian Banking Law mandates the CBE with imposing limits on the exposure of banks with respect to a single client and their related parties in order to reduce the risk of concentration lending in a small number of large bank clients. This capacity is one of the significant tools that bank-monitoring authorities employ to ensure the soundness of the banking sector in countries around the world. By way of background, the Banking Supervision Department of CBE had initially issued – on 23 September 1996[2] – instructions prohibiting banks from lending more than 30% of their capital base to a single client. The same instructions also defined the meaning of ‘capital base’ (to which the financing is prorated) as well as that of ‘single client’. The 1996 instructions were amended twice: the first time by CBE Board of Directors decision dated 7 February 2006[3] which reduced the lending limit to 20% of the bank’s capital base with respect to a single borrower and to 25% with respect to a single borrower and its related parties. The decision also defined the meaning of related parties. The second amendment was introduced in January 2016[4] whereby the limit was further reduced to 15% for single obligors and to 20% for single obligors and their related parties. Finally, the same rules were recently amended by virtue of the new decision issued on 13 October 2019, which did not alter the lending limits but rather introduced two new caveats:

• The first is to exempt insurance companies owned by banks or related thereto from the definition of related companies when considering the lending limit to a single obligor and its related parties.

• The second is to expand the meaning of “employing funds” – i.e. the funding extended by the bank and used in calculating the single obligor ratio – to include the following:

1. All capital commitments between the bank and its client.
2. 50% of the irrevocable and unutilized loans and facilities, if their maturities are longer than a year.
3. 20% of the irrevocable and unutilized loans and facilities, if their maturities are for a year or less.

Finally, the new decision allowed banks six months to apply its rules, i.e.  by April 2020.   [1] CBE Circular dated 13 October 2019 amending the instructions related to the financing of single obligors and their related parties, available through this link (in Arabic). [2] CBE Circular dated 23 September 1996 on the application of Article 37 (bis A) of the Banks and Credit Law No. 163/1957 and its amendments ending with Law No. 97/1996. [3] CBE Board of Directors Decision dated 7 February 2006 on the limits on the exposure of banks with respect to a single client and their related parties. [4] CBE Circular dated 11 January 2016 amending CBE Board of Directors Decision on the limits on the exposure of banks with respect to a single client and their related parties.