CBE Circular with Further Regulatio

On 13 October 2019, the Central Bank of Egypt (“CBE”) issued a circular with further regulations for banks to follow when offering credit facilities to microfinance companies and associations (the “Circular”),[1] as part of the mandatory allocation of 20% of banks’ lending portfolios to small and medium enterprises (“SMEs”) and to microfinancing, a quota that was set in 2016 for a four-year period.

Background

The past half a decade witnessed increased efforts to create a legislative and supervisory framework that promotes the microfinance industry and provides SMEs with sources of funding and proper protections. First among these was the first Microfinance Law, which was passed in November 2014 and brought the industry under the supervision of the Financial Regulatory Authority (“FRA”).[2] This was followed by three FRA decisions in 2015 on the licensing requirements and costs as well as financial statement preparation.[3] Then, in November 2016, an FRA decision included a consumer protection guide that attempted to fill in standard gaps and provide a more comprehensive code.[4] With regards to CBE and microfinance in particular, CBE issued a circular in January 2016 to require banks to direct 20% of their lending portfolios to SMEs within the following four years (i.e., until 2020) in order to facilitate their access to funding.[5] Another CBE circular followed in February 2017, which amended the definitions of micro, small, and medium enterprises, with the aim of easing funding conditions and the maximum amounts that can be granted to a single client by a single bank.[6] Then, in May 2017, CBE issued yet another circular to extend the 20% level specified by CBE earlier to also include microfinancing (given either directly to individuals and enterprises or through intermediary NGOs, associations, and microfinance companies) as a way of facilitating the access of micro-enterprises to funding; the May 2017 circular also included guiding standards for banks to apply when conducting credit studies in providing microfinance to the aforementioned entities that have received licenses from FRA to undertake microfinancing.[7]

The New Circular

The new Circular issued in October 2019 builds on the previous circulars by specifying a set of regulations that banks must follow when offering credit facilities to companies, NGOs, and associations that are licensed to undertake microfinance as part of the 20% quota on the lending portfolios of banks that are to be allocated to SMEs and microfinancing. These include monthly declarations to the I-Score Credit Information Company of the credit limits given to said companies and associations for microfinancing; obtaining from said companies and associations an undertaking to inquire about their clients through the I-Score Company prior to financing to ensure that a single client does not have more than three loans from three entities; and obtaining from FRA a letter regarding the sound performance of said companies and associations, their compliance with FRA’s regulations on microfinancing, and their declaring to the I-Score Company of their clients and their credit behaviour. Credit portfolios bought from microfinance companies and associations are not to be included in the mandatory 20% quota. In addition, the financial leverage of these companies and associations must not exceed 10 times. Finally, in case of proven violations by these companies and associations of the Microfinance Law or microfinancing regulations, banks must not increase the funding granted to these entities or grant them new funding until the violations are addressed within the time limit set by FRA.   [1] CBE Circular dated 13 October 2019 on the regulations for microfinance, available through this link (in Arabic). [2] Law No. 141/2014 on Microfinance, Official Gazette, Issue No. 46 (cont.), 13 November 2013. [3] FRA Board of Directors Decision No. 172/2014 on the licensing requirements of microfinance companies, Egyptian Gazette, Issue No. 10, 10 January 2015. FRA Board Decision No. 1/2014 on the conditions, rules and procedures for the compliance of associations and NGOs that undertake microfinancing before the application of Law No. 141 of 2014, Egyptian Gazette, Issue No. 20, 27 January 2015. FRA Board of Trustees Decision No. 1/2015 on the licensing requirements for associations and NGOs to undertake microfinancing in accordance with Law No. 141/2014, Egyptian Gazette, Issue No. 137, 15 June 2015. [4] FRA Board Decision No. 123/2016 issuing the Guide on Protecting the Customers of Microfinance Companies, Egyptian Gazette, Issue No. 252 (cont.) (a), 9 November 2016. [5] CBE Circular dated 11 January 2016 encouraging banks to grant loans and credit facilities to Small and Medium-Sized Enterprises. [6] CBE Circular dated 5 March 2017 amending its Circular dated 7 December 2015 on the SMEs Definition. [7] CBE Circular dated 23 May 2017 on the Microfinance Initiative.