FRA’s Regulations on Nano-Financing

A recent decision by the Financial Regulatory Authority (“FRA”) introduced a new product in the microfinancing sector in Egypt. In specific, FRA Board of Directors Decision No. 142 of 2019 (the “Decision”),[1] which was published in the Egyptian Gazette on 21 November 2019, sets forth the regulations for microfinance companies to undertake “nano-financing”. The Decision stipulates the main features of nano-financing as a form of microfinancing offered to individuals in addition to defining the monetary limit that must not be exceeded for the value of nano-financing products, the repayment period, the prerequisites for obtaining FRA’s approval for the undertaking of this activity, and the provision of these products through financial technology (“fintech”). The regulations went into effect on 22 November 2019.

Background

Despite its practice as a financially inclusive activity, microfinancing retains several disadvantaging inflexibilities to its target clients, the most widely reported of which include high interest rates and transaction costs, and could thus be ill-suited to the most marginalized of the clients. A possible way to work through this has been via nano-financing, which could be defined as a type, or sub-set, of microfinancing products that offers individuals small, ‘low value’ (i.e., nano) loans. In many ways, nano-financing differs from ‘traditional’ microfinancing in the sense that the latter is often group-based and features graduated financing as a substitute for collateral (in order to mitigate default and delinquency risks). Nano-financing, on the other hand, is modelled on financing natural persons without any asset or property pledged as collateral. In addition, nano-financing employs digital financial services and fintech innovations, especially apps for mobile devices, for managing the financing process in a simple, fast, and user-friendly manner.[2] Accordingly, nano-financing not only addresses some of the shortcomings of microfinancing but it also helps reduce the incidence of individuals resorting to the illegal business of loan sharking, which has ever-changing terms and conditions, to meet their urgent cash flow requirements. Instead, nano-financing operates in a regulated industry with transparent terms and conditions for the loans. It has been undertaken in a variety of developing countries, including Thailand, Indonesia, Cambodia, India, Tanzania, and the Philippines and more and more fintech companies worldwide are offering nano-finance loans. In Egypt, in particular, the Central Bank of Egypt (“CBE”) has been considering the introduction of nano-credit, or mobile-based cash loans, since last year as part of the regulator’s mobile banking strategy.[3] To this end, a report prepared by CBE and published by the Alliance for Financial Inclusion on this subject characterized nano-financing as “allow[ing] mobile money customers to request instant, low-value emergency loans. The loan amount is set using a credit-scoring algorithm based on historical data from [mobile network operators] on the customer’s airtime”.[4]

The New Decision

The new FRA Decision largely adopts the main aspects of nano-financing as explained above, listing the regulations pertaining to the provision of nano-financing products through companies licensed to undertake microfinancing activities (i.e., “microfinance companies”) in Egypt, including the definition of said products and the prerequisites for obtaining FRA’s approval to offer them. It is worth noting that no mention is made in this Decision regarding the provision of these products through microfinance associations or NGOs.

• Definition

The Decision describes nano-financing as “a microfinancing product offered to individuals at no more than EGP 30,000 per person, to be repaid within 90 days. Its due payments may not to be carried forward and it is not to take the form of collective borrowing”. The Decision also adds that during the validity period of the nano-finance product, nano-financing clients may not borrow more than one loan (per client) from any source (including any microfinance institution) for the purpose of financing an economic activity.

• Requirements for FRA’s Approval to Offer Nano-Financing

Microfinance companies wishing to obtain FRA’s approval for offering nano-financing must fulfil certain requirements, including having a system for risk management related to the electronic application through which the financing is to be offered and managed; using simple awareness-raising methods on nano-financing with the clients; submitting a declaration of their commitment to obtain an insurance policy (covering at least 25% of the value of the nano-financing portfolio at the end of each month) against non-payment risks or life; and submitting another declaration of the usage of appropriate methods for monitoring the debts of the clients. In cases of nano-financing for values above EGP 500, the companies must inquire about the clients in question and their guarantors (if any) from any of the CBE-licensed credit scoring companies before granting the financing; if such an inquiry cannot be done before the granting of the financing for reasons beyond the control of the company, then the company must conduct the inquiry within two business days from the day of granting the financing and it must not renew the financing if it concluded that there are issues with the client’s credit standing with relation to the regulations of granting nano-financing. Finally, companies must update the client information and credit standing at the credit scoring company, every two weeks maximum.

• Applications for Nano-Financing: Procedures and Regulations

The client must complete the form for requesting nano-financing via electronic applications (“apps”) on digital multimedia platforms set up to exchange data and information and/or to operate and manage the financing portfolio. Microfinance companies must take all necessary measures for data protection in the apps used and they must obtain the competent authority’s approval for operating the apps. In addition, the nano-financing request form must include the rights and obligations of the clients in a clear, simplified manner and the company must keep record – either via the app or in print – of the clients’ agreement to the terms and conditions of said nano-financing.

• Collections of Nano-Finance Dues

Microfinance companies offering nano-financing could contract field collections agents to collect clients’ instalments. In such cases, the companies must guarantee the compliance of said agents with FRA’s principles on client protection as related to the process of collections. Additionally, companies must set aside provisions for doubtful loans and the total outstanding balance of the nano-financing portfolio. These percentages are linked to the period of late repayments and are thus listed in the Decision. However, in cases of death or total permanent disability, the percentage allocated is the full amount of the due/balance after deducting the insurance to be paid to the company. Additionally, the company may deduct the value of the insurance policy against the risk of default(non-payment) when calculating the percentage to be allocated for the total outstanding balance of clients who are regular in their repayments (i.e., those who pay on the scheduled deadlines or with a delay of no more than7 days).

• Reporting Requirements

Microfinance companies providing nano-financing products must submit biweekly reports regarding their nano-finance portfolios to FRA.

• Miscellaneous

Unless otherwise specified, the general regulations on the undertaking of microfinancing by companies, as per FRA Board of Directors Decision No. 173 of 2014, shall apply to the undertaking of nano-financing by microfinance companies.

Conclusion

The introduction and regulation of nano-financing in Egypt coincides with the tenth anniversary of FRA’s establishment, as per an FRA statement on the topic that was published on the regulator’s website. Besides reporting on the Decision, the regulator’s statement highlights two main features of nano-financing. The first is the direct link between nano-financing and fintech as regulated by FRA: “Nano finance is an innovative financing product that [is] based on the availability of mobile finance and using FinTech Applications . . . . the product is based on using financial services technology with the ability to create a digital credit structure consisting of 3 pillars (Mobile Application, Machine Learning, and Smartphone).” Secondly, the statement associates nano-financing to financial inclusion that targets marginalized groups in a streamlined and simplified manner, particularly “small farmers . . . self-employed persons, home-based businesses, day-to-day vendors . . . street vendors . . . . [and] young people [with] . . . entrepreneurial thinking”.[5] In this manner, the Decision generally tries to follow the basic contours of what has been practiced or legislated elsewhere in the field of nano-financing. However, it still remains to be seen how this will play out in practical terms, particularly since nano-loans reportedly have a high risk of default.[6]   [1] FRA Board of Directors Decision No. 142/2019 on the regulations for nano-financing, Egyptian Gazette, Issue No. 261, 21 November 2019. [2] Musari, K., and Simanjuntak, R. (2016). Nanofinance, Redefinition of Microfinance for the Very Micro Society Through Philanthropy Linkage Program (Case Study in Indonesia, Cambodia, Thailand, India). Asian Academic Research Journal of Social Sciences & Humanities, 3(4), 455-463. Deloitte. (January 2019). Legal News: Thailand. Available through this link. Erdman, J. (2018). Are You a Fan of Microfinance? Meet Nanofinance. Available through this link. The European. (October 2018). Nano-Financing: Fintech for Emerging Markets. Available through this link. Fernquest, J. (October 2016). Nanofinance to Fight Loan Sharks. Available through this link. [3] Enterprise. (September 2018). CBE Looks to Introduce Nano Credit. Available through this link. [4] The Central Bank of Egypt and the Alliance for Financial Inclusion. (2018). Financial Inclusion through Digital Financial Services and Fintech: The Case of Egypt. Available through this link. [5] Financial Regulatory Authority. (November 2019). FRA Approves the introduction of an Innovative Financing Product to Microfinance Sector. Available through this link. [6] The European. (October 2018). Nano-Financing: Fintech for Emerging Markets. Available through this link.