New Rules on Micro-Financing Activities by Civil Associations and Foundations
Mid-November 2014 saw the enactment of the long-awaited Micro-Finance Law,[1] Egypt’s first comprehensive regulatory framework for this crucial activity. The Law distinguished between two main types of financiers, namely micro-finance companies and micro-finance entities that are established under the Civil Associations and Foundations Law (Law 84/2002, commonly referred to as the “NGO Law”). These NGOs are currently responsible for a significant part of the micro-finance portfolio in the country.
Created under the NGO Law, these entities are generally regulated by the Ministry of Social Solidarity, rather than the Egyptian Financial Supervisory Authority “
EFSA”, the authority responsible for supervising and regulating non-banking financial markets and instruments in general. This creates an anomaly, since the Micro-finance Law entrusted EFSA with being the sole entity responsible for licensing, supervising and regulating micro-finance activity. To overcome this, the Law tasked EFSA with creating a special regulatory unit (the “
Unit”) to supervise micro-finance related activities of NGOs. The Micro-finance Law mandated this regulatory Unit to license and set the licensing requirements for NGOs seeking to perform micro-finance activities and to follow up on their performance.
In this context, and in a further step to carry out the Micro-Finance Law, EFSA recently issued a decision stipulating the rules and standards (the
“Rules”) that NGOs engaging in micro-finance activities must abide by.
[2] This decision was mentioned explicitly as one of the actions that the Unit was mandated with under Article 13 of the Micro-Finance Law.
Scope of the Rules and Standards
The new Rules and Standards apply to all NGOs licensed by the Unit to perform micro-finance activities. Similar to the definition provided by the Law, micro-finance is defined in the Rules as all finance for the purpose of economic productivity, service, trade or agriculture, provided that such financing does not exceed a value of EGP 100,000. Differently from the Law’s definition, the Rules stipulate that in order for it to be considered micro-financing, the recipient of the finance must participate in the project either with his/her own effort or through appropriate financing of his/her own.
Portfolio Categories
The Rules categorize NGOs working in micro-financing into three categories. Category A includes entities with a micro-finance portfolio of 50 million EGP or more; Category B is reserved for portfolios between 10 million and 50 million EGP; and Category C includes all those NGOs with a portfolio of less than 10 million EGP.
| In case of loans exceeding 1500 EGP, the NGOs is obliged to perform a credit check and to inform the borrower of the entity that did such check, as well as inform them of their right to contest the result of the check with the entity that performed it. |
These distinctions allow for the imposition of different rules and standards, depending on the size of the relevant NGOs. For instance, while the Rules require a micro-financing NGOs to have two board members with appropriate experience in financing and credit, such requirement only applies to Category A and Category B NGOs, with category C being exempt. Similarly, the Rules require each NGOs to create a “Risk Unit”, tasked with assessing and determining credit, operational and liquidity risks related to the relevant entity’s activity. It is to be noted that this unit will not deal with the credit risks related to each individual financing activity, but rather with the risks emanating from the overall portfolio of the NGOs. The Rules also exempt Category C entities from having approved policies relating to “risk management”, “collection”, “dealing with defaulting customers”, etc.
Dealing with the Borrower
The Rules include many protections to the borrower as well as to the financing entity. For the borrower, the document lists a number of considerations that must be respected by the lender when making financing decisions, such as the credibility of the borrower with respect to the project he/she seeks financing for, the compatibility between payment conditions and the (expected) income and cash flow of the borrower, whether the borrower and his/her assets are insured or not. This list may instill a sense of objectivity and make the financing more predictable for borrowers. The Rules also stipulate that the maximum permissible loan for an individual is 100,000 EGP (it is unclear whether this is a maximum amount per transaction or one that applies to each borrower permanently).
With respect to inquiring about the credit history of a borrower, the Rules oblige NGOs performing micro-finance activities to enroll in a credit information system that is licensed by the Central Bank of Egypt. The lender in this case has the right to perform a credit check without obtaining the consent of the borrower. In case of loans exceeding 1500 EGP, the NGOs is obliged to perform a credit check and to inform the borrower of the entity that did such check, as well as inform them of their right to contest the result of the check with the entity that performed it.
In terms of insurance, the Rules allow a lending institution to require insurance on the life of the borrower or his/her project. Once again, the regulations do not go into the detail of such insurance policies and leave a wide margin of freedom for each lending institution to determine its own required insurance policy. The only restriction, however, is that a lending institution may not impose a specific insurer on a borrower, as long as that borrower presents the required insurance policies.
Interestingly, the Rules allow a wide maneuvering space for NGOs to determine their own rules with respect to “collective micro-financing”, which enables financing entities to furnish loans unto a group of individuals. The Rules leave it up to the financiers to determine their own regulations with respect to the size of the group, the responsibilities of each member of the group and determining the group’s representative. The only real requirement specified is that each individual be handed a copy of the financing contract or the loan conditions. While there may be concerns related to ensuring free and informed consent of each member of the borrowing group, it must be noted that this, as well as other practices would still be subject to other relevant laws regulating contracts and financing, such as the Civil Code.
Miscellaneous
The Rules detail numerous other regulations that an NGOs which performs micro-financing activities must take note of. This includes rules on the required structure of such entity and its management, requirements related to the financial statements and audit, requirements related to technical informational aspects, and others related to cash maintenance and disbursements. The Rules and Standards also stipulate that NGOs may not merge with each other or seize activity temporarily or indefinitely except with the approval of the Unit.
Conclusion
The Rules are one more step towards creating a comprehensive regulatory framework to deal with a crucial economic activity that has been left neglected for a long time. Commendably, the Rules and Standards deal with many aspects related to the protection of the borrower as well as the protection and financial sustainability of the lender. In doing so, the document often gives the general guidelines and leaves a wide margin of freedom for each NGOs to design its own policies. Naturally, this may be useful if not abused due to the wide discrepancies between the lending institutions depending on their portfolio, their target borrowers and the regions they work in.
Notably, the Rules oblige Category A and B entities to create a “Risk Unit”, as well as a “Review and Risk Committee”. Since the mandates of both intersect, it remains to be seen whether the repetition is a drafting mistake or whether the Rules will require the creation of both units.
It also remains to be seen how the Government will be able to regulate and supervise this financing channel without losing right of the developmental effect of micro-finance extended by NGOs.
[1] Presidential Decree No. 141/2014 enacting the Micro-Finance Law, Official Gazette, Issue No. 46 (cont.), 13 November 2014.
[2] EFSA Board of Directors' Decision No. 31/2015 stipulating the rules and standards that NGOs engaging in micro-finance activities must abide by, Egyptian Gazette, Issue No. 74 (cont.), 31 March 2015
Mid-November 2014 saw the enactment of the long-awaited Micro-Finance Law,[1] Egypt’s first comprehensive regulatory framework for this crucial activity. The Law distinguished between two main types of financiers, namely micro-finance companies and micro-finance entities that are established under the Civil Associations and Foundations Law (Law 84/2002, commonly referred to as the “NGO Law”). These NGOs are currently responsible for a significant part of the micro-finance portfolio in the country.
Created under the NGO Law, these entities are generally regulated by the Ministry of Social Solidarity, rather than the Egyptian Financial Supervisory Authority “
EFSA”, the authority responsible for supervising and regulating non-banking financial markets and instruments in general. This creates an anomaly, since the Micro-finance Law entrusted EFSA with being the sole entity responsible for licensing, supervising and regulating micro-finance activity. To overcome this, the Law tasked EFSA with creating a special regulatory unit (the “
Unit”) to supervise micro-finance related activities of NGOs. The Micro-finance Law mandated this regulatory Unit to license and set the licensing requirements for NGOs seeking to perform micro-finance activities and to follow up on their performance.
In this context, and in a further step to carry out the Micro-Finance Law, EFSA recently issued a decision stipulating the rules and standards (the
“Rules”) that NGOs engaging in micro-finance activities must abide by.
[2] This decision was mentioned explicitly as one of the actions that the Unit was mandated with under Article 13 of the Micro-Finance Law.
Scope of the Rules and Standards
The new Rules and Standards apply to all NGOs licensed by the Unit to perform micro-finance activities. Similar to the definition provided by the Law, micro-finance is defined in the Rules as all finance for the purpose of economic productivity, service, trade or agriculture, provided that such financing does not exceed a value of EGP 100,000. Differently from the Law’s definition, the Rules stipulate that in order for it to be considered micro-financing, the recipient of the finance must participate in the project either with his/her own effort or through appropriate financing of his/her own.
Portfolio Categories
The Rules categorize NGOs working in micro-financing into three categories. Category A includes entities with a micro-finance portfolio of 50 million EGP or more; Category B is reserved for portfolios between 10 million and 50 million EGP; and Category C includes all those NGOs with a portfolio of less than 10 million EGP.
| In case of loans exceeding 1500 EGP, the NGOs is obliged to perform a credit check and to inform the borrower of the entity that did such check, as well as inform them of their right to contest the result of the check with the entity that performed it. |
These distinctions allow for the imposition of different rules and standards, depending on the size of the relevant NGOs. For instance, while the Rules require a micro-financing NGOs to have two board members with appropriate experience in financing and credit, such requirement only applies to Category A and Category B NGOs, with category C being exempt. Similarly, the Rules require each NGOs to create a “Risk Unit”, tasked with assessing and determining credit, operational and liquidity risks related to the relevant entity’s activity. It is to be noted that this unit will not deal with the credit risks related to each individual financing activity, but rather with the risks emanating from the overall portfolio of the NGOs. The Rules also exempt Category C entities from having approved policies relating to “risk management”, “collection”, “dealing with defaulting customers”, etc.
Dealing with the Borrower
The Rules include many protections to the borrower as well as to the financing entity. For the borrower, the document lists a number of considerations that must be respected by the lender when making financing decisions, such as the credibility of the borrower with respect to the project he/she seeks financing for, the compatibility between payment conditions and the (expected) income and cash flow of the borrower, whether the borrower and his/her assets are insured or not. This list may instill a sense of objectivity and make the financing more predictable for borrowers. The Rules also stipulate that the maximum permissible loan for an individual is 100,000 EGP (it is unclear whether this is a maximum amount per transaction or one that applies to each borrower permanently).
With respect to inquiring about the credit history of a borrower, the Rules oblige NGOs performing micro-finance activities to enroll in a credit information system that is licensed by the Central Bank of Egypt. The lender in this case has the right to perform a credit check without obtaining the consent of the borrower. In case of loans exceeding 1500 EGP, the NGOs is obliged to perform a credit check and to inform the borrower of the entity that did such check, as well as inform them of their right to contest the result of the check with the entity that performed it.
In terms of insurance, the Rules allow a lending institution to require insurance on the life of the borrower or his/her project. Once again, the regulations do not go into the detail of such insurance policies and leave a wide margin of freedom for each lending institution to determine its own required insurance policy. The only restriction, however, is that a lending institution may not impose a specific insurer on a borrower, as long as that borrower presents the required insurance policies.
Interestingly, the Rules allow a wide maneuvering space for NGOs to determine their own rules with respect to “collective micro-financing”, which enables financing entities to furnish loans unto a group of individuals. The Rules leave it up to the financiers to determine their own regulations with respect to the size of the group, the responsibilities of each member of the group and determining the group’s representative. The only real requirement specified is that each individual be handed a copy of the financing contract or the loan conditions. While there may be concerns related to ensuring free and informed consent of each member of the borrowing group, it must be noted that this, as well as other practices would still be subject to other relevant laws regulating contracts and financing, such as the Civil Code.
Miscellaneous
The Rules detail numerous other regulations that an NGOs which performs micro-financing activities must take note of. This includes rules on the required structure of such entity and its management, requirements related to the financial statements and audit, requirements related to technical informational aspects, and others related to cash maintenance and disbursements. The Rules and Standards also stipulate that NGOs may not merge with each other or seize activity temporarily or indefinitely except with the approval of the Unit.
Conclusion
The Rules are one more step towards creating a comprehensive regulatory framework to deal with a crucial economic activity that has been left neglected for a long time. Commendably, the Rules and Standards deal with many aspects related to the protection of the borrower as well as the protection and financial sustainability of the lender. In doing so, the document often gives the general guidelines and leaves a wide margin of freedom for each NGOs to design its own policies. Naturally, this may be useful if not abused due to the wide discrepancies between the lending institutions depending on their portfolio, their target borrowers and the regions they work in.
Notably, the Rules oblige Category A and B entities to create a “Risk Unit”, as well as a “Review and Risk Committee”. Since the mandates of both intersect, it remains to be seen whether the repetition is a drafting mistake or whether the Rules will require the creation of both units.
It also remains to be seen how the Government will be able to regulate and supervise this financing channel without losing right of the developmental effect of micro-finance extended by NGOs.
[1] Presidential Decree No. 141/2014 enacting the Micro-Finance Law, Official Gazette, Issue No. 46 (cont.), 13 November 2014.
[2] EFSA Board of Directors' Decision No. 31/2015 stipulating the rules and standards that NGOs engaging in micro-finance activities must abide by, Egyptian Gazette, Issue No. 74 (cont.), 31 March 2015