Home | | Contact Us

New Legislation Regulating Micro-Fi

New Legislation Regulating Micro-Finance in Egypt
The past few months have seen several important legal developments related to micro-finance in Egypt. Following the passage of the long-awaited Micro-finance Law No 141 of 2014 in the middle of November 2014, the Egyptian Financial Supervisory Authority ("EFSA") – which is the administrative entity responsible for micro-finance activity according to the law – issued decisions regulating the provisions of the law. These decisions include regulations on the procedures for the licensing of companies that engage in micro-finance, procedures for the standardization and reconciliation of the situation of associations and non-governmental organisations ("NGOs") that engage in micro-finance, and the consideration required by EFSA in exchange for its regulatory and supervisory services.
The Licensing of Micro-finance Companies
Micro-finance projects are currently undertaken by four main sources: associations and NGOs (which are responsible for the largest share of funding), micro-finance companies, banks (which are subject to the provisions of the Banking Law and are regulated by the Central Bank, rather than EFSA), and the Social Fund for Development (which regulates micro-finance activity according to its own rules). In other words, the regulation of micro-finance activity, including EFSA resolutions, does not only apply except to companies and associations and NGOs engaged in micro-finance activity. The Micro-finance Law designated EFSA as the body responsible for granting licenses for companies that operate in the field of micro-finance. EFSA has issued a decision on the rules and procedures for the licensing of such companies, both reiterating some of the conditions stipulated in the law as well as detailing others.[1] Accordingly, companies engaging in micro-finance must:
  • take the form of a joint stock company;
  • limit their activity to micro-finance;
  • have the majority of shares be owned by legal persons (furthermore, in the event that a party or a group of parties plans to own more than 50% of the company, EFSA must provide approval);
  • have a minimum issued share capital of not less than EGP 15 million, with the paid-up capital not constituting less than 50%, to be fully repaid within three years;
  • have at least one auditor; and
  • satisfy the experience and reputation criteria required by EFSA.
The procedures for licensing
EFSA’s regulations differentiate between temporary and final licensing procedures. In the case of the temporary license, the company will have to submit documents including but not limited to its articles of incorporation, a statement denoting the membership of the Board of Directors, and proof of the location of the company's headquarters. EFSA’s decisions appear to attempt to facilitate the temporary licensing procedures; for example, the Authority must now come to a decision on temporary license applications within a period not exceeding two weeks of application submission. In addition, the temporary license application does not require immediate submission of the administrative and organizational structure documents. However, these will have to be submitted within six months of the date the temporary license is granted, or it will be considered void. Issuance of a temporary license does not require more than 25% of the minimum amount for the issued capital to be paid up. As mentioned above, however, payment of at least 50% must be made before making an application for a final license. In practice this means that micro-finance companies will pay 25% of the minimum capital when applying for the temporary license, with the payment of the second 25% to be made within six months of being granted that license, which in turn satisfies the requirement for final license application; the final 50% must be paid within three years. In addition to the completion of the administrative structure and the organizational structure requirements and the payment of 50% of the minimum capital, the decision of the Board requires companies wishing to obtain final license to join the Egyptian Micro-finance Federation following incorporation. The membership of the Federation (which is organised under the Micro-finance Law and designated to organize the micro-finance sector) includes companies and associations and NGOs working in the field of micro-finance and aims to improve the standards of the sector’s employees.
Licensing Fees and the Standardization of Existing Companies
EFSA has set the licensing fee to one per cent of the paid-up capital, in any case not exceeding EGP 100,000. Furthermore, EFSA will require – as consideration for its regulatory and supervisory services – an amount equivalent to 0.5/1000 of the balance of micro-financing operations presented by the newly licensed company in the previous quarter, payable within six weeks of the end of each quarter. With regards to associations and NGOs that are engaged in micro-finance activity, EFSA will demand 0.25/1000 of the previous quarter’s balance, also payable within six weeks.[2] EFSA’s resolution has detailed several provisions aimed at standardizing micro-finance companies already in operation before the enactment of the Micro-finance Law (Law 141 for the Year 2014) and bringing them in line with the new rules. Those companies will have to abide by all of the new provisions, with the exception of Article 8, which prohibits ownership of more than 50% of a micro-finance company. Companies will have to reconcile their current situations with the new law’s provisions, including meeting capital requirements; complete adjustment must be made within six months of the enactment of the Micro-finance Law. Furthermore, all financial statements from the date the companies began operations will have to be provided to EFSA, within 30 days of the law’s enactment.
Licensing and the Standardization of Associations and NGOs
As mentioned above, a large part of the funding of micro-finance enterprises comes from associations and NGOs, subject to the general supervision of the Ministry of Social Solidarity. The Micro-finance Law provided for the establishment of an independent unit at EFSA, to be charged with the oversight of the micro-finance activity of associations and NGOs. The Law stipulates that the unit will determine regulations and licensing procedures of the associations and NGOs, which took place through a resolution of the Unit’s Board of Trustees, published on 27 January 2015.[3] The Unit’s Board of Trustees’ resolution is a temporary measure, pending a more detailed decision on the licensing of associations and NGOs. The resolution only provides temporary licensing terms, which is a first step towards standardization, but does not include the final licensing rules. The resolution requires that the associations and NGOs wishing to obtain a temporary license must already be licensed by the competent ministry and be subject to the NGO Law. Furthermore, its constitutive documents must allow it to do financing, loaning, or economic development. Finally, the relevant association or NGO must have been operating in the field of micro-finance prior to the issuance of the Micro-finance Law in November 2014. Finally, the Board of Trustees’ resolution details the documents required to be submitted alongside the license application, which include the association or NGO’s existing license, articles of association, financial statements, and fees to be paid for the license. The resolution stipulates that the newly formed unit must decide on the outcome of the license application within two weeks (which is the same time frame in which EFSA decides on permits for micro-finance companies).
Conclusion
Detailing licensing procedures and providing for the process by which companies and NGOs engaged in micro-finance can comply with the new Micro-finance Law is an important step in giving force the long-awaited Law. Also worth noting is the relative speed of EFSA’s issuance of these decisions after the enactment of the Law, which gives the impression that the State is willing to take serious measures to encourage the micro-finance sector. The main drawback, however, is the continued differentiation between the regulation of companies on the one hand, and associations and NGOs on the other, despite their performance the same activities. It may have been advisable for EFSA to maintain a unified oversight and supervisory process on the operations of companies, as well as NGOs and associations, working in micro-financing.   [1] EFSA Board of Directors' Decision No. 172/2014 on the rules and procedures for the licensing of micro-finance companies, Egyptian Gazette, Issue No. 10, 10 January 2015. [2] EFSA Board of Directors' Decision No. 171/2014 on licensing fees of Micro-finance companies, Egyptian Gazette, Issue No. 10, 10 January 2015. [3] EFSA Board of Trustees of the Unit for the Supervision of Micro-finance Activities of NGOs and Civil Associations' Decision No. 1/2014 on the rules and procedures for the licensing of associations and NGOs to conduct micro-finance activities, Egyptian Gazette, Issue No. 20, 27 January 2015.
The past few months have seen several important legal developments related to micro-finance in Egypt. Following the passage of the long-awaited Micro-finance Law No 141 of 2014 in the middle of November 2014, the Egyptian Financial Supervisory Authority ("EFSA") – which is the administrative entity responsible for micro-finance activity according to the law – issued decisions regulating the provisions of the law. These decisions include regulations on the procedures for the licensing of companies that engage in micro-finance, procedures for the standardization and reconciliation of the situation of associations and non-governmental organisations ("NGOs") that engage in micro-finance, and the consideration required by EFSA in exchange for its regulatory and supervisory services.
The Licensing of Micro-finance Companies
Micro-finance projects are currently undertaken by four main sources: associations and NGOs (which are responsible for the largest share of funding), micro-finance companies, banks (which are subject to the provisions of the Banking Law and are regulated by the Central Bank, rather than EFSA), and the Social Fund for Development (which regulates micro-finance activity according to its own rules). In other words, the regulation of micro-finance activity, including EFSA resolutions, does not only apply except to companies and associations and NGOs engaged in micro-finance activity. The Micro-finance Law designated EFSA as the body responsible for granting licenses for companies that operate in the field of micro-finance. EFSA has issued a decision on the rules and procedures for the licensing of such companies, both reiterating some of the conditions stipulated in the law as well as detailing others.[1] Accordingly, companies engaging in micro-finance must:
  • take the form of a joint stock company;
  • limit their activity to micro-finance;
  • have the majority of shares be owned by legal persons (furthermore, in the event that a party or a group of parties plans to own more than 50% of the company, EFSA must provide approval);
  • have a minimum issued share capital of not less than EGP 15 million, with the paid-up capital not constituting less than 50%, to be fully repaid within three years;
  • have at least one auditor; and
  • satisfy the experience and reputation criteria required by EFSA.
The procedures for licensing
EFSA’s regulations differentiate between temporary and final licensing procedures. In the case of the temporary license, the company will have to submit documents including but not limited to its articles of incorporation, a statement denoting the membership of the Board of Directors, and proof of the location of the company's headquarters. EFSA’s decisions appear to attempt to facilitate the temporary licensing procedures; for example, the Authority must now come to a decision on temporary license applications within a period not exceeding two weeks of application submission. In addition, the temporary license application does not require immediate submission of the administrative and organizational structure documents. However, these will have to be submitted within six months of the date the temporary license is granted, or it will be considered void. Issuance of a temporary license does not require more than 25% of the minimum amount for the issued capital to be paid up. As mentioned above, however, payment of at least 50% must be made before making an application for a final license. In practice this means that micro-finance companies will pay 25% of the minimum capital when applying for the temporary license, with the payment of the second 25% to be made within six months of being granted that license, which in turn satisfies the requirement for final license application; the final 50% must be paid within three years. In addition to the completion of the administrative structure and the organizational structure requirements and the payment of 50% of the minimum capital, the decision of the Board requires companies wishing to obtain final license to join the Egyptian Micro-finance Federation following incorporation. The membership of the Federation (which is organised under the Micro-finance Law and designated to organize the micro-finance sector) includes companies and associations and NGOs working in the field of micro-finance and aims to improve the standards of the sector’s employees.
Licensing Fees and the Standardization of Existing Companies
EFSA has set the licensing fee to one per cent of the paid-up capital, in any case not exceeding EGP 100,000. Furthermore, EFSA will require – as consideration for its regulatory and supervisory services – an amount equivalent to 0.5/1000 of the balance of micro-financing operations presented by the newly licensed company in the previous quarter, payable within six weeks of the end of each quarter. With regards to associations and NGOs that are engaged in micro-finance activity, EFSA will demand 0.25/1000 of the previous quarter’s balance, also payable within six weeks.[2] EFSA’s resolution has detailed several provisions aimed at standardizing micro-finance companies already in operation before the enactment of the Micro-finance Law (Law 141 for the Year 2014) and bringing them in line with the new rules. Those companies will have to abide by all of the new provisions, with the exception of Article 8, which prohibits ownership of more than 50% of a micro-finance company. Companies will have to reconcile their current situations with the new law’s provisions, including meeting capital requirements; complete adjustment must be made within six months of the enactment of the Micro-finance Law. Furthermore, all financial statements from the date the companies began operations will have to be provided to EFSA, within 30 days of the law’s enactment.
Licensing and the Standardization of Associations and NGOs
As mentioned above, a large part of the funding of micro-finance enterprises comes from associations and NGOs, subject to the general supervision of the Ministry of Social Solidarity. The Micro-finance Law provided for the establishment of an independent unit at EFSA, to be charged with the oversight of the micro-finance activity of associations and NGOs. The Law stipulates that the unit will determine regulations and licensing procedures of the associations and NGOs, which took place through a resolution of the Unit’s Board of Trustees, published on 27 January 2015.[3] The Unit’s Board of Trustees’ resolution is a temporary measure, pending a more detailed decision on the licensing of associations and NGOs. The resolution only provides temporary licensing terms, which is a first step towards standardization, but does not include the final licensing rules. The resolution requires that the associations and NGOs wishing to obtain a temporary license must already be licensed by the competent ministry and be subject to the NGO Law. Furthermore, its constitutive documents must allow it to do financing, loaning, or economic development. Finally, the relevant association or NGO must have been operating in the field of micro-finance prior to the issuance of the Micro-finance Law in November 2014. Finally, the Board of Trustees’ resolution details the documents required to be submitted alongside the license application, which include the association or NGO’s existing license, articles of association, financial statements, and fees to be paid for the license. The resolution stipulates that the newly formed unit must decide on the outcome of the license application within two weeks (which is the same time frame in which EFSA decides on permits for micro-finance companies).
Conclusion
Detailing licensing procedures and providing for the process by which companies and NGOs engaged in micro-finance can comply with the new Micro-finance Law is an important step in giving force the long-awaited Law. Also worth noting is the relative speed of EFSA’s issuance of these decisions after the enactment of the Law, which gives the impression that the State is willing to take serious measures to encourage the micro-finance sector. The main drawback, however, is the continued differentiation between the regulation of companies on the one hand, and associations and NGOs on the other, despite their performance the same activities. It may have been advisable for EFSA to maintain a unified oversight and supervisory process on the operations of companies, as well as NGOs and associations, working in micro-financing.   [1] EFSA Board of Directors' Decision No. 172/2014 on the rules and procedures for the licensing of micro-finance companies, Egyptian Gazette, Issue No. 10, 10 January 2015. [2] EFSA Board of Directors' Decision No. 171/2014 on licensing fees of Micro-finance companies, Egyptian Gazette, Issue No. 10, 10 January 2015. [3] EFSA Board of Trustees of the Unit for the Supervision of Micro-finance Activities of NGOs and Civil Associations' Decision No. 1/2014 on the rules and procedures for the licensing of associations and NGOs to conduct micro-finance activities, Egyptian Gazette, Issue No. 20, 27 January 2015.