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New Law Regulating Micro-Finance

New Law Regulating Micro-Finance
For many years there have been efforts to pass a law regulating microfinance activity and putting in place the necessary regulatory framework, the most prominent of which was the draft law prepared by the Egyptian Financial Supervisory Authority ("EFSA") in mid-2010 and published at the time on its website. That draft was sent to the Cabinet to be reviewed before being presented to Parliament, but delays in discussions and varying viewpoints surrounding the draft meant it only reached the People's Assembly just before the January 2011 Revolution, which in turn resulted in complete postponement of the passing of the law. A few months ago, EFSA renewed its interest in the subject and undertook the studies necessary for the production of a new micro-finance law, intended for discussion by the general community. Subsequently, Presidential Decree No. 141 of 2014was issued, organising micro-finance and establishing a legal framework for this activity for the first time in Egypt (the "Law").[1]
Importance of the Subject
Micro-finance broadly refers to all funding for economic purposes and in limited amounts utilised for the interests of a few individuals dealing in small-scale projects. These small-scale projects rarely create jobs for others but they generate additional income which helps their owners withstand the rigours of living. In this sense, micro-enterprises throughout the entire world will not necessarily reduce the unemployment rate or increase the national GDP significantly, but instead are hoped to have a major impact on reducing poverty and enabling the most disadvantaged households access much-needed additional income. The need for a law regulating micro-finance is derived from the presence of dozens of NGOs and a limited number of companies that deal with hundreds of thousands of small borrowers who rely on them for additional income, but who operate in the complete absence of any supervision or control, and without any application of regulations and standards that protect these borrowers. Therefore, the issuance of such a law has been a pressing demand of the companies and associations who are dedicated to this line of work and who require a legal framework that protects the interests of all the parties involved as well as safeguarding the interests of society. Finally, it should be noted that the entity responsible for the supervision and regulation of all micro-finance activity of microfinance is EFSA, in accordance with law No 10/2009, which granted it supervisory authority over all non-banking financial markets and instruments.
The Scope of the Law
The law deals with a number of key matters, including:
  • Definition of micro-finance and determination of which entities may engage in micro-finance;
  • Conditions to be met by those engaging in micro-finance activity and the necessary licensing procedures;
  • Controls and standards of micro-finance activities;
  • Matters regarding taxation of micro-finance activity;
  • EFSA’s oversight role;
  • Control over associations and institutions;
  • Egyptian Federation for Micro-finance;
  • Sanctions.
Definition of micro-finance and determination of which entities may engage in micro-finance: Article 2 of the Law defines micro-finance as all finance for the purpose of economic productivity, service, or trade provided that they are in the fields and the values determined by the Board of EFSA and which in any case do not exceed a value of EGP 100,000. This means that the Board of Directors of the Authority may determine micro-finance activities in the future, in accordance with this law. The Law also specifies the entities that can be licensed to carry out micro-finance activities, these being companies as well as associations and institutions that work in the field. No company, association, or institution may engage in micro-finance activity without obtaining a license from EFSA to do so. It is to be noted that the scope of law does not extend to either banks or the Social Fund for Development, which means that banks that engage in micro-finance activity must do so in accordance with the provisions of the Banking Law and those of the Central Bank of Egypt while the Social Fund operates in accordance with its own rules.
Terms and procedures for licensing
Entities that engage in micro-finance activity must satisfy the following conditions:
  • That it takes the form of Egyptian joint stock company;
  • That it engages solely in micro-finance
  • That its issued and paid capital are not less than the amount determined by EFSA and in all cases be not less than EGP 5,000,000;
  • That is has available the technical capabilities specified by EFSA;
  • That the board of directors of the company comprises managers and experts with the relevant expertise and reputability as indicated by EFSA
The law regulates the submission of license applications to EFSA and stipulates that the Board has the right to decide on the license application in light of the market need for new companies; this allows for the possibility of the rejection of a license application on the basis of a lack of demand for micro-finance institutions in the market.
Regulations and Standards for Engaging in Micro-finance Activities
Article 4 of the Law very clearly prohibits licensed micro-finance companies from receiving deposits or undertaking of any activity other than the licensed activity. This provision of the law attempts to resolve the controversy over allowing the establishment of non-banking institutions which receive deposits from the public who refuse this concept unequivocally, meaning that the deposit of funds remains limited to entities under the control and supervision of the Central Bank of Egypt and to the banks in general. It is very important to note that Article 16 of this Law stipulates that interest rates on micro-finance loans offered by the companies, associations and institutions will be determined by the board of directors of each individual institution, “without adherence to the limits contained in any other law”. This provision is without a doubt one of the most important of this new law because previously microfinance was subject to a maximum interest rate of 7% as stipulated by Egyptian civil law. This threatened all micro-finance activities and resulted in recourse to the court system; Article 16 resolves this matter by giving the power to determine interest rates to the boards of directors of the entities actually engaged in micro-finance activities. The Law also stipulates the regulations and standards set by EFSA for engaging in micro-finance, which include regulations governing the following:
  • Ownership of 50% or more of the company's capital;
  • Licensing regulations for workers;
  • Controls and limits for funding of the company's employees;
  • Maximum dealings with one client;
  • Rules ensuring the rights of clients and creditors;
  • Rules for accounting;
  • Disclosure rules;
  • Rules for the advertisement of the services and financial products offered;
  • Rules of participation in the credit information system
  • Governance rules;
  • Rules for concluding financing contracts with organisations.
Finally, the law ensures that companies commit to disclosing to customers the details of financial services and products, the burden of financing and the prices of services offered, and the risks of dealing that clients might be exposed to and the obligations of current and future clients.
Taxation of Micro-finance Activity
The text of the Law requires micro-finance companies to prepare quarterly and annual financial statements in accordance with Egyptian Accounting Standards and the rules issued by EFSA. Furthermore, company's accounts must be reviewed by an accountant registered at EFSA. The Law identifies those costs deductible when determining the net taxable income, which include:
  1. Interest the company pays on its loans;
  2. The reserves formed by the company with regards to bad loans, in accordance with the standards issued by EFSA;
  3. Bad debt, after taking the necessary legal action in accordance with the regulations prescribed by the Board of Directors of EFSA.
Finally, the Law exempts micro-finance companies from stamp duty and other similar taxes and fees.
Oversight Role of EFSA
EFSA is the sole body responsible for the licensing of companies engaging in micro-finance activity, supervising and regulating their work, and developing controls and standards for engaging in such activity. Article 11 of the law stipulates that EFSA’s duty is to stabilize the market and protect the rights both the micro-finance companies and those who engage in business with them. The Board of Directors of EFSA can take action against violating companies, in several different ways:
  • Send a formal warning to the company to cease its violations;
  • Compel the company to increase its paid capital or the funds it has allocated for its business activities;
  • Convene the company’s board of directors or its General Assembly to consider and resolve the violation;
  • Ban from engaging in all or some of the activities the company has been licensed to operate in;
  • Prevent dealing with new clients;
  • Dissolve the Board of Directors and appoint a delegate to oversee management;
  • Merge the violating company with another company, subject to the approval of the other company;
  • Cancel the company’s license.
The micro-finance companies, associations and institutions may appeal EFSA decisions before a panel to be formed by decision of the Prime Minister, within 15 days of the date of EFSA’s decision. It is noted that this type of appeal must be undertaken before the micro-finance company in question shall be permitted to file a claim at the competent administrative court.
Supervision Over Associations and Civil Institutions
Because a large number of micro-finance institutions are associations and civil institutions which fall under the control of the Ministry of Social Solidarity, the Law allows for EFSA to create an independent and special unit responsible for the oversight of micro-finance activity engaged in by these associations and institutions. Furthermore, the law establishes an independent Board of Trustees of the unit in which the relevant ministries and stakeholders will be represented; this Board shall be comprised following an EFSA resolution, which will also set out the unit’s basic financial and administrative system and its regulations. Article 13 of the Law specifies the activities of this independent unit, which include the following:
  • Setting the conditions for civil societies and institutions to become licensed to engage in micro-finance, and setting out how these entities will cooperate with companies that engage in the field;
  • Setting the rules and standards for associations and institutions engaging in micro-finance;
  • Accessing data and information on the micro-finance activity carried out by the associations and institutions;
  • Following-up on the performance of the associations and institutions and setting inspection rules and controls, and presenting a report to the Chairman of EFSA.
The associations and institutions that engage in micro-finance activity are required to hold separate accounts for micro-finance and for their other activities, and to maintain independent financial statements, so that funds will be organised and to avoid financial mistakes.
The Egyptian Federation for Micro-finance
Micro-finance remains a relatively new field in Egypt there is a pressing need to raise awareness of it and establish sound rules and regulations.  Accordingly, the Law stipulates for the establishment of a union or federation comprising the companies, institutions, and associations working in micro-finance, with the intention of representing this new industry, working to increase awareness, and improving the conditions of employees. In order to make this federation effective, the Law allows it to take administrative action against those of its members who violate its professional rules.
Sanctions
The Law provides for the strict penalties for engaging in micro-finance activity without a licence, deliberately providing data or incorrect information to EFSA or the publishing of incorrect information in its bulletins, disclosures, or financial statements. The penalty can either be a term of imprisonment of not less than three months or a fine of between EGP 50,000 and EGP 2,000,000, or both. The Law also imposes a fine of between EGP 50,000 and EGP 500,000 for those found to have committed the following violations:
  • Not obtaining EFSA’s approval for the products and services offered;
  • Not disclosing to customers about the products and the burdens and risks of financing;
  • Merger or liquidation of assets or ceasing the licensed activity without the approval of EFSA;
  • Failure to provide EFSA with the reports and statements required;
  • Providing funding to a member of the board of directors in violation of rules;
  • Violation of the rules for the engaging in micro-finance activity;
  • Reporting incorrect data or information.
It is noted that the move towards criminal procedures can only be made based on a written request from the Chairman of EFSA, who also retains the right to resolve the matter without resorting to such procedures.
Conclusion
The new Micro-finance Law is undoubtedly one of the most important pieces of legislation enacted over the last period. It regulates a new financial sector previously operating with limited government control, putting the market at risk of instability while making borrowers susceptible to exploitation, and as such represents a very positive development in the Egyptian finance market. However, if there is one criticism of this Law is that it creates a dual regulatory system whereby the Oversight Unit issues rules pertaining to associations engaged in micro-finance, which represent the bulk of market. It is more desirable that all micro-finance entities fall fully under the control of EFSA, like all other companies engaged in similar activity, and that no differentiation had been made.   [1] Presidential Decree-Law No. 141/2014 on Micro-Finance, Official Gazette, Issue No. 46 (cont.), 13 November 2013.
For many years there have been efforts to pass a law regulating microfinance activity and putting in place the necessary regulatory framework, the most prominent of which was the draft law prepared by the Egyptian Financial Supervisory Authority ("EFSA") in mid-2010 and published at the time on its website. That draft was sent to the Cabinet to be reviewed before being presented to Parliament, but delays in discussions and varying viewpoints surrounding the draft meant it only reached the People's Assembly just before the January 2011 Revolution, which in turn resulted in complete postponement of the passing of the law. A few months ago, EFSA renewed its interest in the subject and undertook the studies necessary for the production of a new micro-finance law, intended for discussion by the general community. Subsequently, Presidential Decree No. 141 of 2014was issued, organising micro-finance and establishing a legal framework for this activity for the first time in Egypt (the "Law").[1]
Importance of the Subject
Micro-finance broadly refers to all funding for economic purposes and in limited amounts utilised for the interests of a few individuals dealing in small-scale projects. These small-scale projects rarely create jobs for others but they generate additional income which helps their owners withstand the rigours of living. In this sense, micro-enterprises throughout the entire world will not necessarily reduce the unemployment rate or increase the national GDP significantly, but instead are hoped to have a major impact on reducing poverty and enabling the most disadvantaged households access much-needed additional income. The need for a law regulating micro-finance is derived from the presence of dozens of NGOs and a limited number of companies that deal with hundreds of thousands of small borrowers who rely on them for additional income, but who operate in the complete absence of any supervision or control, and without any application of regulations and standards that protect these borrowers. Therefore, the issuance of such a law has been a pressing demand of the companies and associations who are dedicated to this line of work and who require a legal framework that protects the interests of all the parties involved as well as safeguarding the interests of society. Finally, it should be noted that the entity responsible for the supervision and regulation of all micro-finance activity of microfinance is EFSA, in accordance with law No 10/2009, which granted it supervisory authority over all non-banking financial markets and instruments.
The Scope of the Law
The law deals with a number of key matters, including:
  • Definition of micro-finance and determination of which entities may engage in micro-finance;
  • Conditions to be met by those engaging in micro-finance activity and the necessary licensing procedures;
  • Controls and standards of micro-finance activities;
  • Matters regarding taxation of micro-finance activity;
  • EFSA’s oversight role;
  • Control over associations and institutions;
  • Egyptian Federation for Micro-finance;
  • Sanctions.
Definition of micro-finance and determination of which entities may engage in micro-finance: Article 2 of the Law defines micro-finance as all finance for the purpose of economic productivity, service, or trade provided that they are in the fields and the values determined by the Board of EFSA and which in any case do not exceed a value of EGP 100,000. This means that the Board of Directors of the Authority may determine micro-finance activities in the future, in accordance with this law. The Law also specifies the entities that can be licensed to carry out micro-finance activities, these being companies as well as associations and institutions that work in the field. No company, association, or institution may engage in micro-finance activity without obtaining a license from EFSA to do so. It is to be noted that the scope of law does not extend to either banks or the Social Fund for Development, which means that banks that engage in micro-finance activity must do so in accordance with the provisions of the Banking Law and those of the Central Bank of Egypt while the Social Fund operates in accordance with its own rules.
Terms and procedures for licensing
Entities that engage in micro-finance activity must satisfy the following conditions:
  • That it takes the form of Egyptian joint stock company;
  • That it engages solely in micro-finance
  • That its issued and paid capital are not less than the amount determined by EFSA and in all cases be not less than EGP 5,000,000;
  • That is has available the technical capabilities specified by EFSA;
  • That the board of directors of the company comprises managers and experts with the relevant expertise and reputability as indicated by EFSA
The law regulates the submission of license applications to EFSA and stipulates that the Board has the right to decide on the license application in light of the market need for new companies; this allows for the possibility of the rejection of a license application on the basis of a lack of demand for micro-finance institutions in the market.
Regulations and Standards for Engaging in Micro-finance Activities
Article 4 of the Law very clearly prohibits licensed micro-finance companies from receiving deposits or undertaking of any activity other than the licensed activity. This provision of the law attempts to resolve the controversy over allowing the establishment of non-banking institutions which receive deposits from the public who refuse this concept unequivocally, meaning that the deposit of funds remains limited to entities under the control and supervision of the Central Bank of Egypt and to the banks in general. It is very important to note that Article 16 of this Law stipulates that interest rates on micro-finance loans offered by the companies, associations and institutions will be determined by the board of directors of each individual institution, “without adherence to the limits contained in any other law”. This provision is without a doubt one of the most important of this new law because previously microfinance was subject to a maximum interest rate of 7% as stipulated by Egyptian civil law. This threatened all micro-finance activities and resulted in recourse to the court system; Article 16 resolves this matter by giving the power to determine interest rates to the boards of directors of the entities actually engaged in micro-finance activities. The Law also stipulates the regulations and standards set by EFSA for engaging in micro-finance, which include regulations governing the following:
  • Ownership of 50% or more of the company's capital;
  • Licensing regulations for workers;
  • Controls and limits for funding of the company's employees;
  • Maximum dealings with one client;
  • Rules ensuring the rights of clients and creditors;
  • Rules for accounting;
  • Disclosure rules;
  • Rules for the advertisement of the services and financial products offered;
  • Rules of participation in the credit information system
  • Governance rules;
  • Rules for concluding financing contracts with organisations.
Finally, the law ensures that companies commit to disclosing to customers the details of financial services and products, the burden of financing and the prices of services offered, and the risks of dealing that clients might be exposed to and the obligations of current and future clients.
Taxation of Micro-finance Activity
The text of the Law requires micro-finance companies to prepare quarterly and annual financial statements in accordance with Egyptian Accounting Standards and the rules issued by EFSA. Furthermore, company's accounts must be reviewed by an accountant registered at EFSA. The Law identifies those costs deductible when determining the net taxable income, which include:
  1. Interest the company pays on its loans;
  2. The reserves formed by the company with regards to bad loans, in accordance with the standards issued by EFSA;
  3. Bad debt, after taking the necessary legal action in accordance with the regulations prescribed by the Board of Directors of EFSA.
Finally, the Law exempts micro-finance companies from stamp duty and other similar taxes and fees.
Oversight Role of EFSA
EFSA is the sole body responsible for the licensing of companies engaging in micro-finance activity, supervising and regulating their work, and developing controls and standards for engaging in such activity. Article 11 of the law stipulates that EFSA’s duty is to stabilize the market and protect the rights both the micro-finance companies and those who engage in business with them. The Board of Directors of EFSA can take action against violating companies, in several different ways:
  • Send a formal warning to the company to cease its violations;
  • Compel the company to increase its paid capital or the funds it has allocated for its business activities;
  • Convene the company’s board of directors or its General Assembly to consider and resolve the violation;
  • Ban from engaging in all or some of the activities the company has been licensed to operate in;
  • Prevent dealing with new clients;
  • Dissolve the Board of Directors and appoint a delegate to oversee management;
  • Merge the violating company with another company, subject to the approval of the other company;
  • Cancel the company’s license.
The micro-finance companies, associations and institutions may appeal EFSA decisions before a panel to be formed by decision of the Prime Minister, within 15 days of the date of EFSA’s decision. It is noted that this type of appeal must be undertaken before the micro-finance company in question shall be permitted to file a claim at the competent administrative court.
Supervision Over Associations and Civil Institutions
Because a large number of micro-finance institutions are associations and civil institutions which fall under the control of the Ministry of Social Solidarity, the Law allows for EFSA to create an independent and special unit responsible for the oversight of micro-finance activity engaged in by these associations and institutions. Furthermore, the law establishes an independent Board of Trustees of the unit in which the relevant ministries and stakeholders will be represented; this Board shall be comprised following an EFSA resolution, which will also set out the unit’s basic financial and administrative system and its regulations. Article 13 of the Law specifies the activities of this independent unit, which include the following:
  • Setting the conditions for civil societies and institutions to become licensed to engage in micro-finance, and setting out how these entities will cooperate with companies that engage in the field;
  • Setting the rules and standards for associations and institutions engaging in micro-finance;
  • Accessing data and information on the micro-finance activity carried out by the associations and institutions;
  • Following-up on the performance of the associations and institutions and setting inspection rules and controls, and presenting a report to the Chairman of EFSA.
The associations and institutions that engage in micro-finance activity are required to hold separate accounts for micro-finance and for their other activities, and to maintain independent financial statements, so that funds will be organised and to avoid financial mistakes.
The Egyptian Federation for Micro-finance
Micro-finance remains a relatively new field in Egypt there is a pressing need to raise awareness of it and establish sound rules and regulations.  Accordingly, the Law stipulates for the establishment of a union or federation comprising the companies, institutions, and associations working in micro-finance, with the intention of representing this new industry, working to increase awareness, and improving the conditions of employees. In order to make this federation effective, the Law allows it to take administrative action against those of its members who violate its professional rules.
Sanctions
The Law provides for the strict penalties for engaging in micro-finance activity without a licence, deliberately providing data or incorrect information to EFSA or the publishing of incorrect information in its bulletins, disclosures, or financial statements. The penalty can either be a term of imprisonment of not less than three months or a fine of between EGP 50,000 and EGP 2,000,000, or both. The Law also imposes a fine of between EGP 50,000 and EGP 500,000 for those found to have committed the following violations:
  • Not obtaining EFSA’s approval for the products and services offered;
  • Not disclosing to customers about the products and the burdens and risks of financing;
  • Merger or liquidation of assets or ceasing the licensed activity without the approval of EFSA;
  • Failure to provide EFSA with the reports and statements required;
  • Providing funding to a member of the board of directors in violation of rules;
  • Violation of the rules for the engaging in micro-finance activity;
  • Reporting incorrect data or information.
It is noted that the move towards criminal procedures can only be made based on a written request from the Chairman of EFSA, who also retains the right to resolve the matter without resorting to such procedures.
Conclusion
The new Micro-finance Law is undoubtedly one of the most important pieces of legislation enacted over the last period. It regulates a new financial sector previously operating with limited government control, putting the market at risk of instability while making borrowers susceptible to exploitation, and as such represents a very positive development in the Egyptian finance market. However, if there is one criticism of this Law is that it creates a dual regulatory system whereby the Oversight Unit issues rules pertaining to associations engaged in micro-finance, which represent the bulk of market. It is more desirable that all micro-finance entities fall fully under the control of EFSA, like all other companies engaged in similar activity, and that no differentiation had been made.   [1] Presidential Decree-Law No. 141/2014 on Micro-Finance, Official Gazette, Issue No. 46 (cont.), 13 November 2013.