Law No 194 of 2020 Issuing the Central Bank and Banking Sector Law (the “New Banking Law”) was introduced on 15 September 2020, and replaced the previous banking legislation, the Central Bank Law of 2003 (the “Old Banking Law”). Its main feature is its level of detail and its coverage of many subjects that were unaddressed in the Old Banking Law, and it expanded on and/or clarified some existing topics, such as the following:
In addition to this new legislation, the CBE also routinely issues regulatory directions and circulars on a range of topics complementing the New Banking Law and providing guidance on the implementation of the law. The CBE is considered the bank of the government and can guarantee funds raised by different governmental entities. It also maintains reserves of foreign currencies and may provide bailouts to distressed banks subject to certain conditions.
A licence for operating banking activities in Egypt must be given through a process detailed in the New Banking Law under supervision from the CBE. The CBE also oversees the licensing of foreign currency exchange firms, credit rating agencies and operators of payment systems.
Banking activities are defined in the New Banking Law as activities that include the acceptance of deposits, raising funds, and the investment of funds in debt and equity financing, in addition to any activities customarily considered as banking activities.
A banking licence can be given to a joint-stock company, a branch of a foreign bank, or a representative office. The board of the CBE can grant a preliminary approval for a banking licence to any joint-stock company or a branch of a foreign bank subject to certain conditions, as follows.
Applicants for a banking licence must submit their request accompanied by all the mentioned documents and information. The fees for submitting an application for a preliminary approval of a banking licence is EGP1 million for a joint-stock company and USD50,000 for a branch. The board of the CBE must issue its decision within 90 days from completion of the submission.
If the application is approved, the applicants must finalise the establishment of a joint-stock company or a branch, as the case may be, within one year from the approval in relation to joint-stock companies and six months in relation to branches. Then the preliminary approval and all required documents will be submitted a second time for the final approval of the board of directors of the CBE.
The licensing for branches of a foreign bank has an additional step that requires foreign banks to guarantee all the deposits of the branch and the rights of its creditors. The registration of a new bank or a branch must then be annotated in the register of banks maintained by the CBE. The fees for this are EGP500,000 for the headquarters and EGP250,000 for any branch registered, or EGP150,000 for small branches or offices.
It is further allowed for foreign banks to establish a representative office in Egypt after obtaining a licence from the CBE. The activities of a representative office must always be limited to market studies and investment opportunities. These entities are not allowed to perform any commercial or banking activities.
The New Banking Law also includes several other provisions that provide for the licensing of foreign currency exchange firms, payment facilitators and payment aggregators. However, these provisions leave the details of the licensing processes to be decided by the board of directors of the CBE.
The ownership of share capital in Egyptian banks is allowed equally for Egyptians and foreigners, whether individuals or companies, subject to several rules that relate to the percentage of ownership. Any ownership between 5 and 10% of the issued share capital or voting rights of a bank requires the owner to notify the CBE within 15 days from the date of acquiring ownership.
If an ownership of the bank-issued share capital or voting rights is anticipated to be more than 10%, then the prior approval of the CBE must be obtained. Any request to acquire more than 10% of a bank-issued share capital must be submitted at least 60 days prior to the date of acquisition. The applicant must demonstrate solid financial creditworthiness and its objectives from acquisition detailed by the strategies of participating in its management.
An applicant for a percentage of more than 10% of an issued share capital of a bank must also clarify its own capital and ownership structure (if a company) and identify all its related parties and ultimate beneficial owners. The CBE checks whether the applicant enjoys the financial capabilities and expertise to support the capital structure of the bank and implement its objectives without adversely affecting competition in the banking industry.
If the applicant is a foreign bank, the consent of the regulatory authority in its jurisdiction must be obtained to allow for the co-operation and sharing of information between the CBE and such authority. The CBE must reply to the applicant within 60 days, and if approval is given, the applicant must finalise the acquisition within six months from the approval date.
The New Banking Law and the Governance Instructions issued by the CBE on 23 August 2011 (the “Governance Instructions”) must be read together as a comprehensive guideline for governance rules in the banking sector. The CBE also issues regular circulars addressed to the senior management and boards of directors of banks to provide instructions in certain matters of corporate governance.
The appointment of senior executives in banks must be approved by the Governor of the CBE in accordance with Article 120 of the New Banking Law. Senior executives are defined as chairpersons, board members and executive directors of the main and oversight activities as specified in detail by the board of the CBE. The approval of the Governor is necessary for vetting the technical competence and capabilities of the candidate prior to appointment.
The senior executives must observe the following principles in performing their roles.
The member of the board of directors of any bank must not be, at the same time, a member of a board of any other bank or credit agency. The member cannot participate in management or consultancy activities with other banks or credit agencies as well. Also, a bank may not extend lending or guarantee the facilities of its chairman, board members, auditors, or any of their spouses or second-degree relatives, including any companies in which these persons have a controlling stake.
The Governance Instructions provide that a committee of three non-executive board members must be established in each bank to set the rules and recommendations for the remuneration scheme of senior executives and board members. The financial remuneration includes matters such as salaries, allowances, in-kind benefits, share schemes and any other bonuses or financial benefits.
The committee has certain guidelines to follow, such as the following.
The Anti-Money Laundering Law No 80 of 2002 (the “AML Law”) regulates the methods and obligations of different stakeholders to combat money laundering and the financing of terrorism. The AML Law imposes certain obligations on financial institutions to apply “know your customer” measures prior to establishing a relationship with clients or undertaking certain transactions.
Any bank must request documentation evidencing the ultimate beneficial ownership of any new corporate client. This must be supported by declarations and a list of shareholders or partners for each shareholder of the entity as established in each jurisdiction. This line of ownership must be traced by the bank up until the ultimate individuals vested with beneficial ownership to scrutinise any relationship with terrorist organisations or money laundering activities.
The bank must further request all other documents supporting the due incorporation and legitimate activities of the shareholders of the client, such as the articles and memorandum of association, the certificate of registration, and the lists of directors and shareholders. This information must be reviewed and updated regularly by the bank throughout the term of the relationship with its clients.
The obligations of banks under the AML Law extends also to monitoring the transactions processed within the bank and reporting any suspicious activities on accounts. This might require the bank to request from the client supporting documents for deposits, money transfers, or trade transactions to check that the funds are not passing through sanctioned countries or the hands of terrorists and sanctioned groups.
The CBE has created an anti-money laundering and terrorist combating unit in its structure to receive any suspicious reports from banks in this respect. Each branch of a bank must appoint an anti-money laundering officer who is responsible for processing any alarms raised by the operation staff and reporting incidents to the combating unit of the CBE.
Chapter 14 of the New Banking Law provides that a fund, affiliated to the CBE, must be established for guaranteeing the deposits of a bank's clients. This fund, the Guarantee of Deposits Fund (GDF), has an independent legal personality and separate financial statements. The GDF must have articles of association that provides for many things, including:
The CBE has the power to impose penalties on banks if they breach any of the articles of the fund or the related implementing decisions. In reality, the articles of Chapter 14 of the New Banking Law have not been implemented and no GDF has been established to date.
The New Banking Law considers that the information of banks’ clients is confidential and cannot be disclosed. This includes information such as bank accounts, deposits, safe locks and any related transactions. The bank must not allow the disclosure of this information to any party unless with the prior written consent of the account holder or a proxy or delegate is obtained. This obligation of confidentiality is a continuing one and remains even after the relationship between the bank and the client ends.
Certain exceptions apply to the secrecy of account information, such as in cases of a court order or an arbitral award allowing the disclosure of information during a lawsuit or arbitral proceedings. Also, if the investigations of a felony or misdemeanour require the disclosure of account information, the public prosecutor or any of its delegated senior public lawyers may apply for the permission of the Cairo Court of Appeal to disclose this information.
Any person who receives account information during the course of their job must not disclose this information to any other person. This obligation remains even after the person leaves their job. The New Banking Law also provides that the confidentiality of account information does not apply in the following situations:
Any breach in the obligations of confidentiality and secrecy of clients’ information under the New Banking Law is penalised by a period of imprisonment of not less than one year and/or a fine ranging between EGP200,000 and EGP500,000.
The CBE's Adoption of the Basel III Guidelines
The CBE adopts the guidelines of Basel III through its regulatory circulars and decisions addressed to the banks. There is a dedicated sector within the structural organisation of the CBE that is entrusted with several aspects of the adoption of Basel requirements. The Basel Sector of the CBE regularly follows up the latest updates in the Basel requirements and seeks methods to implement them in the banking sector. It further updates the guidelines in Egypt and conducts training for employees in co-ordination with foreign regulatory bodies and authorities.
All banks operating in Egypt are required to maintain a minimum capital ratio of at least 10% of their risk-weighted assets to mitigate any credit, market, or operational risks. This applies to the bank on a consolidated basis, including any group companies that operate banking activities or financial institutions (except for insurance companies) in which the bank or its related parties own more than 50%, or any other controlling percentage.
The capital basis, as defined by the CBE regulations, consists of two tiers. Tier 1 is the core capital (common equity) and additional capital (additional going concern). The core capital consists of ordinary shares representing the issued and paid-up capital, in addition to retained earnings and any reserves (for example, legal reserves and capital reserves).
This core capital excludes any treasury shares, intangible assets, receivables from securitisation transactions, deferred recoverable tax assets, and investments in insurance and financial companies subject to certain percentages. The core capital is also adjusted to exclude certain provisions made for non-performing loans, reserves of foreign currency discrepancies and cash-flow risks, among other things.
The additional capital consists of preferred shares, interim profits or losses, minority rights, and the discounted value of any shareholder loan calculated based on the interest rate of treasury bonds. The supplementary capital must comply with certain guidelines, such as that it has to be issued and paid-up capital, ranking behind depositors and creditors, unsecured, and unconditional or not recoverable by the right-holders unless with certain parameters.
The Identification of Systematically Important Local Banks in Egypt
In addition, the CBE has regularly followed the developments and updated rules issued by the Basel Committee on Banking Supervision, including an initiative to conduct a study in 2017 to specify the systematically important local banks in Egypt.
In order to identify the systematically important banks locally, the CBE assigns a relative weight for certain indications, including the aggregate exposure used in calculating the leverage, aggregate deposits, assets held with other local banks, liabilities due for other banks, volume of payments settled, assets held with offshore banks, and labilities due for offshore banks.
The CBE then assigns five categories of systematically important banks based on the mentioned criteria. These banks have more requirements on their additional capital to ensure a higher loss absorbency ability. The additional capital requirements for systematically important banks range between 1.25% for category 5 and 0.25% for category 1. These criteria for identifying the systematically important banks are revisited regularly by the CBE in case of any market developments within periods that do not exceed three years.
The CBE has also issued several circulars concerning the requirements of a minimum capital conservation buffer, and the maintenance of certain liquidity coverage ratios, in addition to other rules to mitigate concentration risks and interest rate risks related to trading books of banks. All banks in Egypt, except branches of foreign banks, are required to comply with the ratios specified by the CBE to manage their credit, market and operational risks.
The financial distress of any Egyptian bank is regulated by Chapter 12 of the New Banking Law, which excludes banks from the purview of the Restructuring, Reconciliation, and Bankruptcy Law No 11 of 2018, which is the general legislation regulating the bankruptcy of companies in Egypt. The New Banking Law designates the CBE as the authority entrusted with regularising the status of banks in financial distress. For that objective, the CBE is given wide powers and tools to put into effect the provisions of the New Banking Law.
Chapter 12 of the New Banking Law aims to achieve general objectives such as maintaining the stability of the banking system, protecting the interests of depositors, mitigating losses for creditors, and avoiding the utilisation of public funds in any settlement process. The guiding principles include proportionality of the measures with the level of distress, absorbing any losses through equity rights as an initial resort, and giving all creditors of the same rank similar treatment.
The CBE may issue a decision that a bank is in financial distress in the following cases:
In all cases, early intervention or any other procedures are not deemed as conditions precedent to initiate the settlement process for the distressed bank.
Notwithstanding the above, the CBE may issue a decision that a specific bank is in financial distress if any of the following cases, among others, that cancel the licence and registration of the bank by virtue of the board of directors of the CBE are realised:
The board of directors of the CBE may cancel the licence and registration of the bank subject to settlement in the following cases:
The cancellation decision shall not be issued unless the relevant bank has been notified to present its defence arguments in writing within 15 days of the date of notice. The licence cancellation decision will be published in the Egyptian official gazette within ten days of its issuance date. It will also be published on both the CBE’s and the relevant bank’s websites for the entire period of liquidation.
The CBE is entitled to issue a reasonable decision that a bank is in financial distress and to initiate the settlement of its status. Such decision shall be valid for a period of one year as of the publication date or the date upon which the relevant party is notified of such decision (as the case may be). The board of directors of the CBE is entitled to cancel the decision issued in respect of the settlement of the distressed bank’s status at any time if the reasons for the issuance of such decision no longer exist.
If the CBE has decided that a bank is in financial distress, the consequences will be as follows:
The CBE may also reschedule all the dues owed by the bank for a period not exceeding 60 days, except the clients’ deposits. The CBE may also suspend the application of early termination of financial contracts to which the bank under settlement is a party according to certain regulations.
The CBE will undertake to prepare a report including the inventory of the assets and liabilities of the bank under settlement.
The CBE may undertake any of the below procedures, upon publishing that a bank is in financial distress without obtaining the approval of the bank’s shareholders, creditors or debtors.
As per the New Banking Law, if the settlement process of a distressed bank requires the approval of the Financial Regulatory Authority or any other competent authority, such request shall be reviewed within three business days as of the application date.
Moreover, the CBE may prepare a plan to reschedule, reduce or recapitalise all or some of the liabilities of the bank under settlement to enhance its ability to successfully operate, noting that the below liabilities shall be excluded from such plan:
In the event of undertaking the settlement process, the CBE is obliged to consider the following:
Furthermore, in the event that any of the creditors or shareholders have borne, as a result of the settlement of the distressed bank, losses more than the losses that would have been borne in the event of liquidating the bank pursuant to the provisions of the law regulating the restructuring, preventative reform and bankruptcy issued by virtue of Law No 11 of 2018 by ranking the preference of the creditors as mentioned in Article 175 of the New Banking Law, they will be compensated for such losses from the distressed bank's settlement fund. Such losses shall be evaluated by an independent expert appointed by the CBE, taking into account the exclusion of financial support provided by the government to the bank that is the subject of the settlement, and this is pursuant to the regulations and procedures specified by virtue of a decree issued by the board of directors of the CBE.
As per the New Banking Law, the ranking of debt payments to the creditors of the bank subject to liquidation in the event of insufficiency of its assets to cover its liabilities and after the settlement and payment of secured debts shall be as follows:
Creditors with the same ranking shall be treated equally. Creditors with a lower ranking shall not be entitled to claim their dues until the settlement of the indebtedness of the higher rank.
The New Banking Law was only recently issued, in 2020, and no executive regulation has been issued to date.