Banking Regulation 2021

Last Updated December 10, 2020

Egypt

Law and Practice

Authors



Matouk Bassiouny & Hennawy is a leading, full-service, MENA region law firm with offices in Egypt (Matouk Bassiouny & Hennawy), the United Arab Emirates (Matouk Bassiouny & Ibrahim), Sudan (Matouk Bassiouny in association with AIH Law Firm) and Algeria (Matouk Bassiouny in association with SH-Avocats), as well as a country desk covering its Libya practice. The firm's attorneys specialise in advising multinationals, corporations, financial institutions and governmental entities on all legal aspects of investing and doing business in the MENA region. The Finance & Projects group’s primary goal is to provide its clients with legal advice on the banking and finance sector in Egypt, as well as the strengths and weaknesses of security available to lenders in the Egyptian market. Headed by Mahmoud Bassiouny, the group maintains close relationships with Egyptian financial institutions, which enable it to have first-hand knowledge of what constitutes commercially acceptable solutions for major institutions involved in large-scale deals.

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:

  • an expanded supervisory and regulatory role for the Central Bank of Egypt (CBE);
  • data privacy and security;
  • clarification and organisation of the process for taking collateral for foreign banks;
  • consolidation of the government’s approach of generalising cashless payments (in tandem with Law 18 for 2019 regarding cashless payments);
  • clear permissibility for repo transactions;
  • capitalisation requirements; and
  • the creation of a licensing regime for fintech and e-payments activities;

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.

  • The issued and paid-up capital must be at least EGP5 billion. This shall be USD150 million or its equivalent for branches of foreign banks.
  • The ultimate beneficial owners can be clearly identified from the ownership structure and the legitimacy of the capital funds are established.
  • The licensing must not contravene the general economic interests in Egypt.
  • It must not jeopardise the competition and antitrust laws.
  • The name of the bank must not be similar to any other bank operating in Egypt.
  • The applicants must demonstrate a solid financial and economic feasibility study that includes the objectives and targeted operations, in addition to a market study on how to employ assets.
  • The bank must have clear internal auditing and risk management systems and shall identify the governance and other strategic policies followed in its operations.
  • Furthermore, the branch of a foreign bank or the applicants for a licence of joint-stock companies that have a parent financial institution must show that such foreign bank or parent institution is regulated under the framework of a regulator similar to the CBE. The consent of such regulator must be obtained, and the branch must further accept that it will exchange information and co-operate with the CBE in implementing its role.

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.

  • Complying with the laws and regulations, and having the due care required for their profession.
  • Co-operating with the CBE and reporting any incidents of material breach.
  • Supervising and ensuring that operations are efficient within their departments and delegating their powers to competent personnel. However, a senior executive will remain responsible for any matters delegated to others.
  • Providing information to clients with transparency and avoiding any conflicts of interest.

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 auditing roles in the bank must be given adequate remuneration without exposing their independence.
  • A comparative study with other institutions must be conducted to attract talent and maintain it.
  • A written policy must be in place and this policy has to be reviewed and updated regularly. The board of directors shall ratify the policy and disclose the aggregate amount of the 20 highest-paid individuals in the bank.
  • A performance-based approach must be applied in deciding the level of financial remuneration, and, specifically, long-term assessment criteria must be adopted rather than relying on short-term goals.

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 mechanism of how the fund will achieve its goals and regulate its relationship with banks;
  • the structure of its board of directors and work systems;
  • the share of participation in its capital for each bank, and the annual fees of membership;
  • the limits and amounts of deposits that can be guaranteed by the fund; and
  • the sources for raising funds and investment opportunities.

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:

  • for the performance of the roles and responsibilities of the auditors of a bank;
  • when the bank is obliged to issue a reasoned rejection to the beneficiary of a returned cheque;
  • when a bank is suing a counterparty in a legal dispute and the disclosure of certain client information is necessary for that purpose; and
  • in the event of a necessary disclosure in accordance with the AML Law.

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:

  • the financial position is poor or the interests of depositors are subject to risk;
  • the bank failed to meet its liabilities in respect of depositors or other creditors;
  • the bank’s liabilities exceeded the value of its assets;
  • the value of the bank’s shareholders' rights is decreased in comparison with the allocations that should be formed;
  • if the bank fails to have access to funding resources or the financial markets;
  • the bank failed to adhere to the limit of the capital adequacy ratio or the liquidity ratio, or any other applicable supervisory ratios decided by the CBE's board of directors;
  • the value of the bank’s assets or profits has decreased significantly in a way that threatens its ability to operate;
  • the bank is relying on exceptional and onerous financial resources to conduct its normal course of business;
  • the bank did not undertake the procedures related to the early intervention prescribed by the New Banking Law under Article 147; or
  • the branch of a foreign bank failed to meet its liabilities as well as the bank’s headquarters as per the unconditional security provided pursuant to Article 68 of the New Banking Law, and the competent authority did not issue a decision to settle the bank’s status in the state of its headquarters within the period determined by the board of directors of the CBE.

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 commitment of a gross or continued violation by the bank according to the provisions of the New Banking Law or the issued decrees in this regard, provided that such violation has not been rectified within the period determined by the board of directors of the CBE;
  • the bank has followed a policy that negatively affects the general economic interest, the monetary policy, the banking system, or the depositors’ interests;
  • the bank ceased to operate, or has presented a liquidation request by choice or a request to suspend its activities;
  • the licence has been issued based on incorrect data that has been provided to the CBE;
  • one of the licensing conditions is missing; or
  • the data given in respect of the issuance of a licence has been materially changed.

The board of directors of the CBE may cancel the licence and registration of the bank subject to settlement in the following cases:

  • the bank’s status may not be reconciled or restructured; and
  • the bank’s assets or liabilities have been fully or partially transferred to another bank or to the interim bank.

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:

  • all the competencies related to the general ordinary and extraordinary assemblies, the board of directors and the executive administration will be transferred to the CBE unless otherwise decided by the CBE;
  • the distribution of any profits or any other form of capital distribution to the shareholders or others will be suspended;
  • the disbursement of due payments to the main executives will be suspended, except those related to the business or services decided by the CBE; and
  • any lawsuits filed by the creditors against the bank under settlement will be suspended, for a period of 90 days as of the date upon which the bank's financial distress was published.

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.

  • Dissolving the distressed bank’s board of directors and appointing a delegate to carry out the management activities.
  • Suspending fully or partially the bank’s operations or certain activities.
  • Reducing the nominal value of the bank’s shares or reducing the issued shares.
  • Recapitalising the bank by issuing new shares or any other tradable securities.
  • Reducing the value of some of the bank’s liabilities or transferring such liabilities to shares in its capital or in the interim bank.
  • Terminating or amending any provisions of any contract or bond from debt securities to which the bank under settlement is a party.
  • Assigning all or some of the rights, liabilities and assets owned by the distressed bank to another bank or the interim bank.
  • Merging the distressed bank with another bank or transferring its title to shares.
  • Filing civil lawsuits claiming compensation or in order to receive any monies. Such lawsuits will be filed against any of the shareholders or main executives or the employees responsible for such financial distress.

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:

  • the clients’ deposits without the deposits of the related parties of the bank under settlement;
  • the taxes, the social insurance and the CBE dues;
  • the debts secured by a guarantee, or transferred or tangible assets; and
  • the salaries of the bank’s employees.

In the event of undertaking the settlement process, the CBE is obliged to consider the following:

  • ranking the preference of the creditor as shown under Article 175 of the New Banking Law, without prejudice to the authority of the CBE to eliminate any obligations as shown under the second paragraph of Article 163 of the New Banking Law; and
  • applying the principle of reciprocity for creditors with the same ranking, unless non-compliance is mandatory to maintain the stability of the banking system given the impact of the negative consequences that the distressed bank would have on the rest of the banks, or to increase the value of the bank subject to settlement in favour of the group of the creditors.

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:

  • the liquidator and delegate expenses;
  • the deposits of clients, except the deposits of the related parties of the bank subject to liquidation;
  • the salaries (within six months prior to the appointment of a liquidator) due to the employees of the bank subject to liquidation;
  • the government dues that arose from the financing of settlement operations or the financing provided by the CBE on behalf of the government;
  • the taxes, dues and insurances of the employees working prior to the appointment of the liquidator;
  • the debts provided to the bank by the private sector after announcing the settlement of its status or the appointment of a liquidator; and
  • the unsecured debt.

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.

Matouk Bassiouny & Hennawy

12 Mohamed Ali Genah
Garden City
Cairo
Egypt

+(202) 2796 2042

+(202) 2795 4221

info@matoukbassiouny.com www.matoukbassiouny.com
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Law and Practice

Authors



Matouk Bassiouny & Hennawy is a leading, full-service, MENA region law firm with offices in Egypt (Matouk Bassiouny & Hennawy), the United Arab Emirates (Matouk Bassiouny & Ibrahim), Sudan (Matouk Bassiouny in association with AIH Law Firm) and Algeria (Matouk Bassiouny in association with SH-Avocats), as well as a country desk covering its Libya practice. The firm's attorneys specialise in advising multinationals, corporations, financial institutions and governmental entities on all legal aspects of investing and doing business in the MENA region. The Finance & Projects group’s primary goal is to provide its clients with legal advice on the banking and finance sector in Egypt, as well as the strengths and weaknesses of security available to lenders in the Egyptian market. Headed by Mahmoud Bassiouny, the group maintains close relationships with Egyptian financial institutions, which enable it to have first-hand knowledge of what constitutes commercially acceptable solutions for major institutions involved in large-scale deals.

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