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NEW LAW ALERT: New Egyptian Banking Law No. 194 of 2020

The new Egyptian Banking Law, No. 194 of 2020 (the “New Banking Law”) was promulgated on 15 September 2020 and entered into effect on 16 September 2020 with a grace period for compliance with its provisions of one to three years (as applicable) from said date. The most prominent feature of the New Banking Law is its exhaustiveness and level of detail, with its 241 articles of law in comparison to the now cancelled law No. 88 of 2003 (135 articles) (the “Previous Banking Law”).  In our view, the main features of the New Banking Law are:

 

Expanded CBE supervisory and regulatory role

    • Under the Previous Banking Law, the CBE already enjoyed broad supervisory and regulatory powers. The New Banking Law details those powers further and explicitly adds (under article 7 thereof) powers relating to “settlement of status for distressed banks”, “protection of client’s rights and settling related disputes”, and the “protection and consolidation of competition and prohibition of monopolistic practices.”. We view those explicit powers as conferring upon the CBE more powers to intervene in the banking products and practices of Egyptian banks and Egyptian branches of foreign banks (although the freedom of pricing products, already present under the Previous Banking Law, has been retained under article 88 of the New Banking Law).
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    • The New Banking Law has set criteria that should be fulfilled for the appointment executives, with the CBE monitoring application. Article 120 of the New Banking Law provides that, without prejudice to the authority of the bank’s general assembly, the“main executives” (defined under the New Banking Law as chairman of the board, board members, and executive managers) must now be approved by the Governor of the CBE (as opposed to the CBE expressing its opinion on those under the Previous Banking Law), as to ensure qualifications’ criteria are satisfied. The same applies to managers of foreign banks branches and their deputies pursuant to article 68.
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    • Banks may not convene general assemblies without receiving CBE’s comments on the auditors’ report. The CBE may also order measures such as a capital increase or increasing relevant reserves prior to dividends’ distribution. Banks’ auditors also now have an obligation to report to the CBE any malfunctions or conflict of interest they see within the banks’ internal audit systems. Further, the CBE board of directors now has the power to freeze the auditor’s from conducting its activities, in case of failure to perform its duties (Articles 125-127).
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    • The reporting requirements from banks to the CBE has also been expanded according to the New Banking Law. The requirement to provide periodical risk reports in relation to the investment and credit portfolios of the banks under article 90 of the New Banking Law is a quarterly requirement instead of being semi-annually according to the Previous Banking Law.
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    • The information relating to banks’ financial position now takes a daily, weekly and monthly format (as opposed to monthly only under the Previous Banking Law). In addition, article 129 of the New Banking Law now authorizes the CBE to request for any information from the relevant Egyptian bank’s parent, sister companies or affiliates.
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    • It is worth noting that the supervision fee payable to the CBE has been doubled from EGP 1 for every EGP 10,000 (as stated in the banks’ average financial position) to EGP 2 for every EGP 10,000.
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Financial and monetary stability

    • The CBE is entrusted to instruct banks as to the applicable capital adequacy ratios and leverage calculation ratios, and will supervise all banking products (As opposed to “accounts opening guidelines, and provision of banking services” under the Previous Banking Law), and will ensure the presence of a code of ethics, and sufficiency of internal audit mechanisms. 
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    • Articles 149-171 (permitting the CBE to advance facilities to distressed banks) are to be read in conjunction with articles 10-11 (permitting the CBE to advance facilities to insolvent banks and those lacking liquidity) as they regulate the cases in which a bank could be deemed distressed, insolvent and the actions the CBE could take in this regard. It is worthy to note that the New Banking Law explicitly excludes the application of Law No. 11 for 2018 (Bankruptcy Law) on banks registered with the CBE.
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    • The New Banking Law has also innovated the “committee for financial stability” in its article 49, to be held at least once every 3 months and to be headed by the Prime Minister, with the governor of the CBE as vice chairman, and the Minister of Finance and the chairman of the Financial Regulatory Authority (“FRA”) as members. The council aims to take a preventive approach for financial crises, and reports to the President of the Arab Republic of Egypt, the President of the House of Representatives, and the Cabinet of Ministers. 

 

Data privacy and security

    • The New Banking Law contains several provisions relating to the security and protection of data used by banks or by the CBE (and the CBE board of directors) (articles 29 and 54). Article 142 provides that anyone who receives or acquires, by virtue of his profession, directly or indirectly, information or data about clients, their accounts, their deposits or their safes, shall not disclose it or enable others to view it in cases other than those authorised by virtue of this law. Such prohibition shall continue even after they leave work. 

 

Clarification and organization of process for taking collateral

    • The New Banking Law has, in our view, simplified some of the issues and processes relating to taking security, by foreign banks and international financial institutions. Mainly, it is now clear in article 108 that foreign banks can take real estate mortgages as security, as well as fonds de commerce mortgages, subject to an approval from the CBE (article 106). The timeline of registering real estate mortgages is generally problematic in Egypt. The New Banking Law aims to solve this issue by stating that the competent notary public must “give a decision on the request for mortgage within fifteen days form the date of submission”, provided that all necessary supporting documents have also been submitted with the request. 

 

Consolidation of the Government’s approach of generalizing cashless payments (in tandem with Law 18 for 2019 regarding cashless payments)

    • Under article 50 of the New Banking Law, the President of the Arab Republic of Egypt shall also establish the “National Payments Council” to limit the use of banknotes and to facilitate the use of e-payment systems. The council shall convene once every 3 months and shall be presided by the President, with the Prime Minister, the Governor of the CBE and other experts as members.

 

Innovation of a dispute resolution mechanism

The New Banking Law has explicitly excluded the application of Law No. 181 of 2018 (concerning consumer protection) on entities licensed according to the New Banking Law and introduced a new chapter covering the protection of banks’ clients. According to the New Banking Law, the CBE shall establish:

      • a department that is entrusted with receiving complaints from any of the banks’ clients;
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      • a committee (Dispute Resolution Committee) inside the CBE that can deliberate any disputes between a bank and any of its clients; 
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      • In addition, the New Banking Law establishes an arbitration and settlement center entrusted with any disputes connected with the application of the New Banking Law.

 

Acknowledging mutual supervision of foreign central banks on foreign banks operating in Egypt

    • Section 7 of chapter 2 under the New Banking Law organizes in detail the powers of the CBE when dealing with competent foreign regulatory authorities. It establishes the principle of joint supervision (concerning Egyptian branches of foreign banks) and allows for coordination and recognition of foreign competent central banks actions (such as approving settlements that are agreed between the foreign bank and the competent regulatory authority), and allows for a framework for sharing of information. This is an important addition for Egyptian branches of foreign banks, as it allows for harmonization between the parent and the branch rules, and may prevent situations of conflict of rules.

 

Outsourcing arrangements

    • The New Banking Law has now defined “delegated services” as the services delegated by licensed entities to third parties in order to perform functions and activities on their behalf. This is a newly covered area of regulation which would, in our view, cover the outsourcing of data processing and KYC services to offshore service providers. According to article 96 those service providers must now be registered with the CBE.

 

Clear permissibility of repo transactions

    • Article 84 of the New Banking Law explicitly excludes article 465 of the Egyptian Civil Code from a bank’s dealing on financial instruments. Article 465 of the Egyptian Code prohibits sale and buy back transactions, which had always put ‘repo transactions’ at a risk of being invalidated. The explicit exclusion will now practically serve to exclude financial instruments’ transaction from that prohibition.

 

Capitalization requirements

    • The New Banking Law has raised the minimum capital requirements from the Previous Banking Law EGP 500 million (for Egyptian banks) to EGP 5 billion and USD 50 million (for branches of foreign banks) to USD 150 million. It is worth noting that“digital banks” and “specialized banks” may be excluded from this minimum capitalization requirement (article 64).
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    • Further under article 80, the New Banking Law obliges banks to notify the CBE in case (i) any nature or juridical person, or their related parties owns more than 5% of the bank’s issued capital, or 5% of the bank’s voting rights, or any ratio that leads to the effective control over the bank, and for each increase or decrease thereof by 1%; and (ii) any major shareholders’ ownership falls below authorized ownership limit.
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    • Also, in case any bank is willing to hold shares in any financial or non-financial company, by more than 5% of the company’s issued capital, the bank shall provide the CBE with the full data of such company by no later than two months prior to the actual procedures of the shareholding.
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    • Regarding the bank’s capital requirements, in comparison with the Previous Banking Law , the definition of what an Egyptian bank must hold to counter its actual or contingent obligations has been expanded (as per article 91 of the New Banking Law). Under the Previous Banking Law, banks must have had (in addition to its capital),“monies” sufficient to satisfy its obligations. This has been replaced under the New Banking Law by “assets”, hence including immovable property in the calculation of what a bank should hold versus its obligations. Both the Previous Banking Law and the New Banking Law allow for a bank to calculate “monies” held by that bank outside of Egypt.
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    • In addition, although the obligation for the bank to hold a credit balance with the CBE reflecting a percentage (to be determined by the board of the CBE) of what that bank holds in deposits has been retained, the contravention to this obligation now has more severe consequences, including the CBE calling for a general assembly of the contravening bank and compelling the assembly to discuss the agenda the CBE sees fit.

Creation of a licensing regime for fintech and e-payments’ activities 

    • The Previous Banking Law had not expressly regulated electronic payments service providers and FinTech companies, whereas relevant CBE circulars were more concerned with the regulation of e-payments platforms operated by Egyptian banks. The New Banking Law sets forth conditions and procedures for licensing of payment systems operators and payment service providers, their respective operating rules and their obligation to provide protection for the E-Systems used, their final settlements, and the supervision and control of the CBE. Service providers may now have agents in Egypt (as it is unlikely that all e-payments service providers would establish Egyptian legal entities), however this does not limit the liability of the service provider for services rendered in Egypt.
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    • This is a newly introduced chapter under the New Banking Law in its entirety. There were previously a lot of uncertainties surrounding the area of FinTech and several provisions were loosely regulated by circulars from the CBE. This has been covered and addressed under the New Banking Laq, which provides for much certainty for companies operating in this area and the banks they transact with.
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    • Any electronic payments service provider must be licensed by the CBE. The service provider must comply with certain requirements set out by the board of the CBE. As a general requirement, the provider must deposit a security whose amount is subject to the discretion of the CBE.

 

For any questions or inquiries, please feel free to contact:

Mahmoud Bassiouny

Regional Managing Partner and Head of Finance & Projects

mahmoud.bassiouny@matoukbassiouny.com

 

For further press related inquiries please contact Mary Harding (mary.harding@matoukbassiouny.com).