The future of Egypt’s banking laws

Egypt is one of the three largest economies in Africa and is strategically positioned at a crossroads between east and west, making it a significant player in international trade in the Middle East and Africa (MENA) region. It is also home to the Suez Canal, a key artery in global trade that connects the Mediterranean Sea with the Red Sea.

Egypt's total area is 1,010,408 square kilometres, including 995,450 square kilometres of land and 6,000 square kilometres of water. According to the Egyptian Central Agency for Public Mobilization and Statistics, the population grew to over 100 million in 2020, divided among 27 governorates, 217 cities and 4,617 villages. Governorates with the highest population are Cairo (10.8%), Giza (8.6%) and Sharqiyya (7.4%).

The Egyptian government has been working hard to attract more foreign direct investment (FDI). As a consequence of these efforts, fDi Markets 2017 categorised Egypt as one of the top five destinations globally for greenfield FDI in 2016 and Forbes named Cairo as one of the top 10 cities in the world to launch a tech start-up in 2016.

According to fDi Intelligence's latest fDi Report 2020: "Egypt replaced South Africa as the second ranked destination by projects in the region, experiencing a 60% increase from 85 to 136 projects". This ranking covers the MENA region. Furthermore, Egypt led MENA countries in capital investment in 2020, attracting 12% of all capital investment with a total value of $13.7 billion. Financial services were one of the top five sectors for these projects in MENA in 2019.

In general, the Central Bank and Banking Sector Law No. 88 of 2003 bans any natural or legal person from practicing any banking activity, as prescribed by the law, in Egypt without being licensed by and registered with the Central Bank of Egypt (CBE). This restriction does not apply to any public legal person that operates banking activities within its scope of incorporation or international financial institutions (IFI) that were empowered to do so in Egypt by virtue of any special law or international treaty. These IFIs include the International Monetary Fund (IMF), the World Bank Group and Agence Française de Développement (AFD).

Banking activities are defined under the Banking Law as: "any activities of receiving deposits, providing refinancing, loans, facilities, contributing to share capitals in local companies as well as any other activities that is considered a banking activity as per the banking custom, on a regular basis and as the main business activities of any person carrying out these activities." This definition is also used un the Egyptian Trade Code.

Any person violating the restriction above will face imprisonment for a period of 24 hours to three years and/or a minimum fine of EGP5,000 ($317) and maximum fine of EGP50,000, in accordance with the Banking Law.

There are currently 38 banks operating in Egypt. The latest licence issued by the CBE to approve a new bank in Egypt was for Arab International Bank on June 5 2012. Since then, the CBE has not issued any new licences in Egypt, so the only way that any non-registered bank has been able to operate in Egypt is through the acquisition of a registered bank.

"A profit bonanza for Egyptian banks is ripening the industry for acquisitions. If only there were more willing sellers" – this is how Bloomberg has described the banking sector in Egypt. Over the past eight years Egypt seen only a few, albeit very large, M&A deals in the banking sector. These include Qatar National Bank Alahli's (QNB) acquisition of National Société Générale Bank Egypt (NSGB) in 2013, Emirates NBD's acquisition of BNP Paribas Egypt in 2013 and Attijariwafa bank's acquisition of Barclays Bank Egypt in 2017. Newspapers have recently reported discussions relating to a potential acquisition of Bank Audi Egypt by First Abu Dhabi Bank.

No one can deny the rapid global change in the banking and finance sector, notably the transition into fintech. The banking sector in Egypt, a country that witnessed two revolutions in 2011 and 2013, has undoubtedly been impacted by rapid global change as well as by local political upheaval. This was more than enough for the Egyptian Government, encouraged by the CBE, to propose an entirely new draft for the Banking Law (New Draft Banking Law). The New Draft Banking Law was prepared based on advice from international consultancy firms, a comparative study of other countries' laws, international standards, the Basel Framework, recommendations from the OECD, World Bank and IMF, and recommendations from CBE-registered banks.

As per the Egyptian Constitution, the New Draft Banking Law was submitted to the Egyptian House of Representatives for review and approval. After an almost five month review, the House of Representatives introduced several amendments to the New Draft Banking Law that was approved in principle by the House of Representatives on May 5 2020.

There are several important new provisions in the New Draft Banking Law, as amended by the House of Representatives which represent a marked break with the existing legal framework.

The New Draft Banking Law doubles down a restriction under the Companies Law (the Egyptian Companies Laws No 159 of 1981) that prohibits any member of an Egyptian-registered bank's board of directors from being appointed to the board of more than one Egyptian-registered bank or of an insurance company. It also prohibits any such board member from providing management or consultancy services to an insurance company or to more than one Egyptian-registered bank. The New Draft Banking Law highlights that this restriction will be imposed on anyone acting as a board member either in person or as a representative of any entities; this was not explicitly stated under the Companies Law's existing provisions.

All persons that are subject of the New Draft Banking Law are required to legitimise their position by no later than one year. The CBE can extend this by no more than two years.

The New Draft Banking Law will enter into force the day following the date on which it is published in the Egyptian Official Gazette, which diverges from the CBE's proposal that the law enter into force 30 days after publication.

The New Draft Banking Law adopts the same definition of 'banking activities' used by existing banking law.

The required minimum paid-in capital for the CBE will be increased to EGP10 billion instead of the EGP3 billion required by the existing law. The governor of the CBE will also be blocked from serving more than two successive four-year terms, which contrasts with the absence of any limits under the existing law.

The new law will allow the CBE to enter into loan agreements with local and international entities, however there are important existing provisions that will control this activity. According to the Egyptian Constitution, the House of Representatives is entrusted with approving the state's public budget. The executive authority – the President, the Government of Egypt (including the CBE) and any local administration – cannot borrow, obtain facilities or engage in any project that is not included in the state's public budget, unless parliament approves. The Public Budget Law also imposes a similar restriction on the executive, stipulating that it "may not enter into loan or get engaged in projects that are not included in the State's public plan or budget resulting the utilization of amounts from the State's treasury in the future without having an approval from the Parliament".

The new law will compel the CBE to prepare its financial position statement on a monthly instead of weekly basis.

The CBE will be allowed to enter into MoUs, agreements and/or protocols with its similar non-Egyptian supervisory entities to allow them to conduct an inspection of any registered bank in Egypt that is affiliated to any non-Egyptian bank subject to the supervision of such entities abroad.

The required minimum paid-in capital for banks in Egypt will become EGP5 billion, up from the existing EGP500 million requirement, while the minimum paid-in capital for branches of non-Egyptian banks will continue as $50 million.

The New Draft Banking Law requires each registered bank in Egypt to evaluate all its risk, especially its investments and loan portfolio risks, on a quarterly basis instead of semi-annual basis, as under the existing rules. Banks registered with the CBE will only be able to use the outsourcing services of providers that are registered with CBE.

The law relaxes and extends the deadline for the Notary Public Office to review any commercial mortgage request from seven days to 15 days. It also increases the minimum capital for credit bureaus in Egypt to EGP200 million from EGP5 million.

The Military Prosecutor (or any of its delegates) and Military Felony Court in Cairo are both empowered under the new law to obtain any data on any customer of an Egyptian-registered bank.

No one is now allowed under the New Draft Banking Law to operate or provide a payment system without a CBE licence. This new restriction is applied to all persons, whether natural or juristic, carrying out such activity inside Egypt or providing such services abroad to any residents in Egypt except for stock exchanges, futures exchanges, securities settlement systems, licensed central clearing, depository and registry systems, custodian banks and internal systems of the Egyptian Ministry of Finance that do not include payment, collection, set off or clearance of payment.

The New Draft Banking Law includes a chapter dedicated to fintech which includes, for the first time in Egypt, the possibility of issuing or marketing cryptocurrencies as long as it has been licensed by the CBE's board of directors.

The required minimum paid-in capital for currency exchange companies in Egypt will be EGP50 million, instead of EGP5 million under the existing banking law, while the required minimum paid-in capital for money transfer companies in Egypt will be EGP24 million, up from EGP5 million.

Auditors are required under the New Draft Banking Law not to audit more than two registered banks and more than three currency exchange companies in Egypt.

The New Draft Banking Law explicitly excludes the CBE, as well as any entity that is subject to its supervision, from the application of the Egyptian Consumer Protection No. 181 of 2018 and the Egyptian Antitrust Law No. 3 of 2005.

Under the New Draft Banking Law, branches and subsidiaries of non-Egyptian banks will have to obtain approval from the CBE's supervisory authority to be eligible for registration in Egypt.

The new law imposes a $50,000 fee, to be paid to the CBE, for reviewing any new application to register branches of non-Egyptian banks with the CBE and a EGP1 million fee for reviewing any new application to register a new bank with the CBE. Any person carrying out the banking activities stipulated by the law without authorisation in Egypt will face a prison sentence stretching from 24 hours to three years, as is the case under the existing law, and/or a fine of between EGP100,000 to EGP1,000,000, up from the existing EGP5,000 to EGP50,000 penalty.

The New Draft Banking Law also requires CBE approval for any stake over 10% in any Egyptian-registered bank, and this also includes any holding held through global depository receipts (GDRs). As with the existing law, the new law will require any holding between 5% to 10% of the issued capital of any registered bank in Egypt to be notified to the CBE. In a further development however, the new law extends this requirement to include the voting right in such a bank as well.

The New Draft Banking Law adopts the same requirement under the existing law to obtain prior approval from the CBE's board of directors to hold 10% or over in any registered bank in Egypt; however, the New Draft Banking Law introduces an additional remedy for any unapproved ownership of shares whereby the distribution of dividends and any voting rights associated with such shares must be ceased; and the shares must be transferred no later than six months from the date on which the holding was acquired, otherwise the CBE will be have the right to request the Egyptian Financial Supervisory Authority (FSA) to appoint a brokerage firm to sell the shares. This new remedy is in addition to imposing a fine of between EGP1 million to EGP2 million, which is an increase from the EGP100,000 to EGP200,000 penalty allowed under the current rules. The New Draft Banking Law also imposes this requirement on GDRs. By contrast, the existing law does not include any explicit provision applying this requirement to GDRs. It is also worth noting that Commercial International Bank is the only registered bank in Egypt that has issued GDRs.

Aside from the New Draft Banking Law, a new Non-Cash Payment Law was issued on April 17 2019 under Law No. 18 of 2019 regulating use of non-cash payment methods. The Executive Regulation relating to this Non-Cash Payment Law should have been issued by the Prime Minister by no later than six months since after April 17 2019. However, this Executive Regulation has not been issued as required by the Non-Cash Payment Law.

The Non-Cash Payment requires all governmental authorities, entities, public juristic persons and companies that the Egyptian Government owns the majority or the entire of its capital to settle all financial obligations due to and social insurance subscriptions due on their members, employees and experts by any non-cash payments except for travel allowance abroad.

The Non-Cash Payment Law requires all private sector entities of any kind to:

• settle all payments due to or social insurance subscriptions due on their employees, experts, chairs, board members and committees by non-cash payments as long as the total number of such employees or the aggregate amount of their monthly salaries exceed the limits to be determined by the Executive Regulation;

• settle all tax, customs duties, fees and fines; and

• repay instalments for any loan and insurance premium.

All governmental and private sector entities mentioned above are also required, within the thresholds to be determined by the Executive Regulations, to settle any payment by non-cash payment related to:

• Payments to suppliers, contractors, service providers, or any other counterparty;

• Loans;

• Dividends distribution;

• Rent, purchase or allocation fees; and

• Any other types of payment to be determined by the Prime Minister.

Any person that violates the above requirements will face a fine of between 2% to 10% of the payment made in cash subject to a cap of EGP1 million.

About the author
		Mohamed Hashish Partner, Soliman Hashish & Partners Cairo, Egypt Tel: +2 (02) 25162131 (Ext. 101) m.hashish@shandpartners.com www.shandpartners.com Mohamed Hashish has over 15 years of experience in handling corporate, M&A, restructuring, banking and finance, energy and electricity, TMT, construction and public procurement matters. Mohamed has been recognised by IFLR1000 as a Highly Regarded Leading Lawyer in Egypt for banking, M&A and project development since 2015. Throughout his career, he has advised over 700 multinational clients across these practice areas, as well as on matters related to starting up and operating of their businesses in Egypt. Due to his active practice and achievements, Mohamed was appointed a vice-chair of the international financial products and services and the Middle East committees of the International Law Section at the American Bar Association for the ABA terms starting from August 2016 to August 2020. He is also a board member of the United Nations Global Compact in Egypt and a Beachhead Advisor for Egypt for the New Zealand Trade and Enterprise (NTZE).