CBE looking to encourage digital and SME banks under proposed changes to banking act

The central bank’s push to develop SME and digital banks and M&A news lead an otherwise reasonably quiet morning. We’d also like to quitely note that the Brits are back as direct flights to Sharm El Sheikh from the UK resume. We have chapter and verse on all of this in this morning’s Speed Round, below.

What everyone’s going to be talking about instead: El Corona, where we are pleased to report that as of dispatch time, there were no new cases in Egypt after one was reported over the weekend.

Reactions to Egypt’s first confirmed covid-19 case:

• EGX-listed companies are beginning to file disclosures denying that their businesses have any ties with China or will be affected by the outbreak (here and here).
• Egypt is unlikely to be “singled out” as a destination tourists will stay away from, and the detection of our first case probably won’t drive down tourism, former Egypt Tourism Federation Chairman Elhamy El Zayat tells the local press.
• Speed Medical will have PCR kits to test for the virus by the end of the month, making it one of the first private medical labs in the country to have the kits on hand, according to a filing to the EGX (pdf).
• Rep. Ayman Aboul Ela wants to see “periodic and random testing” for the virus in schools and other places with large gatherings, according to Youm7.

The virus outbreak could infect two-thirds of the global population, said Ira Longini, an adviser to the World Health Organization (WHO), according to Bloomberg, based on a model of the virus’ spread in China. Some public health officials fear the outbreak may have reached a “turning point” after an incident in Cambodia that saw hundreds of people disembark from a cruise ship and then head to airports — only to find later that at least one passenger was infected.

The numbers as of dispatch this morning are more than 70k cases of coronavirus worldwide with 1,670 deaths, according to a Bloomberg live tracker, as China’s Hubei province reported more cases than the day before.

The Central Bank of Egypt will meet this Thursday, 20 February to review interest rates. Our poll showed yesterday a division among analysts about whether the CBE’s Monetary Policy Committee will resume its easing cycle or leave rates unchanged to study the effects of last year’s rate cuts and potentially inflationary effects of the covid-19 outbreak.

Foreign Minister Sameh Shoukry is on his way back from Germany, where he attended the Munich Security Conference. The minister held talks with several of his regional and European counterparts during the three-day event, and urged the international community to do more to combat the threats posed by terrorism and political instability in North Africa during a discussion session on regional security. The Munich conference is one of the world’s largest gatherings for international security experts and policymakers.

On the latest episode of “The Robots Cometh”: Robo-analysts tend to outperform their human counterparts in generating returns for investors, particularly since they don’t have the innately human biases that sometimes stand in the way of making the right call, according to a study by Indiana University professors picked up by Bloomberg. The small and largely experimental branch of fintech using robo-analysts was found to produce more sell ratings than traditional firms, and are more balanced in their buy/sell recommendations.

BlackRock has become a target for France’s Yellow Vest protesters, who allege that the US asset manager is attempting to influence French President Emmanuel Macron’s overhaul of the country’s pension system for its own gain, the New York Times reported. Blackrock, which manages over USD 7 tn in assets — more than twice France’s economic output — has denied the accusations, but the Gray Lady notes that “financial firms could get some business from part of the pension overhaul that encourages high earners to invest in stocks.”

Foreign creditors are getting anxious as opinions diverge on Lebanon’s scheduled debt repayment deadline next month. International creditors Ashmore and Pimco are at odds over whether to push Beirut to repay its debt in full, with Pimco saying that Ashmore’s attempts to pressure the “effectively bankrupt” government to repay is “just delaying the inevitable,” the Financial Times reports. The country seems likely to default on its debts as public pressure mounts to avoid further budget cuts and rapidly eroding confidence in the country’s local currency is pushing it into even tighter fiscal territory.

British communications regulator Ofcom has come up with proposals to tighten regulations on internet businesses under a mandate from the UK government to regulate the internet, according to the Guardian. One of the proposals Ofcom has put forth would require annual transparency reports from internet firms, particularly companies that allow user-generated content such as Facebook and Google, on how they define and handle harmful content.

Mark Zuckerberg thinks El Face should be regulated as a newspaper-telecom company hybrid — only, without the whole “responsibility” thing. He told the Munich Security Conference that Facebook shouldn’t be responsible for the content circulated on the platform like newspapers with editors normally would be, according to the Wall Street Journal. The Facebook CEO thinks his company’s accountability should be akin to a telecom operator, which can’t be reprimanded for what customers say over the phone, but he didn’t really explain the thought beyond that.

PSA- Expect cold, rainy weather in the capital city this evening, with lows expected to reach 13°C, according to the Egyptian Meteorological Authority, and a daytime high of 18°C. Nighttime readings elsewhere in the country — including Alexandria, Port Said, and Ismailia — will also range between 11-13°C, with a chance of light to medium rain.

*** It’s Blackboard day: We have our weekly look at the business of education in Egypt, from pre-K through the highest reaches of higher ed. Blackboard appears every Monday in Enterprise in the place of our traditional industry news roundups.

In today’s issue: We look at how the government is looking to foreign universities to ensure the quality of private sector higher education, and with that, turn most private sector operators into international universities.

The slow news day seeped into the airwaves, giving the talking heads little to chew on last night. Among the highlights were a chat Lamees El Hadidi had with Shuaa Securities’ Amr El Alfy on the latest with the Saudi Telecom Company’s (STC) bid to acquire Vodafone Group’s stake in Vodafone Egypt.

The ball is in TE’s court: Telecom Egypt, which holds a 44.8% stake in Vodafone Egypt, still has three possible courses of action to decide how to respond to STC’s bid to acquire the other 55% stake, El Alfy tells Al Kahera Alaan’s El Hadidi (watch, runtime: 12:58). Whether TE will decide to offload its stake, keep it, or use its right of first refusal to claim the stake STC is eyeing remains unclear.

A planned industrial zone in Banha would create more than 3.5k direct jobs, cabinet spokesman Nader Saad told Al Hayah Al Youm’s Lobna Assal (watch, runtime: 9:03). Such zones will contribute to creating a stronger manufacturing base, allow Egypt to maintain economic growth levels, and keep unemployment rates from rising, Saad added.

Wuhan rescue mission accomplished: The Egyptian expatriates the government brought home from Wuhan earlier this month spent two weeks in quarantine and were scheduled to return home yesterday, Health Ministry spokesperson Khaled Megahed tells Assal (watch, runtime 6:41). El Hadidi (watch, runtime: 9:38), El Hekaya’s Amr Adib (watch, runtime: 5:46), and Masaa DMC’s Eman El Hosary (watch, runtime: 6:51) all reported the news.

EXCLUSIVE- SME lenders and digital banks to be made exempt from new capital requirements in proposed Banking Act: The proposed Banking Act would exempt SME lenders and digital banks from complying with new capital requirements designed to increase the stability of the financial sector, a Central Bank of Egypt (CBE) source tells Enterprise. A revised version of the draft legislation — which would hike capital requirements for all commercial banks — would exempt these so-called “specialized banks” from meeting the new requirements.

How does the legislation define specialized banks? A copy of the revised legislation seen by Enterprise does not set a clear definition of what the CBE will classify as a “specialized bank.” One industry watcher with whom we spoke told us that this could be convenient in the future — the central bank wouldn’t have to get new legislation approved if it decides it wants to widen or change the definition at a later date.

CBE to classify digital banks and SME lenders “specialized”: One CBE source said that the bank would initially allow dedicated SME lenders and digital banks to qualify as specialized banks. The amount of capital these banks would be required to hold would be set on a case-by-case basis, unlike local commercial banks which would need to hold at least EGP 5 bn in reserve — a tenfold increase from the current requirements. Banks that apply for the license would need to submit a market study and risk assessment, after which the CBE would set reserve capital requirements, deposit limits, and the maximum amount of money they can lend.

Existing banks cannot be retrospectively given a specialized bank status, one CBE official told us, explaining that the 2003 Banking Act legally defines all banks currently operating in Egypt as commercial banks. This means that only new banks and subsidiaries of existing ones can be designated specialist. The exemption from the minimum capital requirements would apply only to the subsidiary, not to the parent bank.

The CBE has already received applications from specialized banks in both sectors — including from the National Bank of Egypt, Banque Misr, and Baraka Bank, media reports suggest — but will begin studying them once the law is approved.

This isn’t the only thing that has changed from the last time we saw the draft legislation.

Chief among those changes: Private and state-owned banks would get more control over board composition in the latest draft, which allows them to form their own boards without any CBE intervention. The boards of directors of 100% state-owned banks would be formed with the approval of the prime minister rather than by the presidency.

Also worth mentioning:

• The CBE would have fewer punitive powers when banks are found guilty of breaking the law. The current version removes their right to fine individual bank officials, limiting them to handing out fines to the banks themselves. The CBE would maintain its right to fire officials.
• Reporting violations: Payment companies would be obliged to report violations to the CBE.

The latest version increases penalties for several violations: Businesses that provide banking or payment services without a CBE license would be fined between EGP 1-10 mn, up from EGP 100k-1 mn in the original legislation. People who repeatedly use credit for purposes different from what they stated in their applications would receive both a fine and a jail term, while those found guilty of black market FX trading would receive a harsher punishment.

What’s the current status of the legislation? The House Economic Committee has been discussing the draft legislation since last month, three months after the cabinet gave its approval.

Background: The Banking Act has been in the works since 2017 and was only handed over to cabinet for discussion in May last year. The legislation would grant the CBE increased oversight over the banking sector and introduce new regulations to govern the tools devised by technology, including e-payments, fintech, and cryptocurrency, amongst others. It would also enhance data protection and customer privacy by requiring banks to obtain written consent for indirect or direct data dissemination. You can find out more about the legislation here.

The EU is going after Chinese subsidies … in Egypt: European customs authorities will begin to register imports (pdf) of Chinese glass-fiber products made in Egypt ahead of possible anti-dumping duties. The move comes after European glass-fiber manufacturers complained last year (pdf) that Chinese company Jushi, which set up shop in the Suez Canal Economic Zone in 2012 and swiftly expanded after 2016, of using Chinese subsidies to dump in the European market.

The case also claims that the Egyptian government agreed with Beijing to provide subsidies to the company and that Chinese banks are providing cheap loans to Egyptian state-owned banks for the benefit of Chinese companies in Egypt.

EU authorities are confident they can take the case to the European courts and perhaps the World Trade Organization — but even if they don’t the case will set a precedent for clamping down on Chinese subsidies outside of China. The FT has more.

UK flights officially return to Sharm El Sheikh after four-year hiatus: British tourism companies resumed flights to Sharm El Sheikh yesterday following a four-year ban imposed by the British government following the downing of the Russian Metrojet in 2015, the local press reports. Flights will run five times a week between Gatwick, Manchester, Birmingham and Sharm El Sheikh from February through May of this year. National flag carrier EgyptAir will be operating direct flights between Gatwick and Sharm. The resumption of flights could increase the number of British tourists visiting Sharm each year to around 600k, according to experts quoted by the local press.

Background: The UK first imposed its flight ban to Sharm El Sheikh Airport after the downing of a Russian airliner in 2015 and only officially lifted it in October last year. Tui announced that it would relaunch flights from Edinburgh and Glasgow to Sharm in November 2020, shortly after the removal of the ban last year and EasyJet announced it would be doing the same, running two flights a week from Manchester from June and two flights a week from London Gatwick from September of 2020.

M&A WATCH- Could STC find a way out of having to make a bid for 100% of Vodafone Egypt? The Saudi Telecom Company (STC) is planning to submit paperwork to the Capital Market Authority arguing that it should be exempt from making a mandatory tender offer for Telecom Egypt's stake in Vodafone Egypt, Al Shorouk reports, citing an unnamed source. It remains unclear what these golden ticket papers are that would allow STC to circumvent the Financial Regulatory Authority, which earlier this month ruled that the Saudi company must submit a MTO for TE’s 44.8% stake in Vodafone Egypt if it goes ahead with its USD 2.39 bn acquisition of Vodafone Group’s 55% stake.

Meanwhile, TE might beat STC to the punch and acquire the entirety of Vodafone: State-owned TE brought EFG Hermes and Citibank on board to advise on its options and confirmed in a regulatory filing last week that it has the right of first refusal to STC's purchase and pre-emption rights to make a counteroffer. The Egyptian Competition Authority is looking into whether this would violate competition rules since TE already owns the We mobile network. TE can also secure financing to put forward an acquisition offer or seek to sell its stake in Vodafone in the form of a partial sell-off in exchange for a seat at the company’s board of directors.

M&A WATCH- Bank Audi is looking to offload the entirety of its 100% stake in online brokerage firm Arabeya Online and has already received offers of interest from a number of would-be buyers, Al Mal reports, citing sources close to the matter. The Lebanese bank has already granted a handful of these investors the green light to begin the due diligence process, which the sources expect to wrap in 1Q2020. Audi is in direct contact with the investors and reportedly has no intention of hiring financial advisors for the transaction.

Arabeya was founded in 2006 by current Public Enterprises Minister Hisham Tawfik and his brother, Hany. Bank Audi had bought into the online securities brokerage in 2010, when it snapped up Hisham Tawfik’s 10% stake and Al Naeem Holding Group’s 80% stake. Audi then acquired the remaining 10% in 2015, giving it full ownership of Arabeya.

Background: News of the potential Arabeya Online sale comes after Bank Audi announced it was looking to sell its Egypt unit to First Abu Dhabi Bank (FAB) last month as it seeks to exit the country amid Lebanon’s ongoing financial crisis. Bank Audi has tapped EFG Hermes as its financial advisor for the transaction and FAB is currently undergoing a formal evaluation of Audi.

M&A WATCH- Mwasalat Misr eyes growth through bus operator High Jet: Mwasalat Misr is considering purchasing transport company High Jet, which currently services 14 cities with a 60-bus fleet, to expand its operations to include cross-governorate transport, reports Al Mal. The company is expected to reach an agreement in the coming weeks, two sources familiar with the talks said, without disclosing the value of the acquisition.

Background: Mwasalat Misr currently operates seven bus lines between Sixth of October and Sheikh Zayed to Abdel Moneim Riad and Cairo University. The company just launched its first electric buses on a route it operates between Abdel Moneim Riad square and New Cairo earlier this month and plans to have its fleet entirely made up of electric buses by 2022.

Hassan Allam, Arab Contractors, Petrojet contracted to work on Dabaa: Our friends at Hassan Allam Construction, alongside Arab Contractors and Petrojet, have been awarded contracts in three separate tenders to begin work on the site of the Dabaa nuclear power plant, according to Hapi Journal. Hassan Allam won a USD 20 mn contract to prepare the “pioneers base camp” for staff working on the facility, while Arab Contractors will be doing leveling work for the camp, according to Russia’s Rosatom subsidiary Atomstroyexport, the main contractor for the Dabaa project. Atomstroyexport will be issuing a new tender for local companies this year to complete other site preparation work. Construction of the Dabaa plant is expected to begin in the middle of this year, but no contracts for construction, infrastructure or other work on the plant have so far been issued.

Correction: 25/02/2020

A previous version of this story said Hassan Allam Construction had been awarded a contract to work on the foundation of the plant, not the base camp site. This version has also been edited to include the contract value.

FinMin directs state coffers to only pay suppliers who pay their taxes: Finance Minister Mohamed Maait has ordered state auditors to ensure that only suppliers who regularly pay their taxes are paid for any goods and services delivered to state bodies, according to a circular seen by the press. Suppliers of medical goods, maintenance and spare parts, cleaning and security services, and food were singled out by the memo, among others.

A potential obstacle to the private sector? This requirement will tie the hands of private suppliers and add a bureaucratic layer by requiring them to get clearance from the Tax Authority every time they get a new purchase order, Mahmoud Gaballah, tax expert at auditing firm Mazars Egypt, said. According to Gaballah, the move is unnecessary as a similar requirement is already covered by proposed the new unified tax payment law currently under discussion in the House of Representatives.

A quarter of the founders of pre-seed startups operating in the MENA region are Egyptian — meaning that we eclipse all other nationalities, a report by Wamda shows (pdf). 12% of regional pre-seed startup founders are Jordanian, putting them in second position. Meanwhile, a third of MENA’s pre-seed startups are registered or incorporated in Egypt — a higher number than any other country in the region, with the UAE having the next-highest figure of 27%, even though only 2.7% of the region’s startup founders are Emirati. Egypt and the UAE are also the favored locations for pre-seed startups to base themselves, the report shows — with 26.5% of these startups being based in Egypt and 35.3% in the UAE. The report is based on data from 627 startup founders who applied to the Wamda X fellowship program, Zawya reports.

STARTUP WATCH- Egyptian courier startup Bosta has raised seven figures in its series A funding round from European delivery giant DPD Group and Egyptian e-payment platform Fawry, the company said in a statement (pdf), without disclosing the exact amount. The company reportedly raised USD 1.4 mn in the funding round, Waya reports, citing sources with knowledge of the matter. The startup has so far served over 5k businesses in Egypt, Bosta’s co-founder and CEO Mohammed Ezzat told Menabytes. Rather than employing a fleet of drivers, Bosta uses an Uber-like model that allows users to connect to couriers to deliver packages.

IPO WATCH- Mubasher’s brokerage firm acting as broker in Emerald IPO: Mubasher Capital Holding for Financial Services’ trading arm is acting as a broker in the IPO of real estate investment firm Emerald, Vice Chairman Ehab Rashad said. Emerald kicked off its private placement and public offering last Wednesday, marking Egypt’s first IPO this year. The offering’s lead manager is Odin Investments, which is an indirect shareholder in Emerald through its holdings in the Egyptian Real Estate Fund (EREF).

EARNINGS WATCH- Abu Dhabi Islamic Bank reported a 37% increase in annual net profits, rising to EGP 1.1 bn in 2019 from EGP 804 mn the year before, according to an EGX filing (pdf). The bank’s revenues increased 19% during the period to EGP 3.7 bn, up from EGP 3.1 bn.

Is passive fund growth putting fossil fuel divestment in jeopardy? The growth of market-tracking passive funds threatens to be a huge stumbling block to the fossil fuel stock divestment movement — despite efforts from both environmental campaigners and even asset managers themselves, writes Billy Nauman in the Financial Times. Despite a significantly growing number of institutional investors committing to cutting fossil fuel stocks from their portfolios, soaring growth in passive investing means that fossil fuel companies can still see sizable inflows — as long as they retain their position in the right indices.

Asset managers are jumping on board with divestment, but fossil fuel companies are finding ways to lessen its impact: BlackRock, the world’s largest asset manager, said in January that it would reshape its investment strategy in response to the climate crisis, pledging to drop USD 500 mn of coal stocks from its actively managed funds. But until its customers choose to pick funds that exclude fossil fuels, BlackRock will retain a significant stake in every major oil company, Nauman writes. Fossil fuel companies appear well aware of the advantages that passive funds can offer, with oil firm Encana securing its inclusion in large US indices by relocating from Calgary to Denver in January.

Can anything be done to halt the trend? An initiative started by the New Zealand Superannuation Fund in 2017 saw it work with MSCI to create customized indices that weight companies according to their carbon emissions performance. Through this effort, some USD 610 mn has been moved from high carbon companies to lower-risk alternatives. And global fund manager State Street recently said its USD 3.1 tn passive investing arm would begin voting against company boards that don’t meet ESG standards. But with the purpose of passive investing being the avoidance of this kind of scrutiny on individual market winners and losers, it is difficult to see how the fossil fuel companies can be outmaneuvered without dropping the vehicle altogether, Nauman argues.

And how is Egypt’s most popular ETF doing from an environmental perspective? Not badly at all. The VanEck Vectors Egypt Index ETF, which has approximately USD 31 mn under management, has an A grade on the Fossil FreeFunds website, with 0% fossil fuel exposure.

On an otherwise quiet morning for Egypt in the foreign press, the prosecutor general denying that detained activist Patrick Zaky was tortured in custody is topping coverage, with most outlets picking up wire copies from the Associated Press and AFP.

Big tech has entered the oil business: Google, Microsoft, and Amazon are keen to market themselves as leaders in energy-saving initiatives. But the same machine learning technology these companies use to reduce dependence on fossil fuels in some areas is also being used to automate oil and gas discovery and extraction, this video from Vox shows (runtime: 09:01). Cutting edge machine learning AI processes data to train itself to operate as efficiently as possible. With oil being notoriously hard to find, this tech is just what oil companies need to stay profitable. Vast swathes of data amassed by oil companies can be fed to the AI, which can then pinpoint the best places to drill and streamline extraction to make it cheaper. The oil and gas industry spent USD 1.75 bn on AI in 2018 and this is expected to rise to USD 4 bn in 2025. And while they might be publicly trumpeting their role in a shift to renewables and a reduction in energy usage, Google, Microsoft and Amazon are all competing for a piece of that pie.