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Monday, 17 February 2020

SME lenders and digital banks to be made exempt from new capital requirements in proposed Banking Act

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.

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