September 26, 2020
The New Central Bank and Banking Sector Law
The long-awaited banking law has been finally ratified by the President and published in the Official Gazette as Law No. 194 for the year 2020 (the “Law”) on 15 September 2020 and became effective as of 16 September 2020. The Law abolishes law No. 88 for the year 2003 promulgating the law of the Central Bank of Egypt (the “CBE”) (the “Old Law”).
The Law, which was in the pipeline since 2017, is expected to stabilize the banking and monetary sectors and develop the banking sector’s performance, while keeping up with the best practices, international customs and legal framework of corresponding foreign supervisory authorities. The Law also aims to enhance the independence of the CBE and increase its supervision of the banking sector in Egypt. The Law sets a maximum period of one year for banks and two years for the CBE to comply with and adopt its terms.
We will delve into the key highlights of the Law as follows:
The CBE and its Governor
The Law vests the CBE with the broadest powers and authorities to supervise and regulate the banking sector and ensures the CBE’s independence. The CBE’s Board of Directors, in many aspects of the Law, shall issue circulars and regulations to further regulate the banking sector (including banks’ corporate governance and payment services).
The Law increased the minimum paid-up capital of the CBE to EGP 20 billion to be in line with the new role of the CBE and the developments that occurred in the last few years in the banking and monetary sectors. Under the Law, the term of the governor of the CBE is 4 years, which can only be renewed once. The Old Law did not include a time limit on the term of the governor.
The Law introduces an entire chapter governing the relationship of the CBE with corresponding foreign entities. To this effect, the Law authorizes the CBE to enter into agreements and protocols with foreign entities that would allow foreign entities to inspect branches of foreign banks that are registered with the CBE and the CBE to inspect branches of Egyptian banks registered abroad, while complying with the confidentiality rules stipulated under the law.
In order to maintain financial stability, the Law requires the establishment of a committee chaired by the Prime Minister, which aims at maintaining the financial stability of the State by avoiding any financial crises and managing them in case of occurrence.
As part of the State’s vision to promote electronic payments, the Law requires the establishment of a national council for payments chaired by the President, which aims at reducing the use of cash and support and encourage the use of electronic channels for payments.
Banks’ Capital Requirements
The Law increased the minimum paid-up capital for local banks to EGP 5 billion and USD 150 million or its equivalent in any foreign currency for branches of foreign banks. Further, the Law requires that the supervisory authority of the foreign bank approves the establishment of a branch in Egypt and to have a common supervision with the CBE over the foreign bank and the branch.
Assistance of Banks in Financial Distress
The Law introduces a chapter that regulates banks in financial distress instead of the bankruptcy law No. 11 for the year 2018. The Law authorizes the CBE to declare a bank to be in financial distress by a decree valid for one year from its publishing date or the notification date of relevant parties, which can be renewed for a similar period with a maximum period of three years from the issuance date of the decree. The CBE can appoint a delegate to implement the procedures set by the CBE to help the relevant bank overcome the financial distress.
Further, the Board of Directors of the CBE may establish a fund to finance the settlement procedures of banks in financial distress. All banks registered with the CBE will be members of this fund and its resources will be from the contributions of the member banks, return on its investments and other funding resources, which shall amount to 50% of the value of the banks’ deposits. The said amount must be met within 10 years from the date of the Law. If such threshold is not met within the said period, the Ministry of Finance can lend such money temporarily to the fund to maintain the stability of the banking sector in Egypt.
Technological Developments
To keep up with the current technological developments and to adopt the best practices in this sector, the CBE is authorized to introduce rules governing the use of financial technology (“Fintech”) in the banking sector and the terms of granting Fintech licenses or any exemptions from the licensing requirement.
Further, the Law requires any entity that will provide payment services in Egypt or from abroad to Egyptian residents to obtain a license from the CBE.
In addition, the issuance of cryptocurrencies, their trade or marketing and the establishment and operation of a market for their trade requires a license from the Board of Directors of the CBE in accordance with the rules and procedures to be set therefrom.
Market Reaction
The issuance of the Law has been positively received, as it aims to raise the level of the Egyptian banking sector’s performance, and develop and support its competitive capabilities to qualify it for global competition, as explained by the legal advisor of the CBE.
Further, the Law has been viewed by the International Monetary Fund as a step towards strengthening the legal framework for the CBE and the banking sector in Egypt.
The Law, which was in the pipeline since 2017, is expected to stabilize the banking and monetary sectors and develop the banking sector’s performance, while keeping up with the best practices, international customs and legal framework of corresponding foreign supervisory authorities. The Law also aims to enhance the independence of the CBE and increase its supervision of the banking sector in Egypt. The Law sets a maximum period of one year for banks and two years for the CBE to comply with and adopt its terms.
We will delve into the key highlights of the Law as follows:
The CBE and its Governor
The Law vests the CBE with the broadest powers and authorities to supervise and regulate the banking sector and ensures the CBE’s independence. The CBE’s Board of Directors, in many aspects of the Law, shall issue circulars and regulations to further regulate the banking sector (including banks’ corporate governance and payment services).
The Law increased the minimum paid-up capital of the CBE to EGP 20 billion to be in line with the new role of the CBE and the developments that occurred in the last few years in the banking and monetary sectors. Under the Law, the term of the governor of the CBE is 4 years, which can only be renewed once. The Old Law did not include a time limit on the term of the governor.
The Law introduces an entire chapter governing the relationship of the CBE with corresponding foreign entities. To this effect, the Law authorizes the CBE to enter into agreements and protocols with foreign entities that would allow foreign entities to inspect branches of foreign banks that are registered with the CBE and the CBE to inspect branches of Egyptian banks registered abroad, while complying with the confidentiality rules stipulated under the law.
In order to maintain financial stability, the Law requires the establishment of a committee chaired by the Prime Minister, which aims at maintaining the financial stability of the State by avoiding any financial crises and managing them in case of occurrence.
As part of the State’s vision to promote electronic payments, the Law requires the establishment of a national council for payments chaired by the President, which aims at reducing the use of cash and support and encourage the use of electronic channels for payments.
Banks’ Capital Requirements
The Law increased the minimum paid-up capital for local banks to EGP 5 billion and USD 150 million or its equivalent in any foreign currency for branches of foreign banks. Further, the Law requires that the supervisory authority of the foreign bank approves the establishment of a branch in Egypt and to have a common supervision with the CBE over the foreign bank and the branch.
Assistance of Banks in Financial Distress
The Law introduces a chapter that regulates banks in financial distress instead of the bankruptcy law No. 11 for the year 2018. The Law authorizes the CBE to declare a bank to be in financial distress by a decree valid for one year from its publishing date or the notification date of relevant parties, which can be renewed for a similar period with a maximum period of three years from the issuance date of the decree. The CBE can appoint a delegate to implement the procedures set by the CBE to help the relevant bank overcome the financial distress.
Further, the Board of Directors of the CBE may establish a fund to finance the settlement procedures of banks in financial distress. All banks registered with the CBE will be members of this fund and its resources will be from the contributions of the member banks, return on its investments and other funding resources, which shall amount to 50% of the value of the banks’ deposits. The said amount must be met within 10 years from the date of the Law. If such threshold is not met within the said period, the Ministry of Finance can lend such money temporarily to the fund to maintain the stability of the banking sector in Egypt.
Technological Developments
To keep up with the current technological developments and to adopt the best practices in this sector, the CBE is authorized to introduce rules governing the use of financial technology (“Fintech”) in the banking sector and the terms of granting Fintech licenses or any exemptions from the licensing requirement.
Further, the Law requires any entity that will provide payment services in Egypt or from abroad to Egyptian residents to obtain a license from the CBE.
In addition, the issuance of cryptocurrencies, their trade or marketing and the establishment and operation of a market for their trade requires a license from the Board of Directors of the CBE in accordance with the rules and procedures to be set therefrom.
Market Reaction
The issuance of the Law has been positively received, as it aims to raise the level of the Egyptian banking sector’s performance, and develop and support its competitive capabilities to qualify it for global competition, as explained by the legal advisor of the CBE.
Further, the Law has been viewed by the International Monetary Fund as a step towards strengthening the legal framework for the CBE and the banking sector in Egypt.
