March 21, 2022
Credit Rating Activities: Progressive Development of the Egyptian Financial Market
Credit rating activities are a relatively new addition to the Egyptian market. Before 2018, the law did not allow Egyptian established companies to venture into credit rating. Viewed as an integral part of the Egyptian financial markets, the independence and efficiency of credit rating activities were limited to international partners because of the lack of experience within the Egyptian market.
The increase in the issuance of public and private debt instruments highlighted the need for Egyptian credit rating companies. By its Decree No. 53 for 2018 regulating the shareholding of non-banking financial entities (the “Decree”), the Financial Regulatory Authority (the “FRA”) allowed the creation of Egyptian entities capable of undertaking credit rating activities.
On 23 January 2022 the FRA issued Decree No. 9 for 2022 (the “Amendment”) published on 10 February 2022 to amend the Decree.
We will delve into the main provisions of the Amendment as follows:
Abolishing Foreign Ownership Requirement
Under the Decree, local credit rating companies were required to have international credit rating organisation as shareholders as a prerequisite to undertake credit rating activities. This requirement was set forth to ensure that the required level of expertise to undertake such activity is fulfilled and, with time, the transfer of such expertise to the Egyptian market.
The Amendment abolished the foreign shareholding requirement, thus, allowing Egyptian entities to undertake credit rating activities without the need to have an international credit rating agency as a shareholder.
Without prejudice to the abolishment of the foreign ownership requirement, local credit rating agencies are now required by the Amendment to obtain and maintain an insurance policy against professional liability in accordance with the criteria set forth by the FRA.
Ability and Experience Requirement from Managers and Employees
As stated, credit rating entities offer highly specialised services that are needed for a healthy financial market. As their activities directly affect investments, certain safeguards are set forth by the FRA in the Amendment.
The Amendment sets forth the relevant experience and underlying sectors the managing director and key personnel of credit rating entities must fulfil. In addition, the managing director must pass an in person interview with the FRA.
Guarantees Ensuring Similar Operation to International Entities
Despite the foreign ownership requirement being abolished by the FRA, egyptian credit rating entities will still be required to prove to the FRA that they follow the enterprise model of one of the accredited international financial entities in addition to a statement to this effect by said international financial entity.
Market Reaction
The FRA Director, Dr. Mohamed Omran, stated that the amendment was adopted to encourage the establishment of national credit rating entities within the non-banking financial sector. The amendment will serve all institutions and investors as it will allow them to have multiple credit rating alternatives.
The increase in the issuance of public and private debt instruments highlighted the need for Egyptian credit rating companies. By its Decree No. 53 for 2018 regulating the shareholding of non-banking financial entities (the “Decree”), the Financial Regulatory Authority (the “FRA”) allowed the creation of Egyptian entities capable of undertaking credit rating activities.
On 23 January 2022 the FRA issued Decree No. 9 for 2022 (the “Amendment”) published on 10 February 2022 to amend the Decree.
We will delve into the main provisions of the Amendment as follows:
Abolishing Foreign Ownership Requirement
Under the Decree, local credit rating companies were required to have international credit rating organisation as shareholders as a prerequisite to undertake credit rating activities. This requirement was set forth to ensure that the required level of expertise to undertake such activity is fulfilled and, with time, the transfer of such expertise to the Egyptian market.
The Amendment abolished the foreign shareholding requirement, thus, allowing Egyptian entities to undertake credit rating activities without the need to have an international credit rating agency as a shareholder.
Without prejudice to the abolishment of the foreign ownership requirement, local credit rating agencies are now required by the Amendment to obtain and maintain an insurance policy against professional liability in accordance with the criteria set forth by the FRA.
Ability and Experience Requirement from Managers and Employees
As stated, credit rating entities offer highly specialised services that are needed for a healthy financial market. As their activities directly affect investments, certain safeguards are set forth by the FRA in the Amendment.
The Amendment sets forth the relevant experience and underlying sectors the managing director and key personnel of credit rating entities must fulfil. In addition, the managing director must pass an in person interview with the FRA.
Guarantees Ensuring Similar Operation to International Entities
Despite the foreign ownership requirement being abolished by the FRA, egyptian credit rating entities will still be required to prove to the FRA that they follow the enterprise model of one of the accredited international financial entities in addition to a statement to this effect by said international financial entity.
Market Reaction
The FRA Director, Dr. Mohamed Omran, stated that the amendment was adopted to encourage the establishment of national credit rating entities within the non-banking financial sector. The amendment will serve all institutions and investors as it will allow them to have multiple credit rating alternatives.
