Egypt's usually very quiet (and very conservatively managed) banking industry has been in the headlines since the early days of the Covid-19 pandemic as a wave of M&A activity has swept the sector.
Egypt has 38 active banks today, and the Central Bank of Egypt (CBE) is adamant there will not be a 39th anytime soon. Instead, 20 years after leading a clean-up and consolidation of the sector in the wake of the non-performing loans scandal of the 1990s, Egypt's regulator has held the line: "You want into the sector? Buy a new bank. There are no new licences coming."
As recently as early February, the notion of an Egyptian bank being sold was rare enough to prompt headlines declaring that "with profits hitting record highs, Egypt's banks are ripe M&A targets – but nobody really wants to sell."
The pandemic and a new twist in Lebanon's economic crisis changed everything. Gulf Cooperation Council (GCC) lenders are facing the prospect of low domestic vying for the Egyptian arms of Lebanese banks, which in turn are looking for liquidity as they grapple with changes in their home markets. At least four GCC-based banks are interested in kicking the tyres of Blom Bank and Bank Audi's Egyptian operations. Meanwhile, there is ongoing bidding for state-owned Arab Investment Bank in partnership with Egypt's new sovereign wealth fund.
It's against this backdrop that the new Central Bank and Banking Act (law 194 of 2020, replacing the 2003 act) just became law – setting up what we think will remain a consistently conservative approach to regulation of the sector.
But perhaps the most exciting development? The law allows the Central Bank to accelerate its financial inclusion drive (this in a nation in which perhaps one third of citizens are banked) while catching up with global trends and norms in both e-payments and fintech.
Below is a quick rundown.
A new capital requirement could result in even more M&A activity
Article 64 of the new law requires any local bank to maintain a minimum EGP 5 billion ($320 million) in capital instead of EGP 500 million under the former banking law – the idea is to bring capital requirements in line with the modern size of Egyptian banks 20 years after the CBE's last reform wave. Some in the industry think this could see the merger of as many as 10 domestic banks, and the new law makes mergers easier under Article 97 while at the same time outlining requirements to safeguard the interests of employees and customers in the event of a merger.
The CBE as economic actor
Beyond setting policy, Article 8 clearly authorises the CBE to provide payment solutions and related services – this is alongside the standard authorisation to participate in international institutions and entities and to establish joint-stock companies on its own or in partnership with third parties. The payment network aspect is key to financial inclusion as the CBE and other arms of the state push ahead with Meeza, a domestic payments network owned by the CBE-led Egyptian Banking Corporation (EBC) that aims to bring more low-income consumers into the banking system (EBC is jointly owned by the CBE alongside the Finance Ministry and a number of Egyptian banks).
Access to foreign lenders and banks
Under the former banking law, it was unclear whether a foreign bank or international institution was authorised to register a real estate mortgage under its name as collateral. In practice, the foreign lender would typically entrust a bank licensed to operate in Egypt to act as a security agent. Article 108 of the new law provides explicitly that foreign banks and international financial institutions may register real estate mortgages as collateral. A foreign bank or a global financial institution may also offer commercial mortgages as a security to other parties subject to the CBE's approval (Article 106).
The new law introduced a new chapter (Chapter 7) in Book 2 (Egyptian Central Bank) on the collaboration between the CBE and corresponding foreign entities. According to Article 52, the CBE may execute cooperation protocols, memorandums of understanding or agreements with corresponding foreign entities for the following reasons:
- to exchange information relating to the shared supervision of the foreign bank's branch by the foreign entity, stepping in procedures and settlement of distressed banks;
- to authorise the corresponding foreign entity to inspect the operations of the foreign bank's branch falling under the jurisdiction of the foreign entity; and
- to coordinate with the corresponding foreign entity before taking any action that may affect the branch of the foreign bank's operations.
This is a big development for Egyptian arms of foreign banks as it sets the foundation for the joint supervision of the foreign bank's operations by the corresponding central bank in that bank's home country.
International trends to minimise the use of cash and fintech initiatives
Article 50 of the new law sets out the framework for the newly established National Payments Council, which will be chaired by the Egyptian president. The council will have one goal – stamp out the use of cash and move the nation to electronic payments.
Unlike the former banking law, the new law provides some prerequisites on licensing payment systems operators and payment service providers, their respective operating rules and their obligation to protect the e-systems utilised, their final settlements, and the supervision and control of the CBE.
It is worth highlighting the growing role of the Financial Regulatory Authority (FRA) being the regulator of non-banking financial activities (i.e. insurance, factoring, financial lease, micro finance, consumer finance). The act, however, confirms that the CBE is the competent authority to licence and regulate the e-payment and e-system solutions and the CBE will set the minimum capital requirements and other prerequisites for such activities.
Tighter oversight of the sector
The new law requires the governor's prior approval on the appointment of senior executives including chairmen, board members and executive managers of both domestic banks and branches of foreign banks. The act allows the CBE to set requirements for office and requires it to make clear why it rejects any individual candidate (Articles 120 & 68).
New teeth for auditors
Notably, Article 125 of the law restricts banks from holding their annual general assembly before the CBE offers them feedback on the report of the bank's auditors, who are now required to report any deficiencies in a bank's internal audit systems directly to the CBE.
We also think it notable that while Article 7 provides that the CBE will be the entity competent to set monetary, exchange rate and risk management policies, it also includes reference to the CBE's role in protecting the customers of banks and to settle related disputes, ensure competition in the sector, and maintain the security of payment solutions and services.