A new draft law in Egypt could significantly change the banking sector

The published draft of the new banking law, the latest reform from the Central Bank of Egypt (CBE), was made public in July 2017, and its potential changes fast became a major talking point for the sector. Formulated after lengthy consultation with global experts – which included meetings with the IMF, the World Bank and the Bank of England – the law has been welcomed by some as an essential upgrade of the governing legislative framework that has been in place for 14 years.

One of the important components of the proposed law is an article that allows financial institutions to keep official documents in electronic form, a practice more in line with international standards. The move to have a more flexible framework for Islamic banks has also been met with broad approval from sharia-compliant banks, as this segment has historically been challenged by limited options in crucial areas, such as liquidity management. The new law is expected to address the use of sukuk (Islamic bonds), mudaraba (profit sharing) and other sharia-compliant financing tools.

Raising Capital

The new law seeks to raise the minimum capital requirements applied to Egypt’s banks, a decision that has elicited a more divided response from the sector. The initial proposal would see banks compelled to increase their capital from the LE500m ($32.9m) required under the 2003 Banking Law to the new level of LE1.5bn ($98.8m). The nation’s foreign exchange companies are also in line for a capital hike, from LE5m ($329,000) to LE20m ($1.3m), while money transfer operations will be required to boost their capital from LE5m ($329,000) to LE10m ($659,000). In the context of a greatly depreciated currency, the raising of minimum capital requirements makes sense in that larger capital buffers would provide the financial sector with greater protection from economic shocks. However, the proposed raises also present a challenge to banks, particularly for those that will have to increase their capital by a significant percentage, though the timetable for this was not clearly defined as of early 2018. Banks around the world are being asked by regulators to strengthen their capital positions, but this is usually through an increase in capital adequacy ratios. In most cases, these incremental rises can be met in an orderly fashion through retained earnings. The tripling of the minimum capital requirement, as has been proposed by the CBE, is a more burdensome proposition. If the draft law goes ahead a number of non-compliant banks will be compelled to take more strenuous capital-raising steps. These may include the issuance of bonus shares or mergers and acquisitions.

Management Issues

While many in the sector see the new requirements as a difficult but logical step, multiple articles under the new law have been met with steadfast opposition. In July 2017 the Federation of Egyptian Banks, a non-profit industry body, requested that Article 109 of the draft law, which effectively limits bank CEOs to a maximum of two, three-year terms, be removed. The CBE’s previous move in this regard – when it attempted to limit the tenures of bank CEOs to nine years in 2016 – was successfully blocked by private banks who brought the issue before the Administrative Court. The re-emergence of the limit has generated equally concerted resistance. The proposed requirement would disqualify most of the current bank CEOs, some of which have held their positions for decades.

The new law also grants the CBE the right to send a representative to attend the board meetings of any bank, without an invitation. This has attracted significant criticism as it is seen as an unnecessary intervention in banks’ affairs. Critics have pointed out that international best practice does not typically hand over powers to determine employee terms or boardroom representation to regulators. In response, the CBE has pointed to Nigeria’s 2010 decision to impose a 10-year term limit on CEOs as a precedent for the changes. To what extent the promulgated law will reflect the controversial draft law will continue to be a central point of discussion for industry players in the year ahead.