Decision of the Board of Directors of the General Authority for Financial Supervision

No. (191) of 2018 dated 31/12/2018

Regarding Financial Solvency Standards for Licensed Financial Leasing Companies

According to the latest amendment dated 16-11-2023

Board of Directors of the General Authority for Financial Supervision

Having reviewed the Law on Joint Stock Companies, Companies Limited by Shares, Companies with Limited Liability, and Single-Person Companies issued by Law No. (159) of 1981 and its executive regulations;

And Law No. (10) of 2009 regulating supervision over markets and non-banking financial instruments;

And Law No. (176) of 2018 regulating financial leasing and factoring activities;

And Presidential Decree No. (192) of 2009 issuing the Basic Statute of the General Authority for Financial Supervision;

And Board Decision No. (137) of 2018 regarding licensing conditions and continuity for financial leasing and factoring companies;

And Board Decision No. (138) of 2018 regarding the preparation and presentation of financial statements and submission deadlines for licensed financial leasing and factoring companies;

And Board Decision No. (164) of 2018 regarding executive rules for corporate governance of licensed financial leasing and factoring companies;

And Chairman Decision No. (2864) of 2003 of the General Authority for Investment and Free Zones;

And the memo issued by the Central Administration for Supervision of Financing Companies dated 13/12/2018;

And the approval of the Board of Directors in its session held on 31/12/2018;

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Decided

(Article One)

The financial solvency standards attached to this Decision shall apply to companies licensed to conduct financial leasing activities.

(Article Two)

Companies subject to the provisions of this Decision shall comply with the attached financial solvency standards and submit to the Authority the results and reports mentioned in these standards, or any other documents or data requested by the Authority to verify the companies' compliance.

Companies shall submit the mentioned reports to the Authority via the email address designated by the Authority for this purpose within fifteen days from the end of each month.

(Article Three)

Companies subject to the provisions of this Decision shall prepare an action plan containing a timeline for compliance with the attached standards, to be submitted to the Authority by no later than 30/6/2019, and shall submit quarterly reports to the Authority detailing the measures taken in this regard.

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(Article Four)

The application of Chairman Decision No. (2864) of 2003 of the General Authority for Investment and Free Zones mentioned above is hereby repealed.

(Article Five)

This Decision shall be published in the Egyptian Gazette and on the Authority's website, and shall take effect from the day following its publication in the Egyptian Gazette.

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Financial Solvency Standards for Licensed Financial Leasing Companies

Objective of Applying Financial Solvency Standards

The financial solvency standards aim to emphasize the importance of managing the risks faced by companies licensed to conduct financial leasing activities and support their ability to implement them, including: credit risks, operational risks, market risks, and liquidity risks.

These standards also aim to ensure that the aforementioned companies maintain a minimum financial solvency ratio, which is used to estimate the size of risk-bearing capital, which depends on covering "credit risks and operational risks" for various weighted or transferred asset types.

Article (1)

Capital Adequacy Standard

The financial solvency ratio of the company must not fall below (10%) at any time, and will gradually increase to reach (12%) within a maximum of three years from the date of implementation of this Decision, with the company submitting semi-annual reports to the Authority detailing the measures taken in this regard.

The capital adequacy standard is calculated according to the following formula:

Capital Base

Risk-Weighted Assets + Operational Risk Coverage Margin

First: The Capital Base:

The capital base (numerator of the standard) consists of two tiers as follows:

Tier One (Core Capital):

1. Paid-up capital.
2. Legal reserve.
3. Regulatory reserve (if available).
4. Accumulated profits (losses) of the year (period financial losses).

Tier Two (Supplementary Capital):

1. General provision for organized financing balances.
2. Subordinated loans.

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Subordinated loans are considered in the capital base calculation upon meeting the following conditions:

(a) The loan term must not be less than five years, with a 70% amortization rate annually.

(b) The remaining term until maturity must not be less than 12 months.

(c) The loan must be fully paid in cash.

(d) The loan must not be pledged or attached to a specific activity or for specific assets.

(e) The loan must not be secured by any asset or have priority over other creditors.

(f) Fulfilling the loan must not cause the capital base to fall below the required financial solvency ratio as stated in the first paragraph of this Article.

For the purpose of calculating the capital adequacy ratio, the value of Tier Two (supplementary capital) must not exceed 100% of the value of Tier One (core capital).

Second: Risk-Weighted Assets (Denominator of the Standard):

Risk weights for assets are classified according to the risk level of each asset, excluding financings whose risks are covered by banks, venture capital companies, credit risk coverage entities, non-payment risk insurance entities, or through any other guarantees accepted by the Authority.

The company shall calculate risk-weighted assets according to the financial position as follows:

Financial Position Items	Risk Weights
Cash and cash equivalents	0%
Government securities (Treasury bills - Treasury bonds)	0%
Bank deposits in local currency	0%
Financial investments in money market fund instruments	0%
Organized financing (financing portfolio / weighted assets)	100%
Financial investments - Shares	100%
Investments in sister or subsidiary companies	100%
Intangible assets	100%
Receivables (balances due)	150%
Net unorganized financing (defaulted after 90 days especially)	150%
Deferred tax assets	150%
Net fixed assets (after depreciation)	100%
Other assets	100%

The company must disclose the sectors it has financed and the percentage and value of each from the financing portfolio.

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Third: Operational Risks

The company shall calculate the operational risk coverage margin at a rate of (15%) of the average operating profits over the last three years.

If the income statement at the end of the three years mentioned in the previous paragraph results in total losses or zero values, the first year prior to the mentioned three years that achieved operating profits shall be considered, and in this case, the capital required to cover operational risks shall be calculated for that year only.

Article (2)

Concentration Risks

The company shall calculate additional capital to cover concentration risks it faces, measured and calculated as follows:

First: Single Concentration Risk

Single concentration risk is calculated by dividing the value of the balance of the top 10 clients by the value of the total financing portfolio balance. If the calculated percentage exceeds (30%), additional capital shall be calculated at a rate of (4%) of the minimum capital adequacy to cover credit risks (12% of the value of risk-weighted assets).

In all cases, the company's exposure to a single client must not exceed (50%) of the company's capital base, excluding balances that do not bear the company's risks.

Second: Sector Concentration Risk

Sector concentration risk is calculated by squaring (value multiplied by itself) the financing balance of each sector individually, summing them together, and dividing the total by the square of the total financing portfolio value. If the calculated percentage exceeds (40%), additional capital shall be calculated at a rate of (4%) of the minimum capital adequacy to cover credit risks (12% of the value of risk-weighted assets).

The company is granted a grace period of three years from the date of implementation of this Decision to comply with this provision, with the commitment not to conclude new operations resulting in exceeding the legal concentration percentage during this period. The company shall also submit quarterly reports to the Authority detailing the measures taken in this regard.

Article (3)

Financial Leverage

The total loans and financings obtained by the company (excluding subordinated loans) must not exceed nine times its capital base, after excluding loan and financing balances that do not bear the company's risks.

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Article (4)

Asset-Liability Maturity Matching

The tenor of loans and credit facilities obtained by the company for financing the leased asset must not exceed the duration of the financial lease contract.

The company is granted a grace period of two years from the date of implementation of this Decision to comply with the provision of this Article, and shall submit quarterly reports to the Authority detailing the measures taken in this regard.

Article (5)

Liquidity Standard

The ratio of liquid assets to net cash outflows over thirty days must not fall below (100%), according to the following formula:

Liquid Assets

Net cash outflows over 30 days

The company is granted a grace period of three years from the date of implementation of this Decision to comply with the provision of this Article, and shall submit quarterly reports to the Authority detailing the measures taken in this regard.

Article (6)

Calculation of Impairment (Provision) for Doubtful Financing and Debt Write-off

The company shall calculate impairment for granted financings, excluding financings that do not bear the company's risks, as follows:

First: Minimum Compliance, as follows:

A general provision shall be established on organized balances at a rate of (1%) of the total existing organized balances, to be calculated from the financial statements for the period ending on 31/12/2019.

The company may apply the aforementioned general provision rate gradually at a rate starting at (0.5%), then (0.75%), reaching (1%) within a maximum of three years from the date of the financial statements for the period ending on 31/12/2019, to be treated in accordance with Egyptian accounting standards.

Second: According to the payment grading system for each case individually, as shown in the following table:

Level	Payment Delay	Classification	Provision Rate	Notes
First	More than 90 days up to 180 days	Follow-up required	10% of unsecured balance	-
Second	More than 180 days up to 275 days	Substandard	25% of unsecured balance	Income is suspended
Third	More than 275 days up to 365 days	Doubtful	50% of unsecured balance	Income is suspended
Fourth	More than 365 days	Loss	100% of unsecured balance	Income is suspended

Table of Coverage Ratios by Asset Value:

Level	Classification	Provision Rate	Notes
First	Real estate assets	80% of current market value after asset valuation by a certified appraiser
Second	Vehicles and cars	70% of current market value after asset valuation by a certified appraiser
Third	Machinery, equipment, and production lines	50% of current market value after asset valuation by a certified appraiser
Fourth	Intangible assets	Not considered for covering customer balances

The unsecured balance on the asset is calculated based on the default balance after asset valuation by a certified appraiser. The lessor's ownership of the asset registered in the financial lease contract registry with the Authority shall be used, and the aforementioned percentages of the asset value shall be used to calculate the unsecured balance from the financing value.

Suspended Income

No income shall be recognized for financing with doubtful collectability if payment is delayed for a period exceeding 180 days. However, such income may be considered for rescheduled and organized financings with a payment term of one year and a percentage not less than (20%) of the debt.

Debt Write-off

Debts may be written off according to the following conditions:

1. A resolution by the company's Board of Directors to write off the debts.
2. A report from one of the auditors certified by the Authority confirming the following conditions:
   • The company has organized accounts.
   • The debt is related to financial leasing activities.
   • The amount corresponding to the debt has previously been included in the company's accounts.
   • The company has taken serious measures to recover the debt but failed to collect it after 18 months from its due date.

Serious measures for debt recovery include the following:

1. Obtaining a court seizure order in cases where permitted.
2. A first-instance court judgment obliging the debtor to pay the debt value.
3. Claiming the debt in bankruptcy proceedings or concluding a settlement in bankruptcy.

Upon collecting the debt or part of it, the company shall include the collected amount in the company's revenues in the year of collection.

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Article (7)

Basis for Assessing Customer Creditworthiness

The company must follow creditworthiness assessment bases when granting, reviewing, or renewing financing and when establishing provisions, which must include the following:

1. A robust risk assessment system before granting financing that helps measure the credit quality of each financing individually, considering concentration risks for a single client or at the level of economic activity sectors.
2. A review of the creditworthiness of financings granted to all customers at least once per financial year.
3. Verification of the availability of conditions, guarantees, and fulfillment of all legal documents before disbursing financing to customers.
4. A credit database enabling the company to predict any changes that may occur in customers' conditions.
5. Review of unorganized customers and preparation of quarterly reports on them to be presented to the company's Board of Directors.
6. A post-disbursement creditworthiness system to ensure the implementation of policies set by company management and the execution of credit approval conditions.

Article (8)

Disclosure Standards

Subject to the provisions of Board Decision No. (138) of 2018 regarding the preparation and presentation of financial statements and submission deadlines for licensed financial leasing and factoring companies, the company's financial statements must show all provisions or impairment accounts calculated, and suspended income must not be included in the income statement.

The notes related to periodic and annual financial statements must also include a detailed statement of the characteristics of financing with doubtful collectability.

Article (9)

Periodic Reports

The company shall prepare the following periodic reports:

1. A financial solvency report according to the form approved by the Authority for this purpose, which must show the company's financial solvency position on the last day of each month, including:

   • Calculation of capital and equity ratios.
   • Calculation of total capital base.
   • Calculation of risk-weighted assets.
   • Calculation of items included off-balance sheet, including fixed contracts that do not bear the company's risks.

2. A report including the calculation of the liquidity ratio at the end of each day.

3. A report showing the risks faced by the company and the methods used to mitigate them.

4. A report showing the company's compliance with corporate governance rules according to the provisions of Board Decision No. (164) of 2018 regarding executive rules for corporate governance of licensed financial leasing and factoring companies.