Chapter One: Controls for Granting Credit

Part Five: Financing Micro Companies and Enterprises

In order to benefit from the existing microfinance financing system, the Board of Directors of the Central Bank of Egypt issued a decision at its meeting held on February 28, 2017, which stipulates the following:

1. When granting microfinance to individuals, companies, and enterprises directly, banks must observe the following:
   a. Establish an internal policy for dealing with microfinance according to its nature and associated risks. b. Report this type of financing to the General Administration for Aggregating Bank Credit Risks at the Bank for the prescribed limits, as well as to the Egyptian Credit Bureau (Score-I), within the customer category of "Microfinance" and not "Personal Loans."

2. In light of the issuance of the Law Regulating the Activity of Microfinance, banks may provide credit facilities to companies, associations, and non-profit institutions licensed by the Financial Regulatory Authority (FRA) to practice this activity, while observing the establishment of an internal credit classification system for these entities.

3. In all cases, microfinance granted directly to individuals, companies, and enterprises, or through associations, non-profit institutions, and microfinance companies, shall be added to the 25% ratio detailed in Chapter One of Chapter Ten of the Guide. In order to implement the above, the Guidelines attached as Annex No. (1) below have been issued, which banks may rely on when preparing the credit study for granting financing to non-profit institutions and microfinance companies.

And continuing the above, the Board of Directors of the Central Bank of Egypt approved the following decision at its meeting held on October 9, 2019:

"Banks must comply with the following when granting credit facilities to companies/associations and non-profit institutions licensed to practice the activity of microfinance:

1. Banks must report monthly on the credit limits (authorized/used) granted to the aforementioned companies/associations for microfinance to the Egyptian Credit Bureau (Score-I), while continuing to comply with what is reported to the General Administration for Aggregating Credit Risks at the Central Bank of Egypt.

2. Banks must obtain a commitment from those companies/associations to inquire about customers before granting through the Egyptian Credit Bureau (Score-I) to verify that the number of loans granted to a single customer does not exceed three loans from three institutions granted by microfinance companies/associations.

3. Banks must not include the credit portfolios of the aforementioned entities in the 25% mandatory ratio previously mentioned.

4. Banks must obtain a letter from the Financial Regulatory Authority stating the following:

   • The sound performance of microfinance companies/associations and their compliance with the standards and rules of practice defined by the Authority, and the absence of existing violations on their part as of this date.
   • That microfinance companies/associations report to the Egyptian Credit Bureau (Score-I) all their customers and their credit behavior according to the contract signed between those institutions and the Egyptian Credit Bureau, in addition to reviewing the credit data contained in the Egyptian Credit Bureau's report to analyze and evaluate the customer's repayment behavior.
   • That the financial leverage of the microfinance company/association does not exceed ten times.
   • That microfinance companies/associations adhere to the maximum amount granted for microfinance, pursuant to Law No. 141 of 2014 Regulating the Activity of Microfinance and its amendments.

In the event that a violation by the company/association of the provisions of the aforementioned Law or the rules of practice is proven, banks are obligated not to increase the volume of granted financing or grant new financing until the violations are corrected within the time period specified by the Financial Regulatory Authority for correction."

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Footnotes:

1. Letter from the Deputy Governor of the Central Bank of Egypt dated May 23, 2017.
2. Letter from the Governor of the Central Bank of Egypt dated October 13, 2019.
3. Circular letter dated February 22, 2021 regarding the amendment of some provisions of the initiative for Micro, Small and Medium Enterprises.

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Annex No. (1): Credit Study Standards for Microfinance Companies

Credit Standards	Details
Governance Structure (Company/Institution/Association)	1. Internal Auditors are available.<br>2. Head of Risk Management is available.<br>3. Internal Audit Committee is available.<br>4. Compliance with instructions issued by the Financial Regulatory Authority is available.
Experience (Company/Institution/Association)	Experience in the sector is available.<br>- Number of years of experience in the field of microfinance is more than three years.<br>- Expertise available in the members of the Board of Directors and Executive Management.
Business Plan and Financial Projections	A business plan and financial projections for a period of at least two years for companies, and at least one year for associations, are available.<br>- The negative discrepancy between the figures realized in the approved balance sheet and the figures stated in the business plan is less than 15% of the period's requirements. This criterion is applied when renewing credit facilities.
Credit and Operations Policies (Company/Association/Institution)	1. Credit granting standards are available.<br>2. Credit inquiry on customers is available.<br>3. Collection procedures are available.<br>4. Non-performing debt eradication policy is available.<br>5. Risk calculation methodology is available.<br>6. Compliance with the rules and controls of practicing the microfinance activity issued by the Financial Regulatory Authority is available.
Information Management System	An automated information management system is available through which databases are recorded and the process of loan collection and customer inquiry is followed.

Annex No. (2): Financial Statement Standards for Microfinance Companies

Financial Indicators	Details
Quality of Approved Financial Statements	The Company/Institution/Association's commitment to preparing comprehensive financial statements in accordance with the standards of the Financial Regulatory Authority and approved by the General Assembly of the Company/Institution/Association is available.
Profitability Indicators	Return on Assets:<br>(Operating Net Profit / (Average Total Assets - Interest on Deposits and Securities)) > 6%<br>Operating Margin:<br>(Operating Net Profit / Operating Revenues) > 1.3%<br>(Operating Revenues = Operating Costs + Expenses + Financial Expenses)<br>Operating Profit Margin:<br>(Operating Net Profit / Revenues) is determined for each bank according to the Net Return Margin.<br>Return on Portfolio:<br>(Interest Income from Portfolio - Financial Expenses) / Interest Income from Portfolio (Cash Flow from Returns and Currencies for the Portfolio / Average Existing Financing Portfolio) > 25% for each bank.
Liquidity Ratio	(Cash + Short-term Investments + Customer Deposits in the Portfolio Short-term) / (Short-term Loans + Accrued Interest + Payment Papers + Other Short-term Obligations) is between 1.5% and 2.5%.
Financial Leverage	Total Liabilities / Net Equity does not exceed 10 times.
Capital Base Ratio	(Net Shareholders' Equity + Loans Supported by Shareholders) / Total Debtors Account or Existing Financing Portfolio > 10%.
Capital Adequacy Ratio	...

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