Circular dated May 23, 2017 regarding the Microfinance Initiative

Cairo on: 23 May 2017

Dear Mr. / Chairman of the Board of Directors 1

Greetings,

With reference to the Central Bank of Egypt's initiative issued on 11 January 2016 regarding encouraging banks to finance small and medium-sized enterprises (SMEs), which included obliging banks to allocate 20% of their credit portfolio to finance these enterprises over 4 years, and also indicated that means to stimulate the financing of micro-enterprises will be addressed separately later.

In light of the above, and based on recent meetings held with banks and the General Authority for Financial Supervision and the Egyptian Microfinance Union, with the aim of benefiting from the existing microfinance system, the Board of Directors of the Central Bank of Egypt issued a decision at its meeting held on 28 February 2017, which stipulates the following:

1. "Banks must, when granting microfinance to individuals, companies, and establishments directly, observe the following:
   a- Establishing an internal policy for dealing with microfinance according to its nature and associated risks. b- Reporting on this type of financing for both the General Administration for Collecting Bank Credit Risks according to the Score-I limits within the category of "Microfinance" customers and not "personal loans" to the Egyptian Company for Credit Investigation and the Central Bank of Egypt.

2. In light of the issuance of the Law Regulating the Activity of Microfinance, banks may provide credit facilities to companies, associations, and non-governmental institutions licensed by the General Authority for Financial Supervision 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 establishments, or through associations, non-governmental institutions, and microfinance companies, will be added to the 20% ratio mentioned in the circular dated 11 January 2016, which obliges banks to allocate this percentage of the total credit facilities portfolio to finance small and medium enterprises over four years from the date of issuance of those instructions."

In order to implement the aforementioned Board of Directors' decision, I have the honor to attach herewith the Guidelines that banks may use when preparing the credit study for granting financing to non-governmental associations and microfinance companies.

Please be kind enough to alert regarding taking the necessary action to implement the aforementioned decision.

Accept my highest respect,

Gamal Naguib

Attachment: Guidelines for the Credit Study of Microfinance Companies

	Credit Criteria
	Headings
	Sub-items
	Proposed Limits
	Availability of the following:		Government Structure
	-1	Internal Auditor		(Company/Institution/Association)
	-2	Available
	-3	Head of Risk Management		-3
	-4	Internal Review Committee		Experience of the (Company/Institution/Association) in the sector
	Compliance with instructions issued by the General Authority for Financial Supervision
	Number of years of experience in the field of microfinance
	More than three years
	Available expertise in the Board of Directors and Executive Management
	Business Plan and Financial Projections
	Availability of a business plan and financial projections for at least two years for companies, and at least one year for associations
	Difference Ratio in the Business Plan
	The negative difference between the figures achieved in the approved budget and the figures stated in the business plan shall not exceed
	Less than
	15%
	For the same period as the Regulatory Requirements for the Company/Association
	This criterion is applied when renewing credit facilities.
	Credit and Operations Policies
	-1	Credit granting criteria		(For the Company/Association/Institution)
	-2	Credit Inquiry
	-3	Collection procedures
	-4	Available
	-5	Policy for writing off bad debts
	-6	Basis for calculating provisions
	Compliance with the rules and regulations for practicing microfinance activity issued by the General Authority for Financial Supervision
	Information Management System
	Availability of an automated information management system through which databases are recorded and the process of loan disbursement and collection with customers is followed
	Commitment of the Company/Institution/Association to prepare comprehensive financial statements
	According to the standards of the General Authority for Financial Supervision
	Quality of Approved Financial Statements
	Approved and ratified by the General Assembly of the Company/Institution/Association

	Return Rate
	On Assets
	Operating Net Profit / (Average Total Assets - Balance of Deposits and Securities)
	Greater than
	6%
	Operating Self-Sufficiency Ratio
	Operating Revenues / (Operating Costs + Provisions + Financial Expenses)
	Greater than
	1.3%
	Operating Profit Margin
	Operating Net Profit / Revenues
	Determined for each bank according to		Profitability and Operational
	Net Return Margin
	(Interest Revenues from the Portfolio - Financial Expenses) / Interest Revenues from the Portfolio
	Determined for each bank according to		Return
	On the Total Portfolio
	(Cash Flow from Returns and Commissions for the Portfolio / Average Existing Financing Portfolio)
	Greater than
	25%
	Liquidity Ratio
	(Cash + Short-term Investments + Balance of Short-term Portfolio Customers) / (Short-term Loans +
	From
	1.5% to
	2.5%
	Financial Leverage
	Total Liabilities / Net Equity
	Does not exceed
	10 times
	Capital Base Ratio
	(Net Shareholders' Equity + Loans
	Support Loans from Shareholders) / Total
	Debtors' Account or Portfolio
	Greater

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