Board of Directors Resolution No. 20 of 2022 on Responsible Pricing Guidelines for SME and Microfinance

Financial Regulatory Authority

Chairman of the Authority

Board of Directors Resolution No. (20) of 2022 dated 2022/2/6 Regarding the guidelines and considerations of responsible pricing in the activity of financing medium, small, and/or micro enterprises

The Board of Directors of the Financial Regulatory Authority

After reviewing Law No. (10) of 2009 regarding the regulation of supervision over non-banking financial markets and instruments; And Law No. (141) of 2014 regarding the regulation of the activity of financing medium, small, and micro enterprises; And Board of Directors Resolution No. (173) of 2014 regarding the rules and regulations for companies practicing microfinance; And Board of Directors Resolution No. (31) of 2015 regarding the rules and standards for practicing microfinance by associations and civil society institutions; And Board of Directors Resolution No. (186) of 2020 regarding the rules and standards for practicing the activity of financing medium and small enterprises by associations and civil society institutions licensed to practice both medium/small enterprise financing and microenterprise financing; And Board of Directors Resolution No. (211) of 2020 regarding the rules and regulations for practicing the activity of financing medium and small enterprises by companies licensed to practice this activity, and the financial solvency standards, supervision, and oversight rules; And after the approval of the Board of Directors in its session held on 2022/2/6;

Decided

(Article One)

The attached guidelines and considerations of responsible pricing shall be applied regarding companies, associations, and civil society institutions licensed by the Authority to practice the activity of financing medium, small, and/or micro enterprises. These entities are referred to in the provisions of this Resolution as "Financing Entities."

Smart Village, Building 136, Giza, Egypt
Postal Code: 110
Phone: +202 35345350 Fax: +202 35370036
WWW.FRA.GOV.EG
Building Bridges not Walls
We build bridges, not walls

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(Article Two)

The Financing Entities mentioned in the previous Article are granted a compliance period to align with the provisions of the guidelines and considerations attached to this Resolution, with a maximum of six months from the date of its implementation.
Associations and civil society institutions in Category (C) must, in their compliance with the requirements of the attached Resolution, complete the standardized pricing policy form and its appendices issued by the Authority.

(Article Three)

This Resolution shall be published in the Egyptian Official Gazette and on the Authority's website, and shall be implemented from the day following its publication in the Egyptian Official Gazette.

Chairman of the Board of Directors
Dr. Mohamed Omran

Smart Village, Building 136, Giza, Egypt
Postal Code: 110
Phone: +202 35345350 Fax: +202 35370036
WWW.FRA.GOV.EG
Building Bridges not Walls
We build bridges, not walls

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Guidelines and Considerations of Responsible Pricing In the Activity of Financing Medium, Small, and/or Micro Enterprises

(Article One)
Concept and Pillars of Responsible Pricing

Responsible pricing is considered a "high-level professional commitment by Financing Entities towards their clients with medium, small, and micro enterprises. This commitment is reflected in a fair and balanced price structure for their financing products and services, ensuring full transparency of clients' rights to proper knowledge of financing burdens. It achieves an acceptable level of the total cost of obtaining credit sustainably, at rates affordable by different client segments, enabling them to achieve real and sufficient net benefits from financing after paying all burdens, thereby fostering business growth and prosperity, and maintaining the continuity of their financial transactions in their normal form. It also preserves the Financing Entities' ability to achieve the desired operational and financial sustainability rates.

Responsible pricing is based on the comprehensive structure of all financial burdens and actual expenses borne by the client to obtain financing, throughout the financing period until full repayment.

(Article Two)
Technical Considerations for Responsible Pricing

Financing Entities must adhere to the following technical considerations at a minimum when formulating pricing policies for their various financing products and services to achieve the responsible pricing guidelines:

First: Qualitative Considerations
These consist of objective qualitative or descriptive factors that must be distinguished when a Financing Entity considers the pricing basis for different financing products and associated services, as follows:

• Financing Duration: Short-term financing (one year or less), medium-term financing (more than one year up to three years for microenterprise financing, and more than one year up to five years for medium and small enterprise financing), and long-term financing (more than three years up to five years for microenterprise financing, and more than five years for medium and small enterprise financing).
• Financing Installment Repayment Period: Once a month, more than once a month, or once during a period longer than a month.
• Nature of Financing Purpose: Financing current and operational needs, or financing investment needs of the project.
• Method of Fund Disbursement: Funds are disbursed either in cash directly or through using one of the non-cash payment methods, according to the financial limits of the financing amount as stipulated in the Law regulating the use of non-cash payment methods issued by Law No. (18) of 2019 and its executive regulations, or non-cash such as payments to suppliers or microfinance leasing, etc.
• Date of Client's Credit Transactions with the Entity: New clients, existing clients.
• Type of Collateral Provided: High-recovery-value tangible collateral, documentary collateral according to organized rules, personal guarantees, or a mix of guarantees.
• Extent of Applying the Non-Repayment Risk Guarantee Mechanism: Insured clients, uninsured clients.
• Insurance on the Project or Financed Assets: Clients whose project/assets are insured, clients whose project/assets are not insured.
• Nature of the Financing Product: Individual financing products, collective financing products.
• Place of Product Provision: Physically at the entity's outlets, digitally, or a mix of both.
• Allowed Financing Segments: Low financing segment, medium financing segment, high financing segment.
• Timing of Return Collection on Financing: Collecting part of the return in advance, distributing the return over the financing period, or a mix of both.
• Target Client Risk Category: The calculation of the client's risk level is subject to several sub-factors according to the risk criteria accepted in the credit policy of each Financing Entity, which must be clear and specified for risk categories with target clients (including, for example, the client's credit history, geographic area risk, legal form risk, systemic business risk, economic activity risk, and financing segment). Consequently, the credit classification of client categories is determined (low-risk clients, medium-risk clients, high-risk clients), along with the corresponding additional risk percentage (Risk Premium) borne by the Financing Entity for each client category in the targeted profit rate.

Second: Quantitative Considerations
These consist of objective financial and measurable factors that must be distinguished when a Financing Entity considers the pricing basis for different financing products and associated services, as follows:

• Average Cost of Obtaining External Funding Sources: To provide operational liquidity for injecting required ongoing financings for the activity, directly represented by the cost of borrowing from interest income, commissions, etc.
• Costs of Guaranteeing Non-Repayment Risks (if any): When borne directly by the Financing Entity.
• Main Administrative Expenses: Represented by the main actual expenses incurred in executing the annual operational processes of the financing activity, exclusively consisting of rent items for various headquarters (headquarters and branches), depreciation and amortization, human resource costs including salaries, wages, and equivalents, and all monetary benefits such as incentives, bonuses, and allowances in all forms, and all in-kind benefits provided to them such as training and medical insurance.
• Secondary Administrative Expenses: Represented by the secondary actual expenses incurred in executing the annual operational processes of the financing activity, exclusively consisting of the remaining items of general, administrative, and sales expenses other than those mentioned in the main administrative expense items, plus the cost of insuring non-repayment risks (if any).
• Average Annual Inflation Rate: According to the official rates published by the Central Agency for Public Mobilization and Statistics.
• Average Credit Loss Rate: Represented by the average bad debts relative to the total portfolio size.
• Average Rate of Other Risk Losses: According to the historical records of various risks the Financing Entity has been exposed to and future data for each.
• Average Targeted Profit Margin/Surplus: Net profit/surplus targeted before or after taxes, depending on the circumstances.
• Special Costs: Represented by cost items specific to a certain segment of clients, such as late and irregular clients, including late payment penalties, judicial expenses, and legal fees.

(Article Three)
Obligation of Financing Entities to Prepare a Pricing Policy

Each Financing Entity must prepare a clear and objective pricing policy for all its financing products and services, and determine the final prices for each financing product, including the pricing bases that consider all qualitative and quantitative considerations as mentioned in Article Two of these Guidelines, according to three levels: (low-risk clients, medium-risk clients, and high-risk clients), including financing segments. The pricing policy must be approved by the Board of Directors/Board of Trustees of the Financing Entity, as applicable, and reviewed periodically at least once a year and updated as needed. The final approved price structure of the Board of Directors/Board of Trustees of the Financing Entity for any product/service specific to financing granted by another authority within the Financing Entity (other than the approval authority) may not be changed. The Board of Directors/Board of Trustees of the Financing Entity may, by a special resolution, delegate the "Product Pricing Committee," which is formed by at least three senior management members of the Financing Entity with expertise in the Committee's scope of work, and chaired by the Managing Director or CEO/Head of Financing Activity, as applicable, to make decisions on changing and approving the price structure. The Board of Directors/Board of Trustees must be informed of the Committee's decisions at the next meeting. The Authority must be notified of the approved pricing policy, and upon any full or partial update to it, within a maximum of five working days from the approval date for either, with a clear activation date specified for each. The Authority may provide the Entity with any observations it deems fit regarding the approved pricing policy or its updates.

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(Article Four)
Mechanism for Applying Responsible Pricing

The Financing Entity must follow a clear mechanism to calculate the estimation of the pillars of the responsible pricing structure to be applied to clients, according to each category of different risk categories for target clients, and the financing segments for the various products and services provided to them. The criteria for classifying risk categories and financing segments are subject to the guidelines to be issued by the Authority regarding them, as follows:

Pillar One: Financing Cost Rate
This is represented by the "Sustainable Annual Nominal Financing Cost Rate" that the Financing Entity needs to use in pricing a specific financing product. It reflects the term cost charged to the client for a specific period of time according to the financing contract, expressed as a fixed or variable annual percentage of the financing amount granted to the client. Pricing for this pillar is based on the free approach to financing cost and is calculated according to one of the following methods, depending on the Financing Entity's policy:

First: The Simple Method
This method involves applying the following equation to calculate the first pillar of the responsible pricing structure:

Sustainable Annual Nominal Financing Cost Rate = Main Expense Rate + Financing Loss Rate + External Funding Cost Rate + Other Risk Loss Rate + Portfolio Return Rate + Tax Margin Rate + Return from Other Investments Rate

Each element of the previous equation must be expressed as a percentage of the average financing portfolio.

The average financing portfolio for the required period in months is calculated according to the following equation:
Average Financing Portfolio = (Value of portfolio balance at the beginning of the period + Value of portfolio balance at the end of each month) / Total number of months + 1

It must be ensured that the average financing portfolio includes the value of credit portfolios transferred while the Financing Entity continues to be committed to collecting them.
This allows for monthly price updates to keep pace with any changes in funding source cost rates and other high-cost elements.

The terms mentioned above refer to the following concepts:

1. Main Administrative Expenses: Represented by the main actual expenses incurred in executing the annual operational processes of the financing activity, exclusively consisting of rent items for various headquarters (headquarters and branches), depreciation and amortization, human resource costs including salaries, wages, and equivalents, and all monetary benefits such as incentives, bonuses, and allowances in all forms, and all in-kind benefits provided to them such as training and medical insurance.
2. Financing Loss Rate: Reflects the annual loss volume due to uncollectible financings (bad debts). Based on the Financing Entity's historical performance rates, the bad debt ratio to the total portfolio over an average period of no less than three years is a key factor in predicting future financing loss rates, especially under the application of Egyptian Accounting Standard No. (47) titled "Financial Instruments."
3. External Funding Cost Rate: Reflects the cost of available funding sources for the Financing Entity from external sources, which it will rely on in the future to finance the portfolio. The historical cost indicator for the Financing Entity relative to the average financing portfolio, in light of the credit facility agreements obtained, is a fundamental pillar in estimating the most accurate rate for external funding costs in the future, taking into account changes in future agreements.
4. Other Risk Loss Rate: Reflects the limits of losses from other business risks other than financing (credit) losses exposed to the financing activity in the Entity, for example:
   (a) Operational Risk Losses: Reflects the limits of operational risk losses exposed to the Entity's financing activity resulting from inadequate or failure of internal operations, employees, systems, or external events. The Entity's historical and documented records are the basis for estimating the total loss value incurred or likely to be incurred by the Entity in this framework, with due consideration for the relative weight of the probability of overlap between operational risks and credit risks to prevent double counting and estimation. (b) Market Risk Losses: Reflects the limits of market risk losses exposed to the Entity's financing activity resulting from negative market movements regarding fair value volatility and future cash flows of financial instruments used by Financing Entities, primarily resulting from fluctuations or changes in the level of interest rates for debt instruments held by the Financing Entity in the trading portfolio (if any), such as bonds, treasury bills, preferred shares, and foreign exchange rates (in case the Financing Entity obtains facilities in foreign currency and repays them in foreign currency or the equivalent in Egyptian pounds), and commodity prices (in case the Financing Entity holds them for trading, such as in Islamic financing forms and microfinance leasing). The Entity's historical and documented records are a reference in estimating the total loss value incurred or likely to be incurred by the Entity in this framework. In all cases, the calculation of this item is subject to objective and documented justifications by the Financing Entity.
5. Financing Portfolio Return Rate: Represents the net real profit before taxes (if any) that the Financing Entity has decided to target in its business results from practicing the activity, expressed as a percentage of the average financing portfolio.
6. Tax Margin Rate: Represents the value of expected taxes to be paid as a result of practicing the activity, expressed as a percentage of the average financing portfolio.
7. Return from Other Investments Rate: Represents the expected return the Financing Entity will obtain from investing its available surpluses in assets other than the financing portfolio (if any).
   Generally, the historical levels of the previous elements, based on the approved financial statements of the Financing Entity, form an objective basis for estimating the future value of each to reach the target price to be applied to financing products in the future, taking into account any modifications resulting from clear and justified future variables. In the absence of historical data, reliance is placed on the inputs of the future financial model for the Financing Entity's practice of the relevant activity, and prevailing industry averages.

Second: The Advanced Method
This method involves applying the "Financial Modeling Approach" to determine the "Sustainable Annual Nominal Financing Cost Rate," where the Financing Entity builds a comprehensive financial planning model using electronic databases or full financial modeling software. This relies on accurate monthly feeding of the Financing Entity's financial data during the financial planning period, using this data to calculate the cost of financing, and then extracting the results of different cost elements to use in the previous equation more accurately. This method also requires the Financing Entity to develop specialized measurement tools to determine other risk losses.

In all cases, the Financing Entity must, regarding the first pillar, determine the type of financing cost applied in its pricing policy to achieve the "Sustainable Annual Nominal Financing Cost Rate" it targets. It may choose between two main methods:
(a) Declining Balance Method: This refers to the financing cost calculated on the outstanding financing balance at a specific point in time. Consequently, the financing cost amount changes in each period throughout the financing duration and is calculated monthly throughout the financing duration.
(b) Fixed Price Method: This refers to the financing cost calculated on the principal financing amount throughout the repayment period, not on the outstanding financing balance. Consequently, the financing cost amount remains fixed throughout the financing duration and is calculated once when the financing is granted, with the aim of repaying the principal financing amount and its cost in equal periodic installments. The Financing Entity must commit, when disclosing in its pricing policy, that the "Sustainable Annual Nominal Financing Cost Rate" is expressed using the Fixed Price Method, and clarify the percentage that may be collected as an advance payment (if any), and consider disclosing the impact of that on the final actual cost burden of this pillar on clients.

Pillar Two: Administrative Expenses
Administrative expenses are calculated as revenue for the Financing Entity, and their rate reflects an acceptable coverage of each of the following:
(a) Items of secondary administrative expenses borne by the Entity, detailed in Article Two of these Guidelines, consistent with the nature of its activity, product type, client risk category, and financing product segment.
(b) Other service expenses related to the financing granting process, as outlined in Pillar Three.
Pricing for this pillar is based on the flexible fixed approach, as follows:

• Administrative expenses are collected after financing approval.
• Administrative expenses are calculated as a percentage of the principal financing amount, as follows:
  • Medium and small enterprise financing activity: maximum (1.5%).
  • Microenterprise financing activity: maximum (5%).
• The graduated calculation of the applied administrative expense rate must be adhered to, according to the level of financing amount segments from highest to lowest.
• It is prohibited to calculate and collect additional financing costs on the administrative expenses collected from the client.
• In case of rejecting the client's financing, the client may not be charged administrative costs except for the actual costs of conducting credit inquiries for him and his guarantors, with the commitment to disclose this to him before starting to study his financing request.
• It is emphasized that all main administrative expenses are reflected in the responsible pricing rate for the financing cost rate included in the cost elements in calculating the first pillar.

Pillar Three: Other Service Expenses Related to the Financing Granting Process The Financing Entity may collect some other expenses for services accompanying the financing granting process for its clients according to the nature of each. However, it must take this into account when evaluating the final pricing of its financing products, specifically the components of main and secondary administrative expenses in Pillars One and Two, to prevent double counting of any cost element. Pricing for this pillar is based on the free approach, where the value of the burdens of these expenses is covered within the maximum percentage of administrative expenses predetermined in Pillar Two, as follows:
(a) Pre-Granting Financing Service Expenses

• Financing application (issuance)/renewal fees.
• Credit inquiry expenses: The actual cost incurred by the Financing Entity to obtain the credit inquiry report for the client and his guarantors must be adhered to, according to the contract concluded with the credit inquiry entity. The same applies to expenses of inquiries from the civil registry (if any). The cost of this item may be collected in advance independently before the financing granting decision is issued, with the client being provided with an official receipt.
• Non-cash financing disbursement expenses: The client may not be charged any expenses not actually paid if the financing is disbursed in a non-cash manner due to direct payment to suppliers. This means charging the client only the actual price of the financed investment/operational commodity paid to the supplier after deducting any commercial discounts obtained by the Financing Entity due to bulk purchasing for its clients. Such discounts should be a relative advantage for the Financing Entity with its clients, not a source of additional profit in its transactions with financing clients, except in the case of providing the financing product in one of the Islamic financing forms according to its nature and/or through microfinance leasing.

(b) Post-Granting Financing Service Expenses

• Financing settlement/clearance certificate issuance expenses: Whether issued for the client himself or for any other entity.
• Financing disbursement and installment collection service expenses: Which are conducted on-site only at the client's location - within the financial limits allowed according to the Law regulating the use of non-cash payment methods issued by Law No. (18) of 2019 and its executive regulations, according to the Financing Entity's policy.
• Mandatory insurance expenses on death and permanent disability risks: Conducted within the price limits previously determined by the Authority according to the resolutions issued by it in this regard, and according to the actual cost incurred for this purpose according to the contracts concluded with the concerned insurance company.
• Optional insurance expenses, against other risks, or according to financing granting conditions: Conducted according to the contracts concluded with the concerned insurance company without achieving any profitability from the client in these services if the Financing Entity collects such insurance itself, except if the Financing Entity acts as a distributor for one of the insurance companies registered with the Authority in distributing microfinance insurance products, according to the rules issued by the Authority in this regard.
• Other expenses: Regarding any other expenses that may arise in the future beyond the control of the Financing Entity, they must be directly related to the financing granted to the client, and collected from the client according to the actual cost incurred by the Financing Entity only, without increase. It is emphasized that the client must be notified of them before granting financing or during the repayment period, depending on the timing of their approval.

(Article Five)
Mechanisms for Responsible Disclosure of Financing Product Prices and Related Services

The Financing Entity is committed to sufficient disclosure to clients regarding the responsible pricing structure of its financing products and services, and according to its three pillars mentioned in these Guidelines. This must be in easy-to-understand and clear language to facilitate reading and review, according to the following disclosure levels:

First: Basic Disclosure Level (Mandatory)
This is the level that reflects the minimum data that must be disclosed to clients regarding the total cost of obtaining credit in the responsible pricing structure for the products and services provided by the Financing Entity. This is done through the following tools:
(a) Official Disclosure Form for the Responsible Pricing Structure: This is the disclosure form prepared by the Financing Entity according to Annex No. (1) attached, reflecting the actual value of the pillars of the responsible pricing structure according to the prevailing prices for the relevant products and services on the date of providing financing and according to risk categories and their reflected financing segments. The client is informed of it and provided with a copy after the data therein is explained by the financing officer of the Entity. The client's signature is obtained to confirm knowledge of its content before obtaining the required financing, and a copy is kept in the client's file. The required data in the disclosure form must be completed in easy, clear, and accurate language, enabling the client to easily and simply compare prices among different Financing Entities and verify their compliance with the official prices announced by the Financing Entity. (b) Periodic Disclosure Bulletin for the Responsible Pricing Structure: This is the internal disclosure bulletin prepared periodically, and upon any full or partial change in the responsible pricing structure for the products and services provided by the Financing Entity. The responsibility for its preparation lies with the specialized management at the Financing Entity's headquarters, chaired by the Managing Director or CEO/Head of Financing Activity, as applicable, and those delegated by them. It must be approved and stamped with the Entity's seal. It is published on the Entity's official website (if available), and distributed to all licensed branches and offices for public disclosure to clients in bold, easy-to-read font, thereby enhancing the reliability of announced prices among all client segments. The Financing Entity must keep a record of its approved periodic disclosure bulletins for at least five years at each branch or office, and keep copies of these bulletins for at least one year in a special file prepared for this purpose. The person responsible for the actual management of the financing activity in the Entity is responsible for verifying the accuracy and integrity of the required disclosure. A copy of this bulletin must be provided to the Authority monthly and upon any changes to it, within five working days from its date.

Second: Advanced Disclosure Level (Optional) This is the level that reflects an advanced level of technical disclosure of all actual costs incurred by the client when obtaining credit, condensed into a single number. It is preferred for the Financing Entity to use it to further facilitate comparison between Financing Entities' prices. It includes reliance on all three pillars of responsible pricing mentioned, excluding any expenses the client can avoid, such as costs or expenses incurred by the client due to breach of any of its obligations in the financing contract. This approach relies on using a clear indicator for disclosing the actual cost of financing and is not used to determine the actual cost of financing. This indicator can be applied through one of the following two methods according to the Financing Entity's policy:
Method One: Effective Annual Financing Cost Rate This rate essentially expresses the "Annual Cost of Financing throughout the Repayment Period" ---