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

No. (193) of 2018 dated 31/12/2018

Regarding the Financial Solvency Standards for Companies Licensed to Conduct Factoring Activities

According to the latest amendment dated 16-11-2022

Board of Directors of the General Authority for Financial Supervision

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

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

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

And Presidential Decree No. (197) of 2009 issuing the Basic Statute of the General Authority for Financial Supervision;

And Board Decision No. (72) of 2013 regarding regulatory and supervisory controls for factoring activities;

And Board Decision No. (137) of 2018 regarding licensing and renewal controls 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 the memorandum issued by the Central Directorate 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 attached financial solvency standards shall apply to companies licensed to conduct factoring activities.

(Article Two)

Companies subject to this Decision shall comply with the attached financial solvency standards and submit to the Authority the forms and reports mentioned therein, or any other documents or data requested by the Authority to verify compliance.

Companies shall submit the mentioned reports to the Authority via the dedicated email address within fifteen days from the end of each month.

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(Article Three)

Companies subject to this Decision shall prepare a work plan including a timeline for compliance with the attached standards, to be submitted to the Authority by no later than 30/6/2019, and shall provide quarterly reports on measures taken in this regard.

(Article Four)

Any provision contradicting this Decision 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 Companies Licensed to Conduct Factoring Activities

Objective of Applying Financial Solvency Standards

The financial solvency standards aim to emphasize the importance of risk management for licensed factoring companies and support their capacity to implement it, including credit risk, operational risk, market risk, and liquidity risk.

These standards also aim to ensure compliance with maintaining a minimum financial solvency ratio, which is used to estimate the risk-weighted capital, based on covering "credit risk and operational risk" for various types of financial rights or financed assets.

Article (1)

Capital Adequacy Standard

The company's financial solvency ratio must not fall below (10%) at any time, gradually increasing to (12%) within a maximum of three years from the effective date of this Decision, with the company submitting semi-annual reports on 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: 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 applicable).
4. Retained earnings (accumulated profits/losses), including profits/losses of the current or financial year.

Tier Two (Supplementary Capital):

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

Article 1 was amended by Board Decision No. 161 of 2022 to measure the company's ability to face risks associated with its activity (Capital Adequacy Ratio "CAR"), including legal risk. The capital adequacy standard aims to cover credit and operational risks.

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A loan is considered in the capital base account if the following conditions are met:

(a) The loan term is at least five years, amortizing at (20%) annually.

(b) The remaining maturity until loan due date is at least 12 months.

(c) The loan is fully paid in cash.

(d) The loan is not earmarked or reserved for a specific activity or specific assets.

(e) The loan is not secured by any asset or has priority over other creditors.

(f) Fulfilling the loan does not reduce the capital base below the required 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 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, factoring correspondents, credit risk coverage entities, credit default swap providers, or any other guarantees accepted by the Authority.

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

Risk Weights	Financial Position Items
0%	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
100%	Structured financing (financing portfolio/financial rights)
100%	Financial investments - Shares
100%	Investments in sister or subsidiary companies
100%	Intangible assets
150%	Staff (receivable balances)
150%	Net unstructured financing (overdue more than 90 days after deducting specific provisions)
150%	Deferred tax assets
150%	Net fixed assets (after depreciation)
150%	Other assets

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

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Third: Operational Risk

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

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

Article (2)

Concentration Risk

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

First: Individual Concentration Risk

Individual concentration risk is calculated by dividing the value of the largest 10 factors by the total balance of the financing portfolio.

If the calculated ratio exceeds (30%), additional capital requirement shall be calculated at (4%) of the minimum capital adequacy to cover credit risk (12% of risk-weighted assets).

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

Second: Portfolio Concentration Risk

Portfolio concentration risk is calculated by dividing the (value squared) by the total financing balance of each sector individually.

Then summing them up and dividing the total by the value of the total financing portfolio. If the calculated ratio exceeds (40%), additional capital requirement shall be calculated at (4%) of the minimum capital adequacy to cover credit risk (12% of risk-weighted assets).

The company shall disclose factoring in local markets and factoring for exports to international markets, with factoring of financial rights arising from exports to international markets exempt from the additional capital requirement mentioned in the previous paragraph.

The company is granted a three-year period from the effective date of this Decision to comply with this Article, with a commitment not to conclude new operations that exceed the maximum legal concentration ratio during this period. The company shall also submit quarterly reports on measures taken in this regard.

(3) Operational risk refers to potential risks resulting from failure or inadequacy of internal procedures, human elements, and systems within companies, or due to external events, including legal risk.

(4) Individual concentration risk arises from the company's allocations to a single client or a limited number of clients. (5) Portfolio concentration risk for financial leasing companies is measured across different economic sectors to calculate capital requirements to cover this type of risk.

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Article (3)

Leverage Ratio

The total loans and financings obtained by the company (including subordinated loans) must not exceed nine times the company's capital base, excluding loan and financing balances whose risks are covered by banks, factoring correspondents, credit risk coverage entities, credit default swap providers, or any other guarantees accepted by the Authority.

Article (4)

Asset-Liability Maturity Matching

The total short-term factoring receivables included in the company's financial statements must not be less than the value of short-term financings obtained by the company and included in the financial statements.

The company is granted a two-year period from the effective date of this Decision to comply with this Article, and shall submit quarterly reports on measures taken in this regard.

Article (5)

Liquidity Standard

The ratio of liquid assets to net cash outflows over three days must not be less than (100%), according to the following formula:

Liquid Assets

Net Cash Outflows over 30 days

The company is granted a three-year period from the effective date of this Decision to comply with this Article, and shall submit quarterly reports on measures taken in this regard.

Article (6)

Calculation of Amortization (Provisions) for Doubtful Financing Balances and Debt Write-offs

The company shall calculate amortization for customer balances for overdue balances from the total portfolio balances, with a minimum commitment, as follows:

First: A provision of (1%) shall be established on existing structured balances, to be calculated from the financial statements for the period ending on 31/12/2019.

(1) Liquid assets refer to cash, bank deposits, treasury bills, treasury bonds, and money market fund instruments.

(2) Net cash outflows refer to the value of cash outflows minus the value of cash inflows.

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The company may apply the mentioned 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 according to Egyptian accounting standards.

Second: A provision shall be established on doubtful collectible balances according to collection delay rates, as shown in the following table:

Notes	Provision Rate	Collection Delay Rate
-	10%	60 to 90 days
-	25%	More than 90 to 120 days
-	50%	More than 120 to 180 days
Accruals suspended	70%	More than 180 to 365 days
Accruals suspended	100%	More than 365 days

The provision on doubtful debts is calculated after fully or partially excluding balances whose risks are covered by banks, factoring correspondents, credit risk coverage entities, credit default swap providers, or any other guarantees accepted by the Authority.

Suspended Accruals

No income shall be recognized for financings granted by the company if payment is delayed for a period exceeding 180 days. However, such income may be considered for refinanced and structured financings with a repayment schedule of one year and a rate not less than 20% of the debt.

Debt Write-offs

Debt may be written off according to the following conditions:

1. A decision by the company's board of directors to write off the debt.
2. A report from one of the Authority's auditors confirming the following conditions: (a) The company has structured accounts. (b) The debt is related to factoring activities. (c) The amount corresponding to the debt was previously included in the company's accounts. (d) The company has taken serious measures to collect the debt but failed to collect it after 18 months from its due date.

The second paragraph of the first item in Article 6 was amended by Board Decision No. 70 of 2020.

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Serious measures to collect the debt include the following:

1. Obtaining an execution order where permissible.
2. A first-instance court ruling obliging the debtor to pay the debt value.
3. Claiming the debt in bankruptcy execution procedures or concluding a protective composition against bankruptcy.

The company shall recognize any recovered debt or portion thereof as company revenue in the year of recovery.

Article (7)

Creditworthiness Assessment Principles for Customers

The company must follow creditworthiness assessment principles when granting, increasing, or renewing financing and when establishing provisions. This must include the following:

1. A robust risk assessment system before granting financing to measure the credit quality of each financing individually, considering concentration risk for a single client or at the economic activity sector level.
2. Conducting a credit review for financings granted to all customers at least once per financial year.
3. Verifying the availability of conditions, guarantees, and completion of all legal documents before disbursing financing to customers.
4. A credit database enabling the company to predict any changes in customer conditions.
5. Reviewing non-compliant customers and preparing quarterly reports on them to be presented to the company's board of directors.
6. A system to monitor financings after granting to ensure implementation of policies set by company management.
7. Implementing 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 and/or amortization calculations, and suspended income must not be included in the income statement.

Disclosures related to periodic and annual financial statements must include a detailed breakdown of provisions for doubtful collectible financings.

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Article (9)

Periodic Reports

The company shall prepare periodic reports according to the model prepared by the Authority for this purpose, which must show the financial solvency position of the company on the last day of each month, including:

(a) Calculation of capital and equity ratios.

(b) Calculation of total capital base.

(c) Calculation of risk-weighted assets.

(d) Calculation of elements disclosed outside the financial position statement, including fixed contracts that do not bear the company's risk.

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 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.