Chapter One: Controls for Granting Credit

Part One: General Controls for Granting Credit

First: Introduction (1)

Banks face various risks when granting loans, including the risk that the extended money does not generate the expected returns, or that the bank fails to recover expected loan amounts, potentially extending to the bankruptcy of the bank and the loss of customer deposits.

Loan risks are diverse, including risks specific to the borrower, risks related to the nature of the activity, risks related to economic conditions, risks resulting from the bank's overall operations, and risks resulting from external shocks.

Banks must pay attention to these risks and organize their work systems to study and monitor granted credit, assess risks with the borrower, and obtain sufficient guarantees and insurance.

Therefore, banks must comply with the rules issued by the Central Bank of Egypt and the banking regulations and instructions issued by the Central Bank of Egypt regarding this matter.

Second: General Rules

Banks must observe the systems and regulations in force in the banking sector.
Banks must adhere to established banking rules and customs in all credit granting activities and the issuance of guarantees.
Credit granting decisions and facilities must be linked to specific purposes and monitored within the scope of those purposes.

Banks have the right to impose conditions on their customers regarding the use of funds not specified in the Central Bank of Egypt's rules and banking regulations, as penalties for using credit facilities or guarantees for purposes other than those approved in the credit file.

Banks must not grant credit facilities to support foreign currency deposits if there are funds available for foreign currency transactions with the required liquidity, provided that the use of funds is in accordance with the required liquidity.

In this regard, the following must be considered:

The bank providing the transaction must obtain a declaration from the customer confirming their withdrawal of foreign currency funds from the financing bank.
5. The primary basis for granting loans and credit facilities in foreign currency is the customer's ability to generate foreign currency through the activity for which the loan/facility is granted, such as generating deposits for the customer or purchasing goods from abroad.
6. The primary basis for granting credit to non-residents is the justification of the exchange rate for non-resident transactions, provided that the customer has sufficient insurance in all credit granting activities.
7. The liquidity of foreign currency resources must be commensurate with the amount of loans and credit facilities granted by the bank.
8. The bank must have sufficient liquidity in foreign currency transactions with other banks and financial institutions acting as creditors in foreign currency.
9. The bank must comply with the credit conditions to support the customer's management, operations, and the nature of the granted facilities.

5. Banks must stop granting credit facilities to non-residents with maturities not exceeding one year in foreign currencies, whether issued by foreign banks or banks operating in Egypt, and whether the facilities granted to the non-resident are in foreign currency.

This applies to all maturities and all types of facilities issued by foreign banks.

(♦) This applies to a limit of A.

Banks must not grant credit facilities to non-residents with foreign currency deposits with maturities less than one year or foreign currency bonds, except for banks that have notified the Central Bank of Egypt of such status.

(9) And in accordance with the provisions of the circulars issued by the Central Bank of Egypt regarding:

♦

Circulars of the Governor of the Central Bank of Egypt issued on February 26, 2003; Circulars of the Deputy Governor of the Central Bank of Egypt issued on March 4, 2008; 4. Meeting of the Governor of the Central Bank of Egypt with the heads of banks held on November 19, 2001. 5. Meeting of the Governor of the Central Bank of Egypt with the heads of banks held on September 8, 1997. 6. Meeting of the Governor of the Central Bank of Egypt with the heads of banks held on February 17, 1998. 7. Meeting of the Governor of the Central Bank of Egypt with the heads of banks held on November 10, 1998. 8. Letter from the Governor of the Central Bank of Egypt dated January 18, 2011.

Circulars of the Supervision and Inspection Department issued on July 27, 2003.

(a) This restriction applies only to foreign currency branches that have stopped granting credit facilities to non-residents with maturities not exceeding one year in foreign currencies, except for branches of foreign currency branches operating in Egypt and branches of Egyptian banks operating abroad that have not exceeded their limits, and the facilities granted to non-residents with foreign currency deposits must be within the limits of the deposits held in the same bank.

(b) Regarding non-resident credit customers who do not comply with the approved credit file, it is noted that in the event of using these facilities abroad and without any foreign currency payments, the bank has the right to deduct these payments from the deposits held in foreign currencies in the event of non-compliance with the transaction with the required liquidity of resources, and if the bank holds foreign currency deposits, they are used for foreign currency transactions, and banks must inform customers that in the event of using facilities for foreign currency payments, it is considered as settling these foreign currency payments.

Banks must observe the conditions and procedures for the approval of credit facilities before starting implementation, and complete the required procedures before starting implementation, including accepting commitments from customers to complete the procedures.
Banks must observe the limits of the Egyptian pound, meaning that any transaction exceeding a certain limit must be approved by the Central Bank of Egypt.

These limits are determined by the bank, taking into account the credit study and the availability of an approved credit file, which allows granting all limits after studying each limit according to the Central Bank's instructions and the bank's internal policies regarding credit.

The credit officer and the credit investigator must have the necessary qualifications and experience.

The positions must be held by senior employees who have been promoted from lower positions and must not hold other positions within the bank.

The credit system must be based on sound principles, and the bank's management must ensure compliance with the regulations and instructions.
Banks must ensure that credit facilities granted in the first quarter are based on in-depth studies of the borrower's financial position, results of operations, reputation, and ability to meet obligations and the purpose of the facility.

And the repayment must be based on considerations that may differ from the sources.

In studying the borrower's financial position, banks seek to verify the following (and any other documents that support them): the validity of the financial statements and the completeness of the information provided by the borrower, and the reliability of the auditors who reviewed the financial statements, and the necessary decisions and actions in a timely manner.

And it must be considered that the financial statements have been reviewed by an auditor who meets the conditions and qualifications specified in the Circulars of the Supervision and Inspection Department issued on March 7, 2005, and the decision of the Board of Directors of the Central Bank of Egypt issued on November 18, 2005.

Banks must ensure that credit facilities are consistent with the borrower's financial position and the sources of their income, whether from the main activity or other activities.

Banks must, when examining customer requests for loans to establish new projects or expand existing ones, consider the borrowing ratio of the entity - from local and foreign financial institutions - to determine the capacity of the entity to absorb additional loans that the bank will provide.

In the case of existing projects that require borrowing, or the granting of a joint loan with another bank and managed by that bank, the bank must conduct the necessary credit studies, and the approval of such facilities must be based on the credit file approved by the Board of Directors of that bank and other credit approvals, provided that the sources are sufficient.
Banks must comply with the instructions regarding the purpose of the granted facilities and monitor the use of funds for the intended purpose, and the bank must not disburse the approved facility in a manner inconsistent with the intended purpose, and must avoid using funds for speculative activities such as buying or selling securities, insurance, or trading.
Banks must study the customer's position and the associated risks (related parties) in aggregate and in detail, taking into account the ongoing relationships with the customer, whether when approving credit limits or when assessing the credit risk associated with the customer, while avoiding lending to related parties of the bank, and in accordance with the laws and regulations governing the lending of the board of directors of banks.
The Board of Directors of the bank must adopt rules and procedures for the banking system and the management of credit customers, and must approve the forms of the documents provided by the customer regarding credit and associated risks, and the credit investigator must present the credit form to the customer at the time of granting or renewing or increasing the limits granted to the customer, with the customer's declaration that they have signed the form and the associated risks.
Banks must ensure that credit facilities are granted by authorized persons within the limits of their authority, and must not allow customers to exceed the maximum limits for facilities, and must know the creditworthiness of the borrower and the repayment source, and must not exceed the temporary limits without referring to the competent administrative authority in the bank, and must monitor the status of extensions that have been granted with temporary documents issued by the competent authority of the main supervision department of the bank.

It is also noted that the bank must have a file to provide evidence of the competent authority's approval of the extension with a temporary document for the approved limits or the available balances in the debtor accounts.

The renewal or increase of limits must be based on the bank's monitoring of the customer's transactions and the competent authority's approval before the banking regulations, meaning that the renewal or increase of the approved limits must be based on a completed credit study, and banks must not increase the approved limits merely due to the expiration of the limits that were actually used.
Banks must monitor the customer's financial position from the beginning of the transaction to the end, and must be able to recover any losses during the transaction and throughout the entire transaction before they are realized.
Banks may consider granting credit facilities or renewing them based on the status of existing credit customers, according to the forms approved by the bank, which include the basic documents used in credit studies and provided by the banking supervision department, along with advisory documents to help identify the documents that the customer must provide with the application, while ensuring the customer's compliance with the conditions for completing the forms to the extent possible to simplify the forms.

And the documents that the customer must provide include a declaration signed by the customer to the bank and the leasing company, the financing company, and the insurance company with which the customer has transactions and the amount of transactions with the bank, and the outstanding balances of the customer before the approval of the facilities, such as the approval of the facilities with the bank, or the approval of non-valid facilities with the bank, or the approval of facilities other than the requested ones, or the approval of the facilities requested.

Banks must submit the completed forms to the administrative department for the meeting of the banking credit committee before the Central Bank of Egypt issues them, and regarding the customer and the associated risks, and before the customer is granted credit facilities, whether new, renewed, or increased limits, and the completed forms are considered by the final authority as a mandatory reference for the approval of credit.
Banks must notify the administrative department for the meeting of the banking credit committee at the Central Bank of Egypt of the completed forms and the associated risks.
Banks must diversify their loan portfolios to a certain degree to reduce the risks that the bank may be exposed to.

Diversification of transactions with one customer or with a group of related customers or with a group of activities in the economic sector.

It is incumbent upon the credit departments in banks to verify the documents provided by customers to meet the requirements of the credit for the requested facilities before the approval of the facilities, so banks must refer to the competent authorities for the investigation of the documents provided by some customers for borrowing, provided that they are sufficient for the customer, and the bank is not exposed to any information regarding the customer, and the bank is not exposed to any information regarding the customer.
Banks must comply with the instructions of the Central Bank of Egypt and the Central Bank of Egypt regarding the granting of credit to the Central Bank of Egypt and the Central Bank of Egypt (the Central Bank of Egypt and the Central Bank of Egypt are subject to the banking rules and regulations, and the monitoring of the Central Bank of Egypt and the Central Bank of Egypt is subject to the instructions of the Central Bank of Egypt and the Central Bank of Egypt).

Banks may grant credit to the Central Bank of Egypt based on credit studies and their compatibility, and it is emphasized that the amount of loans granted to the Central Bank of Egypt must be approved by the Minister of Finance.

Banks must determine the credit system and the internal work systems adopted by the Board of Directors of the bank, including the authorities and responsibilities of the bank's credit department, and determine the penalties, whether in the granting phase, or the renewal or increase phase, and the completion of the granting procedures before disbursement, and the disbursement.
Banks must determine the system for monitoring the use of funds from the loan for the intended purpose from the bank.

And the Board of Directors of the bank aims to support the departments mentioned in the previous paragraph and to establish the bases for relying on the level of each branch and to establish a system that deals with the monitoring of the use of funds and their role, and the departments that are exposed to non-compliance.

The Board of Directors of the bank must determine the role of the audit department in supervising the credit transactions.

Third: Controls Related to Each Type of Credit Facilities (*)

-1 Facilities with Goods Collateral:

(a) Lending is restricted to new goods.

(b) Banks must accept goods as collateral for industrial purposes from customers at a certain percentage.

(c) The granting of these facilities is restricted to the types of goods that can be insured by the bank, such as goods that have been insured or are available for the competent authorities in the bank with sufficient insurance, and in the event of the lack of such insurance, it is not acceptable to rely on these goods before the facilities.

And the matters that banks must observe regarding the types of goods are as follows: the goods must be available before the bank in the warehouses of the producing or importing companies, or the bank must provide them with the bank's seals, with the availability of specifications and labels on the packages, and it must be determined that the percentage of the goods is at least the percentage of the goods, with the use of the necessary seals at the time of borrowing with all the goods, and the goods must be deposited in the bank's sealed warehouses, with (d) ensuring that the credit facility granted is subject to the bank's verification of the availability of the necessary procedures to ensure its rights regarding the collateral, and it must be considered that the bank does not rely on the collateral provided by the customer as a guarantee for the facilities, and the facilities are considered as unsecured, with the customer's commitment to the valid documents within the limits of the authorities of the competent administrative authorities that are responsible for granting credit.

(●)

-2 Facilities with Commercial Papers and Bills of Exchange Collateral:

Banks must verify the validity of the transactions that gave rise to these papers and the existence of a debtor and the acceptance of the papers with the necessary conditions for all the endorsers to the last holder of the papers and their ability to repay, while observing the percentage of the papers (if any).

And it must be considered that the rules for the credit risks that may arise from granting facilities with these types of papers are as follows:

For credit granted to customers, because the papers may be defaulted and lost as a whole, and:

(a) The acceptance of papers from any entity whose assets are not sufficient to meet the immediate demands of the banks is prohibited.

(b) Regarding the acceptance of papers presented with a discount, the bank must observe the following conditions to verify the validity of the existence of these papers and the validity of the endorsers from the following:

-1 Verification that the commercial paper is fully insured, and verification that the insured amount in the commercial paper is sufficient for the repayment of the paper, and for this purpose, a detailed study must be conducted on the main debtor and the endorsers of the commercial paper to the last holder of the papers and their ability to repay, and before the issuance of any credit transaction by the bank.

(●) Circulars of the Governor of the Central Bank of Egypt issued on November 16, 1999; Circulars of the Supervision and Inspection Department issued on September 17, 1987.

-2 Verification of the relationship between the endorsers of the commercial papers and the bank's customers who presented these papers with a discount, to ensure the acceptance of the accepted papers.

-3 The distribution of risks among several limits, with a limit for the risks that the bank accepts from the papers regarding the main debtor for these limits, while diversifying the customer with the group of his activity, with the availability of the main debtor with sufficient insurance for the accepted commercial papers, whether presented with a discount or for collection.

-4 The commercial papers presented must not be presented as a group.

-5 Verification that the debtor in the commercial paper is not subject to bankruptcy, and that the transaction is not subject to the date of the start of the settlement of the papers or their replacement with other commercial papers, whether presented with a discount or to the debtor's account.

-6 In the event of the return of a commercial paper due to non-payment, it must be considered that the bank does not rely on the commercial papers presented by the debtor.

-7 It must be considered that granting credit with commercial papers is not granted to customers who are related to the granting of commercial credit to the debtor's customers in the commercial papers that are accepted with a discount.

-8 It must be considered that the bank obtains the necessary guarantees for the amounts of the accepted papers and the temporary limits for them.

-9 It must be considered that the bank accepts commercial papers from a limited number of debtors, with the diversification of the credit risks that may arise from this diversification.

-3 Loans and Facilities with Securities Collateral:

(a) When granting facilities with securities, the bank must ensure that the securities are traded on a recognized stock exchange, and that the securities are traded, with the attention to the market prices or the book values of the securities, which must be consistent with the market prices or the book values of the securities in the stock exchange market, and with the amount of the discounts and the amount of the discounts in the insured amounts resulting from the interest and expenses, and the bank must comply with the rules and procedures for the classification of securities.

(15) Circulars of the Supervision and Inspection Department issued on September 17, 1987; Circulars of the Supervision and Inspection Department issued on July 15, 2004.

(b) It must be considered that the bank relies on the market price of the securities, if there is no active trading, and the rules for the preparation and presentation of the financial statements of banks and the accounting standards regarding the active trading of securities must be applied to the Egyptian securities (Official Table 1) in the case of active trading (if the group is determined and its approval is observed, and the group's presentation and the presentation of the price are observed) in the previous table.

(16) Circulars of the Advisor to the Governor issued on March 4, 2009.

(c) It must be considered that the bank does not present the securities before the approval of the facilities, and the bank must conduct a study for the purpose of the customer obtaining the facility before the granting, and the purpose must be approved before the acceptance of the securities as collateral, and it must be considered that the bank has the necessary qualifications and experience to monitor the prices of the securities presented as collateral, and the bank must not exceed the approved percentage when granting credit at any time.

(d) The granting of facilities to companies trading in securities for the purpose of short-term speculation is prohibited, unless the company completes the transactions and settles with its customers, and it must be considered that the group is consistent with the transactions that the company carries out, with the adoption of the necessary procedures to prevent any risks resulting from granting these facilities with the maximum limit of the facility and the group of the company's mandatory activities.

(17) Circulars of the Deputy Governor of the Central Bank of Egypt issued on May 20, 2001.

(e) It is mandatory to stop the activities of the heads of the stock exchange companies and their deputies and the managers of the currency companies for the intended purpose, and to monitor their use for the intended purpose from the bank.

For the purpose of the relevant instructions, (w) it is incumbent upon the banks to submit the bonds issued by some companies, provided that they are consistent with the provisions of the relevant laws that impose on the banks in the event of the company's inability to meet the limits of these bonds, and the banks must obtain the bonds and the maturity dates of the bonds from the competent authority of the Central Bank of Egypt regarding the matter, with the submission of studies regarding the matter that indicate the positive cash flows of the company that issues the bonds that indicate their ability to repay the installments and the limits of the bonds at maturity.

(19) Meeting of the Governor of the Central Bank of Egypt with the heads of banks held on May 4, 1999.

(z) It is prohibited for banks to grant credit facilities to individuals, companies, or financial institutions or other institutions for the purpose of financing the purchase of shares of companies listed on the stock exchange or the companies and banks participating in the stock exchange under the program.

(20) Circulars of the Supervision and Inspection Department issued on May 9, 1996; Circulars of the Supervision and Inspection Department issued on September 17, 1987.

-4 Facilities Granted Against the Assignment of Receivables to Third Parties:

Facilities granted to finance construction, trading, or manufacturing transactions for the purpose of selling the facilities without any guarantee are subject to the limits of the authorities of the competent administrative authorities for granting credit.

And it must be considered that the customers monitor the regularity of the transactions in the settlement of the transactions, and the monitoring is the means to ensure the bank's receipt of its dues.

-5 Guarantee Letters:

Banks must, before approving the issuance of guarantee letters for the completion of transactions and contracts..., conduct detailed studies regarding the customer's financial position and the validity of the financial statements and the ability to complete the transactions granted from the bank, and to determine the amount of the facilities that the customer will need to finance the transactions, and the bank's ability to provide them, and this is where banks must not grant facilities after the mere fear of the cost of the previous guarantees issued.

And banks must observe the following provisions:

(a) Banks must not grant credit to customers with the issuance of guarantee letters issued by local banks, whether these letters are in the form of bills of exchange or commitments, and it is incumbent upon the banks to take the necessary steps to verify the validity of the commitments of the local banks to the main auditors of the local banks, with the work to present them all, except for foreign banks, and in the event of the presentation of the letters for credit facilities, it is incumbent to verify the validity of the issuance of these letters except for the verification of the soundness of the auditors of the issuing banks.

(●) Circulars of the Governor of the Central Bank of Egypt issued on November 16, 1999.

(b) The bank must take the necessary procedures for the guarantee letters, except for the letters issued by the competent authority and the stamps and signatures that confirm their validity, and the bank must not rely on the issuing bank's letter and the number and date of its registration at the Central Bank of Egypt, its address, and its registration number, and the number of the account, and it is incumbent to use the letters that are used in the banking letters.

-6 Industrial, Real Estate, and Hotel Projects:

(a) It is incumbent upon the banks to review the economic feasibility studies submitted for these projects and to verify the economic, financial, and developmental aspects, and to calculate the progress and the necessary periods for completion and the ability to meet the obligations and the cash flow tables and the loan repayment schedule and its maturity.

(b) It is incumbent upon the banks to ensure the balance between the resources available to the customer and the local financing.

-7 Unsecured Facilities:

Unsecured facilities may be granted based on in-depth studies of the borrower's financial position and the results of operations, and the availability of a sound financial position and the results of operations, and the absence of any risks in the borrower's history and transactions with the bank, except for old customers.

And it must be considered that the granting of these facilities is based on a reasonable percentage of the...

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CBE Regulation Book 4.1 - Controls For Granting Credit General Controls For Granting Credit