Chapter One: Credit Granting Controls

Part Two: Financing the Activity of Real Estate Development Companies

First: Banking Financing Controls and Rules for Real Estate Development Companies Operating in the Field of Constructing Residential Units for Sale

Article One:
Subject to the controls and rules previously issued by the Central Bank of Egypt regarding real estate financing and credit granting, and the determinations contained in the credit policies of each bank in the field of this type of credit, the provision of banking financing for residential units for sale by real estate development companies operating in the field of constructing units shall be in accordance with the following controls and rules:

1. The land on which the residential units are built must be owned by the borrowing company or a lease contract must be issued from the owner, with the possibility of financing real estate projects established between real estate development companies and government entities and/or development companies, subject to verifying the presence of good creditworthiness and good liquidity for all parties.

2. Complete segregation between the financing provided to the real estate development company and the financing of those wishing to purchase the residential units.

3. The bank must ensure that the company conducts the necessary technical studies to verify the project's feasibility under the supervision of consultants approved by the bank. The bank shall employ approved consultants to monitor project implementation and approve the completion percentage, with the disbursement of financing aligned with this percentage.

It is also necessary for the bank to oblige the company to provide a detailed schedule for the completion of construction works for each stage of the project, so that the actual completion volume is reviewed against the schedule by the approved consultant to verify the company's ability to complete the project and that the financing provided is not for speculation in real estate or profiting from price differences.

4. The bank must employ qualified lawyers to prepare financing contracts and documents to ensure the security of the granted credit and guarantee the recovery of the bank's dues.

Footnote 1: Letter from the Governor of the Central Bank dated March 31, 2008 Footnote 2: Letter from the Governor of the Central Bank dated February 15, 2021

Based on this, it is observed that when issuing the credit decision to finance the construction of residential units for sale, the financing must be for the construction cost of the project and not for the selling value of the residential units.

Article Two:
The bank shall open a project account into which all proceeds from the sale of residential units (down payments, installments, late payment penalties, fees, and compensation for additional works, as well as the company's own funds allocated to the project, etc.) are deposited. It shall also open a current account in debit from which the financing provided by the bank is disbursed. The balances of the aforementioned accounts shall not be used except for spending on the project or settling the debt of the current debit account, in accordance with the completion approved by the consultant mentioned in Article One, item (3) of the same decision.

Article Three:
Financing shall be used to meet the project's obligations from the financing requested from the bank, proportionate to the financial leverage of the project, and not for the company's own funds allocated to the project. Down payments paid by buyers of sold units shall be considered part of the project's obligations.

Article Four:
For the purpose of calculating the bank's capital adequacy ratio, the risk weight of the credit granted to the company shall be weighted as follows:

Example No. (1): (Project Leverage: 1:2 or better) Project Cost: 100 million EGP Project Leverage = Total Project Liabilities / Company's Own Funds Allocated to the Project 67 million EGP : 33 million EGP 33% : 67% So, the Leverage = 1:2. Therefore, the risk weight is 100% of the project liabilities.

Example No. (2): (Project Leverage exceeds 1:2) The liability ratio is multiplied by 4 and added to 100% if the leverage exceeds 1:2. The increase in the project liability factor is weighted according to the following:
To reach the risk weight for the total model 2

Project Cost: 100 million EGP
Project Leverage = Total Project Liabilities / Company's Own Funds Allocated to the Project 75 million EGP : 25 million EGP, so the Leverage = 1:3 The increase in the liability ratio over the basic state is 75% - 67% = 8%. The risk weight is as follows:
8% × 4 = 32%
100% + 32% = 132%
Total risk weight for project liabilities.

Article Five:
Financing provided to buyers of residential units is not considered real estate financing or secured by a mortgage until the unit is delivered and all project facilities are completed, subject to the application of the provisions of the Real Estate Financing Law and its implementing decisions.

Article Six:
The bank is not allowed to discount commercial papers and other payment instruments presented by real estate development companies from buyers of residential units and offset the company's debt with them until the units are fully delivered to their buyers and they have done so. This is without prejudice to the bank's right to present such commercial papers and payment instruments to real estate development companies for collection at maturity, with the proceeds in this case being used to offset the project's debt towards the bank.

Article Seven:
The controls and rules contained in this decision apply to financing provided by banks to real estate financing companies and refinancing companies.

Article Eight:
Full compliance with the aforementioned controls and rules is required from the date of issuance of this decision, for any credit facilities implemented after that date.

Article Nine:
This decision shall be published in the Egyptian Gazette and shall come into force from the date of its issuance. Banks may also be allowed to finance installments of land owed to their customers who have existing credit facilities from real estate development companies operating in the field of constructing residential units for sale, subject to the following conditions:

1. Financing must be granted to secure the existing facility for the real estate development company, only in cases where the company faces a liquidity crisis preventing it from paying the required installments to the land owners from its own resources, with the bank required to conduct the necessary credit studies to verify this.

2. The land owner must be one of the government bodies or entities.

3. The bank must conduct a study of the project's cash flows after including the additional deficit amount to be financed, to ensure the project's feasibility and the customer's ability to meet its obligations to all concerned parties.

4. The real estate development company must have already started receiving down payments from its customers and construction works must have begun.

5. It must be confirmed that the financing granted to real estate development companies to finance land installments will be added to the total amount of funds granted by banks to real estate development companies when calculating the maximum limit mentioned in item 12 of the Circular Letter dated April 7, 2019, regarding the controls for discounting commercial papers for real estate development companies, without recourse to the disbursement limit.

Second: Discounting Commercial Papers Presented by Real Estate Development Companies

In the context of the Central Bank's continuous effort to support all Egyptian economic activities, including those contributing to the development plans adopted by the state, such as the real estate development sector, which is a pillar of the economy due to its linkage to many other industries. The Central Bank Board of Directors, in its meeting held on March 28, 2019, decided to issue controls regarding the discounting of commercial papers for real estate development companies without recourse against them as follows (with emphasis on the continued application of the rules mentioned above dated October 2, 2007, and January 11, 2016):

Footnote 3: Letter from the Governor of the Central Bank dated February 15, 2021 Footnote 4: Letter from the Governor of the Central Bank dated April 7, 2019

Footnote 5: Commercial papers discounted without recourse to the bank are exempt from the maximum limit instructions for the ratio of mortgage installments for home ownership and real estate loans for individual natural persons, subject to compliance with the following controls:

1. Real estate development companies must obtain a waiver from the customer with their consent to convert such debts to the bank's benefit and provide the bank with a copy or include a clause in the purchase contract stating the customer's consent to the possibility of the real estate development company converting the debt to the bank.

2. Real estate development companies must oblige the customer to pay the value of the converted commercial papers to the bank when the bank converts the customer's debt to it.

3. The commercial papers intended for discounting must be issued for units delivered to their buyers, with the company obtaining a waiver from them and providing the bank with a copy.

4. At least 50% of the assessed value of the unit must have been paid.

5. The remaining period for paying the installments must not exceed 6 years from the date of issuing the commercial papers.

6. The bank must obtain a valid right certificate in its favor for the unit (according to the opinion of the bank's legal advisor).

7. The company must provide the banks with a quarterly report certified by one of the auditors registered with the Central Bank of Egypt, showing the ratio of returned commercial papers to the total portfolio of the company, calculated on an average basis over three years. Commercial papers are considered returned if not collected within 90 days.

8. The bank must conduct a credit assessment for each customer in the portfolio of commercial papers presented for discounting individually.

9. The company must deposit a cash amount with the bank when presenting commercial papers for discounting, to be used to cover returned commercial papers at a rate of 10% of the total portfolio of commercial papers intended for discounting at a minimum, or twice the ratio of returned commercial papers in the portfolio mentioned in item 7 to the total amount of commercial papers presented for discounting, whichever is higher, as follows:
   (Ratio of returned commercial papers * 2) * Total value of commercial papers presented for discounting.

10. The company must maintain the ratios mentioned in the previous item throughout the validity period of the commercial papers, and the amount mentioned shall be used to cover returned commercial papers immediately upon their return.

11. The company must provide a commitment stating that in the event of the return of a commercial paper from a customer's portfolio not issued to a customer, the entire portfolio will be replaced by another customer's portfolio or the company will pay the amount of this portfolio for that customer within 60 days at the latest from the date of return.

12. The total amount of funds granted by banks to real estate development companies, in addition to the debt resulting from the discounting of commercial papers without recourse to the bank, must not exceed the total equity of the company at a ratio of 1:3.

13. The total amount granted to the company and its related parties - for the purpose of discounting commercial papers without recourse to the bank - must not exceed 1% of the total direct loan portfolio of each bank, with the total of this type of financing not exceeding 3% of the total direct loan portfolio of each bank.

14. The amount granted under this type of financing for the Egyptian banking sector as a whole must not exceed 50 billion EGP, and this shall be monitored by the Risk and Supervision Department (Office Risk Management) at the Central Bank.

15. The debt of each real estate development company shall be reported individually regarding commercial papers without recourse to the bank, to the Central Administration for Credit Risk Aggregation - as a marginal information - to calculate the ratios mentioned in the previous items.

16. This debt shall be reported separately to individuals to the Central Administration for Credit Risk Aggregation and the Egyptian companies for credit scoring (Score-I), and it shall be excluded from the minimum ratio of required installments to the monthly income of the individual.

17. Banks must take whatever measures they deem necessary to study real estate development companies when discounting commercial papers presented by them without recourse, in light of their credit policies, while complying with all credit granting controls and instructions issued by the Central Bank of Egypt.

18. Compliance with the provisions regarding the calculation of mortgage installments for home ownership instructions for applying the International Financial Reporting Standards (IFRS 9) issued on February 26, 2019, and the creditworthiness assessment standards for customers and the formation of provisions issued on June 6, 2005, and April 4, 2006, for the models provided by the Office Risk Management Department in this regard.

19. Providing the Central Bank with a monthly statement according to the following format.

These instructions shall apply from April 7, 2019, and do not apply to commercial papers discounted without recourse to the bank before this date.