Chapter Twelve: Controls on the Use of Alternative Data for Credit Evaluation

With reference to the initiatives of the Central Bank of Egypt regarding micro, small, and medium-sized enterprises (MSMEs) issued in the Circular Letter dated January 11, 2016, and its subsequent circulars.

And with reference to the approval of the Central Bank of Egypt's Board of Directors to amend the MSME initiative, which allowed banks to finance micro and small enterprises and establishments (with a maximum sales volume of less than 20 million Egyptian pounds) without obtaining audited financial statements from an external auditor, while providing other alternatives to study these enterprises and assess their specific risks, including the use and analysis of alternative data for credit evaluation through digital scoring models based on customer behaviors, their social data, and their financial and non-financial transactions.

In light of the above, and in order to provide easy and fast channels that support the availability of financing for micro and small enterprises and establishments, positively impacting financial inclusion and economic growth rates,

The Board of Directors of the Central Bank of Egypt, in its meeting held on February 21, 2021, has decided to approve the issuance of the following controls regarding the use of alternative data for credit evaluation through Behavioral Scoring Models:

In the event that banks grant financing based on digital scoring models that analyze alternative data instead of traditional credit granting requirements, such as customer behaviors, their social data, and their financial and non-financial transactions, the following controls must be adhered to:

This must be limited to micro and small enterprises, including newly established companies, whose estimated business volume (annual revenue/sales) does not exceed 20 million Egyptian pounds, with the necessity for banks to periodically monitor their business volume to ensure compliance with the mentioned limit.
The financing must be direct and in local currency only.
Establishing specific policies and work procedures for digital scoring models, which must be approved by the bank's Board of Directors and reviewed periodically.
The bank must prepare a digital scoring model, taking into consideration the following:
a. The preparation of the digital scoring model according to the product type and the data available about customers. b. The necessity of establishing the required procedures and standards to test, evaluate, and modify the model periodically according to the quality of the granted portfolio, and making the necessary adjustments.
c. Reviewing the performance indicators and inputs of the scoring model according to the granted portfolio periodically, and making the necessary adjustments by the competent authority for model approval within the bank.
d. Verifying the integrity and validity of the digital scoring model through an independent entity, with the aim of evaluating the effectiveness of the models and the accuracy of the results, with the bank providing the Central Bank of Egypt with a report from this entity upon initial application. Banks that have engaged a specialized entity to build the scoring model are exempted from this clause. e. Considering the development of technical capabilities for bank employees, whether those responsible for the model or its users.
Notifying the Central Bank of Egypt upon commencing the use of the digital scoring models subject to these instructions.
Providing the Central Bank of Egypt with the following:
a. The policies approved by the bank's Board of Directors referred to in clause (3), which must include a strategy for dealing with risks and expected losses, and the ratio of expected non-performing loans and facilities in the financing portfolio granted based on digital scoring models. b. A comprehensive quarterly statement of the total financing portfolio granted based on digital scoring models, including the ratio of non-performing loans and facilities in the portfolio, according to the models provided by the Office Supervision Sector in this regard.

Circular Letter from the Governor of the Central Bank of Egypt dated February 22, 2021 1 For the results of these procedures.