Circular dated February 22, 2021 regarding stimulating banks to contribute to the capital of targeted investment funds to invest in small and medium-sized companies

Mr. Chairman of the Board of Directors

Cairo: February 22, 2021

Bank

Greetings,

Further to the Circular No. dated May 26, 2019, which included adding bank contributions to the capital of direct investment funds targeting emerging small companies within the percentage of 20% of the total credit facilities portfolio of the bank directed to micro, small, and medium enterprises, as well as calculating a relative risk weight at a rate of 0% on bank contributions to the capital of these funds provided that certain conditions are met as stated in the aforementioned Circular.

And based on the above, and with the aim of encouraging banks to increase their contributions to the capital of the targeted funds for investment in small and medium-sized companies at all stages to support this vital sector and continue achieving growth, the Board of Directors of the Central Bank of Egypt approved at its meeting held on February 21, 2021 the following Decision:

First: "Adding bank contributions to the capital of investment funds (Funds of Funds) and funds and companies targeted for investment in the capital of small and medium-sized companies including emerging ones among them to the prescribed percentage of 25% of the total credit facilities portfolio of the bank directed to micro, small, and medium enterprises pursuant to the instructions issued in this regard, subject to the following:

1. Obtaining the necessary license to practice the activity from the Financial Regulatory Authority.

2. From the date of investment in the fund, reliance shall be placed on the higher of the following: the value of the bank's share - from the amounts invested in the capital of small and medium-sized companies in the fund - or the total contribution of the bank in it, according to the following:
   a. During the first year: 70% of the total contribution. b. During the second year: 50% of the total contribution.
   c. During the third year: 30% of the total contribution.
   d. Starting from the fourth year: Reliance shall be placed on the value of the bank's share from the amounts invested in the capital of small and medium-sized companies in the fund.

3. The Supervision Sector must be provided with a periodic quarterly report showing the value of the bank's share from the amounts invested in the capital of small and medium-sized companies in the fund compared to the bank's contribution.

Second: "Calculating a relative risk weight at a rate of 20% on bank contributions to the capital of all investment funds (Funds of Funds) and funds and companies targeted for investment in the capital of small and medium-sized companies including emerging ones subject to the following conditions:

1. Setting maximum limits for the value of bank investments in the capital of the aforementioned funds or companies, such that they do not exceed the total value of the bank's investments by more than 10% of the bank's core capital, and in case this percentage is exceeded, the excess must be deducted from the core capital when calculating the capital adequacy ratio.

2. The total bank share must not exceed 50% of the capital of the funds or companies so as not to fall within the banking group.

3. The bank investing in those funds or companies must meet the Capital Adequacy Ratio standard by an amount exceeding the minimum limit for the standard, as well as complying with all controls related to the Internal Capital Adequacy Assessment Process (ICAAP).

4. The bank's investments in these funds or companies must be included in the leverage ratio.

5. Obtaining the necessary license to practice the activity from the Financial Regulatory Authority and being subject to its supervision, considering that these funds or companies are non-banking financial institutions.

6. The fund's constitution must include the possibility of the bank exiting starting from the fourth year from the date of the fund's commencement, especially in case of not achieving profits for 3 consecutive subsequent years.

Third: Amending what was stated in the instructions issued on May 26, 2019 regarding Item No. 6 of the Second Part concerning calculating a relative risk weight at a rate of 0% on bank contributions to the capital of investment funds targeted for emerging small companies to become as follows:
"That the fund's constitution includes the possibility of the bank exiting starting from the fourth year from the date of the fund's commencement, especially in case of not achieving profits for 3 consecutive subsequent years."

These instructions apply from the date hereof and do not apply to any bank investments prior to this date, with emphasis on the continued validity of the remaining items contained in the instructions issued on May 26, 2019 as they are, in matters not addressed in these instructions.

In case of any inquiries, contact can be made via the following email address:
Seif.Seifelnasr@cbe.org.eg

Please accept our highest respect.