Circular dated February 22, 2021 regarding the use of alternative data for credit assessment through digital assessment models

Dear Mr. Chairman of the Board,

Greetings,

With reference to the initiatives of the Central Bank of Egypt regarding micro, small, and medium enterprises issued in the Circular 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 initiative for micro, small, and medium enterprises, which allowed banks to finance micro and small enterprises (with a maximum sales volume of less than 20 million Egyptian pounds) without obtaining audited financial statements from an auditor, while providing other alternatives to study these enterprises and assess their risks, including the use and analysis of alternative data for credit assessment through digital assessment 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, thereby positively affecting financial inclusion rates and economic growth, the Central Bank of Egypt's Board of Directors decided in its meeting held on February 21, 2021, to approve the issuance of the following controls regarding the use of alternative data for credit assessment through digital assessment models - Behavioral Scoring Models:

In the event that banks grant financing based on digital assessment models that analyze alternative data to 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:

1. This must be limited to micro and small enterprises - including newly established companies - whose estimated business volume (annual revenues/sales) does not exceed 20 million Egyptian pounds, with banks required to periodically monitor their business volume to ensure compliance with the mentioned limit.

2. The direct financing must be in local currency only.

3. Establishing specific policies and work procedures for digital assessment models, which must be approved by the Bank's Board of Directors and reviewed periodically.

4. The Bank must prepare a digital assessment model, taking into account the following:
   a. The digital assessment model is prepared according to the type of business and the available data about customers. b. The necessity of establishing the necessary procedures and standards to test and evaluate the model and modify it periodically according to the results of these procedures.
   c. Reviewing the performance indicators and inputs of the assessment model periodically according to the quality of the granted portfolio and making the necessary modifications (if any) by the competent authority for model approval within the Bank.
   d. Verifying the integrity and validity of the digital assessment 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 a report from this entity to the Central Bank upon initial implementation. Banks that have engaged a specialized entity to build the assessment model are exempted from this clause. e. Considering the building of technical capabilities for Bank employees, whether those responsible for the model or its users.

5. Notifying the Central Bank when starting to use the digital assessment models subject to these instructions.

6. Providing the Central Bank with the following:
   a. The policies approved by the Bank's Board of Directors referred to in clause (3), which must include the strategy for dealing with expected risks and losses, and the ratio of expected non-performing loans and facilities in the financing portfolio granted based on digital assessment models. b. A comprehensive quarterly statement of the total financing portfolio granted based on digital assessment models and the non-performing loans and facilities in the portfolio, according to the models provided by the Office Supervision Sector in this regard.

Please be kind enough to direct compliance with the aforementioned decision.

Accept our highest regards,

Tarek Amer