Controls and rules of bank financing for real estate development companies working in the field of constructing residential units for the purpose of selling them

Greetings and after,

I would like to refer to my letter No. 547M dated 2 October 2007, attached with a copy of the decision of the Board of Directors of the Central Bank of Egypt No. (1906) of 2007 at its session held on 2 October 2007 regarding the controls and rules of bank financing for real estate development companies working in the field of constructing residential units for the purpose of selling them (copy attached).

I reiterate the necessity of adhering to what was stated in Article Eight of that Decision, which stipulates that the controls and rules contained therein apply to financing provided by banks to real estate financing companies and refinancing companies. Consequently, full compliance with the provisions of Article Eight of that Decision is required, as well as the provisions of Article Six thereof, which stipulate that financing provided to holders of residential units is not considered real estate financing or secured by a mortgage until the residential unit is delivered and the completion of all project facilities is finished. This means that it is a condition that the financing provided by banks to real estate financing companies and refinancing companies is for the purpose of financing residential units with complete facilities delivered to their holders, and not otherwise.

In this regard, it was observed that some banks circumvented the provisions of the aforementioned Decision by granting personal loans used to finance the reservation of residential units that have not been delivered with complete facilities, which contradicts that Decision and at the same time contradicts the supervisory rules issued by the Central Bank of Egypt regarding the determination of creditworthiness bases, which require distinguishing between consumer loans (personal loans, credit cards, debit accounts) and real estate loans for personal housing, as well as the rules regarding the necessity of determining the purpose of granting credit and monitoring its use for the purpose for which it was granted.

In the aforementioned context, in addition to banks, full compliance with the provisions of the decisions of the Board of Directors of the Central Bank of Egypt, including Decision No. 1906 mentioned above, is required, without circumvention, to avoid the Board taking any of the measures stipulated in Article 135 of the Central Bank, Banking System and Currency Law issued by Law No. 88 of 2003 against the violating bank.

Please accept my highest regards,,, Dr. Farouq Al-Aqda

In Cairo on: 2 October 2007

Greetings and after,

I hope you find attached herewith a copy of the decision of the Board of Directors of the Central Bank of Egypt No. (1906) of 2007 issued at its session held on 2 October 2007 regarding the controls and rules of bank financing for real estate development companies working in the field of constructing residential units for the purpose of selling them.

Please be alerted to full compliance with the controls and rules contained in the aforementioned Decision as of the date 2 October 2007, including any existing credit facilities that have not been implemented prior to that date.

Please accept my highest regards,,,

Dr. Farouq Al-Aqda

Decision of the Board of Directors No. 2007/1906 At its session held on 2 October 2007 Regarding the controls and rules of bank financing for real estate development companies __________________________________________________________________________________________ working in the field of constructing residential units for the purpose of selling them

After reviewing the Central Bank, Banking System and Currency Law issued by Law No. 88 of 2003 and its Executive Regulations,

And based on the approval of the Board of Directors of the Central Bank of Egypt at its session held on 2 October 2007,

DETERMINED Article One

Subject to the controls and rules previously issued by the Central Bank of Egypt regarding real estate financing and granting credit, and the determinants contained in the credit policy of each bank in the field of this type of credit, the provision of bank financing to real estate development companies working in the field of constructing residential units for the purpose of selling them 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 designation decision must have been issued by the owning authority.

2. Complete separation 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 confirm the feasibility of the project under the supervision of specialized consultants hired by the bank, with the bank relying on a specialized consulting entity to monitor the implementation of the project and approve completion percentages, and withdrawals from financing must be consistent with these percentages.

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

Article Two

When making the credit decision regarding financing the construction of residential units for the purpose of selling them, it must be noted that the financing is based on the cost of constructing the project, not the sales value of the residential units.

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Article Three

The bank shall open a special account to serve the project, into which all proceeds from the sale of residential units (down payments, installments, late fees, commissions, consideration for executing additional works, etc.) are deposited, in addition to the financing provided by the bank and the company's own funds allocated for the project. The account balance shall not be used except for spending on the project, in proportion to what has been implemented in the project as approved by the consulting entity referred to in Article One, item (3) of that Decision.

Article Four

The financial leverage of the financed project is calculated based on the project's commitments, including the financing required from the bank, divided by the company's own funds allocated to the project, and the down payments made by holders and purchasers of the sold units are considered part of the project's commitments.

Article Five

For the purpose of calculating the bank's capital adequacy ratio, the size of credit granted to the company is weighted according to the following model:

Example No. (1): (Project financial leverage 1:2 or better)

Project cost 100 million Egyptian Pounds

Project financial leverage = Total project commitments / Company's own funds allocated to the project

67 million pounds : 33 million pounds

33% : 67% meaning that the financial leverage = 1:2, therefore, the risk weight is 100% for project commitments.

Example No. (2): (Project financial leverage exceeds 1:2)

If the financial leverage exceeds 1:2, the value of the increase in the percentage of commitments is weighted by a factor of 4, and the result is added to 100% to reach the risk weight for the total project commitments, according to the following model:

Project cost 100 million pounds

Project financial leverage = Total project commitments / Company's own funds allocated to the project

75 million pounds : 25 million pounds, meaning that the financial leverage = 3 : 1

25% : 75%

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Increase in the percentage of commitments over the basic state 75% - 67% = 8%, and the risk weight is as follows: 8% × 4 = 32% 100 + % = 132% risk weight for total project commitments.

Article Six

Financing provided to holders of residential units is not considered real estate financing or secured by a mortgage until the residential unit is delivered and the completion of all project facilities is finished, while observing the continuation of the application of the remaining provisions of the Real Estate Financing Law and the decisions implementing it.

Article Seven

The bank is not allowed to discount commercial papers and other payment instruments provided by the real estate development company from holders of residential units, nor to reduce the company's indebtedness by them, until delivery to the units is completed to their purchasers and they acknowledge this, without prejudice to the bank's right to accept those commercial papers and payment instruments from real estate development companies for collection at maturity, with the proceeds in this case being used to reduce the project's indebtedness to the bank.

Article Eight

The controls and rules contained in this Decision apply to financing provided by banks to real estate financing companies and refinancing companies.

Article Nine

Full compliance with the aforementioned controls and rules is required as of the date of issuance of that Decision on 2 October 2007, including any existing credit facilities that have not been implemented prior to that date.

Article Ten

This Decision shall be published in the Egyptian Gazette, and shall be implemented as of the date of its issuance.

The Governor

Dr. Farouq Al-Aqda