EFSA proposes financial services companies be involved in CBE microfinance initiative

Mohamed Ahmed
6 Min Read
EFSA Chairman Sherif Samy

The Egyptian Financial Supervisory Authority (EFSA) submitted a proposal to the Central Bank of Egypt (CBE) to involve financial services companies, especially financial leasing, factoring and micro-finance companies, in activating the small- and micro-sized enterprises financing initiative.

Financial services companies will link banks and clients, EFSA chairperson Sherif Samy said during a symposium held by the Egyptian Credit and Risk Management Association (ECRA) on Wednesday.

He added that financial services companies can acquire loans from banks under the initiative. In turn, these companies will grant loans to customers, taking advantage of their access to customers in various provinces, unlike the majority of banks, which do not have the expertise to deal with this segment.

As an example, Samy used the case of financing a woman from Upper Egypt with EGP 5,000. Most banks cannot deal with similar cases, unlike financial leasing companies, such as El Saeed Company for Leasing and the Upper Egypt Factoring Company.

The EFSA is concerned with a number of issues, including exploring opportunities to develop commercial papers, known as short-term bonds, as the law provides for issuing them with a maturation period of 13 months only, without justification for that period.

“This situation prompted me to think: why not provide other periods to offer more flexibility for companies to issue these commercial papers for funding their working capital,” he said.

Despite the failure to issue the law governing sukuk (Islamic bonds), several points should be taken into consideration, such as offering variable rates on sukuk based on a fixed rate of return, Samy said.

Companies explain in their bulletins for sukuk subscriptions that they will acquire a specific percentage of the net profit, for example 20%, in which case the rate of return will be fixed, but the value of profits earned will vary, which is compatible with the provisions of Islamic sharia.

Samy revealed that some features of the leasing and factoring law that EFSA are being prepared to deal with tax and accounting practices over the past 20 years, since the release of the 1995 financial leasing law.

The law aims to establish companies in which financial leasing is the main activity, with the possibility of others, in order to address the current distorted situation in which companies that predominantly operate in real estate or construction add financial leasing to their activities.

Samy explained that there have been steps taken to add operating leases by law in order to allow leasing companies to practice it. He added that operating leases will not be exempted from the taxes that financial leasing is exempt from, such as the sales tax, as operating leases are not considered a financing activity.

Operating leases differ from financial leasing, as the text of the operating leasing contracts specify a period for the tenant party to keep the original. Upon completion of the contract, the lessor party is obligated to obtain the original again, in order to sell it once and for all to any other party.

The EFSA has proposed that micro-financing leases be added to the law, alongside small- and micro-insurance activities. “However, this step is contingent on penning a precise definition of micro-financing leasing with specific rules, such as the limited value of funding,” he added.

There are proposals to allow the issuance of leasing funds, but this step is also subject to a definition, Samy said.

The EFSA will complete the preparation of the law in May or June, following which the leasing companies will open up a dialogue before submitting it to the government in preparation for discussion at parliament.

As for the activation of the movable collateral law, Samy said the EFSA is considering tasking the management of the movable collateral registry to Misr For Central Clearing, Depository and Registry (MCSD) or iScore, as both are stable and owned by entrusted entities, and have good technological infrastructure.

He added that EFSA is preparing the bylaw to improve financial leasing activity, as well as financing small- and micro-enterprises. The law will be similar to the land registry in terms of registration of guarantees in an electronic record for funding.

Samy explained that the law preserves the rights of lenders from the risk of any party claiming rights to any guarantee, as registering guarantees electronically will safeguard the lender’s right to the priority over the original record.

Samy also said he was met with welcoming by former finance minister Hany Kadry Dimian in terms of the ministry not imposing real estate tax on financial services activities.

He explained that while no promises were made by the current Finance Minister Amr El-Garhy, the ministry has already made a positive impression in dealing with such issues.

Share This Article
Leave a comment