CBE Issues Regulatory Controls for Banks over Financing Provided to Leasing Companies

The Central Bank of Egypt (CBE) decided in its session held on February 20, to issue controls that banks must adhere to when financing financial leasing companies.

This came in light of the CBE's follow-up of the banking sector and market developments, and with the aim of tightening control over the financing provided by banks to these companies, and reducing the risks associated with it.

CBE pointed out that these instructions apply to the new facilities starting from this date, explaining that investments exceeding the established limits have been reduced gradually, in accordance with the deadlines for existing investments, with the office control sector being provided with a corrective plan within 3 months, and a quarterly report clarifying the position of these investments. .

The Central Bank of Egypt clarified the controls that banks must adhere to when financing these companies comes as follows:

- The total credit facilities and investments in the securitization portfolios of financial leasing companies should not exceed 5% of the total portfolio of loans and credit facilities of the bank, and the total credit facilities and investments in the securitization portfolios of one financial leasing company should not exceed 1% of the bank’s total portfolio of loans and credit facilities, without prejudice to the instructions for the maximum limits for a single customer, the client and related parties issued in 2006 and subsequent amendments.

- Determine the purpose of the facility, whether financing financial leasing contracts or refinancing contracts financed by the company’s own resources, with the bank’s commitment to follow up on the use of the facility for the purpose for which it was granted, by completing all documents supporting the contracts being financed, and obtaining an approval from the financial leasing company as it did not obtain prior financing from banks for the same contracts.

- The main source of financing for repayment shall be cash flows arising from financial leasing contracts financed by the bank, taking into account the following as a minimum:

- Matching the repayment schedule for the financing granted by the bank with the repayment schedule for financial leasing contracts.

- Transferring the financial leasing company’s rights arising from the contract being financed to the bank, so that it can verify that the client being financed has fulfilled its obligations.

- Ensure that the financial leasing company studies the client subject to financing and the parties related to him, and pays due diligence to estimate his financial solvency and ability to repay.

- Ensure that the credit limit granted to the financial leasing company is not concentrated in financing a limited number of customers being financed, while paying due attention to ensuring the diversity of the bank’s portfolio of facilities granted to financial leasing companies, and not concentrating it in financing a specific sector.

- Not granting credit facilities in "foreign currency" to financial leasing companies unless there is already an import operation, and customers have sufficient sources of foreign currency for payment.

- Obtaining evidence of the financial leasing company’s compliance with the rules and controls issued by the Financial Regulatory Authority regulating the work of companies licensed to practice financial leasing and factoring activities before granting, taking into account ensuring that the company continues to comply with the authority’s requirements upon renewal.