The existence of a sophisticated non-banking financial sector is one of the main components of the success of the process of sustainable economic development, especially with the trend in modern economies to rely on technology and innovation. Reliance on traditional financial systems has become ineffective in leading the development process or achieve high rates of development, that Egypt pursues in line with its economic ambitions.
The Financial Regulatory Authority (FRA) is studying international experiences on the development of legal frameworks that facilitate electronic services for companies and entities engaged in non-banking financial activities, and encourage the use of non-cash means of payment.. This comes in line with the state’s plan to improve financial inclusion, keep up with international developments in providing financial services to citizens, and rely on modern methods of service provision and payment. This requires developing the legislative framework and controlling mechanisms of how to provide these services electronically.
The FRA’s plan includes proposing the appropriate legislative amendment to adopt electronic means as an approved means of notification, and deal with the entities subject to the FRA’s control. This is known as Tech-Re. It comes in line with the state’s orientation toward the digital society, as it reduces the time and cost of transactions between the FRA and the entities subject to its control, which contributes to achieving efficiency and speed in the performance of tasks.
With the tangible development witnessed by the Egyptian economy in recent years, economic reforms need to create an active financial sector able to cope with these variables and provide financing and financial services more efficiently. Low costs, less procedures and a variety of ways to benefit different categories depending on the nature of each economic activity, regardless of size or financial solvency, are definitely a plus.
The FRA is currently implementing a comprehensive strategy for the development of the non-banking financial sector, which includes the activities of both the capital and stock markets, insurance, private insurance funds, government insurance funds, real estate finance, leasing, factoring, microfinance, movable guarantees, and consumer finance. This is done through preparing a study of laws and regulations expected to be issued in the coming three years.
FRA considers relying on technology to provide supervisory services to insurance market
The FRA seeks to rely on technology to provide supervisory services to the insurance market to facilitate supervision and communication with insurance companies, known as Tech-Reg. The authority is currently cooperating and coordinating with insurance companies through the Insurance Federation of Egypt, to establish an information centre for all insurance activity data, Subsequently, this thus helps the development of subscription, lower risks, setting fair value of insurance coverage, development of current products, and becoming a base for innovation in insurance and stopping harmful practices by customers or companies.
The FRA is also considering the introduction of online controls and licensing standards, online insurance, whether for existing companies or specialised companies established on the basis of that system, and contribute to delivering insurance services to all segments of society.
The authority seeks to encourage insurance companies to use digital applications and electronic issuance of insurance policies as one of the important distribution channels. This is in addition to allowing the insurance companies and microfinance associations to deal with micro insurance clients through mobile applications.
The FRA looks forward to the proposed legislative amendments to Law No 10 of 1981 to oversee and control the insurance sector. The amendments would provide incentives that contribute to the growth, availability and accessibility of micro-insurance activity by reducing capital requirements when establishing specialised micro-insurance companies.
The FRA is also considering setting controls that require insurance companies in general to reach groups in need of micro-insurance. Plus, allowing the registration of insurance brokers specialised in the field of micro-insurance, may be one of the factors that help in the spread of this insurance.
Furthermore, the FRA is seeking to deepen the contribution of the insurance sector in the GDP to exceed 1% during the next five years, in addition to doubling the insurance premiums to reach EGP 50bn in 2022, a stark increase compared to the total premiums of EGP 30bn in 30 June 2018.
The authority’s plan to develop the Egyptian insurance sector aims to raise the net investments of insurance companies to about EGP 150bn during 2022 against the net investments of insurance companies of EGP 99.4bn on 30 June 2018, and increase the size of private insurance funds to EGP 100bn compared to EGP 67.89bn at the end of 2017.
Studying a new legal regulation to finance the right to use real estate
In the coming period, the FRA will consider organising a special law to finance the right to use real estate in order to derogate from the general rules in this regard, so as to guarantee the rights of the financing parties until the end of the process. Such law should lead to the spread of this type of financing, establish rules for instalment sale, and sale on the map.
Moreover, the FRA intends to issue standard forms of documents used in real estate finance activities, in order to facilitate the secondary market, the circulation of mortgage debt securities in the capital market and the issuance of bonds or Sukuk to guarantee them. This is in addition to activating the secondary market for government treasury bonds, thus enabling a reference index of interest use and contributing to the revitalisation of the bond market, in particular mortgage bonds.
A special legal regulation will also be set to regulate the termination of mortgage finance contracts in the interest of the involved parties. Current difficulties of registration procedures lead to the absence of mortgage, and thus the impossibility of enforcement of sale under the existing law.
Plus, the FRA aims to raise the size of the mortgage portfolio from around EGP 10.7bn at the end of 2018 to EGP 20bn by 2022.
Activation of the bond market necessitates the amendment of the Central Bank of Egypt’s (CBE) rules to calculate liquidity ratios.
Repurchasing government bonds highlighted in the activation of the secondary market
The revitalisation of the bonds’ role as one of the most important debt instruments to provide financing for investment projects is linked to the revitalisation of the government bond market. This is particularly apparent in the secondary market for bonds, which will provide an opportunity to build a benchmark for pricing debt instruments issued by corporate and legal persons.
The FRA believes that activating the secondary bond market is linked to taking a number of measures in coordination between the CBE, the Ministry of Finance, and the FRA.
These include creating a market for the repurchase of government bonds and issuing repurchase agreement rules (REPO), and amending the provisions of the decision of the minister of finance on the system of major dealers. This is in order to allow the main dealers to be licensed by the FRA and to establish companies that issue securities or increase their capital, investment banks, and bond brokerage firms.
In addition, companies and non-bank financial institutions are to be allowed to cover government bond offerings in the primary market. This is subsequent to them being registered in the registry of primary dealers in government bonds, and amending the conditions for issuing bonds in the primary market. This would allow for a minimum of free-float bonds; increase the base of dealers in the government bond market, including individual dealers.
FRA intends to establish international factoring companies to increase Egyptian exports
In the factoring sector, the FRA also aims to study how to recognise the necessary costs in starting factoring companies, such as provisions, and the discounted costs from the tax base, in line with the international standards.
It seeks to raise the value of the portfolio of the factoring activity to EGP 20bn compared to about EGP 10.6bn in 2018. Herein the FRA supports the orientations of the state and business owners toward increasing Egyptian exports as well as the turnover of working capital, thereby contributing to small and micro enterprises.
Establishing investment funds specialised in microfinance lending
Over the next three years, the FRA aims to double the microfinance base to up to 4 million beneficiaries. Thereby it yes an increase in the volume of microfinance granted by the regulated entities from EGP 4.8bn at the end of the first quarter of 2018 to EGP 25bn by the end of 2022, and boost the number of MFIs to 1,000.