The Financial Regulatory Authority in Egypt ("FRA") is taking a positive step towards developing the non-banking financial services sector that can be clearly seen by issuing the new Consumer Finance Law No. 18 of the year 2020 and the FRA's Decision No. 56 of the year 2020 concerning the Consumer Finance activities.
The enactment of this Law aims to increase the local purchasing power by regulating establishment of consumer credit firms offering financing to consumers in order to purchase goods and services in installments proportionate to their income.
It is important for the companies who are looking forward to be operating in the consumer finance activity to understand the following:
- Consumer Finance is defined as the activities aiming to provide financing for the purchase of durable goods and services for consumer purposes once practiced as a regular activity, which includes financing through commercial payment cards or any of the payment methods approved by the Central Bank of Egypt. However, it will not be considered as a Consumer Finance activity, unless payment of their price is over a period not less than six months.
- Consumer Finance Company is a licensed company that practices consumer finance activity.
- Consumer Finance Provider is a provider of financing service, selling and distributing products.
Both Consumer Finance Company and Consumer Finance Provider are subject to supervision of the Financial Regulatory Authority.
Goods and services subject to Consumer Finance as mentioned in Article 2 of the aforementioned Law are as follows:
- Vehicles and passenger cars of all kinds;
- . Durable goods (household appliances – electrical – electronic);
- Educational services;
- Medical services;
- Travel and tourism services; and
- Any other goods or services approved by the FRA's Board of Directors
In order for a Consumer Finance Company to perform said activities, a Joint Stock Company shall be incorporated and licensed to offer Consumer Finance under the supervision of FRA. According to Article 9 of Law No.18 of the year 2020 conditions that apply for the obtainment of the license are as follows:
- The incorporated Company shall be a Joint Stock Company and its issued capital shall not be less than EGP 10 million as set by the FRA's board;
- Company's business is restricted to Consumer Finance Activities, unless it obtains FRA's approval to engage it to other non-banking financial activities;
- A least 50% of the founders must be juridical entities of which 25% must be financial institutions;
- Persons holding positions of the Managing Director and Financial Director of the Company have the conditions and professional experience for which a decision is issued by the FRA's board of directors;
- The Company must have equipment, technological infrastructure and information systems necessary to conduct the activity in accordance with requirements set by the authority;
- The Company has an internal bylaw that organizes controls and procedures for granting financing;
- Any other conditions set by the FRA's Board of Directors.
It is worth mentioning that Consumer Finance Companies are obliged to enter into contracts with their clients based on the form provided by FRA as well as comply with conditions and requirements mentioned in Law No. 18 of the year 2020.
As per Article 10 of the Consumer Finance Law the contract shall include exact specification of the goods or services bearing financing, a statement of the price of goods, the amount of financing provided by the Company, a statement of the guarantees obtained by the finance Company, the client's authorization to disclose financing data to FRA, a statement of the sellers and providers of goods and the maximum limit for the financing provided by the Company.
Once a Company is licensed, it shall have the following obligations as mentioned in Articles 11, 12 and 13 of the previously mentioned Law, briefly stated here:
- The Company shall prepare periodic financial statements according to the Egyptian Accounting Standards;
- The Company's accounts are audited by one or more auditors, who are registered in the FRA's auditors' registry;
- The Company is bounded by the requirements of corporate governance with regards to the formation of its Board of Directors;
- Comply with the Financial Solvency Standards;
- The Company shall comply with the percentage of financing, which is determined according to the client's ability to pay;
- The Company must abide by the regulations for opening, moving and closing branches;
- The Company must abide by the regulations on money laundering and terrorist financing; and
- The Company must submit a quarterly report to the FRA.
In order to have the license to practice as Consumer Finance Company a license application should be submitted to the FRA attaching the required Company's legal documents.
While in case of the Consumer Finance Service Provider, it should be highlighted that Article 14 of the aforementioned Law stipulated that whenever the amount of funding provided from the provider of consumer financing annually exceeds limit decided by the FRA's Board of Directors, which shall not be less than EGP 25 Million, the following is required:
- Consumer Finance Provider takes the form of a Capital Company as a Joint Stock Company, a Limited Partnership with Shares, or a Limited Liability Company;
- The capital of the company shall not be less than the minimum determined by the FRA's Board of Directors, provided that it is not less than 10 million Egyptian pounds, for practicing consumer finance activity;
- The executive director responsible for consumer finance activity must meet the conditions and professional experience required for which the Authority's Board of Directors' decision is issued;
- The Company must have equipment, technological infrastructure and information systems necessary to conduct consumer finance activity in accordance with the requirements specified by the FRA;
- The Company must have an internal bylaw that regulates the controls and procedures for granting financing, determining the rates of financing according to the ability of customers to pay, and the obligation to inquire about its customers with a credit information Company, and the mechanisms for managing risks and financial solvency, and dealing with customer complaints that the managers and workers are committed to;
- The Company must maintain separate accounts and financial statements for the consumer finance activity, and adhere to the provisions of this law;
- To conclude a contract between it and its clients in accordance with the provisions of this Law; and
- Fulfilling any other conditions set by the FRA's Board of Directors.
In order to have the license to practice activity of Consumer Finance Service Provider, a license application should be submitted to the FRA attaching the required Company's legal documents.
In conclusion, application of the Consumer Finance Law will be beneficiary for different economical categories. For Producers, it contributes to increase in demand of production of Consumer durable goods, which in turn improves production efficiency and profitability; whereas for Consumers, it helps to improve their living standards and their ability to purchase products that they cannot afford in the meantime. And finally, on the national economical level, it will help increase domestic demand and consequently, increase investments, employment and spur economic growth. Moreover, Consumer Finance achieves social justice by granting medium classes and low-income sector access to financial services as provided by this Law instead of restricting it to the benefit of large companies and high-net worth individuals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.