Controversy intensifies over new Banking Law

CBE surveyed IMF and World Bank experts regarding the law after field visits to several central banks, Amer said in an earlier statement

The controversy has clearly intensified over the new Banking Law put forward by the Central Bank of Egypt (CBE) and is being discussed in the Federation of Egyptian Banks (FEB).
Supporters of the law believe that it takes into consideration the international practices of banking work, and founds the base for the independence of the CBE and the transfer of power within banks.
Opponents believe that it gives of the governor of the CBE broad powers beyond the powers of the president of the state personally. It has some articles that clearly exceed the powers of the general assemblies of banks.
Whatever the opinions on this law, according to experts, its approval with its current situation will certainly cause several leaders to leave to positions and several exchange companies to close, in addition to a clash expected to take place with the Egyptian Financial Supervisory Authority (EFSA).
Banks and credit inquiry companies, in addition to money transfer companies, will be subject to pressure to increase their capital and change their funds to suit the situation of the law.
It is worth mentioning that a prominent official said that the board of the CBE has not discussed the law until now.
International bodies were consulted while preparing the law
Tarek Amer, governor of the CBE, said in an earlier statement that the CBE has surveyed several experts in the International Monetary Fund (IMF) and the World Bank regarding this project, especially after several field visits were made to many central banks, such as the Britain's central bank (Bank of England).
According to the source, after approving the law by the board of directors of the CBE, the law will be presented to the legislation department in the Ministry of Justice, and it will then be presented to the Economic Ministerial Group and the cabinet. Afterwards, it will be presented to the State Council and the parliament.
He also stressed that the goal of amending the current law is keeping up with the financial and banking developments internationally, especially that the current law was issued 14 years ago.
At the same time, the new law is prepared and comprised of 170 articles, and there were several articles that aroused wide controversy between bankers and experts and those interested in the banking affairs in Egypt.
These articles are concerned with hiring banks leaders, increasing capitals of banks and exchange companies as well as the credit inquiry companies and money transfer companies. They are also concerned with the CBE monitoring non-banking financial activities.
The new draft law stipulates that the governor, his deputies, and members of the board of directors to not be members in any political group or party, or members in the government, except for the representative of the Ministry of Finance. They also should not be heads or members of bodies subject to the rule of the new law or EFSA's monitoring.
Article 109 of the draft stipulated that the chairperson of any bank must not be an employee in it or a main shareholder during the three years prior to the enforcement of the law. This means that, currently, most leaders in banks will leave their positions since they have been occupying them for more than three years, and some have been occupying them for 20 years.
A very small number of bank leaders who were recently hired may not be affected by the law, including El Sayed El Kosayer, the chairperson of the Egyptian Agricultural Bank; Maged Fahmy, the chairperson of the Egyptian Industrial Development Bank; and Mervat Sultan, the chairperson of the Egyptian Export Development Bank; and Hussein El Refaay, the chairperson of the Suez Canal Bank.
This is considered the second confrontation of its kind between Tarek Amer, the CBE's governor, and the leaders of the banks operating in the Egyptian market, where Amer had earlier issued a decision that stipulated that no bank leaders should stay in their positions for more than nine years—a decision that was severely rejected by the general assemblies of banks and was taken to court.
The draft law also stipulated that banks' board of directors get to choose executive officers for the bank who are non-members of the bank, with the right to attend hearings without voting. Also, according to the law, the executive regulations of the bank decide the term of work for each executive officer. The new law also provides the CBE with the right to choose a representative to attend the meetings of the board of directors of any bank without an invitation.
The majority of bank leaders excluded, exchange companies closed down
For its part, the Legal Technical Committee in the FEB has demanded the elimination of Article no. 109 in the draft law, stressing that it will result in the exclusion of the majority of the current bank leaders and cause many exchange companies to shut down.
It added that it is not suitable for the CBE to monitor these ideas and exchange opinions in the banks' boards of directors. It pointed out that this can only be the case with troubled banks that require financial support from the state.
The committee said that implementing Article no. 109 will negatively impact the powers of the general assemblies of banks and their board of directors, in addition to the investment climate in general.
Other articles were also controversial, including those that require banks to increase their minimum capital to EGP 1.5bn instead of half a billion pounds in the current law no. 88 for year 2003.
The draft law also included increasing the capital of exchange companies and credit inquiry companies to EGP 20m instead of EGP 5m in the current law. It also included increasing the capital of money transfer companies to EGP 10m as a minimum instead of EGP 5m currently.
According to a report of which Daily News Egypt managed to get a copy, there are currently 92 exchange companies working in the Egyptian market.
According to Mohamed El Abyad, the head of the general exchange department in the Federation of the Chambers of Commerce, the proposed minimum capital of exchange companies in the new law is exaggerated and does not suit the size of the activity of these companies.
He stressed that in case this law was approved, most exchange companies will have to shut down and exit the market as a large number of them have a capital less than EGP 5m.
Exchange companies have been a similar confrontation with the CBE several years ago. They were forced to increase their capital to EGP 5m in order to suit the Law of Banks no. 88 for year 2003; however, the companies operating at the time have filed a lawsuit in order to demand not applying the law, and they managed to obtain a judicial ruling in their favour.
According to El Abyad, exchange companies are currently suffering from recessions where the majority of foreign currencies are traded in banks and have been so since the flotation of the Egyptian pound in November 2016, so increasing these companies' capitals will not be profitable.
He emphasised the importance of those responsible for amending the law to look into the situation of the market largely and allow discussions with the different involved parties included in the law in order to reach appropriate solutions.
Expanding the powers of CBE's governor
The expansion of the powers of CBE's governor was also controversial in the new law.
15 new powers were assigned to CBE's governor, most prominently his ability to hire his deputies as members in the board of directors of the CBE, while the current law stipulates that two deputies can be hired in addition to the rest of the board's members with a decision from the cabinet.
The draft law also allows the CBE governor to be exempted from the ban on the employees of supervisory bodies to work or be part of the companies of which CBE is a shareholder. He also has the right to approve the bank's basic rules in addition to the management contracts made by the bank without presenting them to the CBE's board of directors.
The draft law also stipulated that an approval must be obtained from the governor before establishing branches of banks. In the draft law, he is also given the power to determine the ways foreign banks guarantee the deposits of clients and the power to provide permissions to new companies operating in the field of exchange, credit rating and enquiry, as well as risk guarantees, with the board of directors determining the rules and conditions of the licensing.
The new draft law grants the governor of the CBE the right to nominate the presidents and members of the boards of directors of public banks and the proposal to determine the financial treatment, allowances, and bonuses for them, provided that the decision to appoint them by a decision of the cabinet.
For its part, the committee formed under the recommendation of the Federation of Egyptian Banks to study the draft law, which will need to reconsider the transfer of many of the powers of the board of directors to the central bank governor.
The many powers granted by the draft bank law to the governor of the CBE and the determination of the term of the heads of banks have been controversial even among the banking managers themselves.
Meanwhile, the chairperson of one of the specialised banks said that the article on determining the term of the heads of banks in the new Banking Law will allow the emergence of cadres from the youth that can be employed in the boards of the banks.
He stressed that it is illogical that the position of the chairperson of the bank be limited to a specific person, noting that this does not happen in foreign banks.
Give central banks autonomy to ensure they are not under pressure
According to the director representing the Arab International Bank (AIB) at the Suez Canal Bank, Mohamed Abdel Aal, central banks have long been granted autonomy by governments, and this guarantees that they do not yield to any political or non-political pressure that could affect their functioning.
Abdel Aal explained that in the United States of America, the president does not have any influence over the president of the Federal Reserve or on its governor.
He added that with the development of global events and their interrelationship after the era of globalisation—and with the recurrence of global economic, financial, and monetary crises—those countries were overwhelmed and had a threat of going bankrupt. This led the world to amend the laws of central banks and give them greater strength and independence.
Countries have developed strict standards for monitoring, controlling, measuring, and monitoring the risks that threaten the banking system and its units, so as not to be influenced by the economies of countries, all of which are being developed in the framework of unified global policies and procedures, known as Basel applications of different degrees, according to Abdel Aal.
He pointed out that the CBE and its governor, whatever the name of the incumbent, must enjoy that independence. The laws of the CBE should reflect international standards applied in all countries of the world.
At the same time, prominent banking leaders calmed down fears raised about the draft law on new banks, stressing that it is still under discussion among stakeholders in the implementation of this law and that it is subject to amendment, before being presented to the cabinet and the House of Representatives.
Prime Minister Sherif Ismail has made it clear in his remarks that the new Central Bank Law did not reach the cabinet and that the law must not be judged from its first version.
The sources pointed out that Article 109 of the draft law, which regulates the work of bank leaders, aims to restore blood in the banking sector and take into account international practices in this regard.
On the other hand, other leaders objected to that article, asserting that the organisation of the appointment of bank leaders is essentially the authority of the general assembly of a bank. The international practices and principles of governance are indicative, are not mandatory for banks, and are not stipulated in the laws of banks globally.
Blood must be renewed in banks
According to a banking expert and general manager of a private bank Ahmed Salim, the proposed article concerning the organisation of the appointment of bank directors is important and necessary to restore blood in banks first and to force the current leaders to prepare cadres to lead banks according to future variables.
Salim pointed out that if this article is not activated, the bank heads will remain in their position even if they are weak and incompetent, which will give rise to corruption, which means that older people will head Egyptian banks, who are usually less in line with modern technology and how banks are run in today's world.
Bank directors have almost absolute powers, and absolute power with the length of time will be absolutely spoiled, according to Salim
He added that those who say that the shareholders in the banks are the ones who decide to appoint the leaders of these banks and not the central bank tell them wrong, because the work of banks is not based on your contributions only, but the funds of depositors in them outweigh the capital that you pumped in banks much, the State, represented by the central bank, should protect it.
I agree with this article, which is necessary to enable the central bank to control the banks and also to protect the funds of its citizens, Salim said
In response to the statement that the new law grants absolute powers to the person of the central governor and not the board of directors of the central bank, and that he was set up with the aim of settling accounts with certain banking leaders, Salim said that this statement was echoed by certain people at odds with the governor.
For his part, the banking expert Hany Aboul Fotouh, said, "when I read some articles of the new draft law of the CBE and the banking system and the cash. I started to ask the question whether the governor of the CBE and the heads of banks have unfinished business."
According to Aboul Fotouh, the draft law could shed light on the unfinished business between the CBE's governor and bank heads. This unfinished business, Aboul Fotouh explained, goes back to March 2016 when the CBE stated that the executive heads of public and private banks in Egypt should remain in their position for more than nine years. Because of this decision, shareholders of several private banks raised several lawsuits before the Administrative Court. In June 2016, a court ruling cancelled the decision of the CBE.
"I think that the governor of the CBE insisted to pass this decision, which was overturned by the judiciary under a legal cover within the draft law on the new banks. If the law includes this article, many of the current heads of banks will be forced to get out of office," said Aboul Fotouh.
He wondered why the committee charged with formulating this draft law sets forth Article no. 109, which concerns determining the term of bank heads.
What is the relationship between Article no. 109 and governance?
Aboul Fotouh added that if the inclusion of Article no. 109 in the new Banking Law is consistent with governance, as understood by this law, he does not know on which international practices is the draft law based.
"What do shareholders of banks think regarding the CBE hiring someone whom they deem more competent in achieving the bank's interests? Does the CBE exercise its patriarchal authority, considering itself a force for shareholders, and does it consider itself better aware of their interests?" he added.
Amer and the commission charged with drafting the bill may have been guided by a similar experiment with the Nigeria's central bank in January 2010, when he issued a decision that the maximum number of bank executives would be 10 years.
He added that the decision was made in Nigeria after the spread of corruption and abuse of executive directors of power, and this scenario is completely different with the conditions of the Egyptian banking sector.
The maximum executive position of the bank has nothing to do with international best practices in governance. There is no provision in the OECD and Basel Committee on Banking Supervision recommendations to limit the position of the CEO or the role of regulators in intervening to regulate this, according to Aboul Fotouh.
Instead, the Basel Committee on Banking Supervision believes that the board of directors is ultimately responsible for the bank's business, the development of a financial risk and safety strategy, as well as how the bank manages its business.
Aboul Fotouh pointed out that the draft law of the new banks included articles stipulating the doubling of the licensing fees and the supervision of banks by 1,000% or 10 times the fees currently applied. The proceeds of the fees are deposited in a special account in the name of supervision and supervision of the CBE's governor.
He wondered what the outcome for a special fund is. "Is it not enough for Egypt to suffer from the disasters of private funds? And why does the governor himself dominate the rules of the fund's actions? Who is monitoring the fund to ensure that corruption does not reach the fund's financial behavior and ensure transparency to stakeholders?" he asked.
Aboul Fotouh criticised the existence of a number of other articles in the draft law that focus power in the hands of the governor, not the board of the central bank, wondering that the concentration of power in the hands of one official is not the top of bad governance practices? While the exercise of good governance means balance of powers and authorities and the absence of an individual or an official with absolute authority, to facilitate the process of accountability.
"I do not deny the Central Bank to exercise its role in the supervision and supervision in order to protect the banking sector, but there is a huge difference between control and arrogance in the management of the banks or the powers of the General Assembly of shareholders," according to Abu Fotouh
We need a strong sergeant who exercises his powers, with professional awareness and understanding of the banking environment, and we do not need authoritative censorship based on unnecessarily violent intervention, he said.
Does the Central Bank collide with the General Authority for Financial Supervision?
In the same context, the draft law on new banks included a material that may lead to a definite clash between the Central Bank and the General Authority for Financial Supervision in the event of its approval in its current form, which allows the entry of a number of activities of the capital market within the objectives and competencies of the Central Bank.
Article 21 of the proposed law provides for the participation of the Central Bank in the development and monitoring of the implementation and supervision of the policies and rules related to the activities of the financial sector, in particular the lending, financing, brokerage, brokering, payment and outsourcing services provided by companies, associations or entities that carry out such activities.The article also stipulates that the Central Bank shall carry out financial clearing and settlement activities, as well as the deposit, recording and custody activities of government securities and the operation of its own systems.

This article has received significant objections from non-bank financial sector employees, who stressed that they lead to overlap between the powers of the Central Bank and the authorities of the Financial Supervisory Authority, which is responsible for supervising all non-bank financial activities.
A senior official said that if this article is approved in its current form, it will require issuing an explanatory memorandum on some points that affect the money market transactions, or dealing with this matter in the executive regulations of the new law.
The committee formed by the Federation of Egyptian Banks to study the draft law has stressed the need for legal and constitutional research that opposes the supervision of other regulatory bodies in light of the extension of the supervision of the Central Bank to companies and entities related to banking work.
A member of the board of directors of the Egyptian Association of Securities ECMA criticized the text of Article 21 of the draft law on new banks, stressing that it opens the door for unjustified interventions by the Central Bank in the control of the capital market, despite the existence of the General Authority for Financial Supervision competent to regulate and control the market.
A member of the board of directors of the Egyptian Financial Supervisory Authority (EFSA) said that the draft of the new banking law should be considered carefully when it comes to regulating the work in the money market.
He explained that the new law provides for the participation of the Central in the regulation of the capital market, which is currently in effect through the presence of a representative of the Central Financial Control, Gamal Negm Deputy Governor present, and therefore there are no fears of the intervention of the Central in the work of the General Authority for Financial Supervision, Especially since participation does not mean making final decisions.