• Dr. Omran: Capital adequacy standards set the minimum capital requirements for consumer finance companies to face credit risks and operational risks
• Dr. Omran: Capital adequacy standards for consumer finance companies face credit concentration risks (providing credit to a very limited number of individuals)
• Dr. Omran: Obliging consumer finance providers to prepare an action plan to comply with capital adequacy standards up to the end of the fiscal year 2020 and submitting quarterly reports to the Authority to verify their commitment to applying these standards.
Dr. Mohammad Omran – FRA’s Chairman reveals that FRA’s BOD approves the issuance of capital adequacy standards for consumer finance providers. The Board calls upon them to prepare a work plan that includes a timetable for compliance with capital adequacy standards , noting that by the end of the fiscal year 2020 shall provide the Authority with quarterly reports including forms and reports of standards or any documents or other data requested by the Authority to verify their commitment to these standards. This regulatory procedure aimed at enhancing the capacity of consumer finance activity within the Egyptian economy and the continuity of making it available for financing through professional performance of credit risk and facing operational risks in accordance with the best international practices.
Dr. Mohammed Omran emphasizes that capital adequacy of the consumer finance company represents the main pillar that maintain the integrity of its financial position, adding that these standards shall increase levels of trust in these companies and enhance their ability to perform its role. He points out that the adequacy of the company’s financial resources to meet its obligations in the due dates represents the backbone of the activity’s performance which is recently subjected to FRA’s supervision.
Dr. Omran says that the issuance of capital adequacy standards came with the aim of preserving the ability and capabilities of consumer finance company to carry out its activity efficiently and to achieve objectives of Law No. 18 of 2020 on regulating consumer finance activity , in the forefront of which is providing finance to consumers to enable them to purchase consumer goods and services. Capital adequacy standards are the rules and guidelines that should be followed by the consumer finance companies to enable them to play their role in the national economy and increase the volume of investments and operating rates in productive and service projects, in conjunction with increasing local demand . That is besides doubling purchasing power of citizens and making it available for payment periods that suit their incomes. On the other hand, consumer finance activity will enhance competitiveness within the national economy. Also, it shall reduce prices, establish sound and accurate database that helps the state to adopt appropriate policies and finally , give investors the ability to make right investment decision.
FRA’s Chairman adds that the standards issued by decision no. 101 of 2020 set the minimum of capital adequacy to measure the ability of the consumer finance company to meet the risks associated with granting credit . it set a minimum that must be met in the capital base of the consumer finance company including paid-up capital – Or the amount set aside to practice the activity – and other property rights in addition to supporting loans provided by the shareholders attributed to the assets of the consumer finance company (or the assets of the independent accounts allocated for consumer finance activity) and weighting the value of those assets according to the risks, plus a margin to cover operational risks.
The Authority’s Board of Directors also considers it important to provide adequate financing for consumer financing companies, allowing the company to obtain support loans while calculating them in the capital base of these companies, after excluding loan balances and funds that the company does not bear its risks, and taking into account that the loan period is not less than five years, and that the remaining period of the loan maturity is less than 12 months. In addition, the loan shall be directed to consumer finance activity and paid cash.
FRA’s Chairman stresses that the capital adequacy standards aim at achieving a balance between assets and liabilities in the case of financing consumer finance activity from bank loans and credit facilities, so that the weighted average of the maturities of these loans and facilities should not exceed the weighted average of the terms of the granted consumer finance contracts. The company and the finance provider are granted a period of two years from the date of this decision to comply with the provisions of this article. Moreover , the company is obliged to provide the Authority with quarterly reports that include the measures it has taken in this regard.
Dr. Omran notes that within the framework of the Minister of Finance’s decision to grant tax concessions to consumer finance providers and not to include the interest of loans obtained by the company within the taxable income pool, the Board of Directors Decision No. 101 of 2020 allows the company to obtain loans to finance its activities with a maximum of nine times the property rights.
Dr. Omran points out that in order to expand customer base, the standards stress on facing the risks of concentration and investing the company’s money by granting financing to a limited number of individuals. The said standards set the maximum limit that each customer shall obtain, noting that the volume of transactions with a single customer or the volume of existing financing for a single customer shall not exceed (10%) of the company’s capital base, after excluding the balances that the company can not bear its risks through banks, venture capital companies, entities covering credit risk or entities covering risks of non-payment or any other guarantees accepted by the Authority.
FRA’s Chairman emphasizes that in the context of ensuring that the financial statements of the consumer finance company express their financial positions fairly, capital adequacy standards set the minimum for the company’s revenues as allocations to face debts that are late in payment according to the delay period. Also, it specifies the conditions that must be met to eliminate and exclude debt that is difficult to collect from the corporate debt portfolio.
On the other hand, the standards assert that the period of loans obtained by the company shall not exceed the period of customer financing loans. The Board’s decision also includes a liquidity criterion that is required to meet the company’s due liabilities.