The Central Bank of Egypt Introduces the Regulatory Framework and licensing Requirements for Digital Banks

On the 12th of July 2023, the Central Bank of Egypt (“CBE”) issued a new circular regulating the licensing and regulatory framework of Digital Banks in the Arab Republic of Egypt.

The Circular

This new regulatory framework aims to regulate the licensing and registration requirements and procedures for Digital Banks, as well as, the regulations that govern the revocation of licenses, and the partial and total suspension of operations of Digital Banks.

Pursuant to the applicable regulatory and supervisory rules on Digital Banks, it is prohibited for any entity not registered in accordance with said regulations to use the words “Digital Bank” or any similar expression, in any language, whether in its own title, commercial name, or in its advertisement.

Definition of Digital Banks and scope of work

Digital Banks are defined as any bank or branch of a foreign bank which provides banking services through digital channels or platforms using modern technological techniques. Digital Banks are obliged to operate and abide by the provisions of the Law No. 194 of 2020 (“Banking Law”) and its regulations issued by the CBE except with regard to the provisions regulating the granting of credit facilities to large corporations which has been detailed under clause (3) of the Circular.

It is worth noting that, Digital Banks taking the form of an Egyptian joint stock company are prohibited from establishing branches without having established the central office for the bank. Furthermore, Digital Banks are allowed to use banking agents, having obtained the CBE’s prior approval.

Major Licensing Requirements

Some of the major requirements for the licensing of Digital Banks include:

1. A financial institution must be among the shareholders of the Digital Bank, provided that its percentage is not less than 30% of its capital.
2. The financial institution referred to must have a previous history in similar businesses and activities, an exemption may be provided in light of the approval of the CBE’s Board of Directors.
3. The ownership structure – including all related parties – must be clearly presented to evidently identify the ultimate beneficial owner of the funds to ensure the legality of the source of funds.

Preliminary Approval

1. An application is to be submitted to the CBE to obtain the initial approval in order to undergo the procedures for establishing a Digital Bank or a branch of a foreign Digital Bank, and the evidence of payment of the application examination fee of an amount of EGP 1,000,000 (One Million Egyptian Pounds) for the Digital Bank that takes the form of an Egyptian joint-stock company, or an amount of USD 50,000 (Fifty Thousand United States Dollars) for the branch of the foreign Bank.
2. The application shall be presented to the Board of Directors of the CBE to issue a decree in its regard. The application shall be decided upon within 90 (ninety) days from the date of its submission. The Board of Directors may extend said period for similar additional periods in the case of Digital Banks that take the form of a branch of a foreign bank, whereby the cooperation policies agreed upon by the CBE and competent foreign counterpart in the country which the head office of the foreign bank is located must be taken into account, in order to ensure the coordination between them on all regulatory and supervisory matters.
3. In the event the application is rejected, the relevant parties shall be notified within thirty days from the date of issuance of the rejection decision.

Regulatory and Supervisory Rules and Regulations

All rules and regulatory instructions issued by the CBE for banks operating in Egypt shall apply to Digital Banks, as well as the following:

1.  The maximum deposit of a single client and its related parties must not exceed 1% of the total credit portfolios, with a maximum amount of EGP 200,000 (Two Hundred Thousand Egyptian Pounds).

2.  Digital Banks are prohibited from granting credit facilities to large corporations, except in the following cases:

• Clients of medium enterprises whom their annual business dealings exceed the specified value according to the definition issued by the CBE until the lapse of the term of the existing facilities. In all cases, the total value of those facilities must not exceed 20% of the bank’s total credit portfolios for credit facilities.
• An approval from the CBE has been obtained and that the issued and fully paid-up capital has been increased to EGP 4,000,000,000 (Four Billion Egyptian Pounds) or its equivalent in foreign currencies for Digital Banks which take the form of an Egyptian joint stock company, as well as the capital allocated for the activity of the digital branch of the foreign bank to reach an amount of USD 120,000,000 (One Hundred and Twenty Million United States Dollars) or its equivalent in any foreign currency.

Note: The two aforementioned percentages shall not apply during the first year of practicing the activity.

3.  Digital Banks must abide by and comply with all instructions and rules issued by the Anti-Money Laundering and Terrorism Financing Unit.

The newly issued Decree happens to encompass all regulatory requirements and rules that touch on the amendments, revocations, and termination of Digital Banks and their licenses. It is to be highlighted that the CBE has the utmost discretion to prohibit and reject banks on the basis of them conflicting with the greater economic interest and good of the state.