Digitalisation and technological transformation in Egypt's banking and payment sector in Egypt
Last month, Egypt has witnessed a progressive change in its legislative system to keep up with the global changes in the banking and digital payment sector, which the Egyptian economy is slowly but surely shifting towards.
Egypt is now relying more than ever on the cashless/digital payments, which most users and entities across different sectors have been using since the outbreak of COVID-19. These changes include the promulgation of a regulatory framework within the new Central Bank Law and the executive regulations of the E-Payment Law.
This Article focuses on (I) the digital advancements that the New CBE Law provided and (II) sets out the main highlights of the legal framework governing the E-Payments.
I. CBE Law No. 194 of the year 2020
A. Introduction to the New CBE Law
The new Central Bank and Banking Sector Law No. 194 of the year 2020 was enacted by the Egyptian Parliament and published in the Official Gazette on September 15, 2020 (the “New CBE Law”). The provisions of the New CBE Law apply to the Central Bank and the banking sector, money exchange companies, money transfer companies, information and credit rating companies, credit guarantee companies, payment system operators and payment service providers.
The New CBE Law introduced several technological and digital means that will help with the digital transformation of the banking and financial sector in Egypt. These means include the digital finance, digital settlement of cheques, E-Money, cryptocurrency, FinTech and RegTech. Also, the New CBE Law further expanded the role of CBE’s board of directors by vesting it with several authorities and functions that include the issuance of the decrees, regulations and licensing requirements regulating the afore-mentioned technological and digital means (i.e. giving more flexibility to CBE’s board of directors in this regard).
The New CBE Law repealed, interalia, the older Banking Law No. 88 of the year 2003 and other provisions related to the banking sector in other legislations.
The New CBE Law provides that those entities falling under its domain must adjust their position to comply with the provisions of the New CBE Law within a period of 1 (one) year from the date of its enactment; extendable by virtue of a decision passed by the board of directors of the CBE.
Since the Executive Regulations of the New CBE Law is not out yet, Article 5 of the promulgation law provides that the current executive regulations and CBE decrees shall remain in force, except for the provisions that conflict with the New CBE Law.
B. Scope of Application
The New CBE Law regulates several areas including setting up and licensing of banks, objectives, role and functions of the CBE and its board of directors, disclosure requirements, ownership requirements in the capital of banks, account secrecy, distressed banks, digital payment systems, digital payment services, FinTech and RegTech, and aims to enhance the financial inclusion.
C. Financial Inclusion
According to the New CBE Law, the CBE shall take all the necessary means enabling it to achieve its purposes which includes the enhancement of the financial inclusion and expanding the base of the beneficiaries of the banking services along with setting the framework that would reduce the usage of physical money. 1
One of the initiatives that support the enhancement of the financial inclusion 2 is the setup of the National Counsel for Payments (“NCP”). The NCP is constituted by virtue of a presidential decree for the purpose of reducing the usage of paper money and supporting and encouraging the usage of digital means and channels as an alternative payment method. The NCP is chaired by the President of the Arab Republic of Egypt and its members include the Prime Minister, the Governor of the CBE (“Governor”) and other members.3
D. Digital Banks
Article 1 of the New CBE Law defines Digital Banks as banks that provide banking services via digital channels or platforms using modern technological techniques.
2. Licensing Requirements
Digital banks are subject to the requirements of setting up physical banks, except for the minimum statutory capital which may be waived by CBE’s board of directors.
E. Payment System and Payment Services
As part of the New CBE Law’s initiatives to encourage digital payments, it now sets definitions for (i) “Payment System” which is defined as a set of means and procedures for the payment, set-off or settlement of funds by transferring money between two parties or more via a digital system, (ii) “Payment Services” which is defined as all services associated with the information of an account or issuing, sending, receiving or executing payment orders and transactions, whether in a local or foreign currency, and includes the issuance and management of payment tools and E-Money, and (iii) “Electronic Authentication” which is defined as a set of technological means used to verify the source of a message and the identity of a subscriber when in contact with the system and ensuring that the identity verification message was not amended or replaced during its transmission, and is used in lieu of the client’s signature.
2. Statutory Licensing Requirements
Similar to the repealed Banking Law, which prohibited the use of the term “bank” except to CBE licensed entities, the New CBE Law expands the prohibition to payment system operators and payment service providers, Thus, it is prohibited for any unlicensed entity to use the words “payment system operator”, “payment service provider” or any other similar term in any language, whether in its name, commercial address or advertisements, if that would lead to confusing the public.
According to the New CBE Law, there are a few exceptions that would not be considered under the payment system or as providing payment services when applying the provisions of the New CBE Law, such as the stock exchange, future exchange, securities clearance and settlement systems, companies that are licensed to carryout central clearing, depository and registry transactions for securities and financial instruments, and custodians.4 These activities are nevertheless regulated by the Egyptian Financial Regulatory Authority.
3. Licensing Procedures, Fees and Timeframe
According to Article 185 of the New CBE Law, CBE’s board of directors shall issue the detailed licensing requirements and procedures for operating payment systems or providing payment services that will particularly include the minimum statutory capital, the type of legal entity, the technical efficiency requirements, financial solvency, disclosure of shareholding structure, type of technology used, quality standards and operating rules. A scrutiny fee of not more than EGP 500,000 (five hundred thousand Egyptian pounds) for the payment system operator and EGP 100,000 (one hundred thousand Egyptian pounds) for the payment service provider, shall be paid at the time of the application for a license.
The timeframe for the issuance of the license will take up to ninety days from the date of submitting the application, which can be extended to a similar period pursuant to CBE’s board of directors.
Once approved, the decree approving the license is then published on CBE’s website and includes the activities and services that are permitted to be carried out. The approval will also show whether the license has a definite period or is conditional. Afterwards, the applicant is then registered in a special registry at the CBE after paying an inspection fee of not more than EGP 500,000 (five hundred thousand Egyptian pounds) for a payment system operator and EGP 100,000 (one hundred thousand Egyptian pounds) for a payment service provider.
4. Rights and Obligations
(a) Payment Guarantee
Payment system operators and payment service providers are required to provide a financial guarantee for satisfying their statutory obligations. The rules of such guarantee shall be issued by CBE’s board of directors. 5
(b) Risk Guarantee Fund to be set up by the Payment System Operators
The CBE can require the payment system operator to set up a fund to guarantee the operation risks related thereto and the commercial risks arising from the default of any of its users, which shall be in accordance with the regulations, conditions and procedures to be issued by CBE’s board of directors. 6
(c) Subcontracting with regards to Payment Service Providers
Payment service providers may appoint agents to carry out their licensed activities which shall be in accordance with the regulations, conditions and procedures that are determined by CBE’s board of directors. In any case, the payment service provider shall be liable for all the activities carried out by the agent on its behalf and must ensure that the agent is in compliance with all the applicable laws and regulations. 7
(d) Service Level
Payment system operators and payment service providers are required, while carrying out their licensed activities, to take the requisite security measures that would prevent the hacking and unauthorized access to their systems, manipulation of data or the breach of its confidentiality and privacy.8
As mentioned above, the New CBE Law enabled the CBE to reinforce the development of using modern technology in the financial or banking sector. In doing so, the CBE may:
(a) Set the rules and regulations for the FinTech and RegTech financial services,
(b) Establish a supervisory testing environment for the digital FinTech and RegTech applications, and
(c) Exempt, on a temporary basis, startups and other entities that are in the phase of testing FinTech and RegTech with the aim to provide creative financial services, from some of the licensing requirements set forth in the New CBE Law,
in accordance with the rules and regulations that are determined by CBE’s board of directors.9
II. E-payment Law No. 18 of the year 2019 Regulating the Use of Cashless Means of Payment (“E-Payment Law”) and its Executive Regulations
A. Introduction to the Law
The E-Payment Law was enacted by the Egyptian Parliament and published in the Official Gazette on April 16, 2019. The Executive Regulations of the EPayment Law were issued pursuant to the Prime Minister Decree No 1776 of the year 2020 and published in the Official Gazette on September 7, 2020.
B. Scope of Application
The E-Payment Law and its Executive Regulations regulates the usage of cashless payment means. Such means are defined under the E-Payment Law and its Executive Regulations as “every payment mean resulting in crediting a beneficiary’s bank account. These include deposits, transfers and debit orders, credit and debit cards, mobile payments, or any other means that are approved by the Governor of the Central Bank of Egypt”.
C. Statutory Requirements with regards to using Cashless Means of Payment
Pursuant to the E-Payment Law, private sector entities shall be required to use cashless means of payment in several instances which include payments due to their employees, experts, chairman and members of their board of directors and committees, and social insurance subscriptions, whenever the number of employees of the private sector entity exceed the number or monthly salaries that are set forth in the Executive Regulations of the E-Payment Law.
In addition to the foregoing, private sector entities shall be required to also use cashless means of payment when the amount of payments due to their suppliers, contractors, service providers, other contracting parties and distribution of dividends to shareholders, and other cases set forth in the E-Payment Law and its Executive Regulations, exceed the thresholds set forth therein.
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