Banks operating in the Egyptian market have been considering several solutions to overcome the deadlock, in which they have been placed by the Central Bank of Egypt (CBE) after imposing new regulations concerning retail loans.
CBE recently obliged banks to keep the total premiums on consumer loans below 35% of the total monthly income of customers, after deductions and taxes.
These include credit cards, personal loans, car loans, and mortgage loans outside law No. 148 of 2001. The rate increases to up to 40% in the case of granting mortgage loans for personal housing, according to law No. 148 for the year 2001.
Banks opposed these regulations, especially those that used to exceed CBE’s imposed rates. They said the new regulations will negatively impact their retail banking expansion plans.
Banks have been considering a number of solutions to overcome these problems, while abiding by CBE’s regulations. Daily News Egypt (DNE) spoke to several heads of retail banking in different banks to review these solutions.
The first solution, which is easiest to implement, is increasing the number of years for customers to pay loan premiums. If the original loan was paid over three years with 40% or 50% premium of customers’ salaries, they could extend it to five years and keep the premium under 35% of customers’ income.
Although this may jeopardise banks because of the length of the repayment period, it remains the easiest solution to implement, especially since it does not require the approval of CBE and can be approved according to the bank’s policy.
Another solution is to include all of the customer’s resources under the income on which the loan is calculated. If a customer has a fixed income of EGP 1,000 and other resources, the loan can be calculated based on all of these resources, which will match CBE’s regulations.
Some banks also requested to categorise customers based on their income and not to impose the new regulations on all customers, that is to exclude the 35% ratio for high-income customers only and abide to the current ratio for low-income customers.
These solutions among others are being considered thoroughly by banks’ retail sector experts both on their own and in meetings attended by all banks together. Egyptian banks hope to offer these proposals and solutions to CBE and seek its approval to amend its regulations.
A number of CBE seniors met a week ago with chairmen of banks and heads of their risk, retail, and small and medium enterprises (SMEs) sectors to discuss CBE’s new regulations to control credit facilities and retail banking.
The meeting was attended by CBE Governor Tarek Amer, his deputy Gamal Negm, and Sub-Governor Monetary Policy Unit Tarek El-Kholy.
During the meeting, banks inquired about calculating premium ratios based on net income of customers, especially for the banking products that do not require salary guarantees and the possibility of counting dividends and incentives in the net income.
In response, CBE officials said banks can resort to the I-Score Credit Bureau to determine an approximate estimation of the customer’s income in the absence of documentation of their monthly net income. The estimation can then be used to specify the rate of premiums with a maximum of 35%.
With regard to incentives that the customers obtain from work, CBE said they can be included only if the customer can prove receiving these benefits on an annual basis. Moody’s International had earlier praised the new regulations issued by CBE to regulate credit operations.
Moody’s said in a report last week that these regulations will positively affect the credit activity of Egyptian banks and will contain credit risks of retail banking, which are constantly increasing.
The report explained that these regulations will mitigate the credit risk in banks’ growing retail portfolios and will reduce banks’ asset quality vulnerability that has been caused by focusing on large, single-corporate customers.
According to the report, CBE’s regulations for retail loans will contain the expansion in retail and consumer loans and mitigate the threat of rising credit risk in banks’ retail portfolios.
According to Moody’s, retail lending in Egypt increased by 73% despite the weakness of total loan growth over the past four years and retail lending currently constitutes 27% of private-sector loans.
“The National Bank of Egypt (NBE), which we estimate had an 18% market share of retail loans as of December 2014 and Banque du Caire, which we estimate had a 10% share will benefit from the new affordability criteria,” Moody’s said.