Banking Law 88 of 2003:
A new Banking Law 88 of 2003 was issued in June 2003 replacing a number of laws that regulated the Central Bank of Egypt and the banking sector, dealing in foreign exchange, accounts secrecy, and private ownership of public sector banks. The law allows foreign bank branches to deal in Egyptian currency. Foreign banks are guaranteed national treatment. The law also mandates substantial increases in the minimum capital requirement for banks and foreign exchange bureaus: from LE 100 million previously to LE 500 million for Egyptian banks and subsidiaries of foreign banks; from $15 million to $50 million for foreign bank branches; and from LE one million to LE 10 million for foreign exchange bureaus. Banks were given one year (extendable up to three years) and exchange bureaus given six months (extendable to 18 months) to meet the requirement. The current government has set July 15, 1005 as the final deadline for banks and foreign exchange bureaus to comply with the capital requirements. Some mergers have already taken place in the banking system and we expect more as the July 15 deadline approaches.
The government requires banks to follow systems of loan classification and provisioning. Since 1997 the Central Bank of Egypt (CBE) has required banks to apply International Accounting Standards (IAS) and to publish an annual financial report based on IAS. The CBE required banks, excluding foreign branches, to comply with the 10 percent Basel Capital Adequacy Ratio by March 31, 2003 as part of a more comprehensive banking sector reform and modernization process. The CBE is working with banks to comply with Basel II standards by 2006.
Mortgage Law 148 of 2001
provides the regulatory framework for issuance of mortgages by bank and non-bank institutions and regulates the securitization of mortgages with a potential for increasing trading activity in the stock market.
Leasing Law 95 of 1995:
Law 95 allows for the leasing of capital assets and real estate. It is designed to reduce the high start-up costs faced by new investors. Notably, the law specifically allows for the purchase of real estate assets through leasing mechanisms. The Leasing Law was amended in 2001 to make leasing more attractive for investors. The amendments include exempting financial leasing activities from the sales tax and fees, specifying financial standards that leasing companies must adhere to increasing control, organization and efficiency of the leasing activities and incorporating clear guarantees to the parties involved to encourage investments.
The Capital Market Law 95 of 1992
grants foreign investors full access to capital markets. Along with the new Banking law of June 2003 (replacing Banking Laws of 1992 and 1993), it constitutes the primary regulatory framework for the financial sector. The law permits the establishment of Egyptian and foreign companies that provide underwriting of subscriptions, brokerage services, securities and mutual funds management, clearance and settlement of security transactions, and venture capital activities. Law 95 also authorizes the issuance of corporate bonds and bearer shares, and makes income from most stocks and bonds non-taxable. It established mechanisms for arbitration and legal dispute resolution and prohibited unfair market practices. Law 95 empowered the Capital Market Authority (CMA) to be an independent supervisor of the securities industry. The CMA is currently under the authority of the newly founded Ministry of Investment.
In 1998, the CMA instructed listed companies to adopt international accounting and auditing standards and ruled that directors of securities firms must fulfill expertise requirements. The CMA and the Cairo and Alexandria Stock Exchange (CASE) regularly publish reports on trading and market conditions. The Central Securities Depository and Registration Law and its executive regulations were issued in 2000. This law aims at easing and regulating the registration and deposit of securities.
As of February 2005, the market capitalization of the Cairo and Alexandria Stock Exchange (CASE) was approximately LE 267 billion, with shares in 540 of 983 listed companies subject to active trading in 2004. On average, shares in 100 companies were traded on a daily basis in 2004, with the 20 most active stocks accounting for 45% of total trading value. Total trading volume in 2004 was 1422 million shares, while trading value for 2004 was LE 27.8 billion. Foreigners’ participation in annual trading volume was 21% in 2004.
European and U.S. mutual funds now include Egyptian stocks, and 52 local issues are included in the International Finance Corporation’s general index. Shares in nine Egyptian companies (Commercial International Bank, EIPICO Pharmaceutical Co., Ezz Steel, EFG-Hermes Holding Co., Misr International Bank, Orascom Construction Industries, Orascom Telecom, PACHIN Paints Co. and Suez Cement Co.) are traded on the London Stock Exchange in the form of Global Depositary receipts (GDRs).
The Capital Market Authority (CMA) approved in June 2002 the establishment of the first mutual fund authorized to discount commercial bills. Discounting was added to the activities included in Investment Incentives Law 8 of 1997.
Egypt was included in the Morgan Stanley Emerging Market Index (EMI) effective May 31, 2001 constituting 1.2 percent of the EMI capitalization based on the new company selection criteria. There were initially 14 Egyptian companies in the Index with a total capitalization of $2.7 billion, representing 0.26 percent of the Morgan Stanley All Country World Index (MSCI ACWI).
The Government continues to introduce measures to bring Egypt’s capital market closer to international standards. Companies listed on the CASE are required to apply international accounting and disclosure standards. Stocks are de-listed from the exchange if not traded for six months. Settlement of transactions now takes three days for dematerialized issues, four days for materialized issues and two days for 14 active stocks that are not bound by the five percent daily price movement ceiling, a significant improvement over the eleven days needed at the end of the 1990s. The USAID/Cairo Capital Market Development project, which ended in August 2003, provided substantial technical assistance to the CMA and CASE in the areas of legal and regulatory reform, automation, institutional development, and debt market development.
There are no restrictions on foreign investment in the stock exchange. Although Egyptian law and regulations allow companies to adopt bylaws limiting or prohibiting foreign ownership of shares, only one company listed on the stock exchange has such restrictions. A significant number of the companies listed on the exchange are family-owned or dominated conglomerates, and free trading of shares in many of these ventures, while increasing, remains limited.
Development of the government and corporate bond market has lagged behind the equity market, but changes are being introduced to encourage bond trading. Since 1994, there have been at least 33 issues of corporate and nine issues of medium-term government bonds. Treasury bonds are traded on the stock market. The Government has allowed financial institutions to deal in bonds for their accounts provided they maintain a minimum capital of LE 10 million. In January 2004, the government offered 3-year Treasury bonds worth LE 4 billion to replace bonds that had matured in October 2003. A law issued in mid-1990 sets a LE 13 billion ceiling for Treasury bonds outstanding at any one time, however the law approving the State Budget every year allows the issuance of medium and long-term securities to finance the budget deficit. There is no such ceiling on shorter-term Treasury bills. As of February 2004, the total amount of outstanding Treasury bills was LE 61.98 billion.
In May 2002 the Minister of Finance issued decree number 480 of 2002 authorizing the establishment of a primary dealers systems for government securities. The new system, which finally began operating on July 6, 2004, allows financial institutions, including banks and bond dealers, listed at the Ministry of Finance to underwrite primary issues of government securities and activate trading in the secondary market through sale, purchase, and repurchase agreements of government securities.
In 2002, The Minister of Foreign Trade added an additional chapter to the executive regulations of the existing capital market Law 95 of 1992 to allow margin trading to increase liquidity and trading in the market through brokerage firms and financially solvent licensed companies. To date, however, margin trading has not occurred in the capital market due to the relatively limited trading activity and therefore profits of most brokerage firms. In April 2003, The U.S. Securities and Exchange Commission (SEC) included the Cairo and Alexandria Stock Exchange (CASE) in its list of accredited stock exchanges, allowing U.S. financial institutions to invest in the Egyptian stock market without undertaking the cumbersome procedures previously required.
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