Banking & Finance – Legal Update

In this final update in the series, we look at legal and regulatory developments in Egypt, the Kingdom of Bahrain, the Kingdom of Saudi Arabia and Sultanate of Oman.

In our previous updates we looked at the legal and regulatory developments in the UAE and Kuwait (update here) and then Jordan, Iraq and Qatar (update here).

EGYPT

1. FRA Measures

The Financial Regulatory Authority (“FRA”) has ordered all mortgage lenders, factoring and leasing companies to extend debt maturities for 6 months to all clients. In addition, EGP 250 Million were allocated by the Board of Directors of the FRA to support vulnerable businesses.

2. CBE Circulars

The Central Bank of Egypt (“CBE”) has granted banks the possibility to issue quarterly financial statements in accordance with the Egyptian Accounting Standards No.30 of 2015 (the “Periodic Financial Statements”). The obligation remains to issue full financial statements at the end of December 2020 for banks that usually issue their financial statements at the end of December each year, and at the end of June 2021 for those that usually issue their financial statements at such time. As for the postponing period of credit dues of 6 months for existing clients, by virtue of the Periodic Book dated 15 March 2020 and the subsequent periodic books, such postponed period is not taken into account or considered in any way as an indicator of credit risk, notwithstanding the bank’s responsibility to evaluate its credit wallet to ensure its clients’ ability of repayment.

The CBE also issued:

1. Circular dated 16 April 2020 regarding the mechanism of repayment of interest calculated over the postponing period of credit dues. Regarding the mechanism of repayment of interest calculated over the postponing period of credit dues of 6 months for existing clients without delay penalties or additional fines, the calculated return amounts shall be capitalized within the postponing period in relation to the remaining facility amount. The credit dues shall be settled within the new facility period in accordance with the client’s ability to settle. The banks shall ensure that clients are not asked to pay the delayed facility amount at the first due date following the postponing period.

2. Circular dated 20 March 2020 following up the precautionary measures to counter the effects of COVID-19 virus. The CBE Mobile Payment Regulations issued in November 2016 as well as the procedures applicable to all mobile payments issued by the Anti Money Laundering and Terrorist Financing Combating Department issued in March 2019 to update the maximum limits and clarify the ability to undertake KYC b electronic means.

3. Other Measures

By virtue of a presidential Decree dated April 2020, Egyptian President Abdel Fattah al-Sisi announced a financial stimulus package, including 100 billion Egyptian pounds (6.3 billion U.S. dollars) of soft loans provided by the Central Bank of Egypt.

In addition, the following economic measures were taken by the President on 22 March 2020:

1. Allocation of EGP 20,000,000 to support EGX;

2. Suspension of agricultural land tax for two years;

3. Allocation of EGP 50,000,000 to real estate financing through banks;

4. Allocation of EGP 50,000,000 to the tourism industry;

5. Allocation of EGP 1,000,000 to exporters;

6. Revoking administrative closures imposed on taxpayers with due taxes against the payment of 10% of the entitled tax;

Increase of periodic allowance for pensions to 14% as of the next fiscal year 2021/2022.

KINGDOM OF BAHRAIN

The Central Bank of Bahrain (“CBB”) issued circular number OG/106/2020 dated 17 March 2020 and circular number EDBS/KH/C/30/2020 dated 23 March 2020 (collectively the “Circulars”) which provides, amongst other things, that all retail banks are required to offer all Kingdom of Bahrain (“Bahrain”) citizens and resident financial and non-financial companies in Bahrain, excluding banks, six (6) months deferral of instalments without any fees, no interest on interest and no increase in rate unless the borrower agrees to a shorter period or does not wish to avail of such deferral.

The Circulars apply to all CBB licensed banks, finance companies, microfinance companies and ancillary services providers in Bahrain (collectively hereinafter referred to as the “Relevant Entities” and individually a “Relevant Entity”).

The Circulars require Relevant Entities to adhere to the following regulatory measures and relaxations:

1. deferral of instalments for a period of six (6) months for all Bahraini citizens and resident financial and non-financial companies in Bahrain;

(please note that the instalment deferrals may be made available to non-Bahraini customers; and borrowers who initially refused the deferral option in March 2020 but then request for the deferral option in April 2020 or thereafter, at the discretion of Relevant Entities.)

2. the cooling off period for reclassifying restructured credit facilities from stage three (3) to stage two (2) is reduced from twelve (12) months to three (3) months. This is applicable to any eligible stage 3 credit exposure, whether restructured or not;

3. discounted cheque facilities are included subject to receiving new cheques, if required;

4. progress payment discounting facilities are included if payment is not received;

5. the cost of life insurance policy extension covering the extended tenor and age requirement, shall be borne by the borrower;

6. no new legal action in case of default must be taken, with effect from 23 March 2020 until 30 September 2020, on the following:

• personal and corporate guarantee supporting credit facilities;
• collateral foreclosure; and
• post-dated cheques;

7. for credit cards, the required minimum monthly payment must be zero (0) from March 2020 until August 2020.

The deferral option under the Circulars covers all on and off balance sheet credit exposures as of 19 March 2020 except the following:

1. exposures classified in stage three (3) which are not serving the reduced cooling off period;

2. financing instalment received through the court;

3. credit syndication facilities to resident corporates involving non-resident participating lenders;

4. pre-export financing under letters of credit without recourse to the resident corporate (exporter);

5. overdraft facilities; and

6. leveraged investments/margin call facilities.

KINGDOM OF SAUDI ARABIA

1. The New Movable Assets Security Law and Amendments to the Commercial Pledges Law

The Kingdom of Saudi Arabia (“KSA”) has recently issued two laws that significantly widen the options available for creation of security. These are the Movable Assets Security Law and the Amendment to the Commercial Pledge Law both issued by Royal Decree No. (M/94) dated 15/08/1441H (corresponding to 08/04/2020G).

2. Movable Assets Security Law

1. Under the Movable Assets Security Law, the options to create security have now been expanded to cover the following:

• Commercial pledges (under the provisions of the Commercial Pledge Law);
• A repurchase arrangement, being a sale of movables including with a condition for recovering or repurchasing the such movables;
• Transfer of ownership of movables as security;
• Sale of movables (on an instalment sale basis) on the condition that the transfer of its ownership is postponed until the price is fully paid;
• Assignment or rights by way of security; and
• Sale of rights in receivables.

2. Under Article 3 of the Movable Assets Security Law, security can be created over movables whether tangible or intangible, current or future, or current or future rights including the following:

• Rights of third parties, whether immediately due or deferred, including receivables;
• Credit balances with banks and other financial institutions, including deposit accounts and current accounts;
• Written instruments transferable by delivery or endorsement, including commercial papers such as promissory notes, bank certificates of deposit and bills of lading;
• Vehicles;
• Equipment;
• Stock;
• Animals and animal products;
• Agricultural crops;
• Immovable by Attachment; and
• Trees, even before they are cut down, and minerals, even before they are extracted.

3. However, Article 4 excludes (a) transfer of rights for the purposes debt collection (i.e. sale of receivables under a factoring arrangement); and (b) purchasing a debt that is part of a project acquisition agreement. Further, Article 5 states that the Movable Assets Security Law does not apply to the following asset classes:

• Ships and Airplanes;
• Securities listed in the capital markets;
• Goods deposited in public warehouses unless the Security Interest has been created before they are deposited;
• Trademarks;
• Investment Accounts; and
• Properties with ownership records in which the Security Interests are recorded.

4. Article 6 states that the ‘Secured Obligations’ are required to be generally or specifically described. The definition of ‘Secured Obligations’ includes all current and future obligations of the debtor/borrower. This is a significant change whereby there is no requirement to specify an upper limit of the amount secured. In order for the Security Interest to be perfected, the Security should be registered or in the actual or constructive possession of the secured party. Under Article 20, a Security Interest would be enforceable against third parties and shall have priority over other debts, including employees’ dues and government fees. Article 19 sets out the order of priority, in summary, a registered Security Interest will have priority over an unregistered Security Interest (e.g. possessory pledge) and the first in time Security Interest that is registered will have priority over other registered Security Interest.

5. A new registration system called the Unified Register for Rights Over Movable Assets (the “Register”) is to be established within six months from the publication of this law.

6. Under Article 23, the Security Provider and Secured Party can agree to enforce the Security without using court procedures. In other words, using self-help remedies. This includes selling by way of public auction or direct sale. The

Regulations to be issued will set out the requirements relating to enforcement.

3. Amendments to the Commercial Pledge Law

• The amendments that have been issued are far-reaching and will require financial institutions to quickly adapt to these changes. The following are the significant changes introduced:
• The concept of a floating charge has been removed. Accordingly, there will be a requirement to identify all assets that are the subject of a pledge under the amended Commercial Pledge Law.
• The scope of the Commercial Pledge Law has been expanded by deleting the definition of “economic debt”. Prior to the amendment, the Commercial Pledge Law only applied to commercial debts, that is, debts arising as a result of a commercial transaction. Consumer financing including financing provided to an individual for various purposes was excluded. By deleting the requirement for the debt to be an “economic debt”, the Commercial Pledge Law now extends to consumer finance transactions as well as other secured financing provided to individuals.
• A pledge contract shall be effective against third parties by registration (i.e. the new register to be established under the Movables Asset Security Law) or transfer of possession of the pledged property to the pledgee or trustee, in accordance with the provisions of the Movable Assets Security Law. Issues relating to priority are dealt with under the Movable Assets Security Law.
• All ancillary components of a movable asset that is being pledged and proceeds arising from the movable asset are required to be specifically pledged. Prior to the amendment the pledge by default included such ancillary components and proceeds.
• Under the amended Article 14(2) of the Commercial Pledge Law, the proceeds arising from the pledged movable asset shall not be automatically be transferred to the pledgee. If the intention of the parties is to require such proceeds to be under the control of the pledgee, a specific reference would need be included in the pledge agreement. In the absence of such a provision, pledger would be entitled to receive such proceeds.
• The enforcement process previously covered under the Commercial Pledge Law will now be covered under the Movable Assets Security Law.
• While the amended Commercial Pledge Law retains the concept of a pledge over an economic entity, there is no longer a requirement for this security to be recorded on the Commercial Register maintained by the Ministry of Commerce.
• Article 35 of the Commercial Pledge Law relating to “future rights” has been deleted. However, the definition of the term “future rights” (which related to debts payable by an underlying debtor, i.e receivables) has been retained and forms part of the definition of “movable property”. In addition, the Movable Asset Security Law also permits the creation over future movable assets.
• Article 36 (1) of the Commercial Pledge Law relating to pledge over bank accounts and investment accounts has been deleted. However, Security Interest can now be created under the Movable Assets Security Law (excluding Investment Accounts).
• Article 37(1) has been deleted. This provision clearly permitted the creation of a share pledge over shares of an un-listed company (e.g. the shares of a Limited Liability Company). It is not clear at this point how this would impact this type of security going forward.
• The provisions relating to self-help remedies and enforcement is now to be covered under the Movable Assets Security Law.

SULTANATE OF OMAN

In order to increase the liquidity in the banking and financial sector and to assist them, the Central Bank of Oman issued a directive on 18th March 2020 (the “Directive”) pursuant to which the Central Bank has taken the following measures:

• lowering the mandatory capital conservation buffers by 50% from 2.5% to 1.25%;
• increasing the lending/ financing ratio by 5% per cent from 87.5 % to 92.5%;
• Requiring the banks to requests for the deferment of loan repayments and interest payments, particularly with regards to small and medium enterprises (SMEs) for a period of six (6) months and such deferment should not adversely impact the loan’s risk classification;
• Deferring the risk classifications for loans relating to government projects for a period of six (6) moths;
• Reducing the interest rate for rediscounting commercial papers;
• Directing banks to reduce fees on existing banking services and not charge any new fees this year;
• Reducing the interest rate on repo transactions by 75 basis points to 0.50% and increase the tenor of repo transactions to a maximum of three (3) months;
• Reducing the interest rate of discounting of Government Treasury Bill by 100 bases to 1.00%; and
• Reducing interest rate on foreign currency swap operations by 50 basis points increase the tenor of the facilities to maximum of six (6) months.