This country-specific Q&A provides an overview of Lending and Secured Finance laws and regulations applicable in Egypt.
Do foreign lenders require a licence/regulatory approval to lend into your jurisdiction or take the benefit of security over assets located in your jurisdiction?
Banking activities in Egypt are subject primarily to the Central Bank of Egypt Law no.88 of 2003 (CBE Law), which defines a banking activity that would require a license from the Central Bank of Egypt (CBE) as any service provided customarily by banks in Egypt on a recurring basic. Accordingly, for a foreign lender to lend into Egypt on a recurring basis, it must have a license from the CBE and comply with all the regulations of the CBE issued directly to commercial banks. An unlicensed foreign lender would be able to take limited security in Egypt. For example:
Pledge over movables: the Movables Collateral Law no.115 of 2015 (Movable Collateral Law) regulatingsecurityover movables (e.g. pledge over bank accounts, future assets, movable assets including tangible assets) requires the entity benefiting from the security to be, inter alia, licensed as an Egyptian bank, or a financial leasing company, or other Egyptian companies licensed to provide credit solutions. Accordingly, the Egyptian Collateral Registry (ECR), being the registry with which security over movables must be registered, is limited to certain Egyptian entities who have online accessibility to the register;
Real estate mortgages: although Egyptian law does not explicitly restrict foreign lenders from taking a mortgage over in rem property,the offices of the Notary Public,being the competent authority for real estate mortgage registration,does not, in practice, accept mortgage registrations except in favour of a non-Egyptian banking entity, provided that such entity submits their constitutional documents and fulfills various requirements to the satisfaction of the Notary Public.
Share pledge: a pledge over the share capital of a joint stock company is created by virtue of an agreement which must be registered with Misr for Central Clearing, Depository and Registry (MCDR) being the entity responsible for central depository of shares in all Egyptian joint stock companies. The MCDR requires that the pledgee must be coded on the Egyptian Exchange (EGX) to be able to sell the shares in an enforcement scenario. This coding system on the EGX is available for foreign as well as Egyptian entities and individuals.
Assignment of receivables: the general rule for perfection of an assignment vis-à-vis the counterparty and third parties under Egyptian law is to obtain (i) acknowledgement of the counterparty and (ii) establish date certaine. In practice, this is commonly achieved by notifying the counterparty of the assignment through court bailiff, thus establishing date certaine, and obtaining an acknowledgement of the counterparty. A foreign lender would be able to take an assignment by way of security over receivables.
Are there any laws or regulations limiting the amount of interest that can be charged by lenders?
Pursuant to the Egyptian Civil Code (ECC), to the extent that interest payable by an Egyptian entity would exceed 7% per year including compounding or capitalisation of interest, or interest exceeding the principal, such excess is unenforceable.
However, it may be argued that the calculation and determination of interest is subject to Article 50 of the Egyptian Commercial Law no. 17 of 1999 (Commercial Law) which allows the interest rate between merchants to a contractual maximum of the rate declared by the CBE from time to time(overnight lending corridor rate currently fixed at 10.25% as per the CBE declaration on 16 March 2020). This restriction does not apply to banks licensed and registered in Egypt to undertake banking activities, which banks are entrusted to freely set interest rates subject to the nature of the banking activity according to the CBE Law.
Are there any laws or regulations relating to the disbursement of foreign currency loan proceeds into, or the repayment of principal, interest or fees in foreign currency from, your jurisdiction?
Subject to No. 1 above, we are not aware of any regulations prohibiting the disbursement of foreign currency loan proceeds into Egypt. Save for the temporary measures elaborated further below, there are no foreign exchange controls in Egypt restricting the repayment of principal, interest or fees in foreign currency from Egypt to offshore. It is worth noting, however, that the Egyptian bank making the transfer may request evidence of the underlying commercial transaction substantiating the transfer. Egyptian banksmay provide loans denominated in a foreign currency, provided that the borrower has sources of income denominated in the same currency of the loan. Amid the COVID-19 outbreak, the Central Bank of Egypt has issued a circular on 29 March 2020 implementing daily maximum deposit and withdrawal limits to EGP 10,000 in respect of individuals and EGP 50,000 in respect of companies (other than dues to employees). Pursuant to the aforementioned decree, the restrictions are only in place for a temporary period, however the deadline of the application of the same has yet to be announced by the CBE.
Can security be taken over the following types of asset: i. real property (land), plant and machinery; ii. equipment; iii. inventory; iv. receivables; and v. shares in companies incorporated in your jurisdiction.
Security may, in principle, be created over real property, plant, machinery, equipment, inventory, receivables and shares. In relation to the real property,a real estate mortgage is valid and enforceable if reducedin writing and perfected through registration with the competentNotary Public office, noting that the real estate property itself must be registered prior to or simultaneously with registering the real estate mortgage;
In relation to plant, machinery, equipment and inventory(i.e. movables and tangible assets), a movable pledge agreement shall be concluded in writing between the pledgee and the borrower, and must be registered with the electronic ECR by the bank.
A pledge over shares may be created subject to (i) reducing the agreement in writing, (ii) obtaining signature verification on the part of the pledgor to the satisfaction of MCDR and (iii) registration of the share pledge with MCDR.
Security over receivables may be granted by way of an assignment of receivables, which is commonly perfected by service of a notice of assignment through court bailiff on the debtors and obtaining an acknowledgement from the debtor.
Save in relation to corporate guarantees which may be subject to non-Egyptian law, to the extent any security is granted overassets, whether tangible or intangible, in Egypt, Egyptian law must govern the security.
Can a company that is incorporated in your jurisdiction grant security over its future assets or for future obligations?
Historically, pursuant to Article 1033 of the ECC, a mortgage or pledge of future assets was null and void. However, the Egyptian market faced positive outcomes after the issuance of the Movables Collateral Law, which allowed a pledge tobe granted over future assets and registered with the electronic ECR maintained by the Financial Regulatory Authority (the “FRA”). Security interest may also be granted to secure future debt or obligations, provided that the value of debt is determined.
Can a single security agreement be used to take security over all of a company’s assets or are separate agreements required in relation to each type of asset?
A single security agreement may, in certain instances, be possible in order to take security over the same class of assets (i.e. an assignment of receivables). In certain instances, such as a real estate mortgage which is registered with the geographically competent Notary Public office, it is not possible to create a mortgage over two properties in different geographic locations under the same document.Otherwise, in case the subject of security is a plurality of assets of the same type, it may be consolidated in one security document that includes an asset list detailing each type of asset. In practice, the parties conclude separate security agreements for each type of asset.
Are there any notarisation or legalisation requirements in your jurisdiction? If so, what is the process for execution?
Generally, it is not necessary to notarise or legalise facility or loan agreements in order to ensure enforceability in Egypt. However, various security documents would require certain formalities in order to ensure enforceability. For example, a real estate mortgage or a fonds de commerce mortgage must be notarised before the Egyptian Notary Public. An Egyptian Notary Public would notarise the relevant agreement subject to its satisfaction of the provision of the agreement and the capacity and identity of the parties, noting that notarisation by an Egyptian Notary would require physical appearance before the same. In order for the Notary Public to create a real estate mortgage in favour of a non-Egyptian entity, it must be provided with the constitutional documents of the mortgagee bank, notarised and legalised up to the competent Egyptian Consulate and subject to further legalisation before the Egyptian Ministry of Foreign Affairs. Other security documents, such as the share pledge or movable pledge, need not be notarised or legalised, although respective registration obligations elaborated above would apply. An assignment of insurance proceeds or receivables generally also does not require notarisation or legalisation, noting the aforementioned perfection mechanics.
Are there any security registration requirements in your jurisdiction?
Perfection of the security will vary subject to the nature of the same, some of which require registration in order to be perfected and others which require alternative perfection procedures (please refer to our response to No. 1 above). Real estate and fonds de commerce mortgages must be notarised by and registered with the Notary Public to ensure enforceability. Security over shares must be registered with MCDR, whereas security over movables must be registered with the ECR. Other types of security, such as a possessory mortgage, would be perfected by transferring the possession of the movables, subject of the mortgage, to the mortgageein order for the mortgageto take effect. In instances where Egyptian law requires registration of security,unregistered security interests would carry the risk of unenforceability towards third parties.
Are there any material costs that lenders should be aware of when structuring deals (for example, stamp duty on security, notarial fees, registration costs or any other charges or duties), either at the outset or upon enforcement?
Under the CBE Law, banks and international financial institutions benefit from a maximum ceiling of EGP100,000 in relation to Notary Public fees payable for the registration of real estate mortgages where the value of the loan exceeds EGP30 million.The cancelation of such mortgages shall be exempted from all fees. In practice, the Egyptian Notary Public construes banks benefiting from such fee cap as Egyptian banks only and therefore does not apply a maximum fee cap in relation to registration of a real estate mortgage. Subject to the nature and size of the property and the facility, registration and survey fees may be material. Costs in connection with the registration of a share pledge with MCDR or any security with the ECR are nominal.
Regarding stamp duty, please refer to No. 17 below.
Can a company guarantee or secure the obligations of another group company; are there limitations in this regard?
As a matter of Egyptian law, a company may, subject to due corporate authorisation, guarantee the obligations of another group company to the extent such group company is not represented on the Board of Directors of the proposed guarantor. Therefore, in case a subsidiary will guarantee the performance of its parent company’s obligations under a financing agreement, the parties must confirm that the parent is not represented on the board of the subsidiary.
Are there any issues that lenders should be aware of when requesting guarantees (for example, financial assistance or lack of corporate benefit)?
As a matter of Egyptian law, if a debtor binds himself to offering a guarantor, the latter must be a solvent person residing in Egypt. Accordingly, to the extent that an Egyptian law guarantee would comprise all or part of the lenders’ security package, it is advisable to ensure solvency of the guarantor as well as its residency in Egypt. Corporate benefit is not a statutory legal requirement under Egyptian law for enforceability of guarantees.
Are there any restrictions against providing security to support borrowings incurred for the purposes of acquiring shares: (i) of the company; (ii) of any company which directly/indirectly owns shares in the company; or (iii) in a related company?
There is no explicit legal provision restricting providing guarantees and/or security in the context of acquiring directly or indirectly the shares of a company, thecompany’s direct or indirect shareholder or its related company. In practice, in an acquisition financing, the acquirer grants the acquired shares as security for the financing. In this regard,as elaborated under No. 10 above, we note that a company may not guarantee liabilities of any of its board members. Accordingly, the borrower may not be represented on the Board of Directors of the company providing the guarantee.
Can lenders in a syndicate appoint a trustee or agent to (i) hold security on the syndicate’s behalf, (ii) enforce the syndicate’s rights under the loan documentation and (iii) apply any enforcement proceeds to the claims of all lenders in the syndicate?
The concept of trust is not recognised under Egyptian law. Agency is recognised and regulated under Egyptian law and security agency is commonly used for the purposes of holding and enforcing security as well as applying any enforcement proceeds on behalf of the syndicate.In case the security agency relationship is drafted as a trusteeship or otherwise, there is a wide consensus among legal practitioners that the same will likely be characterised as an agency.
If your jurisdiction does not recognise the role of an agent or trustee, are there any other ways to achieve the same effect and avoid individual lenders having to enforce their security separately?
The concept of agency is recognised under Egyptian law, please refer to No.13 above.
Does withholding tax arise on (i) payments of interest to domestic or foreign lenders, or (ii) the proceeds of enforcing security or claiming under a guarantee?
Withholding tax at a rate of 20% is applicable to interest payments made by Egyptian entities or non-resident entities which have a permanent establishment in Egypt to non-resident lenders, to the extent the tenor of the loan or credit facility is less than three years, and subject to (i) a thin capitalisation rule of 4:1 and (ii) any double taxation treaty providing a lower withholding tax rate or an exemption from tax. Accordingly, interest payments to any foreign lender in relation to a loan or credit facility with a minimum tenor of three years are exempt from withholding tax, subject to a thin capitalisation rule of 4:1.
If payments of interest to foreign lenders are generally subject to withholding tax, what is the standard rate and what is the minimum rate possible under double taxation treaties?
The standard rate is 20% subject to any double taxation treaty, please refer to no. 15 above. We understand that currently, the lowest withholding tax rate applicable under a double taxation treaty concluded by Egypt is 5%. We are not aware of an applicable minimum rate possible under a double taxation treaty.
Are there any other tax issues that foreign lenders should be aware of when lending into your jurisdiction?
Pursuant to the Egyptian Stamp Duty Law no.111 of 1980, the stamp duty rate over loans is 40 basis points levied annually on the highest debt balance under the facility, loan, or borrowing provided by lenders during the financial year. The burden of stamp duty is split equally between the lender and the borrower and is payable in quarterly instalments by the lender. The burden of said duty may not be shifted by contract. Pursuant to the principle of territoriality, stamp duty is not applicable to a facility, loan, or borrowing provided by foreign lenders that are not registered in Egypt. Additionally, income tax is withheld at a rate of 20%, in principle, as elaborated under No. 15 above.
Are there any tax incentives available for foreign lenders lending into your jurisdiction?
Although the law does not explicitly provide for incentives for foreign lenders lending into Egypt, foreign lenders would benefit from the exemptionselaborated under no.15 and no. 17 above as follows: (i) the exemption from withholding tax in respect of loan or credit facility with a minimum tenor of three years, subject to a thin capitalisation rule of 4:1; and (ii)the exemption from stamp duty pursuant to the principle of territoriality.
Is there a history in your jurisdiction of financing structures being challenged by tax authorities, and if so, can you give examples.
We are not aware of financing structures being challenged by the tax authority.
Do the courts in your jurisdiction generally give effect to the choice of other laws (in particular, English law) to govern the terms of any agreement entered into by a company incorporated in your jurisdiction?
The choice of foreign law as the governing law of the agreement is valid to the extent it does not contravene Egyptian public policy or public morality, provided that the party invoking the non-Egyptian law must establish such law before Egyptian courts as a matter of fact.Egyptian courts give effect to the choice of other law taking into account Egyptian public policy and public morality.
In certain instances, Egyptian law provides for the exclusive jurisdiction of local courts and Egyptian laws over certain contracts. For example, disputes arising out of or in connection with transfer of technology contracts shall always be subject to Egyptian law pursuant to the Egyptian Commercial law No. 17 of 1999 (the “Commercial Law”).
Do the courts in your jurisdiction generally enforce the judgments of courts in other jurisdictions and is your country a member of The Convention on the Recognition and Enforcement of Foreign Arbitral Awards?
In order for Egyptian courts to enforce a foreign court judgement or foreign arbitral award, a request for enforcement of a foreign court judgement or foreign arbitral award (as applicable) must be filed before the competent Egyptian court. Egyptian courts would enforce a judgement of a foreign court, without further review of the merits, provided that:
the foreign courts offer reciprocal treatment to judgments obtained in the courts of Egypt under an effective treaty between Egypt and the foreign country providing for such reciprocal treatment;
the parties to the dispute were duly notified and properly represented in the proceedings;
the courts of Egypt are not competent to hear the dispute which constituted the object of the foreign judgment, and the foreign courts are shown to have been competent to hear the dispute in accordance with the laws of the foreign country;
the judgment is final and conclusive in accordance with the foreign law; and
the judgment does not conflict with a prior Egyptian judgment in the same case and is not contrary to public policy in Egypt.
Egypt is a signatory to the New York Convention for the Enforcement of Arbitral Awards. Additionally, pursuant to the Egyptian Arbitration Law, international arbitration awards are enforceability in Egypt. The following documents must accompany the application for enforcement:
the original award or a signed copy;
a copy of the arbitral agreement;
an Arabic translation of the award authenticated by the competent authority, if the award was not issued in Arabic;
a copy of the minutes evidencing deposit of the award with the competent court in the Arab Republic of Egypt; and
a copy of the notification of the award to the party against whom the award has been made.
What (briefly) is the insolvency process in your jurisdiction?
Egyptian law distinguishes between insolvency procedures applied to non-merchant individuals and bankruptcy procedures applied to merchants, including companies.
According to the Restructuring, Rescue, and Bankruptcy Law No. 11 issued in 2018 (the “Bankruptcy Law”), the bankruptcy process entails the issuance of a judgement by the competent court rendering the debtor bankrupt. Such judgement is issued by virtue of a request submitted to the Bankruptcy Administration. The request may be submitted by governmental authorities (i.e. public prosecution or the competent court) or by the debtor or his creditor(s).1In rendering a bankruptcy judgement, the court shall also determine a date for the cessation of payment by the debtor, assigns a liquidator to bankruptcy and chooses one of the court judges to be the bankruptcy judge.
Nonetheless, the BankruptcyLawprovides for two procedures that lessen the financial distresses of a company and provide a defence mechanism ahead of bankruptcy. These proceedings are as follows:
Restructuring: one of the main purposes of restructuring is to figure out a strategy to organise the financial and administrative works of the bankrupt company. Any company may request restructuring provided that its capital is no less than EGP1 million and has conducted business for the previous two years without committing any fraud. The company may not request restructuring if a judgment has been issued declaring its bankruptcy or opening rescue procedures. The competent judge will approve the plan prepared by the restructuring committee. The company will remain in control of its business; although, the competent judge may appoint an assistant.
Rescue: subject to the condition of conducting business for the previous two years, any company that may be declared bankrupt, and hasnot committed fraud or gross negligence, has the right to request “a rescue from bankruptcy” in case there is a disorder in its financial conditions that may lead to cessation of its due payments (even if a bankruptcy declaration has been requested). It is worth noting that the right to request rescue from bankruptcy must be submitted to the competent court. Any company may request a “rescue from bankruptcy” upon the approval of the majority of partners or general assembly as the case may be; however, a company subject to liquidation procedures may not request the same. The company will remain in control of its business under the supervision of a rescue secretary appointed by the competent court.
What impact does the insolvency process have on the ability of a lender to enforce its rights as a secured party over the security?
Once the bankruptcy judgement is issued by the competent court, the debtor may not fulfillany debt owed by it prior to its maturity, irrespective of the modality of fulfillment, save in relation to commercial papers, which may be paid at maturity provided that the bankruptcy administrator does not object to such settlement. Following the judgment, the interest on unsecured loans shall be suspended, and the interest on secured loans may not be requested unless to the extent of the amounts collected from selling any collateral assets. Payment of the principal shall take priority, followed by the interest due before the issuance of the judgment, then the interest due after the issuance of the judgment.
It is worth noting that liens and rights mandatorily preferred by law take priority (such as debts related to judicial expenses and tax dues). Afterwards, secured creditors shall recover outstanding debt from the assets taken as a security according to their priority ranking . Finally, unsecured creditors will share any remaining enforcement proceedings on a pro rata basis related to the total indebtedness of the debtor.
Please comment on transactions voidable upon insolvency.
The following actions may not be invoked against the creditors to the extent a debtor has undertaken any of them after the date of cessation of payment and before the date on which an insolvency judgement is issued:
granting donations of any kind, save for trivial gifts established by custom;
repayment of any debt owed by it prior to its maturity, irrespective of the modality of fulfillment;
fulfill any matured debt in a manner contrary to what was agreed upon (e.g. fulfillment in cash as opposed to set-off);and
any mortgage or other contractual security.
In any case, the date of cessation of payments may not fall more than two years prior to the date on which a bankruptcy judgement is granted. The date of cessation of payments shall be determined in the judgements and if undetermined, the date of cessation of payment will deemed to be the date on which the judgement was rendered.
If anactis not enforceable vis-à-vis third parties except after registration or any other process, such act shall not be enforceable vis-à-vis the company’s creditors unless such act has been registered or otherwise established date certaine prior to the date of cessation of payment.
Is set off recognised on insolvency?
According to Article 114 of the Bankruptcy Law, set-off shall not take place following the issuance of a judgment declaring the bankruptcy of the debtor, unless there is a relationship between the rights and obligations of the debtor. Such relationship exists in particular if the rights and obligation arise out of a common cause.
Can you comment generally on the success of foreign creditors in enforcing their security and successfully recovering their outstandings on insolvency?
In recent years, Egypt has not witnessed many judgments declaring a debtor bankrupt. Therefore, the success of foreign creditors in enforcing their security and successfully recovering their outstanding on a bankruptcy occasion, hasnot, to the best of our knowledge,been sufficiently tested.
Are there any impending reforms in your jurisdiction which will make lending into your jurisdiction easier or harder for foreign lenders?
A new draft banking law is currently in circulation subject to review of the competent authorities. The current draft envisages explicit reference to international banks as benefiting from the cap on registration of mortgages. The issuance of such provision would, of course, facilitate lending into Egypt.
What proportion of the lending provided to companies consists of traditional bank debt versus alternative credit providers (including credit funds) and/or capital markets, and do you see any trends emerging in your jurisdiction?
There are no formal statistics that figure out the proportion of traditional bank debt versus alternative credit providers.
With regards to emerging trends in Egyptian market, Egypt has introduced a new consumer finance law No. 18 of 2020 (the “Consumer Finance Law”), which regulates consumer finance activity, noting that the provisions of the Consumer Finance Law do not apply to banks subject to the supervision of the CBE.