EGYPT: FINANCIAL SECTOR MOU UPDATE, PART II

UNCLAS CAIRO 005169 SIPDIS SIPDIS SENSITIVE STATE FOR NEA/ELA, NEA/RA, EB/IDF AND EB/OMA USAID FOR ANE/MEA MCCLOUD AND DUNN USTR FOR SAUMS TREASURY FOR NUGENT AND HIRSON COMMERCE FOR 4520/ITA/ANESA/TALAAT E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV EG SUBJECT: EGYPT: FINANCIAL SECTOR MOU UPDATE, PART II Sensitive but Unclassified. Not for Internet distribution. REF: Cairo 5001 -------------- SUMMARY -------------- ¶1. (SBU) Reftel reported GOE progress in meeting benchmarks for the first three policy items of the Financial Sector MOU. Following is post's assessment of GOE progress on the remaining policy items in the MOU. In a boost to the GOE's overall real estate sector reform program (key benchmarks for which are part of Policy Item 4 of the MOU) the Ministry of Investment (MOI) announced the effective abolition of stamp taxes on various financial transactions. According to the Minister of Investment, elimination of the stamp tax should help promote the securitization market and hence mortgage financing, a financial service MOI is aggressively promoting. End summary. -------------- -------------- Policy Item 4: Strengthening the Financial Sector and Policy Item 5: Corporate Governance -------------- -------------- ¶2. (U) The U.S. will disburse USD 50 million in DSP funds upon completion of the following six benchmarks for Policy Items 4 and 5: Benchmarks 4.1 - Issuance of regulations that would: - Establish standards for real estate appraisal; Completed - The format for the appraisal report was established by the Mortgage Finance Authority (MFA) and the MOI through the national project for urban real estate registration, which is being implemented by the Ministry of State Administration Development (MSAD). - Establish a real estate appraisal and certification program; Completed - Over 80 appraisers have been certified by the MFA and can now conduct approved appraisals. - Establish a national land title registration system, including procedures and appropriate information systems; Pending - Phase I of the national land title registration system is underway in nine pilot zones and is expected to be fully functioning in those zones by April 2007. The registration system is expected to be fully functional throughout the country by 2013. All property registration will be conducted through the title system, which will also replace deed (personal) registration. - Reduce property transfer and/or registration fees to less than 1 percent of the transaction price; Completed - A law was enacted in May 2006 bringing registration fees down to a flat rate, irrespective of the contract value. In early August 2006, MOI issued the new schedule of property registration fees under the amended law as follows: LE 500 for areas up to 100 square meters, LE 1000 for up to 200 sq. meters, LE 1500 for up to 300 sq. meters and LE 3000 for areas over 300 sq. meters. Benchmark 4.2 - Pass legislation to: - Define rules for joint property ownership; Pending - The MOI is using the new urban communities as a test case for resolving this issue. A protocol is expected soon from the Ministry of Housing and New Urban Communities to facilitate partial property ownership in the new communities. A draft regulation was submitted to the Ministry of Justice in February 2006 on divided co-ownership of moveable property. - Establish land ownership (title) certification for the purpose of securing land holding for residential or commercial property; Pending - The draft law being prepared by the MOJ and MSAD, will, according to MSAD, establish land ownership (title) certification. Land ownership certification is still problematic. Even if land is initially registered, ownership transfer is not. This is mainly due to cumbersome registration procedures and lack of awareness by the public. Benchmark 4.3 - Pass legislation and issue implementing regulations to enact modern bankruptcy procedures, including foreclosure and eviction and procedures that would facilitate joint lender/debtor resolution of outstanding debts. Completed - Regulation on bankruptcy procedures exists in the mortgage law. A total of 14 agents entitled to certify foreclosure, eviction, and other procedures have been approved and certified by MFA. Benchmark 4.4 - Pass legislation, if required, and implementing regulations that would permit establishment of private credit bureaus. Completed - On August 30, 2005 CBE issued rules and procedures for the licensing of credit bureaus, and also issued approval to establish the first private credit bureau, the Egyptian Credit Bureau (ESTAILAM). ESTAILAM will have responsibility for credit investigations and credibility ratings for bank loans, real estate transactions, financial leasing and commodity procurement. The minimum required capital for credit bureaus is LE 5 million. On January 16, 2006, the CBE Board of Directors approved implementing regulations for the operation of credit bureaus; rules governing the exchange of data and information and the system CBE will employ to monitor credit bureaus. Benchmark 4.5 - Facilitate securitization through completion of legislative changes. Completed - Securitization regulations were introduced into the Capital Market Law in June 2004. In April 2006, further legislative amendments were made to the Capital Market Law, specifying rules of establishment and operation of securitization companies. In late June 2006, the MFA announced the establishment of the Egyptian Liquidity Facility (ELF) to play the role of market-maker through re-financing the portfolios of banks and companies involved in the mortgage industry with interest rates lower than the prevailing market rates. The ELF is also to perform securitization for primary mortgage financing institutions. Benchmark 4.6 - Publish a corporate governance best practice code to generate awareness and encourage companies to comply with the code. Completed - Guidelines for private sector corporate governance were issued by the MOI in the form of Ministerial Decree No. 332/2005 in October 2005. The guidelines were prepared in accordance with OECD corporate governance principles, but are not binding. The guidelines apply primarily to share-holding and limited-liability companies, established under Law 159 for 1981 (the Companies Law) and Law 95 for 1992 (the Capital Market Law),in addition to brokerages. A code of corporate governance for public sector companies was published at the beginning of July 2006 by the Egyptian Institute of Directors, and these guidelines are binding. -------------- Policy Item 6: Insurance Sector -------------- ¶3. (U) The U.S. will disburse USD 25 million in DSP funds upon completion of the following benchmark of Policy Item 6: Benchmark 6.1 - Privatization of the candidate public insurance company. Pending - After announcement of the international consortium to restructure major state-owned insurance companies in September 2005, a self-diagnostic matrix valuation of the insurance companies was completed in November 2005. The due diligence diagnostic report of the four public insurance companies, including available skill sets, and development of the financial statements of the companies is expected by September 2006. If progress continues at the current pace, full privatization of one of the companies is possible by mid-2007. -------------- STAMP TAX ABOLISHED -------------- ¶4. (SBU) Minister of Investment Mahmoud Mohieldin announced this week the effective cancellation of the stamp tax levied on financial transfers, debentures, bond ownership, and contracts for establishment of companies or capital increases. The tax was canceled by a Ministerial Decree issued July 1. Mohieldin stated in the press that elimination of the tax would bolster the securitization market, and hence mortgage financing and refinancing. The MOI, in conjunction with the Ministry of Housing, is aggressively promoting mortgage financing, particularly in the new urban communities around Cairo. The GOE's willingness to forego revenue from the stamp tax demonstrates political backing for the economic reforms necessary to expand this underdeveloped financial service sector in the Egyptian market. RICCIARDONE