In light of Egypt’s relentless pursuit of a prosperous economic climate, the Egyptian Parliament passed on August 15, 2018 the new Law No. 176 of the year 2018 regulating both financial leasing and factoring activities, promulgating financial leasing Law No. 95 of the year 1995, which aims at steering economic volume and increasing production of small and medium enterprises.
In accordance with the new Law, Financial Leasing is a financial contract applicable on assets or usufruct rights concluded between two parties, the lessor and the lessee. Whereby the lessor allows the lessee to use their asset for a certain period, in consideration of a rental fee as per the provisions stipulated under the financial leasing contract. Providing the lessee with the option of purchase of such asset.
Financial Leasing contracts shall include a purchase option provision of the asset. Such asset shall be directly necessary to the activities of the lessee. The lessor may be registered with the Import Register regardless of its capital structure requirements.
As to Factoring, it is a financing instrument, pursuant to which a business owner may purchase existing and future financial rights generated from a commercial sales and provision of services.
Financial Leasing or Factoring activities may only be carried out by joint stock companies with paid-in capital of not less than EGP 10 Million, or the equivalent in foreign currency, after obtaining a license from the Financial Regularity Authority.
The Law regulates termination and expiration of such contracts. Financial Leasing and Factoring contracts are automatically terminated without recourse to any judicial proceedings in certain cases, among which are the lessee’s failure to pay the agreed upon lease, bankruptcy or dissolution or death of the lessee. In case the leased asset is in total loss status, the contract may be annulled by virtue of law, without prejudice to any of the parties’ contractual obligations.
For the protection of this type of business, various instruments are provided for filing complaints, prescribed penalties in case of any violation of the Law. Financial Regularity Authority is tasked to prove violations of the Law, having the authority to check all records, books, documents and data of the companies and organizations. In case of a violation, the company may be banned from practicing all licensed activities or a compensation may be imposed for any damage incurred. The Authority may as well, call for the company’s General Assembly or Board of Directors’ Meeting to convene discussing the violation, noting the Financial Regularity Authority may dismiss the Chairman or Managing Director by a reasoned decision.
The new Law No. 176 of the year 2018 aims at accelerating the availability of cash flow of small and medium-size businesses while avoiding the need for expensive, lengthy banking facilities with accompanying guarantees, whether personal, commercial or corporate.