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Abu Dhabi, UAEFriday 14 December 2018

Egypt's bankruptcy law is credit positive for banks

The new legislation will help in boosting local and foreign investments

The first-ever bankruptcy law in Egypt is credit positive for banks and will encourage local and foreign investment in the country, Moody’s Investors Service says. Amr Abdallah / Reuters
The first-ever bankruptcy law in Egypt is credit positive for banks and will encourage local and foreign investment in the country, Moody’s Investors Service says. Amr Abdallah / Reuters

The first-ever bankruptcy law in Egypt is credit positive for banks and will encourage local and foreign investment in the country, according to Moody’s Investors Service.

The law, passed by the parliament, will provide lenders in the most populous Arab country with more options to deal with viable troubled companies, making loan workouts more flexible and faster, the rating agency said in a statement. The legislation will also speed up the liquidation of non-viable companies, which will increase recovery amounts, it added.

Bankruptcy procedures, in the past, were not governed by specific laws and courts handled the maters on a case-by-case basis with debtors facing possible jail terms, Moody’s noted.

“The process was lengthy and bureaucratic, lacked the ability to effect a restructuring or reorganisation of a viable businesses, and was without sufficient out-of-court options for debtors and creditors,” Melina Skouridou, an assistant vice president and Marina Hadjitsangari an associate analyst at Moody’s said in the note released on Thursday.

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The new law will help in increasing recovery amounts and improving banks’ ability to deal with problem loans. The weak insolvency framework in Egypt has been a drag on asset quality of the lenders in the country. The two biggest Egyptian banks -- National Bank of Egypt and Banque Misr -- have taken more than 10 years to recover from legacy problem loans and reducing their aggregate ratio of nonperforming loans to gross loans to around 2 per cent as of June 2017 from more than 25 per cent a decade ago, according to the rating agency.

The new legislation tackles the inefficiencies of the previous system. It allows for out-of-court company restructurings, permits standstill on creditors which enables a viable company to reorganise, and provides safety nets for creditors similar to US Chapter 11 bankruptcy protection.

Under the new rules, restructuring plan must be completed within 60 days of filing for a standstill, although, a judge has the right to extend that period. The bankruptcy law also reduces the liquidation period for a non-viable company to nine months, instead of the current average of more than two years. Courts also have the right to enforce a restructuring plan if a consensual solution is not reached.

Egypt ranked 115th among 190 countries in the World Bank’s Resolving Insolvency Index in its 2018 Doing Business Report. Creditors in Egypt recover an average of 26 cents for every dollar lent, compared with 71.2 cents in countries that are members of the OECD. Bankruptcy proceedings can take an average of 2.5 years, although, anecdotal evidence points to longer actual time periods. By comparison, the bankruptcy duration is 1.7 years on average in OECD countries, Moody’s noted.