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The Legal 500 EMEA

Digital Banks

البنوك الرقمية - digital banks

According to the technological development observed on a world- wide level and its impact on all transactions in all aspects and specializations, especially the economic aspects, as well as the developments that led to the urgent need for remote dealing, especially during the period of Covid-19 pandemic, and the appearance of many modern technological means that help in implementing these transactions, the ease of dealing through them, as well as the efficiency and safety of these means for the parties to any transaction.

Banking transactions also had a share of this technological development, and the so-called Digital Banks appeared, which are the banks that provide banking services through digital channels or platforms using modern technologies, whereas this technology began to be experimentally applied to the banks since 1980 and gradually developed throughout the world until the number of digital banks reached more than 400 digital bank on the worldwide level.

Experts reported that the net interest income of digital banks reached $470,800,000,000 (Four Hundred and Seventy Billion and Eight Hundred Million US Dollars) in 2022, and about $201,300,000,000 (Two Hundred and One Billion and Three Hundred Million US Dollars) in 2020 during Covid-19 pandemic. It is also expected that the annual growth rate of net interest income will reach about 13.4%, which will lead to the increase of the digital banking market by $1,200,000,000,000 (One Trillion and Two Hundred Billion US Dollars) by 2028.

Therefore, these digital banks and their dealing and operating systems will be, if not currently, the ideal choice for customers according to the ease of dealing with them, as well as their reliability, and the advantages they provide, such as support and discounts for services, sharing other applications, the bank interest calculation system, as well as personal loans.

Therefore, some banks inside Egypt have applied to obtain a license to establish a digital bank and to be included in the list of digital banks. The Central Bank of Egypt has determined the systems, rules, and conditions for providing this service in Egypt which will be explained below.

Types of digital banks

The first type is Challenger Banks, which are fintech companies that have their own banking licenses, which means that they can provide traditional banking services in a flexible manner and are considered a direct competitor to traditional banks.

The second type is Neobanks, which are the common type of digital banks. It differs from Challenger Banks in that it is digital banks only and does not have any existing physical branches.

The third type is Beta banks, which are usually affiliated with existing commercial banks and provide financial services through the license of the parent company. These banks are established as a mean of entering new markets and providing limited services, but on a wide-broader base of consumers. It is the least common.

The fourth type is Nonbanks, which are financial institutions that are not considered full-scale banks, because they do not provide lending and deposit services at the same time.

Digital banking services

Digital banks provide all their services via the Internet only, and these services include (cash withdrawal, money transfer, creating a current and saving account, offering long-term and short-term saving funds, personal loans, paying bills, financing small, medium and micro enterprises, financing factories, institutions and productive sectors), which also includes some of the transactional functions of the basic banking system provided by all traditional banks.

Advantages of digital banks

The most important advantages of digital banks are:

  1. Ease of access and recruitment of new clients.
  2. Low operational cost, IT cost, etc.
  3. Ease of use by customers with these banks.
  4. Digital banks provide services to their customers without the need to go to crowded branches.

Rules and conditions for digital bank licenses in accordance with the Central Bank Law for the Digital Banks

The Board of Directors of the Central Bank of Egypt, at its convened meeting on 11th of July, 2023, approved the rules for licensing, registering, and supervising digital banks, and issued a decree to be valid on 12th of July, 2023.

The new rules come in light of the provisions of the Central Bank and Banking Sector Law issued by Law No. 194 of 2020, which includes the concept of digital banks and the banking services they provide through digital channels or platforms using modern technological methods.

Licensing requirements for digital banks include that the issued and deposited capital must not be less than 2,000,000,000 EGP (Two Billion Egyptian Pounds) in the case of practicing all banking activities, with the exception of financing huge companies, with the possibility of financing these companies provided that the capital shall be increased to 4,000,000,000 EGP (Two Billion Egyptian Pounds), as well as that the majority shareholder shall be a financial institution with an experience of business in the similar field of activities at a rate of not less than 30% of the total capital value.

Among the requirements for obtaining the license included submitting a detailed feasibility study that includes identifying the target segments and the services planned to be provided, as well as information technology plans, and cybersecurity plans and strategies, noting that digital banks are subject to the same rules and regulations for control and supervision that is applicable to the banks operating in the Arab Republic of Egypt. The same laws and regulations of money laundering and financing terrorism, in addition to some other requirements consistent with the nature of its activity.

The economic importance of digital bank

These banks support the realization of the countries’ vision of transitioning to a society less reliant on cash. They also work on enhancing financial inclusion and create a supportive climate for the financial technology industry, as digital banks develop and make banking products and services available in a distinct manner remotely and with high quality that suits the needs of all segments of society, including micro, small and medium-sized companies and youth, with the aim of facilitating access to these products and services in a quick and easy way without going to banks’ headquarters or waiting to receive services.

It also helps the country to organize the transactions, as well as moving to banking technology and facilitating the process of reducing cash dealing; which contributes in helping the country in developing this technology in all aspects.