September 2000

Officials had hoped, apparently, that a year would be sufficient to phase out non-bank cheques and post-dated cheques, which were both made illegal under the revised Commercial Law passed in July 1999. But as the prospect of implementation loomed closer, the government came under increasing pressure to back-pedal on the articles of the new law pertaining to cheques.

September 2000

A one-year grace period, during which consumers and retailers were supposed to gradually discontinue the use of non-bank cheques, as well as post-dated cheques, was set to expire on October 1 of this year. But after intense lobbying against the new law by several prominent business associations, President Hosni Mubarak responded on July 5 with a decree extending the grace period by another year, to October 1, 2001.

The next day, in an extraordinary session of the People’s Assembly, house speaker Fathi Sorour stated that the postponement was meant "to lessen the economic crises that would have occurred had we stuck to the original implementation date - crises that include the augmenting of inflation and recession."

The cheque legislation had drawn fire from representatives of the retail sector in particular. "It’s a big problem. It will make us lose a big portion of the people we deal with," Aly Fahmy Tolba, chairman of the high-tech consortium Delta Group, told the press when the draft law first appeared. "We don’t want small consumers to lose the chance of buying on credit."

Mamdouh Thabet Mekky, a parliamentarian from the ruling party, said that postponing the implementation of the new cheque legislation "saved the Egyptian market from an economic crisis. After all, most transactions are on credit - to the extent that some sectors depend solely on post-dated cheques." Implementing the new system on schedule, Mekky argued, "would have immediately paralysed trade."

The cheque provisions are only one part of an expansive package of legislation pertaining to all aspects of trade. The new Commercial Law, the longest law ever passed in the history of the People’s Assembly, contains 772 articles dealing with a broad array of trade-related issues, from customs duties to intellectual property rights.

According to Abdallah Tayel, head of the parliamentary economic committee, "the PA rewrote legislation that was written 114 years ago to ensure consistency with the economic reform process that Egypt is currently undergoing."

Tayel called the chapter regulating the use of cheques a "key point" of the new law. The cheque chapter alone includes 68 articles - as opposed to the current commercial law, which did not even mention the word "cheque."

With the current law failing to define exactly what a cheque is, consumers in the middle- and lower-income segments of the economy have come to rely on financial instruments that would never be accepted as "cheques" in most countries. "Why is it that everywhere in the world a cheque is viewed as a medium of exchange, and we have trouble accepting that here?" asked lawyer Amr Abdel Motaal.

In Egypt, the term "cheque" is commonly taken to refer to a "grocer’s cheque," a printed form that can be bought at most stationary stores and that broadly resemble bank cheques. Despite their official appearance, these forms are neither issued nor guaranteed by a bank and eventually the consumer pays them off when funds are available.

According to international norms, a cheque is a bill of exchange drawn on a bank and payable on demand. What differentiates a real cheque from a simple IOU, whether scrawled on a napkin or written on a grocer’s cheque, is the guarantee that the amount of money specified is available, upon request, from a bank or some other established institution.

The widespread use of non-bank cheques first began in the early 1980s, according to Amal Rashad, assistant general manager of the Export Development Bank of Egypt. At that time, she said, the government wanted to make it easier for people to establish credit, in line with the prevalent Infitah (Open Door) economic policy.

Under the new law, non-bank cheques will no longer be considered legal tender, and anyone caught using them will face a fine or a stint in prison.

For a cheque to be legally acceptable under the new system, it must be issued by a bank and covered by an account there. In addition, the word "cheque," the bank’s name, the account holder’s name and the signatory’s name must all be clearly printed on the document.

Without a bank’s guarantee, a cheque is not simply a method of payment but actually an instrument for taking credit, generally without offering any security on the loan. "Millions who have no collateral sign cheques to secure purchases they make on credit," says Barclay’s Bank clearing and bills manager Abdel-Moneim Khalaf.

Another instrument in widespread use in Egypt is the kimbiyala – a kind of IOU that customers often use to pay by installments for large retail items. Retailers, to protect themselves from the possibility of default, often insist on taking a single post-dated cheque to back up a series of kimbiyalas.

Unfortunately, the rampant use of kimbiyalas and post-dated cheques - along with the honor system that must inevitably accompany their use - leaves the field wide open for abuse by the customer.

Post-dated cheques have also been used by businessmen to secure or underwrite bank loans to associates who may not have the funds to cover the debt. This practice, though acceptable financially, leaves the door open to default or fraud, Abdel Motaal said.

Given the current shortage of cash in the local economy, Abdel Motaal said, many businessmen have reverted to the old practice of issuing "favour" cheques to fellow businessmen, who then use them as security for loans. "This practice is, in effect, fraudulent," he explained, "and will have serious repercussions in the wake of the liquidity crisis."

Along with non-bank cheques, however, post-dated cheques will be forbidden under the new law.

Yet according to a study conducted by the Alexandria Chamber of Commerce (ACC), the elimination of non-bank and post-dated cheques would lead to "major disruptions in the way business is done" in Egypt. The new cheque legislation, the ACC warned, would "deal a death blow to buying in installments, which has become one of the most prominent means of purchasing among less affluent families who don’t have access to large amounts of cash." With consumer demand already sluggish, removing this method of credit payments could further undermine the retail sector.

Before the presidential intervention created another year of breathing space, the ACC had called for the grace period to be extended for two years, to ensure that a viable alternative could be found to replace non-bank and post-dated cheques as instruments of credit for consumers.

Bankers, however, immediately welcomed the new, stricter legislation as a fundamental step towards bringing Egypt more in line with the standards of the international financial community. "If you want to make a loan, a real cheque gives you a chance to investigate the debtor," Rashad said.

Meanwhile, on the retail level, she added, both parties in a transaction need real security. A non-bank cheque or a kimbiyala "doesn’t represent a real transaction."

The government has given retailers and their customers only one more year to figure out how to phase out bogus cheques without strangling domestic trade - a year that could easily pass in the blink of an eye.

WITH ADDITIONAL REPORTING BY MOHAMMED MURSI

This article first appeared in the September 2000 issue of Business Monthly

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