Instruction No. 2019-02 on Relations between Credit Institutions and Related Parties

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CENTRAL BANK OF DJIBOUTI

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INSTRUCTION NO. 2019-02

ON RELATIONS BETWEEN CREDIT INSTITUTIONS AND RELATED PARTIES

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The Governor of the Central Bank of Djibouti,

Having regard to Law No. 118/AN/11/6ème L of 22 January 2011 on the Statutes of the Central Bank of Djibouti;

Having regard to Law No. 119/AN/11/6ème L of 22 January 2011 on the establishment and supervision of credit institutions and financial auxiliaries;

Having regard to the Commercial Code and Law No. 01/AN/18/8ème L of 12 April 2018 amending and supplementing the Commercial Code;

Having regard to Decree No. 2018-171/PRE of 8 May 2018 appointing the Governor of the Central Bank of Djibouti.

Has decreed:

Article 1: Definition of Related Parties

For the purposes of this Instruction, a related party to a credit institution shall mean the shareholders and senior management of the credit institution and other related parties, and by extension for the application of this Instruction, the statutory auditors in office:

1. By shareholder, it shall mean any natural person, their spouses, as well as ascendants, descendants and first-degree collateral relatives, or any legal entity holding, directly or indirectly, at least 10% of the voting rights of the supervised institution.

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2. By senior management, it shall mean persons vested with management¹ or administrative² powers, as well as their permanent representatives, spouses, ascendants, descendants and first-degree collateral relatives, as well as any person vested with management or administrative powers in a legal entity that exercises exclusive or joint control over the supervised institution, or over which the supervised institution exercises, directly or indirectly, exclusive or joint control.

3. By other related parties, it shall mean:

   • any enterprise or group of enterprises in which any of the persons referred to in the first two paragraphs is either a shareholder exercising direct or indirect exclusive or joint control or significant influence, or a partner, or a member of the board of directors, or senior management;
   • any subsidiary or any enterprise in which the credit institution holds, directly or indirectly, a capital participation enabling it to exercise exclusive control, joint control or significant influence;

4. For the application of this Instruction, significant influence over an enterprise is defined as holding at least 20% of the capital or direct or indirect participation in its administration or management.

Article 2: Definition of Exposures to Related Parties

Exposures shall comprise any credit, commitment signed in favor of or on behalf of the person, subscription, purchase or stock lending of securities issued by the person and, more generally, any transaction carried out with them generating settlement, market or counterparty risk for the credit institution.

Article 3: Deduction of Exposures to Senior Management and Shareholders

1. Exposures to shareholders and senior management as defined in Article 1 must be deducted from the institution's Common Equity Tier 1 capital for the calculation of capital used for prudential regulation purposes, in accordance with Article 7 of Instruction No. 2019-01 on the composition of credit institutions' capital. The exposures to be deducted shall be calculated in accordance with the provisions of Instruction No. 2011-04 on large exposures concerning risk weights and deduction of guarantees.

2. By way of derogation from this Article, interbank loans to a banking shareholder are not subject to this deduction, but may be limited in amount and duration by the Central Bank of Djibouti considering the risks incurred, with such limitations applicable to other entities forming part of the same banking group as the shareholder.

¹ Senior management refers to the Chairman and Chief Executive Officer, Chief Executive Officers, Deputy Chief Executive Officers or members of the executive board. ² Members of the board of directors or supervisory board.

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Article 4: Prohibition Regarding Statutory Auditors

Credit institutions may not hold exposures to statutory auditors in office responsible for certifying their accounts. This obligation extends to their close relatives and to legal entities in which they are shareholders or partners, directly or indirectly. As depositors, statutory auditors may not benefit from more favorable conditions than those applied to the general clientele.

Article 5: Capping of Exposures to Other Related Parties

The amount of exposures to all other related parties as defined in Article 1, paragraph 3, may not exceed 15% of the credit institution's net capital. Exposures shall be calculated in accordance with the provisions of Instruction No. 2011-04 on large exposures concerning risk weights and deduction of guarantees.

The cap shall not apply to subsidiaries and participations referred to in Article 1, paragraph 3, which are financial institutions or insurance companies. However, the CBD may impose specific limitations based on the risks incurred.

The Central Bank of Djibouti reserves the right to deduct from the institution's net capital any amounts exceeding the aforementioned cap.

Article 6: Authorization and Supervision by the Board of Directors

1. Exposures in favor of related parties defined in Article 1 must be authorized in advance by the institution's board of directors.

2. No member of the board of directors who may be placed in a situation of conflict of interest due to the exposures subject to authorization shall participate in the decision-making process.

3. Any default, unauthorized account overdraft, or dispute concerning an exposure to a related party must be promptly brought to the attention of the board of directors, which shall be solely authorized to grant formal approval for any maturity extension, restructuring, or debt forgiveness.

4. Exposures to related parties must be reported to the board of directors every semester.

5. Senior management must implement procedures to identify, isolate, and monitor all exposures, of any nature whatsoever, to related parties.

Article 7: Granting Conditions

1. Exposures to related parties defined in Article 1 must comply with the internal procedures applicable to the entire clientele,

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particularly regarding the processing of applications, taking of collateral, or conditions required for the release of funds.

2. The institution's internal operating rules must ensure that beneficiaries of these exposures or persons related to them do not participate in the granting, management, and monitoring process of these exposures.

3. Related parties may not benefit from more favorable conditions than those granted to the entire clientele, particularly regarding interest rates, commissions, fee collection, or discounts. This provision applies to all types of contracts or agreements concluded between the credit institution and these persons.

4. Credit institutions must keep at the disposal of the Central Bank of Djibouti files on related parties, including in particular the pre-disbursement exposure analysis, repayment schedule, collateral valuations, and monitoring reports.

Article 8: Information to Statutory Auditors

Exposures to related parties must be brought to the knowledge of the statutory auditors. A special section of their report must be devoted to assessing the compliance of these transactions with this Instruction and the procedures and practices applicable to the clientele.

Article 9: Information to the Central Bank of Djibouti

1. Credit institutions must maintain an exhaustive list of natural or legal persons related as defined in Article 1 with whom they have dealings.

2. Credit institutions must transmit to the Central Bank of Djibouti, as of the reporting dates of 31 March, 30 June, 30 September, and 31 December, the list of exposures to related parties with a gross unit amount equal to or greater than 1 million DJF, in accordance with the form provided in the annex.

3. This form must be sent to the Central Bank of Djibouti no later than the 20th of the month following the reporting date. If this day falls on a holiday, the form must be transmitted no later than the first following business day.

4. The form in the annex must be transmitted both as a signed paper form by one of the senior managers responsible for the credit institution, and as an Excel file sent via email, according to the procedures set forth in the Central Bank of Djibouti circular on the production and transmission of accounting and prudential reports.

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Article 10: Offenses

1. Under exceptional circumstances at its sole discretion, the Central Bank of Djibouti may authorize a supervised institution to exceed the limits set by this text, and set a maximum deadline for it to regularize its situation.

2. Violations of this text are subject to disciplinary sanctions provided for in Article 58 of the banking law, without prejudice to criminal sanctions provided for in Article 62 of the same law.

Article 11: Entry into Force of the Instruction

This Instruction of the Central Bank of Djibouti shall take effect on its date of publication.

Done in Djibouti, on 31 March 2019

The Governor Mr. AHMED OSMAN

[Stamp: CENTRAL BANK OF DJIBOUTI - The Governor - REPUBLIC OF DJIBOUTI]

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CENTRAL BANK OF DJIBOUTI

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INSTRUCTION NO. 2019-02

ON RELATIONS BETWEEN CREDIT INSTITUTIONS AND RELATED PARTIES

Name of the Credit Institution: ........................................................................... Bank Code: ........................................................................... Reporting Date: ...........................................................................

Submission Characteristics	Part to be completed by the institution	Part reserved for the Central Bank of Djibouti
Name of the institution
Name of the signatory of the report
Signatory's functions
Reporting date of the report
Report version number
• 1st version
• Corrected version
Date of signature of the report
Date of receipt
Date of paper file submission
Date of electronic dispatch	Email of

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CENTRAL BANK OF DJIBOUTI

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INSTRUCTION NO. 2019-02

ON RELATIONS BETWEEN CREDIT INSTITUTIONS AND RELATED PARTIES

Name of the Credit Institution: ........................................................................... Bank Code: ........................................................................... Reporting Date: ...........................................................................

A - Exposures Deductible from Capital

Beneficiary Names	Granting Date(1)	Gross Amount of Exposures	Provisions Set Aside	Collateral
		Total	On-Balance Sheet	Off-Balance Sheet
SHAREHOLDERS
SENIOR MANAGEMENT
TOTAL

(1) Credit granting, off-balance sheet transactions, securities transactions or other transactions mentioned in Article 2.

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CENTRAL BANK OF DJIBOUTI

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INSTRUCTION NO. 2019-02

ON RELATIONS BETWEEN CREDIT INSTITUTIONS AND RELATED PARTIES

Name of the Credit Institution: ........................................................................... Bank Code: ........................................................................... Reporting Date: ...........................................................................

B - Exposures Capped at 10% of Net Capital

Beneficiary Names	Granting Date(1)	Gross Amount of Exposures	Provisions Set Aside	Collateral
		Total	On-Balance Sheet	Off-Balance Sheet
OTHER RELATED PARTIES
TOTAL

(1) Credit granting, off-balance sheet transactions, securities transactions or other transactions mentioned in Article 2.

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CENTRAL BANK OF DJIBOUTI

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INSTRUCTION NO. 2019-02

ON RELATIONS BETWEEN CREDIT INSTITUTIONS AND RELATED PARTIES

Name of the Credit Institution: ........................................................................... Bank Code: ........................................................................... Reporting Date: ...........................................................................

C - Uncollectible Debts Written Off from the Balance Sheet

Beneficiary Names	Granting Date(1)	Gross Amount of Exposures	Provisions Set Aside	Collateral
		Total	On-Balance Sheet	Off-Balance Sheet
SHAREHOLDERS
SENIOR MANAGEMENT
OTHER RELATED PARTIES
TOTAL

(1) Credit granting, off-balance sheet transactions, securities transactions or other transactions mentioned in Article 2.

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