Circular to Banks and Financial Institutions No. 2023-02 of February 24, 2023

Tunis, February 24, 2023

CIRCULAR TO BANKS AND FINANCIAL INSTITUTIONS No. 2023-02 Subject: Classification, risk coverage and monitoring of commitments.

The Governor of the Central Bank of Tunisia, Having regard to Law No. 2016-35 of April 25, 2016, establishing the status of the Central Bank of Tunisia, Having regard to Law No. 2016-48 of July 11, 2016, on banks and financial institutions, Having regard to Circular No. 91-24 of December 17, 1991 on classification, risk coverage and monitoring of commitments as amended and supplemented by subsequent texts, notably Circular No. 2022-02 of March 4, 2022, Having regard to Circular No. 2006-19 of November 28, 2006 on internal control, Having regard to Circular No. 2017-06 of July 31, 2017 on accounting, prudential and statistical reporting to the Central Bank of Tunisia, Having regard to Circular No. 2021-05 of August 19, 2021 on the governance framework for banks and financial institutions, Having regard to Opinion No. 2023-02 of the Compliance Control Committee of February 21, 2023, as provided for in Article 42 of the aforementioned Law No. 2016-35,

Decides:

Article 1: The provisions of Article 10 bis of the aforementioned Circular No. 91-24 are repealed and replaced as follows.

Article 10 bis (new): Banks and financial institutions must set up, through charges against their results, general provisions known as "collective provisions" to cover latent risks on current commitments (Class 0) and commitments requiring specific monitoring (Class 1), as defined in Article 8 of Circular No. 91-24. Banks and financial institutions must, for the evaluation of the amount of these provisions, apply the methodology established by the Central Bank of Tunisia attached to this Circular. The amount of collective provisions must be reviewed at each annual accounts closing date. Any reversal of the collective provisions amount must be justified by risk parameter improvement data and discussed in advance with the Central Bank of Tunisia. The statutory auditors of banks and financial institutions must express their opinion on the adequacy of collective provisions to the nature of latent risks related to current commitments (Class 0) and those requiring specific monitoring (Class 1).

Article 2: This Circular enters into force as of its publication date and its provisions apply to the 2022 financial year and subsequent years. The provisions of Article 2 of Circular No. 2022-02 are repealed.

THE GOVERNOR, Marouane EL ABASSI

Annex III to Circular No. 2023-02 of February 24, 2023 Methodology for determining collective provisions

This methodology is based on the following steps: I. Determination of the target population Direct gross commitments and commitments by endorsement to non-bank clients, financial institutions and microfinance institutions established as public limited companies (société anonyme), classified 0 and 1 at the end of the reference year designated "Nr"

II. Grouping of commitments 0 and 1 into homogeneous groups The target population's commitments are grouped by client segment and economic sector. • Commitments to private sector professionals

• Agriculture
• Mechanical and electrical industries
• Olive oil producers (Oléifacteurs)
• Agro-food industries
• Pharmaceutical industries
• Other industries
• Construction and public works (BTP)
• Tourism
• Travel agencies
• Car rental agencies
• Real estate development (Promotion immobilière)
• Commerce/Retail
• Health
• Telecommunications and ICT
• Other services • Public counterparties
• Public enterprises operating in competitive sectors
• Other public bodies • Individuals (Particuliers)
• Private sector individuals: Housing loans
• Private sector individuals: Consumer credit
• Public sector individuals: Housing loans
• Public sector individuals: Consumer credit

Banks and financial institutions must ensure, within the framework of this grouping, the homogeneity of the groups.

III. Determination for each counterparty group designated "gi" of an estimated average migration rate over the most recent 5-year history; excluding year 2020 and the reference year. TMgi(N) = (Additional risk of group i in year N / Commitments 0 and 1 of group i at the end of year (N-1)) × 100 TMMgi = Σ TMgi(N) / n (from N=1 to n)

Where:

• TMgi(N): Migration rate of year N for counterparty group i.
• Additional risk of group i: Commitments 0 and 1 of year (N-1) for group i that became classified as 2-3-4 at the end of year (N).
• The TMgi(N) must be adjusted to eliminate exceptional effects that may cause bias.
• TMMgi: Historical average migration rate of counterparty group i.
• n: Number of years retained in the TMMgi calculation.

IV. Adjustment (Mark-up) of historical average migration rates The historical average migration rate of counterparty group "gi" is adjusted by a rate "Δgi" as follows: Private sector professionals: Agriculture 6.00%, Mechanical & electrical industries 4.50%, Olive oil producers 2.25%, Agro-food industries 2.25%, Pharmaceutical industries 1.00%, Other industries 4.00%, Construction (BTP) 5.00%, Tourism 9.00%, Travel agencies 7.75%, Car rental agencies 7.50%, Real estate development 5.00%, Commerce 2.00% Public counterparties: Enterprises in competitive sectors 5.00%, Other public bodies 1.50% Individuals: Private sector housing loans 1.50%, Private sector consumer credit 2.00%, Public sector housing loans 1.00%, Public sector consumer credit 1.50% Health 1.00%, Telecommunications & ICT 1.00%, Other services 3.25%

V. Application of standard provisioning rates "TPgi" The standard provisioning rates "TPgi" are as follows: Private sector professionals: Agriculture 35%, Mechanical & electrical industries 35%, Olive oil producers 35%, Agro-food industries 35%, Pharmaceutical industries 35%, Other industries 35%, Construction (BTP) 35%, Tourism 35%, Travel agencies 35%, Car rental agencies 35%, Real estate development 30%, Commerce 35% Health 35%, Telecommunications & ICT 35%, Other services 35% Public counterparties: Enterprises in competitive sectors 35%, Other public bodies 35% Individuals: Private sector housing loans 15%, Private sector consumer credit 35%, Public sector housing loans 15%, Public sector consumer credit 35%

The adjustment rates "Δgi" and standard provisioning rates "TPgi" must be applied by banks. Financial institutions may, with prior approval from the Central Bank of Tunisia and based on a reasoned report, select adjustment rates "Δgi" and/or provisioning rates "TPgi" lower than those indicated above.

VI. Calculation of the amount of collective provisions "PC" on commitments 0 and 1 Collective provision for group i: PCgi = Commitments 0 and 1 of gi × (TMMgi + Δgi) × TPgi Global collective provision: Sum of collective provisions by group: Σ PCgi (from i=1 to n)

The amount of collective provisions must be reviewed at each annual accounts closing date. The target population and TMMgi must be recalculated annually within the framework of rolling series.