Palestine Monetary Authority

سلطة النقد الفلسطينية

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Circular No. (70/2010)

To all lending institutions operating in Palestine

Date: Monday, July 5, 2010

Subject: Development of the Credit Information System

In the context of the Palestine Monetary Authority's efforts to develop the credit information system to include a new borrower classification system, and to meet the requirements of this development, the Authority has added new fields to the inquiry screen and the estimated response screen to meet the disclosure requirements of the new system.

Below are the modifications made to the two credit information system screens (inquiry and estimated response), as well as the operational guidelines for the borrower classification system.

First: Modifications to the Inquiry and Estimated Response Screens

1- Inquiry Screen

Two mandatory fields have been added to the screen:

A- Reason for Inquiry, divided into two categories:

• New Credit Facility: This item is selected by the user when the inquiry is for granting a new credit facility or modifying an existing credit facility limit.
• Follow-up: This item is selected by the user when the bank/branch management wishes to follow up on the status of a client with an existing credit facility or a group of existing credit facilities.

B- Purpose of Inquiry, divided into two categories:

• Borrower: This item is selected by the user when the inquiry is for granting a new credit facility or modifying an existing credit facility limit.
• Guarantor: This item is selected by the user when the inquiry is regarding a guarantor(s) for existing credit facilities or those to be granted.

2- Estimated Response Screen

A- A complete field has been added specifically for the borrower classification system. This field contains a set of items as follows:

• Customer Evaluation

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Palestine Monetary Authority

سلطة النقد الفلسطينية

• Probability of Delinquency over the next 12 months
• Risk Rating
• Evaluation Interpretation Code
• Evaluation Interpretation

The function and concept of each item will be explained in the operational guidelines for the new system in the following part of this circular.

B- Previous Credit Facilities

This field discloses the client's previous credit facilities that have been paid off, settled, or where collection efforts have ceased, and are no longer active or outstanding. It discloses a set of important credit facility items, which are:

• Issuing Institution Code
• Issuing Branch Code
• Credit Facility Classification
• Credit Facility Type
• Disbursement Date
• Disbursement Currency
• Approved Limit
• Utilized Balance
• Outstanding Unpaid Installments
• Recurring Installment Type
• Customer Evaluation
• Legal Actions Taken

C- Customer Status in the Automated Returned Check System

This field discloses the customer's classification rating in the Automated Returned Check System, as the data for this field is sourced directly from the Automated Returned Check System.

Second: Operational Guidelines for the Borrower Classification System

We initially note that this system is a new addition to the credit risk mitigation tools that can be utilized in preparing credit studies. The classification system is based on the study and analysis of data

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Palestine Monetary Authority

سلطة النقد الفلسطينية

the client's paid and outstanding credit facilities, with the aim of determining the level of credit risk the client will be exposed to in the coming period. The results of the study and analysis are disclosed to appear in a separate section in the response report, following the section dedicated to the client's personal data. This field consists of the following items:

1. Customer Evaluation: This item discloses the customer's evaluation number, which represents the customer's credit risk. Evaluation scores range from 100 to 380 points depending on the customer's status. The higher the customer's evaluation score, the lower their credit risk, indicating the quality of the customer's credit facility portfolio. The relationship between evaluation and risk is inverse. Risk ratings D2 (10%) and D3 (15%) represent the average risk rates for individuals and companies, respectively, compared to the credit portfolio risk rate of the banking sector.

2. Probability of Delinquency: This item discloses the percentage probability of the customer becoming delinquent or failing to meet their installment and obligation payments on their specified dates within the next 12 months. A customer may be considered delinquent if payment is delayed by 60 days or more. The higher the probability of delinquency for a customer, the higher the risk rating.

3. Risk Rating: This item discloses the customer's risk rating code, which is directly linked to the customer's evaluation and probability of delinquency. Risk ratings range from A1 to E3, where A1 represents a low risk rating while E3 represents a high risk rating.

4. Evaluation Interpretation: This item discloses the interpretation of the customer's risk-based evaluation code. It discloses up to five evaluation interpretations for the customer, and no interpretation is displayed for low-risk customers. During the first phase of implementing the new system, 35 interpretations for customer credit risks will be used, and they will be developed in the future to align with developments in the credit facility portfolio database.

Third: Cases Exempt from Evaluation:

A customer evaluation will not appear in the following cases:

1. If the inquired customer is a guarantor: Since a guarantor does not receive an evaluation, no risk rating or probability of delinquency will appear for them. Instead, the following will appear in the evaluation interpretation code field:

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Palestine Monetary Authority

سلطة النقد الفلسطينية

2. The code (EXG), meaning that (the inquired customer is solely a guarantor without any credit facilities).

3. If the inquired customer has no data in the Credit Information Bureau database, the evaluation interpretation code EXU will appear, meaning (no data available for the customer).

4. If the customer has not received any type of credit facility during the last three months, the evaluation interpretation code EXI will appear, meaning (no active credit facilities for the customer during the last three months).

5. Certain official figures and institutions will not be evaluated and will be excluded from the process. The evaluation interpretation code (SSO) will appear, meaning that the inquired customer is an official figure or institution exempt from evaluation.

Fourth: Inquiry Fees

Pursuant to Article (6), Item (7) of the Palestine Monetary Authority Law No. (2) of 1997, a fee of $1.90 will be charged for each inquiry that results in a customer evaluation or risk determination under the new borrower classification system. It is stipulated that the bank must bear this fee and is not permitted to collect it from customers or guarantors for executing the inquiry. The following cases are exempt from the fee:

A- The exceptional cases mentioned in Item Third of this circular.

B- Customers classified in the Automated Returned Check System and/or listed on watchlists, who do not hold any banking credit facilities.

C- Repeated inquiries within 7 days for the same customer by the same inquiring institution will be calculated as a single inquiry, not each individual inquiry.

Based on the above, the fee imposition will commence upon the official launch of the new system. The Palestine Monetary Authority will provide lending institutions with a monthly report detailing the inquiries executed during the month and their associated costs. The corresponding amounts will be deposited into a special account held by the Authority after they are provided with the monthly report of executed operations on their part.

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Palestine Monetary Authority

سلطة النقد الفلسطينية

To facilitate the use of the system and ensure smooth interaction, you will find attached two tables related to the evaluation interpretations used in the system, risk ratings, and risk percentages. We also recommend reviewing the material distributed during the training workshop to further enrich the usage process and facilitate system interaction.

D. Faiz Al-Tamimi Chief Executive Officer Palestine Monetary Authority

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Reason Codes

Last update 03/05/2010

Reason Code	Reason Statement	Priority	Evaluation	Interpretation
AM1	Exposure in light arrears is too high	34	Limited outstanding, customer delinquency risk is estimated from (A) to (D) due to total outstanding debt	Customer is on the blacklist
CH0	Check status D (more than 15 returned checks during the last 3 months)	46	Customer evaluation in the Automated Returned Check System gives a (D) rating in the Automated Returned Check System, high escalating risk	Customer is on the blacklist
CH1	Check status C (6-15 returned checks during the last 3 months)	44	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
CH2	Rating in the returned check system is C.	43	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
CH3	Currently in black list	42	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist

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Reason Codes

Last update 03/05/2010

Reason Code	Reason Statement	Priority	Evaluation	Interpretation
CH4	Currently in restricted list	41	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
CH5	Historically in black list and restricted list	41	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
CH6	Historically in black list	41	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
CH7	Historically in restricted list	41	Customer evaluation in the Automated Returned Check System gives a (C) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
CH8	Check status E (transition status) Rating in the returned check system is E.	39	Customer evaluation in the Automated Returned Check System gives an (E) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist

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Reason Codes

Last update 03/05/2010

Reason Code	Reason Statement	Priority	Evaluation	Interpretation
CH9	Check status B (1-5 returned checks during the last 3 months) Rating in the returned check system is B.	38	Customer evaluation in the Automated Returned Check System gives a (B) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
DQ0	Customer is defaulted and has due amounts	47	Customer evaluation in the Automated Returned Check System gives a (B) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
DQ1	Worst manner of payment is 3 or worse in the last 3 months	45	Customer evaluation in the Automated Returned Check System gives a (B) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist
DQ2	Worst manner of payment is 3 or worse in the last 12 months	37	Customer evaluation in the Automated Returned Check System gives a (B) rating in the Automated Returned Check System, escalating risk	Customer is on the blacklist

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