Resolution JPRF-F-2024-0110: Reform of the Credit Guarantee System to Foster Credit Access and Financial Inclusion

Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Resolution No. JPRF-F-2024-0110 THE FINANCIAL POLICY AND REGULATION BOARD

CONSIDERING:

That Article 132, number 6 of the Constitution of the Republic of Ecuador determines that a law is required to: “6. Grant public control and regulatory bodies the authority to issue general norms in matters within their competence, without altering or innovating legal provisions.”;

That Article 141 of the Supreme Norm establishes that the Executive Function is integrated by the Presidency and Vice Presidency of the Republic, the State Ministries, and other necessary organisms and institutions to fulfill, within their competence, the attributes of leadership, planning, execution, and evaluation of national public policies and plans created to execute them.

That Article 226 of the Magna Carta mandates that State institutions, their organisms, dependencies, public servants, and persons acting by virtue of a state power shall exercise only the competencies and faculties attributed to them in the Constitution and the law;

That Article 303 of the Fundamental Norm states that the formulation of monetary, credit, exchange, and financial policies is the exclusive faculty of the Executive Function and will be implemented through the Central Bank;

That Article 308 ibidem prescribes that financial activities are a service of public order, and may be exercised, with prior authorization of the State, in accordance with the law; their fundamental purpose is to preserve deposits and meet financing requirements for the achievement of the country's development objectives. Furthermore, the second paragraph of the aforementioned article provides that “the State will foster access to financial services and the democratization of credit. (…)”;

That Article 309 of the Constitution of the Republic determines that the national financial system is composed of the public, private, and popular and solidary sectors, which intermediates public resources;

That Article 13 of the Organic Monetary and Financial Code, Book I, creates the Financial Policy and Regulation Board, part of the Executive Function, as a public law legal entity, responsible for the formulation of credit, financial, securities, insurance, and prepaid comprehensive health care services policy and regulation;

That Article 14 ut supra prescribes that within the scope of competence corresponding to the Financial Policy and Regulation Board, it includes issuing regulations that allow maintaining the integrity, solidity, sustainability, and stability of the financial, securities, insurance, and prepaid comprehensive health care services systems, in accordance with what is provided in Article 309 of the Constitution of the Republic of Ecuador;

That Article 14.1 of the aforementioned normative body establishes that within the functions that compete to the Board, are: 1. Regulate the creation, constitution, organization, activities, operation, and liquidation of financial, securities, insurance, and prepaid comprehensive health care services entities; (…) 7. Issue the prudential regulatory framework to which financial, securities, insurance, and prepaid comprehensive health care services entities must adhere. framework that must be coherent, not give rise to regulatory arbitrage, and cover, at least, the following:

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | (…) d. Risk management, internal control environment, corporate governance, and market discipline; (…) 10. Promote financial inclusion processes and the full exercise of users' financial rights; 15. Establish, within the framework of its competencies, any measure that contributes to: (…) c. The creation of products oriented to promote and facilitate the financial inclusion of priority attention groups. d. Foster financial inclusion, promoting the participation of financial, securities, insurance, and prepaid comprehensive health care services entities. (…)”;

That Article 149 ibidem creates the “Credit Guarantee System as a mechanism that has the object of securing credit obligations “or obligations and guarantees destined to ensure the fulfillment of contracts covered by the Organic Law of the Public Contracting System by persons who are not capable of carrying out projects with the national financial system or contracts as State suppliers due to lack of guarantees, such as first-time entrepreneurs, single mothers, persons in human mobility, persons with disabilities, youth, and other persons belonging to priority attention groups”;

That the third paragraph of the aforementioned Article 149 prescribes that the Monetary and Financial Policy Board will regulate the credit guarantee system and determine the public institution in charge of its management;

That Article 150 of the aforementioned Code determines that entities of the national financial system will be subject to the regulation issued by the Monetary and Financial Policy Board;

That Article 160 ut supra prescribes that the national financial system is integrated by the public financial sector, the private financial sector, and the popular and solidary financial sector;

That the Twenty-Ninth General Provision of the aforementioned Organic Code states that “in the current legislation where mention is made to the 'Monetary and Financial Policy Board', replace it with 'Financial Policy and Regulation Board';

That the Fifty-Fourth Transitory Provision of the aforementioned normative body provides that “Resolutions contained in the Codification of Monetary, Financial, Securities, and Insurance Resolutions of the Monetary and Financial Policy Board and norms issued by control organisms will maintain their validity until the Monetary Policy Board and the Financial Policy and Regulation Board resolve what corresponds, within the scope of their competencies.”;

That Article 1 of Book II of the Organic Monetary Financial Code states that this “Law aims to promote an organized, integrated, efficient, and transparent securities market, in which securities intermediation is competitive, orderly, equitable, and continuous, as a result of true, complete, and timely information (…)”;

That Article 37 ut supra indicates that “The investment and divestment of securities registered in the Public Registry of the Securities Market carried out directly or indirectly by entities, companies, and organisms of the public sector must be carried out obligatorily through the stock market, except if in the transaction participants as buyer and seller are two entities of the public sector (…)”;

That Article 74 ibidem provides that “Institutional investors will be understood as public or private institutions of the financial system, savings and credit mutuals for housing, savings and credit cooperatives that carry out financial intermediation with the public, insurance and reinsurance companies, guarantee and retro-guarantee corporations, fund and trust management companies, and any other legal person (…)”;

That Article 88 of the same legal body determines that “Investment in instruments or securities issued, accepted, endorsed, or guaranteed by the same entity shall not exceed twenty percent of the total assets of a fund, and investment in instruments or securities issued, accepted, endorsed, or guaranteed by related companies shall not exceed thirty percent of the equity of each fund (…)”;

That Article 162 of the same legal body states that “Every issuance will be backed by general guarantee and may also have specific guarantee. Specific guarantees may secure the payment of capital, interest partially or totally, or both (…)”;

That the Technical Secretary, in charge, of the Financial Policy and Regulation Board, through Memorandum No. JPRF-ST-2024-0066-M of June 15, 2024, submits to the President of the Board the Technical Report No. JPRF-CTIFSP-2024-0009 and the Legal Report No. JPRF-CJF-2024-025, both dated June 15, 2024, as well as the respective resolution project;

That the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on June 15, 2024, and carried out via video conference on June 17, 2024, reviewed the Memorandum No. JPRF-ST-2024-0066-M of June 15, 2024, issued by the Technical Secretary, in charge, of the Board; as well as the Technical Report No. JPRF-CTIFSP-2024-0009 and the Legal Report No. JPRF-CJF-2024-025, both dated June 15, 2024, issued by the Technical Coordination of Financial Inclusion and Prepaid Health Care Policy and Regulation and by the Legal Coordination of Financial Policy and Norms, and the corresponding resolution project;

That the Financial Policy and Regulation Board, in an extraordinary session held by technological means, convened on June 15, 2024, and carried out via video conference on June 17, 2024, reviewed and approved the following Resolution; and,

In exercise of its functions,

RESOLVES:

ARTICLE FIRST.- Delete Article 51 of Subsection II “Commissions, Fees for Services, and Other Concepts Related to Credit Guarantee System Operations”, Section III “Tariffs, Fees for Services, and Other Concepts Related to Banking Operations”, Chapter XI “Interest Rate System and Tariffs of the Central Bank of Ecuador”, Title I “Monetary System”, of Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions.

ARTICLE SECOND.- Substitute the text of Chapter II “Credit Guarantee System”, Title II “National Financial System”, Book I “Monetary and Financial System” of the Codification of Monetary, Financial, Securities, and Insurance Resolutions, with the following:

“CHAPTER II: CREDIT GUARANTEE SYSTEM SECTION I: DEFINITIONS, OBJECT, AND SCOPE

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Art. 1.- Definitions.- For the implementation of this norm, the following definitions will be considered:

Integral risk management: It is the process by which entities identify, measure, control, mitigate, and monitor risks inherent to the business, with the object of defining the risk profile, the degree of exposure the entity is willing to assume in the development of the business, and coverage mechanisms, to protect own and third-party resources that are under its control and administration.

Maturity matching: Implies the alignment between expected cash flows, so that the estimated income of the legal entity authorized to grant guarantees allows covering its expected obligations in a timely manner.

Participation agreement: It is a legal instrument that establishes the responsibilities and obligations of the legal entity authorized to grant guarantees and the entity receiving the guarantee, in order to determine the functioning scheme of the credit guarantee fund.

Business continuity: It is the set of processes and procedures oriented to maintain the entity's operability in the face of unexpected events.

Regulatory compliance: It is the compliance with legal and regulatory precepts to which institutions or entities are obliged.

Entities receiving the guarantee: These are institutions of the public financial sector, private financial sector, popular and solidary financial sector, or public or private law legal persons that meet the eligibility criteria of this norm and those established by the legal entity authorized to grant guarantees and that have signed a participation agreement with a legal entity authorized to grant guarantees.

Portfolio credit guarantees: Mechanism consisting of the allocation of a quota by the legal entity authorized to grant guarantees to the entity receiving the guarantee, so that it assigns guarantees to a group of credit operations, provided that the parameters established in the agreements with the legal entity authorized to grant guarantees are met, including, among others, homogeneity of the credit portfolio to be guaranteed. This mechanism facilitates the massification and decentralization of credit access in favor of micro, small, and medium enterprises, presenting as advantages the speed in operations, the incentive to increase volume, and economies of scale.

Differentiated guarantees: Imply the use of different types of guarantees depending, among others, on the type of credit, the amount of credit, and the credit profile of the guaranteed party.

Progressive guarantees: Refer to a gradual approach in which entities receiving the guarantee request additional guarantees as the loan amount or the perceived risk of the guaranteed party increases.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | One-to-one guarantees: Mechanism through which the authorized legal entity guarantees credit operations or investments individually towards the entity receiving the guarantee, facilitating credit access in favor of micro, small, and medium enterprises.

Corporate Governance: It is the control and direction system of legal entities authorized to grant guarantees. In this context, it covers the set of principles and norms that allow establishing transparent and responsible administration, establishing relationships between the Board of Directors or statutory administrative body acting in its place and the rest of interested parties, and stipulating the rules by which the decision-making process on legal entities authorized to grant guarantees is governed, for value generation.

Corporate Governance Bodies: These are the instances responsible for defining the strategy, risk management, financial solidity or solvency, internal organization, and Corporate Governance structure of the legal entity authorized to grant guarantees. They delegate the administration of operational tasks, but not their responsibility, and must account for the management of resources and the follow-up of actions of their delegates.

Net equity: Within the framework of this norm, it corresponds to the effective backing with which the legal entity authorized to grant guarantees counts, to leverage the issuance of guarantees and the investments of its assets.

Legal entity authorized to grant guarantees: These are public or private law legal persons, on their own or through commercial trusts constituted with public or private resources, that have the authorization issued by the Superintendency of Banks to grant guarantees.

Pricing: It is a methodology that seeks to determine the price of products or services in such a way as to achieve an equilibrium between the value they provide to the client and the risk-adjusted profitability for the legal entity authorized to grant guarantees.

Reaffirmation or retro-guarantee: It is the process by which the legal entity authorized to grant guarantees cedes to an entity or organization providing retro-guarantee services the total or part of the risks assumed directly by it.

Credit risk: It is the possibility of loss due to the borrower's or counterparty's default in direct, indirect, or derivative operations that involves non-payment, partial payment, or lack of timeliness in the payment of agreed obligations.

Liquidity risk: It is the contingency of loss that manifests itself through the entities' inability to face a shortage of funds and meet their obligations, and which determines the need to obtain alternative resources, or to realize assets under unfavorable conditions.

Market risk: It is the contingency that an entity incurs losses due to variations in the market price of a financial asset, as a result of the positions held inside and outside the balance sheet.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Strategic risk: Corresponds to the probability of loss as a consequence of the impossibility of defining the entity's objectives and strategies, as well as appropriately implementing business plans, market decisions, resource allocation, and the inability to adapt to changes in the business environment.

Operational risk: It is the possibility that losses occur in legal entities authorized to grant guarantees, due to events originating from failures or deficiencies in the factors of: processes, people, information technology, and unforeseen external events. It includes legal risk, but excludes systemic and reputational risks.

Reputational risk: It is the possibility of affecting the prestige of a legal entity authorized to grant guarantees due to any external event, internal failures made public, or being involved in transactions or relationships with illicit businesses, which may generate losses and cause a deterioration of the financial situation of the legal entity authorized to grant guarantees.

Systemic risk: It is the set of circumstances that threaten the stability of the national financial system.

Environmental and social risks: These are the potentially negative impacts, both direct and indirect, generated by the activity of various projects and companies, producers, or external agents, that affect the environment and society,

Non-public foreign financial sector: It is the set of institutions of the financial sector of other countries that are not of a public nature.

Non-public foreign non-financial sector: It is the set of non-financial institutions of other countries that are of a public nature.

Information security: These are the mechanisms adopted by the entity that allow it to preserve the confidentiality, integrity, and availability of information and resources related to it, including aspects related to cybersecurity.

Art. 2.- Object and Scope.- The provisions of this norm will apply to the functioning of the credit guarantee system.

SECTION II: OF THE CREDIT GUARANTEE SYSTEM Art. 3.- Credit guarantee system.- The credit guarantee system is a mechanism that has the object of securing credit obligations of natural and legal persons who do not have guarantees, or these are qualified as inadequate or insufficient, to back productive, commercial, and service credit obligations in the national financial system. The credit guarantee system may secure contracts signed by State suppliers due to lack of guarantees.

Also, it may secure the issuance of securities issued by companies in the real sector of the economy, under the protection of the Securities Market Law.

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Address: Av. Amazonas between Pereira and Unión Nacional de Periodistas, Government Financial Management Platform. Red Block, 8th floor | Postal Code: 170507 | Quito - Ecuador | Public or private law legal persons must be authorized by the Superintendency of Banks to operate in the credit guarantee system.

Credit operations that are non-repayable or that contemplate formulas or mechanisms of subsidy, forgiveness, or similar regarding the capital of such operations cannot be guaranteed.

Art. 4.- Members of the credit guarantee system.- The following will be part of the credit guarantee system:

1. Public or private law legal persons authorized by the Superintendency of Banks, referred to as the legal entity authorized to grant guarantees;
2. Entities receiving the guarantee; and,
3. Guaranteed natural or legal persons.

SECTION III: MANAGEMENT OF THE CREDIT GUARANTEE SYSTEM Art. 5.- Manager of the credit guarantee system with public funds.- In accordance with what is provided in the penultimate paragraph of Article 149 of the Organic Monetary and Financial Code, Book I, the Ministry of Economy and Finance will be the manager of the credit guarantee system, within the framework of its competencies.

SECTION IV: LEGAL ENTITIES AUTHORIZED TO GRANT GUARANTEES Art. 6. Legal entities authorized to grant guarantees.- Any public or private law legal person whose object or social statute includes granting guarantees within the credit guarantee system may be a legal entity authorized to grant guarantees.

The constitution, organization, legal life, and liquidation of public or private law legal persons that participate in the credit guarantee system will be governed by the corresponding norms according to their nature.

Art. 7.- Administration body and responsible for technical management.- Legal entities authorized to grant guarantees must have an administration body and a person in charge of the technical management of the different operations carried out under the protection of this norm.

The person responsible for technical management, the legal representative, and the members of the Board of Directors or statutory administrative body acting in its place, of the legal entity authorized to grant guarantees must have prior qualification from the Superintendency of Banks, in accordance with the control norm issued by the referred organism.

The person responsible for technical management must implement the necessary operational measures