On the Corporate Governance of Credit Institutions

BANQUE CENTRALE DE DJIBOUTI

INSTRUCTION NO. 2019-05

ON THE CORPORATE GOVERNANCE OF CREDIT INSTITUTIONS

The Governor of the Central Bank of Djibouti,

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

Having regard to Law No. 119/AN/11/6ème L of January 22, 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 April 12, 2018, amending and supplementing the Commercial Code;

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

Decrees:

Article 1:

This instruction aims to establish corporate governance principles within credit institutions, particularly by specifying the implementation procedures for the provisions of commercial company law set forth in Book 3 of the Djiboutian Commercial Code, as updated by Law No. 191/AN/17/7ème L.

It defines the provisions applicable to the following points:

I. Role and information of shareholders II. Role of the board of directors III. Role of the general management IV. Risk management and internal control V. Ethics and management of conflicts of interest VI. Specific provisions for Islamic finance VII. Supervision by the Central Bank of Djibouti

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Article 2:

For the purposes of this instruction, the following terms shall mean:

• corporate governance: the set of principles and administrative, managerial, and operational procedures of the credit institution;
• risk appetite: the overall risk that the board of directors is willing to assume to achieve the bank's objectives, which may be defined by quantitative and qualitative elements;
• risk tolerance: the overall risk that the institution can bear given the legal and regulatory environment and its financial, human, and technical resources;
• general risk policy: the set of decisions that define the credit institution's risk profile;
• risk profile: the nature and degree of risks assumed by the credit institution at a given time.

I. ROLE AND INFORMATION OF SHAREHOLDERS

Article 3:

The general meeting of shareholders must have access to complete, accurate, and sincere information enabling it to exercise the powers conferred by law, particularly regarding the appointment and determination of remuneration of directors, the designation of statutory auditors and members of the Sharia committees, the adoption of consolidated financial and prudential statements, the approval of regulated agreements, and the amendment of the bylaws.

Article 4:

The board of directors and the general management are responsible for ensuring transparency in the corporate governance model towards shareholders. They must ensure proper organization of the practical procedures for exercising shareholders' right to information and voting rights. They guarantee the quality and sincerity of information provided to shareholders.

They must ensure access to information on the credit institution's activities in accordance with legal and bylaw provisions, particularly during annual general meetings, ensuring that, without breaching business secrecy, the information provided is comprehensive and explicit, particularly regarding complex operations or those likely to generate high risk-taking.

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Article 5:

The annual management report of the board of directors to the general meeting, as provided for in Article L.315-74 of the Commercial Code, must contain all useful information enabling shareholders to assess the activity and results achieved during the past fiscal year, including on Islamic activities and Sharia matters for relevant credit institutions. It must be mandatorily supplemented by clear and complete information on the adopted strategy, activities conducted, nature and extent of risks incurred, and the typology and results of controls performed, providing shareholders and interested third parties with a precise view of the credit institution's risk profile. It must describe risk management and internal control structures, allocated resources, methodologies adopted, and results obtained.

The management report must inform shareholders about capital distribution and transactions with related parties, as defined under the new Article L.315-14 of the Commercial Code and Instruction No. 2019-02 of the Central Bank of Djibouti regarding relations between credit institutions and affiliated persons.

The management report must explain the selection and recruitment process for directors, required competency standards, and training provided, and, where applicable, regarding Islamic finance and knowledge of Sharia principles. It must indicate the number of independent directors provided for in the new Article L.315-12 of the Commercial Code, the number and nature of specialized committees created within the board of directors, including the Sharia committee, their composition, responsibilities, operating procedures, and meeting frequency during the past fiscal year.

The management report must, in accordance with Article L.315-77 of the Commercial Code, indicate the total remuneration, including benefits in kind, paid to the general management. This report must include, for banks distributing Islamic products, the remuneration of Sharia committee members. It also contains indications on fixed and variable remuneration methods and a statement, certified by statutory auditors, of salaries paid to the ten highest-paid individuals during the past fiscal year.

When the company has subsidiaries or shareholdings or controls other companies, the management report must contain the same information regarding them.

Article 6:

The notice of convocation for the general meeting must include the sending or making available upon request of the management report and draft resolutions supported by sufficiently clear, precise, and detailed explanations. In accordance with the new Article L.315-19 of the Commercial Code, the notice of convocation and the aforementioned documents must be brought to the attention of shareholders at least 30 days before the date of the general meeting.

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Article 7:

The board of directors must ensure it facilitates shareholder participation in general meetings and takes into account the interests of minority shareholders, particularly through appropriate organization enabling them to exercise their right to question management.

Decisions of the general meeting must be taken in the interest of the credit institution. Decisions taken solely in the interest of major shareholders, directors, management, and affiliated persons to the detriment of minority shareholders may be subject to appeal before the Courts, in accordance with the new Article L.315-21 of the Commercial Code.

II. ROLE AND RESPONSIBILITY OF THE BOARD OF DIRECTORS

1. Composition, quality, and independence

Article 8:

Given the nature and complexity of activities carried out by credit institutions, implementing effective corporate governance requires a minimum of 7 members on the board of directors, notwithstanding the provisions of Article L.315-8 of the Commercial Code.

Article 9:

The composition of the board of directors must favor the exchange of viewpoints through the diversity of skills and experiences of its members, their knowledge of the local environment, and their ability to understand banking and financial activities, as well as other areas such as human resources management, information technology and security, risk management, or internal control, and, where applicable, Islamic finance.

Article 10:

The board of directors must include members capable of forming an independent judgment on the credit institution's activities. In this regard, the new Article L.315-12 of the Commercial Code requires the presence of one or more independent directors, limited to one-third of the number of board members.

Article 11:

A director is considered independent when they have no other relationship with the credit institution or the group to which it belongs that could compromise the exercise of their freedom of judgment.

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The criteria to be examined in a credit institution to qualify this independence and prevent conflicts of interest include, in particular:

• not being an executive or employee of the credit institution, its parent company, a subsidiary, or an affiliated company, and not having held such a position in the past five years;
• not being a managing director or employee, or having ceased to hold such functions for at least five years, of a company in which the credit institution directly or indirectly holds a directorship;
• not being an executive or employee of a supplier or a debtor client of the credit institution;
• not having served as statutory auditor or external auditor of the credit institution in the past five years.

2. Appointment, training, and remuneration policy

Article 12:

The board of directors must develop a formalized and transparent procedure for the selection and appointment of directors, members of technical committees established within it, the general management, and heads of risk management and internal control.

Article 13:

In addition to considering the prohibitions set forth in Article 18, paragraphs 1 and 2 of the banking law, the appointment process for a director must mandatorily include an assessment of integrity, competence, and availability criteria.

To avoid any conflict of interest, Sharia committee members cannot be appointed as directors.

Article 14:

The appointment of directors is subject to the favorable opinion of the Central Bank of Djibouti. A file containing identity, professional qualification, and other information on the proposed candidate, in the format prescribed for the approval of responsible executives in Annex 5 of Circular No. 02/BCD/2012, must be submitted to the Central Bank of Djibouti at least thirty days before the date of the general meeting to appoint them or the date of the board meeting to rule on a provisional appointment, in case of vacancy due to death, resignation, or dismissal. The absence of written objection from the Central Bank of Djibouti within this period constitutes a favorable opinion.

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Article 15:

New members must receive appropriate training to enable them to promptly understand the nature of the credit institution's activities and risks, its strategy, corporate governance model, and organization, as well as the regulatory and institutional environment in which it operates, and, where applicable, Islamic finance activities and associated risks. Each director must accurately know the operational structure, nature of activities, and risks of the credit institution.

The board of directors ensures the continuous updating of its members' knowledge and, specifically, the members of technical committees.

Article 16:

The remuneration of board of directors members and Sharia committee members is subject to approval by the general meeting. The remuneration of the managing director and deputy managing directors is set by the board of directors. The remuneration policy for senior executives is subject to approval by the board of directors.

The remuneration policy must reflect the involvement of directors, Sharia committee members, the managing director, and senior executives in value creation. It must be formalized and presented to the shareholders' general meeting. The board of directors ensures annually that the remuneration policy remains consistent with the long-term interests of the institution and its shareholders, and preserves the rights of depositors and other third parties.

3. Chairmanship

Article 17:

In accordance with the new Article L.315-32 of the Commercial Code, the chairman of the board of directors does not exercise any executive functions. He is responsible for the proper functioning of the board of directors and for maintaining trust-based relationships among its members. He must possess the experience, skills, and personal qualities necessary to perform his role. He must be available to fully exercise his duties and maintain permanent contact with the general management.

Article 18:

The chairman must convene the board of directors as often as necessary and ensure that members receive in a timely manner all information necessary to perform their duties, particularly upon the occurrence of events likely to impair the financial soundness or reputation of the credit institution.

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Article 19:

The chairman is required to promptly communicate to other board members and statutory auditors the results of the Central Bank of Djibouti's document and on-site inspections transmitted to the credit institution.

4. Responsibilities

Article 20:

The responsibilities of the board of directors are defined by Article L.315-16 of the Commercial Code. It assumes overall responsibility for the credit institution. It is specifically responsible, ultimately, to shareholders and the Central Bank of Djibouti for the financial soundness of the institution, its organization, risk management, internal control, corporate governance system, and compliance with laws and regulations.

Article 21:

The board of directors must formalize its powers and those of the general management, define the framework and responsibilities of risk management and internal control functions, and the information reporting process within the credit institution and to shareholders.

Article 22:

The board of directors must exercise its responsibilities objectively towards all stakeholders, maintaining a balance in decision-making between shareholder interests and those of other stakeholders, promoting long-term growth and value creation, and ensuring at all times the protection of depositors.

Article 23:

The board of directors defines major strategic directions and sets the risk appetite and general risk policy, both overall and by risk type, including for Islamic finance, Sharia non-compliance risk, and equity investment risk, which allow establishing the business plan, taking into account the credit institution's risk tolerance.

The board of directors must ensure that operational objectives are proportionate to the technical, human, and financial resources of the credit institution and that associated risks are measured and controlled.

In this regard, it must approve the operational objectives and policies proposed by the general management, precisely set risk limits to be observed, and supervise their

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implementation. It must monitor and critically review the results achieved by the general management against the set objectives and business plan.

It must permanently ensure that the level of capital allows compliance with prudential regulations and aligns with the credit institution's risk profile.

It must ensure the quality of liquidity management and monitoring policies.

It is responsible under the same conditions for establishing corporate governance structures respecting the principles of this regulation within the credit institution and subsidiaries located in Djibouti or abroad.

Article 24:

The board of directors must define ethical policies for the institution's operations, the appointment of its directors and general management, and staff recruitment. It ensures that a corporate culture based on ethical and responsible behavior is shared by all these individuals.

It ensures the establishment of a compliance function that guarantees respect for laws and regulations and ensures compliance with decisions taken by the board of directors. It must ensure that the risk management strategy it defines is translated into policies and procedures that prevent money laundering and terrorist financing.

The board of directors must approve the establishment of risk management and internal control systems that ensure continuous and comprehensive monitoring of all activities and provide timely information reporting. Heads of risk management and internal control must report directly to it. In the event that a credit institution has subsidiaries or outsources activities, it must ensure that the risk management and internal control system is applied to these entities under the same conditions.

Article 25:

Directors must refrain from any interference in the day-to-day management of the credit institution.

5. Operation

Article 26:

The board of directors must maintain regular contact with the general management and, where it exists, with the Sharia committee, monitor their actions, and ensure that established communication processes enable it to receive all information and explanations that can inform its decision-making. Received information must be complete, accurate, relevant, and communicated in a timely manner.

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The board of directors may, at its request, hear any person within the credit institution.

Article 27:

The board of directors operates collegially.

Each director must act loyally in the interest of the credit institution and all shareholders, while taking into account the interests of depositors and other stakeholders, in compliance with Djibouti's legislative framework and the regulatory framework set by the Central Bank of Djibouti.

Each director has a duty of diligence and must be capable of forming objective and independent judgments, adopting a responsible and prudent attitude. They must rule impartially regarding the general management, major shareholders, or other stakeholders.

To effectively perform their role, each director must know and master the professional standards that underpin their judgments.

Article 28:

Directors are required to exercise their duties impartially and in an informed and prudent manner, and to act loyally towards the credit institution. In particular, directors representing major or controlling shareholders must act without defending the interests of the shareholders they represent to the detriment of the credit institution or all shareholders.

Article 29:

The board of directors meets as often as necessary based on the size of the credit institution, its annual work program, and the particular circumstances of the institution's life, and at least four times a year.

The number of meetings and individual director participation must be clearly stated in the annual report to the shareholders' general meeting.

The minutes of each meeting must include discussion elements among members on addressed topics and a record of adopted decisions, signed by all directors. Documents communicated to directors must be retained and made available to the Central Bank of Djibouti upon request.

Article 30:

Complete and detailed information and necessary documents regarding agenda items must be provided to each member at least 15 calendar days before the board of directors meeting. These documents must be retained to support the meeting minutes and made available to the Central Bank of Djibouti upon request.

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Article 31:

The board of directors must follow an annual program enabling it to address at minimum all questions falling under legal, regulatory, and bylaw provisions.

In particular, the board of directors is required to examine at least twice a year the organization, implementation, and results of the credit institution's risk management and internal control and take related decisions.

Article 32:

The credit institution must notify the Central Bank of Djibouti of any element likely to cast doubt on the honorability or competence of a board member, the managing director, a deputy managing director, or a Sharia committee member.

6. Technical committees of the board of directors

Article 33:

The board of directors is required to establish within it an audit committee composed of at least three directors chosen for their competence. The committee may call upon external experts as needed and, for Islamic finance, members of the Sharia committee. It is chaired by a person different from the chairman of the board of directors who holds no position within the credit institution. Its members must have knowledge and experience in accounting, finance, and audit.

The mandate entrusted to the audit committee by the board of directors must be formalized, as well as its operating and communication procedures with the board. It must be specifically tasked with monitoring the quality of accounting processes and the preparation of financial statements, providing an opinion on candidacies for statutory auditors and external auditors, as well as on nomination proposals for permanent and periodic control management positions to be approved by the board, participating in the preparation and monitoring of permanent and periodic control plan execution, reviewing reports of external and internal controls performed, and monitoring recovery plans regarding identified failures.

Article 34:

The board of directors is required to establish within it a risk management committee composed of at least three directors chosen for their competence. The committee may call upon external experts as needed. It is chaired by a person different from the chairman of the board of conse