Notice No. 9/GBM/2017 of April 3 - Regulation on Prudential Ratios and Limits for Credit Institutions

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--- Banco de Moçambique --- Governador

NOTICE NO. 9/GBM/2017 Maputo, April 3, 2017

SUBJECT: Regulation on Prudential Ratios and Limits for Credit Institutions

Given the need to update prudential ratios and limits for Banks, in order to align them with the increasing risks inherent to their activity and the dynamics of the national economy, the Bank of Mozambique, exercising the powers conferred by paragraph d) of paragraph 2 of Article 37 of Law No. 1/92, of January 3 – Organic Bank Law, combined with Article 64 of Law No. 15/99, of November 1 – Credit Institutions and Financial Companies Act, updated by Law No. 9/2004, of July 21, determines:

1. The Regulation on Prudential Ratios and Limits for Credit Institutions, attached to this Notice, is hereby approved, forming an integral part thereof.

2. This Notice enters into force on the date of its publication and revokes Notice No. 15/GBM/2013, of December 31.

[Signature] Rogério Lucas Zandamela Governor

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--- Banco de Moçambique --- Governador

REGULATION ON PRUDENTIAL RATIOS AND LIMITS FOR CREDIT INSTITUTIONS

CHAPTER I GENERAL PROVISIONS

Article 1 (Scope)

1. This Regulation applies to all credit institutions subject to the supervision of the Bank of Mozambique.

2. The institutions referred to in the preceding paragraph that, according to Articles 3 and 8 of Notice No. 4/GBM/2007, of May 2, do not present their financial statements in accordance with International Financial Reporting Standards (IFRS) shall equally apply the provisions of this Regulation with the necessary adaptations.

Article 2 (Duty of continuous compliance)

Credit institutions must continuously and permanently observe the prudential ratios and limits established in this Regulation.

Article 3 (Definitions)

For the purposes of this Regulation, the following shall be understood:

1. Own funds – elements defined in accordance with Notice No. 8/GBM/2017, of April 3.

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--- Banco de Moçambique --- Governador

2. Capital requirement base for credit risk coverage – asset and off-balance sheet elements weighted according to their respective risks, in accordance with Notice No. 11/GBM/2013, of October 25.

3. Capital requirement base for operational risk coverage – resulting from the application of Notice No. 12/GBM/2013, of October 25.

4. Capital requirement base for market risk coverage – resulting from the application of Notice No. 13/GBM/2013, of October 25.

5. Solvency Ratio – the relationship between total own funds and asset and off-balance sheet elements weighted according to credit, operational, and market risks.

6. Base Solvency Ratio – the relationship between base own funds and asset and off-balance sheet elements weighted according to credit, operational, and market risks.

7. Core Tier 1 Capital – the amount of paid-up capital plus reserves from undistributed profits.

8. Tier 1 Capital – the amount calculated in accordance with paragraph 1 of Article 6 of Notice No. 8/GBM/2017, of April 3.

9. Risk – any facility, used or not, granted by a credit institution and reflected, inter alia, in the granting of credit, even in the form of a guarantee, bank guarantee or similar instrument, and in the acquisition or holding of financial participations or securities of any nature issued by the same client.

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--- Banco de Moçambique --- Governador

10. Large Risk – the risk assumed by a credit institution when its value, individually or together with other existing risks regarding the same client, represents at least 10% of the institution's own funds.

11. Control – in accordance with International Accounting Standard 27 – Consolidated and Separate Financial Statements (IAS 27), it is the power to manage the financial and operational policies of an entity so as to obtain benefits from its activities. Control is presumed when the parent company owns, directly or indirectly through subsidiaries, more than half of the voting rights of an entity unless, in exceptional circumstances, it is clearly demonstrated that such ownership does not constitute control. Control also exists when the parent company owns half or less of the voting rights of an entity, provided that:

a) It has power over more than half of the voting rights by virtue of an agreement with other investors;

b) It has power to manage the financial and operational policies of the entity in accordance with a statutory clause or agreement;

c) It has power to appoint or remove the majority of the members of the board of directors or equivalent governing body, and that control of the entity is exercised by such board or body; and

d) It has power to cast the majority of votes at meetings of the board of directors or equivalent governing body, and that control of the entity is exercised by such board or body.

12. Joint Control – in accordance with IAS 31 – Interests in Joint Ventures, it is the agreed sharing of control in an economic activity, and exists only when strategic, financial, and operational decisions relating to the activity require the unanimous consent of the participating venturers sharing control.

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--- Banco de Moçambique --- Governador

13. Significant Influence – in accordance with IAS 28 – Investments in Associates, it is the power to participate in the financial and operational policy decisions of a company without exercising control or joint control over those policies.

14. Group – in accordance with IAS 27, it is the set of companies consisting of a parent company and all its subsidiaries.

15. Parent Company – in accordance with IAS 27, it is the entity that holds one or more subsidiaries.

16. Venturer – in accordance with IAS 31, it is a partner of a joint venture that has joint control over that venture.

17. Subsidiary – in accordance with IAS 27, it is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (designated as the parent company).

18. Joint Venture – in accordance with IAS 31, it is an arrangement whereby two or more parties undertake an economic activity subject to joint control.

19. Associate – in accordance with IAS 28, it is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and that is not a subsidiary or an interest in a joint venture.

20. Qualified Participation – the direct or indirect participation representing a percentage of no less than 10% of the share capital or voting rights of the participatory company, with the following considered equivalent to the participant's voting rights:

a) Rights held by individuals or legal entities dominated by them or in a group relationship with them;

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--- Banco de Moçambique --- Governador

b) Rights held by the spouse not judicially separated or by minor descendants;

c) Rights held by other entities, in their own name or on behalf of others, but for the account of the participant or the persons referred to in the preceding sub-paragraphs; and

d) Rights inherent to shares of which the participant holds the usufruct.

21. Risk Group Relationship – a relationship between two or more individuals or legal entities that constitute a single entity from the perspective of assumed risk, due to being so closely linked that, in the event one encounters financial difficulties, the other or all others will likely struggle to meet their obligations. This risk group relationship is considered to exist, inter alia, when:

a) There is a control relationship between them;

b) There are common shareholders or partners who exercise significant influence over the entities in question;

c) There are common administrators; and

d) There is direct commercial interdependence that cannot be replaced in the short term.

22. Firm Commitment to Issue Securities – an operation whereby a credit institution commits to acquire the unplaced portion from the offer recipients, in relation to an entity offering shares or bonds to the public for subscription or acquisition.

23. Indirect Subscription of Shares – an operation whereby a credit institution commits to subscribe to a certain quantity of shares, relating to the capital increase of a company, assuming the obligation to offer them, within a specified time frame, to the shareholders of the issuing company or to third parties.

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--- Banco de Moçambique --- Governador

24. Spot Foreign Exchange Position – the difference between purchases and sales in a given foreign currency, whether already realized or those whose settlement occurs within the next two business days.

25. Forward Foreign Exchange Position – the difference between purchases and sales contracted in a given foreign currency, whose settlement occurs after the next two business days.

26. Foreign Currency Position – the sum of spot and forward foreign exchange positions in a given foreign currency.

27. Global Foreign Exchange Position – the sum of foreign exchange positions in all foreign currencies taken in absolute value (module).

CHAPTER II OWN FUNDS

Article 5 (Limits applicable to banks)

1. Total own funds must not be less than the minimum share capital amount, defined by the Bank of Mozambique in specific regulations.

2. Base own funds (Tier 1 Capital) must correspond to at least 80% of total own funds.

3. Core Tier 1 Capital must correspond to at least 50% of base own funds (Tier 1 Capital).

4. Supplementary own funds must not exceed the equivalent of 20% of total own funds.

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--- Banco de Moçambique --- Governador

5. The elements indicated in sub-paragraphs m) to p) of Article 3 of Notice No. 8/GBM/2017, of April 3, may only be considered up to a limit of 20% of base own funds.

Article 6 (Limits applicable to other types of credit institutions)

1. Total own funds must not be less than the minimum share capital amount of the respective type of credit institution, as defined by the Bank of Mozambique in specific regulations.

2. Base own funds (Tier 1 Capital) must correspond to at least 50% of total own funds.

3. Core Tier 1 Capital must correspond to at least 50% of base own funds (Tier 1 Capital).

4. Supplementary own funds must not exceed the equivalent of 50% of total own funds.

5. The elements indicated in sub-paragraphs m) to p) of Article 3 of Notice No. 8/GBM/2017, of April 3, may only be considered up to a limit of 50% of base own funds.

CHAPTER III SOLVENCY RATIO

Article 7 (Limits applicable to banks)

1. The value of the global solvency ratio must not be less than 12% of the total amount calculated in accordance with paragraphs 2, 3, and 4 of Article 3 of this Regulation.

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--- Banco de Moçambique --- Governador

2. The value of the base solvency ratio must not be less than 10% of the total amount calculated in accordance with paragraphs 2, 3, and 4 of Article 3 of this Regulation.

Article 8 (Limits applicable to other credit institutions)

1. The value of the global solvency ratio must not be less than 8% of the total amount calculated in accordance with paragraphs 2, 3, and 4 of Article 3 of this Regulation.

2. The value of the base solvency ratio must not be less than 4% of the total amount calculated in accordance with paragraphs 2, 3, and 4 of Article 3 of this Regulation.

CHAPTER IV CONCENTRATION OF RISKS

Article 9 (Limits)

1. Credit institutions, regarding the risks they assume, are subject to the following limits:

a) With respect to a single client, they must not incur risks whose value, collectively, exceeds 25% of their own funds; and

b) The aggregate value of large risks assumed must not exceed eight times their own funds.

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--- Banco de Moçambique --- Governador

2. When a risk on a client is guaranteed by a third party, in an irrevocable and legally binding manner, such risk is considered to be assumed on that third party rather than on the client.

Article 10 (Exceptions to risk concentration limits)

1. In exceptional circumstances and upon duly justified request by credit institutions, the Bank of Mozambique may authorize them to exceed the limits set in paragraph 1 of Article 9 of this Regulation.

2. In the authorizations granted, under the preceding paragraph, the Bank of Mozambique shall determine the time frame and conditions for the applicant's compliance with the limits set in paragraph 1 of Article 9 of this Regulation.

Article 11 (Treatment of risk in group relationships)

1. Risks related to all individuals or legal entities in a risk group relationship with each other must be considered as assumed by a single client.

2. Credit institutions have the duty to identify the interdependencies and links of their clients, in order to observe the provision in the preceding paragraph.

Article 12 (Valuation criteria)

1. For the calculation of risk position amounts for the purposes of this chapter, the valuation criteria established in Part 1 of Annex II of Notice No. 11/GBM/2013, of October 25, shall be adopted.

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--- Banco de Moçambique --- Governador

2. The limits referred to in paragraph 1 of Article 9 of this Regulation do not apply to risks assumed with:

a) The Government of Mozambique, in national currency;

b) The Bank of Mozambique, in national currency;

c) Eligible foreign governments and central banks subject to a 0% risk weight, in accordance with paragraph 1 of Part 2 of Annex II of Notice No. 11/GBM/2013, of October 25; and

d) International organizations, provided for in paragraph II of Part 2 of Annex II of Notice No. 11/GBM/2013, of October 25.

Article 13 (Risks not considered)

The following risks are not considered for the calculation of the limits referred to in paragraph 1 of Article 9 of this Regulation:

a) Risks covered by express and irrevocable guarantees from entities under the conditions referred to in paragraph 2 of the preceding article;

b) Risks covered by cash deposits, in the same currency, within the institution itself;

c) Risks covered by deposits in the institution itself of debt securities issued by the entities referred to in paragraph 2 of the preceding article or by the institution itself, provided they do not represent its own funds; and

d) Risks covered by own funds, in accordance with sub-paragraph b) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of April 3.

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--- Banco de Moçambique --- Governador

Article 14 (Risks covered)

1. Credit institutions with headquarters in Mozambique must consider risks assumed by their establishments within the country and by their foreign branches.

2. Branches in Mozambique of credit institutions with headquarters abroad must consider only the risks of their own activity, referencing their own funds as defined in Notice No. 8/GBM/2017, of April 3.

CHAPTER V PARTICIPATION IN THE CAPITAL OF OTHER COMPANIES

Article 15 (Limits)

1. Credit institutions must not hold, directly or indirectly, in the capital of a company, participations whose amount exceeds 15% of their own funds.

2. The global amount of qualified participations in companies must not exceed 60% of a credit institution's own funds.

3. The total value of shares or other capital parts of any companies held by a credit institution that are not qualified participations must not exceed 25% of the same institution's own funds.

4. Credit institutions must not hold, directly or indirectly, in a company, a participation that confers more than 25% of the voting rights corresponding to the capital of the participatory company.

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--- Banco de Moçambique --- Governador

Article 16 (Exceptions to shareholding limits)

1. Without prejudice to the deductions provided in paragraph 1 of Article 8 of Notice No. 8/GBM/2017, of April 3, the provisions of the preceding article do not apply to participations in other institutions subject to the supervision of the Bank of Mozambique, nor to those covered by own funds in accordance with sub-paragraph b) of paragraph 4 of the aforementioned Notice.

2. The limits set in Article 15 may only be exceeded as a result of the repayment of own credit, and resulting situations must be regularized within two years.

CHAPTER VI FIRM COMMITMENT TO ISSUE SECURITIES, INDIRECT SUBSCRIPTION OF SHARES AND ACQUISITION OF BONDS

Article 17 (Limits)

1. In each operation of firm commitment to issue shares or indirect subscription of shares, a credit institution must not assume commitments or apply resources exceeding 25% of its own funds.

2. The global value of commitments assumed and resources applied by a credit institution as a result of firm commitment to issue shares or indirect subscription of shares must not exceed the value of its own funds.

3. Firm commitment and acquisition of bonds are subject to the limits established for risk concentration.

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--- Banco de Moçambique --- Governador

Article 18 (Unplaced securities)

1. Securities unplaced as a result of firm commitment to issue shares or indirect subscription of shares must be considered for the purposes of the limits on shareholdings in other companies to which their respective credit institutions are subject.

2. For the purposes of the preceding paragraph, securities are considered unplaced if they:

a) In firm commitment to issue shares operations, have not been sold by the closing date of the subscription period; and

b) In indirect subscription of shares operations, have not been acquired by the shareholders of the issuing company or by third parties within sixty days from the date of their subscription.

CHAPTER VII FIXED ASSETS

Article 19 (Restriction on acquisition of real estate)

Credit institutions must not acquire real estate other than those indispensable to their facilities and operations or to the pursuit of their corporate purpose.

Article 20 (Limits)

The net value of a credit institution's fixed assets must not exceed the amount of its own funds.

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--- Banco de Moçambique --- Governador

Article 21 (Exceptions to fixed asset limits)

The restrictions set in Articles 19 and 20 of this Regulation may be exceeded in the following situations:

a) Fixed assets received as a result of repayment of own credit, with resulting situations to be regularized within two years, after which the deduction provided in sub-paragraph a) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of April 3, shall apply; and

b) Fixed assets covered by own funds, in accordance with sub-paragraph b) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of April 3.

CHAPTER VIII FOREIGN EXCHANGE POSITIONS

Article 22 (Limits)

Credit institutions must not present, at the close of each day, a global foreign exchange position exceeding 20% of their own funds, nor a foreign exchange position in each foreign currency exceeding 10% of the aforementioned own funds.

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--- Banco de Moçambique --- Governador

CHAPTER IX COVERAGE OF LIABILITIES

Article 23 (Form of coverage)

Credit institutions must, on a permanent basis, ensure the coverage of their liabilities to third parties under the following terms:

1. Spot or liabilities with a residual maturity of up to 30 days must be fully covered by the following values:

a) Cash in vault;

b) Postal orders and sight checks;

c) Demand deposits at the Bank of Mozambique;

d) Demand deposits at other credit institutions;

e) Gold and other precious metals; and

f) Other asset elements realizable within a period not exceeding 30 days, excluding tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.

2. The total amount of liabilities with a residual maturity exceeding 30 days and not exceeding 180 days must be fully covered by:

a) The excess of the values referred to in paragraph 1 over the liabilities mentioned therein; and

b) Other asset elements, realizable within a period exceeding 30 days and less than 180 days, excluding investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.

3. The total amount of liabilities with a residual maturity exceeding 180 days must be fully covered by:

a) The excess of the values referred to in paragraphs 1 and 2 over the liabilities mentioned therein; and

b) Other asset elements, realizable within a period exceeding 180 days, excluding tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.

CHAPTER X FINAL AND TRANSITIONAL PROVISIONS

Article 24 (Alteration of the calculation base for prudential ratios and limits)

The Bank of Mozambique may order adjustments to the amounts serving as the basis for calculating the limits established in this Regulation whenever conditions justifying the observance of prudential principles so warrant.

Article 25 (Compliance time frame)

Banks already established at the date of publication of this Regulation must align their own funds according to the following time frames and limits:

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--- Banco de Moçambique --- Governador

Compliance Time Frame	Base Own Funds (Tier 1)	Core Tier 1 Capital	Total Own Funds
Up to 1 year after the entry into force of this Regulation	Base own funds must not be less than 60% of total own funds and must ensure a base solvency ratio of no less than 6%.	Core Tier 1 Capital must not be less than 50% of total own funds.	Total own funds must not be less than the minimum share capital and must ensure a global solvency ratio of no less than 9%.
Up to 2 years after the entry into force of this Regulation	Base own funds must not be less than 70% of total own funds and must ensure a base solvency ratio of no less than 8%.	Core Tier 1 Capital must not be less than 50% of total own funds.	Total own funds must not be less than the minimum share capital and must ensure a global solvency ratio of no less than 11%.
Up to 3 years after the entry into force of this Regulation	Base own funds must not be less than 80% of total own funds and must ensure a base solvency ratio of no less than 10%.	Core Tier 1 Capital must not be less than 50% of total own funds.	Total own funds must not be less than the minimum share capital and must ensure a global solvency ratio of no less than 12%.