Instructions No. 12 on the Continuity of the National Economy's Financial Cycle (2)

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Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (12) of 2023
Regarding the Continuity of the National Economy's Financial Cycle

Based on the provisions of Law Decree No. (9) of 2010 concerning Banks, particularly Articles (40, 41, 72) thereof, and in accordance with the powers delegated to us, and to achieve the public interest, we have issued the following Instructions:

Article (1)
Objective and Scope of Application

1. The provisions of these Instructions aim to contribute to the continuity of the economic cycle by directing credit, covering emergency operational expenses, and restructuring and evaluating existing credit.
2. The provisions of these Instructions apply to all banks licensed by the Palestine Monetary Authority to conduct banking business.

Article (2)
Procedures and Measures for Handling the Credit Portfolio

The bank shall comply with the following:

1. Monitor the financial conditions and circumstances of borrowers and assess the extent to which their operations are affected by the current conditions.
2. Prepare studies and statistics, implement, and evaluate the impact of current conditions on the economic cycle of each sector, and design appropriate procedures to deal with customers according to the degree to which economic sectors are affected by the current financial and economic situation.
3. Identify customers and projects whose financial flows and business activities have been affected by current conditions, and take the initiative to communicate with them to understand their financing needs.
4. Prepare continuous risk level reports for exposures affected by current conditions, including any negative developments regarding the portfolio status, and submit them with management recommendations to the relevant management levels within the bank.

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5. Deal with affected or potentially affected borrowing customers through the following:
   a. Study the possibility of postponing a number of installments expected to mature in the coming months, and grant customers the right to choose the postponement mechanism either at the end of the loan or by distributing installments over the loan term. b. Study the possibility of restructuring existing facilities according to arrangements that suit the customer's repayment capacity and according to the economic cycle of the projects.
   c. Minimize the rescheduling of existing facilities as much as possible and allow it only for the sectors most affected by the current situation according to the results of the study prepared by the bank specifically.
   d. Deal flexibly regarding the scheduling of facilities for customers whose income source has been cut off or whose business interests have been destroyed. e. Study the possibility of granting a temporary overdraft limit or a Murabaha limit to customers expected to restore their financial and commercial activity as soon as possible. f. Allow the completion of scheduling processes without requiring customers to pay a down payment. g. Allow the scheduling of financing in Islamic banks using the Murabaha product subject to prior approval from the Palestine Monetary Authority.
6. Commit to documenting amendments to facility contracts in accordance with the law and sound banking procedures and practices.
7. Do not increase interest rates or profit margins above what they were before restructuring or scheduling, when signing a credit restructuring or scheduling agreement.
8. The bank is prohibited from collecting any commissions or fees on a credit restructuring and scheduling agreement.

Article (3)
Granting and Directing Credit

1. Direct priority in granting new credit to productive and vital projects to ensure the continuity of the financial and economic cycle.
2. Provide emergency financing to support commercial projects whose operations and operational cycles have been affected by current conditions, by taking the following steps:
   a. Extend credit limits granted to customers until the end of the current year or according to the period necessary to enable the borrower to restore commercial activity.

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b. Allow increasing overdraft limits and financing limits allocated for working capital financing according to project needs with the same existing collateral.
c. Address short-term liquidity shortages by enabling affected projects and projects expected to be affected by the current economic situation, and assisting in obtaining liquidity to ensure the continuity of the cycle and economic activity.
d. Provide advice and assistance to customers, especially individuals and small and medium-sized projects, to plan the cash flows of these projects and provide appropriate financing solutions to enable them to resume and continue economic activity.
3. Encourage and enable projects affected by current conditions to benefit from the Sustainability Fund, by enabling them to borrow at favorable interest rates.
4. Restrict granting credit outside Palestine and restrict granting credit for consumer purposes.

Article (4)
Handling the Gaza Strip Credit Portfolio

The bank shall comply with the following regarding the credit portfolio granted in the Gaza Strip:

1. Postpone the deduction of loan installments for borrowers residing in the Gaza Strip from the date of issuance of these Instructions until 2024/01/31, with these installments to be subsequently addressed according to the following alternatives:
   a. The customer pays the installments within a maximum period ending at the end of January 2024, without charging the borrower any interest on the postponement during this period. b. Grant the borrowing customer a temporary overdraft limit to pay the due installments.
   c. Distribute the postponed installments over the loan term.
   d. Postpone the installments to the end of the loan term. e. Use the Murabaha product in Islamic banks to schedule these installments after obtaining approval from the Palestine Monetary Authority.
2. Obtain the borrower's approval for any of the procedures stipulated in paragraph (1) of this Article.
3. Ensure that the installment value does not exceed 50% of the approved income under any circumstances.
4. Take necessary measures to insure the lives of individual borrowers and include current events within the covered causes.

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Article (5)
Asset Quality Monitoring

The bank shall comply with the following:

1. Conduct an initial assessment of damages that have occurred or are expected to occur, which will fundamentally affect credit portfolio risks.
2. Continuously evaluate credit portfolio risks and associated fluctuations due to changes in credit quality.
3. Identify risk levels the bank may be exposed to, determine the most affected sectors, and reflect the impact on credit risk migration criteria from one stage to another.
4. Determine the extent of correlation between exposures and defaults in the economic sector or different economic sectors, and take systemic risks into consideration when evaluating and estimating the volume of credit losses.
5. Identify and measure risks correctly and accurately, evaluate cases where borrowers may face long-term financial difficulties, and adopt the best possible scenarios to help these cases recover and return to the production cycle.
6. Apply conservative methodologies and mechanisms for calculating expected credit losses on all exposures affected by recent events.
7. Assets whose quality is affected shall be subject to impairment calculation (Expected Credit Loss) in accordance with the provisions of Instructions No. (2) of 2018 concerning requirements and guidelines for applying International Financial Reporting Standard No. 9, and the Expected Credit Loss shall be recorded in the income statement.
8. Hold recurring meetings for relevant committees and risk management committees to discuss any developments or increases in risk levels, and make decisions regarding them in a timely manner.
9. Conduct stress testing examinations to evaluate latent and accompanying risks related to current economic conditions, based on the following:
   a. Include in the examinations various scenarios of deterioration in credit quality indicators in some economic sectors according to the results of studies the bank will conduct in accordance with the provisions of paragraph (2) of Article (2) of these Instructions. b. Determine the procedures to be taken to limit the worsening and transmission of risks to other economically linked sectors.
   c. Include variables in economic conditions in expected credit loss calculation scenarios and develop assumptions for transitioning to more severe economic conditions.

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d. Consider applying International Financial Reporting Standards when calculating expected credit losses.
8. Provide the Palestine Monetary Authority with the results of the initial damage assessment and increased risk levels in the Gaza Strip credit portfolio, as well as risks resulting from rising unemployment rates, and provide them to the Authority within two weeks from the date of issuance of these Instructions.
9. Provide the Palestine Monetary Authority with the results of implementing the examinations and stress tests, expected credit loss calculation methodologies, and their impact on financial statements and capital adequacy ratios as of the end of September and the end of December, on 2023/11/15 and 2024/1/31 respectively.

Article (6)
Handling Cheques Drawn on Customer Accounts

Considering the risks of dealing with cheque deduction and account overdrafts to facilitate cheque payments for customers, the bank shall comply with the following:

1. Allow granting the customer a temporary overdraft account to pay the value of cheques drawn against it, subject to legal documentation.
2. Allow overdrafts for non-borrowing employees upon their request for the value of cheques drawn on their accounts, provided the cheque value does not exceed 50% of the salary value, with the overdraft to be settled upon salary transfer.
3. Allow customers, upon request, to overdraft their accounts to pay the value of cheques drawn on them according to the customer's status and credit classification.
4. Grant customers a temporary overdraft to pay the value of cheques drawn on their accounts.
5. Suspend the collection of returned cheque commissions on cheques drawn on bank branches in the Gaza Strip.

Article (7)
Electronic Channels

The bank shall comply with the following:

1. Eliminate all types of commissions on the use of electronic applications and point-of-sale terminals in the Gaza Strip, including transfer commissions and other electronic services.
2. Allow cash withdrawal operations through point-of-sale terminals in Gaza governorates without any commissions.

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3. Eliminate cash withdrawal commissions from ATMs through the national key (194) in all governorates.
4. Reduce the exchange rate margin when customers use banking applications.
5. Supply ATMs with the three main currencies (Jordanian Dinar, US Dollar, Israeli Shekel) and keep them operational.
6. Take the initiative to activate and use the E-SADAD platform for bill payments and encourage billers to link with the platform.
7. Extend the validity date of expired ATM cards or those expiring in the coming two months beyond the end of current conditions, unless technically impossible.
8. Activate and activate the Public Service Center (Call Center) service to provide services and answer public inquiries.
9. Enhance electronic banking services and ensure their effectiveness while increasing the value limits of executed transfers.

Article (8)
Liquidity Provision

1. The bank shall comply with the following:
   a. Manage liquidity in accordance with the prevailing Palestine Monetary Authority instructions on the matter. b. Provide sufficient paper currency to meet customer withdrawal operations.
   c. Continue financing affected projects through the Sustainability Fund.
2. The Palestine Monetary Authority provides the necessary overnight liquidity to assist banks in emergency situations.

Article (9)
General Provisions

1. The bank shall comply with the following:
   a. Grant priority in credit granting to the most affected economic sectors and sectors related to the continuity of the production cycle and supply chains.

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b. Apply the bank's credit policies in evaluating customer creditworthiness, and it is necessary to consider including current conditions and scenarios for the expected impacts of these conditions when granting new credit, with the necessity of taking into account current and future expectations of the borrower's repayment capacity.
c. Encourage borrowing customers to fulfill their credit obligations on time as much as possible.
2. Banks are allowed to deal within the mechanisms specified in these Instructions, fully or partially, in a manner consistent with the borrower's need, interest, and credit status.
3. Islamic banks are permitted to use the Murabaha product to restructure and schedule existing debts for customers affected by current conditions, subject to obtaining the Palestine Monetary Authority's approval on the sectors to be covered, the volume of the portfolio to be Murabaha'd, and pricing mechanisms.

Article (10)
Implementation and Enforcement

All competent authorities shall implement the provisions of these Instructions, each within their respective scope, and they shall apply from the date of their issuance.

Issued in the city of Ramallah, on 2023/10/25.

Dr. Firas Malham
Governor
[Signature]

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