BANQUE CENTRALE DE DJIBOUTI

INSTRUCTION N° 2019-03

RELATIVE À LA CLASSIFICATION DES CRÉANCES

ET AU PROVISIONNEMENT DES CRÉANCES EN SOUFFRANCE

The Governor of the Central Bank of Djibouti,

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

Having regard to Law No. 119/AN/11/6ème L of January 22, 2011, relating to the constitution and supervision of credit institutions and financial auxiliaries;

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

Having regard to Instruction No. 2011-01 of the Central Bank of Djibouti, relating to the internal control of credit institutions.

Orders:

Article 1: Definition of Counterparties and Claims

For the purposes of this Instruction:

1. A counterparty is considered to be any natural or legal person benefiting from disbursed credits or signature commitments from a credit institution, or issuing debt securities held by an institution;

2. A claim is considered to be any on-balance sheet and off-balance sheet commitment held by a credit institution against a counterparty, in particular:

   • disbursed credits or account advances, regardless of their nature, form, and term;
   • signature commitments such as guarantees, aval, acceptance, or financing commitments in favor of the counterparty;
   • debt securities issued by the counterparty and held by the institution;
   • movable and immovable leasing.

Article 2: Classification of Claims According to Credit Risk

Credit institutions must obligatorily classify their claims held in portfolio into the following categories:

• healthy claims,
• sensitive claims,
• non-performing claims, subdivided into:
  • sub-standard claims,
  • doubtful claims,
  • compromised claims.

The classification of claims into appropriate categories is performed independently of the guarantees attached to them.

Article 3: Classification as Healthy Claims

Healthy claims are claims whose repayment is carried out in accordance with contractual provisions and which are held against counterparties whose ability to honor all their current and future commitments raises no cause for concern, in particular: solid financial situation, quality shareholding, satisfactory situation and prospects of the business sector, recurring profitability.

The good management of healthy claims must be accompanied by an appropriate internal rating of counterparties.

Article 4: Classification as Sensitive Claims

1. Sensitive claims are claims whose repayment is carried out in accordance with contractual provisions, but whose current and future ability of the beneficiary to repay, in full and on time, their commitments raises cause for concern, due to intrinsic considerations (payment incidents or unauthorized overdrafts for less than 90 days, deterioration of the financial situation, management problems, change in shareholding...) or external factors (difficulties in the business sector, decline in the value of issued securities...).

2. Signature commitments on clients classified in the sensitive claims category or whose financial situation raises cause for concern are also considered sensitive.

3. Direct claims on the State or guaranteed by it, advances on public tenders pledged, and advances on securities issued by the State, due for less than 90 days, are also considered sensitive.

4. Sensitive claims remain in healthy exposures but must be clearly isolated and recorded in the information system for credit risk surveillance and monitoring, notably by means of attributes. Lists of sensitive claims must be updated permanently and available for the internal management of the institution, statutory auditors, and external controls.

Article 5: Classification as Non-Performing Claims

Claims presenting a risk of total or partial non-recovery due to the deterioration of the immediate or future repayment capacity of the counterparty, regardless of existing guarantees, are considered non-performing claims.

Non-performing claims must be obligatorily recorded in the categories of sub-standard claims, doubtful claims, and compromised claims, in accordance with the provisions of this Instruction.

Article 6: Classification of Claims with Payment Irregularity

Claims are classified as non-performing claims when they present a payment irregularity for:

• 90 days and classified as sub-standard claims,
• 180 days and classified as doubtful claims,
• 360 days and classified as compromised claims.

The time period runs:

• for amortizable loans, from the observation of the first unpaid installment;
• for loans repayable in a single lump sum, from the maturity of the credit contract;
• for authorized overdrafts, from the absence of credit movements capable of covering the amount of interest and other charges for the period;
• for unauthorized overdrafts, from the date the debtor drew sums rendering their account debtor or exceeding the authorized amount.

Article 7: Classification of Public Claims with Payment Arrears

Direct claims on the State or guaranteed by it, advances on public tenders registered in the State budget and pledged, with payments irrevocably domiciled in the books of the credit institution, and advances on securities issued by the State, due for more than 90 days but whose final repayment, while not compromised, cannot be immediately effected by the State or the guaranteed debtor, must be recorded in sub-standard claims and isolated in an appropriate sub-category.

Article 8: Classification of Claims with a Verified Risk of Non-Recovery

Claims on counterparties whose situation leads to the existence of a verified risk of total or partial non-recovery must be classified as non-performing claims, in the absence of a payment irregularity of at least 90 days, and in particular when the institution:

• has opened a contentious procedure regarding the recovery or contestation of claims or for the opening of judicial reorganization or liquidation of the counterparty;
• is aware of the cessation or change of activity of the client;
• is aware of a degraded financial situation of the counterparty;
• is aware of events concerning shareholders or directors (death, disagreement).

The institution performs a classification in the appropriate category based on the risk of non-recovery.

Article 9: Contagion Rules

The classification of a claim as non-performing entails by contagion an identical classification of the entire exposure and commitments related to this counterparty, notwithstanding the existence of guarantees or sureties. By exception, this rule does not apply to claims referred to in Article 7.

When the counterparty belongs to a group, the institution must also examine the consequences of this failure at the group level and classify claims on other legal entities forming the group as non-performing claims. The Central Bank of Djibouti may grant a derogation from this principle when the institution can demonstrate, based on convincing supporting evidence, that certain entities will not be impacted by the debtor's failure and that the institution's claims on these entities can be recovered normally, independently of the existence of guarantees.

Article 10: Treatment of Restructured Claims

A restructured claim is a claim for which the institution agrees to change contractual provisions solely to restore the debtor's financial situation or to strengthen its guarantees, with a view to ensuring the final recovery of the claim. Restructuring may concern the duration, past due amounts, and future amounts due.

Any waiver of principal or interest, past or future, during restructuring must be immediately recognized as a loss.

Restructuring operations must be decided at a hierarchical level higher than that of the person or body that initially authorized the commitment.

Restructured operations must be submitted to the agreement of senior management, who must ensure that the borrower's financial situation allows for the repayment of claims under the new conditions. They must be subject to regular information of the board of directors.

Article 11: Classification of Restructured Claims

Restructured claims must be clearly isolated and recorded in the information system.

Restructured claims without default are classified as sub-standard claims and isolated in an appropriate sub-category. They may be reclassified as healthy claims in the absence of any payment default for one year.

When the debtor does not respect the new repayment plan, restructured claims must be classified directly as doubtful claims, at the latest 90 days after the date of an unregularized payment irregularity.

Article 12: Accounting for Non-Performing Claims

Non-performing claims are accounted for in accordance with the following principles:

1. Non-performing claims are extracted from their original accounts and accounted for in the appropriate accounts for sub-standard, doubtful, and compromised claims. Classification into each accounting category must occur upon the observation of a payment irregularity of 90, 180, or 360 days.

2. Signature commitments falling under non-performing claims are extracted from their original accounts and recorded in a specific account for doubtful off-balance sheet commitments.

3. Unpaid installments are cleared, in case of payment, in order of seniority.

4. Only past due interest and commissions actually received may be recorded in income accounts. Any interest or commission previously recorded in income but not paid must be deducted from income.

5. Past due and uncollected interest, and accrued but not yet due interest, must be placed in separate accounts and fully covered by provisions (reserved interest) in separate accounts, as soon as they are accounted for.

6. Unrecoverable claims must be removed from the balance sheet and subject, if necessary, to appropriate off-balance sheet monitoring, if one of the following conditions is met:

   • the claim is written off from accounting at the initiative of the credit institution;
   • recovery prospects are null despite contentious actions;
   • the gross claim has been covered 100% by provisions for more than four years.

7. Unrecoverable claims are charged to losses on unrecoverable claims for their full amount, in exchange for the reversal of previously constituted provisions recognized in the year's income. This operation must be carried out respecting the following prescriptions:

   • any removal of a claim from the balance sheet must be authorized by the board of directors;
   • institutions must provide the Central Bank of Djibouti with the list of claims removed from the balance sheet concerning related parties defined by Instruction No. 2019-02, according to the state appearing in the annex of said Instruction.

8. Entries recorded in application of this Instruction are a translation of an accounting classification and do not entail novation.

Article 13: Constitution of Provisions for Credit Risk

Credit institutions are required to constitute specific provisions allocated to counterparties to cover credit risk.

Specific provisions are constituted to cover non-performing claims and corresponding off-balance sheet elements. Provisions recognizing the depreciation of claims appearing on the asset side are recorded as a deduction from the corresponding exposures. Provisions recognizing loss risks on claims appearing on the off-balance sheet are recorded in provision accounts for risks on the liability side.

Institutions may constitute collective provisions to cover risks related to a sector or category of counterparties carrying potential risks of non-recovery of claims. They may also constitute general provisions to cover credit risk. These provisions are recorded on the liability side.

Article 14: Determination of Specific Provisions

Exposures appearing in non-performing claims must be subject to an evaluation of non-recovery risks, and the probable loss must be covered by provisions.

The probable loss is determined based on the recoverable amount of the claim, which is calculated based on the counterparty's repayment capacity, the state of ongoing amicable or contentious procedures, and the guarantees held evaluated at their realization value, less realization costs.

Provisions are calculated on the total book value of the claim, less reserved interest referred to in Article 12, paragraph 5, after deduction of guarantees valued according to the rules set forth in Article 15. However, guarantees are no longer taken into account in the calculation when the claim has been classified as compromised for four years.

In all cases, institutions are required to constitute minimum provisions to cover the net exposure of recoverable guarantees, at least equal to:

• 20% for sub-standard claims;
• 50% for doubtful claims;
• 100% for compromised claims.

By exception, claims referred to in Article 7 are excluded from the application of this article, subject to the absence of legal contestation of the claim.

Article 15: Rules Regarding the Taking into Account of Guarantees

1. To be taken into account in the determination of provisions provided for in Article 14, guarantees must be constituted with the institution, immediately available and realizable on first demand, without possibility of contestation. Promises of allocation in guarantee are not taken into account.

2. Guarantees are only taken into account during their effective duration and to the extent of the initially covered contracts, weighted according to the following ratios:

   • ratio of 100% for guarantees received from the State, guarantees received from credit institutions having the capacity to pay on first demand (based on the bank's solidity and country risk), and pledges of cash, blocked accounts, term accounts, treasury bills, or debt securities issued by the institution held by the institution;
   • ratio of 80% for:
     • pledge of debt securities issued by the State,
     • pledge of domiciled public tenders, subject to a certificate from State services delivered to the winning bidder regarding the regularity of execution,
     • mortgages in useful rank on real estate, boats, and aircraft duly registered.

3. The mortgages referred to in paragraph 2 are taken into account:

   • taking into account the rank of the mortgage registration,
   • for the amount evaluated regularly and independently at the initiative of the institution, within the limit of the amount evaluated by the Domain Services.

4. The Central Bank of Djibouti may request the institution to commission an independent expertise offering guarantees of competence and impartiality to evaluate guarantees. It may impose larger discounts when it concerns specific goods or for which market references are non-existent or unreliable.

Article 16: Rectifications at the Request of the Central Bank of Djibouti

The Central Bank of Djibouti may require the downgrading into non-performing claims of on-balance sheet or off-balance sheet exposures, in particular when the financial situation cannot be evaluated due to lack of necessary information and documentation in the institution's files.

The Central Bank of Djibouti may require additional provisions if it considers, following its controls, that the calculation performed by the institution to calculate and cover the probable loss is inappropriate, in particular with regard to the elements available in the institution's files.

Article 17: Publishable Information

Institutions are required to indicate in the annexes of publishable accounts the following information:

• variations in provisions during the year: opening exposure, allocations, reversals, and closing exposure;
• the amount of exposures transferred to sub-standard, doubtful, and compromised claims;
• the amount of exposures of restructured commitments;
• information on the amount of guarantees taken and ceded.

Article 18: Declaration Obligations

1. Credit institutions send to the Central Bank of Djibouti at the end of each quarter a nominative declaration of non-performing claims registered on the balance sheet and off-balance sheet with a gross unit amount greater than or equal to 1 million DJF, in accordance with the model appearing in the annex.

2. The declaration of non-performing claims is transmitted as of the closing date of March 31, June 30, September 30, and December 31. It is sent no later than the 20th of the month following the closing date. In the case where this day is a holiday, the state must be transmitted no later than the first working day following.

3. The declaration must be transmitted both in the form of a paper state, signed by one of the responsible senior managers of the credit institution, and in an Excel file format sent by electronic mail, according to the modalities fixed by the circular of the Central Bank of Djibouti relating to the modalities of production and transmission of accounting and prudential statements.

Article 19: Access to Central Bank of Djibouti Files

1. The Central Bank of Djibouti communicates to banks the list of defaulting debtors declared by institutions within 15 days following each centralization.

2. Credit institutions abstain, under penalty of sanctions provided for this purpose, from granting new credits to clients whose names appear on the list of defaulting debtors drawn up by the Central Bank of Djibouti.

Article 20: Transitional Measures

For the implementation of Article 14, paragraph 3, the following provisions apply:

• the four-year period applies to any new claim placed in doubtful claims from January 1, 2020;
• claims prior to December 31, 2013 must be fully covered by provisions at the latest before January 1, 2020;
• claims prior to December 31, 2014 must be fully covered by provisions at the latest before January 1, 2021;
• claims prior to December 31, 2015 must be fully covered by provisions at the latest before January 1, 2022;
• institutions must present to the CBD, if necessary, the modalities for the necessary strengthening of their own funds to constitute these provisions.

Before the deadlines indicated above, institutions must cover by provisions the concerned claims for which legal recourse proves ineffective.

Article 21: Possibility of Temporary Derogation Granted by the Central Bank of Djibouti

The Central Bank of Djibouti, in exceptional circumstances that it remains free to assess, may authorize a subject institution to temporarily derogate from the provisions of Articles 14 and 20 of this Instruction, and grant it a deadline to regularize its situation.

Article 22: Implementation of the Instruction

This Instruction of the Central Bank of Djibouti takes effect as of January 1, 2020.

Article 23: Repeal of Instruction No. 2011-07

Instruction No. 2011-07 of the Central Bank of Djibouti relating to the accounting, provisioning, and declaration of doubtful claims is repealed.

Done in Djibouti, on March 31, 2019

The Governor Mr. AHMED OSMAN

[Seal: CENTRAL BANK OF DJIBOUTI * The Governor * REPUBLIC OF DJIBOUTI]

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ANNEX

CENTRAL BANK OF DJIBOUTI

INSTRUCTION N° 2019-03 RELATIVE AUX CRÉANCES DOUTEUSES

Name of Credit Institution: ........................................................................... Bank Code: ........................................................................... Closing Date: ...........................................................................

Characteristics of Submission	Part to be filled by the institution	Part reserved for the Central Bank of Djibouti
Name of the institution
Name of the signatory of the state
Functions of the signatory
Closing date of the state
Version number of the state
• 1st version
• Corrected version
Date of signature of the state
Date of receipt
Date of paper file submission
Date of electronic sending	Email from

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CENTRAL BANK OF DJIBOUTI

INSTRUCTION N° 2019-03 RELATIVE AUX CRÉANCES EN SOUFFRANCE

Name of Credit Institution: ........................................................................... Bank Code: ........................................................................... Closing Date: ...........................................................................

A - Sub-standard Claims

Beneficiaries	Date of Passage (1)	Amount of Commitments	Provisions Constituted	Guarantees
		Total	Balance Sheet	Off-Balance Sheet
SUB-STANDARD CLAIMS
PRIVATE NON-RESTRUCTURED CLAIMS
SUB-TOTAL
RESTRUCTURED CLAIMS
SUB-TOTAL
PUBLIC CLAIMS
SUB-TOTAL
TOTAL

(1) Date of initial passage into non-performing claims

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B - Doubtful Claims

Beneficiaries	Date of Passage (1)	Amount of Commitments	Provisions Constituted	Guarantees
		Total	Balance Sheet	Off-Balance Sheet
DOUBTFUL CLAIMS
TOTAL

(1) Date of initial passage into non-performing claims

C - Compromised Claims

Beneficiaries	Date of Passage (1)	Amount of Commitments	Provisions Constituted	Guarantees
		Total	Balance Sheet	Off-Balance Sheet
COMPROMISED CLAIMS
TOTAL

(1) Date of initial passage into non-performing claims

D - Unrecoverable Claims Charged to Losses

Beneficiaries	Date of Passage (1)	Amount of Commitments	Provisions Constituted	Guarantees
		Total	Balance Sheet	Off-Balance Sheet
UNRECOVERABLE CLAIMS CHARGED TO LOSSES
TOTAL

(1) Date of initial passage into non-performing claims