Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (56) of 2015

Concerning Capital, Reserves, and Ownership Shares

Based on the provisions of Legislative Decree No. (9) of 2010 concerning Banks, particularly Chapters Three and Six thereof, and in accordance with the powers delegated to us, and in pursuit of the public interest, we have issued the following Instructions:

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Article (1)

Definitions

The words and phrases contained in these Instructions shall have the meanings specified below, unless the context indicates otherwise:

Concept	Definition
Bank	: As defined in the prevailing Banks Law.
Local Bank	: As defined in the prevailing Banks Law.
Incoming Bank (Foreign)	: As defined in the prevailing Banks Law.
Significant Shareholding	: As defined in the prevailing Banks Law.
Control	: As defined in the prevailing Banks Law.
Subsidiary Company	: As defined in the prevailing Banks Law.
Sister (Affiliate) Company	: As defined in the prevailing Banks Law.
Paid-in/Allocated Capital	: The minimum capital specified by the Palestine Monetary Authority to conduct banking business in Palestine.
Capital Base	: The sum of the values of the elements specified in Annex (1).
Capital Adequacy Ratio	: Capital Base divided by Risk-Weighted Assets.
Risk Reserve	: The reserve established to cover unspecified risks.
Related Parties	: As defined in the prevailing Banks Law.

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Article (2)

Scope of Application

The provisions of these Instructions shall apply to all banks licensed by the Palestine Monetary Authority to conduct banking business in Palestine.

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Article (3)

Capital Requirements for Banks

1. The minimum paid-in/allocated capital required to conduct banking business in Palestine shall not be less than USD 75 million or its equivalent in other currencies circulating in Palestine.
2. A bank is prohibited from reducing its capital through share buybacks or otherwise, whether directly by the bank or through its subsidiaries or sister companies, without the prior written approval of the Palestine Monetary Authority.
3. A bank or any of its subsidiaries is prohibited from purchasing from related parties any assets, shares, or bonds that were subscribed to or distributed to them in previous years.

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Article (4)

Additional Capital Requirements

1. The paid-in/allocated capital must be commensurate with the nature and size of the bank's operations, its branches' and subsidiaries' operations, and the level of risks inherent in its banking operations or assets.
2. If the Palestine Monetary Authority determines that a bank is no longer sufficient to cover risks, whether on or off the balance sheet, it has the right to compel the bank to increase its capital above the minimum to the level determined by the Authority.
3. If a bank fails to increase its capital or comply with the minimum capital and capital adequacy ratio set by the Palestine Monetary Authority, the Authority has the right to take measures it deems appropriate to address this, in order to preserve the bank's financial position and mitigate the volume of risks related to its operations, including:
   • a. Increasing the mandatory reserve ratio for the bank as determined by the Palestine Monetary Authority.
   • b. Compelling the bank to deposit balances with the Palestine Monetary Authority, with or without interest, for the duration the Authority deems appropriate.
   • c. Prohibiting the deployment/deposit of any funds with any other banking institution outside Palestine without obtaining the prior approval of the Palestine Monetary Authority.
   • d. Reducing total overseas deployments to total deposits as determined by the Palestine Monetary Authority.

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Article (5)

Special Requirements for Incoming Banks

1. An incoming bank must maintain a capital base that in no case falls below the capital allocated to its Palestine branches, according to the capital base calculation model in Annex No. (1), subject to quarterly review. In the event the capital base falls below the allocated capital, the bank shall be penalized retroactively by immediately covering the shortfall, while complying with the following:

   • a. Not calculating or paying any interest to the bank's head office on the capital allocated to its Palestine branches.
   • b. Registering the capital allocated to the incoming bank's branches in the Companies Register at the Palestinian Ministry of National Economy, and providing the Palestine Monetary Authority with a certified copy of the bank's registration certificate authenticated by the Companies Controller.
   • c. Depositing a non-withdrawable capital deposit with the Palestine Monetary Authority amounting to 20% of the minimum allocated capital set by the Authority.

2. The Palestine Monetary Authority may take any of the measures set forth below (in Paragraph 3 of this Article) if there is evidence or proof of any of the following:

   • a. The parent bank's capital adequacy ratio falls below the ratio specified by the home country regulatory authority.
   • b. The incoming bank's (Palestine branches) capital adequacy ratio falls below the ratio prescribed by the Palestine Monetary Authority.
   • c. The parent bank fails to cover the shortfall if the capital of its Palestine branches falls below the allocated capital.

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Article (6)

Capital Adequacy Ratio

1. Each bank must maintain a capital adequacy ratio of not less than 12% in any case, with core capital not falling below 8% of risk-weighted assets, while complying with the regulatory capital requirements set forth in Annex No. (1). The ratio shall be calculated according to the model prepared by the Palestine Monetary Authority, and calculated on a quarterly basis.
2. The Palestine Monetary Authority has the right to request that a bank work to increase its capital adequacy ratio or core capital ratio above the minimum relative to risk-weighted assets, commensurate with the size of its operations and risks.

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Article (7)

Ownership Shares

1. The acquisition of a shareholding of (10%) or more of a bank's shares or voting power, directly or indirectly, by a person or group of persons acting in concert, sharing a common interest, or related by kinship up to the second degree or beyond, requires the prior written approval of the Palestine Monetary Authority.
2. In no case shall the shareholding for any person or group of persons acting in concert, sharing a common interest, or related by kinship up to the second degree or beyond exceed 25% of the bank's shares or voting power.
3. The Palestine Monetary Authority shall study and assess the potential impact of a significant shareholding on the soundness of the bank's financial position, in addition to evaluating the reputation and financial soundness of the proposed owners.

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Article (8)

Legal Reserve

1. Each bank must allocate 10% of its annual net profit after tax to the legal reserve account until this reserve equals the paid-in capital of local banks and the allocated capital of incoming bank branches.
2. A bank is prohibited from disposing of the legal reserve without the prior written approval of the Palestine Monetary Authority.

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Article (9)

Risk Reserve

1. Each bank must establish a risk reserve calculated based on a percentage of direct credit facilities, plus a percentage of indirect credit facilities, according to the following rates:
   • 1.5% of net direct credit facilities. (Direct credit facilities after deducting the value of suspended interest and specific provisions).
   • 0.5% of net indirect credit facilities. (Includes unused facility limits, letters of credit, guarantees, and acceptances, and excludes checks under collection, accepted guarantees, and accepted cash advances secured by incoming letters of credit and financial derivatives).
2. Risks shall be assessed semi-annually, and the increase in the reserve shall be calculated from the profit distribution/retained earnings account, and shall not be recorded as an expense in the income statement.
3. The risk reserve shall be recognized and disclosed within the bank's equity under the name "risk reserve", and shall be classified under Basel Tier 2 capital, capped at 1.25% of total risk-weighted assets.
4. No part of the risk reserve may be disposed of in any manner without the prior written approval of the Palestine Monetary Authority.

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Article (10)

Countercyclical Reserve

1. Each bank must establish a countercyclical reserve to address various types of risks, by deducting 15% of the bank's net profit after taxes annually into the countercyclical reserve account. Annual deductions shall continue until the reserve balance equals 20% of the paid-in capital.
2. The countercyclical reserve shall be added to Tier 1 capital when calculating the capital base and capital adequacy ratio.
3. It shall be disclosed among the reserves declared in the Call Report.
4. Disposing of the countercyclical reserve for any purpose is prohibited without obtaining the prior written approval of the Palestine Monetary Authority.
5. The Palestine Monetary Authority may request the bank to increase its paid-in capital if it fails to generate profits used to establish the countercyclical reserve.