Operations relating to credit, investment, shareholding and participation

Old No. 1892 | Text/Section 1/R/81T -6-30/2017

Basic Circular No. 81 Addressed also to financial institutions.

We enclose a copy of Basic Decision No. 7776 dated 2001/2/21 concerning credit, investment, shareholding and participation operations.

Beirut, 21 February 2001 Governor of the Central Bank of Lebanon Riad Toufic Salamé

1. Addressed to financial institutions pursuant to Interim Decision No. 8882 dated 2004/11/8 (Interim Circular No. 69).

532 Basic Decision No. 7776 Operations Relating to Credit, Investment, Shareholding and Participation

The Governor of the Central Bank of Lebanon, Pursuant to the Monetary and Credit Law, particularly Article 174 thereof, And pursuant to the decision of the Central Council taken in its meeting held on 2001/2/21, Decides as follows:

Article 1: Paragraph 1: All banks operating in Lebanon shall subject all their decisions concerning lending, investments of available cash funds, real estate investments, shareholdings, participations, and operations conducted on their behalf using composite or derivative financial instruments to prior approval by one or more specialized committees responsible for formulating effective strategies for managing, monitoring, and developing the bank's operations, at the level of the bank or banking group, as applicable. Paragraph 2: The Lebanese Bank's Board of Directors or the management of a foreign bank branch, or the banking group to which it belongs, as applicable, according to its business volume: a- Establishes the specialized committees it deems necessary, presided over by the Board Chairman or his deputy or an executive member appointed by the Chairman or a relevant specialist, with membership of senior management officials according to their competencies. The number of members in each committee, including the chairman, shall not be less than three persons, according to a system established specifically for this purpose. b- Approves a specific operating system for each specialized committee. (Last amendment introduced by Article 1 of Interim Decision No. 9419 dated 2006/9/29 (Interim Circular No. 116).) c- Ensures that tasks distributed among these committees form a suitable and integrated framework ensuring comprehensive risk management policies for all bank activities. d- Grants these committees the necessary powers to perform their functions, including proposing necessary plans and supervising the implementation of tasks noted in their operating system. Paragraph 3: The specialized committees, each regarding its respective area: a- Adequately identify the operations mentioned above (type, characteristics, maturities, etc.). b- Formulate a concept ensuring the bank is not exposed to risks it cannot bear as a result of these operations or arising therefrom. c- Evaluate the economic viability of the aforementioned operations regarding future returns and subject the bank to stress testing scenarios (Stress Testing Scenarios) to measure the bank's ability to withstand fluctuations in risk factors (market data, currency or stock prices, bonds, or other financial instruments...) and their impact on its financial position. d- Ensure the Lebanese Bank's Board of Directors or foreign bank branch management is informed periodically, at least quarterly, of their recommendations regarding the aforementioned operations exceeding 1% of the bank's core net equity or its equivalent to one million US dollars, whichever is lower, per client or for multiple clients forming a single economic group or related group according to the definition in regulatory texts issued by the Central Bank. e- Comply with applicable regulations and laws, as well as instructions issued by the Central Bank and the Banking Control Commission. f- Study credit risks exposed to the bank and establish ceilings and controls ensuring balanced distribution and diversification of these risks, particularly regarding economic sectors and geographical regions. g- Study and assess inherent risks in the bank's financial sources and uses, particularly maturity dates (liquidity risk) and sensitivity to interest rate fluctuations (market risk), etc. h- Oversee the application of International Financial Reporting Standards and International Accounting Standards, particularly IFRS 9 (concerning financial instruments regarding classification, reclassification, valuation methods, and its reflection on the bank's liquidity, profitability, solvency, transparency, and financial position) in light of stress testing scenario results. i- Hold regular periodic meetings as needed. j- Provide the Board of Directors with requested reports or those stipulated by prevailing banking regulations, periodically and as needed.

533 Text/Section 1/R/81T /2017-12-31 Paragraph 4: Lebanese banks and financial institutions are prohibited from: a- Owning shares or partnership stakes entailing unlimited liabilities. b- Concentrating their shareholdings and participations, directly or indirectly, so that none exceeds 10% of their equity, aiming to distribute them across diverse companies and sectors. Exemptions from this paragraph apply to shareholdings and participations in Lebanon and abroad in banks, financial institutions, finance leasing companies, financial intermediation institutions, collective investment schemes, and insurance companies, subject to their specific legal and regulatory texts. Banks and financial institutions in a non-compliant status are granted a maximum deadline of 31/12/2010 to regularize their status. (Amended by Article 2 of Interim Decision No. 12714 dated 2017/11/7 (Interim Circular No. 476).) (Added by Interim Decision No. 9891 dated 2008/4/18 (Interim Circular No. 159), then amended by Article 1 of Interim Decision No. 10390 dated 2010/3/8 (Interim Circular No. 217).)

534 bis 1 Text/Section 1/R/81T /2019-12-31 Paragraph 5: Granting facilities to clients against collateral of more than 5% of shares in Lebanese banks or financial institutions requires prior notification to the Central Bank and providing a copy of the intended pledge or usufruct agreement along with the bank's estimated market value for the relevant shares. The Central Bank may object to the pledge or usufruct arrangement within one month. Paragraph 6: Commercial banks are prohibited from lending to specialized or Islamic banks belonging to the same economic group. This prohibition includes commercial bank deposits with a specialized or Islamic bank of the same group, but specialized or Islamic banks may deposit with commercial banks. Non-compliant banks have a maximum deadline of 30/6/2011 to regularize. Paragraph 7: Banks and financial institutions are prohibited from lending, directly or indirectly, to any persons subject to Articles 183 and 184 of the Monetary and Credit Law ("Credit Accounts"). Paragraph 8: Banks and financial institutions are prohibited from conducting any operations of any kind (banking, financial, non-banking, or non-financial), recorded inside or outside their balance sheets, with companies or mutual investment funds whose shares or stakes are wholly or partially bearer-owned or directly/indirectly owned by companies or mutual investment funds whose shares/stakes are wholly or partially bearer-owned. (Added by Interim Decision No. 10986 dated 2012/4/30 (Interim Circular No. 298); Article 2 requires banks/institutions to provide the Central Bank by 30/6/2012 with information on shares entitling them to pledge/usufruct rights. Amended by Interim Decision No. 10390 dated 2010/3/8 and No. 10621 dated 2010/12/30.) (Added by Interim Decision No. 12175 dated 2016/1/21 and No. 12194 dated 2016/2/29; Article 9 grants a two-year deadline for non-compliant banks.)

534 bis 2 Paragraph 9: Banks and financial institutions are prohibited from conducting any operations with persons or institutions engaged in exchange or lending operations under Articles 183 and 184, unless listed on the Exchange List or "Credit Accounts" List. Transactions with listed institutions remain within governing laws. Non-compliant banks have a deadline of 30/11/2016 to regularize. Paragraph 10: Banks and financial institutions, upon requesting financial statements from institutions seeking facilities, must obtain audited copies of balance sheets and profit/loss accounts submitted to the Tax Administration, certified as "true copy". Paragraph 11: First, banks and financial institutions are prohibited from granting or renewing facilities to any institution or company with annual business volume equal to or exceeding LBP 1.5 billion, provided both conditions are met: (a) audited financial statements (balance sheet, P&L, cash flow statement) are obtained for credit assessment; (b) these statements match those submitted to the Tax Administration. Non-compliant banks have a deadline of 30/9/2020 to regularize client credit files. Banks must demand immediate repayment for unsettled loans within the deadline, or deposit a special reserve in an interest-free frozen account at the Central Bank equivalent to the loan value until regularization. (Added by Interim Decisions No. 12321 dated 2016/8/16, No. 12667 dated 2017/9/13, and No. 13087 dated 2019/7/18.)

534 bis 3 Paragraph 12: First, banks operating in Lebanon are prohibited from granting new loans or facilities of any kind in US Dollars without "cash funds" as defined in Basic Decision No. 13548 dated 2023/4/19 (Electronic Settlement Operations concerning "Cash Funds") attached to Basic Circular No. 165. Paragraph 13: Banks must conduct adequate credit studies when granting or renewing bank guarantees in "cash funds", ensuring such guarantees are covered by at least 20% cash fund collateral. Non-compliant banks have a deadline of 31/7/2026 to regularize. (Added by Interim Decisions No. 13686 dated 2025/1/13 and No. 13813 dated 2026/5/4.)

Article 1 ter: Paragraph 3: Banks and financial institutions operating in Lebanon are prohibited from granting clients facilities for financing fixed assets (real estate, machinery, equipment, and all fixed-nature assets) except as term loans, after studying the economic viability of the financed project and the client's financial position, and determining a repayment schedule based on cash flows. (Amended by Interim Decision No. 11718 dated 2014/3/8.)

Article 2: Paragraph 2: Banks and financial institutions, when granting any of the lending facilities specified in paragraph (4) of Article 152 of the Monetary and Credit Law, must comply with regulatory texts issued by the Central Bank on this matter. (Amended by Interim Decision No. 11718 dated 2014/3/8.)

Article 2 bis: Paragraph 6: First, banks operating in Lebanon must establish a general provision, not included in any equity category, at 2% of credit-risk-weighted assets related to all loan portfolios (including retail loans), as part of IFRS 9 requirements effective from 1/1/2018, such that:

• Weighted assets are aggregated based on the status as of 31/12/2016.
• The provision is established by the end of 2016, or if impossible, the remaining balance within 2017 at the latest. (Added by Interim Decision No. 11891 dated 2014/11/1, amended by No. 11917 dated 2014/12/24.)

Article 3: Paragraph 1: Banks and financial institutions are prohibited from: a- Granting current account facilities except for current operations or working capital financing, after reviewing total facilities granted by banks/institutions (especially "1Z" facilities in the Central Risk Management Department's loan type codes table), subject to prevailing laws/regulations. b- Granting current account facilities to a single client exceeding 70% of their working capital, and in all cases not exceeding five times the client's equity or investor account if a natural person or sole establishment. (Amended by Interim Decision No. 9193 dated 2005/11/16.) c- If these facilities exceed the above limit, the excess is converted into a term loan or to the relevant bank/institution's promissory notes, scheduled according to client cash flows. d- The following are excluded from this limit calculation: Bank acceptances and operations related to documentary credits. Facilities granted and covered by cash collateral or bank guarantees from listed institutions. e- Exception: Current account facilities to a single client not exceeding 100% of working capital and in all cases not exceeding seven times equity/investor account, valid until 31/12/2007. f- Allowing temporary (accidental) excess over current account ceilings, not exceeding 10% of granted facilities, and total facilities plus accidental excess do not exceed the limit in (c). g- Imposing compensation, fees, or interest/fee increases on approved excesses unless the client fulfills obligations within 90 days. In such case, an additional penalty interest not exceeding 2% may be charged on the excess amount from occurrence. h- Settling excesses by agreement within one year via: client repayment, increasing granted facilities if financially viable, or reclassifying the account to categories (4) or (5) per Basic Decision No. 7159 dated 1998/11/10, suspending facilities. i- Increasing interest rates on utilized facilities when reclassified to categories (4) or (5). j- Granting real estate lending exceeding either 60% of the property value or current value of ongoing projects, or 60% of collateral value. Exemptions: residential loans under Article 2 bis, housing authority loans for low-income rental buildings, military housing device loans. k- Conducting real estate brokerage in all forms or financing real estate speculation/purchase of built/unbuilt properties for resale. l- Exception: Banks/institutions may lend to real estate companies if: (1) business is limited to purchasing built properties in Lebanon, segregated or under segregation, financed by facilities from Lebanese banks/institutions remaining outstanding and not less than 50% of property value; (2) company system requires liquidation within 10 years; (3) built properties not previously sold or pledged for other facilities; (4) facilities comply with all lending laws/regulations; (5) repayment: min 40% from own unencumbered equity, max 60% via bank/institution facilities (including non-recourse promissory notes); (6) priority repayment from purchase proceeds; (7) priority repayment of balances from sale proceeds; (8) properties serve as collateral for facilities; (9) purchases follow arm's length standards. m- Prohibiting banks/institutions from establishing or participating in real estate companies under (l), directly or indirectly. n- Non-compliant banks/institutions have a deadline of 31/12/2006 to comply. (Amended by Interim Decisions No. 9958, 11891, 12286.)

Article 3 bis: Paragraph 1: First, for application purposes, "retail loans" include all consumer loans (auto, student, education, other), revolving credit lines (credit cards, purely personal/consumer loans not linked to professional/commercial objectives), and residential loans. Paragraph 2: Banks/institutions granting "retail loans" must comply with: a- A system with clear policy for granting retail loans. b- Auto or residential loans not exceeding 75% of vehicle/home value, except: housing bank loans, loans under protocols with Housing Authority, Military Housing Device, Ministry of Displaced, Judges' Mutual Aid Fund, General Security, Public Security, State Security, and Customs Authority. Residential loans under Savings/Borrowing Program per Basic Decision No. 6180 dated 1996/5/31. From 1/1/2015, license plate value may be included in vehicle value. c- Total monthly loan repayments not exceeding 35% of family income, up to 45% if benefiting from a residential loan (residential portion max 35%). Family = husband and wife. d- Annual insurance policy costs calculated, payable in lump sum or installments during the year (for residential loans).