Regulation (NAP) on the Adequacy of Own Funds and Solvency Ratio for Microfinance Institutions

4. • '1.-- A A NAP NORMA DE APLICAÇÃO PERMANENTE PROponente (S) ENTRADA EM VIGOR DATA EMISSAO N° DOC FL 1/16 C.A. Assunto: Adequação dos Fundos Próprios e Rácio de Solvabilidade Das Instituições De Microfinanças

The Law 16/2018, of September 3, established the Legal Regime for Microfinance Activities, hereinafter "RJM", taking into account its relevance to access to financing and the promotion of financial inclusion. The aforementioned regime provides for different Microfinance Institutions (MFIs), whose nature and complexity of legally permitted operations warrant distinct treatment regarding the licensing and operational process. Given the need to define Own Funds requirements, the size of MFIs' operations under the RJM; In these terms, the Central Bank of São Tomé and Príncipe, exercising the powers conferred by letters d) and f) of Article 8 of its Law 8/92, in conjunction with Articles 7 and 2(2) of Article 26 of the RJM, approves the following:

Artigo 1.° (Article 1.) Objecto (Object) The present Standard determines the rules regarding the Adequacy of Own Funds and the Solvency Ratio for MFIs.

Artigo 2.° (Article 2.) Ambito (Scope) The present Standard applies to MFIs authorized to operate in São Tomé and Príncipe.

Dados de Revogação: 26/06/2019 26/06/2019 08/2019

NAP NORMA DE APLICAÇÃO PERMANENTE PROponente (S) ENTRADA EM VIGOR DATA EMISSAO N° DOC FL 2/16 C.A.

Artigo 3.° (Article 3.) Conceitos (Concepts) The terms used in this NAP have the definitions assigned to them by the RJM and in the NAP on Licensing and Exercise of Microfinance Activities.

Artigo 4.° (Article 4.) Adequação de Fundos Próprios e Rácio de Solvabilidade (Own Funds Adequacy and Solvency Ratio)

1. The value of own funds of authorized MFIs must always be equal to or greater than the minimum authorized capital.
2. All MFIs authorized to operate in São Tomé and Príncipe must maintain an adequate relationship between the amount of their qualified own funds and their asset elements and off-balance sheet items, weighted according to the respective risks involved, especially credit, foreign exchange, and operational risks.
3. The Qualified Own Funds established under this NAP must include basic and supplementary own funds of the MFI in accordance with the instructions in Annex I to this NAP.
4. The Basic Own Funds defined under the instructions of Annex I must always be equal to or greater than 20% of the Total Assets of Category A MFIs.

Artigo 5.° (Article 5.) (Rácio de Solvabilidade) (Solvency Ratio)

1. The relationship referred to in paragraph 2 of Article 4 is designated as the solvency ratio and is calculated by applying the following formula: FPQ × 100 / (TAPRC + TAPRT + VEAPRO)

Where: FPQ — Value of Qualified Own Funds. TAPRC — Total assets weighted by credit risk, including off-balance sheet items, determined according to Annex II. TAPRTC — Total assets weighted by foreign exchange risk, ascertained according to Annex III; VEAPRO — Equivalent value of assets weighted by operational risk, ascertained according to Annex IV. 2. The solvency ratio value must not be less than 20%. 3. Asset items are associated with the reference levels defined according to Part I of Annex II.

Dados de Revogação: 26/06/2019 26/06/2019 08/2019 Vistos2

NAP NORMA DE APLICAÇÃO PERMANENTE PROponente (S) ENTRADA EM VIGOR DATA EMISSAO N° DOC FL 3/16 C.A.

Artigo 6.° (Article 6.) (Dever de Informação sobre Fundos Próprios) (Duty to Report on Own Funds)

1. MFIs must calculate their own funds and solvency ratio with reference to the periods of March 31, June 30, September 30, and December 31 of each year, communicating to the Central Bank, by the tenth day of the following month, the results obtained as well as the composition of such funds.
2. The Central Bank may order the correction of an MFI's own funds calculation if it considers that the conditions established in this NAP have not been satisfactorily met.

Artigo 7.° (Article 7.) (Reposição de Fundos Próprios) (Replenishment of Own Funds) The Central Bank may, whenever it deems necessary, require MFIs to provide additional capital taking into account the evolution of their prudential ratios.

Dados de Revogação: 26/06/2019 26/06/2019 08/2019 Vistos

4 BANCO CENTRAL NAP NORMA DE APLICAÇÃO PERMANENTE PROponente (S) ENTRADA EM VIGOR DATA EMISSAO N° DOC FL 4/16 C.A.

Artigo 8.° (Article 8.) (Interpretação) (Interpretation) Doubts and omissions arising from the application of this NAP are resolved by decision of the BCSTP.

Artigo 9.° (Article 9.) (Da Vigência) (Entry into Force) The present NAP enters into force on the date of its publication.

Dados de Revogação: 26/06/2019 26/06/2019 08/2019 Vistos\ Dados de Revogação:

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ANEXO I (ANNEX I) (Fundos Próprios de Base) (Base Own Funds)

1. The elements comprising the base own funds of a microfinance institution must be usable to cover risks or losses that occur therein, distinguished by their quality, characteristics of permanence, degree of subordination, capacity and timeliness of loss absorption, and, where applicable, possibility of deferral or cancellation of remuneration.
2. Base own funds of microfinance institutions correspond to the amounts relating to: a) Paid-up share capital and issuance premiums; b) Legal, statutory, and other reserves formed by undistributed results; c) Results from previous financial years; d) Negative results of the current financial year. e) Net intangible fixed assets; f) Own shares; g) The amount corresponding to deficiencies verified in the constitution of regulatory provisions, as defined by the Central Bank, representing the positive difference between the amount of regulatory provisions and the fair value and provisions for credit and off-balance sheet operations recorded in the financial statements; and h) Negative revaluation reserves.

(Fundos Próprios Complementares) (Supplementary Own Funds) Supplementary own funds of microfinance institutions correspond to the amounts relating to:

1. Reserves arising from the revaluation of fixed assets, carried out in accordance with the law, approved by the Central Bank, and after deducting taxes; the revaluation result is limited to 50% of base capital;
2. Other positive revaluation reserves;
3. Subordinated loans with a term exceeding five years, whose conditions are approved by the Central Bank, may be considered up to 50% of Base Own Funds.
4. Issuance of securities, notably with indefinite maturity terms, and those from non-securitized loans, whose conditions are approved by the Central Bank and whose contracts provide: a) That they can only be redeemed at the initiative of the issuing or borrowing institution and with prior Central Bank agreement; b) The option for the institution to defer interest payments; c) That the outstanding capital and unpaid interest may be called upon to absorb losses, allowing the institution to continue its activities;
5. In determining the elements listed in this article, the following must be excluded: a) Unrealized losses and gains on financial liabilities for trading that represent own credit risk; b) Unrealized gains and losses from cash flow hedging of covered elements measured at amortized cost and future transactions; c) Without prejudice to letter e), unrealized gains on credits and other receivables classified as financial assets measured at fair value through profit or loss, where applicable; d) Without prejudice to letter e), unrealized gains and losses that do not represent impairment on credits and other receivables classified as available-for-sale financial assets; e) When the assets referred to in letters c) and d) are involved in fair value hedging relationships, only the gains or the corresponding gains and losses related to the portion not involved in such hedging relationship and/or the ineffective portion of that relationship shall be excluded; f) Without prejudice to letter a), unrealized gains or losses that do not represent impairment on Tangible Fixed Assets for own use, resulting from the application of the fair value method according to the Financial Reporting Standard — Tangible Fixed Assets; and
6. The elements provided for in letter c) of the preceding paragraph 6 correspond: a) To 50% of unrealized gains on available-for-sale assets, according to the Financial Reporting Standard — Financial Instruments: Recognition and Measurement; and b) To 50% of unrealized gains from cash flow hedging of available-for-sale assets, by the net amount of the hedging effect.
7. The prudential treatment of deferred taxes recorded in reserves must be consistent with the prudential treatment given to gains and losses recorded in positive or negative revaluation reserves that originated the recording of such deferred taxes.
8. Amounts corresponding to redeemable preference shares with a fixed redemption date occurring within five years of issuance are not considered own funds of microfinance institutions.
9. Subordinated loans must provide for capital amortization only at the end of the contract or in equal installments during their term and shall be subordinated, in case of insolvency or liquidation of the institution, to the prior fulfillment of all other non-subordinated obligations.
10. Microfinance institutions that include in their own funds amounts from the issuance of securities and redeemable preference shares with a fixed date, and from contracting subordinated loans, must establish a program for the gradual reduction of these amounts in the five years preceding their respective repayment.
11. The total supplementary own funds must not exceed the total base own funds.

Dados de Revogação: 26/06/2019 26/06/2019 08/2019 Vistos

NAP NORMA DE APLICAÇÃO PERMANENTE PROponente (S) ENTRADA EM VIGOR DATA EMISSAO N° DOC FL 6/16 C.A.

12. The elements indicated in letters d) and e) of paragraph 5 above may only be considered up to fifty percent of base own funds.

(Determinação de Fundos Próprios) (Determination of Own Funds) Without prejudice to the provisions in paragraphs 11 and 12 of Article 10, own funds are determined by the sum of base own funds and supplementary own funds after deducting: a) In cases where the microfinance institution holds a participation exceeding ten percent of the share capital of a financial institution, the total amount of that participation shall be deducted, as well as the value represented by other asset elements referred to in paragraph 3 of Article 9 and Article 10 of this NAP, which it holds in the same institution; b) The global amount of other participations and asset elements referred to in paragraph 3 of Article 9 and Article 10 of this NAP, which the microfinance institution holds in a financial institution, not covered by the preceding letter, shall be deducted to the extent that it exceeds ten percent of the own funds of the institution holding them, calculated before making the deductions provided for in this letter and the preceding letter.

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ANEXO II (ANNEX II) Activos Ponderados pelo Risco de Crédito (Credit Risk Weighted Assets)

1. Weighting of asset and off-balance sheet elements of microfinance institutions for the purpose of calculating the solvency ratio.
2. Asset and off-balance sheet items must be weighted according to credit risk.
3. Thus, the balance sheet value of assets must be multiplied by their respective weighting coefficient, according to PART I of this annex, except regarding: a) The value of assets, for which fair value losses and provisions recorded in financial statements are lower than regulatory provisions; b) The value of credits and other receivables, classified as financial assets at fair value through profit or loss, which must exclude their respective unrealized gains; c) The value of credits granted and accounts receivable, classified as available-for-sale financial assets, which must exclude their respective unrealized gains and losses that do not represent impairment; d) The value of credits and other receivables involved in fair value hedging relationships, which must exclude gains and losses corresponding to the portion not involved in such hedging relationship and/or the ineffective portion of that relationship; e) The value of assets classified as available for sale, which must exclude 50% of unrealized gains; and f) The value of investment properties and other tangible fixed assets, which must exclude unrealized gains and losses that do not represent impairment, except regarding gains from revaluations carried out under the legal instrument authorizing them; g) The value of active deferred taxes, which must exclude amounts of deferred taxes resulting from values excluded according to the preceding letters.

Meanwhile, off-balance sheet items must be weighted according to a two-step calculation method, according to numbers 5.1 and 5.2 of this annex. The weighted value of off-balance sheet items must be net of provisions recorded in financial statements for these risks.

PARTE I (PART I)

1. The weighting coefficients to be assigned to asset elements must be as follows: | Weighting Coefficient | Classification of Balance Sheet Elements | |---|---| | 0% | Cash and equivalent assets. Credits on the State, Central Bank, and public sector entities, as well as assets benefiting from express and legally binding guarantees from these entities or covered by prudently evaluated securities issued by them. Rights on central governments and central banks of OECD countries, or benefiting from guarantees by these institutions or covered by securities issued by them. Asset elements covered by deposits with the institution itself and linked to the asset. | | 20% | Credit rights on multilateral development banks or guaranteed by them, or covered by securities issued by these banks. Credit rights on credit institutions headquartered in OECD countries or guaranteed by them. Credit rights on investment companies headquartered in OECD countries and subject to supervision comparable to credit institutions, as well as rights guaranteed by these entities. Credit rights on credit institutions headquartered in non-OECD countries with a residual term equal to or less than one year, or credits guaranteed by these institutions with a residual term equal to or less than one year. Credit rights on public sector entities of OECD countries, excluding central government and central bank, and credits guaranteed by these entities. | | 50% | Values in the process of collection. Loans guaranteed by mortgage on properties intended for the borrower's housing. | | 100% | Credits on the private sector. Credits on credit institutions headquartered in non-OECD countries with a residual term exceeding one year. Credits on central governments and central banks of non-OECD countries. Fixed assets, including real estate, buildings, equipment, and other fixed assets, except those directly deducted from own funds. Participations and non-use real estate, except those directly deducted from own funds. All other assets, except those directly deducted from own funds. |

2. Accounts of receivable income must be subject to the weighting coefficient applied to the active operation from which they originate.

3. Regarding off-balance sheet items, the procedures to be adopted must be as follows: 5.1 The weighted value of off-balance sheet operations, except those related to interest rate and foreign exchange risks, must be ascertained through a two-step calculation: • Step 1 Initially, classification must be performed according to the risk inherent in each operation as established in PART II of this annex. Based on this classification, high-risk operations must be considered at their total value; medium-risk at 50% of their value; medium/low risk at 20% of their value; low risk at 0% of their value. • Step 2 Subsequently, the values obtained after applying the aforementioned method must be multiplied by the weighting coefficients assigned to the respective counterparties, according to paragraph 1 of PART I, except when they are fixed-price asset purchase and sale with repurchase agreements (repos), in which case the weighting coefficient to be applied must be that of the asset in question, and not that of the counterparty in the transaction. 5.2 The weighted value of off-balance sheet operations related to interest rate and foreign exchange risks must also be performed in two steps. In the first step, the theoretical amount of each contract must be multiplied by the following percentages: | Contracts related to interest rates | Contracts related to foreign exchange rates | |---|---| | Initial Maturity | Percentages | | One year or less | 0.5% | 2% | | More than one and up to two years | 1% | 5% | | For each additional year | 1% | 3% |

In the second step, the value obtained after applying these percentages must be multiplied by the weighting coefficient assigned to the respective counterparty under paragraph 1 of PART I, except for the 100% coefficient provided therein, which must be replaced by a 50% weighting coefficient. 6. Whenever off-balance sheet elements benefit from express and validly formalized guarantees, the coefficients to be used in the second step of the calculation, under numbers 5.1 and 5.2, must be those of the guaranteeing entity rather than the guaranteed entity, if they are lower. If these off-balance sheet elements benefit from total guarantee, prudently evaluated, constituted by securities issued by the State, Central Bank, public sector entities, or deposits with the institution itself, the weighting coefficient to be applied in this second step must be 0%. If the guarantee is constituted by securities issued by multilateral development banks or deposits with other credit institutions, the weighting coefficient to be assigned in this second phase must also be 20%. 7. When asset or off-balance sheet elements benefit, partially, from a guarantee that allows for a lower weighting, this weighting must only be applied to the guaranteed portion.

PARTE II (PART II) Classificação dos elementos extrapatrimoniais quanto aos tipos de Risco. (Classification of off-balance sheet elements according to risk types.) High Risk: • Guarantees with the nature of credit substitutes; • Acceptances; • Endorsements of securities without the signature of another credit institution; • Transactions with recourse; • Irrevocable stand-by letters of credit, with the nature of credit substitutes; • Fixed-price asset purchases; • Unrealized portion of shares and other partially realized securities.

Medium Risk: • Documentary credits, issued and confirmed, except medium/low risk; • Guarantees that do not have the nature of credit substitutes, namely contract performance guarantees and customs/tax guarantees; • Irrevocable stand-by letters of credit, that do not have the nature of credit substitutes; • Undrawn credit lines (loan granting agreements, securities purchase agreements, guarantee grants and acceptances and others), with an initial maturity term exceeding one year;

Medium/Low Risk: • Documentary credits in relation to which shipping documents serve as guarantee; • Other transactions with potential automatic settlement.

Low Risk: Undrawn credit lines (loan granting agreements, securities purchase agreements, guarantee grants and acceptances and others), with an initial maturity term equal to or less than one year, or that can be cancelled freely and unconditionally at any time without prior notice.

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ANEXO III (ANNEX III) Activos Ponderados pelo Risco de Cambial (Foreign Exchange Risk Weighted Assets)

1. Foreign exchange risk is defined as the risk of loss in balance sheet and off-balance sheet accounts due to market price variations, including instruments related to foreign exchange rate risks in all balance sheet and off-balance sheet elements, and instruments related to interest rate risks that compose the trading portfolio of institutions.
2. Market risk relating to foreign exchange rates is that which currently affects institutions authorized to operate in accordance with current law.
3. Foreign exchange rate risk must be calculated on the institution's global foreign currency position, determined in the regulatory form and respective technical instructions.
4. Considering the legally binding agreement establishing the parity of dobra and euro, the position in euros shall not be computed for the purpose of calculating the total open long and short positions.

Dados de Revogação: 26/06/2019 26/06/2019 08/2019 Vistos