Instructions No. (18) of 2023 Regarding the Distribution of Dividends and Bonuses and the Establishment of Provisions for 2023

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Palestine Monetary Authority

Instructions No. (18) of 2023 Regarding the Distribution of Dividends and Bonuses and the Establishment of Provisions for 2023

Pursuant to the provisions of Decision-Law No. (9) of 2010 concerning Banks, particularly Articles (36, 43, 72) thereof, and after reviewing Instructions No. (10) of 2017 concerning the Rules and Best Practices for Bank Governance, and Instructions No. (2) of 2018 concerning the requirements and guidelines for implementing International Financial Reporting Standard No. (9), and in accordance with the powers delegated to us, and in pursuit of the public interest, we have issued the following Instructions:

Article (1) Scope of Application

The provisions of these Instructions shall apply to the distribution of dividends and bonuses, and the establishment of provisions for the year 2023, for banks licensed by the Palestine Monetary Authority to conduct banking business in Palestine.

Article (2) Distribution of Dividends and Bonuses

As a result of the uncertainty experienced by the Palestinian economy due to the aggression on the Gaza Strip and its impacts on various economic sectors, and the subsequent effects on banks' financial positions, which require taking precautionary measures, banks are requested to do the following:

1. Restrict the distribution of any cash dividends to shareholders from the results of operations for the year 2023 for local banks, and dividends may be distributed in the form of bonus shares after obtaining the Palestine Monetary Authority's approval.
2. Restrict the transfer of dividends to the general administrations/head offices of foreign banks regarding the results of operations for the year 2023, subject to obtaining the Palestine Monetary Authority's approval.

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3. Take into consideration when allocating and granting bonuses and incentives to the Board of Directors and Executive Management the following: a. The risks faced by the bank, the probability and timing of gains, the financial position, operational performance, and commercial outlook of the bank. b. Total income or earned profit shall not be the sole element for measuring performance; other elements shall be taken into account in measuring employee performance, such as risks associated with core operations and risk-adjusted return on capital, etc., where applicable. c. The performance measurement of senior management employees shall be based on the bank's overall long-term performance, and their bonus grant element shall not be based solely on current-year performance.

Article (3) Expected Credit Losses

1. Apply conservative methodologies and mechanisms for calculating expected credit losses on all exposures, in accordance with the requirements of International Standard No. (9), along with the commitment to assign a minimum weighted average of 60% to the most severe scenarios and 40% to medium scenarios, for exposures other than those mentioned in paragraph (3) of this Article.
2. Do not perform a reversal on financing classified in Stage Two as of September 30, 2023, and granted in the West Bank, and continue to classify them at least in Stage Two in the financial statements as of December 31, 2023.
3. Apply conservative methodologies and mechanisms for calculating expected credit losses on all exposures in the Gaza Strip and facilities for domestic employees, subject to complying with the following: a. Upgrade customer classification stages to at least Stage Two. b. Apply the following at a minimum to the affected exposures mentioned:
4. Assign a weighted average of 100% to the most severe scenarios.
5. Do not recognize real estate collateral, foreclosed assets, or movable collateral (except land) for calculating losses in the Gaza Strip exposure portfolio throughout the war period, and real estate collateral shall be recognized again upon proving it has not been subject to demolition.

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3. Prepare an assessment for the corporate sector and an individual assessment for each customer, classify debt within Stage Three, and establish necessary expected credit losses at 100% as losses if there are indicators of damage to their business and facilities, and inability to repay debts during recent events.
4. Allocate 100% for exposures in the Gaza Strip granted under finance lease (lease ending with ownership) arrangements.
5. Allocate 2% as additional credit losses from net exposures and distribute them to accounts most damaged and affected by current conditions.
6. Establish credit losses at 100% on impaired facilities and financing in the Gaza Strip prior to the war.
7. Provide the Palestine Monetary Authority with the impact of the aforementioned measures on the financial statements as of December 31, 2023, and no later than January 31, 2024.

Article (4) Penalties

Any person who violates the provisions of these Instructions shall be penalized in accordance with the provisions of Decision-Law No. (9) of 2010 concerning Banks.

Article (5) Enforcement

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

Issued in the city of Ramallah, on date: 2023/12/31 AD

Dr. Firas Melhem Governor [Signature]

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3 www.pma.ps Ramallah & Al-Bireh Governorate - Palestine P.O. Box 452 Postal code: P6160675 | Tel: +970 2 2415251 | Fax: +970 2 2415310 | info@pma.ps