INSTRUCTION N° 001/06-CSBF on the Solvency Ratio of Credit Institutions

INSTRUCTION N° 001/06-CSBF on the Solvency Ratio of Credit Institutions The Banking and Financial Supervision Commission (CSBF) of the Republic of MADAGASCAR, Having regard to Law No. 95-030 of February 22, 1996 on the activity and supervision of credit institutions, Having regard to Instruction No. 001/2000-CSBF of February 1, 2000 on the available own funds of credit institutions, Pursuant to the provisions of Articles 35 and 41 of the aforementioned Law No. 95-030, which empower the CSBF to establish management standards and prudential rules that credit institutions must comply with, in particular to ensure their liquidity, solvency, and financial structure balance, Having regard to the opinion issued by the Professional Association of Banks pursuant to the last paragraph of Article 36 of the aforementioned Law No. 95-030, DECIDES:

Article 1: Credit institutions authorized to conduct banking operations in Madagascar are required to maintain at all times a minimum ratio, known as the solvency ratio, between the amount of their available own funds and the risks on their assets and off-balance sheet commitments. Compliance with the provisions of this Instruction must be calculated on a consolidated basis for credit institutions having one or more banking subsidiaries. Consolidation rules are those defined by the Chart of Accounts for Credit Institutions.

Article 2: Available own funds are determined in accordance with Instruction No. 001/2000-CSBF of February 1, 2000. The calculation methods are partially modified by Instruction No. 002/2005-CSBF of June 1, 2005 on the conditions for periodic and annual closing, and the publication of accounting documents of credit institutions.

Article 3: Risks consist of all asset items and off-balance sheet commitments, weighted and subject to conversion factors under the following conditions. 3.1. The following assets are included in the risk base, subject to fixed weighting: a) 0% for: o cash holdings in Ariary and foreign currencies; o claims on the State; o claims denominated and financed in Ariary with the Central Bank of Madagascar; o claims on Malagasy credit institutions, other Malagasy financial institutions, or expressly guaranteed by them, with an initial maturity not exceeding 3 months, excluding claims that the rules applicable to these institutions classify in their own funds; o claims on multilateral development banks; o assets secured by pledge or equivalent collateral assignment, of:  securities issued by the State or the Central Bank of Madagascar;  securities issued by multilateral development banks eligible for a 0% weighting;  deposits with the lending institution;  certificates of deposit or similar instruments issued by and deposited with the lending institution; b) 20% for: o claims on Malagasy credit institutions, other Malagasy financial institutions, with an initial maturity exceeding 3 months; o claims on multilateral development banks, other than those eligible for the 0% weighting above; o assets secured by pledge or equivalent collateral assignment, of:  securities issued by multilateral development banks weighted at 20%;  deposits with credit institutions other than the lending institution;  certificates of deposit or similar instruments issued by credit institutions other than the lending institution; c) 100% for all other assets not listed above and in point 3.2 below, except those deducted from the lending institution's own funds, and notably: o advances and loans to customers, including non-performing loans; o accounts for various debtors and regularization accounts, except those linked to identified counterparties to be included in the risk base according to the counterparty's weighting; o net debtor balances of the following items:  branches and agencies;  collection accounts; o portfolio accounts:  trading portfolio;  investment securities; o fixed asset accounts:  fixed assets;  work in progress; o participations, except those in credit institutions which are directly deducted from own funds. The General Secretariat of the CSBF establishes and updates the list of multilateral development banks with their corresponding weightings. 3.2. The following asset items, subject to variable weighting based on a rating, are included in the risk base as follows: a) claims on foreign States and foreign Central Banks, based on the consensus classification established by export credit agencies (ECA) participating in the "Arrangement on Officially Supported Export Credits":  ECA Rating  Weighting 1 0% 2 20% 3 50% 4 100% 5 100% 6 100% 7 150% b) claims on foreign banks or foreign correspondents, based on their rating:

Rating of foreign correspondents	Applicable Weighting	Weighting for short-term exposures (less than 3 months)
AAA to AA-	20%	20%
A+ to A-	50%	20%
BBB+ to BBB-	50%	20%
BB+ to B-	100%	50%
Below B-	150%	150%
No rating	50%	20%
Upon request from each institution, the General Secretariat of the CSBF communicates the list and updates of the weightings (ECA) by counterparty.
Under this Instruction, the aforementioned notion of claims covers any type of instrument including loans and securities, and also includes guarantees received from these same counterparties to cover distributed credits.
3.3. Doubtful, disputed, and litigious claims (CDL), as defined by current regulations, are included in the risk base for the portion not covered by collateral and guarantees, net of specific provisions, after applying the following weightings:
 150% when specific provisions are less than 20% of the gross amount of CDLs;
 100% when said provisions are between 20% and 50% of the gross amount of CDLs;
 50% when provisions exceed 50% of the gross amount of CDLs.
 Each institution must submit as an annex to its quarterly declaration the results of the periodic portfolio review with the following indications:
 the gross amount of CDLs, i.e., the amount of principal plus accrued and due interest (a);
 the amount of collateral and guarantees retained in application of risk provisioning rules (b);
 the uncovered portion [(a)-(b)] by collateral and guarantees;
 the specific provisions for impairment losses established on CDLs.
3.4. Off-balance sheet items are included in risks according to the following procedures:
Each off-balance sheet item corresponds to a conversion factor into "credit equivalent":
 0% of its amount when it is revocable at any time without notice or becomes void in case of downgrade of the counterparty's rating;
 20% when its initial duration is less than 1 year;
 50% when its initial duration is greater than 1 year.
On the determined "credit equivalent" amount, a weighting is applied at the level applicable to counterparties for balance sheet items.
Commitments covered by a guarantee provided by a third party are assigned the weighting rate applicable to the guarantor or the guarantee, if this rate is lower than the rate applicable to the principal debtor.
Guarantees granted to another credit institution for the repayment of claims held by the latter are assigned the weighting rate applicable to these claims.

Article 4: The items referred to in Article 3 are deducted from the corresponding line items as follows: 4.1. amounts deducted from own funds in application of Instruction No. 001/2000-CSBF, notably additional provisions to be set up; 4.2. impairment losses on asset items as well as reserved income; 4.3. the portion of equipment subsidies exceeding the amount taken into account as funds assimilated to own funds under Instruction No. 001/2000-CSBF on available own funds of credit institutions; 4.4. the following items, up to either the amount of exposures when the guarantee exceeds them, or the amount of the guarantee when exposures exceed it:  sums held as collateral for these claims - security deposits, reserved provisions... -;  guarantees issued by the Malagasy State, by credit institutions governed by Law No. 95-030 of February 22, 1996;  with the express approval of the General Secretariat of the CSBF;  guarantees received from foreign credit institutions;  credit refinancing lines granted by lenders and accompanied by lenders assuming the risks on the thus-financed credits; in case of risk sharing, the refinancing amount is deducted up to the risk borne by the lender;  all exposures covered by a partially mutualized guarantee fund or assimilable resources, when the ratio between the funds thus held and the guaranteed exposures is at least equal to the ratio set in Article 5. Otherwise, the deduction is limited to the amount which, relative to the guarantee fund, is covered by it according to the ratio set in Article 5. In accordance with the Chart of Accounts for Credit Institutions, partially mutualized guarantee funds are funds allocated to guarantee certain categories of credits or signature commitments, and which cover only the risks related to these operations. Only defaults by beneficiaries registered in the guarantee fund trigger its use. The acts governing the operation of these funds are communicated to the General Secretariat of the CSBF.

Article 5: The solvency ratio prescribed in Article 1 is set at a minimum of 8%. The CSBF may raise this level either for a category of credit institutions or for an individual institution based on a reasoned decision according to the specific risk profile of that credit institution.

Article 6: For the application of Article 5 above, a declaration, prepared as of the closing date of the periodic accounting situation and attached thereto, is sent to the General Secretariat of the CSBF according to the model annexed below. The General Secretariat specifies the procedures for submitting this document on electronic media.

Article 7: In case of non-compliance with the standard set in Article 5 of this Instruction, or with that set individually by the CSBF, the institution in question shall, where applicable upon injunction by the Commission issued under Article 47 of Law No. 95-030 and within the timeframe that may be granted, take appropriate measures to regularize its situation, and inform the General Secretariat of the CSBF. An institution that violates the regulation or fails to comply with the CSBF's injunction or proves unable to regularize its situation shall be subject to penalties and sanctions provided for in Articles 49 and 52 of Law No. 95-030.

Article 8: The CSBF may authorize a subject institution to temporarily derogate from the provisions of this Instruction, granting it a deadline to regularize its situation.

Article 9: For institutions newly subject to the banking law pending authorization and already in operation, the first declaration must be submitted during the next periodic closing.

Article 10: These provisions, which repeal all contrary provisions of the same object, notably Instruction No. 002/94/CCBEF of December 29, 1994, enter into force on June 30, 2007 based on financial statements closed on December 31, 2006, duly certified by the auditor(s). Done in Antananarivo, on October 13, 2006 For the Banking and Financial Supervision Commission, The President, Gaston E. RAVELOJAONA

Nature of Risks (Asset Items)	Ref. (Art. 3)	Gross Amount	Risk Mitigations (deposits, pledges, guarantees)	Net Amount	Weighting	Weighted Risks
BALANCE SHEET ITEMS
Cash values
Banknotes and coins	3.1 a)				0%
Values to be settled	3.1 a)				0%
Other cash values	3.1 a)				0%
Sovereign claims
Malagasy State	3.1 a)				0%
Central Bank of Madagascar
Current accounts and loans	3.1 a)				0%
Treasury bills and similar securities	3.1 a)				0%
Foreign States
ECA Rating: 1	3.2 a)				0%
ECA Rating: 2	3.2 a)				20%
ECA Rating: 3	3.2 a)				50%
ECA Rating: 4 to 6	3.2 a)				100%
ECA Rating: 7	3.2 a)				150%
Foreign Central Banks
ECA Rating: 1	3.2 a)				0%
ECA Rating: 2	3.2 a)				20%
ECA Rating: 3	3.2 a)				50%
ECA Rating: 4	3.2 a)				100%
ECA Rating: 5	3.2 a)				150%
Claims on credit institutions
Residents
Claims initial maturity < 3 months	3.1 a)				0%
Claims initial maturity > 3 months	3.1 b)				0%
Non-residents
Claims initial maturity < 3 months
AAA to AA-	3.1 b)				20%
A+ to A-	3.1 b)				20%
BBB+ to BBB-	3.1 b)				20%
BB+ to B-	3.1 b)				50%
Below B-	3.1 b)				150%
No rating	3.1 b)				20%
Claims initial maturity > 3 months
AAA to AA-	3.1 b)				20%
A+ to A-	3.1 b)				50%
BBB+ to BBB-	3.1 b)				50%
BB+ to B-	3.1 b)				100%
Below B-	3.1 b)				150%
No rating	3.1 b)				50%
Other financial institutions
Multilateral development banks
Claims eligible for 0%	3.1 a)				0%
Claims eligible for 20%	3.1 b)				20%
Other Malagasy financial institutions
Claims initial maturity < 3 months	3.1 a)				0%
Claims initial maturity > 3 months	3.1 b)				20%
Claims on customers
Loans, advances to customers	3.1 c)				100%
Non-performing loans	3.1 c)				100%
CDL (1)
provisions ≤ 20% (2)	3.3				150%
20% < provisions ≤ 50% (2)	3.3				100%
Provisions > 50% (2)	3.3				50%
Other assets
Branches and agencies
net debtor balances	3.1 c)				100%
Collection accounts
net debtor balances	3.1 c)				100%
Various debtors (3)
on counterparty at 0%	3.1 c)				0%
20%					20%
50%					50%
100%					100%
150%					150%
Regularization accounts (3)
on counterparty at 0%	3.1 c)				0%
20%	3.1 c)				20%
50%	3.1 c)				50%
100%	3.1 c)				100%
150%	3.1 c)				150%
Portfolio accounts
trading portfolio	3.1 c)				100%
investment securities	3.1 c)				100%
Fixed asset accounts
fixed assets	3