Circular No. 07/M/18 on Prudential Rules for Microfinance Institutions

BANQUE DE LA REPUBLIQUE DU BURUNDI LA DIRECTION

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Circulaire n° 07/M/18 on Prudential Rules for Microfinance Institutions issued under Regulation No. 001/2018 on microfinance activities

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Section 1 : General Provisions

Article 1 : Object and Scope of Application

The purpose of this circular is to define the prudential rules applicable to microfinance institutions.

Article 2 : Prudential Standards

First- and third-category microfinance institutions are individually required to permanently comply with the prudential management, coverage, and risk concentration standards set by the Central Bank.

Savings and credit cooperatives organized in a network or affiliated with an umbrella structure are required to individually comply with the same prudential standards.

Second-category microfinance institutions, within their management framework, are required to comply with certain prudential standards specified in this circular.

Article 3 : Method of Transmission of Prudential Ratios

Prudential ratios are transmitted to the Central Bank on an annual, quarterly, and monthly basis.

Quarterly prudential ratios are transmitted to the Central Bank by the fifteenth day following the end of the quarter and are submitted as an annex to the quarterly financial statements.

Monthly prudential ratios are transmitted to the Central Bank by the fifteenth day of the following month.

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Prudential ratios, calculated based on annual data, are submitted as an annex to the annual financial statements.

The summary statement of prudential ratio calculations must be transmitted to the Central Bank on paper for documents audited by the Statutory Auditor, and via email at imf-reportingmensuel@brb.bi and imf-reportingtrimestriel@brb.bi respectively for monthly and quarterly reporting.

Article 4 : Transmission Frequency of Prudential Ratios

The transmission frequency of prudential ratios is detailed in the table below:

Prudential Ratio Labels	Transmission Frequency of Prudential Ratios
	First and third-category microfinance institution
Liquidity Ratio:<br> - Immediate liquidity ratio (30 days)<br> - 3-month liquidity ratio	- Monthly<br>- Quarterly and annual
Solvency Ratio	Quarterly and annual
Limitation of risks taken on a single signature	Quarterly and annual
Limitation of risks to which an institution is exposed	Quarterly and annual
Limitation of loans to management body members and institution staff	Quarterly and annual
Constitution of the general reserve	Annual
Financing mode for fixed assets	Quarterly and annual
Limitation of shareholdings	Quarterly and annual
Coverage of medium and long-term assets by stable resources	Quarterly and annual

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Section 2 : Calculation Methods for Prudential Ratios

Article 5 : Liquidity Ratios

Microfinance institutions are required to permanently maintain a minimum liquidity ratio between their realizable and available values and their short-term resources, namely the thirty (30)-day ratio known as the "immediate liquidity ratio," and the three (3)-month ratio known as the "short-term liquidity ratio."

The data used to calculate the short-term liquidity ratio are listed in Annex I of this circular, which specifies asset and liability maturities. The concepts of residual duration or remaining term are also detailed therein.

The immediate liquidity ratio must be submitted along with the breakdown table of credits by rate and term, as well as the table for deposits and other resources classified by rate and term, in accordance with the model set out in Annex II of this circular.

I. Immediate Liquidity Ratio

Numerator (A) : Realizable and available values
The realizable and available values consist of the following elements:

• Cash on hand;
• Demand deposits (balances with the Central Bank and financial institutions);
• Term deposits maturing in less than 30 days (balances with the Central Bank and financial institutions);
• Loans to financial institutions maturing in less than 30 days;
• Economic credits maturing in less than 30 days;
• Advances and loans to staff and management body members maturing in less than 30 days.

Denominator (B) : Payable liabilities (maturing within 30 days)
Payable liabilities maturing within 30 days at most consist of:

• Demand deposits from members or clients;
• Term deposits from members or clients maturing in less than 30 days;
• Savings accounts of members or clients maturing in less than 30 days;
• Credit guarantee deposits maturing in less than 30 days;
• Other member or client deposits maturing in less than 30 days;
• Borrowings from institutions maturing in less than 30 days.

Ratio = A/B
The standard to be met is a minimum of 20%.

II. Short-Term Liquidity Ratio (3 months)

Numerator (A) : Realizable and available values
The realizable and available values consist of the following elements:

• Cash on hand;
• Demand deposits (balances with the Central Bank and financial institutions);
• Term deposits maturing in less than 3 months (balances with the Central Bank and financial institutions);
• Loans to financial institutions maturing in less than 3 months;
• Economic credits maturing in less than 3 months;
• Advances and loans to staff and management body members maturing in less than 3 months;

Denominator (B) : Payable liabilities (maturing within 3 months)
Payable liabilities maturing within 3 months at most consist of:

• Demand deposits from members or clients;
• Term deposits from members or clients maturing in less than 3 months;
• Savings accounts of members or clients maturing in less than 3 months;
• Credit guarantee deposits on granted loans maturing in less than 3 months;
• Other member or client deposits maturing in less than 3 months;
• Borrowings from institutions maturing in less than 3 months;

Ratio = A/B
The standard to be met is a minimum of 20%.

Article 6 : Solvency Ratio

Microfinance institutions are required to permanently comply, on the one hand, with a minimum core solvency ratio of 10%, determined by the ratio between net core capital and total risk-weighted assets (credit, market, and operational), and on the other hand, with a minimum global solvency ratio of 12%, determined by the ratio between total capital and total risk-weighted assets (credit, market, and operational).

The numerator of the ratio consists of prudential capital (core capital and complementary capital), while the denominator includes all balance sheet and off-balance sheet asset elements and given commitments weighted for credit risk. The latter is determined by balance sheet and off-balance sheet asset elements net of related amortizations and/or provisions, or eligible guarantees assigned weighting ratios.

Balance sheet assets and off-balance sheet given commitments are assigned weighting coefficients of 0%, 20%, 50%, and 100% depending on whether they present low, moderate, medium, or high risk.

The capital of microfinance institutions, hereinafter referred to as "total capital," consists of net core capital and complementary capital.

Core capital (1) is constituted by the sum of the elements listed in point A, minus the elements listed in point B.

A. Elements included:

• Paid-up share capital;
• Capital premiums;
• Legal, statutory, discretionary, and other reserves;
• Retained earnings (credit balance);
• Undistributed profit up to 50%.

B. Elements to be deducted:

• Net intangible fixed assets;
• Retained earnings (debit balance);
• Negative profit;
• Shareholdings held for more than one year in microfinance institutions, credit establishments, or other financial institutions.

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Complementary capital (2) includes:

• Earmarked funds;
• Investment grants;
• Borrowings maturing in more than 5 years;
• Provisions for risks or of a reserve nature.

The applicable weighting ratios are as follows:

1. Zero percent (0%) weighting ratio

• Cash on hand;
• Balances at the Central Bank;
• Off-balance sheet: Credit guarantees and sureties in favor of the Public Administration.

2. Twenty percent (20%) weighting ratio

• Balances and claims on credit establishments located in Burundi;
• Balances and claims on microfinance institutions located in Burundi;
• Other receivables;
• Internal transfer;

3. Fifty percent (50%) weighting ratio

• Finance lease contracts;
• Off-balance sheet:
  • Performance guarantees;
  • Bid bonds.

4. One hundred percent (100%) weighting ratio

• Net customer claims;
• Loans to financial institutions located in Burundi (credit establishments and microfinance institutions);
• Receivables (credit establishments and microfinance institutions);
• Financial investments excluding securities issued by the State;
• Other debtors excluding amounts due by the State;
• Stocks;
• Asset regularization accounts;
• Liaison account;

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• Advances and loans to staff and executives;
• Other values and assets;
• Net fixed assets;
• Off-balance sheet:
  • Customer financing commitments (net of provisions and guarantee deposits);
  • Credit guarantees and sureties given to customers;
  • Values and securities given as collateral;
  • Doubtful signed commitments net of related provisions;
  • Other cautionary/guarantee commitments.

Article 7 : Limitation of Risks to Which an Institution is Exposed

The risks to which a microfinance institution is exposed, excluding risks taken on earmarked resources borne by the fund provider, must not exceed double its internal and external resources.

Numerator: Risks borne by an institution (A)

• Economic credits at gross amount;
• Advances and loans to staff and management body members;
• Shareholdings;
• Given commitments by signature.

Deducted from these risks are guarantee deposits, risks taken on earmarked resources borne by the fund provider, and commitments received by signature from a microfinance institution for a duration at least equal to that of the risks they cover.

Denominator: Resources (B)
Resources consist of the following:

• Total deposits from members or clients;
• Borrowings from financial institutions;
• Unutilized received grants;
• Earmarked resources.

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Ratio = A/B
The standard to be met is a maximum of 200%.

Article 8 : Limitation of Risks Taken on a Single Signature

Risks taken on a single signature are limited to 5% of the core capital of the microfinance institution.

For any credit or commitment exceeding the ceiling set in the preceding paragraph, the microfinance institution must obtain prior approval from the Central Bank.

A single signature refers to any natural or legal person acting in its own name and/or on behalf of another institution over which it holds direct or indirect control power, notably exclusive, joint, or significant influence. This limitation applies to persons related to a microfinance institution.

Numerator: Gross amount of loans and commitments by signature (A)
Denominator: Core capital (B)

Elements included:

• Paid-up share capital;
• Capital premiums;
• Legal, statutory, discretionary, and other reserves;
• Retained earnings (credit balance);
• Undistributed profit up to 50%.

Elements deducted:

• Net intangible fixed assets;
• Retained earnings (debit balance);
• Negative profit;
• Shareholdings held for more than one year in microfinance institutions, credit establishments, or other financial institutions.

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Ratio = A/B
The standard to be met is a maximum of 5%.

Article 9 : Ratio Limiting Loans to Management Body Members and Institution Staff

Loans and commitments by signature to management body members and staff of a microfinance institution must not exceed 20% of core capital, without individual counterparties exceeding 2% of core capital.

Numerator: Gross amount of loans and commitments by signature to management body members and staff (A)
Denominator: Core capital (B)

Elements included:

• Paid-up share capital;
• Capital premiums;
• Legal, statutory, discretionary, and other reserves;
• Retained earnings (credit balance);
• Undistributed profit up to 50%.

Elements deducted:

• Net intangible fixed assets;
• Retained earnings (debit balance);
• Negative profit;
• Shareholdings held for more than one year in microfinance institutions, credit establishments, or other financial institutions.

Ratio = A/B
The standard to be met is a maximum of 20%.

Article 10 : Ratio Covering Medium and Long-Term Assets with Stable Resources

Microfinance institutions are required to permanently maintain a minimum ratio of 100% between stable resources and their medium and long-term assets.

Numerator: Long-Term Resources (A)

• Borrowings maturing in more than one year;
• Term deposits maturing in more than one year from members, clients, and beneficiaries;
• Other received deposits maturing in more than one year;
• Provisions for risks or of a reserve nature;
• Earmarked funds;
• Investment grants;
• Retained earnings (credit balance);
• Reserves;
• Paid-up share capital;
• Capital premiums;
• Undistributed profit up to 50%.

Elements to be deducted:

• Supplementary provisions to be established;
• Retained earnings (debit balance);
• Deficit result.

Denominator: Medium and Long-Term Assets (B)

• Balances with financial institutions maturing in more than one year;
• Loans to financial institutions maturing in more than one year;
• Healthy medium and long-term credits;
• Other debtors of more than one year;
• Net financial fixed assets;
• Net intangible fixed assets;
• Net tangible fixed assets;
• Work in progress.

Article 11 : Financing Mode for Fixed Assets

Microfinance institutions are required to finance all their net fixed assets as well as their shareholdings within limits of 80% of their total net capital.

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Numerator (A) : Total net fixed assets minus net intangible fixed assets.
Denominator: Core capital + Complementary capital (B)
Ratio = A/B
The standard to be met is a maximum of 80%.

Article 12 : Ratio Limiting Shareholdings

The total shareholdings of a microfinance institution must not exceed 10% of its core capital.

Numerator: Shareholdings (A)
Denominator: Core capital (B)

Elements included:

• Paid-up share capital;
• Capital premiums;
• Legal, statutory, discretionary, and other reserves;
• Retained earnings (credit balance);
• Undistributed profit up to 50%.

Elements deducted:

• Net intangible fixed assets;
• Retained earnings (debit balance);
• Negative profit;
• Shareholdings held for more than one year in microfinance institutions, credit establishments, or other financial institutions;

Ratio = A/B
The standard to be met is a maximum of 10%.

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Article 13 : Constitution of the General Reserve

The general reserve of microfinance institutions is funded by an annual minimum deduction of 20% from net surpluses before dividend distribution for each fiscal year, as applicable, after offsetting any possible debit retained earnings.

Amounts placed in the general reserve cannot be distributed among members, shareholders, or stockholders. The allocation to the general reserve is mandatory at all times, regardless of the level reached by the cumulative amount of this reserve relative to the institution's share capital.

Article 14 : Entry into Force

This circular replaces Circular No. 05/M/10 on prudential standards for microfinance establishments dated May 4, 2010, and enters into force on the day of its publication in the Official Bulletin of Burundi and on the website of the Banque de la République du Burundi.

Done in Bujumbura, on 20.8.2018

BANQUE DE LA REPUBLIQUE DU BURUNDI

Annonciata SENDAZIRASA
2^ème Vice-Governor.-

Melchior WAGARA
1^er Vice-Governor.-