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2021-01-01

Circular No. 225-2021 Regarding International Financial Reporting Standard 9

The Palestine Monetary Authority issued Circular No. 225-2021 mandating all Palestinian banks to appoint a qualified external auditor to independently review their models, methodologies, and hedging levels for calculating expected credit losses and asset classifications under IFRS 9. Banks must secure prior written approval for the external contract, ensure the auditor is completely independent from model design or internal audit functions, and submit full verification reports by February 2022. The directive further requires strict compliance with forward-looking Stage 3 provisioning, robust internal controls, and comprehensive documentation of credit risk assessment methodologies, default definitions, and macroeconomic indicators as outlined in the circular's appendix.

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Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Circular No. (2021/ 225)
To all banks operating in Palestine
Date: Sunday, 19 December 2021

Subject: International Financial Reporting Standard No. (9)

Based on the provisions of Articles No. (40) and No. (46) of the Banks Law No. 9 of 2010, and in follow-up to Instructions No. (02) of 2018 regarding the requirements and guidelines for implementing International Financial Reporting Standard No. (9), and for the purpose of ensuring the application of appropriate methodologies when calculating the requirements of International Standard No. (9) regarding the classification of financial assets, and providing risk levels based on the different characteristics stipulated by the Standard, all banks are required to appoint a qualified external party to conduct an independent review of the validity of the bank's models and methodologies for calculating the Standard's requirements, expected credit losses, and applied hedging levels, subject to compliance with the following:

  1. Contracting based on a defined scope of work and a methodology that ensures suitability, with the scope covering at a minimum the review and verification of the governance of the applied methodology, model inputs, design, outputs, performance quality, consistency, accuracy, and weaknesses, in addition to considering the aspects mentioned in the paper attached to this circular.

  2. Obtaining prior approval from the Palestine Monetary Authority regarding contracting with the external party via a written letter attached with a draft of the proposed contract detailing all aspects related to the contracting process, including the scope of work, methodology, results reports, and other contracting outputs, indicating the provision of a copy of those results and outputs to the Authority.

  3. The required verification process shall not be conducted by the bank's external auditor or any related party or anyone who participated in designing the calculation models or has a relationship with them, with the external party to be selected from among professional external audit firms possessing the competence to complete the required work.

  4. Calculating the requirements for Stage 3 in compliance with the Standard and applying a forward-looking approach in establishing provisions related to this stage.

  5. Completing the verification process and providing it with reports and outputs by a maximum deadline of the end of February 2022.

Dr. Fares Malham
Governor

Appendix: International Financial Reporting Standard No. (9)

  1. Policies and procedures and their compliance with the requirements, guidelines, and principles outlined in the Instructions.
  2. Expected credit loss model methodology, and mechanisms for defining and documenting evaluation and measurement methodologies for credit losses.
  3. Data reliability and provision establishment, in addition to definitions of key related terms.
  4. Bases for classifying credit exposures according to shared credit risk characteristics in case of portfolio-level assessment.
  5. Definition of the event or events that will lead to an increase in credit risk, thereby affecting classification within the different stages.
  6. Definition of default, default periods, and due installments to ensure no deviation from this rule (in case of any deviation, the bank must record the existence of these differences and the reason for them).
  7. Formulation and development of appropriate procedures applied systematically and consistently to determine appropriate provisions in line with the Authority's instructions and the Standard.
  8. How to incorporate forward-looking macroeconomic indicators into the assessment.
  9. Development of mechanisms and scenarios for probability of default (PD) and loss given default (LGD).
  10. Adoption and documentation of sound methodologies for handling policies, procedures, and controls to evaluate and measure credit risk on all credit-related exposures.
  11. The automated system applied for calculating provisions according to the International Financial Reporting Standard and the extent of availability of necessary data and information in banking systems.
  12. Internal control system for evaluating and measuring credit risk.

www.pma.ps

Ramallah & Al-Bireh Governorate - Palestine P.O. Box 452
info@pma.ps | Fax: +970 2 2415310 | Tel: +970 2 2415251
Gaza - Palestine P.O. Box 4026
Fax: +970 8 2844487 | Tel: +970 8 2825713

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