Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (2) of 2021

Concerning the Classification of Loan and Financing Portfolios and the Formation of Provisions

Based on the provisions of Decision No. (132) of 2011 regarding the Licensing and Supervision of Specialized Lending Institutions, particularly Article (21),

After reviewing Instructions No. (3) of 2018 concerning guidelines for implementing International Financial Reporting Standard No. 9,

In accordance with the powers delegated to us,

And in pursuit of the public interest,

We have issued the following Instructions:

(1) Article

Definitions

The words and phrases contained in these Instructions shall have the meanings assigned to them below, unless the context indicates otherwise:

Term	Definition
Lending Institution:	A specialized lending company licensed by the Palestine Monetary Authority.
Performing Portfolio:	Good loans and financings that are fully repaid according to the contract terms, including the repayment of principal, interest/returns, and related fees and commissions.
Non-Performing Portfolio:	Risky loans and financings that have not been repaid according to the contract terms, where the borrower defaults on the repayment of principal, interest/returns, fees, or commissions.
Provision:	Expected credit loss provision formed against both the performing and non-performing portfolios.
Rescheduled Loans and Financings:	Non-performing loans and financings whose agreed terms related to the repayment schedules for the risky (non-performing) debt have been modified for the purpose of debt collection.
Restructured or Refinanced Loans and Financings:	Loans and financings where any modification has been made to the original contract terms or the loan/financing agreement signed with the borrower, including (loan/financing value, installment value, interest/return value/rate, fee/commission value/rate, interest/return calculation and repayment mechanism, date of first or last installment, grace period).
Excluded and Written-Off Loans and Financings:	Loans and financings that the lending institution wishes to exclude from the balance sheet or write off, after exhausting all collection means and procedures in case of debtor default or occurrence of emergency situations affecting the borrower, such as death or natural disasters, among others.

---

(2) Article

Objective and Scope of Application

1. These Instructions aim to regulate the work of lending institutions regarding the classification of loan and financing portfolios and the formation of provisions against them.
2. The provisions of these Instructions apply to all specialized lending institutions licensed by the Palestine Monetary Authority.

(3) Article

Performing Portfolio and Revenue Recognition

The lending institution must comply with the following regarding the performing portfolio:

1. The value of (interest/returns) and (fees/commissions) collected in advance from borrowers over the life of loans and financings shall be amortized using the effective interest method, except for fees and commissions related to loan and financing granting costs whose value is less than $100, which may be recognized directly upon receipt.
2. Continue to form a risk reserve at a rate of 1% of the performing portfolio and form necessary provisions against it in accordance with the provisions of Instructions No. (3) of 2018 concerning guidelines for implementing International Financial Reporting Standard No. 9 "IFRS 9", provided that prior written approval from the Palestine Monetary Authority is obtained before using or reducing this account.

(4) Article

Non-Performing Portfolio

The lending institution must comply with the following regarding the non-performing portfolio:

1. Use any cash collections from non-performing loans and financings to repay the full outstanding principal.
2. Loans and financings and the necessary provisions against them shall be classified in accordance with the provisions of Instructions No. (3) of 2018 concerning guidelines for implementing International Financial Reporting Standard No. 9 "IFRS 9", and distressed loans and financings from the non-performing portfolio shall be classified in the following cases: a. A portfolio of unlisted loans and financings where the due date for one or more installments of principal, interest, or returns has passed for a period ranging from 91 to 120 days, and a provision of 25% shall be formed against them. b. A sub-standard portfolio of loans and financings where the due date for one or more installments of principal, interest, or returns has passed for a period ranging from 121 to 180 days, and a provision of 50% shall be formed against them.

---

(5) Article

Suspended Interest and Returns

The lending institution must suspend interest, returns, fees, and commissions due or charged in advance on unpaid loans and financings after 90 days have passed from the due date of one or more installments of the loan or financing principal, until the full principal is repaid for the due installments. These amounts shall be recorded in a separate account and shall not be included in the revenue account.

(6) Article

Acceptance of Collateral

For the purpose of calculating provisions, collateral against both the performing and non-performing portfolios is accepted in the following cases:

1. The value of the collateral provided under loan guarantee programs must be acceptable according to the coverage ratios set forth in agreements signed with any of the authorized entities listed in Annex No. (1), provided that prior written approval from the Palestine Monetary Authority is obtained for these agreements and before any modifications are made to them.
2. The risk-bearing percentage provided by financiers or debtors, whether local or foreign, under specific agreements for the purpose of lending/financing specialized lending institutions, must be acceptable at 100% of the risk-bearing percentage value according to agreements signed with these entities, for the purpose of calculating provisions, provided that prior written approval from the Palestine Monetary Authority is obtained for those agreements.

(7) Article

Rescheduled Loans and Financings

The lending institution must comply with the following regarding rescheduled loans and financings:

1. The conditions and procedures for rescheduling set forth in the approved credit policy.
2. The classification of rescheduled loans and financings shall remain within the distress periods prior to the rescheduling date, with the continued calculation of the provision formed against them and the progression through distress periods in the following cases: a. For loans and financings that became distressed after complying with rescheduling conditions. b. For loans and financings that became distressed after rescheduling during the grace period related to the payment of three installments. c. For rescheduled loans and financings whose installment due dates have not yet arrived after the rescheduling process.

---

(8) Article

Restructured or Refinanced Loans and Financings

The lending institution must comply with the following regarding the restructuring or refinancing of loans and financings:

1. The availability of a comprehensive policy approved by the Board of Directors regarding the restructuring or refinancing of loans and financings.
2. The restructuring or refinancing process for the borrower's debt must result from reasons unrelated to the client or the probability of distress.
3. It shall be amortized, including only the category of performing loan and financing portfolios.
4. The Palestine Monetary Authority shall periodically and simultaneously with periodic quarterly reports submit a detailed statement of restructured or refinanced loans and financings according to Annex No. (2).

(9) Article

Loans and Financings Referenced to Court

The lending institution must disclose debt referenced to court (before the courts) within its distress period while continuing to:

1. Progress through distress periods and form provisions against them until the debt is fully settled and installment payments are complied with.
2. The lending institution is prohibited from classifying debt referenced to court within the performing portfolio except after completing the first settlement with the borrower and the borrower paying six consecutive installments from their own sources.
3. The lending institution must classify debt referenced to court as losses and collect a 100% provision against it in the following cases: a. When the debt becomes distressed after the first settlement, i.e., it becomes distressed after being classified as a performing portfolio. b. In the case of more than one settlement of the same interest-bearing debt against the borrower at judicial authorities and courts.
4. The lending institution must transfer files of non-performing loans and financings to the company's lawyers by an official letter issued by the institution.

---

(10) Article

Excluded and Written-Off Loans and Financings

The lending institution must comply with the following regarding the exclusion or write-off of debt:

1. The lending institution must have a comprehensive policy approved by the Board of Directors regarding the exclusion and write-off of loans and financings.
2. Two years must have passed from the date of distress of non-performing loans and financings, including taking all collection procedures and follow-ups related to them.
3. It is not permitted to exclude and write off loans and financings belonging to related parties except after obtaining prior written approval from the Palestine Monetary Authority, in addition to disclosing these loans within the related party disclosures in the institution's final (annual) financial statements.
4. Disclosure in the final (annual) financial statements and interim (semi-annual) data of the institution regarding the total amount of excluded and written-off loans and financings and the movements therein.

(11) Article

Repeal

1. Instructions No. (02) of 2014 concerning the classification of loans and financings and the formation of provisions are repealed.
2. Instructions No. (01) of 2018 concerning rescheduled, restructured, or refinanced loans and financings, and those referenced to court, are repealed.
3. Instructions (43) of 2020 concerning the amendment of Instructions No. (2014/02) related to the classification of loans and financings and the formation of provisions are repealed.
4. Everything inconsistent with the provisions of these Instructions is repealed.

(12) Article

Penalties

Anyone who violates the provisions of these Instructions shall be punished in accordance with the provisions of Decision No. (132) of 2011 regarding the Licensing and Supervision of Specialized Lending Institutions.

---

(13) Article

Rectification of Status

All lending institutions must rectify their status in accordance with the provisions of these Instructions within a maximum period of three months from the date of entry into force of these Instructions.

(14) Article

Implementation and Enforcement

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

Issued in Ramallah on 27/10/2021 AD

Dr. Firas Malham Governor (Signature)

---

Annex No. (1)

Loan Guarantee Funds

1. Middle East Initiative.
2. Palestinian European Loan Guarantee Fund.
3. Daman Company. Any other entity may be added to the aforementioned list after obtaining approval from the Palestine Monetary Authority based on requests from specialized lending institutions.

---

Annex No. (2)

Note: Restructured and Refinanced Loans and Financings

Loan or Financing Number	Client/Borrower Name	Loan or Financing Value	Date of First Financing Payment	Date of Restructuring or Refinancing	Reason for Restructuring or Refinancing	Terms Modified in the Original Contract