Instruction 08 on Prudential and Management Standards for Microfinance Institutions

REPUBLIC OF ISLAMIC MAURITANIA CENTRAL BANK OF MAURITANIA GOVERNOR

INSTRUCTION No. 08 IG 2007

Establishing Prudential and Management Standards Applicable to Microfinance Institutions (MFI)

The Governor of the Central Bank of Mauritania, Having regard to Ordinance No. 2007-004 of January 12, 2007, establishing the statute of the Central Bank of Mauritania, Having regard to Ordinance No. 2007-005 of January 12, 2007, regulating Microfinance Institutions, Having regard to Ordinance No. 2007-020 of March 13, 2007, regulating Credit Institutions, Having regard to Decree No. 019-2007 of January 7, 2007, appointing the Governor of the Central Bank of Mauritania, Decides:

Article 1: This Instruction applies to Microfinance Institutions operating in the Islamic Republic of Mauritania. Category A and B MFIs, authorized to receive funds from their members or the public, are subject to supervision focused on compliance with prudential and management standards. Category D MFIs, not authorized to receive funds from the public, and Category C are subject to supervision focused on financial transparency. They are not required to comply with the prudential standards set out in Section 1 of this Instruction.

SECTION I: PRUDENTIAL STANDARDS Article 2: Solvency 2.01 The MFIs subject to this Instruction must comply with the following solvency ratio: Net Equity / Weighted Net Assets ≥ 15% 2.02 Net equity is determined in accordance with a calculation formula to be established by circular of the Central Bank. 2.03 The risks incurred, which constitute the denominator of the ratio, include:

• Customer loans, including hire-purchase and lease-with-option-to-buy operations,
• Investment and participation securities, net of investment titles deducted from available equity,
• Guarantees by endorsement,
• Other assets appearing in classes 3 and 4 of the balance sheet. 2.04 Additional provisions to be established, charged against available equity, are deducted from incurred risks. Also deducted from the calculated commitments under point 2.03 are funds allocated to their guarantee - deposits and blocked provisions, subordinated borrowings... -, guarantees issued by the Mauritanian State, public bodies authorized to provide their guarantee, as well as, with express agreement of the Central Bank, counter-guarantees received from credit institutions, notably guarantee funds. This deduction is made up to the amount of risk effectively covered, i.e., within the limit of the exposures thus backed. 2.05 For Category A MFIs organized in a network, this ratio is calculated on a consolidated basis. 2.06 Category A MFIs organized in a network must ensure that each legally constituted entity forming the network individually complies with a coverage ratio of at least 5%. The head office may allocate equity to an affiliated entity that does not have a sufficient level of available equity. This allocation is deducted from the equity of the allocating entity.

Article 3: Liquidity 3.01 The MFIs subject to this Instruction must comply with the following liquidity ratio: Cash and Equivalents / Demand Deposits and Equivalents ≥ 25% The numerator includes:

• Cash on hand,
• Loans and placements at the Central Bank,
• Treasury bills,
• Debit accounts and placements with credit institutions and other financial institutions. The denominator includes:
• Customer demand accounts,
• Other customer accounts with a maturity of less than three (3) months or for the portion whose residual term is less than three (3) months. In the absence of an aging schedule provided by the MFI, all fixed-term and passbook deposit accounts are included in the denominator of the ratio. 3.02 For mutualist MFIs organized in a network, this ratio is calculated on a consolidated basis.

Article 4: Coverage of Medium and Long-Term Assets 4.01 The MFIs subject to this Instruction must comply with the following ratio for covering medium and long-term assets with stable resources: Medium/Long-Term Assets (Residual Term > 1 Year) / Stable Resources ≤ 100% The numerator and denominator include all securities with a residual term exceeding one year. 4.02 For mutualist MFIs organized in a network, this ratio is calculated on a consolidated basis.

Article 5: Coverage of Fixed Assets 5.01 The MFIs subject to this Instruction must comply with the following ratio for covering fixed assets with available equity: (Investment Securities + Fixed Assets) / Available Equity ≤ 100% The numerator includes:

• Investment securities net of participations deducted from available equity,
• Fixed assets and other immobilized assets. The denominator: net equity is determined in accordance with a calculation formula to be established by circular of the Central Bank. 5.02 The ratio rate will be reduced to 75% on January 1, 2010, and to 50% on January 1, 2013. 5.03 For Category A MFIs organized in a network, this ratio must be respected by each legally constituted entity. Furthermore, affiliated entities are prohibited from receiving subsidies or credits from funders that do not pass through the head office, which is solely authorized to contract as the representative structure of the network.

Article 6: Limitation of Loans to Management 6.01 Category A MFIs must comply with a ratio limiting risks granted to elected directors, members of management and supervisory bodies, as follows: Risks on salaried directors and elected directors / Available Equity ≤ 30% Salaried directors include the General Manager and his deputies (if any), the Operations Director, the Accounting and Financial Director, the Inspector General, and the manager of each agency or local treasury. 6.02 For Category A MFIs organized in a network, this ratio must be respected by each affiliated, legally constituted entity for loans granted to customers. Unions and federations are not subject to this ratio for loans granted to their affiliates. 6.03 Category B MFIs subject to prudential standards may not grant loans to their directors and administrators (natural persons) as well as related parties up to the first degree of kinship. This rule also applies to natural person shareholders and related parties up to the first degree of kinship, holding individually or collectively more than 5% of the capital.

Article 7: Limitation on Participations MFIs subject to this Instruction may not take participations in companies whose object does not directly contribute to the realization of their corporate purpose and the provision of financial services to their customers, except for securities held following the recovery of a claim and destined for resale within a short period. Conversely, they may hold investment securities in companies whose activity contributes to the operation of the MFI, including IT service and software publishing companies, cash-in-transit companies, support and training enterprises for micro-entrepreneurs and farmers, as well as companies whose sole object is holding real estate property housing the MFI's operations.

Article 8: Retention of Results and Guarantee and Support Funds 8.01 Category A MFIs affiliated to a network must set aside 25% of their annual net profit as general reserves. Category A MFIs not affiliated to a network must set aside 50% of their annual net profit as legal reserves. Category B MFIs subject to this Instruction must set aside 15% of their annual net profit as legal reserves. This reserve may be used to offset a negative carried-forward balance when other reserves are unavailable. Annual net profit is understood after the allocation of any deficit carry-forward and before any dividend distribution. For mutualist MFIs, the deduction is made before any member rebates. Furthermore, for these MFIs, any capital increase by incorporation of funds from this reserve and any release of shares through the use of this reserve are prohibited. The retention of profits becomes optional when total equity (excluding supplementary equity) reaches 20% of assets. 8.02 Mutualist MFIs subject to this Instruction, affiliated to a network, must subscribe to an internal guarantee and support fund within the network, intended:

• To allocate equity to affiliated institutions whose solvency ratio is abnormally low, enabling them to comply with their solvency ratio;
• To cover the liabilities of affiliated institutions in case of closure or disaffiliation not followed by individual authorization or affiliation to another network. This fund is financed,
• By an obligatory deduction of 25% from the annual net profits of each entity forming the network,
• By supplementary contributions according to terms set by the head structure of the network having received collective authorization. When the fund is less than 1% of total consolidated assets, a deduction of at least 1% of each affiliate's total customer-facing balance sheet is made at year-end to finance the fund. Financing of this fund ceases to be mandatory when it reaches 5% of the network's total consolidated balance sheet. This fund is called upon to reimburse priority amounts due to customers in case of closure of an affiliated institution, up to 2.5 million Ouguiyas per depositor.

Article 9: Risk Division 9.01 Category A MFIs are required to permanently comply with a risk division ratio as established below: Commitments on the same beneficiary / Available Equity ≤ 15% 9.02 By commitment is understood all risks on customers or employees, such as:

• Distributed loans,
• Hire-purchase and lease-with-option-to-buy operations,
• Investment and participation securities,
• Guarantees by endorsement,
• Overdraft authorizations. By beneficiary is understood, in addition to the definition given for risk division by banks and financial institutions, all natural persons living at the same address. Net equity is determined in accordance with a calculation formula to be established by circular of the Central Bank. 9.03 For Category A MFIs organized in a network, this ratio is calculated on a non-consolidated basis. It does not apply to facilities granted by Unions and Federations to their members or the financial sector. 9.04 MFIs are required to establish an equity provision in case of ratio breach, not covered by a guarantee from a credit institution or International Financial Institution covering the entire excess. This equity provision covers the entire excess and is deducted from available equity. 9.05 Category B MFIs are required to permanently comply with a risk division ratio as established below: Commitments on the same beneficiary / Available Equity ≤ 1% Articles 9.02 and 9.04 apply to Category B MFIs.

SECTION II: MANAGEMENT STANDARDS Article 10: Concept of Financial Viability MFIs must demonstrate their ability to operate and balance their operating account sustainably without operational subsidies. They should strive to reflect this financial viability in their objectives at all stages of development:

• Initial viability, to be achieved within 5 years (upon authorization);
• Concept of sustainable financial permanence: beyond the 5-year period, financial products (excluding subsidies) cover, in normal operating phase, operating expenses, including: • Depreciation and provisions; • For Category A MFIs, the cost of essential services provided by head offices or designated bodies.

Article 11: Global Cap on MFI Operations The maximum exposure of a Category A MFI to the same client or beneficiary may not exceed 1 million Ouguiyas. The maximum exposure of a Category B MFI to the same client or beneficiary may not exceed 2 million Ouguiyas. The maximum exposure of a Category C MFI to the same client or beneficiary may not exceed 1 million Ouguiyas. The maximum credit volume of Category C MFIs may not exceed one (1) billion Ouguiyas. These ceiling amounts may be revalued by circular of the Central Bank, based on the inflation rate recorded for the preceding year. The new ceiling applies as of May 1. The ceilings thus fixed remain valid until modified by instruction of the Central Bank.

Article 12: Category C MFIs must:

• Maintain in kind, or on an account with a Mauritanian bank, or in public funds, the entirety of their guarantee deposits related to credit granted;
• Maintain on a dedicated account with a Mauritanian bank until the financing operation is realized, deposits constituting a prerequisite for credit. Category B MFIs not authorized to receive public funds must maintain in kind, or on an account with a Mauritanian bank, or in public funds, the entirety of their guarantee deposits related to credit granted. Subject to the preceding paragraph, they may not offer their customers savings or deposit accounts in any form whatsoever.

SECTION III: FINAL PROVISIONS Article 13: For the application of the ratios defined above, a quarterly declaration attached to the accounting statement is submitted to the Central Bank according to a model to be specified by circular.

Article 14: In case of breach of any of the standards set out in this Instruction, the institution concerned takes, where applicable upon injunction by the Central Bank and within a deadline that may be granted to it, appropriate measures to regularize its situation, and keeps the Central Bank informed. An MFI that has seriously infringed the regulation, or failed to comply with the Central Bank's injunction, or proved unable to regularize its situation, will be subject to disciplinary sanctions provided for in the articles of the ordinance regulating MFIs.

Article 15: This Instruction repeals and replaces all contrary provisions or those duplicating it, and enters into force as of its date of signature.