Chapter Two: Instructions for Implementing the International Financial Reporting Standard 9 - Part One: Experimental Application

With a view to the Central Bank of Egypt's continued commitment to applying the best practices in the Egyptian banking sector and implementing the global IFRS standards to strengthen the financial positions of banks and facilitate the transition and exchange of experience, and in the framework of preparing for the implementation of the requirements of the International Financial Reporting Standard 9, the Board of Directors of the Central Bank decided in its meeting held on January 17, 2018 the following:

1. Banks are required to prepare financial statements and apply IFRS 9 starting from January 1, 2019 (starting from January 1, 2019 for banks whose financial statements end in December of each year, and starting from July 1, 2019 for banks whose statements end in June of each year).

2. Each bank must notify the Central Bank regarding its readiness in terms of resources or the adequacy of resources, with respect to the banks that will not be subject to the implementation of IFRS 9 requirements, and it must be notified that the readiness of these banks is before June 2018. The bank must also send the Central Bank (Supervisory Department) a report on the actual readiness date for the implementation of the requirements for the banks that will be subject to the implementation of the requirements.

3. Each bank must prepare financial statements as of 31/3/2018 and apply the current standards, in addition to preparing experimental financial statements prepared according to the standards and applying the IFRS 9 requirements (Appendix 1), and under the condition that these statements are prepared for the year 2018 and as of 31/3. Each bank must also conduct the Quantitative Impact Study (QIS) expected to apply the standard on the expected values of the assets resulting from the application compared to the assets according to the current standards, and this is for the first quarter of the Quantitative Impact Study on the application (Appendix 2).

4. Each bank must notify the Central Bank (Supervisory Department) of its IFRS 9 capital model every quarter following the experimental application of the standard, in light of the experimental financial statements.

5. It is incumbent on the external auditors and the internal auditors of each bank to verify the accuracy of the data and the submitted forms to the bank in terms of the adequacy of the resources for the implementation of the standard and the standards of the committee, as well as the responsibility of the verification officials for the accuracy of the entries and the attached documents to the experimental financial statements and the statements prepared by the Central Bank of Egypt for the implementation of the standard.

Letter from the Deputy Governor of the Central Bank of Egypt dated January 28, 2018 1 1 Banks are advised to refer to the guidelines of the Central Bank required to provide the guidelines in this matter.

6. In the framework of the preparation for the implementation of IFRS 9 and for the purpose of preparing the financial positions of banks to face the expected increase in the volume of assets resulting from the adoption of the expected credit loss method, which will affect the future financial positions of the economy (Looking Forward), it is decided that banks form an IFRS 9 credit risk provision at a rate of 1% of the total weighted credit exposures, from the profit of the year 2017, which is deducted from the basic capital by the financial statements, and it is not to be distributed to the Central Bank.

7. It is incumbent on the Board of Directors of the bank (or those who replace them in the case of foreign banks) to assume direct responsibility and close follow-up for the implementation of the instructions and the need to ensure the following:

8. Providing the necessary requirements for the implementation and compliance with the required commitments and removing any obstacles that may hinder the implementation.

9. Preparing the business models (BM) Models that are submitted for implementation in the strategic plan of each bank, including the determination of the credit rating system used, the probability of default (PD) for each category of this classification, and the calculation of each of the loss given default (LGD) and exposure at default (EAD) under the calculation of the expected credit loss (ECL) and what requires the confirmation of the data and their use as a basis for the implementation of these methods.

10. Establishing a committee for the models and the development of the separate models and the reports.

11. Developing the environment for rating and the policies of granting and compliance of credit and collection.

12. Coordinating between the departments concerned with the bank, including the financial departments, the rating departments, the information technology departments, the external and internal audit departments, and the other departments of the bank concerned with this matter.

2 And it is mentioned in Appendix 3 the guidelines for the preparation of the data from the banks according to the global standards for financial reporting IFRS 9.

Letter from the Deputy Governor of the Central Bank of Egypt dated April 2018 2