Constitution of Provisions and Ratio of Net Liquid Shareholders Equity in Lebanese Pound

Text / Section 1 / Circular No. 73 / Date: 2021-12-31 395

Basic Circular for Banks No. 73 Addressed also to Financial Institutions and Finance Lease Companies

We enclose herewith a copy of Basic Decision No. 7694 dated 18/10/2000 concerning the constitution of provisions and the ratio of net liquid shareholders' equity in Lebanese pounds.

Beirut, 18 October 2000 Governor of the Central Bank of Lebanon: Riad Tawfiq Salamah

1 - Addressed to finance lease companies pursuant to Interim Decision No. 9457 dated 9/11/2006 (Interim Circular No. 127). Old Number: 1857

396

Basic Decision No. 7694 Constitution of Provisions and Ratio of Net Liquid Shareholders Equity in Lebanese Pounds

The Governor of the Central Bank of Lebanon, Pursuant to the Monetary and Banking Law, particularly Articles 76 (paragraph e), 174, and 177 thereof, Pursuant to Basic Decision No. 6568 dated 24/4/1997 and its amendments (foreign exchange transactions at banks and financial institutions), Pursuant to the decision of the Central Council adopted in its meeting held on 18/10/2000,

Decides as follows: Article 1: Banks operating in Lebanon must maintain, at all times and especially when constituting provisions or distributing profits, a ratio of 40% of their basic net shareholders' equity released in Lebanese pounds as cash. Cash is considered to be the ready liquidity in bank vaults, funds deposited at the Central Bank of Lebanon or other banks with a remaining maturity of one year or less, and Lebanese Treasury bonds/bills with a remaining maturity of two years or less.

1 - The phrase "and financial institutions" appearing in this Article was abolished by Article 1 of Interim Decision No. 9238 dated 23/1/2006 (Interim Circular No. 102). 2 - Article 2 of Basic Decision No. 7926 dated 20/9/2001 (Basic Circular No. 86), amended by Interim Decision No. 8312 dated 16/12/2002 (Interim Circular No. 26), which operates for two years from its issuance date, is reviewed; and Paragraph (4) thereof states as follows: Subscribers under 1) of this Article from the ready funds at banks shall be "included as Lebanese Treasury bonds/bills eligible for sale and repurchase operations under the repo system at the Central Bank of Lebanon without any commission or interest."

397 Article 2 1 : 2 - Banks and financial institutions operating in Lebanon shall constitute provisions in accordance with the provisions of Basic Decision No. 12713 dated 7/11/2017. 2 - 3 - Banks shall not accept deposits submitted to cover the shortfall in provisions required by the Banking Control Commission. 4 - Banks operating in Lebanon may, within a maximum period of 31/12/2008, release fully or partially the provisions constituted against doubtful debts, bad debts, and suspended interest on non-ordinary debts according to the following principles and mechanisms: 6 a - Adoption of debts classified by the concerned bank as of 30/6/2003, with the following exceptions:

• Loans subject to the provisions of Article 152 of the Monetary and Banking Law.
• Loans benefiting from state interest subsidies.
• Non-performing loans (ordinary debts, doubtful debts, and bad debts) covered by the facilitation loan granted by the Central Bank of Lebanon to the absorbing bank.
• Bad debts written off due to the passage of time.
• Non-performing debts that are reclassified as ordinary or follow-up debts without settlement adjustments.
• Debts fully repaid by the client without the bank taking legal action against them and without settlement adjustments.

1 - The last amendment to this Article was introduced by Interim Decision No. 8046 dated 2/2/2002 (Interim Circular No. 11). 2 - The last amendment to this paragraph was introduced by Article 1 of Interim Decision No. 13373 dated 3/11/2021 (Interim Circular No. 600). 3 a - This paragraph was abolished by Article 2 of Interim Decision No. 13373 dated 3/11/2021 (Interim Circular No. 600). 4 - This paragraph was added by Interim Decision No. 8508 dated 7/10/2003 (Interim Circular No. 37), then amended by Article 1 of Interim Decision No. 8557 dated 17/11/2003 (Interim Circular No. 41). 5 - The last amendment to this date was introduced by Article 1 of Interim Decision No. 9457 dated 9/11/2006; originally 31/12/2005. (Interim Circular No. 127): 6 - The last amendment to this paragraph was introduced by Interim Decision No. 8975 dated 7/3/2005 (Interim Circular No. 80). 7 - This phrase was added by Article 1 of Interim Decision No. 9274 dated 24/2/2006 (Interim Circular No. 105).

398 Returns to the proposal of the Banking Control Commission, and upon the study of each case individually, the Banking Control Commission approves the adoption of a debt classified at a date subsequent to 30/6/2003. b 1 - Approval of the Banking Control Commission to:

• Write off non-performing debts entirely based on an explicit or implicit agreement between the bank and the client to discharge the latter from the debt, upon the bank's final waiver of this debt.
• Reschedule the balance of non-performing loans according to a new repayment program, as specified in Paragraph "third" of Paragraph (4) of this Article, based on a study submitted by the concerned bank to the Commission regarding each client individually. c With due regard to Paragraph (e) of this paragraph, reclassify non-performing debts as follow-up and settlement debts by: 2 first: reducing the value of real estate, shares, and partnership interests owned by the debtor through performance in lieu of payment, if any, provided that the client's ability to service the debt according to the new repayment program specified in Paragraph "third" of Paragraph (c) is verified. In case of disagreement between the Banking Control Commission and the concerned bank on the value of performance in lieu of payment, the matter is referred to a special committee appointed by the Governor of the Central Bank of Lebanon, comprising among its members a representative of the Banking Control Commission and the concerned bank. This committee expresses its opinion on the dispute and submits a recommendation to the Central Council of the Central Bank of Lebanon, which decides as it deems appropriate.

1 - The last amendment to this paragraph was introduced by Interim Decision No. 8975 dated 7/3/2005 (Interim Circular No. 80). 2 - The introduction of this paragraph was amended by Article 1 of Interim Decision No. 9097 dated 28/7/2005 (Interim Circular No. 88).

398 bis 1 Second: Recalculation of interest applied to debtor accounts subject to settlement, at a rate agreed upon between the bank and the client. This interest is calculated for the period between the date of suspending interest or constituting provisions on the debt and the date of settlement. 1 Third: Rescheduling the balance of these debts after reducing them by the value of real estate, shares, and partnership interests owned by the bank, through commercial papers payable to order for a period not exceeding ten years and at an interest rate calculated and paid twice a year, at a rate agreed upon between the bank and the client. These papers may be discounted with recourse at the Central Bank of Lebanon, provided that the discount proceeds are earmarked to purchase deposit certificates issued by it at the same interest rate calculated on these papers. Discounting is based on the re-amortized loan balance before interest calculation. 2 - Re-constituting released provisions against each paper that matures and is not repaid within ninety days from the maturity date, provided that a provision for the full debt balance is constituted if the client defaults on three consecutive papers, or if one year has passed since the client's default on any maturity. 3e - If the settlement contract between the bank and the client includes one of the following:

• Forgiving the debtor part of the debt while retaining the right to claim this part if the client fails to comply with the repayment program,
• Forgiving the debtor part of the debt after complying with the agreed repayment program, The following procedures are taken: First: The portion of debt from which the client is forgiven upon full compliance with the repayment program under the settlement contract is included in the "Fully Provisioned Bad Debts Transferred to Off-Balance Sheet Accounts According to Standards" item, and is not declared in this case to the Central Banking Risks Department.

398 bis 2 According to Standards" off-balance sheet and is not declared in this case to the Central Banking Risks Department. Second: The portion of debt referred to in "First" above is extinguished upon compliance with the repayment program, or re-included in the "Doubtful or Bad Debts on Clients" item within the balance sheet in case of non-payment, and is thus declared to the Central Banking Risks Department. And 1 - Profits realized from releasing these provisions are not distributed and are allocated to increase shareholders' equity after the bank has fully provisioned all debts required by the Banking Control Commission. Z 2 - Banks operating in Lebanon, under threat of appropriate administrative sanctions against them, must constitute a special reserve for the non-covered portion of doubtful and bad debts subject to Paragraph (4) hereof, which have not been settled, according to the following:

• 30% ratio if less than 40% of their total portfolio of non-performing debts defined above before 30/6/2007 has not been settled,
• 45% ratio if less than 50% of their total portfolio of non-performing debts defined above before 31/12/2007 has not been settled,
• 60% ratio if less than 60% of their total portfolio of non-performing debts defined above before 30/6/2008 has not been settled,
• 100% ratio if the entire portfolio of non-performing debts defined above before 31/12/2012 has not been settled.

1 - The numbering of this paragraph was amended by Article 3 of Interim Decision No. 9097 dated 28/7/2005, originally (e) (Interim Circular No. 88). 2 - The numbering of this paragraph was amended by Article 3 of Interim Decision No. 9097 dated 28/7/2005 (Interim Circular No. 88), originally; then the last amendment was introduced by Article 1 of Interim Decision No. 10339 dated 22/12/2009: (w) (Interim Circular No. 209).

398 bis 3 To calculate the ratios referred to in this paragraph and Paragraph (4) of Article 5 of Basic Decision No. 7740 dated 21/12/2000, the Banking Control Commission returns to approve the exclusion of bad debts classified off-balance sheet which have been classified as bad for more than five years as of 30/6/2003. To calculate the ratios referred to in Paragraph (Z) hereof, the balance of non-performed debts that have not been settled is reduced by the value of collateral provided against them. H 1 - Banks operating in Lebanon, under threat of appropriate administrative sanctions against them, must constitute a special reserve equivalent to the value of collateral on doubtful and bad debts subject to Paragraph (4) hereof, which are not covered by provisions and have not been settled, within a maximum period of 31/12/2019. 5 2 - In exceptional cases and to ensure the client's repayment of re-amortized non-performing debts according to Paragraph (4) hereof: First: The Banking Control Commission may decide or approve temporarily not reclassifying these debts "to follow-up and settlement" for a period determined per case, so that they are included in an item branching from "Doubtful or Bad Debts on Clients" called "Suspended Debts Pending Settlement". As for the provisions constituted against these debts, they are included in an item branching from "Provisions for Diminution of Value of Doubtful or Bad Debts" called "Provisions for Suspended Debts Pending Settlement". Second: The Central Council rules on any objection to the Banking Control Commission's decision regarding the reclassification of debts subject to Paragraph (5) hereof.

1 - This paragraph was added by Article 2 of Interim Decision No. 9769 dated 19/11/2007 (Interim Circular No. 155), then amended by Article 2 of Interim Decision No. 10339 dated 22/12/2009 (Interim Circular No. 209). 2 - This paragraph was added by Article 5 of Interim Decision No. 9097 dated 28/7/2005 (Interim Circular No. 88).

398 bis 4 Third: The papers resulting from this settlement are not discounted at the Central Bank of Lebanon according to Paragraph "third" of Paragraph (c) of Paragraph (4) hereof, except after reclassifying the debts "to follow-up and settlement" and releasing the corresponding provisions. 6 1 - Banks and financial institutions must constitute provisions against debtor accounts that are closed, applying procedures, sanctions, and restrictions established by competent international organizations or foreign sovereign authorities, and work to collect these debts from the concerned clients without altering their credit classification. 2 Article 2 bis: Banks, financial institutions, and finance lease companies may, within a maximum period of 31/12/2007, process loans granted to their clients affected by the July 2006 war on Lebanon according to the following principles and mechanisms: -1 Adopting the debt portfolio as of 31/7/2006, excluding loans benefiting from state interest subsidies, provided that they are:

• a) Debts of clients indirectly affected by the July 2006 war on Lebanon and/or due to the imposed blockade, which led to changes in cash flows for these clients without destroying their ability to continue operations and thus repay these debts within a specified period.
• b) Debts of clients directly affected by military operations without these debtors being prevented from continuing their work and resuming repayment within a specified period.
• c) Debts of clients directly affected by military operations, which practically or legally prevented these debtors from continuing their work and thus made repayment of their debts impossible.

1 - This paragraph was abolished by Interim Decision No. 9330 dated 15/5/2006 (Interim Circular No. 109), then added by Article 1 of Interim Decision No. 12252 dated 3/5/2016 (Interim Circular No. 420). 2 - This Article was added by Article 3 of Interim Decision No. 9457 dated 9/11/2006 (Interim Circular No. 127).

398 bis 5 -2 Approval of the Banking Control Commission to:

• a) Write off these debts entirely based on an explicit or implicit agreement with the client to discharge the latter from the debt, upon the bank, financial institution, or finance lease company's final waiver of this debt.
• b) Reschedule the balance of these loans based on a study submitted by the concerned creditor institution to the Commission regarding each client individually, according to the new repayment program specified in Paragraph "third" of Paragraph (3) of this Article. 3 - With due regard to Paragraph (5) of this Article, these debts are included in an item branching from "Debts for Follow-up and Settlement" called "Debts for Follow-up and Settlement due to the July 2006 War on Lebanon" after: First: Reducing the debts subject to Paragraph (c) of Paragraph (1) of this Article, fully or partially, by the value of real estate, shares, and partnership interests owned by the debtor through performance in lieu of payment, if any, provided that the client's ability to service the debt according to the new repayment program specified in Paragraph "third" of Paragraph (3) hereof is verified. In case of disagreement between the Banking Control Commission and the concerned creditor institution on the value of performance in lieu of payment, the matter is referred to a special committee appointed by the Governor of the Central Bank of Lebanon, comprising among its members a representative of the Banking Control Commission and the concerned creditor institution. This committee expresses its opinion on the dispute and submits a recommendation to the Central Council of the Central Bank of Lebanon, which decides as it deems appropriate. Second: Recalculation of interest applied to debtor accounts subject to settlement, at a rate agreed upon with the client. This interest is calculated for the period between the due date of the first unpaid installment and the date of settlement. Third: Rescheduling the balance of these debts through commercial papers payable to order of the concerned creditor institution for a period not exceeding ten years and at an interest rate

398 bis 6 calculated and paid twice a year, at a rate agreed upon with the client, specifically regarding:

• The debts subject to Paragraphs (a) and (b) of Paragraph 1( ) of this Article.
• The debts subject to Paragraph (c) of Paragraph 1( ) of this Article after being reduced by the value of real estate, shares, and partnership interests owned by the concerned creditor institution. These papers may be discounted with recourse at the Central Bank of Lebanon, provided that the discount proceeds are earmarked to purchase deposit certificates issued by it at the same interest rate calculated on these papers. Discounting is based on the re-amortized loan balance before interest calculation. 4 - Notification to the Banking Control Commission of each paper that matures and is not repaid within ninety days from the maturity date, constituting provisions against it, provided that a provision for the full debt balance is constituted if the client defaults on three consecutive papers, or if one year has passed since the client's default on any maturity. -5 If the settlement contract with the client includes one of the following:
• Forgiving the debtor part of the debt while retaining the right to claim this part if the client fails to comply with the repayment program,
• Forgiving the debtor part of the debt after complying with the agreed repayment program, The following procedures are taken: First: Constituting provisions equivalent to the value of the portion of debt from which the client is finally forgiven upon full compliance with the repayment program, and including it in the "Debts Settled due to July 2006 War on Lebanon, Fully Provisioned Transferred to Off-Balance Sheet Accounts According to Standards" item off-balance sheet and not declared in this case to the Central Banking Risks Department.

398 bis 7 Second: The portion of debt referred to in "First" above is extinguished upon compliance with the repayment program, or re-included in the "Doubtful or Bad Debts on Clients" item within the balance sheet in case of non-payment, and is thus declared to the Central Banking Risks Department. 6 - Rescheduling of payments due from July 2006 to the end of June 2007 for affected clients, which had previously been settled according to Paragraphs (4) and (5) of Article 2 of this Decision, before 12/7/2006, by converting the re-amortized installments to the last loan period. -7 Notification of the Central Bank of Lebanon and the Banking Control Commission when affected clients benefit from assistance or grants from any source.

1 Article 3: Banks are granted a maximum period of 31/10/2000 to comply with the provisions of Article 1 of this Decision, and within one week following this date they must provide the Central Bank of Lebanon and the Banking Control Commission with a suspended status as of 31/10/2000.

Article 4: Banks must deposit with the Central Bank of Lebanon a special minimum reserve in Lebanese pounds in an interest-free account equivalent to twelve times the value of the decline occurring on the 40% ratio of basic net shareholders' equity released in Lebanese pounds, which requires keeping them as cash. This reserve remains valid for a period equal to the duration starting from the date of decline of the aforementioned 40% ratio until the situation is settled according to the provisions of this Decision.

1 - The phrase "and financial institutions" appearing in this Article was abolished by Article 1 of Interim Decision No. 9238 dated 23/1/2006 (Interim Circular No. 102).

398 bis 8 Article 5: The Central Bank of Lebanon collects from banks that do not comply with depositing the special minimum reserve according to Article 4 of this Decision a penalty interest calculated according to the provisions of Article 77 of the Monetary and Banking Law and regulatory texts issued by the Central Bank of Lebanon on this matter.

1 Article 6: Administrative sanctions are taken against banks that violate the provisions of this Decision, particularly referral to the Higher Banking Authority.

Article 7: This Decision takes effect upon its issuance.

Article 8: This Decision is published in the Official Gazette.

Beirut, 18 October 2000 Governor of the Central Bank of Lebanon: Riad Tawfiq Salamah