Instruction on Requirements for Operations of Microfinance Companies Attracting Deposits with Affiliated and Related Persons

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Date of creation: 2023-01-11

Appendix to the Resolution of the Board of the National Bank of the Kyrgyz Republic of June 15, 2017 No. 2017-P-12/25-6-(NPA)

INSTRUCTION

on requirements for operations of microfinance companies attracting deposits with affiliated and related persons of the microfinance company and housing savings credit company

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3, December 21, 2022 No. 2022-P-12/81-7-(NFCKU))

Chapter 1. General Provisions

1. This Instruction is developed to establish requirements for the activities of microfinance companies attracting deposits (hereinafter - MFCs), including those conducting activities in accordance with Islamic principles of banking and financing, MFCs having an Islamic window, and the activities of housing savings credit companies (hereinafter - HSCCs) when carrying out operations and transactions with affiliated and related persons of MFCs and HSCCs.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

2. MFCs and HSCCs must maintain a register of affiliated and related persons respectively of MFCs and HSCCs, to which unrestricted access must be provided for employees of the National Bank of the Kyrgyz Republic (hereinafter - the National Bank). The register of affiliated and related persons of MFCs and HSCCs must, at a minimum, contain information about the surname, first name, and patronymic of the official of the MFC or HSCC, their position in the MFC or HSCC, the surname, first name, and patronymic of the person related to them who is a close relative, and the degree of kinship with the official (parents, spouse, etc.). Keeping the register in electronic form is permitted, provided that a security system ensuring the safety of information is installed in the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

3. Relationships of a person affiliated with an MFC or HSCC can be tracked through company and person links, relationships between which are based on ownership of a threshold share in the capital of the MFC or HSCC, regardless of the number of affiliated persons.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

4. The principle of impartiality means that the MFC or HSCC is not entitled to issue loans to affiliated and related persons, as well as significant participants, if the terms of providing such loans are more favorable than for loans issued under similar conditions to other persons - clients of the MFC or HSCC (legal or natural persons) who do not have common interests with the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

5. The aggregate debt of one borrower and persons related to them is the total debt of one borrower for:

• loans (regardless of repayment term);
• factoring;
• financial leasing;
• investments in the form of debt obligations;
• accrued interest receivable;
• any other type of direct or indirect issuance of funds to borrowers who are credit substitutes;
• the amount of off-balance sheet obligations (commitments to issue loans) issued to this borrower;
• any risk of the MFC or HSCC regarding a third party that is unconditionally guaranteed by this borrower;
• previously written-off loans, including interest.

Information on previously written-off loans and interest of this borrower and persons related to them must be attached to the credit file of each borrower, which must contain the following information: the name of the borrower and persons related to them, the amount of the written-off loan and interest, the date of write-off, and the reason why this debt was written off. If such information is absent, the credit file must contain a conclusion from an authorized person of the MFC or HSCC stating that there is no previously written-off debt of this borrower and persons related to them.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

6. When calculating the maximum risk limit for one borrower, the debts of various borrowers must be summed and considered as a single aggregate debt if financial difficulties of one borrower can lead to payment problems for other persons.

7. For the purposes of this Instruction, the term "borrower" refers to a person/group of persons to whom the MFC or HSCC has issued the loans or funds specified in paragraph 6 of this Instruction, which are credit substitutes. The debts of various borrowers must be summed if:

• one borrower controls another;
• a loan is issued to both a legal entity and a participant/founder of this legal entity;
• they have at least one controlling person or significant participant, except in cases where the controlling person or significant participant is a state body of the Kyrgyz Republic;
• there is significant financial interdependence between several borrowers. Significant financial interdependence, including an agreement on mutual cooperation, exists, as a rule, if 50 or more percent of the annual gross income/expense or other receipts or payments of one borrower arose from transactions with another borrower;
• the same source is used to repay the loan, including a situation where borrowers use loan funds to participate in a joint venture or common activity, or when both use the same secondary payment source (collateral);
• one of the borrowers guaranteed the obligations of the other (cross-guarantees), or when the same third party is a guarantor for both borrowers;
• funds obtained by one or more borrowers are used for the direct benefit of a third party, except for state bodies of the Kyrgyz Republic, (regardless of whether the MFC or HSCC had a claim against this third party or not), or when funds or assets purchased with these obtained funds are transferred to a third party, except for cases of purchasing goods or services from them in the ordinary course of business;
• they have one pledgor, except in cases where the pledgor is a state body of the Kyrgyz Republic.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

Chapter 2. Procedure for Carrying Out Operations and Transactions

8. Operations conducted by MFCs and HSCCs with affiliated or related persons respectively of MFCs and HSCCs must not be carried out to the detriment of the MFC or HSCC, the interests of its depositors, or other creditors.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

9. The Chairman and members of the Board of Directors who approved the issuance of a loan to an affiliated or related person of the MFC or HSCC, and the Chairman (General Manager/Manager) and members of the Management Board who ensured the issuance of the loan in violation of the requirements of this Instruction, are liable for the repayment of the microfinance company's debt on this loan and for compensating it for lost profits.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

10. MFCs and HSCCs are not entitled to lend (hereinafter also including the issuance of financing in accordance with Islamic principles of banking and financing (for MFCs)) to affiliated or related persons of the MFC or HSCC if any of the following conditions exist:

1. in the presence of current losses as of the last reporting date;
2. The maximum risk size for operations with affiliated persons, including those who are related persons of the MFC or HSCC, must not exceed the value established by the National Bank. Operations with related persons of affiliated persons are prohibited, except for operations for providing them with consumer loans and accepting deposits from them;
3. The MFC or HSCC does not meet the requirements for the minimum size of fully paid-up charter capital and the minimum size of the MFC or HSCC's own capital and capital adequacy (adequacy) established by the National Bank;
4. the total amount of all loans and their substitutes provided to all affiliated and/or related persons of the MFC or HSCC exceeds 60% of the own capital of the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

11. MFCs and HSCCs are recommended to establish internal limits for restricting lending to affiliated and related persons of the MFC or HSCC, which must be lower than those established by the National Bank.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

12. Any operation or transaction of the MFC or HSCC or its subsidiary with persons related to the MFC or HSCC or an affiliated person must be concluded on terms confirming safe and reliable activity.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

13. Transactions of the MFC or HSCC with related persons in an amount exceeding one percent of the own capital of the MFC or HSCC are interested transactions. The decision to conclude an interested transaction, and other banking operations carried out with affiliated and related persons, the size of which is from one percent to 20% of the own capital of the MFC or HSCC, is taken only by disinterested members of the Board of Directors of the MFC or HSCC.

The decision on loans and credit substitutes with affiliated and related persons is taken only by disinterested members of the Board of Directors of the MFC or HSCC.

In this case, the minutes of the Board of Directors' decision must indicate the interest or disinterest of the Board of Directors members.

If the Board of Directors is unable to make such a decision due to the lack of a quorum, the issue of concluding such a transaction is referred to the general meeting of shareholders of the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

14. The decision to conclude an interested transaction, and other banking operations, except for loans and their substitutes, carried out with affiliated and related persons, the size of which exceeds 20% of the own capital of the MFC or HSCC, is taken by the general meeting of shareholders of the MFC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

15. The maximum aggregate risk size for one borrower related to the MFC or HSCC and including affiliated persons must not exceed 5% of the own capital of the MFC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

16. Any operation or transaction of the MFC or HSCC with any person must be considered an operation or transaction with an affiliated or related person of the MFC or HSCC if even part of the income from operations or transactions is used for the benefit of an affiliated or related person of the MFC or HSCC or transferred to their disposal.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

17. The MFC or HSCC has the right to conduct operations or transactions with an affiliated or related person of the MFC or HSCC only in case of fulfillment of all the following conditions:

1. Operations and transactions may be conducted only on such terms and requirements that are not more favorable compared to the terms and requirements applied at the same time for similar operations and transactions between this MFC or HSCC and other persons - clients of the MFC or HSCC who are not employees of this MFC or HSCC and are not any other persons related to the MFC or HSCC and/or having common interests with the MFC or HSCC. Such terms and requirements include, in particular, the prohibition of:

• charging lower interest rates (hereinafter also including markup and/or other payments agreed between the MFC or HSCC and the client/partner in accordance with Islamic principles of banking and financing) or fees compared to those charged from other persons - clients of the MFC or HSCC who are not employees of this MFC or HSCC and are not any other persons related to the MFC or HSCC and/or having common interests with the MFC or HSCC;
• paying higher interest on deposits (hereinafter also including attracting funds in accordance with Islamic principles of banking and financing, except for limited mudaraba (for MFCs)) compared to other persons - clients of the MFC or HSCC who are not employees of this MFC or HSCC and are not any other persons related to the MFC or HSCC and/or having common interests with the MFC or HSCC;
• accepting collateral that has a lower value than that required from other persons - clients of the MFC or HSCC who are not employees of this MFC or HSCC and are not any other persons related to the MFC or HSCC and/or having common interests with the MFC or HSCC. When accepting collateral, a methodology allowing its valuation higher than another similar collateral must not be applied;
• issuing loans and credit substitutes that would not be issued to other persons - clients of the MFC or HSCC (legal or natural persons) who are not employees of this MFC or HSCC and are not any other persons related to the MFC or HSCC and/or having common interests with the MFC or HSCC, due to the risk level of this operation or the low creditworthiness of the borrower;
• purchasing a low-quality asset from an affiliated or related person of the MFC or HSCC or accepting a low-quality asset as collateral;
• purchasing an asset at a price higher than that which could be paid to another person - client of the MFC or HSCC who is not an employee of this MFC or HSCC and is not any other person related to the MFC or HSCC and/or having common interests with the MFC or HSCC;
• selling an asset at a lower price than that which could be accepted from another person - client of the MFC or HSCC who is not an employee of this MFC or HSCC and is not any other person related to the MFC or HSCC and/or having common interests with the MFC or HSCC;
• investing in securities in which the MFC or HSCC would not invest in any other case due to the risk level of the securities or the type of activity engaged in by the investor or the considered affiliated or related person of the MFC or HSCC;
• paying for goods, services, or property rental at a higher price than that which would be paid to another person - client of the MFC or HSCC who is not an employee of this MFC or HSCC and is not any other person related to the MFC or HSCC and/or having common interests with the MFC or HSCC, or under conditions under which payment would not be made to another person - client of the MFC or HSCC who is not an employee of this MFC or HSCC and is not any other person related to the MFC or HSCC and/or having common interests with the MFC or HSCC;
• restructuring loans of affiliated or related persons of the MFC or HSCC, when such restructuring would not be done for another person - client of the MFC or HSCC who is not an employee of this MFC or HSCC and is not any other person related to the MFC or HSCC and/or having common interests with the MFC or HSCC.

2. In the case of issuing loans, its risk at the time of the decision by the Board of Directors of the MFC or HSCC must not exceed the risk embedded in loans classified as satisfactory, according to the Regulation on asset classification and corresponding provisions for potential losses and losses.

3. The decision must be taken by the Board of Directors by roll-call vote, provided that the majority (more than 2/3 of the roster) of the members of the Board of Directors of the MFC or HSCC vote for it, in the absence of influence (direct or indirect) from the person interested in conducting the operation. Any member of the Board of Directors directly or indirectly interested in the proposed operation must leave the Board of Directors meeting during the discussion of the issue, and they do not have the right to vote on this issue.

4. The MFC or HSCC must keep a written record of approval of such an operation or transaction, which must include a written analysis of all merits of the operation or transaction, including justification that the operation or transaction is not to the detriment of the MFC or HSCC and in its interests. The analysis must include:

• for credit operations and credit substitutes - the loan amount, loan term, interest rate, financial information about the borrower proving the borrower's ability to repay the loan in accordance with the agreement, and information confirming the value of the loan collateral;
• for operations or transactions related to the purchase or sale of assets - the purchase price and information confirming the value of the asset;
• for investments - an assessment of the risk of such investments and potential benefits for the MFC or HSCC and the person in question;
• a detailed explanation of the reasons for the necessity of this operation or transaction;
• for operations or transactions involving the sale/acquisition of assets or services, the Board of Directors of the MFC or HSCC must consider at least three offers for the purchase/sale of the asset or provision of the service. These offers must be made by persons not related to the MFC or HSCC or persons having common interests with the MFC or HSCC, and correspond to average market prices.

5. Persons related to the MFC or HSCC who are a party to the proposed operation or transaction with the MFC or HSCC or are connected with this party by common interests must disclose in writing information about their interest in the operation or transaction and the degree of relationship with the other party to the operation. Such written disclosure must be provided to the Board of Directors of the MFC or HSCC before voting on the proposed operation or transaction and must be part of the record of approval of the operation by the Board of Directors of the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

18. The Chairman of the Board of Directors of the MFC or HSCC must notify in writing the members of the Board of Directors of the MFC or HSCC that all applicable conditions of paragraph 17 of this Instruction have been met before the members of the Board of Directors of the MFC or HSCC vote on the issue in question. Any member of the Board of Directors of the MFC or HSCC has the right to review the supporting documentation before voting. Each voting member of the Board of Directors of the MFC or HSCC must personally sign the resolution approving the operation. The resolution must clearly indicate that the member of the Board of Directors of the MFC or HSCC has reviewed and understands the conditions of the proposed operation, is personally familiar with the analysis specified in subparagraph 4 of paragraph 17 of this Instruction.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

19. The MFC or HSCC has the right to provide loans to officials and employees of the MFC or HSCC, except for the Chairman and members of the Board of Directors, the Chairman and members of the Shariah Council, consumer loans providing identical terms for issuing consumer loans to employees of the MFC or HSCC and officials. In this case, the lending terms must meet, at a minimum, the following requirements:

1. the maximum loan amount must not exceed 5% of the own capital of the MFC or HSCC;
2. loans must be secured by at least 100% by the salaries of employees or deposits that are оформлены (documented) by a corresponding pledge agreement, and the repayment term of which does not occur earlier than the repayment term of consumer loans;
3. loans must be provided on terms and requirements (interest rates, collateral, loan terms) that are not inferior to the terms and requirements applied when issuing loans to persons who are not employees of the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

20. The MFC or HSCC has the right to provide loans to officials and employees of the MFC or HSCC, except for the Chairman and members of the Board of Directors, the Chairman and members of the Shariah Council, in accordance with the employee support program of the MFC or HSCC, for the purchase or construction of housing only in case of fulfillment of all the following conditions:

A) the purchased or constructed housing must belong by right of ownership only to the official/employee of the MFC or HSCC to whom the loan is provided; B) the official/employee of the MFC or HSCC to whom the loan is provided and their family members (if any) must reside in the purchased or subsequently constructed housing; C) only the purchased or constructed housing is accepted as primary collateral; D) the issuance of a loan for the purchase of housing by an official/employee of the MFC or HSCC from persons who are their close relatives is prohibited.

The loan agreement concluded between the MFC or HSCC and the official/employee of the MFC or HSCC must contain a clause stating that in case of violation by the official/employee of the MFC or HSCC of the lending conditions provided for in subparagraphs 1-8 of this paragraph, the loan agreement is subject to modification on the terms provided for in paragraph 24 of this Instruction.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

21. The maximum aggregate amount of the loan issued to one employee of the MFC or HSCC must not exceed 5% of the own capital of the MFC or HSCC.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

The internal document of the MFC or HSCC regulating the procedure for lending to employees must contain provisions on lending to officials of the MFC or HSCC, comply with the requirements of the legislation of the Kyrgyz Republic and regulatory legal acts of the National Bank, and contain, at a minimum, the following:

• the share of loans issued to officials of the MFC or HSCC in the total volume of the credit portfolio of the MFC or HSCC;
• the maximum loan amount;
• lending terms;
• interest rates (pricing);
• criteria for assessing the value and acceptability of collateral.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3, December 21, 2022 No. 2022-P-12/81-7-(NFCKU))

23. The internal document of the MFC or HSCC regulating the procedure for lending to employees must be approved by the Board of Directors of the MFC or HSCC. The Board of Directors of the MFC or HSCC must also:

• annually review the internal document of the MFC or HSCC regulating the procedure for lending to employees, in order to ensure its relevance and compliance with the credit policy of the MFC or HSCC;
• control the activities of the Management Board of the MFC or HSCC (or another similar executive body of the MFC or HSCC) to ensure compliance with the requirements of the internal document of the MFC or HSCC regulating the procedure for lending to employees.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

24. In case of violation by officials of the MFC or HSCC of the lending conditions provided for in paragraph 17 of this Instruction:

• the MFC or HSCC must, on the day of detecting the violation, amend the loan agreement, providing in it such requirements and loan terms that are not more favorable compared to the terms and requirements applied at the same time for similar operations between this MFC or HSCC and other persons - clients of the MFC or HSCC who are not employees of this MFC or HSCC and are not any other persons related to the MFC or HSCC and/or having common interests with the MFC or HSCC;
• the official of the MFC or HSCC is obliged to compensate the MFC or HSCC for the interest difference arising from the date of receiving the loan to the date of changing its terms;
• compensation for the interest difference must be provided for in the loan and interest repayment schedule, starting from the month following the month in which the loan terms were changed.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic of November 1, 2019 No. 2019-P-33/55-3)

25. The provisions of subparagraphs 3, 4, and 5 of paragraph 17 of this Instruction do not apply to the acceptance of deposits by the MFC or HSCC from affiliated or related persons of the MFC or HSCC, when providing deposit services on the same terms and requirements as for other persons - clients of the MFC or HSCC who do not have common interests with the MFC or HSCC.

Funds and loans may be attracted on the basis of a decision of the Board of Directors of the MFC or HSCC on such terms and requirements that are not more preferential compared to the terms and requirements, p