Circular dated January 28, 2018 regarding instructions for implementing the requirements of International Financial Reporting Standard No. 9

Cairo: 28 January 2018

To: The Chairman of the Board of Directors Bank

Greetings,

In light of the Central Bank of Egypt's commitment to continuing the application of best international practices in the banking industry, including International Financial Reporting Standards (IFRS), to enhance the financial stability of banks and deepen their concepts of disclosure and transparency, and with reference to my letter No. 199 dated August 28, 2017, attached with the questionnaire prepared to assess your bank's readiness to implement the requirements of International Financial Reporting Standard No. 9 (IFRS 9), which was issued in its final form in July 2014 to take effect from January 1, 2018, and which stipulated that each bank must form an implementation committee responsible for developing a detailed plan for implementing the standard, studying the expected financial impact and its effect on the capital adequacy standard, and devising a concept for measuring expected credit losses.

In the context of preparing to implement the requirements of the aforementioned standard on banks' financial statements, the Board of Directors of the Central Bank of Egypt, in its session held on January 17, 2018, decided the following:

First: Banks must prepare financial statements in accordance with IFRS 9 starting from the year 2019 (starting from January 1, 2019, for banks whose annual financial statements are prepared as of December 31 of each year, and starting from July 1, 2019, for banks whose statements are prepared as of June 30 of each year).

Second: Each bank must submit to the Central Bank of Egypt a plan approved by its Board of Directors or the Regional Manager for branches of foreign banks, including specific timelines for implementing the requirements of IFRS 9, such that the deadline for fulfilling all standard requirements does not exceed June 30, 2018. The committee formed in each bank must also monitor the implementation status by submitting a monthly report on the implementation status to the Central Bank of Egypt (Office Supervision), approved by the Managing Director or the Regional Manager for branches of foreign banks.

Third: Each bank must prepare financial statements as of March 31, 2018, in accordance with current instructions, in addition to collaborating with auditors to prepare audited trial financial statements as of the same date in accordance with the requirements of IFRS 9 (see Attachment No. 1), and the statements must be prepared using the same approach.

Fourth: Each bank must assess the expected Quantitative Impact Statement (QIS) of implementing the standard, particularly the value of provisions expected as a result of implementation compared to provisions according to current instructions, in accordance with the attached tables for the Quantitative Impact Statement (Attachment No. 2), which must be submitted to the Central Bank of Egypt (Office Supervision) along with the trial statements every quarter.

Fifth: Each bank must submit to the Central Bank of Egypt (Office Supervision) the capital adequacy standard form every quarter, including the impact of the trial implementation, along with the trial financial statements.

Sixth: The executive management and auditors of each bank are responsible for verifying the adequacy of the systems and models used by the bank in terms of their suitability for the requirements of the standard and any other related standards. They are also responsible for verifying the accuracy of the figures and information contained in the trial financial statements and the data required by the Central Bank of Egypt regarding this standard. Banks may engage any of the auditors registered with the Central Bank of Egypt to provide assistance in this regard.

Seventh: In the context of preparing to implement IFRS 9 and to strengthen the financial positions of banks to face the expected increase in the volume of provisions resulting from the adoption of the Expected Credit Losses approach, which takes into account the forward-looking view of economic conditions (Looking Forward), banks must establish an IFRS 9 risk reserve at a rate of 1% of total risk-weighted credit exposures, from the net profit after tax for the year 2017. This reserve will be included in the core capital item in the capital base and will not be used except with the approval of the Central Bank of Egypt. I would like to emphasize in this regard that your bank's Board of Directors (or its substitute for branches of foreign banks) must supervise and closely monitor the implementation of these instructions and ensure the following:

1. Providing the necessary requirements for implementation and monitoring compliance with the established plan, and removing any obstacles that may face execution.

2. Determining the Business Models that will be used during implementation in light of each bank's strategy, in addition to the importance of having an internal credit classification system, which includes the Probability of Default (PD) reflected by each degree of this classification, and the methodology for calculating both the Loss Given Default (LGD) and the Expected Credit Exposure at Default (EAD) to calculate the Expected Credit Loss (ECL). This requires emphasizing the availability of historical data and its quality in preparation for applying these methodologies.

3. Measuring the adequacy of information systems and the availability of human resources and expertise.

4. Developing the risk management environment and credit granting, monitoring, and pricing policies.

5. Coordinating between the different departments in the bank, including the financial management, risk management, information technology management, internal audit, credit, and all other concerned departments in the bank in this regard.

Please be kind enough to alert to giving utmost attention and taking the necessary measures to ensure the execution of the above, noting that the Central Bank of Egypt will subsequently issue final instructions regarding the implementation of the aforementioned standard.

In case of any inquiries, please send them to the email address: eg.org.cbe@committee9.IFRS

Please accept our highest respect,

Gamal Naguib (Central Bank of Egypt)

(Attachment No. 1)

Instructions for Preparing Trial Financial Statements for Banks In accordance with the requirements of International Financial Reporting Standard No. 9 "Financial Instruments"

In light of the issuance of International Financial Reporting Standard No. 9 "Financial Instruments" on July 24, 2014, and in the context of preparing to implement the requirements of the aforementioned standard on the financial statements of banks issued for financial periods beginning on or after January 1, 2019, banks must, when preparing trial statements, do the following:

1. Apply the requirements of International Financial Reporting Standard No. 9 "Financial Instruments" and its amendments, as well as the disclosure requirements resulting from it in International Financial Reporting Standard No. 7 "Financial Instruments: Disclosures", to both the standalone, separate, and consolidated financial statements of the bank.

2. The process of calculating and recognizing the burden/credit of expected credit losses must cover all assets inside and outside the financial position, represented by the following:

• All financial assets recognized at amortized cost.
• Debt instruments at fair value through other comprehensive income.
• Loan commitments and similar debt instruments.
• Financial guarantee contracts.
• Other contingent liabilities.
• Debts that have been written off (to match the probabilities of recovering part or all of these debts).

3. Financial assets are classified into three main categories as follows:

• Financial assets measured at amortized cost.
• Financial assets at fair value through other comprehensive income.
• Financial assets at fair value through profit or loss. Classification is generally based on the business model under which the financial assets are managed and their contractual cash flows.

4. Each bank must prepare, document, and approve the business model(s) in accordance with the requirements of International Financial Reporting Standard No. 9, reflecting the bank's established strategy for managing financial assets and their cash flows as follows:

Asset Type	Business Model	Characteristics
Financial assets held to collect contractual cash flows	The objective of the business model is to hold financial assets to collect contractual cash flows consisting of principal and interest.	Sales are exceptional in relation to this model, with conditions stated in the standard such as the occurrence of credit impairment of the financial instrument. Sales must be documented, clear, and approved to justify each sale and demonstrate its consistency with the standard's requirements.
Financial assets held to collect contractual cash flows and for sale	Achieving both objectives of collecting contractual cash flows and selling.	Sales are high (more than periodic and value) compared to the model of assets held to collect contractual cash flows.
Financial assets at fair value through other comprehensive income	The business model is to hold financial assets to collect contractual cash flows or hold them to collect contractual cash flows and sell.	Sales are exceptional in relation to this model.
Financial assets at fair value through profit or loss	Management of financial assets based on fair value through profit or loss (financial instruments).	Other business models that include - Management of financial assets on the basis of fair value - Organizing cash flows through (sale) financial assets at fair value through profit or loss.

5. The characteristics of the business model are as follows: A structure of a group of activities designed to... [Text cuts off]

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