Circular dated September 21, 2020 regarding reviewing the models used in calculating expected credit losses

Cairo: September 21, 2020

Dear Chairman of the Board,

Greetings,

I would like to refer to the instructions issued by the Central Bank of Egypt on February 26, 2019, regarding the implementation of International Financial Reporting Standard 9 (IFRS 9), which included the necessity for banks to verify the integrity and effectiveness of the models used in calculating expected credit losses (ECL), with the aim of evaluating the effectiveness of the models and the accuracy of the results.

And in light of what the recent crisis has shown regarding the necessity for each bank to study and analyze the overall risks associated with the current crisis and to put plans in place to deal with unexpected crises and their impact on the bank.

And in the context of the Central Bank's keenness on the soundness of banks' financial positions and verifying the quality of assets and calculating expected credit losses correctly during crises, it has been decided that banks should do the following:

• Review the models (Models) used in calculating expected credit losses and identify the elements that were not taken into account when designing these models (factors unseen) and verify the integrity of the methodology used in calculating expected credit losses.

• Verify the measurement of the quality, sufficiency, and efficiency of information systems, and the current and future information used in designing the models (Models).

Each bank must provide the Central Bank with a report certified by the Audit and Risk Committees within one month of its date, containing the results of the review of the models used in calculating expected credit losses, including the modifications made to those models and the impact thereof on the bank's credit portfolio after calculating (ECL) (according to the review results).

Please accept my highest regards,

Gamal Naguib