Circular No. 001/2025-CSBF Establishing the Implementation Modalities for Instructions on Regulatory Capital and Capital Requirements for Credit Institutions

BANKY FOIBEN'I MADAGASIKARA COMMISSION DE SUPERVISION BANCAIRE ET FINANCIERE

CIRCULAR NO. 001/2025-CSBF SETTING OUT THE IMPLEMENTATION MODALITIES FOR INSTRUCTIONS ON REGULATORY CAPITAL AND CAPITAL REQUIREMENTS FOR CREDIT INSTITUTIONS

The President of the Commission de Supervision Bancaire et Financière (CSBF), Having regard to Law No. 2020-011 of September 1, 2020 on banking law, Having regard to Decree No. 2023-011 of January 4, 2023 appointing the Governor of Banky Foiben'i Madagascar, Having regard to Instruction No. 002/2022-CSBF of December 20, 2022 on regulatory capital of credit institutions, Having regard to Instruction No. 003/2022-CSBF of December 20, 2022 on capital requirements for credit institutions, Having regard to Instruction No. 002/2023-CSBF of October 23, 2023 on liquidity ratios for banks and financial establishments, Sets out the implementation modalities for Instructions No. 002/2022-CSBF and No. 003/2022-CSBF as follows.

1. Regulatory Capital

1.1. For the application of Article 10 of the aforementioned Instruction No. 002/2022-CSBF, the residual terms corresponding to the haircuts to be applied to the outstanding amount of subordinated loans and other financial instruments eligible for Additional Tier 2 capital are specified as follows:

Residual Term	Percentage Taken into Account
5 years and more	100%
4 years to less than 5 years	80%
3 years to less than 4 years	60%
2 years to less than 3 years	40%
1 year to less than 2 years	20%
Less than 1 year	0%

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1.2. For the application of Article 13 of the aforementioned Instruction No. 002/2022-CSBF, the interim beneficial result at the end of June of the fiscal year is considered an "event having the effect of increasing the amount of regulatory capital by 10% or more" subject to prior authorization from the General Secretariat of the CSBF and when the following conditions are met:

• taking into account all charges related to the period under review, including provisions for depreciation, provisions for impairment losses, and tax charges;
• certification of the interim financial statements by the Statutory Auditor(s);
• deduction of the estimated amount of dividends to be distributed, determined by the Board of Directors.

The amount of the aforementioned interim result must be retained in regulatory capital at the end of the fiscal year and thus cannot be subject to distribution during the allocation of the final result of the fiscal year.

2. Capital Requirements 2.1. Definitions 2.1.1. For the application of Article 5.1 e) of the aforementioned Instruction No. 003/2022-CSBF, a "commercial building" constitutes a building that does not have the nature of housing and is not intended for residential purposes. A mixed-use building is used both for commercial and residential purposes.

2.1.2. For the application of Article 5.2 c) of the aforementioned Instruction No. 003/2022-CSBF, it is understood by:

• short-term exposures, exposures whose maturities are less than or equal to 3 months;
• external rating of the counterparty, the direct rating of the counterparty established by an international financial rating agency or by an external body recognized by the supervisory authority of the counterparty's country.

2.1.3. For the application of Article 5.1 e) and f) of the aforementioned Instruction No. 003/2022-CSBF and by derogation from the provisions of Article 2, 13th and 14th paragraphs of Instruction No. 002/2023-CSBF of October 23, 2023, the definitions of small and medium-sized enterprises (SMEs), micro-enterprises, and retail customers are those currently applied by banks and financial establishments, until new definitions relating thereto are determined.

2.1.4. For the application of Article 3.6 of the aforementioned Instruction No. 003/2022-CSBF, the criteria defining the specific risk profile of a CI are:

• the business model;
• the quality of governance, internal control, and risk management;
• risks weighing on capital, notably credit risk, concentration risk, foreign exchange risk, and operational risk;
• risks weighing on liquidity.

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2.2. Weighting of Balance Sheet Items 2.2.1. For the weightings provided for in Articles 5.1.c) and 5.1.e) of the aforementioned Instruction No. 003/2022-CSBF:

• the borrower's weighting shall be applied:
  • to the remaining exposure, after deducting the accepted market value, when the fixed conditions are met;
  • to the exposure, when the fixed conditions are not met;
• the market value concerns assets pledged as collateral;
• the weighting of 50% or 75% is applicable regardless of the rank of mortgages when they are all held by the reporting establishment;
• financing of mixed-use buildings benefits from the weighting applicable to commercial building financing.

The assessment of the market value of commercial buildings mentioned in point e) may be carried out based on a single expert report during a transitional period of three (3) years from the signing of this circular.

2.2.2. For the application of Article 5.2 of the aforementioned Instruction No. 003/2022-CSBF:

• external ratings used for the weighting of asset elements must be updated by banks and financial establishments, at least every 18 months, from the last rating date recorded in the annexes of the reporting statements;
• ratings of banking counterparties by tranche are updated annually by banks and financial establishments and must be justified.

A monitoring mechanism regarding the situation of counterparties referred to in said article must be put in place to ensure immediate consideration of any change in external rating or event likely to motivate a modification of the internal rating.

2.2.3. For the weighting of doubtful and disputed claims (CDL), the securities provided for in Article 5.3 concern regularly registered mortgage guarantees.

2.2.4. In matters of capital requirements, the counterparty weighting takes precedence over that of the nature of the credits.

2.3. Treatment of Off-Balance Sheet Items 2.3.1. The conversion factors applicable to off-balance sheet items for conversion into "credit risk equivalent" mentioned in Article 5.4 of the aforementioned Instruction No. 003/2022-CSBF apply only to given commitments and are provided in Annex 1 of this circular.

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2.3.2. Risks on guarantors must be reintegrated into received off-balance sheet commitments, by applying the guarantor's weighting to the amount retained for risk mitigation, for received and eligible guarantees.

2.4. Deductible Elements for Credit Risks 2.4.1. For the application of Article 6.2. c) of the aforementioned Instruction No. 003/2022-CSBF, the deductions to be applied to credit risks, depending on the guarantor's weighting, are specified in Annex 2 of this circular.

2.4.2. Eligible guarantees for risk mitigation provided for in Article 6.2 of the aforementioned Instruction No. 003/2022-CSBF must meet the following conditions:

• the term of the guarantee is at least equal to that of the commitments it covers. The amount of the guarantee can be adjusted according to the outstanding amount of the commitments;
• the guarantee is irrevocable: it must not contain any clause authorizing the guarantor to unilaterally cancel the coverage or increase its effective cost due to a deterioration in credit quality;
• the guarantee is unconditional: no clause can dispense the guarantor from their payment obligation;
• the guarantee is on first demand: in the event of a default or non-payment event by the counterparty, the bank or financial establishment can quickly recourse against the guarantor so that the latter settles all arrears under the act governing the transaction;
• the guarantor can settle all arrears by a single payment to the bank or financial establishment or assume future payment obligations of the counterparty covered by the guarantee. The bank or financial establishment must have the right to receive these payments without being obliged to pursue the counterparty in court for the recovery of its claims.

2.4.3. Eligible guarantees provided for in Article 6.2. c) of the aforementioned Instruction No. 003/2022-CSBF are taken into account only if the guarantor is subject to a more favorable weighting than that applicable to the principal debtor.

2.4.4. The following are retained as risk mitigation at the periodic closing date:

• guarantees subscribed at the time of credit granting;
• guarantees subscribed subsequently to the establishment of credits, provided that they fully cover the period under review.

2.4.5. As a transitional measure, banks and financial establishments have a period of one (1) year from the signing of this circular to regularize previously authorized guarantees that do not meet the conditions set out in point 2.4.2. The quota of 80% authorized as risk mitigation remains applicable during this period.

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2.5. Capital Requirements for Operational Risk (EFPRO) When the Net Banking Product (NBP) is negative for one of the last three fiscal years, the EFPRO is determined by applying a flat ratio of 15% to the last three positive NBPs of previous fiscal years.

3. Declarations are communicated to the General Secretariat of the CSBF, in accordance with the models presented in Annex 3, via the BSA "Banking Supervision Application" tele-declaration system, no later than the 15th of the month following the date of the periodic accounting statement closing.

4. As a transitional measure, a period of one (1) year from the signing of this circular is granted for the effective application of the regulatory capital conservation buffer provided for by Article 9 of the aforementioned Instruction No. 003/2022-CSBF.

This circular, of which the annexes form an integral part, enters into force upon its notification to the Professional Association of Banks, Financial Establishments, and the Professional Association of Microfinance Institutions for the provisions concerning them, and upon its publication on the website of Banky Foiben'i Madagascar.

Made in Antananarivo, on MARCH 24, 2025 For the Commission de Supervision Bancaire et Financière, The President, Aivo H. ANDRIANARIVELO Governor of Banky Foiben'i Madagascar

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Annex 1

CONVERSION FACTORS APPLICABLE TO GIVEN COMMITMENTS

Type of Given Commitments	Conversion Factor
Acceptances	100%
Aval and endorsement of bills not bearing the signature of another credit institution	100%
First-demand guarantees of a "financial" nature ("financial standby letter of credit")	100%
Counter-guarantees given to credit institutions on risks of other credit institutions	100%
Duroir commitments	100%
Irrevocable leasing commitments - balance remaining to be disbursed on the total amount of the financed operation	100%
Asset sales accompanied by a recourse right in favor of the buyer (e.g., factoring, invoice discounting facilities)	100%
Temporary asset transfers for which the bank or financial establishment retains the credit risk	100%
Repurchase of assets other than securities issued by sovereign borrowers and assimilated entities	100%
Irrevocable standby letters of credit constituting credit substitutes	100%
Term deposits against term (forward deposits)	100%
Other given commitments with high risk with approval of the SG-CSBF	100%
Documentary credits, granted or confirmed, not guaranteed by underlying merchandise	50%
Bid bonds, performance bonds, completion bonds, good execution of contracts, return of advances, retention guarantees (such as bid bonds)	50%
Customs and tax sureties	50%
Administrative and tax bonded obligations	50%
Sureties related to commercial and private service provision contracts	50%
Sureties resulting from legislative or regulatory texts on the financial guarantee necessary for the exercise of certain professions or activities	50%
Note issuance facilities (NIF) and revolving underwriting facilities (RUF)	50%
Other elements of a nature guaranteeing non-financial commercial or private transactions	50%
Other commitment-type guarantees of transactions, presenting moderate risk, with approval of the SG-CSBF	50%

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Type of Given Commitments	Conversion Factor
Issuance and confirmation of execution of commercial letters of credit whose maturities are less than or equal to 6 months, automatically settled linked to merchandise movements (such as documentary credits guaranteed by underlying merchandise).	20%
Undrawn credit facilities (overdraft authorizations, commitments to lend, buy securities, or grant sureties or credits by acceptance), which cannot be cancelled unconditionally at any time without notice or which do not provide for automatic cancellation in case of deterioration of the borrower's credit quality	20%
Other commitments presenting moderate risk, with approval of the SG-CSBF	20%
Revocable commitments unconditionally and at any time without notice, or which effectively provide for automatic revocation in case of degradation of the borrower's solvency (such as unconfirmed overdraft authorizations)	10%
Other commitments presenting low risk, with approval of the SG-CSBF	10%
Securities Operations
Securities to be received	100%
Unpaid fraction of shares and partially paid securities	100%
Doubtful Off-Balance Sheet Commitments
Provisions ≤ 20%	150%
20% < provisions ≤ 50%	100%
Provisions > 50%	50%

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Annex 2

DEDUCTIONS FOR RISK MITIGATION FOR THE APPLICATION OF ARTICLE 6.2. c) OF INSTRUCTION NO. 003/2022-CSBF RELATING TO CAPITAL REQUIREMENTS

Guarantor Weighting	Percentage of Guarantee Deductible
0%	100%
20%	80%
30%	70%
40%	60%
50%	50%
75%	25%
100%	0%
150%	0%