BANQUE DE LA REPUBLIQUE DU BURUNDI

LA DIRECTION

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Circular No. 04/M/18 on the Governance of Microfinance Institutions, Special Structures, Financial Bodies and Community Financial Groupings issued under Regulation No. 001/2018 on Microfinance Activities

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Article 1: Object and Scope

This circular aims to establish minimum governance rules.

It applies to microfinance institutions, Special Structures, Financial Bodies and Community Financial Groupings.

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Article 2: Definitions

For the purposes of this circular, the following terms apply:

• Reference Shareholder: a shareholder or group of shareholders designated by the microfinance institution and individually holding at least five percent (05%) of voting rights;

• Qualified Shareholder: any group of shareholders resulting from an express agreement, which holds, directly or indirectly, a share of the microfinance institution's capital conferring at least fifty percent (50%) of voting rights or enabling it to control them;

• Director: any person serving on the Board of Directors of a microfinance institution and approved for this purpose by the Central Bank;

• Non-Executive Director: any Director not holding executive management functions within a microfinance institution;

• Independent Director: any Non-Executive Director who does not have interest ties with the institution or its group that could compromise their freedom of judgment, such as a shareholder holding at least one share, even symbolic, neither reference nor qualified, who is elected to the Board of Directors for their expertise in banking or finance, particularly in accounting, management, economics, taxation and law;

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Article 3: Establishment of a Governance Framework

Microfinance institutions, Special Structures and Financial Bodies must establish a governance framework consistent with sound practices and adapted to their size, structure, nature and complexity of activities as well as their risk profile. This governance framework must be approved by the Board of Directors.

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Article 4: General Governance Principles

The governance framework must in particular:

• be developed and implemented taking into account, among other things, information system security, coverage of all risks incurred by the institution and potential conflicts of interest;

• establish and formalize strategies, policies and procedures to be implemented, in order to define and organize the various means necessary to achieve sound governance;

• define the roles and obligations of stakeholders;

• meet the needs of the institution as a whole and each of its organizational and operational units;

• integrate mechanisms aimed at maintaining and/or restoring operations in case of disruption;

• reflect, over time, changes resulting from the institution's characteristics and its external environment as well as developments in governance best practices;

• provide mechanisms to ensure the integrity and commitment of stakeholders, who must be sufficiently numerous, competent and have a good knowledge of the institution's activities, risks and legal obligations.

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Article 5: Management of Risks Related to Governance Failure

Microfinance institutions, Special Structures and Financial Bodies are required to establish risk management mechanisms specifically related to governance failure.

These risks include in particular:

• routine risk: practices remain the same while the socio-economic environment changes;

• mission drift risk: objectives and criteria defined in the mission statement become secondary or are neglected in favor of other objectives;

• risks related to poor growth management: excessive and poorly controlled growth presents risks, particularly for the portfolio, and can lead to mission drift;

• conflict of interest risks: problems arising from decisions driven by the pursuit or protection of personal benefits, both at the management level and among Directors, and misaligned with the long-term development of the institution;

• decision blockage or poor decision risks: a situation where two groups of Directors oppose each other such that no majority can be reached.

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Article 6: Integrity and Honorability of Shareholders

Shareholders of microfinance institutions must comply with the laws and regulations governing the financial sector, failing which they shall be subject to the sanctions provided by these laws and regulations as well as those contained in this circular.

The recognized integrity and honorability at the time of approval or capital increase must subsist throughout the life of the institution.

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Article 7: Abuse of Voting Rights by Shareholders

Any shareholder is prohibited from exercising their voting rights against the interests of the microfinance institution or Financial Body and its depositors.

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Article 8: Sanctions on Shareholders

Any shareholder or group of shareholders that exercises their voting rights against the interests of the institution and its depositors is subject to the withdrawal of the right to sit and be represented at meetings of the Board of Directors and the General Meeting, as well as the withdrawal of the voting rights attached to their shares.

In case of recidivism, the Central Bank may withdraw from the defaulting shareholder or group of shareholders the right to participate in the shareholding of the Burundian microfinance and banking sector.

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Article 9: Code of Conduct for Directors

Microfinance institutions, special structures and financial bodies must develop a code of conduct for Directors.

The code of conduct must include in particular the following aspects:

• duty of competence, diligence and efficiency: Directors must leverage their skills and abilities while showing respect for their colleagues and management team. Directors must act effectively and demonstrate professional and independent judgment. They are responsible for all acts performed in the exercise of their functions.

• duty of loyalty: Directors must exercise their powers in the interest of the institution and not in their own interest or that of a third party. The duty of loyalty is exercised particularly in the face of conflicts of interest, operational opportunities and anything requiring confidentiality.

• duty of compliance: Directors must remain faithful to the institution's mission and promote its values. They must ensure that the institution's practices are consistent with its social and financial objectives and cannot in any way harm its employees, clients or members and its environment.

• duty of prudence and independence: Directors must show reserve, discernment, prudence, rigor and independence in the exercise of their mandate.

• duty of confidentiality: Directors must respect the confidential nature of any information brought to their attention in the exercise or within the framework of their mandate.

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Article 10: Participation in Board of Directors Meetings

A Director must actively and effectively participate in the discussions and deliberations of the Board of Directors.

Participation in Board of Directors meetings includes physical presence, videoconference or any other modality recorded in the organic texts.

The Chairman of the Board of Directors presents, to the General Meeting, the status on the regularity of Directors' attendance at Board meetings. The General Meeting ensures compliance with the seventy-five percent (75%) participation rule for Board meetings in order to rule on the benefits and fate reserved for them.

In case of impediment, a Director may grant a proxy to another Director. However, the responsibility for decisions taken lies with the represented party.

The organic texts of each institution must specify that a Director who has not participated annually in at least fifty percent (50%) of Board meetings must be replaced by the General Meeting.

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Article 11: Role of the Chairman of the Board of Directors

The Chairman of the Board of Directors ensures the leadership of the Board and is responsible for its proper functioning. They must be a Non-Executive Director and must not have a family relationship with the institution's Management.

The Chairman ensures that Board decisions are based on reliable and well-documented information. They encourage and promote critical discussion and ensure that divergent opinions can be expressed and discussed in the decision-making process.

The Chairman of the Board of Directors exercises their powers in the general interest of the institution and not in their own interest or that of a group of Directors or a third party.

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Article 12: Prohibitions for an Independent Director

An Independent Director must not:

• serve on the Board of Directors for more than two successive terms;

• be a Director in two microfinance institutions;

• hold shares other than the symbolic share;

• be an employee or corporate officer of the microfinance institution;

• be a corporate officer of a company in which the microfinance institution holds a Director mandate;

• be an employee of a company maintaining shareholding relations with the microfinance institution;

• be a service provider to the microfinance institution;

• have a family relationship with a corporate officer of the microfinance institution;

• have been an external auditor or Statutory Auditor of the microfinance institution over the past three years.

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Article 13: Specialized Committees of the Board of Directors

In its oversight function over key areas, the Board of Directors is organized into specialized committees tasked with thoroughly analyzing specific issues and advising the Board accordingly.

Nevertheless, delegating certain responsibilities to a specialized committee does not in any way exempt the Board of Directors from its responsibility.

Each specialized committee must have a charter or internal regulations defining its mandate, scope and working procedures. It must meet according to a predefined schedule and predetermined agenda and produce signed minutes, approved by the Board of Directors and stored chronologically in the microfinance institution.

The specialized committees report to the Board of Directors, in an exhaustive and clear manner, on the conclusions and recommendations resulting from their work.

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Article 14: Sanctions on Directors

Any Director who hinders decisions regarding compliance with legal and regulatory standards as well as internal procedures to achieve predefined objectives is subject to the withdrawal of the right to sit at meetings and deliberations of the Board of Directors. In case of recidivism, the Central Bank may withdraw the Director's approval.

The sanction referred to in paragraph 1 of this article also applies to a Director presenting a delayed payment maturity of at least 30 days with the microfinance sector and 90 days or more of unpaid amounts with the banking sector. The sanction applies to them until the clearing of arrears or their reclassification into healthy loans following debt rescheduling.

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Article 15: Cessation of Functions of Directors, Members of the Supervisory Board and Management

The cessation of functions of a Director, a member of the Supervisory Board or a Manager within a microfinance institution, Special Structure or Financial Body must be immediately declared to the Central Bank.

The vacancy of a Management position in a microfinance institution or Financial Body may not under any circumstances exceed a period of three (03) months.

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Article 16: Responsibility and Composition of the Management Committee of a Community Financial Grouping

The Management Committee ensures daily management and proper functioning of the grouping within the limits set by the statutes and internal regulations.

It is composed of a Chairman, a Vice-Chairman, a Treasurer and a Secretary. The members of the grouping may establish a supervisory council tasked with overseeing the actions of the Management Committee.

The members of the Management Committee are elected by the General Meeting for a fixed term determined by the statutes and not exceeding five (05) years.

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Article 17: Responsibilities of the Chairman of the Management Committee of Community Financial Groupings

The Chairman of the Management Committee performs on behalf of the grouping all management and administrative acts in accordance with legal and regulatory provisions. Nevertheless, the alienation of assets can only be carried out by decisions of the General Meeting.

In the exercise of their mandate, the Chairman of the Management Committee is strictly bound by the decisions of the General Meeting and the Central Bank.

The violation of these decisions and instructions engages their personal responsibility vis-à-vis the grouping and the Central Bank without however affecting the validity of commitments taken on behalf of the grouping towards third parties.

The Chairman of the Management Committee is required to transmit, to the Central Bank and other competent authorities, financial data and the report on the activities of the past year.

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Article 18: Entry into Force

This circular enters into force on the day of its publication in the Official Gazette of Burundi and on the website of the Banque de la Republique du Burundi.

Done in Bujumbura, on 30/8/2018

BANQUE DE LA REPUBLIQUE DU BURUNDI

Annunciata SENDAZIRASA
2nd Vice-Governor.

Melchior WAGARA
1st Vice-Governor.