Circular No. 21/2018 on Corporate Governance in Credit Institutions

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BANQUE DE LA REPUBLIQUE DU BURUNDI

LE GOUVERNEUR

CIRCULAR NO. 21/2018 ON CORPORATE GOVERNANCE IN CREDIT INSTITUTIONS ISSUED PURSUANT TO LAW NO. 1/17 OF 22 AUGUST 2017 GOVERNING BANKING ACTIVITIES

Pursuant to Law No. 1/34 of 02 December 2008 establishing the Statutes of the Banque de la République du Burundi, specifically Articles 7 (paragraphs 4 and 6) and 8;

Pursuant to Law No. 1/17 of 22 August 2017 governing banking activities, specifically Articles 3, 15, 26, 28, 29, 30, 31, 32, 47, 49, 50, 53, 66 and 68;

Having reviewed Circular No. 21/10 on the responsibility of shareholders of banks and financial institutions;

The Banque de la République du Burundi, hereinafter referred to as the "Central Bank", enacts:

CHAPTER I: GENERAL PROVISIONS

Article 1: Purpose

The purpose of this Circular is to establish the minimum prudential rules applicable to credit institutions regarding corporate governance.

Article 2: Definitions

For the purposes of this Circular, the following terms are defined as:

reference shareholder, a shareholder or group of shareholders designated by the credit institution and holding individually at least 5% of the voting rights;

qualified shareholder, any group of shareholders resulting from an express agreement, which holds, directly or indirectly, a share of the capital of the institution conferring at least fifty percent (50%) of the voting rights or allowing it to control the institution;

corporate governance, the set of measures, rules and decision-making, information and supervisory bodies that ensure the proper functioning and control of a credit institution;

executive or delegated director, any person sitting on the Board of Directors and part of the General Management on a day-to-day basis of the credit institution;

non-executive director, any Director not exercising management functions in the credit institution;

independent director, any non-executive Director who does not have, with the credit institution or the group to which it belongs, interest links likely to compromise their freedom of judgment, such as a shareholder holding at least one share, even symbolic, without being either a reference or qualified shareholder. They are elected as members of the Board of Directors for their expertise in banking, finance, accounting, economics, taxation or law;

insider dealing: an offense consisting of using or transmitting information not known to the public which, if it were known, would have a positive or negative impact on the decision-making of market actors;

person related to a credit institution, any natural or legal person, or group of linked persons, having with it at least one of the following qualities or relations:

1. Director or Manager;
2. qualified shareholder;
3. shareholder holding at least 5% of the voting rights;
4. enterprise in which the related person holds, directly or indirectly, at least 25% of the voting rights;
5. any enterprise in which the persons referred to in 1), 2) and 3) are Managers, Directors or hold, directly or indirectly, at least 25% of the voting rights;
6. spouses, direct line relatives or first-degree allies of any of the persons referred to in 1), 2) and 3) as well as the enterprises in which they are Managers, Directors or hold, directly or indirectly, at least 25% of the voting rights;
7. enterprise that, alone or with others, the credit institution controls directly or indirectly;
8. enterprise controlled directly or indirectly by a person or entity that controls the credit institution;
9. any other person that the Central Bank deems related;

linked persons,

• any group consisting of two or more natural or legal persons having between them interrelations such as common management, commercial or financial interdependence, such that the difficulties of one necessarily affect the other or others;
• any other group of persons that the Central Bank deems linked.

family tie, spouse, direct line relative or ally up to the second degree;

conflict of interest, a situation in which a person has a direct or indirect private or personal interest in a matter that is sufficient to directly or indirectly influence or may directly or indirectly influence the objective exercise of their official or administrative functions in the institution.

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Article 3: Implementation of Corporate Governance

Every credit institution must implement corporate governance adapted to its risk profile, size and complexity.

Article 4: Abuse of Power or Position

Any member of a body is responsible for any decision taken collectively in the meeting in which they participated.

It is prohibited for any member of a decision-making body of a credit institution to use their position to:

• grant or allow the granting of advances, loans or credit facilities at favorable rates beyond the duration of the mandate to a member of the General Management or the Board of Directors;

• grant or allow the granting of unsecured advances, loans or credit facilities to its shareholders or related persons;

• grant favorable conditions regarding deposits, credits or guarantees to related persons outside the rules and procedures in force in the credit institution;

• waive debts, interest or commissions in favor of related persons outside the rules and procedures in force in the credit institution.

The rules and procedures governing any benefits possibly granted to related persons regarding credits and guarantees must be approved by all members of the Board of Directors of the credit institution and communicated to the Central Bank for non-objection.

CHAPTER II: SPECIFIC PROVISIONS

Section 1: General Meeting of Shareholders

Article 5: Duties of the General Meeting of Shareholders

Shareholders have the duty to exercise their supreme authority jointly through the General Meeting.

Shareholders are responsible for:

• designating, among themselves, the reference shareholder or group of reference shareholders;
• ensuring the implementation of objective criteria for the composition of the Board of Directors and the evaluation of its members for their replacement if necessary;
• ensuring the implementation of a clear and rigorous procedure to identify and select Director candidates;
• ensuring that only honest persons with diversified skills are elected or appointed to the Board of Directors;
• ensuring that the Board of Directors has implemented efficient and effective governance;
• ensuring that the Board of Directors has taken necessary measures to comply with legal and regulatory texts;
• ensuring that the design and functioning of the credit institution's remuneration system offers appropriate motivations aligned with prudent risk-taking.

Article 6: Abuse of Voting Rights

It is prohibited for any shareholder to use their voting rights against the interest of the credit institution, depositors or the banking sector.

Article 7: Integrity and Honorability of Shareholders

Shareholders of a credit institution must be in compliance with the law governing banking activities and its implementing texts, exchange regulations and other laws and regulations governing the financial sector, under penalty of sanctions provided for by these laws and regulations as well as those contained in this Circular and in the Circular on the sanctions matrix.

The integrity and honorability recognized to shareholders upon the approval of the credit institution or the increase in capital must subsist throughout the life of the credit institution.

Article 8: Treatment of Dividends

The share of dividends due by a credit institution to a shareholder in default and/or in overdraft in that institution is allocated primarily to the clearance of their payment arrears and/or overdrafts.

Article 9: Sanctions on Shareholders

Any shareholder or group of shareholders who uses their voting rights against the interest of the credit institution, depositors or the banking sector 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 shareholding in the Burundian banking sector.

A shareholder presenting 180 days or more of unpaid amounts in the credit institution where they are a shareholder loses, until the clearance of arrears or their reclassification into healthy loans, the right to:

• participate in the increase in share capital;

• sit and be represented at meetings and deliberations of the Board of Directors and the General Meeting as well as the voting rights attached to their shares.

Section 2: Board of Directors

Article 10: Responsibilities of the Board of Directors

The Board of Directors is responsible for the strategic planning of the credit institution, the risk taking and management strategy, the remuneration policy and practice, corporate governance and the implementation and dissemination of the credit institution's values. The Board of Directors is also responsible for implementing, controlling and dismissing members of the General Management.

The Board of Directors is collectively responsible before the General Meeting of Shareholders.

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Article 11: Internal Rules of Procedure of the Board of Directors

The Board of Directors of each credit institution must adopt Internal Rules of Procedure that specify the organizational and operational modalities of the Board of Directors and its specialized Committees. The Internal Rules of Procedure must in particular describe:

• the main role of the Board of Directors;
• the determination of the specialized Committees of the Board of Directors;
• the delimitation of the roles, functions, responsibilities and powers of the Board of Directors and its specialized Committees;
• questions reserved for final decision-making or prior approval by the Board of Directors;
• the practices of the Board of Directors regarding issues such as conflicts of interest and the convening of Board meetings;
• the resignation procedure for a Director who does not participate in Board meetings as required.

The Internal Rules of Procedure of the Board of Directors must require all Directors to declare to the Board of Directors any potential or perceived conflict of interest, such as business relationships or other circumstances that could interfere with the exercise of objective judgment.

The Internal Rules of Procedure must guarantee independence in the organization and functioning of the Board of Directors vis-à-vis influential shareholders, notably reference shareholders and qualified shareholders.

Article 12: Monitoring of the Management of the Credit Institution by the Board of Directors

In the context of monitoring the management of the credit institution, the Board of Directors must:

• be regularly informed of the situation of the credit institution by the General Management, in accordance with Article 30, paragraph 5 of this Circular;
• meet, preferably at least once per quarter, to deliberate on the reports on the situation of the credit institution and to guide the General Management;
• examine audit reports, the Statutory Auditor's reports and the Central Bank's control reports, and ensure the implementation of formulated recommendations.

The monitoring of the management of the credit institution is not the responsibility of a Director taken individually. In case of a request for information by a Director, they address it to the Bureau of the Board of Directors.

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Article 13: Supervision of the General Management by the Board of Directors

The Board of Directors must define the missions of the General Management and appoint competent, qualified and experienced persons to manage the affairs of the credit institution effectively.

In ensuring the supervision of the General Management, the Board of Directors must in particular:

• appoint and, if necessary, replace members of the General Management and put in place an appropriate succession plan;
• monitor that measures taken by the General Management are consistent with the strategy and policies approved by the Board of Directors, notably the tolerance or risk appetite;
• hold meetings, attested by minutes, to examine reports transmitted to it by the General Management;
• formally establish performance standards for the General Management consistent with the long-term objectives, strategy and financial solidity of the credit institution and evaluate the performance of the General Management against these standards.

Article 14: Participation in Board of Directors Meetings

A member of the Board of Directors must actively and effectively participate in the discussions and deliberations of the Board of Directors. They must attend at least 75% of the Board of Directors meetings of the credit institution during a fiscal year.

Participation in Board of Directors meetings may include physical presence, videoconference or any other method that the Central Bank may authorize upon request of the credit institution.

The General Meeting of Shareholders is required to examine that any Director complies with the 75% participation rule in Board of Directors meetings.

Article 15: Values of the Credit Institution and Code of Conduct

The Board of Directors must establish formal policies defining a code of ethics and business conduct standards for the credit institution as well as effective policies to ensure compliance with these standards.

The code of conduct must apply to members of the Board of Directors and General Management and to all staff members.

The code of conduct must include, at a minimum, the business conduct standards relating to the following elements:

• obligation to comply with applicable laws and regulations;
• conflict of interest between the institution and a member of the Board of Directors, General Management or staff;
• guidelines for decision-making;
• employee whistleblowing rights, i.e., the methods by which employees can raise concerns or report potential violations without fear of retaliation;
• fair treatment of clients and employees;
• professional development of employees;
• information sharing and communication with supervisors and other partners;
• insider dealing;
• reporting procedures;
• explicit prohibition of illegal activities, such as financial misrepresentation and reprehensible financial behavior, economic crimes, including fraud, violation of sanctions, money laundering and terrorist financing, anti-competitive practices, corruption, or violation of consumer rights;
• procedures specifying to employees that they must adopt ethical behavior and execute their work with competence and diligence.

Article 16: Competence of Board of Directors Members

Members of the Board of Directors must be and remain qualified, notably through continuous training and professional development, for their positions. They must have a clear understanding of their role in corporate governance and be able to exercise objective judgment on the affairs of the credit institution.

Article 17: Appointment of Directors

Every credit institution must implement a formalized and transparent procedure for the selection and appointment of Directors.

This procedure must be compatible with the provisions of this Circular and those of the Circular on the approval of Managers and Directors of credit institutions.

The Director appointment procedure must be formal, transparent and incorporate the following aspects:

• the composition of the Board of Directors and its specialized Committees;
• the level of training, qualification and professional experience;

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• the duration of the mandate and the age limit for Directors;
• reasons for cessation (dismissal, resignation,...) of the Director function;
• any other relevant information.

The credit institution must immediately inform the Central Bank when a member of the Bureau of the Board of Directors ceases their functions as well as the reasons for their departure.

The State is represented in the Bureau of the Board of Directors in any credit institution where it is a shareholder.

Article 18: Composition of the Board of Directors

The Board of Directors is composed of at least five members, the majority of whom are non-executive Directors. Among these, there are independent Directors, chosen for their technical skills and recruited based on a public call for tenders.

The size of the Board of Directors must correspond to the volume, complexity, diversity and development prospects of the credit institution's activity. This size criterion must, furthermore, be subject to regular review to ensure that the number of Directors remains appropriate given the evolution of the credit institution's activity.

Non-resident foreign Directors must not exceed two-thirds (2/3) of the total number of members of the Board of Directors.

In order to strengthen the impartiality and objectivity of decisions taken, at least two (2) members of the Board of Directors must be independent.

The Bureau of the Board of Directors is composed of the President, the Vice-President and the Secretary.

The President and Vice-President of the Bureau of the Board of Directors must be non-executive Directors. The Secretariat of the Bureau of the Board of Directors is provided by the General Manager.

Article 19: Role of the President of the Board of Directors

The President of the Board of Directors must be the guarantor of good governance and responsible for the efficient functioning of the Board. They must be a non-executive Director and must not have a family tie with a member of the General Management of the credit institution.

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

The President of the Board of Directors must also ensure that:

• there is an Internal Rules of Procedure for the Board of Directors and it is regularly updated;
• there is harmonious functioning of the Board of Directors;
• all relevant questions are on the agenda of Board of Directors meetings and that all Directors actively and fully participate in the activities of said Board;
• the Board of Directors receives in a timely manner the necessary information from the General Management.

Article 20: Prohibitions for an Independent Director

An independent Director must not:

• sit on the Board of Directors for more than two successive mandates;
• be a Director in two credit institutions;
• be a Director and/or Manager of another credit institution;
• hold shares other than the symbolic share;
• be an employee or agent of the credit institution, or of a company in the group to which the credit institution belongs;
• be a Manager or Director of a company in which the credit institution holds a Director mandate;
• be an employee of a company having shareholding relations with the credit institution;
• have commitments with the credit institution or be a supplier thereof;
• have a family tie with a Manager or Director of the credit institution;
• have been an external Auditor or Statutory Auditor of the credit institution during the last five years.

Article 21: Prohibition of Cumulation of Functions

No one may simultaneously:

1. manage two credit institutions;
2. manage a credit institution and another enterprise;
3. manage a credit institution and be a Director in another credit institution;

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4. be a Director in two credit institutions.

The prohibitions provided for in points 2), 3) and 4) do not apply to institutions forming part of the same financial group.

Article 22: Other Prohibitions

Two related persons cannot simultaneously be President of the Board of Directors and member of the General Management of the same credit institution.

The President of the Board of Directors must be a non-executive Director and must not have a family tie with the members of the General Management of the credit institution.

A member of the Bureau of the Board of Directors cannot preside over any specialized Committee of the Board of Directors.

Article 23: Specialized Committees of the Board of Directors

In its function of controlling key areas, the Board of Directors is organized into Specialized Committees which are tasked with analyzing in depth certain specific issues and advising it on this matter.

The Board of Directors must mandatorily establish within itself the Audit Committee and the Risk Management Committee. Depending on the size, activity of the credit institution and its risk profile, other specialized Committees, notably the Nomination and Remuneration Committee, may also be established. These Committees are chaired by non-executive Directors.

Article 24: Mandates of the Specialized Committees of the Board of Directors

The Board of Directors must put in place a formal procedure to delegate certain of its functions, describing the extent of this delegation, to allow it to properly discharge its duties and responsibilities, and to execute its decision-making process effectively.

Each specialized Committee must have a charter or internal rules of procedure 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 kept chronologically in the institution.

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