Circular Regarding Instructions for Fair and Transparent Customer Treatment No. (6226/4/2/10) dated 20/5/2013

In the Name of Allah, the Most Gracious, the Most Merciful

[Central Bank of Jordan Logo]
Central Bank of Jordan

No: 10/4/2556
Date: 10/7/1434 AH
Corresponding to: 20/5/2013 AD

Circular to Licensed Banks

With reference to the Instructions for Fair and Transparent Customer Treatment No. (2012/56) dated 31/10/2012, published in Official Gazette No. (5187) on 14/11/2012, the provisions of which apply to all banks operating in the Kingdom starting from 14/5/2013, and in light of the numerous inquiries received from a number of licensed banks and following the meeting held with bank representatives in the Banks Association regarding this matter, we present below further clarification regarding the application of some articles of the aforementioned Instructions:

First: Chapter One:

1. Calculation of the Effective Annual Percentage Rate (Effective APR): An appendix containing two examples illustrating the calculation method is attached.
2. Article (14) regarding the Payment Card Industry Data Security Standard (PCI DSS):
   a. The scope of application of the Payment Card Industry Data Security Standard (PCI DSS) includes all entities involved in card industry activities that are subject to compliance requirements according to the standard's requirements, and the Bank must establish a compliance plan within a maximum period of one year, and provide the Central Bank with a quarterly report detailing the level of achievement of the plan. b. The Bank must obtain a Certificate of Compliance issued by the Payment Card Industry Security Standards Council, and the Bank may refer to qualified assessors accredited by the Council for this purpose.

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CENTRAL BANK OF JORDAN

Second: Operational Procedures regarding the application of Chapter Three / Management of Dormant Accounts: Clarification on the application of the text of Articles (17) and (18) of the Instructions in the case where the client has more than one account with the Bank:
Each account shall have a freezing period according to the provisions of Article (17) of the Instructions, and the following shall be observed in freezing any of them:
a. Any transaction on any of the client's accounts with the Bank shall constitute a new starting point for calculating all prescribed freezing periods for these accounts. b. The deduction of periodic installments to repay facilities granted to the client from his other credit accounts is considered, for the purposes of these Instructions, as withdrawals that keep the account active, whereas debiting fees and commissions for the benefit of the Bank is not considered a reason to keep it active.
c. Subject to the above, if the prescribed period for freezing any of the accounts expires, it shall be frozen, and no transaction occurring thereafter on the client's other accounts shall have any effect on the frozen account.
d. The provisions of Article (18) of the Instructions shall not apply until the last account of the client with the Bank is frozen.

Third: General Guidelines:

1. The provisions of these Instructions apply to all bank clients unless the text indicates that its provisions are limited to retail clients.
2. All types of credit granted to the Small Enterprise - which meets the definition provided in the Capital Adequacy Instructions according to Basel II Standard No. (2008/39) dated 24/3/2008 - fall within the definition of (Retail Portfolio) explained in these Instructions and are thus subject to their provisions.
3. In application of the general rules of legislation regarding time, these Instructions apply to facility contracts granted to retail clients after the commencement of their provisions according to the texts contained therein, and therefore:
   • The provisions of these Instructions do not apply to facility contracts concluded before the commencement of these Instructions unless a credit renewal or top-up of any of these contracts occurs after the commencement of these Instructions.

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CENTRAL BANK OF JORDAN

• The provisions of these Instructions apply to credit cards granted to retail clients or renewed after the date of commencement of the Instructions.
• If the Bank's action in transitioning to EMV technology in the field of credit cards, in compliance with the provisions of Article (14) of the Instructions, is limited to merely changing the plastic card while keeping the original contract valid with all its financial effects towards the client and the Bank, the contract is not subject to the Instructions provided it was concluded before their commencement.
• All credit products are subject to the provisions of these Instructions from their commencement, and banks must restructure their existing products to comply with the provisions of these Instructions.

4. Pure savings products are not subject to the restrictions on fees stipulated in these Instructions.

Please accept our highest respect,

The Governor
Dr. Ziad Frieze

Enclosed

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CENTRAL BANK OF JORDAN

Appendix
Illustrative Example No. (1) showing how to calculate the Effective Annual Percentage Rate (Declining Interest)

Example (1): On 26/3/2013, Bank X granted a client a home loan worth (80,000) JD over (20) years (240 months), with a nominal annual interest rate (declining) of 9%, according to the costs detailed below (repayment method: monthly installments starting on 26/4/2013):

• Costs (Y) paid once, for example (200) JD.
• Credit granting commission (maximum limit 1%) = 800 JD.
• Annual life insurance cost for the client, for example (12) JD if charged to the client's account.
• Property appraisal/re-appraisal fee = for example (50) JD (as per the Instructions, it is a lump sum), collected every four years [its periodicity is governed by Article (3) of the Instructions for Classifying Credit Facilities and Calculating Provisions for Impairment and General Banking Risk Reserves No. (47/2009) dated 10/12/2009].

Calculation Method:
First: The nominal annual interest rate = 9%, therefore the nominal monthly interest rate = 0.75%, and the nominal daily interest rate = 0.025% [The year (360) days in compliance with the provisions of Instructions No. (14/2002) dated 15/12/2002].

Second: Cash flows at the start of the loan: 80,000 - 800 - 200 - 50 = 78,950 JD.

Third: Depending on the PMT equation in Excel software, the following are entered: Rate (Nominal Monthly) = 0.75%, Nper = 240 (number of installments until the end of the loan term), PV = 80,000, FV = 0, Type = (If the first loan installment is paid by the client immediately, i.e., at the beginning of the first period, we put 1, whereas if it is paid at the end of the first period, we put 0 or ignore the value). This results in the monthly installment (PMT) = 720 JD (approximately).

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CENTRAL BANK OF JORDAN

Fourth: Cash Flow Table:

Installment No.	Date	Number of Days (Difference between Xn and Xn-1)	Monthly Installment	Interest Payment	Principal Payment	Costs	Amount Granted/Remaining
X0	26/3/2013	...	...	...	...	1050	80,000	(78,950)
X1	26/4/2013	31	720	600	100	...	79,900	720
X2	26/5/2013	30	720	599.25	120.75	...	79,779.25	720
X3	26/6/2013	31	720	618.29	101.71	...	79,677.54	720
...	...	...	...	...	...	...	...	...
X13	26/3/2014	28	720	...	...	...	...	732
...	...	...	...	...	...	...	...	...
X49	26/3/2017	28	720	...	...	12+50	...	782
...	...	...	...	...	...	...	...	...
X239	26/2/2033	31	720	...	...	...	...	720
X240	26/3/2033	28	720	...	...	...	...	720

Fifth: Depending on the Internal rate of return (IRR) equation in Excel software, we place the cash flows in column A, for example; we enter: values=A1:A241, while Guess (representing the expected return) = 0, the result = 0.7686% (since the flows are monthly, IRR represents the actual monthly rate).

Sixth: Based on the above:
Effective APR= (1+IRR)^12 - 1 = (1+0.007686)^12 - 1 = 9.623%

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CENTRAL BANK OF JORDAN

Illustrative Example No. (2) showing how to calculate the Effective Annual Percentage Rate (Flat Interest/Return)

Example (2): On 26/3/2013, Bank X granted a client a car loan/financing (90%) of its total value of (20,000) JD over (4) years (48 months), with a nominal annual interest/flat return (7%), according to the costs detailed below (repayment method: monthly installments starting on 26/4/2013):

• Costs (Y) paid once, for example (80) JD.
• Credit granting commission (maximum limit 1%) = 180 JD.

Calculation Method:
First: The nominal annual interest/return = 7%, therefore the nominal monthly interest = 0.583%, the loan/financing granted = 90% × 20,000 = 18,000 JD.

Second: Cash flows at the start of the loan/financing = 18,000 - 180 - 80 = 17,740 JD.

Third: Since the interest/return is Flat, the monthly installment is calculated as follows:

• Monthly interest/return value = 0.00583 × 18,000 = 104.94 JD.
• Monthly value due from the loan/financing principal = 18,000 / 48 = 375 JD.
• Monthly installment = 104.94 + 375 = 479.94 JD.

Fourth: Cash Flow Table:

Month	Cash Flows
26/4/2013	(17,740)
26/5/2013	479.94
26/6/2013	479.94
...	...
26/4/2017	479.94

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CENTRAL BANK OF JORDAN

Fifth: Depending on the Internal rate of return (IRR) equation in Excel software, we place the cash flows in column A, for example; we enter: values=A1:A49, while Guess (representing the expected return) = 0, the result = 1.121% (since the flows are monthly, IRR represents the actual monthly rate).

Sixth: Based on the above:
Effective APR= (1+IRR)^12 - 1 = (1+0.01121)^12 - 1 = 14.31%