Notice No. 9/GBM/2017 of June 5 Approves the Regulation on Prudential Ratios and Limits for Credit Institutions and Revokes Notice No. 15/GBM/2013 of December 31

BOLETIM DA REPÚBLICA — OFFICIAL PUBLICATION OF THE REPUBLIC OF MOZAMBIQUE SUMÁRIO NOTICE The matter to be published in the "Boletim da República" must be submitted as a duly authenticated copy, one for each subject matter, containing the following endorsement, signed and authenticated: For publication in the "Boletim da República". IMPRENSA NACIONAL DE MOÇAMBIQUE, E.P. Bank of Mozambique: Notice No. 9/GBM/2017: Approves the Regulation on Prudential Ratios and Limits of Credit Institutions and revokes Notice No. 15/GBM/2013, of December 31. Monday, June 5, 2017 | SERIES I — Number 87

BANK OF MOZAMBIQUE Notice No. 9/GBM/2017 of June 5 Given the need to update the prudential ratios and limits for Banks, in order to align them with the increasing risks inherent to their activity and the dynamics of the national economy, the Bank of Mozambique, exercising the powers conferred upon it by paragraph d) of paragraph 2 of Article 37 of Law No. 1/92, of January 3 – Organic Law of the Bank of Mozambique, combined with Article 64 of Law No. 15/99, of November 1 – Credit Institutions and Financial Companies Act, updated by Law No. 9/2004, of July 21, determines:

1. The Regulation on Prudential Ratios and Limits of Credit Institutions, attached to this Notice and forming an integral part thereof, is hereby approved.
2. This Notice enters into force on the date of its publication and revokes Notice No. 15/GBM/2013, of December 31. Maputo, April 3, 2017. Governor, Rogério Lucas Zandamela.

Regulation on Prudential Ratios and Limits of Credit Institutions

CHAPTER I General Provisions

ARTICLE 1 (Scope)

1. This Regulation applies to all credit institutions subject to the supervision of the Bank of Mozambique.
2. The institutions referred to in the preceding paragraph that, according to Articles 3 and 8 of Notice No. 4/GBM/2007, of May 2, do not present their financial statements in accordance with International Financial Reporting Standards (IFRS), shall also apply the provisions of this Regulation with the necessary adaptations.

ARTICLE 2 (Duty of Continuous Compliance) Credit institutions must continuously and permanently observe the prudential ratios and limits established in this Regulation.

ARTICLE 3 (Definitions) For the purposes of this Regulation, the following shall be understood:

1. Own funds – elements defined in accordance with Notice No. 8/GBM/2017, of April 3.
2. Capital requirement calculation base for credit risk coverage – on-balance sheet and off-balance sheet elements weighted according to their respective risks, in accordance with Notice No. 11/GBM/2013, of October 25.
3. Capital requirement calculation base for operational risk coverage – resulting from the application of the provisions of Notice No. 12/GBM/2013, of October 25.
4. Capital requirement calculation base for market risk coverage – resulting from the application of the provisions of Notice No. 13/GBM/2013, of October 25.
5. Solvency Ratio – the relationship between total own funds and on-balance sheet and off-balance sheet elements weighted according to credit, operational, and market risks.
6. Core Solvency Ratio – the relationship between core own funds and on-balance sheet and off-balance sheet elements weighted according to credit, operational, and market risks.
7. Core own funds (Tier 1 Core Capital) – the amount of paid-up capital plus reserves from undistributed profits.
8. Own funds (Tier 1 Capital) – the amount calculated in accordance with paragraph 1 of Article 6 of Notice No. 8/GBM/2017, of April 3.
9. Risk – any facility, used or not, granted by a credit institution and translated, inter alia, in the granting of credit, even in the form of a guarantee, bank guarantee or similar instrument, and in the acquisition or holding of financial participations or securities of any nature issued by the same client.
10. Large Risk – the risk assumed by a credit institution when its value, individually or together with other existing risks concerning the same client, represents at least 10% of the institution's own funds.
11. Control – in accordance with International Accounting Standard 27 – Consolidated and Separate Financial Statements (IAS 27), is the power to govern financial and operating policies of an entity so as to obtain benefits from its activities. Control is presumed to exist when the parent company owns, directly or indirectly through subsidiaries, more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent company owns half or less of the voting power of an entity, provided that there is: a) Power over more than half of the voting rights by virtue of an agreement with other investors; b) Power to govern the financial and operating policies of the entity in accordance with a statutory clause or agreement; c) Power to appoint or remove the majority of the members of the board of directors or equivalent administrative body, and that control of the entity is exercised by such board or body; and d) Power to cast the majority of votes at meetings of the board of directors or equivalent management body, and that control of the entity is exercised by such board or management body.
12. Joint Control – in accordance with IAS 31 – Interests in Joint Ventures, is the agreed sharing of control in an economic activity, and exists only when strategic, financial, and operating decisions relating to the activity require the unanimous consent of the venturers sharing control.
13. Significant Influence – in accordance with IAS 28 – Investments in Associates, is the power to participate in the financial and operating policy decisions of the company without exercising control or joint control over those policies.
14. Group – in accordance with IAS 27, is the set of companies consisting of a parent company and all its subsidiaries.
15. Parent Company – in accordance with IAS 27, is the entity that holds one or more subsidiaries.
16. Venturer – in accordance with IAS 31, is a partner of a joint venture that has joint control over that venture.
17. Subsidiary – in accordance with IAS 27, is an entity, including a non-incorporated entity such as a partnership, that is controlled by another entity (designated as the parent company).
18. Joint Venture – in accordance with IAS 31, is a contract whereby two or more parties undertake an economic activity subject to joint control.
19. Associate – in accordance with IAS 28, is an entity, including a non-incorporated entity such as a partnership, over which the investor has significant influence and that is not a subsidiary or an interest in a joint venture.
20. Qualified Participation – the direct or indirect participation representing a percentage not less than 10% of the share capital or voting rights of the participating company, with the following being considered equivalent to the participant's voting rights: a) Rights held by individuals or legal entities dominated by them or in a group relationship with them; b) Rights held by the legally unmarried spouse or minor descendants; c) Rights held by other entities, in their own name or on behalf of others, but for the account of the participant or the persons referred to in the preceding subparagraphs; and d) Rights inherent to shares of which the participant holds the usufruct.
21. Risk Group Relationship – a relationship that exists between two or more individuals or legal entities that constitute a single entity from the perspective of assumed risk, due to being so closely linked that, in the event one encounters financial difficulties, the other or all others will likely have difficulty fulfilling their obligations. This risk group relationship is considered to exist, inter alia, when: a) There is a control relationship between them; b) There are common shareholders or partners who exercise significant influence on the entities in question; c) There are common administrators; and d) There is direct commercial interdependence that cannot be replaced in the short term.
22. Firm Underwriting of Bond Issues – an operation whereby a credit institution commits to acquire the unplaced portion from the offer recipients, before an entity that offers shares or bonds for subscription or acquisition by the public.
23. Indirect Share Subscription – an operation whereby a credit institution commits to subscribe to a certain quantity of shares, relating to the capital increase of a company, assuming the obligation to offer them, within a specified time limit, to the shareholders of the issuing company or to third parties.
24. Spot Foreign Exchange Position – the difference between purchases and sales in a given foreign currency, whether already executed or those whose settlement occurs within the two subsequent business days.
25. Forward Foreign Exchange Position – the difference between purchases and sales contracted in a given foreign currency, whose settlement occurs after the two subsequent business days.
26. Foreign Exchange Position in a Foreign Currency – the sum of spot and forward foreign exchange positions in a given foreign currency.
27. Global Foreign Exchange Position – the sum of foreign exchange positions in all foreign currencies taken in absolute value (modulus).

CHAPTER II Own Funds

ARTICLE 4 (Limits applicable to banks)

1. Total own funds must not be less than the minimum share capital amount, defined by the Bank of Mozambique in specific regulations.
2. Core own funds (Tier 1 Capital) must correspond to at least 80% of total own funds.
3. Core own funds (Tier 1 Core Capital) must correspond to at least 50% of core own funds (Tier 1 Capital).
4. Supplementary own funds must not exceed the equivalent of 20% of total own funds.
5. The elements indicated in subparagraphs m) to p) of Article 3 of Notice No. 8/GBM/2017, of April 3, may only be considered up to a limit of 20% of core own funds.

ARTICLE 5 (Limits applicable to other types of credit institutions)

1. Total own funds must not be less than the minimum share capital amount of their respective type of credit institution, as defined by the Bank of Mozambique in specific regulations.
2. Core own funds (Tier 1 Capital) must correspond to at least 50% of total own funds.
3. Core own funds (Tier 1 Core Capital) must correspond to at least 50% of core own funds (Tier 1 Capital).
4. Supplementary own funds must not exceed the equivalent of 50% of total own funds.
5. The elements indicated in subparagraphs m) to p) of Article 3 of Notice No. 8/GBM/2017, of April 3, may only be considered up to a limit of 50% of core own funds.

CHAPTER III Solvency Ratio

ARTICLE 6 (Limits applicable to banks)

1. The value of the global solvency ratio must not be less than 12% of the total amount calculated in accordance with paragraphs 2, 3 and 4 of Article 3 of this Regulation.
2. The value of the core solvency ratio must not be less than 10% of the total amount calculated in accordance with paragraphs 2, 3 and 4 of Article 3 of this Regulation.

ARTICLE 7 (Limits applicable to other credit institutions)

1. The value of the global solvency ratio must not be less than 8% of the total amount calculated in accordance with paragraphs 2, 3 and 4 of Article 3 of this Regulation.
2. The value of the core solvency ratio must not be less than 4% of the total amount calculated in accordance with paragraphs 2, 3 and 4 of Article 3 of this Regulation.

CHAPTER IV Risk Concentration

ARTICLE 8 (Limits)

1. Credit institutions, regarding the risks they assume, are subject to the following limits: a) With respect to a single client, they must not incur risks whose total value exceeds 25% of their own funds; and b) The aggregate value of large risks assumed must not exceed eight times their own funds.
2. When a risk on a client is guaranteed by a third party, in an irrevocable and legally binding manner, such risk is considered to be assumed on that third party rather than on the client.

ARTICLE 9 (Exceptions to risk concentration limits)

1. In exceptional circumstances and upon duly substantiated request by credit institutions, the Bank of Mozambique may authorize them to exceed the limits set in paragraph 1 of Article 9 of this Regulation.
2. In the authorizations granted, under the preceding paragraph, the Bank of Mozambique shall determine the time limit and conditions for adaptation of the applicant to the limits set in paragraph 1 of Article 9 of this Regulation.

ARTICLE 10 (Treatment of risk in a risk group relationship)

1. Risks relating to all individuals or legal entities in a risk group relationship with each other must be considered as assumed with a single client.
2. Credit institutions have the duty to identify the interdependencies and links of their clients, in order to observe the provision in the preceding paragraph.

ARTICLE 11 (Valuation criteria)

1. For the calculation of risk position amounts for the purposes of this chapter, the valuation criteria established in Part 1 of Annex II of Notice No. 11/GBM/2013, of October 25, shall be adopted.
2. The risks assumed with the following are exempt from the limits referred to in paragraph 1 of Article 9 of this Regulation: a) The Government of Mozambique, in national currency; b) The Bank of Mozambique, in national currency; c) Eligible foreign governments and central banks subject to a 0% risk weight, in accordance with Part I of Part 2 of Annex II of Notice No. 11/GBM/2013, of October 25; and d) International organizations, provided for in Part II of Part 2 of Annex II of Notice No. 11/GBM/2013, of October 25.

ARTICLE 12 (Risks not considered) For the purposes of calculating the limits referred to in paragraph 1 of Article 9 of this Regulation, the following risks are not considered: a) Risks covered by express and irrevocable guarantees from entities under the conditions referred to in paragraph 2 of the preceding article; b) Risks covered by cash deposits, in the same currency, within the institution itself; c) Risks covered by deposits in the institution itself of debt securities issued by the entities referred to in paragraph 2 of the preceding article or by the institution itself, provided they do not represent their own funds; and d) Risks covered by own funds, in accordance with subparagraph b) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of April 3.

ARTICLE 13 (Risks covered)

1. Credit institutions with headquarters in Mozambique must consider risks assumed by their establishments within the country and by their foreign branches.
2. Branches in Mozambique of credit institutions with headquarters abroad must consider only the risks of their own activity, referencing their own funds as defined in Notice No. 8/GBM/2017, of April 3.

CHAPTER V Shareholdings in Other Companies

ARTICLE 14 (Limits)

1. Credit institutions must not hold, directly or indirectly, in the capital of a company, participations whose amount exceeds 15% of their own funds.
2. The total amount of qualified participations in companies must not exceed 60% of a credit institution's own funds.
3. The total value of shares or other equity interests in any companies held by a credit institution and which are not qualified participations must not exceed 25% of the same institution's own funds.
4. Credit institutions must not hold, directly or indirectly, in a company, a participation that confers more than 25% of the voting rights corresponding to the capital of the participating company.

ARTICLE 15 (Exceptions to shareholding limits)

1. Without prejudice to the deductions provided in paragraph 1 of Article 8 of Notice No. 8/GBM/2017, of April 3, the provisions of the preceding article do not apply to participations in other institutions subject to the supervision of the Bank of Mozambique, insurance companies with headquarters in Mozambique, and those covered by own funds, in accordance with subparagraph b) of paragraph 4 of Article 8 of the aforementioned Notice.
2. The limits provided in this article may only be exceeded as a result of the repayment of own funds, and resulting situations must be regularized within two years.

CHAPTER VI Firm Underwriting of Bond Issues, Indirect Share Subscription and Acquisition of Bonds

ARTICLE 16 (Limits)

1. In each firm underwriting of share issues or indirect share subscription operation, a credit institution must not assume commitments or apply resources exceeding 25% of its own funds.
2. The total value of commitments assumed and resources applied by a credit institution as a result of firm underwriting of share issues or indirect share subscription operations must not exceed the value of its own funds.
3. Firm underwriting and acquisition of bonds are subject to the limits established for risk concentration.

ARTICLE 17 (Unplaced bonds)

1. Unplaced bonds resulting from firm underwriting of share issues or indirect share subscription operations must be considered for the purposes of limits on shareholdings in other companies to which the respective credit institutions are subject.
2. For the purposes of the preceding paragraph, bonds are considered unplaced if: a) In firm underwriting operations of share issues, they have not been sold by the closing date of the subscription period; and b) In indirect share subscription operations, they have not been acquired by the shareholders of the issuing company or by third parties within sixty days from the date of their subscription.

CHAPTER VII Fixed Assets (Immobilizations)

ARTICLE 18 (Restriction on acquisition of real estate) Credit institutions must not acquire real estate that is not indispensable to their facilities and operations or to the pursuit of their corporate object.

ARTICLE 19 (Limits) The net value of fixed assets of a credit institution must not exceed the amount of its respective own funds.

ARTICLE 20 (Exceptions to fixed asset limits) The restrictions provided in Articles 19 and 20 of this Regulation may be exceeded in the following situations: a) Fixed assets received as a result of repayment of own funds, with resulting situations to be regularized within two years, after which the deduction provided in subparagraph a) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of April 3, shall apply; and b) Fixed assets covered by own funds, in accordance with subparagraph b) of paragraph 4 of Article 8 of Notice No. 8/GBM/2017, of April 3.

CHAPTER VIII Foreign Exchange Positions

ARTICLE 21 (Limits) Credit institutions must not present, at the close of each day, a global foreign exchange position exceeding 20% of their own funds, nor a foreign exchange position in each foreign currency exceeding 10% of the aforementioned own funds.

CHAPTER IX Coverage of Liabilities

ARTICLE 22 (Form of coverage)

1. Credit institutions must, on a permanent basis, ensure the coverage of their liabilities to third parties under the following terms:
2. Spot or liabilities with a remaining maturity of up to 30 days must be fully covered by the following values: a) Cash in vault; b) Postal orders and sight cheques; c) Demand deposits at the Bank of Mozambique; d) Demand deposits at other credit institutions; e) Gold and other precious metals; and f) Other on-balance sheet elements realizable within a period not exceeding 30 days, except tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.
3. The total amount of liabilities with a remaining maturity exceeding 30 days and not exceeding 180 days must be fully covered by: a) The excess of the values referred to in paragraph 1 over the liabilities mentioned therein; and b) Other on-balance sheet elements realizable within a period exceeding 30 days and less than 180 days, except tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.
4. The total amount of liabilities with a remaining maturity exceeding 180 days must be fully covered by: a) The excess of the values referred to in paragraphs 1 and 2 over the liabilities mentioned therein; and b) Other on-balance sheet elements realizable within a period exceeding 180 days, except tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.

CHAPTER X Final and Transitional Provisions

ARTICLE 23 (Alteration of the calculation base for prudential ratios and limits) The Bank of Mozambique may order adjustments to the amounts serving as the basis for calculating the limits established in this Regulation whenever conditions for observing prudential principles so justify.

ARTICLE 24 (Adaptation period) Banks already established on the date of publication of this Regulation must adapt their own funds according to the following time limits and thresholds:

Adaptation Period	Core Own Funds (Tier 1)	Core Own Funds (Core/Tier 1)	Total Own Funds
Up to 1 year after the entry into force of this Regulation	Core own funds must not be less than 60% of total own funds and must ensure a core solvency ratio not lower than 6%.	Core own funds (Core/Tier 1) must not be less than 50% of total own funds.	Total own funds must not be less than minimum share capital and must ensure a global solvency ratio not lower than 9%.
Up to 2 years after the entry into force of this Regulation	Core own funds must not be less than 70% of total own funds and must ensure a core solvency ratio not lower than 8%.	Core own funds (Core/Tier 1) must not be less than 50% of total own funds.	Total own funds must not be less than minimum share capital and must ensure a global solvency ratio not lower than 9%.