Palestine Monetary Authority

Instructions No. (1/2008)

To All Banks Operating in Palestine

Date: Sunday, January 20, 2008

Subject: Classification of Credit Facilities, Provisions, and Accepted Collateral

Based on the provisions of Article (38) of the Banks Law No. (2) of 2002, and following the reviews and studies prepared by the Palestine Monetary Authority to establish specific standards for measuring credit risk, taking into account the observations of banks and the Banks Association, it has been decided to amend the instructions regarding the classification of facilities, the establishment of provisions, and the suspension of interest. All banks are required to comply with these instructions starting from the beginning of 2008, with the impact reflected in each bank's financial statements as of March 31, 2008, and the facility portfolio to be reassessed every three months:

First: Definition of Specific Provision:

1. Specific Provision:

An amount set aside to cover identified losses in the credit facility portfolio, individually, after deducting accepted collateral according to the attached table, and the provision is charged to the profit and loss account.

Second: Classification Basis:

1. Regular Facilities:

Facilities where the principal, interest, and related commissions are repaid according to agreed terms, without any negative developments in the client's status or credit repayment capacity.

2. Facilities Under Monitoring:

Facilities where one or more installments and/or interest and/or related commissions have been unpaid for a period of 30–90 days. These facilities require special attention and monitoring, but do not generally require the establishment of provisions. However, in certain cases, the bank must establish "specific" provisions for this category if the borrower's financial situation warrants it (e.g., deterioration of the borrower's status, signs of change, or changes in their debts at other banks). Interest and commissions due may be recognized in the profit and loss account within the aforementioned period (less than 90 days). If the debtor continues not to pay, previously recognized interest and commissions must be reversed to be accounted for as suspended interest and commissions.

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3. Irregular (Non-Performing) Facilities and Suspension of Interest and Commissions:

Facilities that have not been repaid according to the terms of the executed contract, because the debtor is facing financial and economic difficulties that may affect their ability to service and repay the principal and/or interest and/or commissions, or both. This category includes facilities where one or more installments and/or interest and/or related commissions have been unpaid for a period exceeding 90 days. Other considerations for classifying these facilities include a court ruling against the client or a declaration of bankruptcy. In all cases, the debt is handled as follows:

1. All direct and indirect facilities granted to the debtor are aggregated, and provisions are calculated collectively for the granted facilities after deducting accepted collateral according to the specified percentages.
2. All due and unpaid interest and commissions and/or prepaid interest and commissions are suspended and recorded in a suspended interest and commissions account until the full principal is repaid.
3. In cases of rescheduling, the suspended interest and commission are accrued against the value of the granted facilities, and no part of them is recognized in the income statement.

Irregular Facilities are:

a- Sub-Standard Facilities:

Facilities where one or more installments of principal and/or interest and related commissions have been unpaid for a debtor's stagnation period (from 91 to 180 days), requiring the establishment of a specific provision of 20% of the total debt value owed by the debtor (direct and indirect) after deducting accepted collateral according to the specified percentages.

b- Doubtful Facilities:

Facilities where one or more installments of principal and/or interest and related commissions have been unpaid for a debtor's stagnation period (from 181 to 360 days), requiring the establishment of a specific provision of 50% of the total debt value owed by the debtor (direct and indirect) after deducting accepted collateral according to the specified percentages.

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c- Loss Facilities:

Facilities where one or more installments of principal and/or interest and related commissions have been unpaid for a debtor's stagnation period exceeding 360 days, requiring the establishment of a specific provision of 100% of the total debt value owed by the debtor (direct and indirect) after deducting accepted collateral according to the specified percentages.

Third: Accepted Collateral and Guarantees for Calculating Non-Performing Loan Provisions, and Matters Banks Must Observe During Implementation:

1- Valuation of Traded Securities for This Purpose as Follows:

• a. Shares of companies traded on the Palestine Securities Exchange and/or traded in foreign financial markets are accepted at 50% of the market value.
• b. Acceptance of these shares requires that they be properly pledged in favor of the bank, along with authorizing the bank to sell them at any time without consulting the client to settle the debt value.

2- Real Estate Collateral (Land and Buildings):

• a. Properties registered in the Land Department and fully owned by the client. The acceptance percentage is based on the deed value or appraisal, whichever is lower, as follows:
  • 70% for the first two years from the date of default.
  • 50% for the third year, provided a recent appraisal (less than two years old) is available.
  • 35% for the fourth year, provided a recent appraisal and intensive banking and judicial follow-up of the client for collection purposes are available.
  • 20% for the fifth year, provided a recent appraisal and intensive banking and judicial follow-up of the client for collection purposes are available.
  • 0% after the fifth year.
• b. Properties registered in the Land Department and owned by more than one person (first mortgage or partial/full ownership shares of the property). The acceptance percentage is based on the deed value or appraisal, whichever is lower, as follows:
  • 40% for the first 3 years from the date of default.
  • 20% for the fourth year, provided a recent appraisal is available.
  • 10% for the fifth year, provided a recent appraisal and intensive banking and judicial follow-up of the client for collection purposes are available.
  • 0% after the fifth year.

c. Unregistered Properties (Periodic Agency), with acceptance percentage based on deed value or appraisal, whichever is lower, as follows:

• 30% for the first two years from the date of default.
• 20% for the third year.
• 10% for the fourth and fifth years, provided a recent appraisal is available.
• 0% after the fifth year.

d. Second or higher mortgages on a property are accepted if the first mortgage is held by the same bank.

e. Properties are not accepted for provision calculation purposes after five years have passed since the debt default, nor in cases of rescheduling.

3- Vehicles, Machinery, and Equipment: Acceptance percentage is 50% of the insurance policy value or market value, whichever is lower, for the first two years from the date of default, and 25% for the third and fourth years, provided mortgage procedures are completed and the insurance policy is properly assigned in favor of the bank. Collateral is not accepted for provision calculation purposes thereafter, and the collateral is void if valid insurance or license is not available for the pledged vehicles or machinery.

Fourth: Overdraft Accounts

An overdraft account is converted to a frozen overdraft account in the following cases:

1. If the calculated commissions and interest on the overdraft account exceed the client's total deposits within 90 days.
2. If the permitted withdrawal limit is exceeded by 20% or more of the overdraft ceiling according to the contract, for a period exceeding 90 days.
3. If a 90-day period passes since the expiration of the ceiling or maturity without repayment or renewal. If the frozen overdraft is not repaid according to the above controls, the percentages stipulated on page (2) will be applied.

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Fifth: Call Accounts Overdrafts

• Overdrafts are emergency, short-term, and non-recurring facilities, and must be settled within a period not exceeding 30 days. Any overdraft (irregular) exceeding an additional 90 days requires a 100% provision after deducting accepted collateral.
• If call accounts are documented and converted to overdrafts after completing necessary contracts, the instructions for overdraft accounts apply to them.

Sixth: Off-Balance Sheet Items

Indirect facilities are considered irregular if the direct facilities for the same client are classified as irregular. Additionally, if the client's financial situation deteriorates, any existing unconditional commitment by the bank for indirect facilities will become irregular upon maturity and require a provision after deducting accepted collateral according to the specified percentages.

Seventh: Rescheduling of Facilities

1- Rescheduling of first-time classified facilities is permitted provided an advance estimated payment of not less than 10% of the existing debt balance is made. The rescheduled facilities are treated as follows:

• a. If the account was under monitoring and the client committed to repayment for three consecutive months after rescheduling without delay, the debt may be excluded from classified facilities.
• b. If the account was classified as irregular in all its categories and the client committed to repaying all due installments (plus interest and commissions) for six consecutive months without delay, the debt may be excluded from classified facilities, and the provision amount reversed as deemed appropriate by the Palestine Monetary Authority.

2- Rescheduling of second-time classified facilities is permitted subject to the following:

• a. The borrower makes an advance estimated payment of not less than 20% of the existing debt.
• b. The debt is not excluded from the provision schedule until full repayment. Special cases are reviewed after a comprehensive account review by the Palestine Monetary Authority.
• c. No part of the suspended profits is recognized as revenue during the rescheduling process, except after full repayment.

3- Rescheduling of third-time classified facilities is permitted subject to the following:

• a. The borrower makes an advance estimated payment of not less than 30% of the existing debt.
• b. The debt is not excluded from the provision schedule until full repayment.
• c. No part of the suspended profits is recognized as revenue during the rescheduling process, except after full repayment.

Eighth: General Provisions

1. The bank has the right to acquire properties, shares, or other pledged assets as collateral for non-performing facilities, provided it complies with relevant provisions in the Banks Law and notifies the Palestine Monetary Authority of the acquisition date of the properties, shares, or other assets.
2. The external auditor must verify the adequacy of provisions established by the bank and examine compliance with relevant PMA regulations and instructions.
3. The provision value is determined after deducting allowed collateral from the principal debt according to the table below, and provisions established under these instructions constitute the minimum requirements to be applied.
4. Banks may grant new facilities to consolidate existing debtor facilities, provided the new facilities do not exceed the total debtor's debt value.
5. The bank is not permitted to grant new facilities to consolidate a debtor's debts for a second or third time.
6. Credit facilities shall not be granted to any client whose credit facilities have previously been written off partially or in full, unless those facilities have been repaid.
7. Precious metals are valued monthly according to international market prices, and this valuation applies to all types of bullion.
8. Interest and commissions on facilities under monitoring and non-performing facilities are recognized as follows:
   • a. Banks may record due interest and commissions on facilities whose repayment date is less than 90 days past due under unpaid accrued interest.
   • b. Due and unpaid interest and commissions on unpaid facilities are suspended after 90 days have passed since the repayment date, and the due interest and commissions are reversed from the profit and loss account to the suspended interest and commissions account.

c. Suspended. As for interest and commissions that were not included in the profit and loss account and become due after 90 days have passed since the repayment date, they are suspended directly.

d. Any estimated collections from the debtor to repay the principal are used until the full principal is repaid. Suspended interest and commissions collected subsequently are recognized in the profit and loss account according to cash basis principles.

9. Non-performing facilities that have been outstanding for more than six years, along with the provisions established against them, are identified semi-annually for the purpose of excluding those facilities and provisions from the bank's financial statements, with semi-annual reports submitted to the Palestine Monetary Authority.

Ninth: Table of Accepted Collateral and Guarantees for Calculating Provisions on Classified Debts, Subject to the Controls Stipulated in the Following Item:

نوع الضمان أو الكفالة	نسبة القبول للضمان	ملاحظات
الضمان النقدي	100%	مبلغ مقدّم في حساب تأمينات نقدية مقابل تسهيلات مصرفية
شهادات الإيداع - سندات الخزينة - أذونات الخزينة المتدولة الصادرة عن السلطة الوطنية والمؤسسات العامة الفلسطينية والمتبقي على استحقاقها أقل من سنة	100%
الكفالات الحكومية غير المشروطة (الوزارات فقط)	100%	الصادرة عن السلطة الوطنية الفلسطينية
الكفالات المصرفية (الصادرة عن المصارف المحلية)	100%	المصارف المحلية التي يقل معدل كفاية رأسمالها عن الحد المقرر في تعليمات سلطة النقد
الكفالات المصرفية (الصادرة عن المصارف الوافدة)	100%	المصارف الوافدة التي يقل معدل كفاية رأسمالها عن الحد الأدنى المحدد من السلطات الرقابية في ذلك البلد، وفق الأصول
الضمانات الممنوحة من قبل صندوق الاستثمار الفلسطيني ومؤسسة أوبك الأمريكية	100%	ضمن إطار برنامج ضمانة القروض
أذونات الخزينة - سندات الخزينة (الأجنبية)	90%	أذونات وسندات الخزينة الصادرة عن الحكومة الأجنبية المتبقي على استحقاقها أقل من سنة
السندات الفلسطينية	80%	السندات المتبقي على استحقاقها أكثر من سنة (الصادرة عن الشركات المساهمة العامة الفلسطينية)
السندات (الأجنبية)	70%	شهادات الإيداع - سندات الخزينة الصادرة عن الشركات الأجنبية المتبقي على استحقاقها أكثر من عام
المعادن الثمينة	80%	السلع الأساسية من الذهب والفضة والمعادن الثمينة الأخرى
أسهم الشركات المساهمة	50%	1. أسهم شركات متداولة في سوق فلسطين للأوراق المالية. 2. أسهم الشركات المتداولة في الأسواق المالية العربية والأجنبية شريطة موافقة سلطة النقد على ذلك
السيارات والآليات والمعدات	50%	صافي القيمة الدفترية، بحيث يكون مؤمناُ عليها تأميناُ شاملاُ ومجبراُ لصالح المصرف، ومستوفية للشروط القانونية ومرهونة من الدرجة الأولى
أسهم غير مدرجة	من 1% - 25%	الأسهم غير المدرجة في أسواق المال المحلية والعربية والعالمية وفق ما تراه سلطة النقد

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Governor Dr. Jihad Azor

Ramallah - Al Bireh P.O.Box 452 - Tel.: 02-2409920 - Fax.: 02-2409922 Gaza - P.O. Box 4026 - Tel.: 08-2825713 - Fax.: 08-2844487 E-mail: info@pma.ps www.pma.ps