GOVERNMENT GAZETTE OF THE REPUBLIC OF NAMIBIA

WINDHOEK - 29 June 1998
No. 1899

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CONTENTS

GENERAL NOTICES

No.	Title
119	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on the Appointment, Duties and Responsibilities of Directors and Principal Officers of Banking Institutions	2
120	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on the Classification of Loans and the Suspension of Interest on Non-performing Loans and the Provisions for Bad and Doubtful Debts	9
121	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on Money Laundering and "Know Your Customer Policy"	20
122	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on Large Exposures to a Single Person or Group of Related Persons	31
123	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on Risk-Weighted Capital Adequacy	38
124	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on Minimum Liquid Assets Requirement	55
125	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on Minimum Local Assets	60
126	Determinations under the Banking Institutions Act, 1998 (Act No. 2 of 1998): Determinations on Fees payable in terms of section 64(6) of the Banking Institutions Act, 1998	61

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General Notices

BANK OF NAMIBIA

No. 119

DETERMINATIONS UNDER THE BANKING INSTITUTIONS ACT, 1998 (ACT NO. 2 OF 1998)

In my capacity as Governor of the Bank of Namibia (The Bank) and under the powers vested in the Bank by virtue of sections 71(3) of the Banking Institutions Act, 1998 (Act No. 2 of 1998), read in conjunction with sections 27, 36, 37 and 41 of the aforementioned Act, I hereby issue the Determinations on the Appointment, Duties and Responsibilities of Directors and Principal Officers of Banking Institutions (BID-1), which Determinations shall become effective on 1 July 1998.

T K ALWEENDO
GOVERNOR
Windhoek, 2 June 1998

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BID-1

DETERMINATIONS ON THE APPOINTMENT, DUTIES AND RESPONSIBILITIES OF DIRECTORS AND PRINCIPAL OFFICERS OF BANKING INSTITUTIONS

Overview

Public confidence is the cornerstone of a stable banking system. As the custodian of public funds, the management of a banking institution must exhibit impeccable integrity and professionalism in their conduct so as to engender public confidence in the safety of their deposits. The board of directors of a banking institution must comprise technically competent persons of integrity with a strong sense of professionalism, fostering and practising the highest standards of banking and finance in the country. These determinations incorporate a coherent set of rules relating to the appointment, duties and responsibilities of directors and principal officers to ensure the interests of banking institutions are adequately safeguarded through prudent, efficient and professional management.

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1. Duties and Responsibilities of the Board

The board of directors of a banking institution shall:

1.1 Select and appoint senior executive officers who are qualified and competent to administer the affairs of the banking institution effectively and soundly. The management team must be professional at all times in carrying out its duties and the board of directors must ensure at all times the effectiveness and competence of their management team;

1.2 Establish and ensure the effective functioning of an Audit Committee, comprising of non-executive directors;

1.3 Set up an effective internal audit department, staffed with qualified internal audit personnel to perform internal audit functions, covering the traditional function of financial as well as management audit. To enhance the independence of the internal audit function, the board shall ensure that the internal auditors have full access to all records, and are given an appropriate standing in the organisation’s hierarchy. In this regard, the internal auditors shall be placed under the direct authority and supervision of the Audit Committee. Since the internal auditors are accountable to the Audit Committee, their performance shall be evaluated and decided by the Audit Committee;

1.4 Ensure that the banking institution has a beneficial influence on the economic well-being of its community. Within the framework of sound business practices, directors have a continuing responsibility to the community to provide those banking services and facilities which will be conducive to economic growth and national policy aspirations;

1.5 Supervise the affairs of the banking institution, and be regularly informed of the banking institution’s financial condition and management policies ensuring that the institution is soundly managed. The directors of a banking institution are entrusted with the handling and investment of public funds. Consequently, the supervisory commitment required from them entails a higher degree of wisdom, prudence, good business judgement and competence than that of directors of other types of companies. They shall commit sufficient time to be fully informed of the condition of the business, the direction they are steering the institution to, and to apply immediate remedial measures when the need arises. Although directors may delegate certain authority to senior officers, it is their responsibility to supervise the banking institution to ensure sound management. The board shall meet regularly, not less than once every quarter, to deliberate on the performance of the banking institution and to provide direction and guidance for management;

1.6 Adopt and follow sound objectives, strategies and policies which have been fully deliberated. Directors shall provide clear objectives and policies within which senior executive officers are to operate; These shall cover all aspects of operations, including strategic planning, credit administration and control, asset and liability management encompassing the management of liquidity risk, interest rate risk, market risk, credit risk, accounting system and control, service quality, automation plan, prevention of money laundering, profit planning and budgeting, adequacy of capital and human resource development. Clear lines and limits of authority for all levels of staff shall be established;

1.7 Observe banking laws, regulations and determinations. Directors shall be familiar with banking and other relevant legislation, related regulations, determinations, guidelines and notices and shall exercise due diligence to ensure that these are not violated. Directors may be held accountable for any non-compliance with the provisions of the banking legislation and be removed from office if found to have acted against the interests of depositors and the banking institutions;

1.8 Avoid self-serving practices and conflicts of interest. Once their appointments take effect, directors assume a fiduciary role and shall display the utmost good faith towards the banking institution in their dealings with it or on its behalf. Directors shall disclose their outside business interests and in particular, they shall avoid making any personal profit, acquiring personal benefit or retaining any commission, bonus or gifts for performing their official function of granting approval to financing arrangements or the use of particular services; and

1.9 Undertake to comply with the lending policies and practices applicable to directors of the banking institution. With regard to credit exposures to directors, banking institutions shall comply with the determinations issued by the Bank in terms of section 36 of the Banking Institutions Act, 1998 (Act No. 2 of 1998) on exposures to directors, officers with managerial responsibilities, shareholders etc.

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2. Appointment of Directors and Principal Officers

2.1 With regard to the appointment of directors and principal officers, banking institutions shall ensure that only “fit and proper” persons are appointed. In determining whether a person is “fit and proper” to hold the position of director or principal officer of a banking institution, due regard shall be had to the following:

2.1.1 his¹ probity, competence and soundness of judgement for fulfilling the responsibilities of that position. High standards of integrity, objectivity and professionalism are required;

2.1.2 his experience, knowledge and understanding of conducting and managing banking business;

2.1.3 the diligence with which he is fulfilling or is likely to fulfill those responsibilities; and

¹ Reference to the male gender shall throughout this document equally apply to the female gender.

2.1.4 whether the interests of depositors of the banking institution are, or are likely to be, in any way threatened by his holding that position.

2.2 Without prejudice to the generality of the foregoing provisions, banking institutions shall not appoint a person as a director or principal officer if he has at any time:

2.2.1 committed an offence involving fraud or other dishonesty, or any other relevant criminal offence;

2.2.2 contravened any provision made by or under any written law designed for protecting members of the public against financial loss due to dishonesty, incompetence or malpractice by persons concerned in the provision of banking, insurance, investment or other financial services or the management of companies or against financial loss due to the conduct of insolvents or rehabilitated insolvents;

2.2.3 engaged in any business practices that may be regarded as being deceitful or otherwise improper (whether unlawful or not) or which otherwise reflect discredit on his method of conducting business; or

2.2.4 engaged in or been associated with any other business practices or otherwise conducted himself in such a way as to cast doubt on his competence and soundness of judgement.

2.3 The sound operation of a banking institution depends critically on its principal officer. The candidate for the principal officer’s post shall be suitably qualified with appropriate experience and shall preferably possess a proven track record in the banking industry.

He shall be a person of high calibre and impeccable integrity. Banking institutions may consider a candidate ineligible for the position of principal officer if he has been dismissed for any reason while performing his duties in his previous employment. The following requirements shall be observed with regard to the appointment and responsibilities of the principal officer:

2.3.1 The principal officer shall be directly responsible for the day-to-day operations of a banking institution. He shall be familiar with the operations of the banking institution, the state of internal controls, legal requirements, as well as current issues and policies affecting the industry in general. He must also have the necessary knowledge and professional competence in the conduct of banking business;

2.3.2 A banking institution shall inform the Bank of the person who will be directly responsible for the overall running of

the institution in the absence of the principal officer. This is necessary for the Bank to consult him on matters of policy and day-to-day operations. The person so nominated shall be fully acquainted with the affairs of the banking institution, and must be able to act promptly, with authority, on matters affecting the banking institution; and

2.3.3 The delegation of responsibilities to several persons, with no single person as the coordinator within the institution, is not permitted.

2.4 Practising Lawyers and Accountants

To enable banking institutions to tap the expertise of lawyers and accountants, practising lawyers may be appointed as directors of a banking institution provided they are not employed by or are not partners in a legal firm, which is on the panel of lawyers of that particular banking institution. Similarly, practising accountants may be directors provided they are not employed by or are not partners in an accounting firm which is engaged to conduct the audit of or consultancy work for that particular banking institution. The practising lawyers and accountants who are appointed as directors of banking institutions shall exercise the highest degree of integrity and professionalism. They shall be mindful of the need to avoid being involved or seen to be involved in any self-serving practices and conflict of interest situations in the conduct of their profession while serving as directors of a banking institution.

For practical purposes, however, practising lawyers who are currently serving on a bank’s board of directors and who are affected by para 2.4 of these Determinations will be given until 31 December 1998 to comply with this requirement.

2.5 Politicians

Individuals who are active in politics shall not be appointed as directors of a banking institution. This is to avoid risk of the politicians encountering conflict of interest situations in serving their constituencies. For this purpose, a person is considered to be politically active if he is a member of the National Assembly or the National Council. In this regard, banking institutions shall inform the Bank promptly upon the knowledge that any of their directors have become actively involved in politics.

2.6 Alternate Directors

Directors of banking institutions shall not appoint alternate directors as they should be committed personally to the board in directing the management of the banking institutions. An alternate director, in his capacity as a proxy for a director, may not be able to contribute effectively to the deliberations of the board: Provided that directors

who are not residents of Namibia should be permitted to appoint alternates.

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3. Directorship in Other Corporations

3.1 Interlocking directorships in any banking institution and building societies are prohibited. The Bank will only allow a common director for banking institutions which are related corporations. This is in line with the need to avoid conflict of interest situations in the management of two or more banking groups. Consistent with this policy, a person with more than 5% of the total nominal value of all vote bearing shares issued in a banking institution in his personal capacity (directly or indirectly) shall not be appointed to the board of another banking institution or banking group.

3.2 Except with the prior written approval of the Bank, any executive director (including the principal officer) of a banking institution shall not hold any executive position in another corporation. However, for companies within the same group, and family-owned companies of the principal officer or executive director, exemption may be granted on a case-by-case basis. This is consistent with the Bank’s requirement for a principal officer and any other executive director to devote his attention and commitment principally to the day-to-day operations of a banking institution.

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4. Non-Executive Directors

A non-executive director (i.e. not a full-time staff of a banking institution) shall attend at least 75% of the board meetings of a banking institution in any particular year. This is to ensure that he will discharge his duties and responsibilities effectively. At its Annual General Meeting, a banking institution shall review the suitability of any non-executive director who has failed to comply with this 75% attendance rule without valid reason. A non-executive director who has breached the 75% attendance rule without valid reason for two consecutive years shall be discharged.

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5. Composition of the Board of Directors

5.1 Minimum Number of Directors

A banking institution shall have at least five directors. This is crucial to ensure that an adequate number of directors are always present to provide direction and guidance to the management of the banking institution. In the event that the Memorandum and Articles of Associations (M&A) of a banking institution prohibits the appointment of more than four directors, the M&A shall be amended. In other cases, banking institutions are encouraged to amend their M&A, as and when convenient, to provide for a minimum of five directors.

5.2 Independent Non-Executive Directors

5.2.1 In an increasingly complex banking environment, the presence of suitably qualified independent directors can contribute effectively towards achieving the main tasks of the board. Independent directors shall provide the necessary check and balance on the “controller” i.e. parties representing the interests of the majority shareholders of the banking institution so as to ensure that the interests of minority shareholders and that of the general public are given due consideration in the decision-making process. Independent directors should not be brought in only to be neglected and ignored as this would tantamount to deceiving the minority shareholders and the public.

5.2.2 A banking institution shall appoint at least two independent non-executive directors to its board. An independent director is defined as a director who is not a substantial shareholder in the banking institution as defined in the Banking Institutions Act, Act 2 of 1998, and who represents the interest of the shareholders other than the controlling shareholders, or the interest of members of the general public. A director of banking institution who is an independent director of the bank holding company will be considered as an independent director of the banking institution if he does not have a direct or indirect stake of more than 5% in the banking institution.

5.3 Maximum Number of Executive Directors

A maximum of two senior officers, including the principal officer, of a banking institution shall serve on the board. In exceptional cases with the prior written consent of the Bank, up to three senior officers may be appointed as directors. Directors with executive powers shall not account for more than 50% of total board members at any time. This is to ensure that the non-executive directors, who should form the majority, render the necessary independence to the board from the executive arm of the banking institution, and help mitigate any possible conflict of interest between the policy-making process and the day-to-day management of the banking institution.

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6. Remuneration

The remuneration of the directors and principal officers shall not be out of line with the nature and size of operations of a banking institution. The directors and principal officer shall not avail themselves of unreasonably bountiful remuneration, with excessive bonuses and fringe benefits relative to the profits and operations of the banking institution.

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BANK OF NAMIBIA

No. 120

DETERMINATIONS UNDER THE BANKING INSTITUTIONS ACT, 1998 (ACT NO. 2 OF 1998)

In my capacity as Governor of the Bank of Namibia (The Bank) and under the powers vested in the Bank by virtue of sections 71(3) of the Banking Institutions Act, 1998 (Act No. 2 of 1998), read in conjunction with section 30 of the aforementioned Act, I hereby issue Determinations on the Classification of Loans and the Suspension of Interest on Non-Performing Loans and the Provision for Bad and Doubtful Debts (BID-2), which Determinations shall become effective on 1 July 1998.

T K ALWEENDO
GOVERNOR
Windhoek, 2 June 1998

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BID-2

DETERMINATIONS ON THE CLASSIFICATION OF LOANS AND THE SUSPENSION OF INTEREST ON NON-PERFORMING LOANS AND THE PROVISION FOR BAD AND DOUBTFUL DEBTS

Overview

Every banking institution is required to make provision for bad and doubtful debts and before any profit is declared, ensure that the provision is adequate. The Bank requires a banking institution to maintain a general provision for bad and doubtful debts in addition to the specific provision already maintained by that banking institution. These Determinations also provide directions for the classification of loans, the treatment of interest on non-performing loans, and writing off bad debts. It must be emphasised that the following determinations represent only the minimum requirements that banking institutions should observe in respect of interest-in-suspense, classification of loans as non-performing and provision for bad and doubtful loans. Any banking institution which chooses to adopt a more stringent standard is encouraged to do so.

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1. Classification of Loans as Non-Performing

1.1 Criteria for Different Categories of Credit

Classifications shall apply to all direct and indirect extensions of credit. An account will be classified as non-performing after having due consideration to all pertinent credit factors and the protection afforded by collateral, if any. For the purpose of these determinations, credit accounts shall be classified as “non-performing loans” in the following manner:

1.1.1 Overdrafts

An overdraft facility shall be classified as non-performing, if an account has been dormant for a period of 6 months or more and the outstanding amount is in excess of the approved limit. For this purpose, dormant accounts shall include accounts which have had only a few transactions of insignificant amounts during the last 6 months.

As such, overdrafts which are dormant for 6 months or more and subsequently breach the approved limit, as a result of the accrual of interest, shall be classified as non-performing as and when the approved limit is breached. The same principle shall apply in cases where the banking institution consciously allows the borrower to draw down on an overdraft account which has been dormant for 6 months or more, leading to an outstanding balance in excess of the approved limit. Such accounts shall be classified as non-performing as and when the approved limit is exceeded.

An active account which has breached the approved limit shall be classified as non-performing when the amount in excess of the approved limit (or the revised approved limit, if applicable) is not settled fully within 6 months from the date the account first breaches the approved limit (or the revised approved limit). Interest accrued from the date an account is classified as non-performing shall forthwith be suspended until all arrears in excess of the approved limit are settled.

1.1.2 Revolving Loans, Mortgage Loans, Term Loans, Hire-Purchase Loans, Other Loans

These types of accounts shall be classified as non-performing when the principal or interest has been in arrears for a period of 6 months or more.

1.1.3 Bankers Acceptances, Bills of Exchange and Other Instruments of A Similar Nature

When the instrument is overdue.

1.1.4 Rescheduled Credit Facilities

Where rescheduling occurs before an account is classified, the rescheduled account shall be classified as non-performing when, in the aggregate, the period of time the account is in arrears before rescheduling (if any) and after rescheduling is 6 months or more. Where rescheduling occurs after an account has been classified as non-performing, the rescheduled account shall continue to be classified as non-performing.

The rescheduled loan may be reclassified as a performing loan only when the repayments under the rescheduled term have been complied with for a continuous period of six months.

In this regard a continuous period of six months means, depending on the schedule of repayment, for example, 6 monthly payments, 4 equal payments or 2 equal payments; and the borrower shall comply with the rescheduled term for a continuous period of six months without any break in between. In other words, if the borrower is in arrears for any repayment under the rescheduled term (i.e. a break occurs), the arrears would have to be settled in full before the 6 continuous months of compliance with the rescheduled term can commence afresh. In cases where the 6 continuous months of repayment under the rescheduled term are settled in advance, for example, 6 monthly payments are settled within the first 3 months, such an account may be reclassified performing provided that the value of each monthly instalment which has been settled in advance is not significantly lower than the value of any subsequent monthly instalments payable.

1.1.5 Credit Card Accounts

A credit card account shall be classified as non-performing when the credit card holder is in default of the minimum monthly repayments for 6 months or more.

1.2 Related Issues on Classification of Credit

1.2.1 Recalled Overdraft Facility

When an overdraft facility is recalled, the account shall immediately be classified as non-performing. In the event that a recalled overdraft facility is subsequently allowed to be reinstated without full settlement of the amount outstanding, the facility shall be regarded as a rescheduled facility and shall continue to be classified as non-performing until the borrower has complied with the terms and conditions of the reinstated facility for a continuous period of 6 months.

1.2.2 Approved Limit for Overdraft Facility

For the purposes of these determinations, the term ‘approved limit’ refers to the current approved line of credit granted to the borrower. Any reduction in the limit, for example, as a result of the expiry of a temporary additional overdraft or annual review, would lower the ‘approved limit’ accordingly.

An unadvised line of credit shall not be regarded as the ‘approved limit’ for purposes of classification of overdraft facilities and the ‘approved limit’ must be transparent to the borrower.

1.2.3 Quarterly or Semi-Annual Repayments

An account shall be classified as non-performing where the repayment of the principal or interest has been in arrears for 6 months or more. Where repayments are scheduled to be made on a quarterly basis, each repayment shall be considered equivalent to three months of repayments. Thus default of one repayment shall render an account three months in arrears. Similarly, a default of a semi-annual repayment shall be equivalent to 6 months in arrears. Where repayments are scheduled to be made at an interval longer than 6 months, the account shall be classified as non-performing upon the default of one instalment.

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2. Suspension of Interest on Non-Performing Loans

2.1 Treatment of Interest on Non-Performing Loans

All interest accrued (but uncollected) from the date an account is classified as non-performing shall forthwith be suspended and credited to the “interest-in-suspense” account. The “interest-in-suspense” account shall not be maintained as a memorandum entry account and shall be reflected in the banking institution’s books of accounts.

However, interest accrued and recognised as income prior to the date the loan is classified as non-performing, but which has not been collected, need not be reversed out of income. In other words, claw-back of interest previously earned and recognised but uncollected on a non-performing loan (claw-back of interest to day 1) is not required. Suspension of interest on a non-performing account shall be mandatory from the date the account is classified as non-performing. Interest earned on an account which has been classified as non-performing shall only be recognised as income as and when the interest has been collected by the banking institution. In other words, interest income shall be recognised on a cash basis.

2.2 Accrual of Penalty Interest

Banking institutions may recognise penalty interest charged (but uncollected) as income, as provided in the Usury Act, 1968 (Act no. 73 of 1968). However, from the date an account is classified as non-performing, the penalty interest charged thereon shall be recognised as income only on a cash basis. As in the case of normal interest, penalty interest shall be recorded in the books of accounts and not

maintained on a memorandum basis. Memorandum entry is permitted only where the loan has been fully written off (i.e. taken out of the books of accounts) or partly written off.

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3. Reclassification of Non-Performing Loans as Performing

Upon full settlement of all arrears, in interest and/or principal, due on a non-performing account, which has not been rescheduled, the account may be reclassified as a performing account and, thereafter interest income may be recognized on an accrual basis. However, funds for the repayment of the arrears shall not be obtained from the creation of new loans or debt instruments from the same banking institution (including other banking institutions in the same group).

This rule shall not apply where a banking institution in realising the collateral for the non-performing loan, grants a loan to an independent or non-related third party wishing to purchase the collateral. The loan to the third party shall be granted on the basis of normal credit evaluation criteria, including the credit-worthiness of the third party. As stated above, for a non-performing loan which has been rescheduled, the account shall be reclassified as performing only when the repayments under the rescheduled term have been complied with for a continuous period of 6 months. On the other hand for an account which was performing at the time of rescheduling but subsequently turned non-performing, the account shall be reclassified as a performing account upon full settlement of the repayments in arrears under the rescheduled term.

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4. Provision for Bad and Doubtful Debts

With regard to provisioning for bad and doubtful loans, banking institutions shall build up and maintain a general provision account, which shall not be less than the following percentages:

• 0.5 percent with immediate effect;
• 0.75 percent by 31 December 1998; and
• 1.0 percent by 31 December 1999.

The method of computation shall be based on total outstanding loans (including accrued interest), net of interest-in-suspense and specific provision for bad and doubtful accounts.

General provisions = 1% x (total outstanding loans - interest in suspense - specific provisions)

In respect of specific provision, banking institutions shall maintain the following percentages:

Category	Specific provision on the shortfall in security value over the amount outstanding net of unearned interest and interest suspended
Sub-standard accounts	Nil
Doubtful accounts	50%
Bad accounts	100%

4.1 Classification of Accounts

In assessing the adequacy of specific provision, banking institutions shall conduct regular and systematic reviews of all loans and advances and other credit facilities extended to their clients, and shall classify adverse accounts according to the following categories:

4.1.1 Sub-Standard Accounts

Loans/advances/other credit facilities or portions thereof, which involve more than a normal risk of loss due to certain adverse factor(s), but which are at this stage not considered as doubtful or bad. These adverse factors can include:

• sporadic delays in debt servicing;
• unfavourable financial conditions;
• insufficient operating cash-flow to meet current debt commitments; and
• insufficiency of security.

and other adverse factors which give rise to some doubts as to the ability of the borrower to comply with the present loan repayment terms. Although no specific provision is required at this stage, special and corrective attention/action needs to be taken by the banking institution to arrest any further deterioration in loan quality and to enhance its quality in the near future. Corrective action that may be taken includes obtaining suitable reduction in the amount of facility, additional security, and more complete financial data concerning the borrower’s condition.

4.1.2 Doubtful Accounts

Loans/advances/other credit facilities or portions thereof with respect to which collection in full is improbable and there is a high risk of ultimate default. A specific provision amounting

to 50 percent of the amount outstanding net of unearned interest, interest suspended and value of security (as set out in Annexure A hereto) is required.

4.1.3 Bad Accounts

Loans/advances/other credit facilities or portions thereof which, on the basis of the relevant circumstances, are deemed uncollectible and worthless. Bad accounts shall be written off or covered by a specific provision amounting to 100% of the amount outstanding, net of unearned interest, interest suspended and value of security (as set out in Annexure A hereto).

4.2 Generally, the appropriate classification for an individual account will be determined on a case-by-case basis, based on the principles enumerated above, taking into account all relevant information currently available. Nonetheless, in order to expedite the process of evaluating the quality of loans and provisioning for possible loan losses, all loans and credit facilities which had been approved for an amount of N$500,000 and below shall be classified in the following manner:

Period of Default	Classification	Provision on Shortfall¹
6 months or more but less than 12 months	Sub-standard, unless there is evidence to support a worse-off classification	Nil
12 months or more but less than 18 months	Doubtful, unless there is evidence to support a better or worse-off classification.	50%
18 months and above	Bad, unless there is evidence to support a better classification	100%

4.3 Accordingly, for approved loans of N$500,000 or below (the outstanding amount may exceed N$500,000 due to the accrual of interest) which have not been serviced:

4.3.1 for 6 months or more but less than 12 months, no provision is required, unless there is evidence to justify a worse-off classification, i.e. “doubtful” or “bad”, in which case, a provision of 50% or 100% on the shortfall in security value shall be made.

4.3.2 for 12 months or more, but less than 18 months, a 50% specific provision on the shortfall in security value is required, unless the banking institution can produce evidence to justify a better classification in which case, the provision shall be nil. Where there is evidence to support a worse-off classification, i.e. “bad”, a 100% provision on the shortfall in security value shall be made.

4.3.3 for up to 18 months and beyond, full provision on the shortfall in security value shall be made, unless the banking institution can produce evidence to justify a better classification, i.e. “doubtful” or “sub-standard”, in which case provision shall be 50% of the shortfall in security value, or nil.

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5. Write-off of Non-Performing Loans

Accounts or portions thereof shall be classified bad when they are deemed uncollectible and worthless or in the case of credit facilities approved for N$500,000 and below, when they are in default for 18 months or more with no evidence to support a better classification. In view that the above are stipulated as minimum guidelines and banking institutions are free to set more stringent requirements, write-off of loan accounts shall not be allowed unless it is certain that the accounts are genuinely uncollectible and worthless.

Where recovery is still possible but a more prudent provisioning is required, the banking institutions are encouraged to set aside a 100% specific provision for the whole account or part thereof.

5.1 Writing Off Bad Debts of Directors and Principal Officers

A banking institution shall seek the written approval of the Bank before writing off any loan or advance granted by it to:

• 5.1.1 any of its principal officers;
• 5.1.2 any of its directors; or
• 5.1.3 any company in which it or any of its directors or principal officers is a partner, manager, or agent or to any individual or company of whom or of which any of its directors or principal officers is a guarantor.

The above reference to Directors and Principal Officers shall equally apply to Directors and Principal Officers who had resigned prior to the loan being written off.

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6. Write-back of Specific Provision

Write back of specific provision is permitted under the following circumstances:

• 6.1 where the loan account is fully settled;
• 6.2 where there is cash inflow;
• 6.3 where additional collateral which is readily marketable is provided;
• 6.4 where there is a firm contractual agreement to dispose of the collateral at a price higher than the valuation used by the banking institution;
• 6.5 where there is enhancement in the value of security arising from actual conversion of land used on the property bonded, e.g. from agricultural land to residential/industrial/commercial land; or
• 6.6 where there is concrete evidence to support a reclassification of the account to a better category.

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7. Auditors Disclosure

In submitting annual financial accounts to the Bank, auditors of banking institutions shall disclose whether the accounting treatment of the annual financial statements comply with these determinations.

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ANNEXURE A

DETERMINATIONS ON THE VALUATION OF SECURITY

1. Property Secured by Mortgage Bond.

1.1 Where court proceedings are not yet instituted, forced sale value (FSV) shall be used. However under exceptional circumstances, fair market value (FMV) may be used, for example, where the banking institution feels strongly that the property bonded is worth FMV and there is evidence to that effect;

1.2 Where an auction is pending and a reserve price (RP) has been fixed, RP shall be used;

1.3 Where an auction has been aborted and FSV of the property is lower than RP, and in the absence of new RP, FSV shall be used;

1.4 Where aborted RP is based on FSV, and in the absence of new RP, a 10% discount shall be made on the aborted RP;

Note: The FSV shall be based on the existing use of the land as valued by an independent professional valuator.

2. Cession of Shares

2.1 Quoted Shares:

These shall be valued at the latest market price. Appropriate discounts shall be considered if the shares are either thinly traded and/or comprise a large block of shares. Premiums may only be considered where there is a valid offer at the higher price as evidenced by a firm commitment, such as purchase contracts or undertaking letters provided by solicitors or brokers.

If trading in that counter has been suspended (other than temporary suspension), the net realisable asset value, as per the latest audited financial statements (not more than 18 months old and taking into account the content of interim announcement), shall be used. If appropriate financial statements are not available, normally no value is given. In the case of shares which are temporarily suspended, the last quoted price prior to suspension shall be used. The meaning of “temporary” will be inferred from the reasons for suspension, for instance, shares which are temporarily suspended pending a takeover scheme.

2.2 Unquoted shares

Value may be given provided the test of marketability is met. The condition of marketability shall be considered based on the merit of each case if it can be demonstrated that the shares are marketable, the basis of valuation applied shall be the net tangible asset per share. Higher valuation may be considered if the banking institution is able to provide detailed valuation of net assets in support of the higher valuation if there is a purchase offer for the shares evidenced by firm commitments, such as purchase contracts or undertaking letters provided by legal practitioners or brokers.

3. Motor Vehicles, Plant, Machinery and Equipment

In the absence of independent professional valuation, the net book value shall be applicable, using a 20% depreciation rate on a straight line basis on the acquisition price.

4. Gold Coins (Kruger Rands), Unit Trusts

Up to 75% of the market value of Kruger Rands/Gold Coins/Unit Trusts is permitted.

5. Cession of Insurance Policies

The latest net surrender value (after tax) shall be used or the payout value if the policy is nearing maturity.

6. Debentures

For quoted debentures the latest market price shall be used. No value may be attached to unquoted debentures.

7. Notarial Bonds

No value may be attached to any movables secured under notarial bonds.

8. Cession of Book Debts

No value may be attached unless the banking institution can prove that the debtors are worth the value quoted.

9. Guarantees

9.1 Personal | No value

9.2 Licenced bank | Full value

9.3 Government | Full value

9.4 Generally, guarantees falling in categories other than 9.2 and 9.3 may not be given value unless, it can be clearly demonstrated otherwise, such as cases where the strong financial standing of the guarantor can be firmly established by way of current audited financial statements.

10. Pledge of Investments

Full value may be attached to investments pledged, such as fixed deposits and time deposits.

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BANK OF NAMIBIA

No. 121

DETERMINATIONS UNDER THE BANKING INSTITUTIONS ACT, 1998 (ACT NO. 2 OF 1998)

In my capacity as Governor of the Bank of Namibia (The Bank), and under the powers vested in the Bank by virtue of section 71(3) of the Banking Institutions Act, 1998 (Act No. 2 of 1998), read in conjunction with section 50 of the aforementioned Act, I hereby issue the Determinations on Money Laundering and “Know your Customer Policy” (BID-3), which Determinations shall become effective on 1 July 1998.

T K ALWEENDO
GOVERNOR
Windhoek, 2 June 1998

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BID-3

DETERMINATIONS ON MONEY LAUNDERING AND “KNOW YOUR CUSTOMER POLICY”

Overview

Money laundering covers all activities and procedures to change the identity of illegally obtained money so that it appears to have originated from a legitimate source.

The most common form of money laundering that banking institutions will encounter on a day-to-day basis takes the form of accumulated cash transactions which are deposited in the banking system or exchanged for value items. These simple transactions may be just one part of the sophisticated web of complex transactions set out on the next pages. Nevertheless, the basic fact remains that the key stage for the detection of money laundering operations is where the cash first enters the banking system.

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1. Stages of Money Laundering

There are three stages of money laundering. In each of them, there may be numerous transactions made by launderers through banking institutions, i.e.:

1.1 placement - the physical disposal of cash proceeds derived from illegal activity often by converting such cash into non-cash assets;

1.2 layering - separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity; and