Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (2) of 2016

Regarding Responsible Lending

Pursuant to the provisions of Law Decree No. (9) of 2010 regarding Banks, and in the public interest, we have issued the following instructions:

Article (1)

Definitions

Responsible Lending: Providing financing products that match customers' needs and their repayment capacity.

Borrower: Any customer who has obtained financing from a financial service provider, or any customer who has applied or intends to apply for financing from a financial service provider.

Service Provider: Commercial and Islamic banks, specialized lending institutions, or any other entity subject to the supervision of the Palestine Monetary Authority and authorized to provide credit/financing services.

Gross Income: The total aggregate of an individual's or family's monthly income, whether from a monthly salary, returns, profits, or any additional documented income.

Net Income: The net income available for use by the individual or family, calculated by deducting fixed monthly obligations (bills, school installments, house rent, etc.) from the individual's gross income.

Retail Loans (Individuals): The retail loan portfolio includes the following:

• All consumer loans granted to individuals to finance consumption needs or personal purposes, including car loans, student loans, education loans, and other consumer loans.
• Revolving Credit lines, including credit cards, revolving overdraft limits, and loans granted for consumption or personal purposes, not related to professional or commercial objectives.

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Article (2)

Objective of the Instructions

In the context of the Palestine Monetary Authority's efforts to develop regulations governing banking operations in line with best international practices and standards, and to enhance transparency and disclosure principles related to lending operations conducted by banks and specialized lending institutions (financial and banking service and product providers), and to inform borrowers of credit terms and conditions, as well as their rights and obligations, and to inform guarantors of their obligations and limits, thereby protecting the rights of all contract parties based on clarity, transparency, and fairness in dealings.

The instructions also aim to define the relationship between lending and financing entities on one hand and banking service consumers on the other, and to enhance procedures related to granting facilities in accordance with the borrower's financial status, requirements, and needs, and to verify their repayment capacity before granting the loan/financing. The core concept of responsible lending revolves around the service providers' responsibility toward borrowers, requiring them to develop banking and financial products that align with local community needs, and not to sign a facility contract with a borrower or propose a facility contract that does not match their needs and financial suitability.

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Article (3)

Scope of Application

The provisions of these instructions shall apply to all banks and specialized lending institutions operating in Palestine, each regarding its own affairs, which grant facilities to individuals and small, medium, and micro enterprises.

To achieve the objectives of the above instructions, the instructions are divided into two parts as follows:

First: Mandatory instructions, including Articles (4, 5, 6, and 7)

Second: Guideline instructions, including Articles (8 and 9)

Article (4)

Interest Rates / Credit and Debit Returns, Commissions, and Fees

All banks shall comply with the following:

1.1 Determine interest rates / credit returns periodically (monthly, quarterly, semi-annually, annually), and the rates shall remain in effect until changed, with updates made immediately upon any global change in interest rates.

1.2 Adhere to the interest rates / returns announced by the service provider and stipulate them in contracts signed with borrowers.

1.3 Disclose interest rates / returns in a prominent place at branch offices and on the service provider's website, updating them periodically and as needed.

1.4 If a minimum interest rate is specified in the credit contract concluded between the service provider and the borrower, the service provider must also specify the maximum interest rate calculated on the loan.

1.5 The service provider shall not change the interest calculation method on credit, for example from the reducing balance method to the flat method or vice versa, without obtaining the borrower's prior written consent.

1.6 The service provider shall not impose a general (non-index-linked) interest rate on mortgage loans without having specific rules for interest rate changes.

1.7 Service providers offering Islamic services and products shall not charge commissions on margin financing or collect rent on guarantee letters, but may bear administrative and general expenses in exchange for issuing guarantee letters and collect the actual cost value on permanent facilities, and may charge a fee for performing required services, whether as a lump sum or a percentage of the facility amount. They may also collect a lump sum for actual expenses incurred in extending the facility duration.

1.8 Interest / returns on profits or granted credit shall be calculated on the basis that the number of days in a year is 360 days.

Article (5)

Credit Contracts and Documents

Service providers shall comply with the following:

1.1 Inform borrowers before disbursement of all details and terms of the credit being granted, including the net amount the borrower will receive, disbursement date, maturity date, annual interest/return rate, calculated fees and commissions, calculation methods, and other terms such as late payment penalties for missed scheduled installments.

1.2 Provide a preliminary written offer to the borrower including all details mentioned in Article (1.1) above, with the offer remaining valid for eight days for consumer loans, and ten working days for mortgage loans and investment loans for projects and establishments.

1.3 Provide borrowers and guarantors, if any, with an original or certified copy of the contracts and documents as negotiable instruments for them after signing and stamping by the service provider in accordance with prevailing banking practices, ensuring provision of a document confirming and/or proving that the borrower and guarantors received a copy of those contracts and documents.

1.4 Request in writing from the relevant departments/authorities to remove the mortgage lien on the borrower's assets and pledged guarantee to the service provider immediately upon the borrower's settlement of obligations owed to the service provider, and obtain a written request from the client regarding this matter.

1.5 Provide borrowers with a free certificate of good standing once after full settlement of their obligations, without prior request from them.

1.6 The service provider must notify the borrower in writing if it intends to cancel the granted credit, with justification for the reasons, provided that the borrower is given a reasonable deadline before implementation.

1.7 Borrowers' rights under existing credit contracts shall remain fixed and undiminished if the service provider assigns its rights to any other party.

1.8 The service provider shall not bind borrowers to any conditions regarding the continuation of the borrower's dealings with the service provider for re-granting credit.

1.9 The service provider shall not withhold any amount from the credit granted to the borrower for cash insurance accounts as guarantees against debt.

1.10 The service provider shall calculate an interest/return rate in favor of the borrower on balances deposited as cash guarantees, according to the prices announced in the bank's bulletin.

Article (6)

Disclosure and Pre-Disbursement Procedures

Service and product providers are requested to comply with the following:

1. Advertising for credit products in all visual and audio media, including social media, must be clear, comprehensive, in simple and easy language, non-misleading, and understandable by all segments of society.

Prohibitions in Advertising and Marketing Practices for Credit Products:

1.1 Stating in advertising that the interest calculated on the loan is zero percent, while in reality interest or commissions are charged on the granted loan.

1.2 Advertising a preferential interest rate at the beginning of the loan term, which is later increased without the borrower's written consent, or making it a subsequent condition stipulated in the loan contract.

1.3 Failing to set a cap on the interest rate if it is variable.

1.4 Using the phrase "Buy now, pay later" without full disclosure of the underlying borrowing process associated with the purchase of the goods.

1.5 Using misleading general phrases or terms aimed at attracting new borrowers, while in reality these phrases or terms are imposed with conditions not stipulated in the advertisement.

1.6 Advertising the ease of obtaining a loan/financing with the intent to mislead and attract new borrowers, while the loan granting conditions and procedures do not allow it.

1.7 Failing to disclose the existence of administrative commissions for the loan outside the credit policy.

1.8 Failing to disclose sufficient information regarding the terms and conditions of borrowing.

1.9 Providing the lending entity with the ability to unilaterally change the loan terms and conditions.

1.10 Directing promotional offers for credit products to a specific borrower who has reached the maximum limit of their borrowing capacity.

1.11 Offering complex loans without providing appropriate awareness and financial assessment to customers regarding them.

1.12 Offering banking products conditional upon purchasing other banking/financial products such as insurance products/credit cards.

Article (7)

Cost of Lending / Financing (Annual Interest / Return Rate)

2.1 The lending price (cost of lending / interest rate / annual return) on granted facilities must reflect the credit cost to be borne by the borrower, such that the specified price includes all costs related to the loan, including deducted commissions, additional administrative fees such as insurance fees, and any other costs, if any.

2.2 The lending price (cost of lending or interest rate / annual return) must be specific and clear, enabling borrowers to understand the true cost of the loan and allowing them to easily compare the costs of loans offered by different service and product providers.

2.3 Provide those wishing to obtain credit with an awareness bulletin clarifying the types of credit offered by the service provider, interest/return rates and commissions for each type, the calculation mechanism for interest/returns, and explaining the differences if the interest rate is fixed or variable, and ensuring the bulletin includes illustrative examples thereof.

Credit Assessment

Following the completion of the comprehensive credit assessment process for the borrower's credit status, and to ensure transparency, protect rights, and enhance professionalism in evaluating credit applications, if the borrower requests a copy of the final credit decision, the service provider that reviewed and submitted the client's application must provide them with a free written copy of the final credit decision regarding the requested facility/financing, clearly stating and mentioning the main and professional reasons for the service provider's refusal to grant the financing/facility if the outcome is rejection.

Article (8)

Credit Granting Contract

4.1 The service provider must clarify to the borrower all main terms in the loan agreement before signing, including the loan amount, the calculated interest rate, whether the interest/return rate is fixed or variable, a detailed breakdown of other costs, in addition to the annual interest/return rate representing the annual cost of lending.

4.2 Contractual terms between the service provider and the borrower shall not include the right of the service provider to modify the interest rate if fixed, or to add any other expenses, or to convert from variable to fixed interest, for example, during the credit period or vice versa, without providing written consent between the contracting parties.

4.3 Record all information of borrowers and guarantors, credit details, and dates on the credit contract and its summary, and ensure borrowers sign and verify all pages of the credit contract and its documents and amendments.

4.4 Record all guarantees clearly, and specify the client's accounts that will secure the granted facilities.

4.5 Ensure that there is no conflict in the text of the credit contract and its appendices with laws, Palestine Monetary Authority instructions, and prevailing laws in Palestine.

4.6 Clarify the mechanism for calculating interest/returns, commissions, and fees clearly and understandably within credit contracts or a dedicated appendix, noting that the rates may change if the interest is variable.

4.7 Ensure that Arabic is the official language of the contract concluded with borrowers within Palestine and in all forms of dealings with them, and in case contracts are concluded in a foreign language, the text must be accompanied by an Arabic translation, with Arabic being the basis for interpreting the provisions of those contracts.

4.8 Complete all data included in credit contracts and their appendices, including the interest/return rate, commission, and mechanism for other expenses, with the basic data clearly stated on the first page of the credit contract and not in appendices or footnotes, and ensure borrowers are informed of them before signing.