On the Prudential Standards for Microfinance Institutions

CENTRAL BANK OF DJIBOUTI

INSTRUCTION NO. 2022-14/IMF ON THE PRUDENTIAL STANDARDS FOR MICROFINANCE INSTITUTIONS

The Governor of the Central Bank of Djibouti,

Having regard to Law No. 118/AN/11/6th L of January 22, 2011 amending the statutes of the Central Bank of Djibouti;

Having regard to Law No. 179/AN/07/5th L of May 16, 2007 regulating microfinance activities in the Republic of Djibouti;

Having regard to Law No. 117/AN/11/6th L of May 25, 2011 regulating financial cooperatives;

Having regard to the Commercial Code, Book 3 on Company Law;

Having regard to Law No. 119/AN/11/6th L of January 22, 2011 on the establishment and supervision of credit institutions and financial auxiliaries;

Having regard to Decree No. 2018-171/PRE of May 8, 2018 appointing the Governor of the Central Bank of Djibouti.

Orders:

Article 1: Microfinance institutions shall comply with the rules and prudential standards set forth in this instruction and the annex specifying their calculation methods.

The prudential rules and standards that MFIs must comply with are as follows:

• The liquidity ratio;

• The risk limitation ratio per person;

• The risk limitation ratio for all management;

• The risk-bearing ratio of an MFI;

• The coverage ratio of medium and long-term assets by stable resources;

• The capital adequacy ratio (capitalization standards).

Article 2: Compliance with prudential standards and ratios must be maintained at all times.

Article 3: This instruction shall enter into force upon its signature.

Issued in Djibouti, March 14, 2022

The Governor

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Annex to INSTRUCTION NO. 2022-14/IMF on the Prudential Standards for Microfinance Institutions

Orders:

CALCULATION OF PRUDENTIAL RATIOS

The liquidity standard: measures the MFI's ability to meet its payable liabilities, i.e., to honor its short-term commitments (maximum 3 months) using its short-term assets (maximum 3 months), i.e., its available and mobilizable funds.

➢ LIQUIDITY RATIO

Every microfinance institution must maintain at all times a minimum liquidity ratio of 80%. This ratio is defined as the ratio between available and mobilizable funds and the short-term payable liability amount/total deposit amount.

1 – Short-term available and mobilizable funds: (A)

A = + (10) : Cash on hand

• (111) : Demand deposits
• (112) : Short-term deposits maturing in less than 3 months
• (141) : Short-term loans maturing in less than 3 months
• (211+212) : Performing short-term credits maturing in less than 3 months
• (35) : Advances and loans to staff and management maturing in less than 3 months
• (26) : Accrued interest receivable on these deposits, loans, and credits
• (31) : Other receivables

2 – Short-term payable liabilities (3 months): (B)

B = (221) : Members' demand deposits

• (222) : Members' term deposits maturing in less than 3 months
• (223) : Savings accounts (term less than 3 months)
• (224) : Security deposits (term less than 3 months)
• (131, 132, 133) : Borrowings (term less than 3 months)
• (33) : Other liabilities (term less than 3 months)
• (146) : Accrued interest on borrowings
• (226) : Accrued interest on members' term deposits less than 3 months

Formula: Ratio = A / B x 100 ≥ 80 %

➢ RISK LIMITATION RATIO PER PERSON

A microfinance institution may not grant credits to the same person for an amount exceeding 5% of total equity, excluding risks taken on earmarked resources borne by the fund provider.

1 – Amount of risk taken on a single person or group of persons: (A)

(Source: Statement of the 10 largest borrowers)

2 – Equity: (B)

B = (22) Total equity

Formula: Ratio = A / B x 100 ≤ 10%

➢ RISK LIMITATION RATIO FOR ALL MANAGEMENT

The risks incurred on all its management by a microfinance institution that collects savings must not exceed 20% of the total volume of deposits made with this institution.

1 – Amount of risk taken on all management

(A) (source: Statement of credits to management)

2 – Institution's deposits: (B)

B = (22) Total members' deposits

Formula: Ratio = A / B x 100 ≤ 20 %

➢ RISK-BEARING RATIO OF AN MFI

The credit risks borne by a microfinance institution, excluding risks taken on earmarked resources borne by the fund provider, must not exceed 200% of the total volume of its deposits.

1 – Risks borne by an institution: (A)

A = + (211+212) : Performing credits

• (214) : Non-performing credits (at gross amount)
• (35) : Advances and loans to staff and Management
• (90) : Given commitments

2 – Institution's deposits: (B)

B = (22) Total members' deposits

Formula: Ratio = A / B x 100 ≤ 200%

➢ COVERAGE RATIO OF MEDIUM AND LONG-TERM ASSETS BY STABLE RESOURCES

Microfinance institutions must cover, at all times, their medium and long-term assets with stable resources.

1 – Medium and long-term assets: (A)

A =

• (112) Deposits with financial institutions for more than one year
• (142+143) Loans to financial institutions for more than one year
• (211+212+213) Performing medium-term credits
• Other debtors for more than one year (analysis of account 31)
• (40 less 490) Net financial fixed assets
• (42 less 492) Net intangible fixed assets
• (43 less 493) Net tangible fixed assets
• (41) Assets under construction

2 – Stable/long-term resources (B)

B =

• (132+133) Borrowings for more than one year
• Members' term deposits for more than one year (analysis of account 222)
• Other deposits received for more than one year
• (50) Provisions for risks or of a reserve nature
• (51) Earmarked funds
• (52) Investment grants
• (531) Brought forward credit balance
• (54) Reserves
• (5511) Paid-up capital
• (56) Result pending allocation

Formula: Ratio = A / B x 100 ≥ 100 %

➢ EQUITY RATIO (CAPITALIZATION STANDARDS)

Every MFI must at all times hold equity representing at least 15% of total assets.

1 – Net equity: (A)

B = Net equity:

• (50) Provisions for risks or of a reserve nature
• (51) Earmarked funds
• (52) Investment grants
• (531) Brought forward credit balance
• (54) Reserves
• (5511) Paid-up capital
• Result pending allocation up to 50% – (42 less 492) Net intangible fixed assets – Supplementary provisions to be established – (532) Brought forward deficit – Deficit result

2 – Total assets (B)

Formula: Ratio = A / B x 100 ≥ 15 %