INSTRUCTION N°35 (Modification 1)

CENTRAL BANK OF CONGO

THE GOVERNOR

INSTRUCTION N°35 RELATING TO LEASING ACTIVITY (Modification 1)

The Central Bank of Congo:

• Given Law n°005/2002 of May 07, 2002, relating to the constitution, organization, and functioning of the Central Bank of Congo, specifically Article 6 thereof;
• Given Law n°003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions, specifically Articles 7 and 36 thereof;
• Given Law n°002/2002 of February 02, 2002, enacting provisions applicable to Savings and Credit Cooperatives;
• Given Law n°11//020 of September 15, 2011, establishing rules relating to microfinance activity in the Democratic Republic of Congo;
• Given Law n°15/003 of February 12, 2015, relating to leasing.

Hereby enacts the following provisions applicable to leasing activity.

CHAPTER 1: OBJECT AND SCOPE OF APPLICATION

Article 1:

The purpose of this Instruction is to determine the conditions for access to and exercise of leasing activity applicable to Credit Institutions and Microfinance Institutions. It also sets out the prudential standards relating to leasing companies.

Article 2:

Leasing is a form of credit provided for in Article 7 of Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions.

It may only be carried out as a habitual activity by a bank, a leasing company, and a financial company approved for this purpose by the Central Bank in accordance with the provisions of Articles 11 to 16 of Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions.

It may also be carried out as an ancillary activity by other credit institutions and Microfinance Institutions.

Article 3:

Leasing is a commercial and financial operation:

• carried out by a bank and a financial company or by a leasing company established in this capacity, with national or foreign economic operators, natural persons or legal entities under public or private law;

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• supported by a leasing contract including a purchase option for the benefit of the lessee;
• exclusively concerning movable or immovable property for professional use, a business goodwill, or an artisanal establishment.

CHAPTER II: CONDITIONS FOR ACCESS TO LEASING ACTIVITY

Article 4:

A leasing company is required, prior to carrying out its activities, to obtain approval from the Central Bank.

To this end, in addition to the provisions of Article 12 of Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions, the applicant must provide, in three (3) copies, the following documents, necessary for the assessment of its application:

1. a written application for approval in French and signed by the persons duly authorized for this purpose, addressed to the Governor of the Central Bank;
2. documents establishing the qualifications and powers of legal representatives;
3. an information sheet on the main shareholders, directors, and other creditors of the institution, with attached copies of their identity documents, their curricula vitae, and their residence certificates, as well as extracts from their criminal records;
4. the articles of association, drafted in French, indicating that the company's corporate purpose is leasing activities and proof of the full payment of the required minimum capital provided for in Article 6 of this Instruction;
5. the identity of natural or legal persons holding direct or indirect interests in the capital, the extent of their participation, proof of their capacity, as well as the annual financial statements for the last three (3) financial years (for legal entities), duly certified by an approved auditor;
6. a detailed presentation of the leasing activity, through a business plan including:

• activity, establishment, and organizational forecasts;
• details of the technical, material, and financial means planned for the implementation of this activity;

Provisional financial statements for a minimum of three (3) years. The Central Bank reserves the right to request any additional information deemed necessary for the processing of the approval application file.

Article 5:

Without prejudice to the legal provisions relating to commercial companies, no one may directly or indirectly:

• propose to the public the creation of a leasing company;
• administer, direct, or manage a leasing company;

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1° if they have been convicted of an offense against Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions or exchange regulations; 2° if they have been declared bankrupt and have not been rehabilitated, even when the bankruptcy occurred in a foreign country; 3° if they have been convicted in the Democratic Republic of Congo or abroad as perpetrator, accomplice, or for attempt of one of the following offenses: a. counterfeiting currency; b. counterfeiting or falsification of banknotes, public securities, shares, bonds, interest coupons; c. counterfeiting or falsification of seals, stamps, hallmarks, and marks; d. forgery and use of forged documents; e. corruption of a public official or extortion; f. theft, extortion, embezzlement or breach of trust, fraud or receiving stolen goods; g. bankruptcy, fictitious circulation of commercial papers; h. issuing a bounced check; i. money laundering and terrorist financing; 4° if they have been convicted of a common law crime and for an offense assimilated by law to one of those listed above; 5° if they have participated in the administration, direction, or current management of a Credit Institution whose forced dissolution has been ordered or whose bankruptcy has been declared. 6° if they appear on the list of persons who have been subject to sanctions issued by international organizations concerning money laundering, terrorist financing, and financing the proliferation of weapons of mass destruction.

When the decision resulting in one of the prohibitions referred to in this article is subsequently revoked or overturned on final appeal, the prohibition ceases automatically.

Article 6:

A leasing company must have a minimum share capital fully paid up in cash equivalent to USD 5,000,000 (five million US Dollars) in Congolese Francs at the time of approval.

However, the Central Bank may, in light of the business plan presented to it, require a capital level higher than the minimum capital amount.

Article 7:

Approval is notified by a decision of the Central Bank, within a period of ninety (90) days from the date of receipt of the complete file by the latter.

Approval is evidenced by the institution's registration on the list of Credit Institutions maintained by the Central Bank upon prior payment of approval fees to the latter as prescribed by its Tariffs and Conditions.

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Article 8:

The day-to-day management of a leasing company must be entrusted to at least two natural persons, demonstrating the integrity, competence, and professional experience in the financial sector necessary for the exercise of this function.

CHAPTER III: CONDITIONS FOR EXERCISING LEASING ACTIVITY

Article 9:

Approved banks wishing to engage in leasing activities are required to notify the Central Bank in writing beforehand. The latter may object if it finds, after analyzing the business plan, that this activity cannot be carried out under conditions that guarantee the sustainability and compliance by the applicant bank with prudential regulations.

Other Credit Institutions, particularly financial institutions specializing in financing the economy, Savings and Credit Cooperatives, on the one hand, and Microfinance Institutions, on the other hand, wishing to carry out leasing operations must obtain express authorization from the Central Bank before engaging in leasing activities as an ancillary activity. Express authorization must be requested in writing from the Central Bank.

This authorization is granted by the Governor of the Central Bank and may be withdrawn by him if the Credit Institution does not comply with the commitments undertaken.

Article 10:

No one may habitually engage in leasing activity under the name of a leasing company or any other identical or similar name in another language, if they do not meet the conditions set by the provisions of this Instruction.

CHAPTER IV: WITHDRAWAL OF APPROVAL

Article 11:

The withdrawal of approval for a leasing company is carried out in accordance with Articles 22, 23, and 77 of Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions.

The Central Bank arranges, at the expense of the leasing company, for the publication of the decision to withdraw approval in the Official Gazette.

Article 12:

The withdrawal of approval results in the removal of the leasing company from the list of Credit Institutions.

The removal automatically entails the forced dissolution of the leasing company in accordance with the legal provisions on commercial companies and Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions.

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CHAPTER V: PRUDENTIAL REGIME FOR LEASING COMPANIES

Article 13:

A leasing company is required to permanently comply with all prudential management standards, both qualitative and quantitative, set by the Central Bank.

Article 14:

The commercial activities of a leasing company are limited to the provision of leasing services in accordance with Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions and Law n°15/003 of February 12, 2015, relating to leasing.

Article 15:

A leasing company is not authorized to receive funds from the public within the meaning of Article 6 of Law n° 003/2002 of February 02, 2002, relating to the activity and control of Credit Institutions.

Article 16:

The own funds of a leasing company may at no time fall below the aforementioned minimum regulatory capital amount.

The standard is assessed based on regulatory funds as defined by this Instruction.

Article 17:

The regulatory own funds of a leasing company consist of the elements listed below, after deducting the elements cited in Article 18 of this Instruction.

Included are:

• capital;
• issue or merger premiums;
• provision for capital reconstitution;
• legal, statutory, optional, and other reserves;
• positive retained earnings;
• positive result of the last closed financial year, pending its allocation, certified by the auditors and after deduction of anticipated dividend distribution;
• positive result of the current financial year, provided, on the one hand, that it is calculated after deduction of all expenses, depreciation allowances, provisions, and value adjustments relating to the period, as well as foreseeable taxes, advances, or dividend forecasts, and on the other hand, that it has been certified by the auditors and authorized by the Central Bank;
• revaluation reserves and differences resulting from revaluation operations carried out in accordance with current legal and regulatory provisions;
• subordinated loans under the conditions defined in Article 17 of this Instruction;

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• general provisions or provisions not covering a specific risk, constituted to cover future losses not yet identified, provided that they are not allocated to a recognized impairment of specific assets or known commitments, considered individually or in groups;
• investment grants.

Article 18:

Funds from the issuance of securities or subordinated loans of indefinite duration may be included in regulatory own funds when they meet the following conditions:

• be pre-approved by the Central Bank of Congo, which reserves the right to consult the Supervisory Authority of the funder's country of origin;
• funds may only be repaid at the initiative of the borrower and with the prior agreement of the Central Bank;
• the securities issuance or loan agreement allows the subject leasing company to defer interest payments;
• the lender's claims on the subject leasing company are subordinated to those of all other creditors;
• the interest rate is a preferential rate compared to that practiced in the Congolese financial market;
• the securities issuance or loan agreement provides that non-repayment of the debt and non-payment of interest allow for the absorption of losses so that the leasing company is able to continue its activities.

Funds from the issuance of securities or subordinated loans that are not of indefinite duration may be taken into account in regulatory own funds when they meet the following conditions:

• if the contract provides for a determined maturity, the initial duration must be at least 5 years;
• if no maturity has been set, the debt may only be repayable with 5 years' notice or when the agreement of the Central Bank of Congo is formally required in case of early repayment, and provided that the solvency of the leasing company is not affected;
• if there is a remaining term of 5 years, an annual reduction of 20% of the residual amount is applied to reflect the decreasing contribution to the bank's solvency.

Article 19:

To be deducted are:

• the unpaid portion of the share capital;
• own shares held at their book value;
• negative retained earnings;
• participations held in other Credit Institutions and Microfinance Institutions;
• goodwill;
• negative result of the last closed financial year, pending approval, certified by the auditors;
• negative result of the current financial year;

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• subordinated claims meeting the definitions of this Instruction, held in other Credit Institutions.

Article 20:

A leasing company may not grant credits or guarantees to related persons for a total amount exceeding 10% of its regulatory own funds.

It may not hold foreign assets for a total amount exceeding 10% of its regulatory own funds.

The portion of facilities and guarantees in favor of these related persons and foreign assets exceeding the aforementioned ceilings

• Pledged deposits with the relevant establishment in the same currency as the facilities they guarantee benefit from a deductibility of 100%;
• The pledge of deposit certificates or similar securities issued by the establishment itself and deposited with the considered establishment benefits from 100% deductibility;
• Claims secured by movable property covered by all-risk insurance subject to financial leasing benefit from a deductibility of 100%;
• Pledged deposits with the relevant establishment in a currency other than that of the facilities they guarantee benefit from a deductibility of 80%;
• Bank counter-guarantees emanating from credit institutions rated by international agencies from AAA to AA- benefit from a deductibility of 80%;
• Bank counter-guarantees emanating from credit institutions rated by international agencies from A+ to BBB- benefit from a deductibility of 50%;
• Claims secured by a mortgage on residential real estate that will be occupied or rented out by the borrower benefit from a deductibility of 50%;
• Claims secured by a mortgage on commercial real estate intended entirely for productive activities benefit from a deductibility of 70%;
• Bank counter-guarantees received from credit institutions with lower ratings or unrated are not admitted for deduction of risks.

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• Claims secured by insured movable property subject to financial leasing benefit from a deductibility of 30%;
• Claims secured by uninsured movable property subject to financial leasing benefit from a deductibility of 20%.

Article 28:

To be acceptable for deduction of risks, guarantees must meet the following conditions:

(i) regarding bank guarantees:

• the duration of the guarantee must be at least equivalent to that of the risk;
• the counter-guarantees must be enforceable on first demand;
• the guarantee must cover at least 80% of the actual outstanding amount of the client's commitments.

(ii) regarding mortgages:

• the parties must conclude an explicit agreement duly legalized with the land registry conservator allowing for the easy realization of the mortgage without recourse to judicial procedures;
• its market value must be subject to independent and qualified appraisal.

Article 29:

The leasing company must present, upon request by the Central Bank body responsible for the Supervision of Financial Intermediaries, any acts of guarantees coming into reduction of risks for verification of their eligibility.

The leasing company must justify to the Central Bank body responsible for the Supervision of Financial Intermediaries all elements for assessing guarantees coming into reduction of risks, notably the ratings of the banks issuing the counter-guarantees.

Article 30:

The leasing company is required, within the framework of risk division, to permanently respect:

• a maximum ratio of 10% between the total risks incurred on the same beneficiary, including assets or claims towards a foreign correspondent, and the amount of their regulatory own funds;
• a maximum ratio of 800% between the total amount of large risks and the amount of regulatory own funds.

By large risk, we mean the total risks incurred on beneficiaries whose risks exceed for each of them 5% of the regulatory own funds of the establishment.

Article 31:

The leasing company is required to attach to its declaration to the Central Bank body responsible for the Supervision of Financial Intermediaries, a detailed statement of weighted risks exceeding for the same beneficiary or the same

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set of counterparties of 5% of the regulatory own funds of the concerned establishment.

The leasing company is also required to provide to the Central Bank body responsible for the Supervision of Financial Intermediaries, a detailed statement of assets held with each correspondent.

Article 32:

For the application of these provisions, the considered risks, possibly reduced by admitted guarantees and provisions, are the asset and off-balance sheet items listed in articles 24 to 28 of this Instruction.

Article 33:

For the application of these provisions, the following are considered as the same beneficiary:

• natural or legal persons who have capital links such that one of them exercises over the others, directly or indirectly, exclusive or joint control power or significant influence, or who are subject to common de facto direction;
• natural or legal persons who are linked in such a way that the financial difficulties encountered by one or some of them would necessarily lead to serious financial difficulties in the other or all others.

Such links may notably exist between two or more natural or legal persons in one of the following cases:

• natural persons who are related up to the second degree;
• legal persons that are subsidiaries of the same parent company;
• persons who are subject to common de facto direction;
• persons who are local authorities (or decentralized public entities) or public establishments and have financial dependency links between them or vis-à-vis the central government or the State;
• persons who are linked by cross-guarantee contracts or who maintain predominant business relations between them, notably when they are linked by subcontracting or franchise contracts.

Article 34:

The leasing company is required, within the framework of participation limitation, to respect one or the other of the following limits in the capital of a company:

• no participation must exceed 5% of regulatory own funds as defined in articles 16 and 17 of this Instruction;
• the total of participations cannot exceed 15% of the regulatory own funds of the concerned establishment.

Participations are considered at their net book value.

Article 35:

The leasing company must also respect a liquidity ratio fixed at a minimum of 100% of the ratio between availability and resources due in one month or less.

By availability, we mean the sum of the following elements:

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• cash and balances with banks due in one month or less;
• the portion maturing in a maximum of one month of loans and credits regardless of their remaining durations;
• commercial securities portfolio maturing in one month or less;
• receivables due in one month or less;
• other assets due in one month or less.

By resources due in one month or less, we mean the sum of the following elements:

• bond and subordinated borrowings repayable within a period of one month or less;
• the portion maturing of other borrowings repayable within a period of one month or less;
• expenses to be paid within a period of one month or less;
• suppliers and related debts + due in one month or less;
• other liabilities due in one month or less.

Article 36:

Leasing companies are required to permanently respect:

• a maximum ratio of 5% between the amount of their long or short positions in each foreign currency and the amount of their regulatory own funds. For the most used currencies in their transactions, the maximum ratio is raised to 10%;
• a maximum ratio of 10% between the amount of their long or short position in the aggregate of currencies and the amount of their regulatory own funds.

Article 37:

The numerator of the ratio is the net foreign exchange position determined by the difference between assets and commitments in foreign currencies, all maturities combined:

• asset and liability items denominated in foreign currencies are taken into account after deduction of the following elements:

• operations where the foreign exchange risk is borne by the State; • structural positions, that is to say, in a limiting manner, tangible and intangible fixed assets, shares in subsidiaries and participations as well as allocations to branches abroad. Other asset and liability elements may be considered as structural elements, with the agreement of the Central Bank of the Congo, on condition that these do not give rise to cash flows within the framework of the normal management of the regulated establishment.

Article 38:

The denominator of the ratio consists of regulatory own funds calculated in accordance with articles 16, 17 and 18 of this Instruction.

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CHAPTER VI: ON THE REGIME OF OWNERSHIP OF LEASED PROPERTY AND GUARANTEES

Article 39:

Unless otherwise agreed, the lessor may request additional guarantees from the lessee, which may be real or personal securities, if the nature of the financial leasing operation or that of the financed equipment so requires.

The lessor may also require a security deposit, which will be returned at the end of the contract, if applicable. This deposit cannot exceed 10% of the price of the equipment.

During the entire duration of the concluded contract, the lessor remains the sole owner of the property.

In the event that the lessee exercises the purchase option at maturity, the lessor retains the title of ownership, until the full settlement of the debt in accordance with contractual clauses.

Article 40:

The transfer of the leased property to another lessor does not result in termination or modification of the financial leasing contract. The rights and obligations of the lessor resulting from the financial leasing contract will be transferred to the new lessor.

CHAPTER VII: ON THE ACCOUNTING RULES OF THE FINANCIAL LEASING CONTRACT

Article 41:

The accounting of financial leasing operations is based on the principle of the primacy of economic reality over legal appearance.

The recording of financial leasing operations on the balance sheet is carried out as follows:

• the financial leasing object is recorded as an asset on the balance sheet of the lessee, who will bear the amortization costs on this object, as if he were the owner;
• the lessor records on the asset side of its balance sheet the financial claim for the amount of the capital remaining to be paid by the lessee;
• the lessee records this obligation on the liability side of its balance sheet for the same amount of capital remaining to be paid to the lessor. These amounts are reduced by the rents paid.

The recording of financial leasing operations on the income statement is carried out as follows:

• the lessee takes as deductible charges for the period, the amortization of the financial leasing object and the interest due in the financial leasing rents paid to the lessor;
• the lessor will take as taxable income, the interest received from the lessee.

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CHAPTER VIII: PERIODIC INFORMATION OBLIGATIONS

Article 42:

The leasing company is required to transmit to the Central Bank, for supervisory purposes, weekly, monthly and annually their accounting, prudential and other situations, according to models defined by the latter.

Article 43:

Without prejudice to the provisions on the transmission of periodic situations to the Central Bank, for statistical needs, banks, other categories of Credit Institutions and Microfinance Institutions are required to transmit semi-annually, at the latest on the 15th day of the calendar following the closing of the previous quarter, on paper and electronic support, to the Central Bank body responsible for the Supervision of Financial Intermediaries, a detailed report of contracts concluded on financial leasing operations.

Credit Institutions and Microfinance Institutions are required to establish annually a summary report on credit operations.

CHAPTER IX: FINAL PROVISIONS

Article 44:

Any breach of the provisions of this Instruction leads to the application of pecuniary or administrative sanctions provided for by the legal and regulatory texts in this matter.

Article 45:

This Instruction enters into force on the date of its signature.

Made in Kinshasa, on NOV 29 2018

Déogratias MUTOMBO MWANA NYEMBO Governor

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