Instruction No. 002/08-CSBF on Prudential Standards for Level 2 and Level 3 Microfinance Institutions

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The Banking and Financial Supervision Commission (CSBF),

Having regard to Law No. 95-030 of February 22, 1996, relating to the activity and supervision of credit institutions, as amended,

Having regard to Law No. 2005-016 of September 29, 2005, relating to the activity and supervision of microfinance institutions,

Having regard to Decree No. 2007-027 of January 29, 2007, appointing the Governor of the Central Bank of Madagascar,

Having regard to Decree No. 2008-446 dated May 5, 2008, appointing the members of the Banking and Financial Supervision Commission (CSBF),

Having regard to Instruction No. 001/2000-CSBF of February 1, 2000, relating to the available own funds of credit institutions,

In application of the provisions of Article 41 of Law No. 95-030 and Article 70 of Law No. 2005-016, which empower the CSBF to set management standards and prudential rules that credit institutions must respect, notably to guarantee their liquidity, solvency, and the balance of their financial structure,

Having regard to the opinion formulated by the profession pursuant to the last paragraph of Article 36 of the aforementioned Law No. 95-030,

DECIDES

Article 1

Level 2 and Level 3 microfinance institutions (MFIs) are required to permanently comply with the prudential ratios defined by this instruction. These ratios are calculated based on available own funds, as defined by the regulation applicable to all categories of credit institutions.

Section One Solvency Ratio

Article 2

The solvency ratio is the ratio between available own funds and the risks incurred by the institution due to its operations.

Article 3

The risks incurred, forming the denominator of the ratio, consist of balance sheet assets and off-balance sheet commitments, retained after deduction of the items referred to in Article 4 below and application of the following weightings:

100% for

– performing loans,
– the risky portfolio of less than thirty days net of specific provisions, – transaction and investment portfolio accounts, excluding participation in grouping structures, – the net balance of order or waiting accounts, – fixed assets;

150% for

– the risky portfolio of more than thirty days net of specific provisions, – restructured receivables that have not respected the six-month probationary payment period, – immobilized receivables;

0% for other asset items;

20% for signature commitments.

The risky portfolio includes all loans overdue in repayment, in principal or interest, from the due date. This portfolio includes the total remaining amount to be paid, namely, overdue and unpaid repayments and those not yet due, excluding accrued interest. It does not include loans that have been subject to restructuring or refinancing.

Article 4

The items referred to in Article 3 are deducted from the corresponding heading:

amounts deducted from own funds as defined by CSBF instruction, notably additional provisions to be set aside,

value losses on asset items as well as reserved income,

the portion of equipment subsidies that exceeds the amount taken into account as funds assimilated to own funds,

the elements cited below, up to the amount of outstanding loans when the guarantee exceeds them, or up to the amount of the guarantee when the outstanding loans exceed it:

– sums held as security for these receivables – blocked deposits, security deposits,...; – guarantees issued by credit institutions authorized by the CSBF, excluding microfinance institutions.

with the express agreement of the General Secretariat of the CSBF:

– guarantees issued by credit institutions,
– guarantees received from other national or foreign non-banking institutions, – refinancing lines of credit granted by donors and accompanied by a risk assumption by the donors for the credits thus financed; In case of risk sharing, the amount of refinancing is deducted up to the risk borne by the donor, – all outstanding loans covered by a partially mutualized guarantee fund or assimilable resources, when the ratio between the funds thus held and the guaranteed outstanding loans is at least equal to the ratio set in Article 5. Otherwise, the deduction is limited to the amount which, reported to the guarantee fund, is covered by it according to the ratio set in Article 5.

In accordance with the Chart of Accounts for Credit Institutions, partially mutualized guarantee funds are funds allocated to the guarantee of certain categories of credits or signature commitments, and which cover only the risks related to these operations. Only the defaults of beneficiaries registered in the guarantee fund give rise to the activation of the latter.

The acts governing the operation of these funds are communicated to the General Secretariat of the CSBF.

Article 5

The solvency ratio prescribed in Article 2 is fixed, at a minimum of:

15% for Level 2 MFIs,

12% for Level 3 MFIs.

For mutualist MFIs organized in a network, this ratio must be respected permanently by each affiliated MFI and by the grouping structure(s).

Article 6

For the application of Article 5 above, a declaration established according to the model in the annex at the date of the accounting situation closing is sent to the General Secretariat of the CSBF in accordance with the procedures of the instruction on the financial transparency of MFIs.

In the event of unavailability of supporting elements on the data admitted for deduction from the risk base, the calculation will be performed in the most unfavorable hypothesis.

Article 7

The CSBF may raise the level of the standard referred to in Article 5 either for a level of MFI, or for an institution taken individually, based on a reasoned decision according to the risk profile specific to that institution.

Section II Risk Division Ratio

Article 8

The risk division ratio is the ratio between the amount of risks incurred by an institution due to its operations with the same beneficiary and the amount of its available own funds.

Article 9

The risks incurred, which constitute the numerator of the ratio, are retained after deduction of the items referred to in Article 10 below and application of the following weightings:

at 100% for

– performing loans,
– the risky portfolio of less than thirty days net of specific provisions, – transaction and investment portfolio accounts, excluding participation in grouping structures;

at 150% for

– the risky portfolio of more than thirty days net of specific provisions, – restructured receivables that have not respected the six-month probationary payment period, – immobilized receivables;

at 20% for signature commitments.

Article 10

Additional provisions to be set aside, charged against available own funds in accordance with the provisions of the relevant instruction issued by the CSBF, come in deduction of the risks incurred. Also deducted from the risk base, provided that their term is at least equal to that of the commitments they cover:

funds allocated as security for commitments notably blocked deposits,

with the express agreement of the CSBF, counter-guarantees received from other credit institutions, notably from bodies acting as "guarantee funds".

This deduction is made up to the risk actually covered, namely within the limit of the outstanding loans thus backed.

Guarantees received from other credit institutions must satisfy the following conditions: at first demand, irrevocable, of a previously defined duration, of well-determined amounts and backed by identified risks. The CSBF may refuse to take into account a guarantee when, in the event of a call on a guarantee issued previously, the guarantor failed in its commitments.

Article 11

The following are considered as a single beneficiary groups of persons whose interests are closely linked, namely:

persons who have a family relationship up to the first degree - husband, wife and children - and/or any other person living under the same roof - partner, household employees, employers and employees – without this list being exhaustive,

members of solidary guarantee groups,

legal entities and their managers, when the credits granted to them are intended for the activity of the legal entity,

natural or legal persons exercising a common activity when the credits granted are intended for this activity,

interposed persons with respect to a natural or legal person.

The following are also considered as a single beneficiary natural or legal persons who meet one of the following conditions:

the same group holds either the majority of voting rights, or the power to appoint the majority of the members of the administration, management or supervisory bodies, or the largest participation without other shareholders or partners each owning more than 5% of the capital, or dominant influence pursuant to a management contract, statutory clauses, or in fact, one of them exercises joint control over the other, directly or indirectly; this is presumed when the capital of a company is held by a limited number of partners and shareholders who jointly designate the management bodies for a common policy,

they maintain predominant business relations between them (subcontracting, franchise …).

When the institution can prove that the risks taken on the natural or legal persons referred to in the preceding paragraphs are sufficiently independent of each other, it may not consider them as a single beneficiary.

However, the General Secretariat of the CSBF may, when it considers that prudential rules require it, consider a set of clients as a single beneficiary if the links uniting these clients appear to impose it.

Article 12

Level 2 and Level 3 MFIs must be able to justify at any time that the total amount of risks incurred on a single beneficiary does not exceed 10% of their available own funds. For mutualist MFIs organized in a network, the risk division ratio must be respected at the level of each affiliated institution. The General Assembly of the grouping structure sets the rule regarding risk division on affiliated institutions. This rule must be validated beforehand by the General Secretariat of the CSBF.

Article 13

For the application of Article 12 above, a declaration established according to the model in the annex at the date of the accounting situation closing is sent to the General Secretariat of the CSBF in accordance with the procedures of the instruction on the financial transparency of MFIs. In the event of unavailability of supporting elements on the data admitted for deduction from the risk base, the calculation will be performed in the most unfavorable hypothesis.

Section III Credits to Managers

Article 14

Level 2 and Level 3 MFIs must respect, at all times, a maximum ratio of 15% between the cumulative commitments, direct or indirect, in favor of the members of their corporate and executive bodies as per the current instruction, and the amount of available own funds.

For mutualist MFIs organized in a network, this ratio must be respected by each affiliated MFI and by the grouping structure(s).

The statutory auditors of the MFI are not authorized to contract credits from it.

Commitments are taken into account after authorized deductions and application of the weightings defined in the previous section.

Article 15

For the application of Article 14 above, a declaration established according to the model in the annex at the date of the accounting situation closing is sent to the General Secretariat of the CSBF in accordance with the procedures of the instruction on the financial transparency of MFIs.

In the event of unavailability of supporting elements for the data admitted for deduction from the risk base, the calculation will be performed in the most unfavorable hypothesis.

Section IV Miscellaneous Provisions

Article 16

The CSBF may authorize an institution to temporarily derogate from the provisions of this instruction by granting it a deadline to regularize its situation.

Article 17

When a Level 2 or Level 3 MFI is in an irregular situation vis-à-vis the regulation on minimum capital or the rule of representativeness of minimum capital or when its own funds are negative, notwithstanding the decision of the CSBF, it must immediately suspend any new grant of credits, unless the guarantee fund mechanism previously authorized by the General Secretariat of the CSBF is implemented, and take all measures to comply with the current regulation. For institutions organized in a network, the entire device must be taken by the central body.

Section V Transitional and Final Provisions

Article 18

Institutions already operational, in excess of the standards set in the previous sections, must regularize their situation within a period of six (6) months after the classification decision or the authorization decision.

Article 19

This instruction enters into force upon its notification to the professional association.

Made in Antananarivo, on November 14, 2008

For the Banking and Financial Supervision Commission, The President,

Frédéric RASAMOELY

ANNEXES:

Annex prudential standards Level 2 and 3 MFIs

Annex prudential standards Level 2 and 3 MFIs network

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