CENTRAL BANK OF MADAGASCAR

BANKING AND FINANCIAL SUPERVISION COMMISSION

INSTRUCTION NO. 003/2019-CSBF ON PRUDENTIAL RATIOS AND MANAGEMENT INDICATORS FOR MICROFINANCE INSTITUTIONS

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The Banking and Financial Supervision Commission (CSBF),

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

Having regard to Law No. 2017-026 of 8 February 2018 on microfinance,

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

Having regard to Instruction No. 001/08-CSBF of 14 November 2008 on the financial transparency of microfinance institutions,

Having regard to the opinion issued by the Professional Association of Microfinance Institutions (APIMF),

DECIDES

Article 1 - Purpose

This instruction aims to define the prudential ratios and management indicators applicable to microfinance institutions, hereinafter referred to as "MFIs".

Article 2 - Definitions

For the purposes of this instruction, the following terms shall mean:

• available own funds, the own funds serving as the reference base for calculating prudential ratios in accordance with the relevant instruction;
• MFI network, the entity formed by an umbrella structure and its affiliated MFIs;
• umbrella structure, the body within a network possessing separate legal personality, responsible for the entire network;
• management, the natural persons residing in Madagascar responsible for the daily management of the MFI, tasked with determining the institution's strategic direction in accordance with the policy defined by the board of directors;
• corporate officers, the directors who are members of the board of directors and the management of affiliated MFIs;
• short term, an initial contractual maturity of less than one (1) year;
• medium term, an initial contractual maturity of one (1) to five (5) years;
• long term, an initial contractual maturity of more than five (5) years;
• non-performing loans, advances and loans granted by MFIs that present a risk of non-repayment or a repayment delay under the conditions set forth in the relevant instruction;
• related party, a natural or legal person, or group of persons, meeting one or more of the following criteria:
  a) member of the Board of Directors and committees established by the Board, including persons representing corporate members of said Board, management of the MFI, and corporate officers of affiliated MFIs; b) shareholder holding a direct or indirect stake in the MFI within the limit set by CSBF instruction; c) member of the Board of Directors of an entity meeting the criteria defined in point b) above; d) spouse, family members in direct line up to the second degree and their respective spouses, or in collateral line up to the third degree of a person referred to in points a), b), and c); e) enterprise in which a person referred to in points a), b), and c) is a member of the Board of Directors and affiliated companies; f) political party in which a person referred to in points a), b), c), or d) is registered as a leading member or founding member of said political party; g) enterprise in which a person referred to in points a), b), and c) holds, directly or indirectly, shares or voting rights within the limit set by CSBF instruction; h) enterprise that the MFI controls directly or indirectly, alone or with other natural or legal persons, within the limit set by CSBF instruction;
• salary advance, an advance payment of a portion of the salary corresponding to work already performed by the employee and cannot exceed the remuneration earned in exchange for work actually completed on the date of the advance request;
• same beneficiary,
  a) all persons whose interests are closely linked, namely:
  * persons with a family relationship up to the first degree, notably the spouse, children, and/or any other person living under the same roof, such as the partner and household employees;
  * members of joint liability guarantee groups;
  * legal entities and their management, when the credit granted to them is intended for the legal entity's activity;
  * natural or legal persons exercising a common activity when the credit granted is intended for that activity;
  b) all natural or legal persons meeting one of the following conditions:
  * the same group of shareholders or partners holds either the majority of voting rights, or the power to appoint the majority of members of the administration, management, or supervisory bodies, or the largest stake without other shareholders or partners each holding more than 5% of the capital, or dominant influence under a management contract, statutory clauses, or de facto;
  * one exercises joint control over the other, directly or indirectly; this is presumed when the capital of an enterprise is held by a limited number of shareholders and partners who jointly designate the management bodies for a common policy;
  * they maintain predominant business relations such as subcontracting and franchising.

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CHAPTER ONE - PRUDENTIAL STANDARDS

Article 3 - Solvency Ratio

3.1. MFIs must permanently maintain a minimum solvency ratio of 15%, represented by the ratio between available own funds and incurred risks.
For MFIs constituted as a network, each affiliated MFI is required to maintain a minimum solvency ratio of 5%. It is the responsibility of the umbrella structure to ensure compliance with this limit. Consolidation rules are those set forth in the Accounting Plan for Credit Institutions (PCEC).

3.2. "Incurred risks" consist of balance sheet assets and off-balance sheet commitments, retained after deducting the items referred to in point 3.3 below and applying the following risk weights:
a) for net balance sheet assets:

• 0% for claims on the Central Bank of Madagascar (BFM) and Treasury Bills and assimilated securities;
• 20% for:
  • cash on hand;
  • claims on banks and electronic money institutions;
  • receivables from credit institutions;
  • other sums due by other credit institutions;
  • all internal treasury operations of the Network, for calculating the solvency ratio of the affiliated MFI as provided in point 3.1, second paragraph;
• 50% for claims on other financial institutions;
• 100% for:
  • claims on other MFIs;
  • advances and loans to customers classified as performing loans under the relevant instruction, and unpaid claims of less than thirty (30) days;
  • accounts of various debtors and regularization accounts, except those linked to identified counterparties to be included in the risk base according to the counterparty's weight;
  • net debtor balance of the branches and agencies headings;
  • active balance of collection accounts;
  • trading portfolios and investment securities, excluding participation in grouping structures for mutualist MFIs constituted as a network;
  • subordinated loans;
  • fixed assets and assets in progress, except those in credit institutions which are directly deducted from own funds;
  • other asset items;
• 150% for:
  • non-performing loans of more than thirty days;
  • doubtful claims on other financial accounts;

b) for off-balance sheet commitments

• 100% for given signature commitments.

3.3. The following are deducted from the incurred risks mentioned in point 3.2, with respect to the corresponding heading:

• guarantee deposits allocated to cover the risk of non-repayment;
• amounts deducted from available own funds as defined by the relevant instruction, notably additional provisions to be set up;
• impairment losses on asset items as well as reserved income;
• the portion of equipment subsidies exceeding the amount taken into account as funds assimilated to available own funds under the relevant instruction;
• the following items, up to either the amount of exposures when the guarantee exceeds them, or the amount of the guarantee when exposures exceed it:
  • sums held as security for these claims, namely blocked deposits, specific provisions;
  • guarantees issued by the Malagasy State and by credit institutions authorized by the CSBF, excluding MFIs.

3.4. The following are deducted, with the express approval of the CSBF General Secretariat:

• guarantees issued by foreign credit institutions, up to 80%;
• guarantees received from other national or foreign financial institutions and MFIs up to 80%;
• any hedging or risk-sharing instrument by lenders retained up to the covered risk;
• partially mutualized guarantee funds or assimilable resources provided that the coverage of this fund represents at least 15% of the guaranteed exposures; otherwise, the deduction is limited to the amount that, when related to the guarantee fund, is covered by the 15% ratio. The acts governing the operation of the partially mutualized guarantee fund are communicated to the CSBF General Secretariat.

The conditions required by the CSBF for taking guarantees or counter-guarantees into account in the solvency ratio calculation are specified in Annex 1 of this instruction. The CSBF may refuse to take a guarantee into account when, in the event of a call on a previously issued guarantee, the guarantor has failed to meet its commitments.

Article 4 - Risk Concentration Ratio

MFIs are required to maintain a maximum risk concentration ratio of 3%, represented by the ratio between incurred risks on the same beneficiary, as defined in Article 2 of this instruction, and available own funds. The ratio is calculated on the basis of consolidated available own funds for MFIs constituted as a network.

Incurred risks include all credits and commitments on the same beneficiary, after deducting the items defined in Articles 3.3 and 3.4 of this instruction and applying the following weights:

• 100% for:
  • performing credits;
  • risk portfolio at thirty days past due;
  • signature commitments;
• 150% for:
  • risk portfolio of more than thirty days net of specific provisions;
  • restructured claims.

Deduction is made up to the amount of risk actually covered, namely within the limit of exposures backed by collateral.
The conditions required by the CSBF for taking guarantees or counter-guarantees into account in the risk concentration ratio calculation are specified in Annex 1 of this instruction. For mutualist networks, the risks of the umbrella structure on affiliated MFIs are not taken into account. In case of breach, in addition to sanctions that may be imposed by the CSBF under Article 17 of this instruction, the credit shall be amortized according to the pace agreed in the contract between the client and the MFI. The MFI cannot grant new credit in violation of the standard, including for debt restructuring purposes. MFIs are required to declare to the CSBF General Secretariat risks on the same beneficiary exceeding 2% of available own funds. Available own funds are those defined in Article 2 of this instruction.

Article 5 - Demand Deposit Coverage Ratio

Deposit and credit MFIs must permanently maintain a minimum demand deposit coverage ratio of 10%, defined by the ratio between cash and demand deposits. "Credit MFIs" are exempt from complying with this ratio. Cash consists of:

• cash on hand;
• short-term loans and claims on the BFM and credit institutions;
• Malagasy Treasury Bills and assimilated securities;
• debtor current accounts of credit institutions and other financial institutions, and other demand accounts opened in other credit institutions and financial institutions.
  Demand deposits consist of current accounts and special-regime savings accounts.

Article 6 - Medium and Long-Term Transformation Ratio

MFIs are required to maintain a minimum medium and long-term transformation ratio of 100%, represented by the ratio between medium and long-term liabilities (MLT) and medium and long-term assets. Medium and long-term liabilities are composed of:

• term borrowings from the BFM, credit institutions, and other financial institutions;
• financing lines obtained from other institutions;
• term deposits;
• cash certificates;
• guarantee deposits;
• other borrowed funds;
• operations on private and public earmarked funds;
• equipment subsidies and other investment subsidies;
• guarantee fund;
• ordinary borrowings from third parties;
• subordinated loans and securities;
• provisions for liabilities;
• capital, reserves, and assimilated elements;
• retained earnings.
  Medium and long-term assets are composed of:
• claims on the BFM;
• term loans and placements with credit institutions and other financial institutions;
• loans and advances to customers;
• operations on private and public earmarked funds.

Article 7 - Fixed Assets Coverage Ratio

MFIs are required to maintain a maximum fixed assets coverage ratio of 50%, defined by the ratio between net fixed assets and available own funds. Fixed assets include intangible, tangible, and financial fixed assets. Fixed assets are retained after deducting:

• any impairment provisions,
• and immobilized values deducted from available own funds, namely:
  • "Participation shares in other credit institutions and assimilated";
  • "Subordinated loans granted to other credit institutions";
  • and "Intangible fixed assets".
    Available own funds are those defined in Article 2 of this instruction.

Article 8 - Risk Limitation Ratio for Shareholders, Corporate Officers, Management, Employees, and Related Parties (AMSDSP)

MFIs are required to permanently maintain a maximum risk limitation ratio for AMSDSP of 10%, represented by the ratio between commitments to AMSDSP and available own funds. Commitments include loans and advances as well as off-balance sheet items, taking into account the deductions provided for in Articles 3.3 and 3.4 and applying the following weights:

• 100% for:
  • performing credits;
  • risk portfolio of less than thirty days;
  • signature commitments;
• 150% for:
  • risk portfolio of more than thirty days net of specific provisions;
  • restructured claims.
    Salary advances granted to employees and credits granted by the umbrella structure to its affiliated MFIs are not taken into account.
    Credits to AMSDSP are granted under conditions similar to those for the entire customer base, except for employees, whose procedures and applied rates are subject to a written document to be submitted to the CSBF for opinion. MFIs are not authorized to grant credits to their statutory auditors. Available own funds are those defined in Article 2 of this instruction.

Article 9 - Risk Limitation Ratio for Participations in Non-Financial Institutions

MFIs are required to permanently maintain a maximum ratio of 25% between the total participations in non-financial institutions and available own funds. Participations in non-financial institutions consist of shares or partnership interests subscribed in any enterprise other than a credit institution, electronic money institution, money transfer company, insurance company, and any other financial institution whose book value in fixed assets is not deducted from available own funds. Shares or partnership interests acquired as part of debt realization are not subject to this ratio for twelve (12) months after acquisition. Available own funds are those defined in Article 2 of this instruction.

Article 10 - Non-Banking Income Limitation Ratio

MFIs are required to maintain a maximum non-banking income limitation ratio of 5%, represented by the ratio between non-banking income and net banking income. Non-banking income essentially includes income arising from training activities, leasing of fixed assets, service leasing, and sales of goods and merchandise not related to the MFI's activities.

Article 11 - Specific Provisions for Mutualist MFI Networks

11.1. Any MFI network benefiting from a collective authorization is subject to consolidated prudential supervision. Compliance with the prudential ratios defined by this instruction is required at the consolidated level. However, the CSBF may require the application of these ratios at the level of each affiliated MFI when it identifies a management imbalance likely to weaken the network's solidity.
The umbrella structure periodically sets, at least semi-annually, the maximum amount of commitment that each affiliated MFI in the network may take on for each type of risk considered in the calculation of the various ratios required by this instruction.
11.2. Any MFI network benefiting from a collective authorization must, upon its creation, establish a Financial Solidarity Fund, hereinafter the Fund. The Fund is intended to strengthen the own funds of affiliated MFIs that do not comply with the solvency ratio set in Article 3 of this instruction.
The Fund is constituted in a specific account opened in the books of the umbrella structure. It is funded by non-refundable annual contributions from affiliated MFIs, based on a levy of 2%:

• of the total net assets and signature commitments for the first year, and
• of the increase in net assets plus signature commitments for subsequent years.
  The Fund's amount must be equal to at least 5% of the network's consolidated net assets. However, the CSBF may require an increase in the Fund's level based on its assessment of the network's financial situation. Own fund strengthening through the Financial Solidarity Fund is done in the form of:
• refundable endowments;
• and long-term subordinated debt eligible as supplementary own funds.
  Upon the MFI's return to compliance with the solvency ratio, only the portion of the endowment representing the excess of available own funds is refundable according to conditions established by the umbrella structure. Affiliated MFIs pay their contributions to this Fund to the umbrella structure no later than six (6) months after the closing date of each fiscal year. Other modalities for funding, managing, implementing, and controlling the Fund are specified in the network's solidarity agreement. A copy of said agreement is communicated to the CSBF General Secretariat.
  11.3. Financial solidarity is unlimited within the network, such that the umbrella structure:
• ensures that affiliated MFIs comply with prudential ratios and prevailing procedures;
• provides the necessary resources to cover the entirety of liabilities, excluding partnership shares subscribed by affiliated MFIs, in the event of liquidation of any of them.
  11.4. The umbrella structure organizes consolidated cash and liquidity management within the network. It offers its services to affiliated MFIs. It is not authorized to directly grant credit to customers.
  Affiliated MFIs are not authorized to make cash placements among themselves or outside the network.

CHAPTER TWO - MANAGEMENT INDICATORS

Article 12 - General Provisions

MFIs must equip themselves with procedural, technical, and analytical management tools enabling them to:

• know their liquidity situation, by branch and consolidated;
• have appropriate information enabling forward-looking liquidity management;
• calculate at any time and prospectively the management indicators defined by this instruction;
• carry out better allocation of resources in the short, medium, or long term, at the level of each MFI in the network;
• consolidate all operations carried out within the MFI.

Article 13 - Management Indicators

MFIs must calculate the following management indicators monthly:

• Capitalization Indicator
  Simplified capitalization ratio: Core own funds / unweighted net assets At net assets, elements deducted from core own funds must be removed.
• Asset Quality Indicators

• Risk Portfolio (PAR) at 1 day past due:
  Unpaid claims from 1 day past due / gross credit portfolio
• Risk Portfolio (PAR) at 30 days past due:
  Non-performing loans at 30 days / gross credit portfolio
• Risk Portfolio (PAR) at 90 days past due:
  Non-performing loans at 90 days / gross credit portfolio
• Risk Portfolio (PAR) at 180 days past due:
  Non-performing loans at 180 days / gross credit portfolio Restructured claims undergoing normal repayment are classified in PAR 30, while those with at least one unpaid installment are classified in PAR 180.
• Annual loss rate on loans (credit portfolio):
  Net annual losses net of recoveries / gross credit portfolio
• Exposure ratio:
  Net non-performing loans (PAR 30 net of provision) / available own funds

• Profitability and Financial Balance Indicators

• AROA: return on assets:
  Annualized net result excluding subsidies / Average assets
• AROE: return on equity:
  Annualized net result excluding subsidies / Average equity
• Operating coefficient:
  Operating expenses (general administrative expenses + depreciation charges) / Net banking income

CHAPTER THREE - DECLARATIVE OBLIGATIONS

Article 14 - Declarative Obligations

MFIs must communicate to the SG/CSBF monthly the declarations relating to the ratios and indicators provided for by this instruction, within a period of thirty (30) days via the tele-declaration system managed by the CSBF and according to the declaration statement models fixed in Annex 2. For mutualist MFIs constituted as a network, all declarations in