Instruction No. 14 to Banks: Prudential Management Standards

INSTRUCTION No. 14 TO BANKS

Modification No. 3, effective July 29, 2003. Concerns: PRUDENTIAL MANAGEMENT STANDARDS

Pursuant to the provisions of Title Three of Law No. 003/2002 of February 2, 2002, relating to the Activity and Control of Credit Institutions, the Central Bank of the Congo issues the following standards to be respected by said institutions in the course of their management.

TITLE I. MINIMUM CAPITAL

Article 1 Banks are required, at the time of their registration on the list of approved banks, to have paid-up capital to the extent of a minimum amount of USD 1.5 million fixed by the Central Bank of the Congo. This amount constitutes a floor, and the Issuing Institute, at the time of approving a bank, reserves the right to require more based on the activity forecasts submitted to it.

Existing approved banks must ensure at all times that their prudent own funds ensure the required level of solvency.

Any bank must justify at all times that its assets effectively exceed by an amount at least equal to the minimum capital its liabilities to third parties.

The own funds of banks as defined in Title II below cannot, at any time, become lower than the amount of the minimum capital.

Article 2 For the purposes of paragraph 3 of Article 1 above, the constituent elements of the balance sheet assets and liabilities are:

Total balance sheet assets less the following items: Code 301: Unpaid capital 302: Deferred charges (start-up costs) 4040: Subsidiary holdings in credit institutions 80: Negative result of the current fiscal year -: Negative brought forward 83: Unapproved negative results

Total balance sheet liabilities: less the following items: Code 518: General provisions 53: Subsidies 54: Reserves 55: Share premiums 56: Share capital 80: Positive result of the current fiscal year 82: Positive brought forward 84: Unapproved positive results -: Subordinated loans (quasi-capital)

TITLE II. PRUDENTIAL OWN FUNDS

Article 3 For the purposes of this Instruction, the prudent own funds of banks consist of the sum:

• of core own funds (core tier 1)
• of supplementary own funds

Core own funds consist of the following elements: Code 518: General provisions 541: Legal reserves 542: 75% of legal revaluation reserves of fixed assets up to December 31, 2001 543: Other Reserves 55: Share premiums 56: Share capital (subscribed) 80: Positive result of the current fiscal year if certified by the Statutory Auditors or by an external audit, provided it includes all charges, provisions, amortizations, and corrections of values related to the period and deducts foreseeable taxes, and advance payments on dividends or dividend forecasts 82: Positive brought forward 84: Unapproved positive results, up to 50%.

Less: the following asset accounts: Code 301: Unpaid capital 302: Deferred charges (start-up costs) 80: Negative result of the current fiscal year -: Negative brought forward 83: Unapproved negative results

• Other expenses and intangible assets;
• Any provision required by the Central Bank and not yet constituted by the bank concerned;

Supplementary own funds include the following elements: Code 53: Unearmarked subsidies 542: Revaluation reserves of fixed assets, including the 25% of revaluation reserves prior to 2002 and the entirety of those subsequent to 2001 -: Subordinated loans (quasi-capital)

Article 4. A subordinated loan is a financial commitment contracted by a financial institution with a lender, notably to strengthen its financial structure.

To be acceptable, an indefinite-term subordinated loan must meet the following conditions:

• It must be previously approved by the Supervisory Body of the Central Bank of the Congo, which reserves the right to consult the supervisory authority of the lender's country;
• The initiative for repayment must come from the borrower based on its capabilities and with the agreement of the Central Bank of the Congo;
• The interest rate is a preferential rate compared to that practiced on the financial market for the transaction; its payment is conditional upon the existence of a profitable financial situation;
• It can be converted into capital contribution;
• The repayment of the loan is subordinate to that of all other classic creditors;
• The savings realized from the non-repayment of the subordinated loan and related charges, within the limits of the deadlines set by the borrower, must, in case of losses, be available and used to absorb said losses without however affecting the continuation of the bank's activities.

In the case of deadlines, in addition to the conditions described above, the subordinated loan must:

• Have an initial duration of at least 5 years;
• Provide for an annual discount or progressive reduction during the last five years to reflect its increasingly less significant contribution to the solidity of the bank's balance sheet.

Article 5. Supplementary own funds can only be included in prudent own funds up to a limit of 100% of the amount of core own funds.

Article 6 Holdings held in credit institutions as well as loans and guarantees in favor of directors and major shareholders are deducted from prudent own funds.

TITLE III. SOLVENCY

Article 7. Banks are required, in the management of their resources, to respect a ratio of at least 10% between prudent own funds and the total banking risks included in Article 8 below.

Article 8. The ratio thus established consists of the following elements:

1. Numerator: Prudent own funds as defined in Title II above.
2. Denominator: Banking risks.

Banking risks on and off the balance sheet are affected by weighting coefficients of 0%, 20%, 25%, 50%, 80%, and 100%, the detailed situation of the accounts concerned being reproduced in the annex.

TITLE IV. DIVISION OF RISKS

Article 9 Banks must justify at all times that:

• The total amount of risks incurred on the same beneficiary or the same signature does not exceed 25% of their prudent own funds;
• The total amount of risks incurred on beneficiaries whose risks exceed for each of them 15% of the prudent own funds of said banks does not exceed 800% of these same own funds.

Considered as the same beneficiary or same signature:

• Natural or legal persons who constitute a set from the risk point of view because one of them holds, directly or indirectly, a power of control over the other or others, notably exclusive, joint control, or significant influence;
• 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 any of the following cases:
  • The persons are related in the first degree;
  • The persons are subsidiaries of the same parent company;
  • The persons are subject to common de facto management;
  • Each of the persons is a local authority or a public establishment, and one depends financially on the other.
• 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 10 The notion of prudent own funds to be taken into consideration is that defined in Article 3 of Title II above.

Regarding risks, it is necessary to retain the risks as defined in Article 8 of Title III.

Furthermore, banks are required to attach to their declaration to the Central Bank a detailed statement of loans granted on the same set of counterparties exceeding 10% of the prudent own funds of the institution.

TITLE V. SUPERVISION OF FOREIGN EXCHANGE POSITIONS

Article 11

Banks are required, in the management of their resources and uses, to respect permanently: a) a maximum ratio of 5% between the amount of their long or short position in each foreign currency and the amount of their prudent own funds; b) a maximum ratio of 15% between the amount of their long or short position in the aggregate of currencies and the amount of their prudent own funds.

Article 12 The ratio thus established consists of the following elements:

1. Numerator: Net foreign exchange position The net foreign exchange position is determined by the difference between assets and liabilities based on the following elements:

• Asset and liability items denominated in foreign currencies;
• Off-balance sheet items denominated in foreign currencies.

However, the following items are excluded:

• Operations for which the foreign exchange risk is borne by the State;
• Structural positions, i.e., tangible and intangible fixed assets, subsidiary and participation securities, as well as provisions for branches abroad.

1. Denominator: Prudent own funds as defined in Title II above.

TITLE VI. LIQUIDITY

a) Immediate Liquidity

Article 13 Banks are required, in the management of their resources and uses, to respect a minimum Cash ratio of 80% between the total availability and the total demand resources as included in Article 14 below.

Article 14 The ratio thus established consists of the following elements:

1. Numerator: Available Uses Code 10: Cash 111: Central Bank, available accounts 121: Money market interventions, overnight loans 131: Interbank market, overnight loans against public or private bills 141: Banks and other private financial institutions, current accounts 148: Banks and other private financial institutions, funds received from the Central Bank, foreign aid 204: Customer credits, commercial bills rediscounted up to 95%

2. Denominator: Resources Code 111: Central Bank, debit balance of current account 115: Central Bank, rediscount 124: Money market interventions, overnight borrowings against public or private bills 135: Interbank market, overnight borrowings against public or private bills 14: Banks and other financial institutions, current accounts 20: Resources from customers on demand 281: Other resources from customers, savings accounts.

b) Short-term liquidity

Article 15 Banks are required, in the management of their resources and uses, to respect a minimum ratio of 80% between their liquid assets or assets that can be made liquid quickly through mobilization and the total of their short-term debts.

Article 16 The ratio thus established consists of the following elements for amounts remaining to run for less than one year:

1. Numerator: Liquid or short-term mobilizable assets a) Balance sheet assets Code 10: Cash 111: Central Bank, available accounts 112: Central Bank, assimilated securities 113: Central Bank, short-term account 121: Money market interventions, overnight loans 122: Money market interventions, short-term loans 131: Interbank market, overnight loans against public or private bills 132: Interbank market, short-term loans against public or private bills 141: Current accounts of banks and other private financial institutions 142: Credits to banks or short-term accounts 143: Credits to banks or medium and long-term accounts 147: Foreign exchange hedges for documentary credits 148: Funds received from the Central Bank, foreign aid 161: Transit operations for the Treasury Account 162: Postal Check Office 163: Other public financial institutions short-term 165: Advances on taxes 167: Fiscal stamps 168: Non-financial non-productive administrative bodies short-term 17: Treasury bills and assimilated securities, up to 95% 201: Customer credits short-term, current accounts overdrafts - companies 203: Customer credits short-term, current accounts overdrafts - individuals 204: Customer credits short-term, commercial bills rediscounted up to 95% 205: Customer credits short-term, commercial bills not rediscounted 206: Customer credits short-term, other short-term credits allocated 207: Customer credits short-term, other short-term credits unallocated 231: Non-financial productive public organizations, short-term 241: Non-financial productive public organizations, short-term prorogued 251: Special credits, financing of credit sales short-term 253: Special credits, subsidiary or controlled enterprises short-term 255: Special credits, administrators and directors short-term 257: Special credits: Personnel short-term 32: Values in collection 353: Asset regularization accounts, products to be received 371: Coupons and securities due to be collected on securities transactions 401: Securities portfolio, public funds maturing in less than one year 402: State-guaranteed loans short-term 403: Short-term placements 405: Securities held for less than one year.

b) Off-balance sheet assets

Code 20: Commitments received from financial intermediaries, up to 5%; 50: Real guarantees received outside the money market, up to 5%.

Regarding refinancing commitments received from credit institutions, the agreements relating to them must include a written clause of irrevocability for a duration of 6 months and be submitted for approval to the Central Bank - Supervision of Financial Intermediaries Directorate.

2. Denominator: The short-term passive items below: a) Balance sheet liabilities Code 111: Central Bank, demand accounts 113: Central Bank, short-term accounts 114: Central Bank, medium-term accounts: maturities due short-term 115: Central Bank, rediscount 124: Money market interventions: overnight borrowings against public or private bills 125: Borrowings of more than three months maximum against public or private bills 126: Borrowings of more than three months and six months maximum against public or private bills 127: Borrowings of more than six months and one year maximum against public or private bills, short-term maturities 128: Borrowings of more than one year against public or private bills 135: Interbank market: Overnight borrowings against public or private bills 136: Borrowings of more than three months maximum against public or private bills 137: Borrowings of more than three months and six months maximum against public or private bills 138: Borrowings of more than six months and one year maximum against public or private bills 139: Borrowings of more than one year against public or private bills, maturities due short-term 141: Banks and other financial institutions, current accounts 151: Banks and other financial institutions, liability accounts up to three months maximum 152: Banks and other financial institutions, liability accounts of more than three months and six months maximum 153: Banks and other financial institutions, liability accounts of more than six months and one year maximum 154: Banks and other financial institutions, liability accounts of more than one year, maturities due short-term 161: Treasury and public establishments, transit operations for the Treasury Account 162: Treasury and public establishments, other financial institutions short-term, maturities due short-term 166: Taxes and social laws 20: Resources from customers on demand 271: Term customer resources, accounts and bonds, companies – three months maximum 272: Term customer resources, accounts and bonds, individuals – three months maximum 273: Term customer resources, accounts and bonds, companies – six months maximum 274: Term customer resources, accounts and bonds, individuals – six months maximum 275: Term customer resources, accounts and bonds, companies – of more than six months and one year maximum 276: Term customer resources, accounts and bonds, individuals – of more than six months and one year maximum 277: Term customer resources, accounts and bonds, companies – of more than one year, maturities due short-term 278: Term customer resources, accounts and bonds, individuals – of more than one year, maturities due short-term 281: Other resources from customers, savings accounts 282: Other resources from customers, unavailable accounts 30: Various creditors 33: Accounts payable after collection 362: Products received in advance 363: Charges to be paid 364: Bills sent for collection discount. 52: Bonds: 5 years minimum, maturities due short-term.

b) Off-balance sheet liabilities

Code 10: Commitments in favor of or on behalf of financial intermediaries, up to 25% 31: Commitments in favor of or on behalf of customers 40: Real guarantees granted outside the money market

TITLE VII. TRANSFORMATION RISK ON MEDIUM AND LONG TERM

Article 17. Banks are required to respect a minimum ratio of 80% between, on the one hand, permanent capital and, on the other hand, the book value of fixed assets.

However, prudent own funds must fully cover tangible fixed assets.

Article 18 The ratio thus established consists of the following elements of resources and uses whose initial duration is greater than 1 year or for the fraction of the period remaining to run for more than 1 year:

1. Numerator: Permanent capital a. Prudent own funds as defined in Title II above. b. Medium and long-term resources. Code 114: Central Bank, medium-term accounts 128: Money market interventions borrowings of more than one year against public or private bills 139: Interbank market, borrowings of more than one year against public or private bills 154: Banks and other financial institutions, liability accounts borrowings and term accounts 164: Treasury and public establishments, other establishments medium and long-term 277: Resources from customers term, accounts and bonds, companies of more than one year 278: Resources from customers term, accounts and bonds, individuals of more than one year 52: Bonds: 5 years minimum.

• Average demand deposits calculated over a one-year period.

2. Denominator: Fixed assets Code 21: Medium-term credits 22: Long-term credits 232: Credits to non-financial productive public organizations medium-term 233: Credits to non-financial productive public organizations long-term 242: Prorogued credits medium and long-term 252: Special credits, financing of sales medium and long-term 254: Special credits, subsidiary or controlled enterprises medium and long-term 255: Special credits, credits to administrators and directors medium and long-term. 258: Special credits, personnel medium and long-term 26: Litigious credits 404: Securities portfolio, subsidiary holdings 45: Net fixed assets

TITLE VIII. LIMITATION OF HOLDINGS

Article 19 Banks are required, in the management of their resources, to respect one or the other of the following limits in the context of taking holdings in the capital of a company:

• each holding may not exceed 15% of prudent own funds as defined in Title II above;
• the aggregate of holdings may not exceed 60% of the prudent own funds of the bank concerned.

Holdings are considered at their net book value.

Article 20

For the purposes of this Instruction, holdings are considered as securities that confer at least 10% of the capital or voting rights in a company or that allow exercising, directly or indirectly, tangible influence on the management and financial policy of a company.

This is the case for holdings that an institution holds through portfolio or investment companies.

The limits imposed in Article 19 do not apply to:

• holdings held in credit institutions subject to regulation;
• holdings in companies whose activity constitutes a prolongation of the activity of the holding bank or consists, either in the holding of fixed assets affected to the operation of the establishment, or in the provision of services necessary to the operation of the bank;
• securities held on behalf of third parties pursuant to a formal agreement involving an irrevocable purchase commitment received from a third party, up to the funds received from third parties by the bank to cover the transaction.

TITLE X FINAL PROVISIONS

Article 21

Banks are required to respect these standards permanently. They must calculate and declare to the Central Bank of the Congo, Supervision of Financial Intermediaries Directorate, the above ratios indicating details on the calculation method of each.

The transmission to the Central Bank of the data indicated in the above paragraph must be done as follows:

• daily: the immediate liquidity ratio
• weekly: the foreign exchange position supervision ratios
• monthly: all other ratios

Article 22 Banks have six months from the publication of this Instruction to permanently comply with the ratios provided for.

Banks that do not respect the minimum or maximum ratios thus determined are subject, at the discretion of the Central Bank of Congo, either to a penalty equal to 1% of the shortfall or excess between the required standard and the ratio observed at the end of each month, or to one of the sanctions provided for in Article 77 of Law No. 003/2002 of February 2, 2002, relating to the Activity and Control of Credit Institutions.

Banks admitted to the Special Restructuring Regime as renewed to date are exempt from penalties during the legal period of their restructuring provided that the banking supervisory body is convinced of the proper execution of the restructuring plan.

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Article 23 The bank that does not respect the provisions of paragraph 2 of Article 1 is required to present appropriate corrective measures to the Central Bank within a period of 60 days from the date of the finding. Beyond this period and in the absence of presentation of the aforementioned measures, the penalty provided for in Article 22 will apply.

Article 24 This Instruction, which enters into force on the date of its signature, abrogates all prior provisions contrary to it.

Done in Kinshasa, on July 29, 2003 J-C MASANGU MULONGO Governor