Instruction on Conducting Inspectorial Reviews of Non-Bank Financial and Credit Organizations and Other Legal Entities Supervised by the National Bank of the Kyrgyz Republic

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Date of Creation: 2025-01-27

Annex
to the Resolution of the Board of the National Bank of the Kyrgyz Republic dated August 17, 2022 No. 2022-P-33/52-2-(NFKU)

INSTRUCTION on conducting inspectorial reviews of non-bank financial and credit organizations and other legal entities supervised by the National Bank of the Kyrgyz Republic

(As amended by the Resolutions of the Board of the National Bank of the Kyrgyz Republic dated December 27, 2023 No. 2023-P-12/82-7, and January 22, 2025 No. 2025-P-12/2-3-(NFKU))

1. General Provisions

2. This Instruction on conducting inspectorial reviews of non-bank financial and credit organizations (hereinafter - NFKO) and other legal entities supervised by the National Bank of the Kyrgyz Republic (hereinafter - Instruction) is developed for the purpose of exercising supervision and regulation by the National Bank of the Kyrgyz Republic (hereinafter - National Bank) over the activities of microfinance organizations not attracting deposits and credit unions, including those operating in accordance with Islamic principles of banking and financing, specialized financial institutions, housing savings credit companies, guarantee funds, credit bureaus (hereinafter - non-bank organizations) and exchange offices (hereinafter - EO).

3. Supervision over non-bank organizations is a cycle consisting of planning, inspection, monitoring, and interaction, providing for cooperation between the supervisory authority (National Bank) and non-bank organizations/EO. At each stage of the supervisory cycle, the National Bank assesses how effectively the management of non-bank organizations and EO identifies, evaluates, and manages risks.

4. This Instruction defines the main objectives and types of inspectorial reviews of non-bank organizations and EO, and establishes mandatory requirements imposed on non-bank organizations and EO in connection with the conduct of their activity reviews.

5. For the purposes of this Instruction, the following abbreviated designations and terms are used:

a) Microfinance organization (hereinafter - MFO) – is a specialized financial and credit or credit organization established as a legal entity for the purpose of providing microfinance services to individuals and legal entities, including in accordance with Islamic principles of banking and financing;

b) Microfinance company (hereinafter - MFC) is a specialized financial and credit organization established in the form of a joint-stock company, having received a license from the National Bank and carrying out micro-lending to legal and natural persons and other types of operations, including attracting term deposits from individuals and legal entities as provided by the Law "On Microfinance Organizations in the Kyrgyz Republic";

c) Microcredit company (hereinafter - MCC) is a specialized financial and credit organization established in any organizational-legal form of a commercial organization, having received a certificate from the National Bank and carrying out micro-lending to natural and legal persons and other types of operations as provided by the Law "On Microfinance Organizations in the Kyrgyz Republic";

d) Microcredit agency (hereinafter - MCA)
– is a specialized credit organization established in the form of a non-commercial organization, with exceptions established by the Law "On Microfinance Organizations in the Kyrgyz Republic", having received a certificate from the National Bank and carrying out micro-lending to natural and legal persons in accordance with the statutory objectives of the organization;

e) Specialized financial institution (hereinafter - SFI) is a financial institution carrying out foreign currency exchange activities;

f) Housing savings credit company (hereinafter - HSCC) is a non-bank financial and credit organization holding a license to conduct certain banking operations, whose activities are aimed at accumulating depositors' funds in housing savings deposits (deposits) and providing its depositors with loans for individual construction, purchase of residential houses or apartments, or for improving housing conditions within state housing programs;

g) Guarantee fund (hereinafter - GF) is a legal entity established in the form of a joint-stock company, having undergone registration procedures at the National Bank and carrying out guarantee activities;

h) Credit union (hereinafter - CU) is a financial and credit organization established in the form of a cooperative for the purpose of assisting its participants (members) by merging their personal savings and using them for mutual lending, as well as providing other financial services, including in accordance with Islamic principles of banking and financing;

i) Credit bureau is a legal entity, being a commercial organization, providing services for the exchange of credit information based on a license;

k) Exchange office is a specially equipped point created by a legal entity for conducting exchange operations with cash foreign currency, carried out in accordance with the license of the National Bank;

l) Supervisory body is the management body of an NFKO, carrying out general management of a non-bank organization (Board of Directors/Supervisory Board/etc.);

m) Executive body is the management body of a non-bank organization, carrying out current management of a non-bank organization (Board/Management/Managing Director/etc.);

n) Exchange operations with cash foreign currency are operations for the purchase, sale and exchange of cash foreign currency carried out based on a corresponding license of the National Bank;

o) Inspection group is employees of the National Bank authorized based on corresponding documents to conduct an inspectorial review of a non-bank organization supervised by the National Bank.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated January 22, 2025 No. 2025-P-12/2-3-(NFKU))

2. Objectives of Inspectorial Reviews

3. The main objectives of conducting reviews of the activities of non-bank organizations and other legal entities supervised by the National Bank are mainly:

a) identifying risks that may threaten their sustainability and stability; b) evaluating risk management; c) analyzing compliance with and adherence to legislative requirements and regulatory acts of the National Bank, including on consumer protection in financial services and combating terrorist financing and money laundering (hereinafter - CTF/AML); d) evaluating the reliability of reports submitted to the National Bank; e) evaluating the implementation of recommendations and directives from previous reviews to eliminate identified deficiencies; f) other areas of activity depending on risks.

6. The main objectives of conducting reviews of the activities of exchange offices are mainly:

a) analyzing compliance with and adherence to legislative requirements and regulatory acts of the National Bank, including on consumer protection in financial services and combating terrorist financing and money laundering; b) evaluating the reliability of reports submitted to the National Bank; c) other areas of activity depending on risks.

3. Types of Inspectorial Reviews

4. Depending on the set objective, inspectorial reviews may be comprehensive (for evaluating risks of non-bank organizations) and targeted (for reviewing and more thoroughly examining individual aspects of the activities of non-bank organizations).

5. Inspectorial reviews of EOs may be targeted (for reviewing and more thoroughly examining individual aspects of EO activities) and raid-based (to identify facts of conducting cash foreign currency exchange without a corresponding license from the National Bank).

Targeted reviews are conducted to review and more thoroughly examine individual aspects of the activities of a non-bank organization and EO.

9. Reviews of EOs may be conducted with the involvement of state bodies of the Kyrgyz Republic.

In case of conducting reviews of EOs with the involvement of state bodies of the Kyrgyz Republic, a person responsible for coordinating National Bank employees and representatives of state bodies, document preparation, and forming inspection groups is determined.

Following the conducted reviews, the issue of applying impact measures is considered in accordance with the legislation of the Kyrgyz Republic.

10. Reviews of non-bank organizations may be both with prior notice and sudden (without prior written notice about the upcoming review).

In case of conducting an inspectorial review with prior notice, the National Bank sends a notification (Annex 1) to the reviewed organization with an attached list of necessary documents presented by the inspection group, no later than 3 working days before the start of the review.

Conducting all inspectorial reviews is possible only upon presentation by National Bank employees of a review directive (Annex 2) upon arrival at the non-bank organization.

Reviews of EOs may be conducted without prior notice upon presentation by National Bank employees of a copy of the EO review directive (Annex 3) upon arrival at the EO.

11. Review directives for non-bank organizations and EOs are signed by the head of the corresponding structural division of the National Bank responsible for supervision over non-bank financial and credit organizations (hereinafter - SD) or the head/director of the regional management/representative office of the National Bank in the Batken region (hereinafter - RM).

12. The duration of conducting inspectorial reviews is no more than 35 working days. If necessary, the review period may be extended by signing an additional review directive by the head of the corresponding SD/RM.

At the same time, the total duration of conducting inspectorial reviews may not exceed 60 working days.

13. The frequency of conducting inspectorial reviews is determined by the National Bank. Depending on the situation/circumstances, the National Bank may plan more frequent reviews (for example, upon borrowers' complaints, during deterioration of activities, upon appeals by law enforcement agencies, and others).

14. Conducting an Inspectorial Review

15. Upon arrival at the review site, the review head conducts a meeting with a member of the executive body of the non-bank organization in order to:

a) hand over the review directive; b) discuss the review process; c) present the inspection group; d) determine methods for contacting the management and staff of the non-bank organization.

Upon arrival at the review site, the review head conducts a meeting with the management/staff of the EO in order to:

a) hand over the review directive; b) present the inspection group; c) determine methods for contacting the management and staff of the EO.

15. In case of refusal of access to a non-bank organization/EO or the provision of any type of obstruction to conducting an inspectorial review, the inspection group must prepare a Report on Obstruction to Conducting the Review (Annexes 4 and 5).

16. On the first day of a comprehensive review, the non-bank organization is obliged to provide all documents specified in the list attached to the notification, as well as other requested information. Within a targeted review, the non-bank organization is obliged to present all requested information and documents.

The EO at the time of the review is obliged to provide documents and information requested during the conduct of the review.

In case a non-bank organization or EO refuses to present any documents from the list or documents required during the review process, or if the non-bank organization or EO is unable to present these documents, it is obliged to submit a written justification of the refusal or inability to present them, which is immediately reported to the heads of the corresponding department conducting supervision over non-bank financial and credit organizations SD (hereinafter - Supervision Department)/Supervision Department of RM (hereinafter - SD RM) and SD/RM.

17. In case of refusal or unjustified delay in providing requested documents and information, and if the non-bank organization or EO refuses to provide such justification or due to unreasonableness of the reasons for refusal, the inspection group has the right to prepare a Report on Obstruction to Conducting the Review (Annexes 4 and 5).

18. In case it turns out upon the arrival of inspectors that a non-bank organization or EO is not located at its registered address, this fact is recorded by the inspection group with subsequent application of corresponding impact measures to the non-bank organization or EO.

19. The management of a non-bank organization must provide comprehensive assistance to the inspection group and ensure compliance with the following conditions:

a) the inspection group must have free access to the premises of the non-bank organization, to all employees, documentation, and records necessary for conducting an inspectorial review; b) the inspection group must timely receive all information necessary for conducting an inspectorial review and obtain necessary clarifications and/or explanations from any employee of the non-bank organization who is a specialist in this field; c) the inspection group must be provided with a separate room free of audio/video devices performing audio/video recording. Any attempts by third parties to install audio/video equipment in the room provided to the inspection group of the National Bank must be prevented. The absence of audio/video devices performing recording must be confirmed in writing by one of the members of the executive body; d) ensure the safe storage of documents of the non-bank organization and the inspection group of the National Bank, and provide these persons with equipment and technology (if available) necessary for conducting the review; e) in case of the absence of copying equipment and refusal by employees of the non-bank organization to accompany the inspector outside the premises for document copying, the inspector, when removing documents from the non-bank organization's premises, must obtain a signature from the responsible employee of the non-bank organization certifying that documents are removed for copying, and upon return of the document obtain another signature confirming that all documents have been returned; f) for the prompt and effective resolution of administrative and other issues raised during the review, as well as coordination of relations between the non-bank organization and inspectors, a responsible person is appointed from the non-bank organization.

20. Inspectors may request documents of the non-bank organization, not limited to those specified in the list of documents and information provided by the non-bank organization for review, related to the fulfillment of their assigned tasks, and may also request duly certified copies or extracts from necessary documents and require the presentation of explanations regarding documents by the non-bank organization. In fulfilling assigned tasks, the inspection group may conduct discussions on issues arising during an inspectorial review with responsible employees of the non-bank organization.

21. If necessary, the head of the inspection group may conduct a meeting with the supervisory body.

22. In case violations and deficiencies in other areas of activity of a non-bank organization are identified during the review, which were initially not provided for in the review program, as well as upon establishing facts of violation of the legislation of the Kyrgyz Republic, the review periods may be extended in accordance with paragraph 12 of this Instruction.

23. The EO, upon request of the inspection group, is obliged to provide access to all data recorded by technical means having photo- and video-recording functions, available at the EO. In case of refusal to provide such data, the inspection group prepares a Report on Obstruction to Conducting the Review (Annex 5).

24. During the review of a non-bank organization and EO, the inspection group has the right to require opening all possible storage places for cash (cabinets, shelves, safes, boxes, etc.) located in the cash office for inspection.

In case cash not accounted for in the EO's cash register is found in the above-mentioned places, it must be counted, and data on the results must be entered into the Cash Audit Report of this EO in accordance with internal documents of the National Bank.

25. A Report on Obstruction to Conducting the Review must be signed by a member of the executive body of the non-bank organization or management/staff of the EO. The refusal of a member of the executive body of the non-bank organization or management/staff of the EO to sign the aforementioned report is recorded in it by the inspection group with indication of the reasons for refusal, if any are provided. If reasons for refusal are not provided, the report must contain a note "without indication of reasons (causes)", with mandatory indication of the full name and position of the person.

A Report on Obstruction to Conducting the Review is the basis for applying impact measures in accordance with the legislation of the Kyrgyz Republic.

5. Preliminary and Final Meetings with the Management of a Non-Bank Organization Following an Inspectorial Review

6. No later than the day following the last day of an inspectorial review, the inspection group organizes a preliminary meeting with the executive body and heads of corresponding structural divisions of the non-bank organization (or persons performing their duties) to inform the management of the reviewed organization about the review results and discuss conclusions, draft recommendations, and directives. During this meeting, the reviewed organization is given the opportunity to provide its comments or explanations on certain issues raised by the inspection group regarding reviewed areas of activity.

Following the preliminary meeting, a brief protocol is drawn up, which must be signed by participants within 5 working days from the date of the meeting.

In case of refusal by the non-bank organization to sign the protocol following the meeting, a letter outlining the main issues discussed at the meeting is sent to the non-bank organization.

If necessary, upon completion of the review, the review head or an employee from the inspection group has the right to request additional documents and information regarding the activities of the non-bank organization.

27. A final meeting is conducted with the executive body of a non-bank organization and members of the supervisory body (if necessary), which is organized to inform the executive body of a non-bank organization about the review results, discuss conclusions regarding risks, and present recommendations and directives. The head of SD/RM (or a person acting in his/her place) may attend the meeting if necessary.

During the meeting, the review head must focus maximum attention on those areas that pose the greatest risk to a non-bank organization. In addition, the final meeting gives the executive body of a non-bank organization the opportunity to clarify situations regarding issues that concern the supervisory authority.

If necessary, the review head or an employee from the inspection group has the right to conduct subsequent meetings to discuss issues related to the inspectorial review.

28. At the final meeting, the review head must inform the executive body of MFOs, HSCCs, GFs about conclusions made during the review regarding risks associated with the activities of MFOs, HSCCs, GFs, including an evaluation of their management, violations of legislation and regulatory acts of the National Bank disclosed during the review, and other important issues.

At the final meeting, the review head must inform the executive body of SFIs about conclusions made during the review regarding compliance with requirements for conducting cash operations, violations of legislation and regulatory acts of the National Bank disclosed during the review, including CTF/AML, reliability of reports submitted to the National Bank, and other important issues.

At the final meeting, the review head must inform the management of a credit bureau about conclusions made during the review regarding:

a) ensuring the security of credit history databases; b) the functioning of credit bureau activities; c) ensuring the preservation and reliability of data; d) compliance with requirements for providing credit reports; e) consideration of customer complaints; f) evaluation of credit bureau management; g) violations of legislation and regulatory acts of the National Bank disclosed during the review; h) other important issues.

At the final meeting, the review head must inform the executive management of a credit union about conclusions made during the review, which include:

• all cases of violation of legislation and regulatory acts of the National Bank disclosed during the review;
• conclusions on asset quality;
• conclusions on the profitability of a credit union;
• conclusions on capital adequacy;
• conclusions on liquidity;
• evaluation of management and quality of governance;
• evaluation of the existing accounting and reporting system, information system, and internal control system;
• disclosure of deficiencies in asset classification, formation and maintenance of adequate reserves. It must be indicated that these requirements must be fulfilled before the start of the next reporting period;
• other necessary information.

29. During the final meeting, the review head informs the executive body of a non-bank organization about the need to correct all deficiencies identified during the review, and also discusses acceptable solutions to these problems and their implementation deadlines. Following the discussion, a protocol is drawn up recording all discussed issues, which is signed by the review head and a representative of the executive body of a non-bank organization. In case of refusal to sign the protocol following the meeting, a letter outlining the main issues discussed at the meeting is sent to the non-bank organization.

30. If necessary, following the review, adjustment of financial statements may be requested taking into account materiality in accordance with accepted financial reporting standards.

31. Review Report

32. Following the review, a review report is drawn up reflecting the results of the review in written form for the supervisory body and executive body of non-bank organizations. A review report informs the executive body and supervisory body about the main conclusions and findings of the review, including all significant issues and measures that need to be taken. The report contains all conclusions and issues causing concern for the supervisory authority, as well as recommendations and directives.

A review report also contains the results of risk assessment in the activities of non-bank organizations based on a risk-oriented approach.

Following the review of EO activities by the inspection group, a Review Report/EO Activity Review Certificate is prepared in accordance with internal documents of the National Bank, which is signed by the inspection group and the head/staff of an EO authorized to represent the interests of an EO, in two copies, one of which is transferred to the EO.

(As amended by the Resolution of the Board of the National Bank of the Kyrgyz Republic dated December 27, 2023 No. 2023-P-12/82-7)

32. Based on the review report, recommendations and directives are drawn up, which together with the review report are sent to the supervisory body and executive body of a non-bank organization.