Instructions No. 12 of 2023 Regarding the Continuity of the Financial Cycle of the National Economy

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PALESTINE MONETARY AUTHORITY

Instructions No. (12) of 2023
Regarding the Continuity of the Financial Cycle of the National Economy

Based on the provisions of Law-Decree No. (9) of 2010 regarding Banks, particularly Articles (40, 41, 72) thereof, In accordance with the powers delegated to us, And to achieve the public interest, We have issued the following Instructions:

Article (1)
Objective and Scope of Application

1. The provisions of these Instructions aim to contribute to the continuity of the economic cycle by directing credit, covering emergency operating expenses, and reorganizing and evaluating existing credit.
2. The provisions of these Instructions apply to all banks licensed by the Palestine Monetary Authority to conduct banking business.

Article (2)
Procedures and Measures for Dealing with the Credit Portfolio

The bank must comply with the following:

1. Monitor the financial conditions and circumstances of borrowers and evaluate the extent to which their operations are affected by the current conditions.
2. Prepare studies and statistics, implement and evaluate the impact of current conditions on the economic cycle of each sector, and design appropriate procedures to deal with customers according to the degree of impact of economic sectors on the current financial and economic situation.
3. Identify customers and projects whose financial flows and commercial activities have been affected by the current conditions and initiate communication with them to understand their financing needs.
4. Prepare continuous reports on risk levels for exposures affected by current conditions, including any negative developments in the portfolio status, and submit them with management recommendations to the relevant management levels within the bank.

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5. Deal with affected or potentially affected borrower customers from the current economic situation through the following:
   a. Study the possibility of deferring a number of installments expected to mature in the coming months, and grant customers the right to choose the deferral mechanism, either at the end of the loan or by distributing installments over the life of the loan. b. Study the possibility of restructuring existing facilities according to arrangements that suit the customer's repayment capacity and according to the economic cycle of the projects.
   c. Limit the restructuring of existing facilities as much as possible and allow it only for the most affected sectors based on the results of the study prepared by the bank specifically.
   d. Deal flexibly regarding the scheduling of facilities for customers whose source of income has been cut off or whose commercial interests have been destroyed. e. Study the possibility of granting a temporary overdraft limit or a Murabaha limit to customers expected to restore their financial and commercial activity as soon as possible. f. Allow the completion of scheduling processes without requiring customers to pay an advance payment. g. Allow the scheduling of financing in Islamic banks using the Murabaha product with prior approval from the Palestine Monetary Authority.
6. Commit to documenting modifications to facility contracts in accordance with the law and sound banking procedures and principles.
7. Do not increase interest rates or profit margins above what they were before the restructuring or scheduling, when signing a credit restructuring or scheduling agreement.
8. The bank is prohibited from collecting any commissions or fees on a credit restructuring and scheduling agreement.

Article (3)
Granting and Directing Credit

1. Direct the priority in granting new credit to productive and vital projects to ensure the continuity of the financial and economic cycle.
2. Provide emergency financing to support commercial projects whose operations and operational cycle were affected by the current conditions by taking the following steps:
   a. Extend the credit limits granted to customers until the end of the current year or according to the period necessary to enable the borrower to restore commercial activity.

--- b. Allow the increase of overdraft limits and financing limits allocated for working capital financing according to the needs of the projects with the same existing collateral.
c. Address short-term liquidity shortages by enabling affected projects and projects expected to be affected by the current economic situation and assisting them in obtaining liquidity to ensure the continuity of the cycle and economic activity.
d. Provide advice and assistance to customers, especially individuals and small and medium-sized enterprises, to plan the cash flows of these projects and provide appropriate financing solutions to enable them to resume and continue economic activity.
3. Encourage and enable projects affected by the current conditions to benefit from the Sustainability Fund by enabling them to borrow at favorable interest rates.
4. Restrict granting credit outside Palestine and restrict granting credit for consumer purposes.

Article (4)
Dealing with the Gaza Strip Credit Portfolio

The bank must comply with the following regarding the credit portfolio granted in the Gaza Strip:

1. Defer the deduction of loan installments for borrowers residing in the Gaza Strip from the date of issuance of these Instructions until 2024/01/31, after which these installments will be processed according to the following options:
   a. The customer pays the installments within a maximum period of the end of January 2024 without charging the borrower any interest on the deferral during this period. b. Grant the borrower a temporary overdraft limit to pay the due installments.
   c. Distribute the deferred installments over the life of the loan.
   d. Defer the installments to the end of the loan term. e. Use the Murabaha product in Islamic banks to schedule these installments after obtaining the approval of the Palestine Monetary Authority.
2. Obtain the borrower's consent to any of the procedures stipulated in paragraph (1) of this Article.
3. Ensure that the value of the installment does not exceed 50% of the approved income under any circumstances.
4. Take necessary measures to insure the lives of individual borrowers and include current events within the covered causes.

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Article (5)
Asset Quality Monitoring

The bank must comply with the following:
1. Conduct an initial assessment of damages that have occurred or are expected to occur, which will materially affect the risks of the credit portfolio.
2. Continuously evaluate credit portfolio risks and associated fluctuations due to changes in credit quality.
3. Identify risk levels the bank may be exposed to, identify the most affected sectors, and reflect the impact on credit risk migration criteria from one stage to another.
4. Determine the size of the correlation between exposures and defaults in the economic sector or different economic sectors, and take systemic risks into consideration when evaluating and estimating the size of credit losses.
5. Identify and measure risks correctly and accurately, evaluate cases where borrowers may face long-term financial difficulties, and adopt the best possible scenarios to help these cases recover and return to the production cycle.
6. Apply conservative methodologies and mechanisms for calculating expected credit losses on all exposures affected by recent events.
5. Assets whose quality is affected are subject to impairment calculation (Expected Credit Loss) in accordance with the provisions of Instructions No. (2) of 2018 regarding the requirements and guidelines for implementing International Financial Reporting Standard No. 9, and the Expected Credit Loss is charged to the income statement.
6. Hold repeated meetings for relevant committees and risk management committees to discuss any developments or increases in risk levels, and make decisions regarding them in a timely manner.
7. Conduct stress tests to evaluate latent risks associated with the current economic conditions based on the following:
a. Include in the tests different scenarios for the decline in credit quality indicators in some economic sectors according to the results of studies to be conducted by the bank in accordance with the provisions of paragraph (2) of Article (2) of these Instructions. b. Determine the procedures to be taken to limit the worsening and spread of risks to other economic sectors with economic interdependence.
c. Include variables in economic conditions in scenarios for calculating expected credit losses and set assumptions for transitioning to more severe economic conditions.

--- d. Consider applying International Financial Reporting Standards when calculating expected credit losses.
8. Provide the Palestine Monetary Authority with the results of the initial assessment of damages and the increase in risk levels in the credit portfolio in the Gaza Strip, as well as risks resulting from rising unemployment rates, and provide them to the Palestine Monetary Authority within two weeks from the date of issuance of these Instructions.
9. Provide the Palestine Monetary Authority with the results of the implementation of tests and stress tests, methodologies for calculating expected credit losses, and their impact on financial data and capital adequacy ratios as of the end of September and the end of January, respectively, on dates 2023/11/15 and 2024/1/31.

Article (6)
Dealing with Cheques Drawn on Customer Accounts

With due regard to the risks of dealing with cheque deductions and account overdrafts to facilitate cheque payments for customers, the bank must comply with the following:

1. Allow granting the customer a temporary overdraft account to pay the value of cheques drawn on them, provided that this is documented legally.
2. Allow overdrafts for non-borrowing employees upon their request for the value of cheques drawn on their accounts, provided that the value of the cheques does not exceed 50% of the salary value, with the overdraft to be settled when the salary is transferred.
3. Allow customers, upon their request, to overdraft their accounts to pay the value of cheques drawn on their accounts according to the customer's status and credit classification.
4. Grant customers a temporary overdraft to pay the value of cheques drawn on their accounts.
5. Stop collecting fees for returned cheques on cheques drawn on bank branches in the Gaza Strip.

Article (7)
Electronic Channels

The bank must comply with the following:

1. Eliminate all types of fees on the use of electronic applications and point-of-sale terminals in the Gaza Strip, including transfer fees and other electronic services.
2. Allow cash withdrawals through point-of-sale terminals in the Gaza Strip governorates without any fees.

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3. Eliminate cash withdrawal fees from ATMs through the national key (194) in all governorates.
4. Reduce the foreign exchange margin when customers use banking applications.
5. Feed ATMs with the three main currencies (Jordanian Dinar, US Dollar, Israeli Shekel) and keep them operational.
6. Initiate the activation and use of the E-SADAD platform for bill payments and encourage billers to link with the platform.
7. Extend the validity date of expired or expiring ATM cards within the next two months beyond the end of the current conditions, unless technically impossible.
8. Activate and activate the Public Service Center (Call Center) service to provide services and answer public inquiries.
9. Enhance electronic banking services and ensure their effectiveness with an increase in the limits of executed transfers.

Article (8)
Liquidity Provision

1. The bank must comply with the following:
   a. Manage liquidity in accordance with the Palestine Monetary Authority's instructions in force regarding the matter. b. Provide sufficient paper currency to face customer withdrawals.
   c. Continue financing affected projects through the Sustainability Fund.
2. The Palestine Monetary Authority provides the necessary overnight liquidity to help banks in emergency situations.

Article (9)
General Provisions

1. The bank must comply with the following:
   a. Grant priority in credit granting to the most affected economic sectors and sectors related to the continuity of the production cycle and supply chains.

--- b. Apply the bank's credit policies in evaluating the creditworthiness of customers, and it is necessary to include current conditions and scenarios for the expected effects of these conditions when granting new credit, with due consideration for current and future expectations of the borrower's repayment capacity.
c. Encourage borrower customers to fulfill their credit obligations on time as much as possible.
2. Banks are allowed to deal within the mechanisms specified in these Instructions fully or partially in a manner consistent with the borrower's need, interest, and credit status.
3. Islamic banks are allowed to use the Murabaha product to restructure and schedule existing debts for customers affected by current conditions, provided that approval is obtained from the Palestine Monetary Authority regarding the sectors to be included, the size of the portfolio to be Murabaha-ed, and pricing mechanisms.

Article (10)
Implementation and Enforcement

All competent authorities must implement the provisions of these Instructions, each within its respective scope, and they apply from the date of their issuance.

Issued in Ramallah, on 2023/10/25.

Dr. Firas Malham
Governor
[Signature]

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