Instructions No. 18 of 2024 Regarding the Licensing and Regulation Framework for Microfinance Banks

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Palestine Monetary Authority
PALESTINE MONETARY AUTHORITY

Instructions No. (18) of 2024
Regarding the Licensing and Regulation Framework for Microfinance Banks

Based on the provisions of Law No. (9) of 2010 concerning Banks, particularly Articles (3), (6), and (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 establish a general framework for the licensing and regulation of microfinance banks.
2. The provisions of these Instructions apply to all microfinance banks licensed by the Palestine Monetary Authority to conduct banking business in Palestine.

Article (2)
Licensing and Regulation Framework for Microfinance Banks The Licensing and Regulation Framework for Microfinance Banks attached hereto forms an integral part of these Instructions, and every microfinance bank must comply with the application of all provisions contained therein.

Article (3)
Penalties
Anyone who violates the provisions of these Instructions shall be punished in accordance with the provisions of Law No. (9) of 2010 concerning Banks.

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Palestine Monetary Authority
PALESTINE MONETARY AUTHORITY

Article (4)
Cancellation of Conflicts
Everything that conflicts with the provisions of these Instructions is repealed.

Article (5)
Implementation and Enforcement
All competent authorities must implement the provisions of these Instructions, each within its respective scope, and they shall apply from the date of their issuance.

Issued in Ramallah, on the date: 01/12/2024

Dr. Firas Malham
Governor
[Signature]

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Licensing and Regulation Framework for Microfinance Banks

Chapter One
Definitions and General Provisions

Article (1)
Definitions
The words and phrases appearing in this Framework shall have the meanings assigned to them below, unless the context indicates otherwise:

• Person: Natural or legal person.
• Microfinance Bank: The bank that provides microfinance services in accordance with the instructions issued by the Palestine Monetary Authority.
• Bank: Microfinance Bank.
• Branch: A place of business that constitutes a legally subordinate part of the Bank and conducts any of the permitted activities in accordance with the instructions of the Palestine Monetary Authority.
• Key Executive: As defined in the prevailing Banks Law.
• Subsidiary Company: As defined in the prevailing Banks Law.
• Credit: As defined in the prevailing Banks Law.
• Credit Concentration: As defined in the prevailing Banks Law.
• Exposure: As defined in the prevailing Banks Law.
• Related Parties: As defined in the prevailing Banks Law.
• Capital Base: As defined in the prevailing Banks Law.
• Leverage Ratio (LR): The ratio adopted in the international standards issued by the Basel Committee on Banking Supervision (Basel III framework), which is a capital measure (numerator) divided by an exposure measure (denominator).
• Capital Measure: Tier 1 net capital as stated in Instructions No. (8) of 2018 concerning the implementation of regulatory capital requirements according to Basel (3) decisions and Instructions No. (9) of 2018 concerning the implementation of capital adequacy requirements for Islamic Banks.
• Exposure Measure: Total on-balance sheet and off-balance sheet exposures and derivative exposures and securities financing transactions in accordance with the provisions of this Framework.

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• Capital Adequacy Ratio: Capital Base divided by Risk-Weighted Assets.
• Risk-Weighted Assets: The adjusted size of assets according to their risk levels in accordance with the instructions of the Palestine Monetary Authority.
• Capital Base: As defined in the prevailing Banks Law.
• Tier 2: Supplementary capital, which includes risk reserves, general reserves for non-banking operations, revaluation reserve of fixed assets, and eligible subordinated loans.
• Mandatory Reserve Ratio: The percentage determined by the Palestine Monetary Authority of customer deposits held at the Bank.
• Mandatory Reserve: The reserve required from the Bank in all currencies, calculated based on the product of the Mandatory Reserve Ratio, the reserve base, and the average balances.
• Reserve Holding Period: A calendar month starting from the 10th of the month following the reserve calculation period.
• Circulating Currencies: US Dollar, Jordanian Dinar, Israeli Shekel, and Euro.
• Other Currencies: Currencies other than Circulating Currencies, valued in US Dollars according to the monthly exchange rate bulletin issued by the Palestine Monetary Authority at the end of each month.
• Cloud Computing: A remote service provided through the web by a service provider to the user in a shared environment owned by the provider, enabling the user to benefit from various services at any time and anywhere, such as Infrastructure as a Service (IaaS), Software as a Service (SaaS), and Platform as a Service (PaaS).
• Software as a Service (SaaS): Renting software and applications from a service provider according to a pay-per-use model.
• Platform as a Service: Providing an integrated environment for the user including the operating system, programming language execution environment, databases, and web servers, enabling the user to develop, run, and deploy their own applications on the cloud infrastructure and control their settings.
• Infrastructure as a Service (IaaS): Providing the necessary hardware, servers, and technologies to enable the user to deploy, run, and control their operating systems and applications.
• Co-Location Service: Renting space from a service provider to host the Bank's main data center, disaster recovery site, or permanent availability data center, or part thereof, so that it operates without any intervention from the provider, with the provider supplying the space, cooling systems, power, physical protection, and necessary privacy.
• Service Provider: The entity that provides cloud computing or co-location services.
• User: The Bank that uses cloud computing or co-location services.

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• Main Data Center: The space occupied by devices, equipment, and systems through which data is processed and stored, including infrastructure, security, and protection systems.
• High Availability Data Center: A backup data center containing a live copy of systems and data that is exactly identical and available at any time to what exists in the main data center.
• Core Banking System: The system used to provide and conduct banking operations permitted by law, which includes recording, posting, and classifying financial and banking transactions.
• Disaster Recovery Site (DRS): The backup site of the main data center, which the Bank can use temporarily to restore its operations to normal in the event that the main data center suffers any failure or natural disaster leading to a work stoppage.
• Critical Operations: Operations whose interruption cannot be tolerated for a period determined based on a Business Impact Analysis.
• Recovery Time Objective (RTO): The acceptable time period to restore activities, operations, and services after an event occurs.
• Recovery Point Objective (RPO): The maximum allowable amount of data loss for the purpose of resuming critical operations when restoring the service.
• Critical Systems: Systems whose failure or malfunction causes critical operations to fail.
• Data: All information, documents, and records pertaining to a natural or legal person, regardless of their form or source, including transactions and movements, account statements, banking and financial dealings, deposits, trusts, liabilities, and rented safe deposit boxes that the Bank has accessed or obtained.
• Data Confidentiality: Maintaining all data obtained by the Bank, as well as financial transactions and movements, and protecting them from unauthorized access and viewing.
• Data Privacy: Taking all necessary measures and precautions to ensure that no data or information pertaining to a customer is disclosed to any parties or used for other purposes without the prior consent of the customer.
• Business Continuity Management: A comprehensive and continuous management process for business that includes policies, procedures, and plans used to maintain the continuity and resilience of operations and restore them in a timely manner upon encountering any emergency or threat, with the aim of reducing the level of risks and operational, financial, legal, and reputational damages resulting from business disruption.
• Business Continuity Plan: A detailed plan outlining the necessary procedures to guide the Bank to ensure response, recovery, and restoration of systems and operations after an interruption.

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• Business Impact Analysis (BIA): Measuring and analyzing the consequences of the interruption of activities and operations in order to develop necessary recovery strategies by identifying priorities, resources, and requirements needed in the restoration process.
• Maximum Acceptable Outage (MAOs): The maximum time period for the stoppage of operations, services, or products that the Bank can tolerate.
• Event: A situation that can lead to a malfunction, emergency, crisis, or loss.
• Disaster Recovery Plan (DRP): A work plan to restore systems, data, applications, etc., upon the occurrence of an event in order to return to the normal state.
• Crisis Management Plan (CMP): A work plan that determines how to deal with a risk or threat when it occurs, and the procedures required from the Bank and service providers to deal with those risks.

Article (2)
Objective and Scope of Application

1. This Framework aims to regulate the licensing and operation of microfinance banks in Palestine.
2. The provisions of this Framework apply to all microfinance banks licensed by the Palestine Monetary Authority to conduct banking business in Palestine.

Article (3)
Use of the Term Microfinance Bank

1. It is prohibited for any person in Palestine to use the word "Bank" or its synonyms or any other expression resembling it in any language in their documents, publications, commercial address, name, or advertising, unless they hold a license issued by the Palestine Monetary Authority.
2. It is prohibited for any unlicensed person to appear to others as licensed, directly or indirectly, or to advertise themselves as licensed by any means of various media.

Chapter Two

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Licensing

Article (4)
Licensing

1. It is prohibited for any person to provide any microfinance services in Palestine without obtaining prior approval/license issued by the Palestine Monetary Authority.
2. It is prohibited to register any company whose purpose is to provide microfinance services in Palestine with the Companies Registrar unless it obtains prior approval from the Palestine Monetary Authority.
3. The Palestine Monetary Authority may take the necessary measures to verify the accuracy of the information contained in the license application, and the applicant must provide the Palestine Monetary Authority with any data it deems necessary or appropriate to consider the license application.
4. It is prohibited for any person to provide any data or information, whether written or oral, claiming that the Palestine Monetary Authority approves or certifies the accuracy of actions, behavior, financial stability, or the validity of any licensed activities or benefits granted to them.
5. It is prohibited for any person convicted by a final judgment of a felony or misdemeanor involving moral turpitude or honesty to establish a microfinance bank, own a significant share in it, be a beneficial owner of shares, or hold any management position therein.
6. It is prohibited for the Bank to terminate or suspend its business in Palestine, or to stop providing some or all of its permitted services without obtaining prior approval from the Palestine Monetary Authority.
7. It is prohibited for the Bank to open, relocate, suspend, or close a branch inside or outside Palestine without obtaining prior approval from the Palestine Monetary Authority.
8. It is prohibited for the Bank to commence taking any special arrangements for establishing or equipping any headquarters without obtaining prior approval from the Palestine Monetary Authority, including renting or owning real estate.
9. It is prohibited to establish any subsidiary company for the Bank without obtaining prior approval from the Palestine Monetary Authority.

Article (5)

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Bank License Application

Applicants for the Bank license must comply with the following:

1. Submit a license application to the Palestine Monetary Authority according to Appendix No. (1).
2. Pay the license fee in accordance with the provisions of the prevailing Banks Licensing Fees System.
3. The proposed legal form of the Bank must be a public joint-stock company.
4. The drafts of the proposed Articles of Association and Bylaws must comply with the requirements of the prevailing Banks Law and the regulations and instructions issued pursuant to it, and prior approval from the Palestine Monetary Authority must be obtained for them before commencing registration. No amendments may be made to them without obtaining prior approval from the Palestine Monetary Authority.
5. The founders must meet the solvency and fit-and-proper criteria stipulated in Article (6) of this Framework.
6. Submit a strategy and five-year future executive work plans, provided that they include the following:
   a. A clarification of the Bank's strategy for the coming years, mechanisms for achieving specified objectives, and the most important opportunities and challenges. b. Proposed business plans and main lines of action.
   c. A clear framework for managing all types of risks, internal control, and operations.
   d. A plan and policy for business continuity management, crisis management, emergency plans, and disaster recovery. e. Infrastructure requirements for the technological environment and information security in accordance with the provisions of Article (20) of this Framework. f. Outsourcing plans and identification of functions and activities planned to be outsourced to a third party, clarifying the reasons for external outsourcing and the Bank's policy and procedures to control risks that may arise from outsourcing.
7. The founders must submit a financial and economic feasibility study including the purpose of establishing the Bank, the nature of activities and services it will provide, the target segment, market study regarding competitors, financing gaps, financing volume, profit margin, and expected non-performing financing ratios for the first five years, along with estimated budgets for the first five years including the income statement, financial position, and cash flows.

Article (6)

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Solvency and Fit-and-Proper Criteria

1. Founders wishing to establish or contribute to the Bank must provide the Palestine Monetary Authority with the following information and documents:
   a. A recent certificate of non-conviction. b. Clarity of the ownership structure to ensure identification of the beneficial owner and verification of the legitimacy of the source of funds intended to be used to establish or contribute to the Bank or increase its capital.
   c. Financial solvency among the founders and any future partner or shareholder.
   d. Certificates of practical experience demonstrating possession of the necessary professional capabilities and competence to manage and succeed the Bank. e. If one of the founders, partners, or shareholders is a legal entity, the Palestine Monetary Authority must be provided with the following:
   1. A recent certificate proving registration with the competent authority and stating the purposes for which it was established, and a copy of its Articles of Association and internal bylaws certified according to regulations.
   2. Ownership structure, beneficial owner, and approved organizational structure.
   3. Audited financial statements for the last year, certified by a licensed legal auditor.
   4. A framework and rules for combating money laundering and financing of terrorism.
2. The following conditions must be met by founders wishing to license the Bank:
   a. Their number must not be less than (5) five members. b. At least one-third of the members must have experience and academic and practical qualifications in the field of microfinance and the ability to understand the business environment, legal and regulatory environment, information security, cybersecurity, and the risk-based Know Your Customer (KYC) base.
   c. None of them must have caused the collapse or inflicted serious losses on a banking institution, specialized lending institution, or any other financial institution where they served as a key executive or member of its board of directors.
   d. None of them must have declared bankruptcy or been unable to pay their debts unless they have been reinstated. e. None of them must have been convicted by a final court judgment of crimes of theft, fraud, embezzlement, forgery, defamation, bribery, credit misconduct, crimes involving moral turpitude or honesty, public morals, or any money laundering or financing of terrorism crimes.

Article (7)

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Preliminary Approval

1. The Palestine Monetary Authority shall respond to applicants within (30) thirty days from the date of receiving the application regarding the completeness of the application, and the response must include the identification of deficiencies that must be provided to the Palestine Monetary Authority to consider the application.
2. Deficiencies, if any, must be completed within a maximum period of (3) three months from the date of the response; otherwise, the application is considered void.
3. The Palestine Monetary Authority shall issue a decision within the period specified by the provisions of the prevailing Banks Law, either granting preliminary approval or rejecting it, provided that the decision is reasoned in case of rejection.
4. In the event of granting preliminary approval, the Palestine Monetary Authority grants the applicant a time period to complete the requirements for obtaining final approval in accordance with the provisions of the prevailing Banks Law.

Article (8)
Headquarters Preparation

1. Prior approval from the Palestine Monetary Authority must be obtained for the headquarters intended to be used for the Bank's business, and the Palestine Monetary Authority must be provided with the following:
   a. Draft lease contract or title deed including (landlord/owner identity, headquarters area, rent value/property ownership cost, location of the electrical generator, location of the emergency exit, proposed headquarters address). b. Approved detailed engineering plan.
   c. Preliminary Civil Defense approval of the design.
2. Equipping the main headquarters/branch in accordance with the provisions of Appendix No. (8).

Article (9)
Final Approval

For the purpose of obtaining final approval, founders must do the following:

1. Actual payment of paid-up capital.
2. Provide the Palestine Monetary Authority with establishment expenses audited by a licensed external auditor, indicating the percentage of deviation from estimated expenses according to the estimated budgets.
3. Complete company registration procedures according to the law.

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4. Contract key executives in accordance with the prevailing instructions.
5. Provide the Palestine Monetary Authority with the organizational structure, job descriptions, financial and administrative authorities, work procedures, and approved policies.
6. Provide a core banking system in accordance with the instructions regulating the information technology environment issued by the Palestine Monetary Authority.
7. Pay the lump-sum fee according to the Banks Licensing Fees System.

Article (10)
Rejection of Applications

The Palestine Monetary Authority may reject a license application, cancel it, reject a branch, reject the entry of a new partner, or refuse approval for the appointment of a key executive in the Bank in any of the following cases:

1. Obscurity of the source and legitimacy of funds intended to be used to establish the Bank or increase its capital.
2. If any of the founders, partners, shareholders, beneficial owners, or key executives are listed on the prevailing blocking and freezing lists in the State of Palestine.
3. For the purpose of preserving the public interest.
4. Violation of any of the conditions stipulated in Article (6) of this Framework.

Article (11)
Branch Establishment

1. A Bank wishing to establish a branch must comply with submitting a branch license application signed by the Chairman of the Board of Directors according to Appendix No. (2), and pay a non-refundable application fee according to the prevailing Banks Licensing Fees System.
2. The application is studied and preliminary approval is granted in accordance with the provisions of Article (5) of this Framework.
3. The time period for the Palestine Monetary Authority's decision to approve or decline the branch license is calculated from the date of application completeness.
4. The branch is equipped and final approval is granted in accordance with the procedures stipulated in Articles (8) and (9) of this Framework.

Article (12)

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Relocation of Management Headquarters and Branches

1. A Bank wishing to relocate its general management headquarters or branch must comply with submitting a relocation application according to Appendix No. (3).
2. The application is studied and preliminary approval is granted in accordance with the procedures stipulated in Article (5) of this Framework.
3. The time period for the Palestine Monetary Authority's decision to approve or decline the relocation is calculated from the date of application completeness.
4. The proposed relocation headquarters is equipped and final approval is granted in accordance with the procedures stipulated in Articles (8) and (9) of this Framework.
5. The Bank must execute the relocation process according to the timeline specified in the relocation plan.
6. The Palestine Monetary Authority completes readiness inspection procedures, and based on the results, final approval for the Bank's relocation is issued.
7. A team from the Palestine Monetary Authority visits the old headquarters to verify that the Bank has vacated the premises and removed all its belongings. No belongings may be kept in the old headquarters without obtaining prior specific approval from the Palestine Monetary Authority.
8. The Bank is obligated to inform its dealing public of the relocation by announcing it in a prominent place and on its website or by any other means specified by the Palestine Monetary Authority at least two weeks prior to the relocation process. After completing the relocation process, an announcement must be made on its website.
9. The Bank must provide the Palestine Monetary Authority with phone numbers and addresses of the new headquarters.

Article (13)
Rehabilitation of Management Headquarters and Branches

1. A Bank wishing to rehabilitate the management or branch must comply with the following:
   a. Provide a suitable mechanism for service delivery. b. Inform the Palestine Monetary Authority of the rehabilitation process.
   c. Obtain approval from relevant authorities.
2. If rehabilitation requires temporary closure or relocation, the procedures stipulated in this Framework regarding temporary closure and relocation apply.

Article (14)

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Temporary Closure of Branches

A Bank wishing to temporarily close a branch must comply with the following:

1. Submit a Bank application regarding temporary closure according to Appendix No. (4).
2. The Palestine Monetary Authority issues a decision to approve or reject within (30) thirty days from the date of completion of the closure application, with the decision being reasoned in case of rejection.
3. In case of approval, the Bank commences closure procedures for the premises and completes them within a period not exceeding (30) thirty days from the date of Palestine Monetary Authority approval.
4. Inform the dealing public at least two weeks prior to the temporary closure by announcing it in a prominent place in the relevant branch and on its website until the end of the temporary closure period.
5. Pay all fees due for the temporarily closed premises.
6. Inform the public upon the expiration of the temporary closure period.

Article (15)
Permanent Closure of Branches

A Bank wishing to permanently close a branch must comply with the following:

1. Submit a Bank application regarding permanent closure according to Appendix No. (5).
2. The Palestine Monetary Authority informs the Bank of its decision to approve or reject within (30) thirty days from the date of completion of the closure application, clarifying the reasons in case of rejection.
3. In case of approval, the Bank commences closure procedures, and the closure process must be completed within the time period specified in the plan submitted by the Bank and approved by the Palestine Monetary Authority.
4. Upon issuance of Palestine Monetary Authority approval for permanent closure, the Bank announces this at the main center and the branch intended for closure in a prominent place and on its website or according to specific Palestine Monetary Authority requirements, at least two weeks prior to the permanent closure process. It is also announced in two daily local newspapers for (3) three consecutive days from the date of completion of the closure process.
5. The Bank informs the Palestine Monetary Authority of the completion of closure procedures, and based on that, a team from the Palestine Monetary Authority visits the closed premises to verify that the Bank has vacated the premises and removed all its belongings.

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6. After completing the closure process, the Bank announces this at the main headquarters and website for (30) thirty days from the date of completion of the closure.

Article (16)
Purchasing Land or Buildings for Bank Business Management

1. A Bank wishing to purchase land or an existing building must submit an application according to Appendix No. (6).
2. The Palestine Monetary Authority issues a decision to approve or reject within (30) thirty days from the date of application completion, with the decision being reasoned in case of rejection.
3. In case of Palestine Monetary Authority approval to purchase an existing building, the procedures stipulated in this Framework regarding licensing management headquarters or licensing branches and their relocation apply, depending on the purpose of purchasing the building.

Article (17)
Commencement of Construction

1. The Bank must submit a construction commencement application for the general management headquarters and/or branch within a period not exceeding (6) six months from the date of approval to purchase the land according to Appendix No. (7).
2. The Palestine Monetary Authority issues a decision to approve or reject within (30) thirty days from the date of application completion, with the decision being reasoned in case of rejection.
3. The Bank must commence construction within a period not exceeding one year from the date of obtaining Palestine Monetary Authority approval to commence construction.
4. During the period of completing construction according to the specified and approved time period by the Palestine Monetary Authority, the procedures stipulated in this Framework regarding branch licensing or relocation apply.
5. In case the Bank fails to commence construction within the period specified in paragraph (3) of this Article, it must dispose of the land within a period not exceeding one year from the end of this period.

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Article (18)
Other Requirements

A Bank wishing to rent or own a site for non-operational business management purposes, such as employee training halls, central archives, or regional headquarters for branch management, must obtain prior approval from the Palestine Monetary Authority.

Article (19)
Islamic Microfinance Bank

1. A Bank wishing to provide microfinance services in accordance with Islamic Sharia and its principles must obtain a license for an Islamic microfinance bank.
2. The Islamic microfinance bank is subject to the licensing procedures stipulated in this Framework.
3. The provisions of all instructions regulating the activity of microfinance banks apply to Islamic microfinance banks to the extent that they do not conflict with the provisions of Islamic Sharia and its principles.
4. Traditional and Islamic microfinance activities may not be conducted simultaneously.

Article (20)
Technological Environment Requirements

1. The Bank must comply with the following:
   a. Provide a plan for the technological infrastructure environment and a mechanism for hosting data and systems through various technologies such as the main data center, cloud computing, or co-location service in accordance with the instructions regulating the information technology environment issued by the Palestine Monetary Authority. b. Establish an integrated framework for cybersecurity risk management in accordance with best practices and prevailing standards, and according to instructions issued by the Palestine Monetary Authority regarding cybersecurity, so that the selection of technologies and security arrangements matches the banking products and services targeted for provision.
   c. The Bank must conduct an assessment of the technological environment, including a Vulnerability Assessment and Penetration Testing (internal and external), by a specialized entity, and provide the Palestine Monetary Authority with the results of these tests and the results of remediation of discovered problems before commencing any services.

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d. Provide a Security Source Code Review certificate for the core banking system from a specialized entity.
2. The Palestine Monetary Authority may require the Bank to appoint a qualified and experienced specialized external entity to provide it with a report aimed at evaluating specific technical areas and ensuring compliance with any conditions and requirements, and verifying the integrity of operational processes, including those related to the core banking system, application security, infrastructure, and cybersecurity, at the expense of the license applicant.
3. The Bank is fully responsible towards all users of the services it provides in the event of system failure, hacking, information leakage, or mismanagement of accounts, including bearing all material losses that may result from that.

Article (21)
Fees

Fees are collected in accordance with the prevailing Banks Licensing Fees System.

Chapter Three
Banking Activities

Article (22)
Permitted Banking Activities

The microfinance bank may conduct banking activities stipulated in the prevailing Banks Law in accordance with the provisions of this Framework.

Article (23)
Deposits and Other Liabilities

The Bank must comply with the following:

1. The ceiling for a single customer's deposits must not exceed (1%) of the Bank's capital base.
2. The total customer deposits and liabilities...