Palestine Monetary Authority

PALESTINE MONETARY AUTHORITY

Instructions No. (2) of 2021

Regarding the Classification of Loan and Financing Portfolios and the Formation of Provisions

Based on the provisions of Decision No. (132) of 2011 on the Licensing and Supervision of Specialized Lending Institutions, particularly Article (21) thereof,

After reviewing Instructions No. (3) of 2018 regarding guidelines for implementing International Financial Reporting Standard No. 9,

In accordance with the powers vested in us,

And in the public interest,

We have issued the following Instructions:

Article (1)

Definitions

The words and phrases contained in these Instructions shall have the meanings assigned to them below, unless the context indicates otherwise:

Specialized Lending Institution:	A specialized lending company licensed by the Palestine Monetary Authority.
Performing Portfolio:	Good loans and financings that are fully repaid according to the contract terms, including the repayment of principal, interest/returns, and related fees and commissions.
Non-Performing Portfolio:	Risky loans and financings that have not been repaid according to the contract terms, where the borrower has defaulted on the repayment of principal, interest/returns, or related fees and commissions.
Provision:	Expected credit loss provision formed against the performing and non-performing portfolios.
Rescheduled Loans and Financings:	Non-performing loans and financings for which the agreed terms related to the repayment schedule have been modified for the purpose of collecting risky (non-performing) debts.
Restructured or Refinanced Loans and Financings:	Loans and financings for which any modification has been made to the original contract terms or the loan/financing agreement signed with the borrower, including (loan/financing value, installment value, interest/return value/rate, fee/commission value/rate, interest/return calculation and repayment mechanism, date of first or last installment, grace period).
Excluded and Written-Off Loans and Financings:	Loans and financings that the specialized lending institution wishes to exclude from the balance sheet or write off, after exhausting all collection means in cases of debt exposure or emergency situations affecting the borrower, such as death or natural disasters, among others.

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Article (2)

Objective and Scope of Application

1. These Instructions aim to regulate the work of specialized lending institutions regarding the classification of loan and financing portfolios and the formation of provisions against them.
2. The provisions of these Instructions apply to all specialized lending institutions licensed by the Palestine Monetary Authority.

Article (3)

Performing Portfolio and Revenue Recognition

The specialized lending institution must comply with the following regarding the performing portfolio:

1. Distribute the value of (interest/returns) and (fees/commissions) collected in advance from borrowers over the life of the loans and financings using the effective interest method, except for fees and commissions related to the costs of granting loans and financings, the value of which is less than $100, which may be collected directly upon receipt.
2. Continue to form a risk reserve at a rate of 1% of the performing portfolio and form the necessary provisions against it in accordance with the provisions of Instructions No. (3) of 2018 regarding guidelines for implementing International Financial Reporting Standard No. 9 "IFRS 9", provided that prior written approval from the Palestine Monetary Authority is obtained before using or reducing this account.

Article (4)

Non-Performing Portfolio

The specialized lending institution must comply with the following regarding the non-performing portfolio:

1. Use any cash collections from non-performing loans and financings to repay the full outstanding principal.

2. Loans and financings and the necessary provisions against them shall be classified in accordance with the provisions of Instructions No. (3) of 2018 regarding guidelines for implementing International Financial Reporting Standard No. 9 "IFRS 9". The classification of distressed loans and financings from the non-performing portfolio includes the following cases:

   a. Non-consolidated loan and financing portfolio that is overdue on one or more principal or interest installments, with a provision against it at a rate of 25%.

   b. Sub-standard loan and financing portfolio that is overdue on one or more principal or interest installments, with a provision against it at a rate of 50%.

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Article (5)

Suspended Interest and Commissions

The specialized lending institution must suspend interest, commissions, and fees due or collected in advance on unpaid loans and financings after 90 days have passed from the due date of one or more principal installments of the loan or financing, until the full principal is repaid for the due installments. These amounts must be recorded in a separate account and shall not be included in revenue accounts.

Article (6)

Acceptance of Guarantees

For the purpose of calculating provisions, guarantees against the performing and non-performing portfolios are accepted in the following cases:

1. The value of the guarantees provided under loan guarantee programs must be reasonable according to the coverage ratios stated in agreements signed with any of the approved entities listed in Annex No. (1), provided that prior written approval from the Palestine Monetary Authority is obtained for these agreements and before making any modifications to them.
2. The risk-bearing percentage provided by donors or funders, whether local or foreign, under specific agreements for offering loans/financing to specialized lending institutions, must be reasonable at 100% of the risk-bearing percentage value according to agreements signed with these entities, for the purpose of calculating provisions, provided that prior written approval from the Palestine Monetary Authority is obtained for those agreements.

Article (7)

Rescheduled Loans and Financings

The specialized lending institution must comply with the following regarding rescheduled loans and financings:

1. The conditions and procedures for rescheduling stated in the approved credit policy.

2. The classification of rescheduled loans and financings shall remain within the distress periods prior to the rescheduling date, with the continued calculation of the provision formed against them, and the transition to distress periods in the following cases:

   a. For loans and financings that became distressed after complying with rescheduling conditions.

   b. For loans and financings that became distressed during the rescheduling period after exhausting the three-installment period.

   c. For rescheduled loans and financings whose installment due dates have not yet arrived after the rescheduling process.

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Article (8)

Restructured or Refinanced Loans and Financings

The specialized lending institution must comply with the following regarding the restructuring or refinancing of loans and financings:

1. Availability of a comprehensive policy approved by the Board of Directors regarding the restructuring or refinancing of loans and financings.
2. The restructuring or refinancing process for the borrower's debt must result from reasons unrelated to the client's distress or likelihood of distress, so that it includes only the performing loan and financing portfolio category.
3. Providing the Palestine Monetary Authority with a quarterly and simultaneous report with periodic quarterly reports, detailing the restructured or refinanced loans and financings according to Annex No. (2).

Article (9)

Loans and Financings Referenced to Court

The specialized lending institution must disclose debt referenced to court (in courts) within its distress period while continuing to:

1. Transition through distress periods and form provisions against them until the debt is fully settled and compliance with installment payments is maintained.

2. It is prohibited for the specialized lending institution to classify debt referenced to court as part of the performing portfolio except after conducting the first settlement with the borrower and repaying six consecutive installments from their own sources.

3. The specialized lending institution must classify debt referenced to court as losses and collect a 100% provision against it in the following cases:

   a. When the borrower's debt becomes distressed after the first settlement (i.e., classified as performing portfolio).

   b. In case of more than one settlement for the same existing debt of the borrower with judicial authorities and courts.

4. The specialized lending institution must transfer files of non-performing loans and financings to the company's lawyers via an official letter issued by the institution.

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Article (10)

Excluded and Written-Off Loans and Financings

The specialized lending institution must comply with the following regarding the exclusion or write-off of debt:

1. The specialized lending institution must have a comprehensive policy approved by the Board of Directors regarding the exclusion and write-off of loans and financings.
2. Two years must have passed from the date of distress of the loans and the distress of the loans within all collection and follow-up procedures related to them.
3. Loans and financings belonging to related parties shall not be excluded or written off except after obtaining prior written approval from the Palestine Monetary Authority, in addition to disclosing these loans within the final (annual) financial statements and interim (semi-annual) data of the institution.
4. Disclosure in the final (annual) financial statements and interim (semi-annual) data of the institution of the total excluded and written-off loans and financings and the movements therein.

Article (11)

Repeal

1. Instructions No. (02) of 2014 regarding the classification of loans and financings and the formation of provisions are repealed.
2. Instructions No. (01) of 2018 regarding rescheduled, restructured, or refinanced loans and financings, and those referenced to court or written off, are repealed.
3. Instructions (43) of 2020 regarding the amendment of Instructions No. (2014/02) related to the classification of loans and financings and the formation of provisions are repealed.
4. Anything inconsistent with the provisions of these Instructions is repealed.

Article (12)

Penalties

Anyone who violates the provisions of these Instructions shall be punished in accordance with the provisions of Decision No. (132) of 2011 on the Licensing and Supervision of Specialized Lending Institutions.

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Article (13)

Rectification of Status

All specialized lending institutions must rectify their status in accordance with these Instructions within a maximum period of three months from the date of entry into force of these Instructions.

Article (14)

Implementation and Entry into Force

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

Issued in Ramallah on 27/10/2021 AD

Dr. Firas Malham Governor (Signature)

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Annex No. (1)

Loan Guarantee Funds

1. Middle East Initiative.
2. Palestinian European Loan Guarantee Fund.
3. Daman Company. Any other entity may be added to the aforementioned list after obtaining approval from the Palestine Monetary Authority based on requests from specialized lending institutions.

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Annex No. (2)

Summary of Restructured and Refinanced Loans and Financings

Loan or Financing Number	Client/Borrower Name	Loan or Financing Value	Date of First Payment for Loans and Financings	Date of Restructuring or Refinancing	Reason for Restructuring or Refinancing	Condition Modified on Original Contract