Instructions No. 4 of 2022 Concerning Credit Concentration Risks

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Instructions No. (4) of 2022
Concerning Credit Concentration Risks

Based on the provisions of Law No. (9) of 2010 Concerning Banks, particularly Articles (16, 72) thereof, In accordance with the powers delegated to us, And in pursuit of the public interest, We have issued the following Instructions:

Article (1)
Definitions

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

• Exposure: All forms of direct and indirect credit granted to a single person and bonds and debt instruments issued by the same person and purchased by the Bank, in addition to the Bank's investments in this person whether in the form of equity or any other investments.
• Credit Concentration: The total exposure to a single person or a group of persons acting together or sharing a common interest or kinship up to the second degree.
• Person: A natural or legal person.
• First-degree Kinship: Father, mother, son, and daughter, and the relatives of one spouse in the same kinship and degree are considered relatives of the other spouse.
• Second-degree Kinship: Grandfather, grandmother, brothers, sisters, and grandchildren, and the relatives of one spouse in the same kinship and degree are considered relatives of the other spouse.

Article (2)
Objective and Scope of Application

1. The provisions of these Instructions aim to limit credit concentration risks and exposures at the Bank.
2. The provisions of these Instructions apply to all banks licensed by the Palestinian Monetary Authority to conduct banking business in Palestine.

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Article (3)
Approved Limits for Credit Exposures and Concentrations

1. The Bank must not grant, renew, or modify credit to any person if doing so would result in the following:
   a. Reaching a credit exposure or concentration size of 10% or more of the Bank's capital base without obtaining prior approval from the Palestinian Monetary Authority. b. Exceeding a credit exposure or concentration size of 25% of the Bank's capital base.
   c. Exceeding a credit exposure or concentration size of 20% of the capital base for a bank classified as systemically important.
2. The Bank is prohibited from exceeding the total sum of credit exposures or concentrations by four times the Bank's capital base.
3. The Bank is prohibited from exceeding the total sum of direct facilities/financing in a specific economic sector by 20% of the total credit portfolio without obtaining prior written approval from the Palestinian Monetary Authority.
4. The Palestinian Monetary Authority may require the Bank to obtain adequate guarantees or increase them for any credit that constitutes a credit exposure or concentration.
5. The Bank must provide the Palestinian Monetary Authority with data related to credit exposures and concentrations on a monthly basis within the periodic financial statements submitted to the Palestinian Monetary Authority, according to Form (1) attached.

Article (4)
Group of Persons Acting Together or Sharing a Common Interest

1. The concept of a group of persons acting together or sharing a common interest or kinship up to the second degree applies to two or more persons if any of the following is met:
   a. Control Relationship: Any of the counterparty parties controls the other(s) directly or indirectly. b. Economic Interdependence: If any of the counterparty parties faces financial problems, particularly difficulties in financing or repayment, it is likely that the other counterparty parties within the group will face difficulties in financing or repayment.

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2. The Bank must evaluate the relationship between counterparty parties based on what is stated in paragraph (1) of this Article when determining the parties to which the concept of a group of persons acting together or sharing a common interest applies.
3. The Bank must consider the relationship as a control relationship between the parties and the counterparty parties if any of the following is met:
   a. A person or a group of persons acting together or sharing a common interest or kinship up to the second degree owns or owns directly or indirectly 20% or more of the company's shares or voting power. b. The ability to select the majority of the company's directors.
   c. Having direct or indirect ability to exercise effective influence on the company, its board of directors, or its senior officials or decisions issued by them.
4. The Bank must adhere to the following when applying the concept of a group of persons acting together or sharing a common interest based on economic interdependence:
   a. That 50% or more of the total revenues or total expenses (annually) of one counterparty party are derived from transactions with another counterparty party. b. That the counterparty party guarantees the exposure of another counterparty party in whole or in part or is committed to it by other means.
   c. That selling a large part of one counterparty party's products to another counterparty party cannot be easily replaced by other customers.
   d. That the expected source of repayment for a facility or financing obtained by one of the counterparty parties is the same source of the facility or financing obtained by another counterparty party, which has no other income sources to repay this facility or financing. e. That it is likely that if one counterparty party faces financial problems, the other counterparty parties will face difficulties in fully and timely repaying their obligations. f. That the default or insolvency of one counterparty party is linked to the default or insolvency of one or more other counterparty parties. g. That two or more counterparty parties rely on the same supplier (financing source), and if this supplier fails, it is difficult to find an alternative supplier; in this case, it is likely that the financing problem will transfer from one counterparty party to another due to mutual or non-mutual reliance on the same main financing source.

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Article (5)
Mechanism for Calculating Credit Concentration or Exposure

Credit concentration or exposure is calculated as follows:

1. Numerator, which includes:
   a. The full value of credit or exposure within the Bank's financial statement. b. (10%) of items outside the Bank's financial statement (including indirect facilities, unused balances of direct facilities, facilities approved by the Palestinian Monetary Authority but not implemented, and financial derivatives).
   c. The value of cash collateral against credit concentration or exposure is deducted from the numerator.
2. Denominator: Capital base according to the approved model for this purpose in the effective Instructions.

Article (6)
General Provisions

1. The Bank must provide the Palestinian Monetary Authority with a timeline of maximum duration (5) five years to address existing credit concentrations and exposures that exceed the limits approved in paragraphs (b, c) of Article (3) of these Instructions, within a maximum of (3) three months from the date of issuance of these Instructions.
2. If the Bank fails to rectify credit concentrations and exposures in accordance with the provisions of paragraph (1) of this Article, it must weight the value of the excess in credit concentrations and exposures that exceed the limits approved in paragraphs (b, c) of Article (3) of these Instructions by 200% within risk-weighted assets for the purpose of calculating regulatory capital adequacy.
3. The value of credit concentrations and exposures granted after the issuance of these Instructions that exceed the percentages specified in paragraphs (b, c) of Article (3) of these Instructions shall be weighted by 200% within risk-weighted assets for the purpose of calculating regulatory capital adequacy. In the event that companies obtain a credit rating from a rating agency approved by the Palestinian Monetary Authority, the weighting percentage is reduced to 150% instead of 200%.

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4. The prior approval of the Palestinian Monetary Authority regarding credit concentrations and exposures is canceled if not implemented within (60) sixty days from the date of its issuance.
5. The Bank must obtain prior written approval from the Palestinian Monetary Authority if it wishes to grant direct or indirect facilities or financing to the public sector or guarantee them.

Article (7)
Cancellation of Conflict

1. Article (7) of Instructions No. (02) of 2015 Concerning Determinants and Controls for Granting Credit is canceled.
2. Everything inconsistent with the provisions of these Instructions is canceled.

Article (8)
Implementation and Enforcement

All competent authorities must implement the provisions of these Instructions, each within its respective jurisdiction, and they apply from the date of their issuance.
Issued in Ramallah on: 2022/04/27

Dr. Firas Malham
Governor
[Signature]

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