Instructions on Large Exposure Limits and Credit Granting Controls No. (2/2019)

10/1/3573 27 /6/1440 هـ 4 /3/2019 م Instructions on Large Exposure Limits and Credit Granting Controls No. (2/2019)

Greetings,

We enclose herewith the Instructions on Large Exposure Limits and Credit Granting Controls. In this regard, I hereby decide the following:

• These Instructions shall take effect as of 30/6/2019, and any bank found to be in violation of the aforementioned Instructions on the effective date must provide us with a clear timeline to rectify such violations.
• The Credit Limits Instructions No. (9/2001) dated 1/8/2001 shall remain in effect, and banks must continue to provide us with credit concentration data according to the currently approved forms up to the data date of 31/5/2019.
• We will subsequently provide you with specially prepared forms for reporting data related to the Instructions on Large Exposure Limits and Credit Granting Controls, which must be submitted to us starting from their effective date.

Please accept our highest regards, The Governor Dr. Ziad Friez Central Bank of Jordan

Instructions on Large Exposure Limits and Credit Granting Controls No. (2/2019)

First: Legal Basis These Instructions are titled "Instructions on Large Exposure Limits and Credit Granting Controls" and are issued pursuant to the provisions of Articles (4/b/6), (44/a), and (44/b) of the Central Bank Law No. (23) of 1971 and its amendments, and Articles (3/a), (40/a/4), (40/a/9), (41/b), (41/c), (45), (46), (47), and (99/b) of the Banks Law No. (28) of 2000 and its amendments. They shall be effective as of 30/6/2019.

Second: Scope of Application These Instructions apply to all banks operating in the Kingdom according to the levels specified below:

• The banking group, including its affiliated financial companies (excluding insurance companies).
• Jordan branches.
• Affiliated banking companies, each individually.

Third: Definitions The terms: Credit, Person, Executive, Material Interest, Control, and Affiliated Company shall have the meanings assigned to them under the currently effective Banks Law. The definition of Executive in the currently effective Banks Law shall also apply to the Executive in an affiliated company.

Definition of Exposure: Exposure includes all forms of direct and indirect credit granted to a single person, Islamic bonds and sukuk, debt instruments issued by the same person and purchased by the bank, as well as the bank's investments in this person (legal entity), whether in the form of equity or any other investments. For the purposes of these Instructions, a related person shall be considered a single person, including the following: a. The person's obligations appearing within on-balance sheet items, including:

• Direct credit facilities and disclosed current account balances.
• Bonds, Islamic sukuk, and shares issued by the person (legal entity) and similar financial investments.
• Balances and deposits of the bank with other banks. b. The person's obligations appearing within off-balance sheet items, including:
• Unused committed direct credit facility ceilings.
• Issued and confirmed letters of credit.
• Guarantees issued by the bank.
• Banker's acceptances. c. Any other exposures to the person arising from contracts with them, including but not limited to financial derivatives and asset sales with recourse.

3. Definition of Related Person: The term "Related Person" shall have the meaning provided in the currently effective Banks Law and includes the following parties:

• One person controls another (including but not limited to holding the position of Chairman of the Board of Directors, Chairman of the Board of Trustees, General Manager, or their deputies and/or any authorized signatory acting individually for the person's financial and/or administrative matters).
• One person owns not less than 40% of the capital of another person.
• Mutual exchange of guarantees between two persons.
• A single source of repayment for the obligations of two or more persons.
• Two or more persons borrowing for a single project.
• General partnerships in which the person is a partner.
• Simple limited partnerships in which the client is a general partner.
• A person who has economic links with one or more other persons such that if any of them faces financial difficulties, it will affect the ability of the others to meet their obligations. The definition of Related Person includes public joint stock companies if any of the above conditions apply to them. In exceptional cases, prior approval from the Central Bank may be requested to exempt a public joint stock company from the application of the Related Person concept if justified. The bank shall bear full responsibility for verifying the data and information related to related customers and disclosing them accurately in the forms prepared for this purpose, which are submitted to the Central Bank. The bank must refer to the Central Bank if it is unable to identify the group of related customers.

4. Definition of Capital Base: For the purposes of these Instructions, the capital base consists of Tier 1 regulatory capital as specified in the Regulatory Capital Instructions according to Basel III Standard No. (67/2016) and the Regulatory Capital Instructions according to the revised Standard No. (15) issued by the Islamic Financial Services Board (IFSB) No. (72/2018).

• The exposure ratio for bank branches within the Kingdom shall be calculated based on the capital base of the bank's branches within the Kingdom.
• The exposure ratio for the banking group shall be calculated based on the capital base of the banking group.
• The exposure ratio for a bank subsidiary of a Jordanian bank shall be calculated based on the capital base of the subsidiary.
• The capital base shall be adopted after the Central Bank approves the bank's financial statements.

5. Definition of Related Party with the Bank: The term "Person Related to the Bank" refers to:

• If either (the person or the bank) has a material interest in the other, directly or indirectly. An affiliated company of the bank is considered a related party.
• If the person is an executive in the bank or has a joint business interest with an executive in the bank.
• If the person is the spouse of an executive in the bank, or a relative of that executive or their spouse up to the third degree, or has a joint business interest with any of them. b. The bank shall be responsible for verifying the data and information related to customers related to the bank to the extent of its knowledge and disclosing them in the forms prepared for this purpose, which are submitted to the Central Bank.

Fourth: Mechanism for Calculating Exposure Value A large exposure is 10% or more of the capital base. The exposure value for on-balance sheet items shall be calculated by taking the net book value of credit facility balances (and/or fair value for other exposure types), including any accrued interest, after deducting impairment provisions and suspended interest and commissions, if any. For the application of item (b) above, the impairment provisions to be deducted shall be those provided for under the International Financial Reporting Standards (IFRS 9) Implementation Instructions No. (13/2018) or the Credit Facilities Classification, Impairment Provision, and General Banking Risk Reserve Instructions No. (47/2009), whichever is stricter. If the exposure is secured by one of the eligible collateral types listed in Appendix No. (1), the exposure value shall be calculated after deducting the collateral value, while ensuring all necessary steps are taken to meet all legal verification requirements to guarantee the bank's right to obtain and enforce the collateral. Banks are permitted to net off mutual deposits with the same counterparty if the currencies of those deposits match. The exposure value for off-balance sheet items shall be calculated by multiplying the nominal value of the item by its specific credit conversion factor. If eligible collateral exists, the collateral effect shall be calculated before multiplying the nominal value by the credit conversion factor (i.e., eligible collateral is deducted from the item's value, and then the result is multiplied by its specific credit conversion factor). Credit conversion factors for off-balance sheet items are detailed in Appendix No. (2) to these Instructions. The exposure value for derivative contracts, excluding option contracts, shall be calculated using the same method used under the Regulatory Capital Instructions according to Basel III Standard No. (67/2016). The exposure value for option contracts shall be calculated as follows: Long Call Option Position: Exposure = Market Value of the Call Option Short Put Option Position: Exposure = Strike Price - Market Value of the Put Option Short Call Option Position: Exposure = - (Market Value of the Call Option) Long Put Option Position: Exposure = - (Strike Price - Market Value of the Put Option) y. In derivative contracts, if there are different long and short positions against the same counterparty in the same currency, the total positive and negative exposures against that counterparty may be netted. If the net result is negative, the exposure value shall be zero.

Fifth: Maximum Exposure Limit to a Single Person and/or Related Customer Group The bank's total exposure to a single person and/or a related customer group shall not exceed 25% of the bank's capital base. The bank's total exposure to a principal shareholder [1] in the bank and/or their related customer group or guarantor shall not exceed 10% of the bank's capital base. The total large exposures shall not exceed eight times the capital base.

Sixth: Maximum Credit Limit Granted for Real Estate Construction or Purchase The maximum credit limit granted by the bank (Jordan branches) for real estate construction or purchase shall not exceed 20% of total customer deposits (Jordan branches) in Jordanian Dinars. b. Credit granted for real estate construction or purchase includes:

• Credit granted for real estate construction, including land and land with existing buildings, or their purchase.
• Credit granted for all purposes directed to the construction sector, such as construction, maintenance, expansion, completion, or improvement of existing properties, etc.
• Credit granted for the construction or purchase of commercial complexes and offices.
• Credit granted to real estate investors and housing companies.
• Any credit granted for similar purposes. c. The following are exempted from the above components, provided that exempted amounts are disclosed in the forms prepared for this purpose by the Central Bank:
• Credit granted to finance the construction or purchase of hospitals, universities, schools, factories, tourist facilities, hotels, hotel suites, and apartments, provided that their nature was considered upon granting, subject to the following:
  • The original maturity of the financing shall not exceed 7 years.
  • The credit decision must be primarily based on the financed project's ability to generate sufficient operating income/cash flows to repay the financing.
• Credit granted to finance working capital for contractors.
• Amounts refinanced from the Jordan Mortgage Refinancing Company (JMRC), up to a maximum of the signed agreement value between the bank and the company.
• Facilities granted to finance the purchase of residential apartments under the Royal High Initiative "Kareem Housing for a Kareem Life", as well as credit facilities granted to approved contractors exclusively for financing the implementation of housing projects related to this initiative, provided that qualification certificates are obtained from the entities mentioned in the above exemption from the Public Corporation for Housing and Urban Development under this initiative. d. The maximum credit limit for real estate construction or purchase does not include finance leases (Ijarah Muntahia Bittamleek). e. The above ratio shall be calculated according to Appendix No. (3) to these Instructions.

Seventh: Maximum Credit Limit Granted in the Form of Overdraft The credit limit granted by the bank (Jordan branches) in the form of an overdraft shall not exceed 20% of the total direct credit granted by the bank (Jordan branches). Overdraft credit shall not be granted against cash collateral. No credit with the nature and character of an overdraft shall be granted under other names. The above ratio shall be calculated according to Appendix No. (3) to these Instructions.

Eighth: Maximum Credit Limit Granted to the Top Ten Customers of the Bank in the Kingdom The direct credit limit granted to the top ten customers of the Jordanian bank (Jordan branches) shall not exceed 35% of the total direct credit granted by the Jordanian bank (Jordan branches). The direct credit limit granted to the top ten customers of the foreign bank in the Kingdom shall not exceed 70% of the total direct credit granted by the foreign bank in the Kingdom. The above ratio shall be calculated according to Appendix No. (3) in these Instructions.

Ninth: Maximum Exposure Limits to Related Parties with the Bank The maximum exposure to a member of the bank's board of directors shall not exceed 5% of the capital base. The maximum exposure to a member of the board of directors of the bank's affiliated company shall not exceed 5% of the capital base. The maximum exposure to a member of the bank's board of directors and their related parties, including credit granted under their guarantee, shall not exceed 10% of the capital base. The maximum exposure to a member of the affiliated company's board of directors and their related parties, including credit granted under their guarantee, shall not exceed 10% of the capital base. The maximum total exposure to members of the bank's board of directors and members of the boards of directors of the bank's affiliated companies, collectively, shall not exceed 25% of the capital base. The maximum total exposure to members of the bank's board of directors and members of the boards of directors of affiliated companies and their related parties, collectively, shall not exceed 50% of the capital base. The maximum credit limit granted to the bank's affiliated company (and any other companies directly or indirectly affiliated with it) shall not exceed 20% of the subscribed capital of the affiliated company. The bank is prohibited from guaranteeing any credit granted to these companies by other banks. The maximum credit limit granted to general managers, their deputies, assistants, advisors, and executive directors and those in their rank in the bank or any bank affiliate shall not exceed 70 times their monthly salary only (without allowances, bonuses, or any other benefits), for all purposes, with prior board of directors' approval and in accordance with the bank's policies and internal regulations regarding credit facilities. As for other bank executives, the limits stipulated in the bank's systems and instructions must be observed. The maximum credit limit granted to related parties with the bank collectively – excluding credit granted to members of the bank's board of directors, members of the board of directors of any affiliated company and their related parties, and residential loans granted to bank employees – shall not exceed 50% of the capital base. y. The following shall be observed when dealing with related parties with the bank:

• Obtain prior approval from the bank's board of directors when granting, renewing, increasing, or making any credit decision related to credit facilities for a member of the bank's board of directors, provided that the member applying for credit does not participate in any meeting discussing the granting of credit to them. The board of directors shall not delegate its authority in this regard to any of its committees or any other authority.
• Credit to any related party with the bank shall not be granted on terms more favorable than those granted to a person unrelated to the bank, including the determination of interest rates and commissions for credit granted to related parties, in accordance with what is practiced for other customers.
• Include in the bank's annual report and financial statements the balances of credit facilities provided to related parties in the bank, specifying the number of customers, the volume of credit facilities obtained, the collateral provided against these facilities, and interest rates and commissions.

Tenth: Exceptions The following are exempted from these Instructions:

• Exposure to the Jordanian Government or guaranteed by it. For the purposes of these Instructions, the definition of the Jordanian Government provided in the Public Debt and its Management Law of 2001 shall be adopted.
• Exposure to ministries and institutions eligible to receive preferential risk weights for the Jordanian Government (0%) as listed in Appendix No. (8) of the Regulatory Capital Instructions according to Basel III Standard No. (67/2016) and the Regulatory Capital Instructions according to the revised Standard No. (15) issued by the IFSB No. (72/2018).
• Exposures between foreign banks operating in the Kingdom and the parent bank's headquarters and the parent bank's branches worldwide. Compliance with the limits and ratios stipulated under any other orders or instructions issued by the Central Bank of Jordan in this regard shall be observed.

Eleventh: General Provisions Banking companies affiliated with Jordanian banks and operating outside the Kingdom shall comply with the maximum limits stipulated in these Instructions or apply the instructions of the supervisory authorities in the host countries, whichever is stricter. If the host country's supervisory instructions are less strict, the bank may request approval from the Central Bank of Jordan to apply the host country's instructions. Banks shall not issue non-valued or non-maturity-dated banker's guarantees. All foreign currency exposures shall be subject to the maximum limits in these Instructions, provided that other instructions related to granting foreign currency credit are observed. The bank must refer to the Central Bank of Jordan if it is unable to determine the exposure value for any on-balance sheet or off-balance sheet item. The bank must comply with the limits and ratios stipulated in these Instructions and not exceed them on any day of the month. If any of these limits and ratios are exceeded, the Central Bank must be immediately notified of the reasons for the violation and the measures taken by the bank to rectify it. The bank must provide us with data related to large exposures (where the total exposure before considering any mitigants equals or exceeds 10% of the capital base) on a monthly basis according to the forms prepared by the Central Bank of Jordan, at all levels mentioned in item (Second) of these Instructions, no later than the 15th of the month following the month to which the data pertains. The following Instructions and Circulars are repealed as of the effective date of these Instructions:

• Credit Limits Instructions "Credit Concentrations" No. (9/2001) dated 1/8/2001.
• Circular No. (10/2/3/3/11020) dated 16/10/2005.
• Circular No. (10/2/3/3/11647) dated 27/11/2007.
• Circular No. (10/3/12745) dated 26/11/2008.
• Circular No. (10/3/3956) dated 31/3/2011.
• Circular No. (10/3/21) dated 2/1/2014.
• Circular No. (10/3/12103) dated 8/10/2014.
• Circular No. (10/1/12255) dated 12/9/2017.

Appendix No. (1) Eligible Financial Collateral

• 100% of the value of cash collateral.
• 100% of deposit certificates and equivalents issued by the lending bank, pledged in favor of the lending bank.
• 100% of the value of guarantee letters for facilities of all types issued by foreign banks with a credit rating of at least Investment Grade, according to credit rating agencies recognized by the Central Bank, provided that the value of these guarantees does not exceed 25% of the bank's capital base.
• 50% of the market value of debt bonds or Islamic sukuk rated by recognized credit rating agencies at no less than:
  • BB- if issued by governments or public sector entities/companies treated as government.
  • BBB- if issued by other entities (including banks and financial companies).
  • A-3/P-3 for short-term debt bonds.
• 50% of the market value of traded shares (including convertible bonds to shares) listed in a main market index, provided that those shares are not issued by the borrower or any related person.
• 100% of guarantees issued by the Jordanian Loan Guarantee Company.
• Amounts refinanced from the Jordan Mortgage Refinancing Company (JMRC), up to a maximum of the signed agreement value between the bank and the company, are considered eligible financial collateral to mitigate the bank's investment value in bonds issued by the company for mortgage refinancing.

Appendix No. (2) Direct Credit Substitutes, given a credit conversion factor of 100%, include:

• Payment guarantees of all types, including advance payment guarantees and equivalents.
• Customs guarantees of all types.
• Professional practice guarantees of all types.
• Goods supply guarantees of all types (issued upon the buyer's request in favor of the goods supplier).
• Facility guarantee letters of all types.
• Retention guarantees.
• Deferred payment letters of credit.
• Sight letters of credit with a maturity exceeding 180 days.
• Banker's acceptances.
• Enhancement of letters of credit falling under this category (Direct Credit Substitutes).
• Enhancement of banker's acceptances of all types.
• Standby Letters of Credit (SBLC) functioning as letters of credit in the above item. Performance-Related Contingencies, given a credit conversion factor of 50%, include:
• Bid bonds.
• Performance bonds.
• Maintenance bonds.
• Shipping bonds (up to the maximum value of the goods).
• Compliance with legislation and laws bonds.
• Manufacturing quality warranties. Trade-Related Contingencies, given a credit conversion factor of 20%, include:
• Sight letters of credit with a maturity of 180 days or less, provided they are self-liquidating, related to goods transfer, and do not contain any condition that could negatively affect the goods' value (e.g., perishable goods or land transport, etc.).
• Standby Letters of Credit (SBLC) functioning as letters of credit in the above item.
• Enhancement of letters of credit in the above two items. Unused Committed Direct Credit Ceilings:
• Unused committed direct credit ceilings are given a credit conversion factor of 20% if their original maturity is equal to or less than one year.
• Unused committed direct credit ceilings are given a credit conversion factor of 50% if their original maturity exceeds one year.

Appendix No. (3) Mechanism for calculating the maximum credit limit granted by the bank (Jordan branches) for real estate construction or purchase. Numerator:

• Total direct credit granted by the bank (Jordan branches) for real estate construction or purchase. Less:
• Impairment provisions provided against credit granted (Jordan branches) for real estate construction or purchase.
• Suspended interest and commissions (if any). Denominator:
• Total customer deposits (Jordan branches) in Jordanian Dinars.

Mechanism for calculating the maximum credit limit granted by the bank (Jordan branches) in the form of an overdraft. Numerator:

• Total overdraft credit balance granted by the bank (Jordan branches). Less:
• Impairment provisions provided against overdraft credit granted by the bank (Jordan branches).
• Suspended interest and commissions (if any). Denominator:
• Total direct credit granted by the bank (Jordan branches).

Mechanism for calculating the maximum direct credit limit granted to the top ten customers of the bank in the Kingdom (Jordan branches). Numerator:

• Total direct credit balance granted to the top ten customers of the bank in the Kingdom (Jordan branches). Less:
• Impairment provisions provided against direct credit granted to the top ten customers of the bank in the Kingdom (Jordan branches).
• Suspended interest and commissions (if any).
• Eligible financial collateral as stated in Appendix No. (1) to these Instructions against direct credit granted to the top ten customers of the bank in the Kingdom (Jordan branches). Denominator:
• Total direct credit granted by the bank (Jordan branches).

Definition of Principal Shareholder as stated in the Corporate Governance Instructions for Banks No. (63/2016) dated 1/9/2016 and the Amended Corporate Governance Instructions for Islamic Banks No. (64/2016). ↑