Notice No. 4/GGBM/94 - Setting Limits on Risk Concentration in a Single Entity

Maputo, January 27, 1994

BANK OF MOZAMBIQUE

NOTICE No. 4/GGBM/94

SUBJECT: "Setting Limits on Risk Concentration in a Single Entity".

Article 50, paragraph d) of Law No. 28/91 of December 31, confers upon the Bank of Mozambique the competence to establish, among other things, limits on risk concentration in a single entity for institutions subject to its supervision.

In these terms, the Bank of Mozambique determines:

Article 1
For the purposes of this Notice, it is considered:
a) Risk: any facility, used or not, granted by an institution and translated, notably, in the granting of credit, even in the form of a guarantee, bank guarantee, or other similar instrument, and in the acquisition or holding of financial participations or securities of any nature issued by the same client;

b) Large Risk: the risk assumed by an institution when its value, isolated or together with other existing ones regarding the same client, represents at least 15% of the institution's own funds; c) Own Funds: the amounts indicated in Notice No. 2/GGBM/94 of January 27, 1994, calculated under the conditions established therein.

Article 2
All credit institutions, hereinafter designated as institutions, shall carry out adequate management of the risks they assume in the development of their activity, in order to prevent situations that may affect their solvency.

Article 3
Regarding the risks they assume, institutions are subject to the following limits:

a) With respect to a single client, institutions shall not incur risks whose total value exceeds 25% of their own funds. b) The aggregate value of large risks assumed with their clients shall not exceed eight times their own funds.

Article 4

1. In exceptional circumstances and upon duly justified request by the institutions, the Bank of Mozambique may authorize institutions to exceed the limits set in the preceding article.
2. In the authorizations granted under the terms of the previous paragraph, the Bank of Mozambique shall set the deadline and conditions for the adaptation of the applicant to the limits fixed in Article 3.

Article 5

1. Risks related to all natural or legal persons whose relationships with each other lead to presume that financial difficulties occurring in one of them may affect the financial solidity of the others shall be considered as assumed with a single client.
2. Specifically, the following are covered by the provisions of this paragraph:
   a) General partnerships and their respective partners; b) Limited partnerships and the limited partners; c) Natural or legal persons and companies controlled by them.
3. Institutions shall identify the interdependencies and links of their clients, with a view to observing the provisions of the previous paragraphs.

Article 6
The limits referred to in Article 3 do not apply to risks assumed with:
a) The Central Government of Mozambique; b) Local Governments of Mozambique; c) Bank of Mozambique; d) Foreign Governments and Central Banks; e) International Financial Organizations.

Article 7
For the purposes of calculating the limits referred to in Article 3, the following risks are not considered:

a) Covered by explicit and irrevocable guarantees from the entities referred to in Article 6; b) Covered by cash deposits; c) Covered by deposits of public debt securities issued by the Mozambican State; d) Related to operations with other institutions with a term equal to or less than six months.

Article 8
For the purposes of calculating the limits indicated in Article 3, the following risks are considered at 20% of their respective nominal value:

a) Related to operations between institutions with a term exceeding six months; b) Covered by guarantees provided by other institutions subject to the rules of this Notice.

Article 9
With reference to the last day of each quarter, and within the following 30 days, institutions must inform the Bank of Mozambique about all situations qualifying as "large risk," indicating the clients involved, the types of risk assumed, and the respective amounts.

Article 10
Institutions with headquarters in Mozambique shall consider the risks assumed by their establishments in the country and by their establishments abroad.

Article 11
Branches of foreign institutions shall consider the risks of their activity in the country and the own funds registered in their balance sheet in harmony with the provisions of Notice No. 2/GGBM/94 of January 27, 1994, without prejudice to the provisions of Articles 80 and 81 of Law No. 28/91 of December 31.

Article 12

1. Institutions shall regularize situations that are not in conformity with Article 3 existing on the date of entry into force of this Notice by December 31, 1995.

2. The situations covered by the preceding paragraph shall be subject to the quarterly report referred to in Article 9. The Bank of Mozambique will monitor the evolution of the referred situations, fixing, if it deems necessary, the conditions and pace for adaptation to the limits fixed in Article 3.

Article 13
The Banking Supervision Department will issue the necessary instructions for the compliance with the provisions of this Notice.

Article 14
Doubts resulting from the interpretation and application of this Notice will be clarified by the Banking Supervision Department of the Bank of Mozambique.