NOTICE NO. 5/GBM/2007

Subject: OWN FUNDS OF CREDIT INSTITUTIONS AND FINANCIAL COMPANIES

Given the need to adjust the rules for determining the own funds of credit institutions and financial companies to international standards on the matter, and in the exercise of the powers attributed by paragraph d) of paragraph 2 of Article 37 of Law No. 1/92 of January 3, and by paragraph 1 of Article 62 of Law No. 15/99 of November 1, the Bank of Mozambique determines:

Article 1

(Scope)

1. This Notice applies to all institutions subject to the supervision of the Bank of Mozambique.

2. The institutions referred to in the preceding paragraph that, in accordance with Articles 3 and 8 of Notice No. 4/GBM/2007, do not present their financial statements in accordance with International Financial Reporting Standards (IFRS), shall also apply the provisions of this Notice with the necessary adaptations.

Article 2

(Composition of Own Funds)

1. Own funds are composed of positive and negative elements.

2. The following are considered positive elements:

   a) Paid-up capital; b) Share and other securities issue premiums; c) Legal, statutory, and other reserves formed by undistributed results; d) Positive results carried forward from previous fiscal years; e) Positive results of the last fiscal year, under the conditions referred to in Article 10 of this Notice; f) Provisional positive results of the current fiscal year, under the conditions referred to in Article 10 of this Notice; g) Reserves arising from the revaluation of tangible fixed assets carried out under the legal instrument authorizing it; h) Subordinated loans, under the conditions referred to in Article 11 of this Notice; i) Elements characterized in Article 12 of this Notice; j) Foreign currency translation reserves and hedging reserves of net investments in foreign operational units; k) Other positive revaluation reserves, under the conditions set forth in Article 3 of this Notice; and l) Positive actuarial variances associated with post-employment benefits granted by the entity, which, in accordance with International Accounting Standard 19 – Employee Benefits (IAS 19) – The Corridor Method, have not been recognized in the results of the fiscal year, carried-forward results, or reserves.

3. The following are considered negative elements:

   a) Intangible assets; b) Negative results carried forward from previous fiscal years; c) Negative results of the last fiscal year; d) Provisional negative results of the current fiscal year; e) The value corresponding to deficiencies found in the establishment of regulatory provisions, as defined by the Bank of Mozambique, being the positive difference between the amount of regulatory provisions resulting from the application of Notice No. 7/GBM/07 and the value of credit impairment and provisions for off-balance sheet operations resulting from the application of IFRS; f) Negative revaluation reserves, under the conditions set forth in Article 3 of this Notice; g) Negative actuarial variances and past service costs associated with post-employment benefits granted by the entity, which, in accordance with IAS 19 – Employee Benefits, The Corridor Method, have not been recognized in the results of the fiscal year, carried-forward results, or reserves; and h) Treasury shares.

Article 3

(Elements Excluded from Own Funds)

1. In determining the elements enumerated in paragraphs 2 and 3 of Article 2 of this Notice, the following must be excluded:

   a) Unrealized losses and gains on financial liabilities held for trading that represent own credit risk; b) Unrealized gains and losses on cash flow hedges of hedged elements measured at amortized cost and future transactions; c) Without prejudice to paragraph 1(e) of this article, unrealized gains on loans and other receivables classified as financial assets held for trading or as financial assets at fair value through profit or loss, where applicable; d) Without prejudice to paragraph 1(e) of this article, unrealized gains and losses that do not represent impairment on loans and other receivables classified as available-for-sale assets; e) When the assets referred to in the preceding letters c) and d) are involved in fair value hedging relationships, only the gains, or the gains and losses corresponding to the part not involved in such hedging relationship and/or the part of that relationship considered ineffective, shall be excluded; f) Without prejudice to paragraph 2(g) of Article 2 of this Notice, unrealized gains or losses that do not represent impairment on Tangible Fixed Assets for own use, arising from the application of the fair value method in accordance with IAS 16 – Property, Plant and Equipment; and g) Without prejudice to paragraph 2(g) of Article 2 of this Notice, unrealized gains or losses that do not represent impairment on investment properties, arising from the application of the fair value method in accordance with IAS 40 – Investment Property.

2. The elements provided for in paragraph 2(k) of Article 2 of this Notice correspond to:

   a) Unrealized gains on available-for-sale assets quoted in an active market, in accordance with IAS 39 – Financial Instruments: Recognition and Measurement; and b) Unrealized gains on cash flow hedges of assets quoted in an active market classified as available-for-sale assets, to the extent of the net effect of the hedge.

3. The elements provided for in paragraph 2(k) and paragraph 3(f) of Article 2 of this Notice correspond, respectively, to the sum of the individual values of unrealized gains and losses, under the terms of paragraph 2(a) of this article, of financial instruments, and offsetting between these amounts is not permitted.

4. The prudential treatment of deferred taxes recorded in reserves should be consistent with the prudential treatment given to gains and losses recorded in revaluation reserves, positive or negative, which originated the recording of the same.

Article 4

(Base Own Funds)

The amount corresponding to the sum of the elements indicated in letters a) to f), j), and l) of paragraph 2 of Article 2, minus the sum of the elements indicated in paragraph 3 of the same article, constitutes Base Own Funds.

Article 5

(Supplementary Own Funds)

The amount corresponding to the sum of the elements indicated in letters g), h), i), and k) of paragraph 2 of Article 2 constitutes Supplementary Own Funds.

Article 6

(Maximum Limit of Supplementary Own Funds)

Supplementary Own Funds may only be considered up to the value of Base Own Funds.

Article 7

(Maximum Limit of Subordinated Loans)

The elements indicated in paragraph 2(h) of Article 2 shall only be considered up to 50% of the value of Base Own Funds.

Article 8

(Calculation of Own Funds)

Without prejudice to the provisions of Articles 6 and 7, Own Funds are determined by the sum of Base Own Funds with Supplementary Own Funds, after deducting:

a) The value of the elements referred to in paragraph 2 of Article 2 issued or contracted by other institutions subject to the supervision of the Bank of Mozambique, when the participation exceeds 10% of the capital of the participator; b) The global value of the elements referred to in paragraph 2 of Article 2 issued or contracted by other institutions subject to the supervision of the Bank of Mozambique, not covered in the preceding letter, to the extent that it exceeds 10% of the capital of the participant; c) The net book value of the non-financial asset received in repayment of own credit, calculated at an annual rate of 20% from the moment two years have elapsed since the date on which the non-financial asset in question was acquired; d) The amount that the institution intends to allocate exclusively to cover specific risks, notably those related to loans, other financial assets, and tangible fixed assets; and e) The part that exceeds the risk concentration limits defined in Notice 6/GBM/2007, on Prudential Ratios and Limits.

Article 9

(Valuation of Deductible Elements)

The value of asset elements to be deducted under Article 8 corresponds to their respective book value, except for the value of elements classified as available-for-sale assets not quoted in an active market, which must be deducted by unrealized gains (not eligible), as per paragraph 2(a) of Article 3.

Article 10

(Treatment of Results in Own Funds)

Positive results of the last fiscal year and provisional positive results of the current fiscal year shall only be considered as Own Funds if the following conditions are met:

a) They have been determined in accordance with IFRS; b) They have been reduced by the value of taxes and foreseeable dividends, calculated proportionally to the period to which they refer; and c) They have been accepted by the Bank of Mozambique, without prejudice to the audit of accounts by an external auditor approved by the Bank of Mozambique.

Article 11

(Treatment of Loans in Own Funds)

1. The amounts of loans obtained by issuing securities and those from non-securitized loans must meet the following conditions to be eligible as Own Funds:

   a) They must have been approved by the Bank of Mozambique; b) In the case where an initial repayment term is established, it shall not be less than five years. Any early repayment shall only occur at the initiative of the borrowing institution and after obtaining authorization from the Bank of Mozambique; c) If no initial repayment term is established, repayment shall only occur at the initiative of the borrowing institution and after obtaining authorization from the Bank of Mozambique; d) The contracts formalizing them must unequivocally establish that in the event of bankruptcy or liquidation of the borrower, the repayment of the lender is subordinated to the prior repayment of all other non-subordinated creditors; e) The borrowing institution must have the option to defer interest payments; and f) The outstanding capital and unpaid interest may be called upon to absorb losses, allowing the institution to continue its activity.

2. The conditions referred to in the preceding paragraph are cumulative in the following terms: a), b), d), e), and f), or a), c), d), e), and f).

Article 12

(Other Elements of Supplementary Own Funds)

With prior authorization from the Bank of Mozambique, equity elements that meet the following requirements may be included in Supplementary Own Funds:

a) They can be freely used to cover risks normally associated with the institutions' activity without the losses or shortfalls having yet been identified; b) They are expressed in the institution's accounts; and c) Their amounts are verified by a duly accredited external audit firm.

Article 13

(Reduction Period for Loans in Own Funds)

The Bank of Mozambique shall establish, for institutions that include in their Own Funds the loans referred to in Article 11 of this Notice, a program for the gradual reduction of these amounts over the five years preceding their respective repayment.

Article 14

(Deadline for Submission of Information)

1. With reference to the last day of each month, and within the following 15 days, credit institutions and financial companies must inform the Bank of Mozambique about the composition of their Own Funds.

2. Considering the adaptations that credit institutions and financial companies need to make in order to meet the conditions to report their Own Funds on a consolidated and individual basis, in accordance with Notice No. 4/GBM/2007, the Bank of Mozambique determines that the submission deadline referred to in the preceding paragraph shall be extended until June 30, 2007, for the months of January, February, March, April, and May 2007.

3. The Bank of Mozambique may order the correction of the calculation of an institution's Own Funds if it considers that the conditions established in this Notice have not been satisfactorily met.

Article 15

(Instructions and Clarifications)

1. The Bank of Mozambique, through the Banking Supervision Department, will issue the necessary instructions for the compliance with this Notice.

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

Article 16

(Repealing Norm)

This Notice repeals Notice No. 6/GGBM/98 of October 7.

Article 17

(Entry into Force)

This Notice enters into force on the date of its publication, taking into account the deadlines for the adoption of IFRS established in Article 7 of Notice 4/GBM/2007.

Maputo, March 30, 2007

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Ernesto Gouveia Gove Governor