Notice No. 6/GBM/2007 - Prudential Ratios and Limits

NOTICE NO. 6/GBM/2007 Subject: PRUDENTIAL RATIOS AND LIMITS

Credit institutions must be subject to high levels of control in order to ensure sound and prudent management of their activities. Article 37(2)(d) of Law No. 1/92 of January 3, combined with Article 64 of Law No. 15/99 of November 1, grant the Bank of Mozambique, respectively, the powers to establish directives for the conduct of these institutions and prudential limits on the execution of operations that they are authorized to perform.

Using the cited competencies, the Bank of Mozambique determines:

CHAPTER I General Provisions

Article 1 (Scope)

1. This Notice applies to all credit 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 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 (Duty of Continuous Compliance) Credit institutions shall observe continuously and permanently the prudential ratios and limits established in this Notice.

Article 3 (Definitions) For the purposes of this Notice, the following are considered:

1. Own Funds - The funds defined in terms of Notice No. 5/GBM/2007;
2. Solvency Ratio – The relationship between the amount of own funds and that of risk-weighted asset and off-balance sheet items;
3. Risk - Any facility, used or not, granted by a credit institution and translated, notably, in the granting of credit, even in the form of a guarantee, bank guarantee or similar, and in the acquisition or holding of financial participations or securities of any nature issued by the same client;
4. Large Risk - The risk assumed by a credit institution when its value, individually or together with other existing risks regarding the same client, represents at least 10% of the institution's own funds;
5. Control - According to International Accounting Standard 27 – Consolidated and Separate Financial Statements (IAS 27), it is the power to manage the financial and operational policies of an entity in order to obtain benefits from its activities. Control is presumed to exist when the parent company is the owner, directly or indirectly through subsidiaries, of more than half of the voting power of an entity unless, in exceptional circumstances, it can be clearly demonstrated that such ownership does not constitute control. Control also exists when the parent company owns half or less of the voting power of an entity, when there is: a) Power over more than half of the voting rights by virtue of an agreement with other investors; b) Power to manage the financial and operational policies of the entity according to a statutory clause or an agreement; c) Power to appoint or dismiss the majority of the members of the board of directors or equivalent management body and that the control of the entity is carried out by that board or body; and d) Power to represent the majority of votes in meetings of the management board or an equivalent management body and the control of the entity is carried out by that board or management body.
6. Joint Control - According to IAS 31 – Interests in Joint Ventures, it is the agreed sharing of control in an economic activity, and exists only when strategic financial and operational decisions related to the activity require the unanimity of the entrepreneurial parties sharing the control;
7. Significant Influence – According to IAS 28 – Investments in Associates, it is the power to participate in the decision-making on the financial and operational policies of the invested company but which is not control or joint control over those policies;
8. Group - According to IAS 27, it consists of a parent company and all its subsidiaries;
9. Parent Company - According to IAS 27, it is an entity that holds one or more subsidiaries;
10. Entrepreneur – According to IAS 31, it is a partner in a joint venture that has joint control over that venture;
11. Subsidiary - According to IAS 27, it is an entity, including an unincorporated entity such as a partnership, that is controlled by another entity (referred to as the parent company);
12. Joint Venture - According to IAS 31, it is a contract under which two or more partners undertake an economic activity that is subject to joint control;
13. Associate - According to IAS 28, it is an entity, including an unincorporated entity such as a partnership, over which the investor has significant influence and which is not a subsidiary or an interest in a joint venture;
14. Qualified Participation - The direct or indirect participation that represents a percentage not less than 10% of the capital or voting rights of the participating company, considering as equivalent to the participant's voting rights the following: a) Rights held by individuals or legal entities dominated by him or with whom he is in a group relationship; b) Rights held by the spouse not separated judicially or by a minor descendant; c) Rights held by other entities, in their own name or on behalf of others, but on account of the participant or the persons referred to in the preceding subparagraphs; and d) Rights inherent to shares of which the participant holds the usufruct.
15. Risk Group Relationship - A relationship that occurs between two or more individuals or legal entities that constitute a single entity from the point of view of assumed risk, due to being so linked that, in the event that one of them encounters financial problems, the other or all others will likely have difficulties in fulfilling their obligations. This risk group relationship is considered to exist namely when: a) There is a control relationship of one over the other or over others; b) There are common shareholders or partners who exercise significant influence on the entities in question; c) There are common administrators; and d) There is direct commercial interdependence that cannot be replaced in the short term.
16. Firm Takeover of Security Issuances - An operation whereby a credit institution commits to acquire the unplaced portion from the recipients of the offer, before an entity that offers shares or bonds for subscription or acquisition by the public;
17. Indirect Subscription of Shares - An operation whereby a credit institution commits to subscribe to a certain quantity of shares, relating to the increase in the capital of a company, assuming the obligation to offer them, within a certain time frame, to the shareholders of the issuing company or to third parties;
18. Spot Foreign Exchange Position - The difference between the purchases and sales of a given foreign currency, whether already realized or those whose settlement occurs within the two subsequent business days;
19. Forward Foreign Exchange Position - The difference between the contracted purchases and sales of a given foreign currency, whose settlement occurs after the two subsequent business days;
20. Foreign Currency Position - The sum of spot and forward foreign exchange positions in a given foreign currency; and
21. Global Foreign Exchange Position - The sum of foreign exchange positions in all foreign currencies taken in modulus.

CHAPTER II Solvency Ratio

Article 4 (Limit and Effects of Non-Compliance)

1. The solvency ratio value must not be less than 8%.
2. Credit institutions that, for any reason, fail to respect the provision in the preceding paragraph, will automatically be prevented from increasing the global value of asset elements and their off-balance sheet accounts that, under the terms of the annex to this Notice, are weighted with a factor different from 0%, and must adopt all appropriate procedures to regularize the situation, within the time frame fixed by the Bank of Mozambique.

Article 5 (Weighting of Asset and Off-Balance Sheet Accounts) The weights to be assigned to asset elements and off-balance sheet accounts, as well as the process for calculating the solvency ratio, are indicated in the annex to this Notice.

CHAPTER III Risk Concentration

Article 6 (Limits)

1. Credit institutions, regarding the risks they assume, are subject to the following limits: a) With respect to a single client, they must not incur risks whose value, in total, exceeds 25% of their own funds; and b) The aggregate value of large risks assumed must not exceed eight times their own funds.
2. When a risk on a client is guaranteed by a third party, in an irrevocable and legally binding manner, such risk is considered to be assumed on that third party and not on the client.

Article 7 (Exceptions to Risk Concentration Limits)

1. In exceptional circumstances and upon duly justified request by credit institutions, the Bank of Mozambique may authorize them to exceed the limits fixed in Article 6(1) of this Notice.
2. In the authorizations granted, under the preceding paragraph, the Bank of Mozambique shall determine the time frame and conditions for the applicant's adaptation to the limits fixed in Article 6(1) of this Notice.

Article 8 (Treatment of Risk in Group Relationship)

1. Risks related to all individuals or legal entities that are in a risk group relationship with a single client must be considered as assumed with that single client.
2. Credit institutions have the duty to identify the interdependencies and links of their clients, in order to observe the provision in the preceding paragraph.

Article 9 (Valuation Criteria)

1. For the purposes of this chapter, the following valuation criteria must be adopted: a) Asset elements are evaluated at their book value in the balance sheet, minus impairment losses calculated in accordance with International Financial Reporting Standards (IFRS) or, if higher, minus the respective regulatory provisions resulting from the application of Notice No. 7/GBM/07, except regarding: (i) the value of credits and other receivables, classified as financial assets held for trading or as financial assets at fair value through profit or loss, which excludes their unrealized gains; (ii) the value of credits granted and accounts receivable, classified as available-for-sale financial assets, which excludes their unrealized gains and losses (except for the value relating to impairment); (iii) the value of credits and other receivables involved in fair value hedging relationships, (the book value must exclude gains and losses corresponding to the part not involved in such hedging relationship and/or to the part of that relationship considered ineffective); (iv) the value of elements classified as available for sale not quoted in an active market, for which unrealized gains are excluded and their deferred taxes are not considered; and (v) the value of investment properties and other tangible fixed assets, for which unrealized gains and losses (that do not represent impairment) are excluded, except regarding gains resulting from revaluations carried out under the legal instrument authorizing them. b) Off-balance sheet items listed in Part II of the annex to this Notice, with the exception of those with low and medium/low risk and those related to foreign exchange operations, are evaluated at their nominal value, minus provisions calculated in accordance with IFRS or, if higher, minus the respective regulatory provisions resulting from the application of Notice No. 7/GBM/07; c) Off-balance sheet items with low and medium/low risk referred to in Part II of the annex to this Notice are evaluated at 50% of their nominal value, minus provisions calculated in accordance with IFRS or, if higher, minus the respective regulatory provisions resulting from the application of Notice No. 7/GBM/07; and d) Off-balance sheet items related to forward foreign exchange operations are evaluated at the value resulting from the calculation provided for in number 4 of Part I of the same annex.
2. The limits referred to in Article 6(1) of this Notice are exempt from the risks assumed with: a) The Government of Mozambique; b) The Bank of Mozambique; c) Foreign Governments and Central Banks; and d) International Financial Organizations.

Article 10 (Risks Not Considered) The following risks are not considered, for the purposes of calculating the limits referred to in Article 6(1) of this Notice: a) Covered by explicit and irrevocable guarantees from the entities referred to in Article 9(2); b) Covered by cash deposits in the institution itself; c) Covered by deposits in the institution itself of debt securities issued by the entities referred to in Article 9(2) or by the institution itself, provided they do not represent their own funds; and d) Covered by own funds, in accordance with Article 8(d) of Notice No. 5/GBM/07.

Article 11 (Risks Weighted at 20%) Risks are weighted at 20% of the value resulting from the application of the valuation criteria established in Article 9 of this Notice: a) Related to operations with credit institutions subject to the norms of this Notice, with a residual maturity of up to one year; b) Covered by explicit and legally binding guarantees provided by other credit institutions subject to the norms of this Notice, whose residual maturity is not more than one year; and c) Covered by deposit in the institution itself, of negotiable debt securities issued by credit institutions subject to the norms of this Notice, provided they do not represent their own funds.

Article 12 (Risks Weighted at 50%) Risks are weighted at 50% of the value resulting from the application of the valuation criteria established in Article 9, regarding credits guaranteed by the first mortgage of the borrower's residence or real estate finance lease contracts.

Article 13 (Risks Covered)

1. Credit institutions with headquarters in Mozambique must consider the risks assumed by their establishments in the country and by their branches abroad.
2. Branches in Mozambique of credit institutions with headquarters abroad must consider only the risks of their own activity, with reference to their own funds, defined in terms of Notice No. 5/GBM/2007.

CHAPTER IV Participation in the Capital of Other Companies

Article 14 (Limits)

1. Credit institutions must not hold, directly or indirectly, in the capital of a company, participations whose amount exceeds 15% of their own funds.
2. The global amount of qualified participations in companies must not exceed 60% of the own funds of a credit institution.
3. The total value of shares or other capital parts of any companies held by a credit institution and which are not qualified participations must not exceed 25% of the own funds of the same institution.
4. Credit institutions must not hold, directly or indirectly, in a company, a participation that confers more than 25% of the voting rights corresponding to the capital of the participating company.

Article 15 (Exceptions to Share Participation Limits)

1. The provisions of the preceding article do not apply to participations in other institutions subject to the supervision of the Bank of Mozambique, in insurance companies with headquarters in Mozambique, and also those covered by own funds, in accordance with Article 8(d) of Notice No. 5/GBM/07.
2. The limits provided for in Article 14 can only be exceeded as a result of the repayment of own credit, and the situations resulting therefrom must be regularized within a period of two years.

CHAPTER V Firm Takeover of Security Issuances, Indirect Subscription of Shares and Acquisition of Bonds

Article 16 (Limits)

1. In each operation of firm takeover of share issuance or indirect subscription of shares, a credit institution must not assume commitments or apply resources that exceed 25% of its own funds.
2. The global value of commitments assumed and resources applied by a credit institution as a result of operations of firm takeover of share issuance or indirect subscription of shares must not exceed the value of its own funds.
3. The firm takeover and acquisition of bonds are subject to the limits established for risk concentration.

Article 17 (Unplaced Securities)

1. Securities not placed as a result of operations of firm takeover of share issuance or indirect subscription of shares must be considered for the purposes of the limits on participations in the capital of other companies to which the respective credit institutions are subject.
2. For the purposes of the preceding number, securities are considered unplaced if: a) In operations of firm takeover of share issuance, they have not been sold by the closing date of the subscription period; and b) In operations of indirect subscription of shares, they have not been acquired by the shareholders of the issuing company or by third parties within sixty days from their subscription.

CHAPTER VI Fixed Assets

Article 18 (Restriction on Acquisition of Real Estate) Credit institutions must not acquire real estate other than those indispensable to their installations and operation or to the pursuit of their corporate object.

Article 19 (Limits) The net value of fixed assets of a credit institution must not exceed the amount of its own funds.

Article 20 (Exceptions to Fixed Asset Limits) The restrictions provided for in Articles 18 and 19 may be exceeded in the following situations: a) Fixed assets received as a result of the repayment of own credit, and the situations resulting therefrom must be regularized within a period of two years, after which the deduction provided for in Article 8(c) of Notice No. 5/GBM/07 will apply; and b) Fixed assets covered by own funds, in accordance with Article 8(d) of Notice No. 5/GBM/07.

CHAPTER VII Foreign Exchange Positions

Article 21 (Limits) Credit institutions must not present, at the close of each day, a global foreign exchange position greater than 20% of their own funds, nor a foreign exchange position in each foreign currency that exceeds 10% of said own funds.

CHAPTER VIII Coverage of Liabilities

Article 22 (Form of Coverage) Credit institutions must, permanently, ensure the coverage of their liabilities to third parties in the following terms:

1. Liabilities at sight or with a residual maturity of up to 30 days must be fully covered by the following values: a) Cash in vault; b) Postal orders and sight checks; c) Demand deposits at the Bank of Mozambique; d) Demand deposits in other credit institutions; e) Gold and other precious metals; and f) Other asset elements surely realizable within a period not exceeding 180 days, except tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.
2. The total amount of liabilities with a residual maturity of more than 30 days must be fully covered by: a) The excess of the values referred to in number 1 over the liabilities mentioned therein; and b) Other asset elements, surely realizable within a period exceeding 180 days, except tangible fixed assets, intangible fixed assets, investments in subsidiaries, associates and joint ventures, and non-monetary financial assets classified as available for sale.

CHAPTER IX Final and Transitional Provisions

Article 23 (Instructions and Clarifications)

1. The Bank of Mozambique, through the Banking Supervision Department, will issue the necessary instructions for the compliance with the provisions of 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 24 (Repealing Norm) This Notice repeals Notice No. 5/GGBM/99 of March 24.

Article 25 (Entry into Force) This Notice enters into force on the date of its publication, taking into account the time frames 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

ANNEX PART I Weighting of Asset and Off-Balance Sheet Items of Credit Institutions for the Purposes of Calculating the Solvency Ratio

1. Asset and off-balance sheet items must be weighted according to credit risk. By off-balance sheet items, one must understand those explicitly indicated as such throughout this annex, regardless of the designation resulting from the accounting framework applicable to institutions subject to this Notice. Thus, without prejudice to the specific rules indicated throughout this Notice, the book value of asset elements must be multiplied by the respective weighting coefficient, according to the following number 2. In turn, the nominal value of off-balance sheet items must be weighted according to a two-step calculation method, according to numbers 3 and 4 below. The sum of the weighted values of assets and off-balance sheet items constitutes the denominator of the solvency ratio.

2. The weighting coefficients to be assigned to asset elements must be the following: 2.1. Weighting Coefficient of 0%: a) Notes and coins and other equivalent elements; b) Elements representing credit claims on:

• The Government of Mozambique;
• The Bank of Mozambique;
• Foreign Governments and Central Banks; and
• International Financial Organizations. c) Elements that enjoy explicit and legally binding guarantee from:
• Government of Mozambique;
• Bank of Mozambique;
• Foreign Governments and Central Banks; and
• International Financial Organizations. d) Elements totally covered by guarantees, prudently assessed, constituted by deposit in the institution itself of:
• Debt securities issued by the entities referred to in the preceding number or by the institution itself, provided they do not represent their own funds; and
• Cash. e) Elements covered by own funds, in accordance with Article 8(d) of Notice No. 5/GBM/2007. 2.2. Weighting Coefficient of 20%: a) Elements representing credit claims on other credit institutions subject to the norms of this Notice, with a residual maturity of up to one year; b) Elements with explicit and legally binding guarantee from other credit institutions subject to the norms of this Notice, with a residual maturity not exceeding one year; and c) Elements covered by deposit in the institution itself, of negotiable debt securities issued by credit institutions subject to the norms of this Notice, provided they do not represent their own funds.