On the Composition of Own Funds of Credit Institutions

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CENTRAL BANK OF DJIBOUTI

INSTRUCTION NO. 2019-01

ON THE COMPOSITION OF OWN FUNDS OF CREDIT INSTITUTIONS

The Governor of the Central Bank of Djibouti,

Having regard to Law No. 118/AN/11/6ème L of 22 January 2011 amending the statutes of the Central Bank of Djibouti;

Having regard to Law No. 119/AN/11/6ème L of 22 January 2011 on the establishment and supervision of credit institutions and financial auxiliaries;

Having regard to Decree No. 2018-171/PRE of 08 May 2018 appointing the Governor of the Central Bank of Djibouti.

Has decreed:

Article 1: Determination of Own Funds

The net own funds of credit institutions, referred to in Article 3 of Law No. 119/AN/11/6ème L of 22 January 2011 cited above, hereinafter referred to as "subject institutions", shall consist of the sum of the following elements:

• Core own funds as defined in Article 2;
• Supplementary own funds as defined in Article 3.

Article 2: Composition of Net Core Own Funds

Net core own funds include gross Tier 1 core own funds as defined in paragraph 1, after deducting the elements defined in paragraph 2, and other core own funds as defined in paragraph 3.

1. Elements included in gross Tier 1 core own funds (or "core tier 1"):

• Share capital or equivalent amounts,
• Share premiums or merger premiums,
• Reserves, excluding revaluation reserves,
• Retained earnings (credit balance),
• Net profit after tax pending allocation, net of dividends to be distributed, subject to prior approval of the Central Bank of Djibouti which shall set the required conditions by circular,
• Any other issued and fully paid instrument by the institution and related premiums, meeting the inclusion criteria defined in Annex 1, subject to prior approval of the Central Bank of Djibouti.

2. Elements to be deducted from gross Tier 1 core own funds:

• Unpaid share capital,
• Retained earnings (debit balance),
• Pending losses or pending allocation,
• Deficit results at interim dates,
• Provisions requested by the Central Bank of Djibouti not yet established,
• Impaired receivables net of unprovisioned guarantees,
• Own shares held,
• Intangible assets, including setup costs and leasehold rights,
• Holdings in financial institutions and insurance companies according to the provisions of Article 4,
• The excess amount of deductions to be made on supplementary own funds, according to the provisions of Article 4,
• Loans to shareholders and senior management, according to the provisions of Article 7.

3. Elements included in other gross Tier 2 core own funds:

• Instruments issued and fully paid by the institution and related premiums meeting the inclusion criteria defined in Annex 2, subject to approval of the Central Bank of Djibouti. In case of non-compliance with any of the conditions set out in Annex 2, the instrument shall no longer be eligible for core own funds.

Article 3: Composition of Net Supplementary Own Funds

Net supplementary own funds include gross supplementary own funds as defined in paragraph 1 after deducting the elements defined in paragraph 2.

1. Elements included in gross supplementary own funds, subject to prior approval of the Central Bank of Djibouti:

• Net profit at interim dates, according to circular provisions,
• Reserves and revaluation differences, up to 10% of net core own funds and according to circular provisions,
• Net reserve arising from the financial accounting of lease operations, subject to verification by statutory auditors,
• Unallocated funds provided for general banking risks, unallocated general provisions, non-refundable public or private grants, guarantee funds, non-refundable public funds allocated to guarantee credit operations, and any other stable element included in equity not allocated to covering identified risks and meeting the following conditions:
  • be freely usable to cover losses;
  • be recorded in the accounting of the subject institution;
  • have been verified by statutory auditors.
• Fully paid instruments issued by the institution and related premiums meeting the inclusion criteria set out in Annex 3. In case of non-compliance with any of the conditions set out in Annex 3, the instrument shall no longer be eligible for supplementary own funds.

2. Elements to be deducted from supplementary own funds:

• Holdings in financial institutions and insurance companies according to the provisions of Article 4.

Article 4: Deduction of Holdings in Financial Institutions and Insurance Companies

Holdings in financial institutions defined in Article 1 of Law No. 119/AN/11/6ème L and in insurance companies defined by Law No. 40/AN/99/4ème L fixing the regulation applicable to insurance companies include any instrument, regardless of its legal nature, participating in their own funds. Deductions must be carried out on a component-by-component basis:

• Holdings intended to be incorporated into their core own funds must be deducted from Tier 1 core own funds pursuant to Article 2, paragraph 2;
• Holdings intended to be incorporated into their supplementary own funds must be deducted from supplementary own funds pursuant to Article 3, paragraph 2;
• The amount of deductions exceeding the amount of supplementary own funds shall be deducted from Tier 1 core own funds.

Article 5: Other Deductions

The Central Bank of Djibouti may decide to carry out any other deduction from core or supplementary own funds, depending on the operations carried out or the accounting procedures used by credit institutions.

Article 6: Caps

Tier 2 core own funds defined in the third paragraph of Article 2 are capped at 25% of net core own funds.

Net supplementary own funds defined in the first paragraph of Article 3 are capped at 25% of net own funds.

Article 7: Loans to Shareholders and Senior Management

Credit institutions must deduct from their Tier 1 core own funds asset items and off-balance sheet commitments granted to their senior management and principal shareholders according to the procedures set out in Instruction No. 2019-02 regulating relations between credit institutions and related parties.

Article 8: Institutions Required to Calculate Own Funds on a Consolidated Basis

Credit institutions holding holdings giving them exclusive control, joint control, or significant influence over one or more financial institutions must, in addition to individual accounts, prepare consolidated accounts and calculate their own funds on a consolidated basis, according to procedures set out by circular.

Article 9: Extraction of Own Fund Calculation Elements from Accounting

The elements included in the own funds calculation are extracted from the individual or consolidated accounting of the subject institutions.

Article 10: Possibility of Temporary Derogation Granted by the Central Bank of Djibouti

Under exceptional circumstances which it remains free to assess, the Central Bank of Djibouti may temporarily authorize a subject institution to exceed the limits set out in Article 6, and set a maximum deadline for it to regularize its situation.

Article 11: Submission of Form No. 2019-01 Declaring the Composition of Own Funds

1. Credit institutions must submit to the Central Bank of Djibouti, as of the reporting dates of 31 March, 30 June, 30 September, and 31 December, the form set out in Annex 4.

2. This form must be sent to the Central Bank of Djibouti no later than the 20th day of the month following the reporting date. If this day is a holiday, the form must be submitted no later than the first following business day.

3. The form set out in Annex 4 must be submitted both as a signed paper form by one of the responsible senior management of the credit institution, and as an Excel file sent by email, according to the procedures set out in the Central Bank of Djibouti circular on the procedures for producing and submitting accounting and prudential forms.

Article 12: Power of the Central Bank of Djibouti to Correct the Own Funds Composition Declaration Form

The Central Bank of Djibouti may modify the treatment of certain elements if it considers that the conditions provided for by this instruction are not satisfactorily met.

Article 13: Entry into Force of the Instruction

This instruction of the Central Bank of Djibouti shall take effect on its date of publication.

Article 14: Repeal of Instruction No. 2011-05

Instruction No. 2011-05 of the Central Bank of Djibouti concerning the definition of net own funds of credit institutions is hereby repealed.

Done in Djibouti, on 31 March 2019

The Governor
M. AHMED OSMAN

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Annex 1

Eligibility Criteria for Tier 1 Core Own Funds Defined in Article 2, First Paragraph

Pursuant to Article 2, first paragraph of this instruction, other instruments included in Tier 1 core own funds must each meet the following criteria:

• they must constitute the most subordinated claim upon liquidation of the institution, giving a right to residual assets proportional to the issued share capital, after repayment of all senior claims;
• their duration is indefinite. They cannot be repaid outside of the institution's liquidation. At the time of their issuance, no statutory or contractual clause may authorize their buyback, repayment, or cancellation;
• their remuneration is not mandatory and may only be made by deduction from distributable profits. The remuneration is in no way linked to the amount paid at issuance and is subject to neither a floor nor a contractual ceiling, except for the limit relating to the amount of distributable profits;
• their remuneration is paid only after all other legal and contractual obligations have been met, notably payments of any nature on Tier 2 core own funds instruments provided for in Article 2, third paragraph, and supplementary instruments;
• they absorb losses as soon as they occur to ensure business continuity, pari passu with other elements included in core own funds defined in Article 2;
• their capital is fully paid in cash at issuance. The institution may not directly or indirectly finance their acquisition, under penalty of disciplinary and criminal sanctions;
• their capital is not backed by any security or guarantee provided by the issuer or a related entity, and is not subject to any clause allowing its ranking to be enhanced in the repayment order of claims;
• their issuance is carried out with the approval of the general meeting of shareholders.

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Annex 2

Eligibility Criteria for Tier 2 Core Own Funds Defined in Article 2, Third Paragraph

Core own funds instruments referred to in Article 2, third paragraph must comply with each of the following criteria:

• their contract includes a capital and interest subordination clause which, in the event of liquidation, only authorizes repayment after all other claims, except for own funds defined in Article 2, first paragraph;
• their capital is fully paid in cash at issuance. The institution may not directly or indirectly finance their acquisition, under penalty of disciplinary and criminal sanctions;
• their capital is not backed by any security or guarantee provided by the issuer or a related entity;
• they are not subject to any clause allowing their ranking to be enhanced in the repayment order of claims;
• their duration is indefinite;
• they do not include any step-up clause or other buyback incentive;
• any early repayment option initiated by the issuer may only be exercised with the prior approval of the Central Bank of Djibouti and after a period of five years from issuance. It may only be exercised if the instruments are replaced by other own funds instruments of at least equivalent quality, or if own funds are maintained at a level above regulatory requirements after the buyback;
• their principal repayment, in whole or in part, may not take place without the prior approval of the Central Bank of Djibouti;
• their remuneration may be cancelled by the institution at any time without any restriction other than that regarding the payment of dividends to ordinary shareholders, and without this constituting a default event. Cancelled amounts are retained by the institution;
• their remuneration must be an element of distributable profits;
• their remuneration must not be linked to the credit risk profile of the institution and notably its credit rating;
• their possible classification as a debt instrument, according to current accounting provisions, must not hinder their loss-absorbing capacity either by conversion into ordinary shares, or by a principal write-down mechanism, or by partial or total cancellation of remuneration;
• their acquisition may not be carried out by the institution itself or by a related party;
• their contract may not contain clauses detrimental to the possible recapitalization of the institution, notably those requiring the issuer to compensate investors if a new instrument is issued at a lower price.

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Annex 3

Eligibility Criteria for Supplementary Own Funds Defined in Article 3

Supplementary own funds instruments referred to in Article 3, which may be indefinite or fixed-term securities or subordinated loans, must comply with each of the following criteria:

• the contracts include a capital and interest subordination clause which authorizes, in the event of liquidation of the credit institution, repayment to the holder of the security or the lender after all other creditors, except for holders of instruments eligible for core own funds defined in Article 2;
• their capital is fully paid in cash at issuance. The institution may not directly or indirectly finance their acquisition, under penalty of disciplinary and criminal sanctions;
• the paid-in capital is not backed by any security or guarantee provided by the issuer or a related entity, and is not subject to any mechanism enhancing the ranking of claims relative to depositors and unsecured creditors;
• fixed-term instruments have an initial duration of at least 5 years. During the last five years of their life, the amount retained in supplementary own funds is reduced cumulatively by 20% per year. They do not include any step-up clause or any other buyback incentive;
• they may only be repaid at the issuer's initiative and any early repayment option initiated by the issuer may only be exercised with the prior approval of the Central Bank of Djibouti and after a period of five years from issuance. It may only be exercised if the instrument is replaced by another own funds instrument of at least equivalent quality, or if own funds are maintained at a level above regulatory requirements after the buyback;
• the issuance or loan contract gives the subject institution the option to defer interest payments;
• the holder of an instrument may not require that scheduled payments, notably for interest payments or capital repayment, be made early, except in the event of liquidation;
• the remuneration and repayment of instruments must not be linked to the credit risk profile of the institution and notably its credit rating;
• instruments may not be acquired by the institution or by a related party.

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Annex 4

INSTRUCTION NO. 2019-01
ON THE COMPOSITION OF OWN FUNDS

Name of Credit Institution: ......................................................................
Bank Code: ......................................................................
Reporting Date: ......................................................................

Submission Characteristics	Part to be completed by the institution	Part reserved for the Central Bank of Djibouti
Name of institution
Name of signatory of the form
Functions of signatory
Reporting date of the form
Form version No.
• 1st version
• Corrected version
Date of signature of the form
Date of receipt
Date of paper file submission
Date of electronic send	Email of

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NET OWN FUNDS
Instruction n° 2019-01
(In millions of FDJ)

TIER 1 CORE OWN FUNDS
DEDUCTIONS (B)	GROSS OWN FUNDS (A)
Unpaid share capital	Share capital or equivalent
Own shares held	Share premiums or merger premiums
Intangible assets	Reserves, excluding revaluation reserves
Retained earnings (debit balance)	Retained earnings (credit balance)
Pending losses	Pending net profit (1)
Interim loss	Verified interim profit (2)
Excess of expenses/income	Other issued fully paid instruments
Provisions requested by CBD
Impaired receivables net of unprovisioned guarantees
Financial holdings (3)
Non-deducted holdings from supplementary own funds (4), i.e. (J)
Loans to shareholders and senior management (6)
Negative core own funds C = A - B (if A < B)	Net core own funds Tier 1 D = A - B (if A ≥ B)

TIER 2 CORE OWN FUNDS
	Issued and fully paid instruments
	Tier 2 core own funds (E)

CORE OWN FUNDS
	Tier 2 core own funds cap (F)
	If E ≤ 25% (D+E) take F=E
	If E > 25% (D+E) take F=25% × D
Negative core own funds G = C	Net core own funds G=D+F

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SUPPLEMENTARY OWN FUNDS (5)
DEDUCTIONS (H)	GROSS OWN FUNDS (I)
Financial holdings (7)	Reserves and revaluation differences
	General provisions and other funds (8)
	Issued and fully paid instruments with indefinite term
	Issued and fully paid instruments with fixed term
Share to be deducted at less than five years	Net supplementary own funds K = I - H (if I ≥ H)
Deductions exceeding supplementary own funds J = I - H (if I < H)	Supplementary own funds net cap L
	If K ≤ 25%G take L=K
	If K > 25%G take L=25% × G
	Net supplementary own funds (L)

NEGATIVE NET OWN FUNDS M = C	NET OWN FUNDS M=G+L

(1) Net of dividends to be distributed and subject to prior approval of the Central Bank of Djibouti.
(2) After verification by statutory auditors and prior approval of the Central Bank of Djibouti.
(3) Holdings in the form of core own funds in financial institutions and insurance companies (see Article 4).
(4) Holdings in the form of supplementary own funds in financial institutions and insurance companies that could not be deducted from supplementary own funds: take the amount (J) (see Article 4). (5) Entry only subject to prior approval of the Central Bank of Djibouti. (6) Deduction pursuant to Instruction No. 2019-02 on relations between credit institutions and related parties. (7) Holdings in the form of supplementary own funds in financial institutions and insurance companies (see Article 4). (8) Funds for general banking risks, unallocated general provisions, non-refundable public or private grants, guarantee funds, non-refundable public funds and other stable unallocated funds (see Article 3).

Glossary:
FPB = core own funds
FPC = supplementary own funds