BANK OF THE REPUBLIC OF BURUNDI

THE GOVERNOR

CIRCULAR NO. 06/2018 ON THE DIVISION OF CREDIT RISKS FOR CREDIT INSTITUTIONS ISSUED PURSUANT TO LAW NO. 1/17 OF AUGUST 22, 2017 GOVERNING BANKING ACTIVITIES

Having regard to Law No. 1/34 of December 2, 2008 establishing the Statutes of the Bank of the Republic of Burundi, particularly Articles 7 (paragraph 4) and 8;

Having regard to Law No. 1/17 of August 22, 2017 governing banking activities, particularly Articles 3, 48, 49 (paragraph 8), 50, 51, 52, 53, 63 and 70;

Having reviewed Circular No. 06/2014 on the division of credit risks for credit institutions;

The Bank of the Republic of Burundi, hereinafter referred to as the "Central Bank", hereby enacts:

Article 1: Object

This circular aims to specify the credit risk limits that credit institutions are required to comply with on an ongoing basis.

Article 2: Definitions

For the purposes of this circular, the following terms apply:

a) credit risks

the total outstanding claims of a credit institution on an individual counterparty, natural or legal person, net of guarantees meeting the conditions of Articles 5 and 6;

These claims may be:

disbursed credits of any nature, form, and term, including finance lease operations;
debt securities;
loans and balances with another credit institution or any other assimilated entity;
irrevocable signed commitments (such as guarantees, avals, irrevocable financing commitments, etc.).

b) individual counterparty

any individual client or group of clients formed by "linked persons" on which a credit institution holds an outstanding claim;

c) related person to a credit institution

any natural or legal person, or group of linked persons, having at least one of the following qualities or relationships with it:

director or executive;
qualified shareholder;
shareholder holding at least 5% of voting rights;
company in which the related person holds, directly or indirectly, at least 25% of voting rights;
any company in which the persons referred to in 1), 2) and 3) are executives, directors or hold, directly or indirectly, at least 25% of voting rights;
spouse, direct-line relative or first-degree ally of any person referred to in 1), 2) and 3), as well as companies in which they are executives, directors or hold, directly or indirectly, at least 25% of voting rights;
company that, alone or with others, the credit institution controls directly or indirectly;
company controlled directly or indirectly by a person or entity that controls the credit institution;
any other person deemed related by the Central Bank;

d) linked persons

any group consisting of two or more natural or legal persons having interrelations such as joint management, commercial or financial interdependence, so that the difficulties of one necessarily affect the other(s);
Any other group of persons deemed linked by the Central Bank;

e) major risks

credit risks whose amount is equal to or greater than 10% of the institution's core own funds.

Article 3: Calculation of credit risk exposures

Credit risk exposures are calculated by taking the on-balance-sheet credit outstanding and off-balance-sheet commitments, weighted as follows:

on-balance-sheet credit outstanding: 100%;
off-balance-sheet commitments:
a. 0% for guarantees and sureties issued in favor of the Public Administration;

b. 20% for:

financing commitments issued in favor of credit institutions and assimilated entities;
credit guarantees issued in favor of credit institutions and assimilated entities;
documentary credits secured by underlying goods (net of related provisions);
other commitments, guarantees and sureties issued in favor of credit institutions and assimilated entities.
c. 50% for:
performance bonds;
bid bonds.
d. 100% for:
financing commitments issued in favor of clients (net of provisions and security deposits);
credit guarantees issued in favor of clients;
other guarantees and sureties issued in favor of clients;
compromised signed commitments net of related provisions.

Article 4: Credit risk limits

Credit institutions are required to comply on an ongoing basis with:

a limit of 25% for the ratio between the total amount of risks incurred on the institution's staff and core own funds;
a limit of 25% for the ratio between the total amount of credit risks incurred by the institution on an individual counterparty and core own funds;
a limit of 25% for the ratio between the total amount of risks incurred by the institution on all related persons and core own funds;
a limit of 5% for the ratio between the total amount of credit risks incurred by the institution on a single related person and core own funds;
a limit of 800% for the ratio between the total amount of major risks as defined in Article 2 of this circular and core own funds.

The credit risk limits set out in this article do not cover:

risks incurred on the Central Bank and/or the Public Treasury;

credits guaranteed by the Public Treasury;
commitments arising from the money market;
credits and commitments guaranteed by a first-tier international bank other than the parent or related entity, subject to Central Bank waiver;
overnight loans on the interbank market.

Article 5: Deductible guarantees for credit risks

To determine credit risks, outstanding claims are reduced by the following guarantees:

guarantees received from the Public Treasury;
guarantees received from international organizations or international financial institutions up to 80%, subject to Central Bank approval;
pledge of securities issued or guaranteed by the Public Treasury;
pledge of cash (security deposits);
pledge of treasury bills or debt securities issued by Burundese credit institutions up to 80%;
pledge of time accounts opened with the credit institution itself or negotiable debt securities issued by it;
guarantees presented within the framework of money market commitments;
guarantee from a first-tier international bank other than the parent or related entity, subject to Central Bank waiver.

Article 6: Characteristics of deductible guarantees

To be deductible, the guarantees provided in the preceding article must:

be formalized in writing, established and registered in compliance with applicable legal and regulatory provisions;
be callable on first demand without possibility of dispute;
have a maturity at least equal to that of the covered credit.

Guarantees may only be deducted up to their value and the amount of the covered asset.

Article 7: Restrictions on waivers for limit breaches

Credit institutions must prioritize risk-sharing by forming consortia to avoid breaching the limits set in Article 4 of this circular.

The Central Bank's waiver of this circular is conditional upon the requesting credit institution submitting written proof attesting to the refusal of other local credit institutions to co-finance the project in question, notably the minutes of the banking consortium formation meeting.

A credit institution that has received a waiver for limit breaches under Article 4 is required to set aside a reserve of at least 50% of the fiscal year's profit during which the waiver was granted.

Article 8: Declaration to the Central Bank

Credit institutions must declare monthly to the Central Bank, using the models attached to this circular:

the list of related persons to the credit institution that have received financing;
the list of linked persons;
the list of major risks;
the amount of financing provided to staff.

Any incomplete or false declaration exposes the credit institution to sanctions provided for in the circular on the sanction matrix.

Article 9: Entry into force

This circular replaces Circular No. 06/2014 of September 3, 2014 and enters into force on the day of its publication on the Central Bank's website and in the Official Gazette of Burundi.

Done in Bujumbura, on August 17, 2018

Jean CIZA
Governor.

1, Government Avenue - P.O. Box 705 BUJUMBURA - Tel: (257) 22-20 40 00 / 22 22 27 44 - Fax: (257) 223128 - Email: brb@brb.bi