Operational Rules and Prudential Requirements for Microfinance Financial Institutions (Notice No. 08/2024 of December 20)

PUBLISHED IN THE GAZETTE OF THE REPUBLIC, FIRST SERIES, NO. 242, OF DECEMBER 20, 2024 NOTICE NO. 08/2024 SUBJECT: FINANCIAL SYSTEM − Operational Rules and Prudential Requirements Applicable to Microfinance Financial Institutions

Considering the dynamics of the functioning of the Angolan Financial System, internationally accepted best practices, as well as the constant emergence of new institutions and consequently new offers of financial products and services, it is necessary to promote the activity of Microfinance in the country, aiming to expand the typology of new operators and stimulate financial and social inclusion, imposing a new dynamic on economic activity, generating employment, providing income to Angolan families, in line with the objectives defined in the National Development Programme, sustainable economic development, diversification and inclusive growth.

With the publication of Presidential Decree No. 165/24, of July 18, which approves the Regulations of Microfinance Financial Institutions, which confers upon the National Bank of Angola the power to regulate the terms and conditions for the functioning of these non-bank financial institutions, it is necessary to define the operational rules and prudential requirements applicable to Microfinance Financial Institutions, whose nature falls within the provision of financial services, among others, small and medium-sized operations, namely, credit operations and the collection of small deposits, proportional to their risks, business model, nature and level of complexity;

In these terms, under the provisions of Article 4 of the Regulations of Microfinance Financial Institutions, approved by Presidential Decree No. 165/24, of July 18, combined with paragraph 3 of Article 9, and Article 166 of Law No. 14/21, of May 19, General Regime of Financial Institutions Law, as well as with items d) and f) of paragraph 1 of Article 31 and of paragraph 1 of Article 98, both of Law No. 24/21, of October 18, National Bank of Angola Law.

I DETERMINE:

CHAPTER I
GENERAL PROVISIONS

Article 1.
(Object and Scope)
The present Notice establishes the operational rules applicable to Microfinance Financial Institutions, solvency ratios and the composition of regulatory own funds, classification and provisions of operations, accounting and information reporting.

CHAPTER II
ACTIVITIES AND SHARE CAPITAL

Article 2.
(Collection of Deposits and Granting of Credit) For the purposes of the provisions of paragraph 2 of Article 5 of the Regulations of Microfinance Financial Institutions, approved by Presidential Decree No. 165/24, of July 18, Microfinance Financial Institutions may only collect deposits and grant credit, observing the following limits:
a) Collection of deposits up to a maximum of Kz 10,000,000.00 (ten million Kwanzas) per individual client, whereby the respective balance must not exceed the same value; b) Collection of deposits up to a maximum of Kz 20,000,000.00 (twenty million Kwanzas) per corporate client, whereby the respective balance must not exceed the same value; c) Financial investments in securities and time deposits, the residual maturity of which must not exceed 1 (one) year; d) Granting of credit up to a maximum of Kz 10,000,000.00 (ten million Kwanzas) per individual client; e) Granting of credit up to a maximum of Kz 20,000,000.00 (twenty million Kwanzas) per corporate client.

Article 3.
(Share Capital)
Microfinance Financial Institutions must be constituted and remain in operation with the minimum regulatory share capital, defined in specific normative.

CHAPTER III
OWN FUNDS REQUIREMENTS

Article 4.
(Own Funds)
The Own Funds of Microfinance Financial Institutions, established under the terms of this Notice, include Tier 1 own funds and Tier 2 own funds.

Article 5.
(Tier 1 Own Funds)

1. The elements that make up Tier 1 own funds must be used to cover risks or losses that occur in them, distinguished by their quality, by characteristics of permanence, degree of subordination, capacity and timeliness of loss absorption and, where applicable, possibility of deferral or cancellation of their remuneration.
2. Tier 1 own funds consist of positive and negative elements.
3. For the purposes of the provisions of the preceding paragraph, the following are considered positive elements of own funds:
   a) Paid-up share capital; b) Legal, statutory and other reserves formed by undistributed results; c) The positive net result of the previous year; d) The positive net result carried forward from previous years; and, e) The provisional positive result of the current year.
4. For the purposes of the provisions of paragraph 2 of this Article, the following are considered negative elements of own funds:
   a) Intangible assets; b) The negative net result carried forward from previous years; c) The negative net result of the last year; d) The negative result of the current year; and, e) Treasury shares.

Article 6.
(Tier 2 Own Funds)
Complementary own funds are the amounts corresponding to:
a) Funds; b) Reserves arising from the revaluation of fixed assets; c) Other positive revaluation reserves; d) Subordinated loans with a term of more than five years, whose conditions are approved by the National Bank of Angola, which may be considered up to 50% of Tier 1 Own Funds; and, e) Hybrid instruments of capital and debt, whose conditions are approved by the National Bank of Angola.

Article 7.
(Calculation of Regulatory Solvency Ratio)

1. The Regulatory Solvency Ratio (RSR) corresponds to the ratio between Regulatory Own Funds (ROF) and the values exposed to the risks inherent in the operations carried out.
2. For calculation purposes, risk values are segregated according to exposure, obeying the following formula:
   RSR = (Regulatory Own Funds / (RACPR + ROAR) * 100)
3. The formula established in the preceding number is composed of the elements described below:
   i. RSR = Regulatory Solvency Ratio;
   ii. Regulatory Own Funds (ROF) = Tier 1 Own Funds + Tier 2 Own Funds;
   iii. RACPR – Risk-Weighted Assets for Credit Risk, including off-balance sheet items; and,
   iv. ROAR – Equivalent Value in Risk-Weighted Assets for Operational Risk.

Article 8.
(Eligibility of Tier 2 Own Funds)
Tier 2 Own Funds may correspond, at most, to 100% of the value of Tier 1 Own Funds, net of the deductions provided for in paragraph 4 of Article 6 and which satisfy the other conditions provided for in this Notice.

Article 9.
(Compatibility with the Risk Degree of Assets) Microfinance Financial Institutions, regardless of the minimum capital and regulatory own funds, must maintain the value of their own funds compatible with the risk degree of the structure of their assets, to be established in specific normative.

Article 10.
(Regulatory Solvency Obligations)

1. Microfinance Financial Institutions must:
   a) Maintain own funds at the minimum values established in this Notice; and, b) Permanently observe an adequate relationship between the amount of their own funds and the amount of their asset and off-balance sheet elements weighted according to the respective risks involved, especially credit risk and operational risk.
2. Microfinance Financial Institutions must maintain a level of capital compatible with the nature and scale of their operations, as well as the inherent risks, maintaining the Regulatory Solvency Ratio (RSR) equal to or greater than 12% (twelve percent).

Article 11.
(Credit Risk)

1. Microfinance Financial Institutions must calculate the own funds requirement for covering credit risk, as established in specific normative, considering the total activity, with the exception of the trading book and assets deducted directly from own funds, for the following risk classes:
   a) Public entities; b) Organizations; c) Financial Institutions; d) Companies; e) Retail portfolio; f) Positions secured by real estate; g) Overdue elements; h) Mortgage bonds or bonds on the public sector; and, i) Other elements.
2. The National Bank of Angola defines in specific normative, the structure and minimum content of reports and other information elements that must be submitted under the scope of this Article.

Article 12.
(Operational Risk)

1. Microfinance Financial Institutions must calculate the own funds requirement for covering the operational risk of their activities, according to the basic indicator, standard or alternative standard methods, established in specific normative on own funds requirements for covering operational risk.
2. Microfinance Financial Institutions must apply the provisions of this Article on a consolidated and individual basis, as appropriate:
   a) The calculation of the regulatory own funds requirement for covering operational risk must occur on a consolidated basis, according to the method used by the institution, at the individual level, provided that the applicable requirements are met by all entities of the financial group; b) The combined use of different methods for calculating the regulatory own funds requirement for covering operational risk on a consolidated basis may only be used on an exceptional basis, with authorization from the National Bank of Angola, namely, in cases of acquisition of new Institutions or activity segments where a transition period for the application of the authorized method may be requested; and, c) The combined use referred to in the preceding number depends on the commitment assumed by the institution to apply only one method, according to the action plan approved by the National Bank of Angola.
3. The National Bank of Angola defines in specific normative, the structure and minimum content of reports and other information elements that must be submitted under the scope of this Article.

CHAPTER IV
OTHER PRUDENTIAL REQUIREMENTS

Article 13.
(Prudential Limits on Large Exposures and Holding of Participations in Non-Financial Companies)

1. Microfinance Financial Institutions must adopt operational procedures associated with solid, effective and complete internal control policies and processes, for the identification of all risk concentration situations, as well as for the control of the limits referred to in this Article.
2. Microfinance Financial Institutions must consider the direct risk or the risk of guarantors of operations, provided they apply consistent and uniform methodologies.
3. The National Bank of Angola defines in specific normative, the information reporting duties in terms of structure, specifying large exposures and exposures subject to and exempt from limits, as well as the nature of mitigants.

Article 14.
(Liquidity Risk)

1. Microfinance Financial Institutions must comply with regulatory limits on the liquidity ratio and observation ratio, defined in specific normative.
2. Microfinance Financial Institutions must apply the provisions of this Article on a consolidated and individual basis, as appropriate.
3. The parent company of a financial group must apply on a consolidated basis the provisions contained in this Article to the activity of the financial group it is part of, ensuring coherence and alignment of approaches to liquidity risk.
4. The National Bank of Angola defines in specific normative, the quantitative analysis requirements, as well as the structure and content of reporting relating to the liquidity ratio and observation ratio.

Article 15.
(Interest Rate Risk in the Portfolio of Microfinance Financial Institutions)

1. For the purposes of determining interest rate risk in the portfolio, Microfinance Financial Institutions must consider an instantaneous positive or negative shock of 2% (two percent) in the interest rate, which results in a parallel movement of the yield curve of the same magnitude, estimating the impact on the present value of cash flows and on the interest margin.
2. The National Bank of Angola defines in specific normative, the analysis and reporting requirements associated with the impact of a standardized interest rate shock on the economic value of future cash flows associated with the portfolio and interest margin.

Article 16.
(Leverage Ratio)

1. The National Bank of Angola defines in specific normative, the requirements for determining the leverage ratio.
2. For the purposes of the provisions of the preceding number, institutions must comply with a minimum leverage ratio requirement of 3% (three percent), dividing the measure of Tier 1 own funds of an institution by the measure of the total exposure of that institution, according to the methodology established in specific normative.
3. Microfinance Financial Institutions calculate the leverage ratio at the reference date of reporting, and must comply with the minimum requirement established in the preceding number at all times.

Article 17.
(Interest Rates)

1. The interest rates practiced between Microfinance Financial Institutions and their respective clients are freely negotiated.
2. Without prejudice to the provisions of the preceding number, interest rates that constitute usury must not be practiced.

Article 18.
(Classification and Provisioning of Credits)
The rules for the classification of credits granted are applicable to Microfinance Financial Institutions, and respective provisions must be created according to the level of risk assumed, under terms to be defined in specific normative.

Article 19.
(Alteration of the Calculation Base for Ratios and Prudential Limits) The National Bank of Angola may determine the adjustment of the amounts that serve as the basis for the calculation of the limits established in this Notice whenever the conditions for the observance of prudential principles so justify.

Article 20.
(Reserves)

1. Microfinance Financial Institutions must constitute a legal reserve, intended to cover potential losses.
2. Without prejudice to the provisions of the preceding number, the National Bank of Angola may determine the constitution of mandatory reserves and other liabilities that it fixes.

CHAPTER V
SUPERVISION

Article 21.
(Supervision)
Microfinance Financial Institutions are subject to prudential and behavioral supervision, under the terms defined in Law No. 14/21, of May 19, General Regime of Financial Institutions Law and its regulation.

Article 22.
(Acquisition of Real Estate)
Microfinance Financial Institutions may not acquire, for consideration, real estate beyond that necessary for their own installations, or those of their groupings, unless the acquisition is for the purpose of repaying their own credits, in which case the real estate must be alienated within a period of one year.

Article 23.
(Corporate Governance and Internal Control)
The corporate governance model applicable to Microfinance Financial Institutions is established in specific normative.

CHAPTER VI
RISK GOVERNANCE

Article 24.
(Risk Management)

1. The Management Body must have a general perspective of the global risk profile of the Institution, considering credit, liquidity and operational risks, classifying them as material or immaterial.
2. Without prejudice to the provisions of the preceding number, Microfinance Financial Institutions must consider the concentration of risks, including inter and intra risk concentration.
3. The National Bank of Angola defines in specific normative, the functions, policies and risk management processes for the identification, assessment, monitoring, control and reporting for the management of their respective risks.

Article 25.
(Capacity to Assume Risk)

1. Microfinance Financial Institutions must formalize their capacity to assume risk, according to prudent and consistent assumptions.
2. For the purposes of the provisions of the preceding number, Microfinance Financial Institutions must consider, at a minimum, the following factors:
   a) Financial capacity; b) Management capacity; c) Competitive dynamics of the market in which they operate; d) Operational flexibility; and, e) Internal control systems.
3. The Management Body of Microfinance Financial Institutions is responsible for establishing the methods to be used in determining the institution's capacity to assume risk and documenting the assumptions assumed in them, clearly and objectively, to guarantee the verification of their adequacy, at a minimum, annually, and whenever relevant changes occur in the factors referred to in the preceding number.
4. Microfinance Financial Institutions must ensure that assumed risks are covered by formally defined and approved limits in their risk management policy.

Article 26.
(Risk Appetite)

1. Microfinance Financial Institutions must adequately consider risk appetite in their strategies, policies and risk management processes, which must be aligned with the capacity to assume risk and the global strategy of the institution.
2. The Management Body must define the institution's risk appetite, considering its strategy and long-term objectives, as well as its adaptation to changes in business, macroeconomic and market conditions.
3. Whenever the Management Body approves an increase in the risk of a certain activity, it must counterbalance it by reducing the risk of another activity, so that the institution remains within the initially defined risk appetite.
4. In determining risk appetite, Microfinance Financial Institutions must consider the following measures:
   a) Quantitative, which can be translated into risk limits capable of being aggregated and disaggregated to allow the measurement of the risk profile against the appetite and capacity to assume risk; and, b) Qualitative, for assessing risks that are not quantifiable, namely, the consequences at the reputation level resulting from ineffective conduct risk management.

Article 27.
(Strategy)

1. The Management Body must define a viable risk strategy, capable of resisting economic cycles and consistent with the capacity to assume risks and risk appetite.
2. The risk strategy and its level of detail must be appropriate to the nature of the activity, size, complexity and consider contents in terms of the risk of each business in which it operates, always guaranteeing consistency with the business strategy.
3. In formulating the strategy, institutions must consider their legal structure, key business lines, the breadth and diversity of markets, products and jurisdictions in which it operates or plans to operate, macroeconomic conditions and common market practices, as well as national and foreign legal requirements and their respective updates.
4. The strategy defined by the Management Body must consider the level of sophistication of the institution's information and communication systems, as well as its systems and processes for risk management.
5. The risk strategy must contain, the objectives for risk management regarding material activities and significant risks of the institutions, including a definition and formalization of the institution's risk appetite, based on credible assumptions and reliable and current information.
6. Without prejudice to the delegation of competence to employees with management responsibilities, the Management Body must ensure the implementation and monitoring of the strategy.
7. The Management Body must establish a system of limits transversal to the institution, in order to ensure compliance with the strategy and the capacity to assume risks.
8. The limit system must include, sub-limits and alerts adapted to the business unit or entity and to the types of risks, for positions in risk with counterparties or groups of interconnected counterparties, sectors or industries, as well as positions in risk with products, currencies, locations or specific markets.
9. The Management Body must ensure that policies and processes are developed for the acceptance of risks that are consistent with the risk management strategy and the appetite for it.
10. In reviews of the risk strategy, risk appetite, risk management policies and the limit system, stress test results must be considered.
11. In defining the strategy, institutions must determine the relationship between risk and return on their investments, taking into consideration the cost of capital and respective own funds available for its coverage, regulatory requirements and those resulting from the institution's own assessment, as well as its liquidity situation.
12. The Management Body must periodically review the financial results of the institution, at a minimum, quarterly, and based on this analysis, determine any changes in the risk strategy.
13. The Management Body and employees with management responsibility must ensure that the risk strategy is properly documented, that it is reviewed regularly, at a minimum, annually, in order to reflect changes in risk appetite, risk profile, capacity to assume risk, as well as macroeconomic and market conditions.
14. The Management Body and employees with management responsibilities must ensure that the contents of the risk strategy, as well as any changes resulting from its reviews, are communicated internally to areas directly related to their respective contents, in order to guarantee consistency in the overall functioning of the institution.

Article 28.
(Risk Concentration)

1. Microfinance Financial Institutions must adequately consider risk concentration in their strategies, policies and risk management processes, clearly defining the responsibilities of relevant employees, and develop processes for

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