Prudential Standards for the Haitian Savings and Credit Cooperatives Sector

DIRECTION OF GENERAL INSPECTION OF POPULAR COOPERATIVES (DIGCP) PRUDENTIAL STANDARDS FOR THE HAITIAN SECTOR OF SAVINGS AND CREDIT COOPERATIVES

August 2007

TABLE OF CONTENTS

CIRCULAR NO. 1 STANDARD ON LIQUIDITY MANAGEMENT FOR SAVINGS AND CREDIT COOPERATIVES (CECs) ---------------- 1 CIRCULAR NO. 2 STANDARD ON INVESTMENT MANAGEMENT FOR SAVINGS AND CREDIT COOPERATIVES (CECs) ---------------- 6 CIRCULAR NO. 3 STANDARD ON CREDIT RISK MANAGEMENT 11 CIRCULAR NO. 4 STANDARD ON CAPITALIZATION OF CECs ------------- 32 CIRCULAR NO. 5 STANDARD ON INTERNAL CONTROL OF CECs ---------- 36 CIRCULAR NO. 6 STANDARD ON EXTERNAL AUDIT OF SAVINGS AND CREDIT COOPERATIVES ----------------------- 41 CIRCULAR NO. 7 STANDARD ON TRANSMISSION OF FINANCIAL STATEMENTS, ACTIVITY REPORTS OF CECs, AND GENERAL STATISTICS ---------------------------------------------- 49 CIRCULAR NO. 8 STANDARD ON OPENING OF BRANCHES OR SERVICE POINTS --------------------------------------------------------- 60 CIRCULAR NO. 9 ACCOUNTING CHART ------------------------------------------------------ 63

CIRCULAR NO. 1 STANDARD ON LIQUIDITY MANAGEMENT FOR SAVINGS AND CREDIT COOPERATIVES (CECs)

Bank of the Republic of Haiti (BRH) 2
STANDARD ON LIQUIDITY MANAGEMENT
FOR SAVINGS AND CREDIT COOPERATIVES (CECs)

Pursuant to Article 15 of the Law of June 26, 2002 on Savings and Credit Cooperatives, CECs must comply with the following provisions regarding liquidity management.

1. Definitions

1.1. Liquidity
Refers to the following elements:

• Cash;
• Instruments with immediate collectability;
• Demand deposits held with a second-tier structure (federation);
• Demand deposits held in local financial institutions.
  Demand deposit refers to bank balances free of any encumbrance.

1.2. Composition of Deposit Liability
Refers to the following elements received from members and users:

• Demand deposits;
• Blocked deposits;
• Specialized deposits;
• Time deposits;
• Other deposits.

2. Liquidity Requirement
   All CECs are required to hold, in the form of liquidity, an amount corresponding to at least 25% of deposits of all categories received from its members or users. In all cases, the cooperative must respect the general liquidity standard according to the formula:

Formula:
Liquidity / Deposit Liability ≥ 25%

2.1 Optimal Cash Level
The optimal cash level is that which satisfies the liquidity needs of the cooperative at all times while minimizing unproductive balances. Cash includes the operating cash, instruments with immediate collectability, and the safe reserve.

Formula:
Cash / Deposit Liability ≤ 9%

Bank of the Republic of Haiti (BRH) 3

2.2 Deposits in Financial Institutions
Current accounts and savings deposits held in financial institutions and the federation allow for meeting certain significant fund outflows.

Formula:
Demand Deposit / Deposit Liability ≥ 9%

2.2.1 Time Deposits
Time deposits must be placed for the short term (12 months maximum) and distributed over time according to the CEC's needs.

Formula:
Time Deposit / Deposit Liability ≥ 7%

3. Semi-annual Report on Liquidity Evolution
   CECs must complete and send to the BRH a report on the evolution of liquidity according to the table attached to this circular. CECs are required to specify in the report the financial institutions in which the funds are placed.

4. Sanctions

a) Reliability of Information
At all times, the amounts declared in the report provided in the annex must be those appearing in the accounting and auxiliary books of the CEC. Failure to comply with this directive, the BRH may, after inspection, apply an administrative sanction against the CEC in accordance with Articles 139 and 140 of the Law of June 26, 2002.

b) Non-submission of report or delay
In the event of non-submission or delay in transmitting the semi-annual report on the evolution of liquidity, the BRH reserves the right to take administrative sanctions against the CEC in accordance with Articles 139 and 140 of the Law of June 26, 2002. The administrative sanctions imposed by the BRH must be addressed at the annual general assembly of the CEC, pursuant to Article 43, paragraph g of the Law of June 26, 2002.

5. Entry into force of this circular
   The provisions of this circular enter into force on _______________________

Bank of the Republic of Haiti (BRH) 4

This circular cancels and replaces the provisions contained in Circular No. 2 issued on October 24, 2003.

Port-au-Prince, the _______________ 2008
Charles CASTEL
Governor

Bank of the Republic of Haiti (BRH) 5

ANNEX
NAME OF THE CEC :_________________________________________________ STATUS AS OF :_____________________________________ FREQUENCY : SEMI-ANNUAL EVOLUTION OF LIQUIDITY

Standards | Calculated Ratios | Variance
General Liquidity | ≥25% | Deposit Liability / Availability Optimal Cash | ≤9% | (Operating Cash + Immediate Collectability Instruments + Safe Box) / Deposit Liability Bank Deposits | ≥9% | (Demand Deposit Account + Savings Deposit) / Deposit Liability Time Deposits | ≥7% | Time Deposit / Deposit Liability

Explanation of variances:
List of financial institutions:
President : ________________________________________ General Manager: _____________________________________

CIRCULAR NO. 2 STANDARD ON INVESTMENT MANAGEMENT FOR SAVINGS AND CREDIT COOPERATIVES (CECs)

Bank of the Republic of Haiti (BRH) 7
STANDARD ON INVESTMENT MANAGEMENT
FOR SAVINGS AND CREDIT COOPERATIVES (CECs)

Pursuant to Article 14 of the Law of June 26, 2002 on Savings and Credit Cooperatives, CECs must comply with the following provisions regarding limits governing the management of investment risks.

1. Definitions

Investments concern the purchase of equity or bond securities. They do not include time deposits made in financial institutions. Depending on their nature and the period during which the company intends to hold them, investments can be short-term or long-term. If an investment by a CEC in another company aims to control said company or gives rise to significant business relationships, the investment will be classified among long-term investments regardless of its duration.

1.1 Risks concerning investments
Investment risk refers to the probability of financial losses resulting from the negative variation in the value of an investment (on and off-balance sheet) and the default of a counterparty. The risks concerning investments encompass the following asset elements (on and off-balance sheet):

• Equity securities (shares and capital participation in a company);
• Bond securities (bonds);
• Other Securities.

Investment risks exclude claims on the BRH.

1.2 Provision for impairment - Investments and securities
If a loss in value is observed in investments and this decrease in value is durable (at least three (3) consecutive years), a provision must be created to bring the investments to their net realizable value. In the case of short-term investments, they must be revalued at the end of each fiscal year. The CEC may cancel the effects of the prior recognition of a loss in value, but the gain recognized must in no case have the effect of giving the securities a book value that exceeds their acquisition cost.

2. Limitation of Investments
   The limitation ratios aim to limit the use of the cooperative's funds for investment purposes.

2.1 Limitation of total investments:
The total amount of investments must not exceed the following standard:
Investment / Assets ≤ 9%
In no case must investments exceed 70% of equity.

Bank of the Republic of Haiti (BRH) 8

2.2 Limitation of investments in a single company
The maximum amount of investments in a single company must not exceed the following standard:
Investment in a single company / Assets ≤ 5%

2.3 Prohibition of certain investments
A CEC cannot acquire or hold the following type of investment:

• More than 25% of the share capital of a local company;
• Shares traded on the Stock Exchange;
• Investments in a foreign company.

3. Transitional Provisions
   From the publication of this circular, the BRH grants a period of one (1) year to CECs that may own impermissible investments to dispose of them and comply with this standard.

4. Accounting for provisions for impairment - Investments and securities
   When establishing or canceling provisions, the items "provision for impairment - Investments and securities" in the income statement and "provisions for impairment - Investments and securities" in the balance sheet must be used.

5. Semi-annual report on the investment and securities portfolio
   CECs must complete and send to the BRH a report on the investment and securities portfolio according to the table attached to this circular.

6. Sanctions

Poor evaluation of Investments and securities
If a CEC does not restore, within the deadline required by the BRH, the level of its provision for impairment - investments and securities created due to poor evaluation, the BRH reserves the right to apply administrative sanctions against the CEC in accordance with Articles 139 and 140 of the Law of June 26, 2002.

Exceedance of the standard
If a CEC exceeds the investment limits set by this circular, the BRH reserves the right to apply administrative sanctions against the CEC in accordance with Articles 139 and 140 of the Law of June 26, 2002.

Bank of the Republic of Haiti (BRH) 9

Other infractions
For all other infractions of this circular, the BRH reserves the right to apply administrative sanctions against the CEC in accordance with Articles 139 and 140 of the Law of June 26, 2002. The administrative sanctions imposed by the BRH must be addressed at the annual general assembly of the CEC, pursuant to Article 43, paragraph g of the Law of June 26, 2002.

7. Entry into force of this circular
   The provisions of this circular enter into force on _______________________

Port-au-Prince, the ___________________ 2008
Charles CASTEL
Governor

Bank of the Republic of Haiti (BRH) 10

ANNEX
NAME OF THE CEC :_________________________________________________ STATUS AS OF :_____________________________________ FREQUENCY: SEMI-ANNUAL INFORMATION ON THE INVESTMENT AND SECURITIES PORTFOLIO

Company | Investment | Ratios Calculated | Standards | Variance Name | Location | Capital

Investment in the company / Assets ≤ 5%

Total Investments / Assets ≤ 9%

Authorized Signature________________________________________ Date :___________________________

CIRCULAR NO. 3 STANDARD ON CREDIT RISK MANAGEMENT

Bank of the Republic of Haiti (BRH) 12
STANDARD ON CREDIT RISK MANAGEMENT
FOR SAVINGS AND CREDIT COOPERATIVES (CECs)

Pursuant to Articles 14 and 15 of the Law of June 26, 2002 on Savings and Credit Cooperatives (CECs), CECs must comply with the following provisions regarding limits governing the management of credit risks.

The following definitions apply to this circular.

1. Definitions

1.1 Credit Policy
The set of principles that must be respected by the management and employees of a CEC regarding credit management. The credit policy is designed to minimize the risk of losses.

1.2 Credit Risks
Credit risk is the risk of financial losses resulting from the inability of a debtor for any reason to fully repay its debts to a CEC.
Credit risks are linked to the following asset elements (on and off-balance sheet):

• Loans and advances, debt securities, letters of credit, guarantees, substitute loan securities, financial lease contracts, credit cards, and credit lines;
• Any unused balance of irrevocable commitments;
• Any irrevocable agreement to purchase loans.

Credit risks exclude:

• Specific provisions for doubtful debts constituted and accounted for;
• 75% of the outstanding amount of housing loans secured by a first-ranking mortgage;
• 50% of the outstanding amount of commercial real estate loans secured by a first-ranking mortgage;
• 50% of any other claim provided that it is fully secured by a first-ranking mortgage.

For these last three exclusions, if the value of the mortgage serving as collateral is less than the total amount of the claim, the CEC can only deduct 75% or 50% of the value of the mortgage, as applicable.

1.3 Related Persons
A related person to a manager or employee of a CEC is:

1. their spouse, child, or child of their spouse;
2. their brothers, sisters, and their spouses;
3. the person with whom they are associated or the partnership of which they are a partner;
4. a legal entity controlled by them or by their spouse;
5. a legal entity in which they hold at least 5% of the capital.

A spouse is a person:

1. who is bound by marriage;
2. who lives in a marital relationship with a person and cohabits with them.

Bank of the Republic of Haiti (BRH) 13

1.4 Provision for doubtful debts
Refers to an income statement account in which the provision expense necessary to bring the provision for doubtful debts to the calculated amount is recorded. It generally constitutes the difference observed in the amount of the provision for doubtful debts between two dates of financial statement production. Provisions for doubtful debts can be established regarding the loan portfolio and off-balance sheet credit risks.

1.5 Guarantee
Refers to an instrument that allows the creditor to protect against the default of a debtor. This instrument guarantees the future fulfillment of an obligation.

1.6 Loans
Refers to cash advances or any other claim (on and off-balance sheet), with or without guarantee, to a debtor who is required to repay, on demand or at determined dates, the advanced funds as well as payable interest or fees. They include in particular consumer loans, housing loans, production loans, and commercial loans. Every loan requires that the analysis be based on the borrower's financial situation, their capacity, and their desire to repay.

Consumer Loans
The set of advances and loans granted by a CEC for the acquisition of consumer goods or for the payment of services. Advances on credit cards are included in this category.

Housing Loans
The set of loans and advances granted by a CEC for the acquisition, construction, repair, or improvement of a residential real estate property. The expression "residential real estate property" includes single-family residences, multi-unit housing of all types, mixed-use buildings where more than half of the area is used for residential housing, and land intended for residential construction.

Commercial Loans
The set of credits granted to a natural or legal person for business purposes. These credits include loans and advances, debt securities, equity securities, letters of credit, guarantees, substitute loan securities, and financial lease contracts. Loans to financial intermediaries, loans to the State, public enterprises, and local authorities as well as commercial real estate loans belong to this category. Commercial real estate loans are for agricultural buildings, office buildings, commercial buildings and centers, industrial buildings, hotels/motels, mixed-use buildings where more than half of the area is used for commercial or industrial exploitation, and land intended for commercial or industrial construction.

Production Loans
The set of credits granted to a natural or legal person for production purposes. By production is meant the association of inputs aimed at producing a finished product intended for marketing or subsequent transformation. These credits include loans and advances, debt securities, equity securities, letters of credit, guarantees, substitute loan securities, and financial lease contracts.

Loans to Cooperatives
The set of credits granted by a CEC to another CEC in the normal course of its activities. These credits include loans and advances, debt securities, equity securities, letters of credit, guarantees, substitute loan securities, and financial lease contracts.

Loans to Managers, Employees, and Related Persons The set of credits granted to the managers or employees of a CEC, their spouses, and their related persons.

Overdue Loan
Refers to a loan where part or all of the principal or interest is due and unpaid.

Secured Loan
Refers to a loan, even if non-performing, for which the CEC holds adequate protection for the recovery of both principal and interest, in the form of one or more admissible guarantees described in section 4 of this circular.

Non-Performing Loan
Means a loan where part or all of the principal or interest is due and unpaid for more than 90 days.

Written-off Loan
Refers to a loan that the CEC has written off after all possible restructuring or recovery activities have been undertaken and it is unlikely that they will allow the recovery of principal and interest.

Restructured Loan (Rescheduled)
Refers to a loan for which the CEC has agreed to modify the provisions due to the deterioration of the borrower's financial situation. A restructured loan generally implies one or both of the following situations:

• Reduction of the principal or the amount payable at the maturity date of the original agreement;
• Reduction of recognized interest, including waiver of interest;
• Postponement or extension of repayments.

Provision for Doubtful Debts
Refers to a balance sheet account in which any potential devaluation of the loan portfolio presented in offset against the balance of the concerned asset element is recorded, and whose minimum amount must be established according to the provisions of this circular. This account includes the general provision and specific provisions established regarding the loan portfolio.

General Provision
Refers to the provision constituted for prudence purposes, to take into account the global risk of the loan portfolio, without reference to a particular loan.

Specific Provision
Refers to the provision constituted after the evaluation of the entire portfolio of overdue loans to take into account the specific risk of each loan.

1.7 Off-Balance Sheet Risk
Refers to a commitment by the CEC in favor of a third party to guarantee the fulfillment of a financial obligation.

Bank of the Republic of Haiti (BRH) 15

2. Limits governing the concentration of credit risks

2.1 Limitation of credit risks:
The total amount of credit risks must not exceed the following standard:
(Total Credits + Off-Balance Sheet Risk) / Assets ≤ 70%

2.2 Limitation of risks taken on a single natural and/or legal person
The maximum amount of risks taken on a single natural and/or legal person must not exceed the following standard:
(Credit Risk Assumed by a Single Person) / (Total Credits + Off-Balance Sheet Risk) ≤ 2.5%

2.3 Limitation of credit risks taken on managers, employees, and persons related to them
The total amount of credit risks in favor of managers, employees, and persons related to them must not exceed the following standard:
(Credit Risk Assumed by Managers, Employees, and Related Persons) / (Total Credits + Off-Balance Sheet Risk) < 20%

3. Establishment of the provision for doubtful debts
   Every CEC must establish general and specific provisions on loans quarterly in accordance with the provisions of this circular.

3.1 General Provision
Every CEC must establish a general provision for doubtful debts of 1% calculated on the outstanding amount of loans not subject to any specific provision.

3.2 Specific Provision
The amount of the specific provision for doubtful debts is calculated as follows on overdue loans:

• From 31 to 90 days: 35% of unsecured outstanding amount
• From 91 to 180 days: 50% of unsecured outstanding amount
• From 181 days and +: 100% of unsecured outstanding amount

The unsecured outstanding amount means the sum of each loan included in the category, minus the admissible guarantees described in section 4 of this circular. Every CEC may, based on its past experience and its assessment of the future, use higher rates of provision for doubtful debts than those proposed in this circular. In no case can these rates be lower than those stated above.

CECs affiliated with a federation must also comply with the standards prescribed by their federation, insofar as these are not lower than those stated in this circular.

4. Admissible Guarantees
   For the purposes of calculating the specific provision on loans provided for in section 3 of this circular, the following guarantees may be deducted from the outstanding amount of loans:
   a. Securities issued by the BRH; b. Securities issued by the Haitian State;
   c. Fungible deposits (cash deposits held with the lending CEC to guarantee credit risk - mandatory savings). These deposits are admissible when the funds are held by the lending CEC for the account of the depositor/member under the following conditions:

• The funds cannot be withdrawn during the duration of the risk;
• The lending CEC can use the funds to pay off the debt to the extent that it is not paid by the borrower in accordance with the loan agreement terms and where no legal provision prevents the use of the guarantee to pay off the debt.
  d. Letters of guarantee issued by a CEC authorized to operate or a bank operating in Haiti; e. The value of the first-ranking mortgage on a residential property up to 75% of the loan balance, if this value is equal to or greater than the loan balance. If this value is less than the balance

Bank of the Republic of Haiti (BRH) 14

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