BANK OF THE REPUBLIC OF BURUNDI

REGULATION NO. 003/2019 ON THE ESTABLISHMENT AND MANAGEMENT OF COLLATERAL COVERING LOANS TO CREDIT INSTITUTIONS

PRESENTATION NOTE

1. Background

This Regulation is issued as a revision of Instruction No. 02/2017 dated 17/07/2017, on the establishment and management of collateral covering loans to banks and financial institutions. This revision aligns with the Bank of the Republic of Burundi (BRB) objective to promote economic growth by establishing a special refinancing framework for high-growth sectors.

The amendments aim to relax the quantitative and qualitative eligibility conditions and criteria for claims eligible for BRB refinancing.

2. Major Amendments

The title of the reviewed text was changed from "Instruction" to "Regulation", as it is an implementing text of the Law establishing the BRB Statutes.

The range of refinancing collateral is extended to promissory notes drawn on financial companies, allowing credit institutions that have refinanced microfinance institutions to present promissory notes drawn on the latter as collateral.

In addition to relaxing the eligibility conditions for refinancing claims (quantitative and qualitative criteria), the minimum overall evaluation score of the debtor company is reduced from 75% to 65%, given that very few companies achieve a score of 75%. Quantitative criteria are only required for companies with more than five (5) years of activity.

Furthermore, the hairdon applied to determine the refinancing amount has been reduced from 30% to 15% for promissory notes and from 20% to 15% for shares, bonds, and obligations issued by listed companies, across all economic sectors, to encourage balanced financing of all economic activities.

Finally, claims on nascent companies with less than one year of activity and extension projects are eligible for refinancing upon submission of a business plan and feasibility study, conducted by an expert firm in the field.

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REGULATION NO. 003/2019 ON THE ESTABLISHMENT AND MANAGEMENT OF COLLATERAL COVERING LOANS TO CREDIT INSTITUTIONS

Having regard to Law No. 1/34 of 02 December 2008 establishing the Statutes of the Bank of the Republic of Burundi;

Having regard to Law No. 1/10 of 12 August 2016 governing conventional movable securities in Burundi;

Having regard to Law No. 1/17 of 22 August 2017 governing banking activities;

Having regard to Law No. 1/07 of 11 May 2018 establishing the National Payment System;

Having regard to Joint Ministerial Ordinance No. 710/540/1575 of 14/08/2019 determining agro-pastoral products whose financing benefits from exemption under Article 84 of Law No. 1/17 of 22 August 2017 governing banking activities;

Having reviewed Instruction No. 02/2017 on the establishment and management of collateral covering loans to banks and financial institutions;

The Bank of the Republic of Burundi, hereinafter referred to as "BRB", hereby enacts this Regulation.

CHAPTER I: GENERAL PROVISIONS

Article 1: Object

This Regulation defines the procedures for establishing and managing collateral required by the BRB, covering loans it grants to credit institutions.

It determines the nature of eligible assets, the procedures for their transfer or pledge, as well as their valuation and applied hairdons.

Article 2: Establishment of Collateral

All loans granted by the BRB to credit institutions, in all their forms, must be covered by sufficient collateral previously established with it.

Collateral consists of eligible financial assets available in electronic format within the Central Securities Depository (CSD), or in any other form deemed acceptable by the BRB.

Article 3: Eligible Assets

Eligible assets must first meet the eligibility criteria defined in Article 5 of this Regulation. They consist of the following categories of securities:

1. negotiable State securities, namely Treasury bills and bonds;
2. securities issued by the BRB;
3. commercial instruments known as "promissory notes", representing claims on companies;

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4. shares, bonds, and obligations of listed companies traded on the stock exchange and registered in the CSD.

Article 4: Common Collateral Reserve and Registration

The common collateral reserve is established within the CSD, which registers and manages all eligible securities mentioned in Article 3 of this Regulation.

Eligible securities are registered in the CSD through market mechanisms, including acquisition on the primary market via issuance auctions, property transfers on the secondary market in Delivery versus Payment (DvP) or Delivery versus Franco (DvF) form, automatic or manual registration in the CSD of securities managed by the stock exchange (notably shares, bonds, and obligations of companies), as well as eligible commercial instruments after the evaluation process.

During the registration process, the CSD manager assigns these securities the quality of collateral for loans granted by the BRB to credit institutions.

When an asset loses its eligibility status, it may remain on the owner's securities account until maturity without serving as collateral for BRB liquidity injections.

CHAPTER II: ELIGIBILITY, TRANSFER AND VALUATION OF COLLATERAL

Article 5: Eligibility Conditions

Treasury bills and bonds are eligible for mobilization without restriction regarding their maturity. However, the BRB may set the number of days from issuance and/or before maturity for these securities to be admitted as collateral for its refinancing.

Securities issued by the BRB for its own account, as well as State securities issued specifically for monetary policy purposes, are eligible for mobilization regardless of their maturity.

Shares and obligations of companies are admitted as collateral based on their stock exchange quotation and/or the rating assigned by a credit rating agency, regardless of maturity.

Promissory notes issued by companies are eligible regardless of the maturity of the claims to which they are linked. However, these companies must first meet the following conditions:

1. have a positive net profit for at least one of the last three financial years, for companies with more than 5 years of activity;
2. the company must not appear on the list of issuers of unpaid checks during the last three (3) months, and must not exceed six (6) months of defaults;

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3. the company's executives must not appear on the list of issuers of unpaid checks during the last three months, nor on the list of defaulting debtors.

The quantitative and qualitative criteria below must also be verified:

1. Quantitative criteria weighted globally at 60%, with each component weighted in respective proportions of 20%, 25% and 15%:
   a. Net Working Capital / Gross Working Capital ≥ 10%; b. Equity / Indebtedness ≥ 20%;
   c. Current Assets / Short-term Liabilities ≥ 100%.
   The quantitative criteria apply to companies with more than 5 years of activity.

2. Qualitative criteria globally weighted at 40%, with each component having its own weight:
   a. Executive education level, weighted at 10% (Degree/Baccalaureate and above: 100%, A1: 90%, A2/Humanities: 80%, Level below A2/Humanities: 70%); b. Executive professional experience, weighted at 5% (3 years and more: 100%, less than 3 years: 80%);
   c. Company audit, weighted at 5% (audited company: 100%, non-audited company: 80%);
   d. Legal form of the company, weighted at 10%:

   • Joint Stock Company (SA): 100%
   • Limited Liability Partnership (SPRL): 90%
   • General Partnership (SNC) or Limited Partnership (SCS): 80%
   • Others: 70%
     e. Economic sector, weighted at 10%:
   • Industrial: 100%
   • Agro-pastoral: 100%
   • Other sectors: 70%Only claims with an overall score of at least 65% are mobilizable by the BRB. The latter has a minimum period of five (5) working days to rule on their eligibility, provided it has received all necessary assessment elements.
     The BRB may set other complementary eligibility conditions for debtor companies. When the BRB declares claims on a company ineligible, this decision may be extended to any other company having links with the latter as defined in Article 3 of Law No. 1/17 of 22 August 2017 governing banking activities.

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Article 6: Transfer

The transfer of promissory notes is effected by handing over to the BRB a pledge deed signed by the executives of the transferring financial institution, accompanied by documents describing the characteristics of the claims they represent.

Promissory notes must be endorsed to the order of the BRB.

Securities previously held in the CSD, such as Treasury bills and bonds, shares, bonds, and obligations of companies, are transferred to the BRB through the CSD, in Delivery versus Payment (DvP) or Delivery versus Franco (DvF) mode.

The transfer of any type of asset automatically entails the total transfer of its ownership to the BRB.

Article 7: Pledging

The pledging of eligible assets is directly carried out by the participant itself or its intermediary through the CSD web interface at the time of initiating its operations with the BRB, notably delivered repurchase agreements (REPOs) and refinancing concluded based on a bilateral agreement. Pledging a non-eligible asset leads to automatic rejection by the CSD, or manual rejection after evaluation and control.

Article 8: Valuation

The BRB evaluates all assets given as collateral upon registration and during their lifespan, to permanently ensure their eligibility and value in order to trigger a margin call or return excess collateral or those that are no longer relevant, if necessary.

Treasury bills and bonds, securities issued by the BRB for its own account, as well as shares, bonds, and obligations of listed companies are valued at their market prices or, failing that, at their nominal value.

Accrued interest is taken into account in the calculation of asset value by the CSD when pledging securities that generate interest/coupons.

Promissory notes are valued based on the principal amount of the total outstanding balance of the relevant claim.

Article 9: Substitution

When a collateral asset no longer meets mobilization conditions, it is withdrawn from the common collateral reserve. If it was used to cover an ongoing refinancing at the time of withdrawal, the concerned credit institution must immediately substitute it with other eligible assets. Otherwise, the BRB debits its settlement account for the amount not covered by collateral.

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Article 10: Margin Call

A decrease in the value of collateral assets triggers a margin call on the refinanced credit institution to provide additional eligible assets or repay the BRB an equivalent amount, while an increase in their value leads to the return of additional collateral to that institution.

If a margin call is not honored, the BRB automatically debits the title provider's settlement account for the amount not covered by collateral.

Article 11: Withdrawal and Return

A credit institution may, at any time, request the withdrawal or return of a collateral asset from the BRB provided that:

1. the asset is not already pledged for an ongoing refinancing;
2. the value of remaining eligible assets is sufficient to cover an ongoing refinancing;
3. other sufficient eligible assets are substituted to cover an ongoing refinancing.
   Pledged assets cover, in addition to the total outstanding balance of refinancings, interest, late payment penalties, loan facility renewal penalties, recovery fees, and any other charges borne by the BRB.

Credit institutions may no longer sell, transfer, or pledge securities given as collateral to the BRB, which are temporarily transferred to its securities account in the CSD.

Article 12: Subrogation

The BRB, possessing the right of subrogation over all claims and other assets given as collateral, may authorize the transferor to proceed with collection on its behalf for the mobilized claim. It may, under certain circumstances, directly request a company on which it holds claims to repay the amount due.

CHAPTER V: HAIRDON

Article 13: Hairdons Applied to Collateral

To determine the net value of collateral, applied hairdons are defined by categories of eligible assets, as follows:

1. securities issued by the BRB: 5%;
2. Treasury bills and bonds: 10%;
3. commercial instruments (promissory notes): 15%;
4. shares, bonds, and obligations issued by listed companies on the stock exchange: 15%.

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CHAPTER VI: INFORMATION AND CONTROL

Article 14: Required Information

For each company on which claims are given as collateral, credit institutions are required to transmit the following documents and information to the BRB:

1. duly signed balance sheets and annexes by company executives and certified by a recognized Audit Firm of the Burundi Order of Chartered Accountants (OPC), no later than four months after the close of each financial year;
2. business plans and feasibility studies conducted by an expert firm in the field, for companies with less than one year of activity and for extension projects;
3. notarized or Investment Promotion Agency (API) endorsed statutes;
4. status of banking commitments;
5. payment incidents as soon as they are recorded;
6. detailed statements of real and personal collateral covering each transferred claim and their regular updates;
7. any other document or information enabling the BRB to decide on the eligibility of transferred claims and proceed with their valuation;
8. any other information requested by the BRB.
   The non-communication of any required information within the stipulated time, including non-declaration of a payment incident, results in the withdrawal of claims from the concerned company from eligible assets.

Article 15: Verification of Collateral

The BRB may conduct on-site inspections to ensure the existence and value of collateral established by companies with credit institutions.

The BRB may condition the eligibility of a claim to the establishment by the debtor company of additional collateral with the transferring credit institution.

CHAPTER VII: SANCTIONS

Article 16: Sanctions

Any breach of the provisions of this Regulation, notably:

1. failure to transmit financial documents or any other requested information within the stipulated time;
2. communication of incomplete, erroneous, or false information;

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3. failure to communicate the existence of linked groups of persons, as defined in Article 3 of Law No. 1/17 of 22 August 2017 governing banking activities, with a company on which claims are transferred to the BRB;

results in the non-complying credit institution facing one or more of the following sanctions:

• sanctions provided for in Circular No. 19/2019 relating to the sanction matrix;
• restrictions on refinancing operations;
• temporary or permanent suspension of access to BRB refinancings and other facilities.

CHAPTER VIII: FINAL PROVISIONS

Article 17: Entry into Force

This Regulation enters into force on the day of its publication on the BRB website and in the Official Gazette of Burundi.

Done at Bujumbura, on 29/10/2019

Jean CYZA
Governor

[Seal: BANK OF THE REPUBLIC OF BURUNDI, BRB, Governor]