National Bank of the Kyrgyz Republic

Creation date: 2018-05-10

Appendix

to Resolution of the National Bank of the Kyrgyz Republic Board No.21/5

dated May 31, 2017

INSTRUCTION

for Requirements to Bank Transactions with Affiliates and Bank-Related Parties

1. General Provisions

1. The present Instruction is developed to establish requirements for the activities of the banks, including those operating under the Principles of Islamic Banking and Finance, banks with an Islamic window, “Financial Company of Credit Unions” OJSC and the State Development Bank of the Kyrgyz Republic (hereinafter - the Bank) while conducting operations and transactions with affiliates and bank-related parties.

2. The bank shall maintain a register of affiliates and bank-related parties, unimpeded access to which shall be provided for employees of the National Bank of the Kyrgyz Republic (hereinafter - the National Bank). The register of affiliates and bank-related parties, as a minimum, should contain information about the surname, name, and patronymic of the bank’s official, his/her position in the bank, the surname, name and patronymic of the person related to him/her who is a close relative, the degree of his/her relationship with the official (parents, spouse, etc.). It is allowed to maintain the register in electronic form, provided that the banks have a security system in place to ensure the safety of information.

3. Relations of the bank’s affiliate can be tracked by the contacts of companies and individuals, the relations between which/whom are based on possession of a threshold participation in the capital of the bank, regardless of the number of affiliates.

4. In the case of raising funds by the bank, a member of a banking group (deposit/loan and other assets bearing credit risk), the relevant contract for raising funds from the parent company, participant of the banking group or any other foreign company/participant of the banking group should contain the condition of mandatory notification to the National Bank of the contract early termination 30 working days prior to its termination. At the same time, the initiator of the notification should be the participant of the banking group, which is supervised by the National Bank.

2. Procedure for Bank Operations and Transactions

5. The bank does not have the right to credit (furthermore including the issuance of financing in accordance with the Principles of Islamic Banking and Finance) of affiliates or bank-related parties, if any of the following conditions apply:

1) if there are current losses on the last reporting date;

2) the maximum amount of risk per borrower related to the bank (ratio K1.2) exceeds 15% of the net total capital (hereinafter - the “NTC”) of the bank;

3) the maximum size of the risk for interbank placements in another bank related to the bank (ratio K1.4) exceeds 15% of the NTC;

4) the total amount of all loans and their substitutes provided to all affiliates and/or bank-related parties exceeds 60% of the bank’s NTC;

5) the bank does not meet the requirements for sufficiency (adequacy) of capital and own (regulatory) capital established by the National Bank.

6. The bank is recommended to establish internal limits of credit restraints for affiliates and bank-related parties, which should be lower than those set by the National Bank.

7. The maximum amount of any investment in each non-banking organization, including any financial investments and loans, should be less than 15% of the bank’s own (regulatory) capital. The total amount of such investments cannot exceed 60% of the bank’s own (regulatory) capital.

8. Transactions of the bank with bank-related parties in the amount exceeding 1% of the NTC are interested-party transactions. The decision to enter into an interest-party transaction and other banking transactions with affiliates and related parties, the size of which is from 1% to 14% of the NTC, is taken only by uninterested members of the Board of Directors of the bank. At the same time, the minutes of the Board of Directors’ decision should indicate the interest or disinterest of the members of the Board of Directors.

9. The decision on loans and assets bearing credit risk with affiliates and related parties, the size of which ranges from one estimate indicator to 14% of the NTC, is taken only by uninterested members of the Board of Directors of the bank. At the same time, the minutes of the Board of Directors’ decision should indicate the interest or disinterest of the members of the Board of Directors.

10. The decision to conclude an interested-party transaction and other banking operations, including loans and their substitutes, carried out with affiliates and related persons, the size of which is more than 14% of the NTC, is taken by the general meeting of shareholders.

At the same time, such transactions and operations, except for concluded public contracts, should be approved by the Board of Directors of the bank.

11. Any operation or transaction of a bank with any person should be considered as an operation or transaction with an affiliate or bank-related party if even part of the income from operations or transactions is used for the benefit of an affiliate or a bank-related party or transferred to their disposal.

12. The bank has the right to conduct operations or transactions with an affiliate or a bank-related party only if all of the following conditions are met:

1) Operations other than those specified in Clause 13 of this Instruction and transactions may be conducted only under such conditions and requirements that are not more preferential in comparison with the conditions and requirements applied at the same time for similar operations and transactions between this bank and other persons – bank customers who are not employees of this bank and are not any other parties related to the bank and/or having common interests with the bank. Such conditions and requirements include, inter alia, avoidance of:

- charging lower interest rates (hereinafter including extra charge and/or other payments agreed between the bank and the client/partner in accordance with the Principles of Islamic Banking and Finance) or fees as compared to those charged to other persons-bank customers, who are not employees of this bank and are not any other parties related to the bank and/or having common interests with the bank;

- payments of higher deposit interests (furthermore, including raising funds in accordance with the Principles of Islamic Banking and Finance, with the exception of limited mudaraba) compared to other persons - bank customers who are not employees of this bank and are not any other parties related to the bank and/or having common interests with the bank;

- acceptance of a collateral that has a lower cost than that required from other persons - bank customers who are not employees of this bank and are not any other parties related to the bank and/or having common interests with the bank. When accepting collateral, a methodology should not be applied that allows it to be valued higher than another such collateral;

- the extension of credits and credit substitutes that would not have been extended to other parties - bank customers who are not employees of this bank and are not any other parties related to the bank and/or having common interests with the bank due to the level of risk of this operation or low creditworthiness of the borrower;

- purchase of an asset of poor quality from an affiliate or bank-related party or accepting an asset of low quality in the form of a collateral;

- purchase of an asset at a price higher than that which could be paid to the other party – a bank customer who is not an employee of the bank and is not any other party related to the bank and/or having common interests with the bank;

- sale of the asset at a lower price than that, which could be received from the other party – a bank customer who is not an employee of this bank and is not any other party related to the bank and/or having common interests with the bank;

- investing in securities, in which the bank in another case would not invest because of the level of risk of securities or the type of activity that the concerned investor or the affiliate or bank-related party is dealing with;

- payment for goods, services or for rent of a property of a higher price than that paid to the other party – a bank customer who is not an employee of this bank and is not any other party related to the bank and/or having common interests with the bank, or in the conditions under which payment would not have been made to the other party – a bank customer who is not an employee of this bank and who is not any other party related to the bank and/or having common interests with the bank;

- restructuring of credits of affiliates or bank-related parties when such restructuring would not have been made for the other party - a bank customer who is not an employee of this bank and is not any other party related to the bank and/or having common interests with the bank.

2) In case of extending credits, its risk at the time of making a decision by the Board of Directors of the bank should not exceed the risk pledged in credits related to satisfactory according to the Regulation on Asset Classification and the corresponding deductions to the reserve for covering potential losses and damages.

3) The decision to conduct an operation or transaction in the amount from 1% to 14% of the NTC should be taken only by uninterested members of the Board of Directors by a roll-call, by a majority of votes (more than 2/3 of the list of members of the Board of Directors of the bank), taking into account the conclusion of the bank’s risk manager about the risk associated with conducting an operation or transaction with an affiliate or bank-related party in the absence of direct or indirect influence on the part of the person interested in conducting the operation or transaction. The Chairman or any member of the Board of Directors having direct or indirect interest in the proposed operation or transaction should leave the meeting of the Board of Directors for the time of discussion of the matter and he/she has no right to vote on this issue.

4) The bank shall maintain a written record of approval of such operation or transaction. The decision on approval should be made on the basis of a written analysis of all benefits of the operation or transaction, including the justification that the operation or transaction is carried out without compromising the bank and its interests. The analysis should include:

- for credit transactions and credit substitutes - credit amount, credit term, interest rate, financial information about the borrower, proving the borrower’s ability to repay the credit in accordance with the agreement, and information confirming the credit value of collateral;

- for operations or transactions related to the purchase or sale of assets - the purchase price and information confirming the value of the asset;

- for investments - an assessment of the risk of such investments and the potential benefits for the bank and the concerned party;

- a detailed explanation of the reasons for the need for this operation or transaction;

- for operations or transactions including the sale/purchase of assets or services, the Board of Directors of the bank should consider at least three proposals for the purchase/sale of an asset or the provision of a service. These proposals should be made by the parties not related to the bank or the parties having common interests with the bank, and correspond to average market prices.

5) Bank-related parties who are a party to the proposed operation or transaction with the bank or having common interests with this party should disclose information on the degree of their interest in the operation or transaction and the degree of relationship with the other party to the transaction in writing. Such written disclosure should be provided to the Board of Directors of the bank before voting on the proposed operation or transaction, which should be part of the record of approval of the operation or transaction by the Board of Directors of the bank.

13. The Bank has the right to extend credits to officials, with the exception of the Chairman and members of the Board of Directors, the Chairman and members of the Sharia’h Council in accordance with the social support program for bank employees. The program should provide for the same conditions for social support to the employees of the bank and officials. At the same time, the terms of crediting to officials shall meet at least the following requirements:

1) credits are extended to bank’s officials only for acquisition or construction of housing;

2) housing being purchased or being built will be owned on the right of ownership only by the bank’s official whom the credit is extended to;

3) the official of the bank whom the credit is extended to and the members of his/her family (if any) should reside in the purchased or built housing;

4) the maximum amount of credit should not exceed ten million KG soms;

5) the maximum amount of credit should not exceed eighty percent of the fair value of the housing to be purchased or being built. The credit may be extended at a rate of one hundred percent of the fair value of the housing to be purchased or being built in the event that additional collateral is provided in the form of a tied deposit in the amount of not less than forty percent of the fair value of the housing to be purchased or being built;

6) the services of an independent appraiser are used to determine the fair value of housing;

7) only house to be purchased or being built is accepted as an initial collateral;

8) it is prohibited to extend a credit for acquisition of housing by the bank’s official from the persons who are his/her close relatives.

The credit agreement concluded between the bank and the bank’s official shall contain a clause stating that in case of violation by the bank’s official of the credit terms stipulated in Sub-clauses 1-8 of this Clause, the credit agreement is subject to change on the conditions stipulated in Clause 17 hereof.

14. The provisions of Sub-clauses 3, 4 and 5 of Clause 12 shall apply to the transactions with the bank’s officials specified in Clause 13 hereof.

15. The internal document of the bank regulating the employees’ crediting procedure should contain provisions on crediting to the bank’s officials, comply with the requirements of the Law of the Kyrgyz Republic “On the National Bank of the Kyrgyz Republic, Banks and Banking Activities”, the regulatory legal acts of the National Bank and contain at least the following:

- the share of credits extended to the bank’s officials indicated in Clause 13 of this Instruction to the total volume of the bank’s credit portfolio and the bank’s NTC;

- types of credits;

- currency of credit;

- maximum amount of credit;

- terms of crediting;

- interest rates (pricing);

- criteria for assessing the value and acceptability of collateral.

16. The internal document of the bank regulating the employees’ crediting procedure shall be approved by the Board of Directors of the bank. The Board of Directors of the bank also shall:

- annually review the internal document of the bank regulating the employees’ crediting procedure in order to ensure its relevance and compliance with the bank’s credit policy;

- supervise the activities of the Board of the Bank (or other similar executive body of the bank) to ensure compliance with the requirements of the bank’s internal document regulating the employees’ crediting procedure.

17. In case of violation by the bank’s officials of crediting terms stipulated in Clause 13 hereof:

- the bank shall change the credit agreement on the day, on which the violation is detected, providing it with such requirements and conditions for extending the credit, which are not more preferable in comparison with the conditions and requirements used for such transactions;

- the bank’s official should be obliged to reimburse the bank for the difference in interest that has arisen from the date of receipt of a credit until the date of changing its terms;

- compensation for the difference in interest should be provided for in the credit repayment schedule and interest thereon, starting from the month following the one in which the credit terms have been changed.

18. The Chairman of the Board of Directors of the bank shall notify in writing the members of the Board of Directors of the bank that all applicable conditions of Clause 12 hereof are fulfilled before the members of the Board of Directors of the bank vote on the issue under consideration. Any member of the Board of Directors of the bank has the right to review supporting documentation before voting. The Chairman and each voting member of the Board of Directors of the bank shall personally sign a resolution on approval of the operation or transaction. The resolution should clearly indicate that the Chairman and member of the Board of Directors of the bank reviewed and understands the terms of the proposed operation or transaction and personally read the analysis required by Sub-clause 4 of Clause 12 hereof.

19. The provisions of Sub-clauses 3, 4, and 5 of Clause 12 hereof do not apply to accepting deposits by the bank from affiliates or bank-related parties, conducting spot operations of the bank with a bank/company that is a bank-related party, with the exception of the parent bank, provision of settlement and cash services, issuance and maintenance of bank payment cards of the affiliate or bank-related party on the same conditions and requirements as for other persons - bank customers and who are not employees of this bank and are not any other parties related to the bank and/or having common interests with the bank.

Cash and subordinated loans should be attracted on the basis of a resolution of the Board of Directors of the bank on such terms and conditions that are not more favorable than the conditions and requirements applicable at the same time for similar operations and transactions between this bank and other parties who are not affiliates and parties related to the bank and/or having common interests with the bank.

20. Exceptions from the limits of crediting to affiliates and related parties are possible in the cases specified in the Instruction on Credit Limits.

21. Each credit extended to an affiliate or a bank-related party (with the exception of an interbank credit in the ordinary course of correspondent activity) should be secured by a collateral with a sale value of at least:

1) 120 percent of the credit amount if the credit is secured against securities of the Government of the Kyrgyz Republic or a tied deposit in the bank that extends the credit.

A tied deposit means a separate term deposit, which is not a correspondent account:

- with a term not less than the term of the extended credit;

- duly executed as a collateral;

- on which the movement of funds is prohibited;

- unavailable to the customer until the credit obligations are met.

The market value of collateral in the form of securities should be revalued by the bank on a monthly basis in the form of a deposit in foreign currency - weekly/daily.

2) 140 percent of the amount of credit in the case of any other type of collateral.

22. If the value of the collateral in the course of time becomes less than the value specified in Clause 21 hereof, then such collateral should be brought additionally to the required value by concluding a new collateral agreement or making changes to the existing collateral agreement and guaranteed by additional collateral or replaced by a new type of collateral with a value sufficient to meet the specified requirement within a period not later than fifteen working days from the date of revaluation.

23. After approving and extending a credit to the affiliate or the bank-related party, such a credit should be monitored and assessed in the same way as similar credits extended to other persons - the bank customers who are not employees of this bank and are not any other parties, affiliates, bank-related parties and/or persons having common interests with the bank, are managed. Investments to the affiliates and bank-related parties should be monitored and evaluated periodically in the same way as investments to other persons – the bank customers who are not employees of this bank and are not any other parties, affiliates, bank-related parties and/or persons having common interests with the bank.

24. The Bank does not have the right to enter into a transaction with any person to enable it:

1) to pay or otherwise fulfill the obligation to the affiliate or the bank-related party;

2) to acquire any property from the affiliate or the bank-related party;

3) to purchase securities issued by the affiliate or the bank-related party.

3. Decision-Making Procedure by the General Meeting of Shareholders of the Bank

25. Shareholders of the bank are required to exercise their rights and duties in good faith and reasonably for the purposes of safe, healthy and reliable operation of the bank.

26. The General Meeting of Shareholders shall decide whether to carry out an operation or to enter into an interested party transaction with a bank-related party in the amount exceeding 14% of the NTC.

27. In the event that uninterested members of the Board of Directors of a bank are unable to take a decision to conduct an operation or transaction with the affiliate or the bank-related party due to the lack of a quorum, consideration of this matter should be submitted to the general meeting of the shareholders of the bank.

28. The Board of Directors of the bank shall be responsible for the reliable and prudent activities of the bank, including maintaining high standards of ethics and integrity. The Board of Directors of the bank shall provide a detailed report for the general meeting of shareholders of the bank, which should contain a full description of the proposed operation or transaction, including the analysis specified in Sub-clause 4 of Clause 12 hereof. The Board of Directors of the bank should make any attempt to resolve the issue in the exclusive interests of the bank before it is decided to refer the matter to the general meeting of the shareholders of the bank.

29. A shareholder who could obtain a preferential treatment for an operation or transaction (directly or indirectly, or through a person with whom the shareholder has common interests) with the affiliate or the bank-related party is not entitled to participate in the discussion, influence or attempt to influence the voting of the general meeting of shareholders of the bank, or to vote on the issue of approval of the operation or transaction.

30. Shareholders may approve the operation or transaction that grants a preferential treatment to the affiliate or the bank-related party only if 2/3 of the total number of voting shares are casted for the performance of the specified operation or transaction.

31. If each shareholder of the bank is a party who could obtain a preferential treatment for a given operation or transaction (directly or indirectly, or through a person with whom the shareholder has common interests) or if such shareholders constitute more than a third of the number of shareholders, then such operation or transaction cannot be considered by the general meeting of shareholders of the bank and cannot be performed by the bank.

4. Requirements to Reporting

32. The Bank shall maintain documentary records (reports) in accordance with the requirements of the legislation of the Kyrgyz Republic and this Instruction. These records should contain the information about all affiliates and bank-related parties with the indication of the amounts and conditions of all operations and transactions with these parties and persons having common interests with them.

33. The Bank shall maintain records of all credits received by its officials from banks or other transactions according to the information available from the bank. Each bank official who has received a credit from other banks or has applied for a credit shall submit written reports on all existing and newly received credits to the bank during the reporting period, not later than the 10th day of the month, following the reporting one at least six times a year. To account for these reports, the bank shall maintain a separate dossier and, when updating them, the bank shall draw up a protocol, which should indicate all the changes occurred during the reporting period.

34. The Chairman and each member of the Board of Directors of the bank, the bank’s official shall submit a written statement of information regarding its commercial, business and other material interests to the Bank’s Board of Directors and its management once a year. The report should include a list of persons associated with the Chairman and members of the Board of Directors of the bank, the bank’s officials with common interests, and the extent of such interests in each case. The Chairman, each member of the Board of Directors of the bank and the bank’s officials shall notify the bank in writing within two working days about any changes in the information in the report.

35. The Bank shall maintain an adequate internal control system to ensure that its activities comply with the requirements of this Instruction.

36. The bank shall submit reports to the National Bank within the PRR.

37. All reports with the relevant annexes (analysis) required in accordance with this Instruction shall be kept in the bank for at least 5 years after the repayment of all credit debt and upon completion of the operation and transaction with the affiliate and the bank-related party.

5. Final Provisions

38. The Bank shall be prohibited from carrying out any operations and transactions with the affiliates and bank-related parties if, as a result of such operations and transactions, the financial condition of the bank worsens and causes financial difficulties and creates a threat to the interests of the bank, depositors and other creditors.

39. If the shareholders, the Chairman and members of the Board of Directors of the bank and the bank’s officials decide or vote for a decision on the extension of a credit and credit substitutes, conduct of the operation or transaction with the affiliate or the bank-related party that contradicts the requirements of this Instruction and the legislation of the Kyrgyz Republic, as a result of which the bank incurred losses, the said persons are liable for the return of such losses or debts to the bank under this credit, operation or transaction in accordance with the legislation of the Kyrgyz Republic.

40. All internal documents of the bank (policies and procedures) shall comply with the requirements of this Instruction.

41. Any operations and transactions between the bank, affiliate or the bank-related party concluded in violation of the requirements of this Instruction and the legislation of the Kyrgyz Republic, are void.

42. Failure to comply with the requirements of this Instruction is the basis for applying enforcement actions on the part of the National Bank provided for by the legislation of the Kyrgyz Republic.