In accordance with Part Three, Chapter Two, of Union Law No. (10) of 1980 concerning the Central Bank, the Monetary System and Organization of Banking, the Board of Directors of Central Bank of the UAE sets rules to govern ratio requirements to which all banks must adhere to ensure their liquidity and solvency.

In particular, banks must follow a prudent credit policy in order to safeguard the assets entrusted to them.

For the purpose of assessing whether a bank's credit policy, and the exposures arising therefrom, is deemed prudent and, more specifically, whether the risk arising from an excessive concentration of credit to a single borrower or to a group of related borrowers may endanger the solvency of a bank, the Board of Directors of Central Bank of the UAE has resolved to set rules for the monitoring of credit exposure limits of banks operating in the U.A.E. and, as a consequence, has decided to put the following definitions and rules into force.

1.1 Large Exposures

Large exposures are those funded and unfunded exposures (less provisions, cash collaterals and deposits under lien) which a bank allows to a single borrower and his group which in total equal or exceed the percentages of the bank's capital base as scheduled in Article (2) of these Regulations.

In addition, a large exposure secured by securities acceptable to the Central Bank can be adjusted to reflect a deduction for the value of said securities. The Central Bank shall determine the adjusted value based on the quality of the acceptable securities in each case, which is considered a large exposure. The portion of the funded and unfunded exposures above the adjusted value are subject to the schedule of percentage limits for large exposures in Article (2) of these Regulations.

1.2 Exposures

Exposures comprise the on- and off-balance sheet items set out in the attached "Guidelines to Monitoring of Large Exposure Limits," which form an integral part of these Regulations.

1.3 Borrowers and Groups of Related Borrowers

A single borrower shall mean any single natural or juridical person.

A group of related borrowers shall mean:

- Two or more natural or juridical persons who unless shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others, or can exercise a controlling influence over the other party in making financial and operating decisions; or

- Two or more natural or juridical persons between whom there is no relationship of control but who are to be regarded as constituting a single risk because they are so inter-related that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties.

1.4 Control and Controlling Influence

Control or controlling influence shall mean the relationship between a parent company and a subsidiary, as defined in section 1.4 of the attached "Guidelines to Monitoring of Large Exposure Limits" or a similar relationship between any natural of juridical person and a company.

1.5 Principal Shareholders

In the context of these Regulations, a principal shareholder shall mean any natural or juridical person, single or related as defined in section 1.3 above, holding 5% or more of a bank's voting share capital.

1.6 Capital Base

The capital base of a bank is the same as that used for capital adequacy purposes, as defined in the Central Bank's Circular No. 27/2009 dated 17/11/2009 and calculation therein as per BASEL II.

For the purpose of Central Bank reporting a large exposure is defined as those funded and unfunded exposures and unused committed lines (less provisions, cash collaterals, bank guarantees and Federal Government guarantees) to a single borrower or his group, which in total is equal to or exceeds 10 % of the bank’s capital base.

The Central Bank has set the maximum large exposure limits as shown in following table:

Notes to the table:

1. Exposure is defined as the sum of: funded, unfunded and committed lines. Unfunded exposures may be adjusted for Credit Conversion Factors (CCF) in accordance with Basel II.
    
2. The above definition of Exposure excludes bank’s investment in marketable bonds/sukuks (that are rated not less than AA-, or equivalent, by one of the top three rating agencies) where such bonds/sukuks are held to meet Central Bank liquidity requirements, or are held in the trading book and the intention is not to hold such bonds/sukuks to maturity.
    
3. Exposure to Federal Government includes deals transacted on behalf of the Federal Government.
    
4. A Government Related Entity (GRE) that is profitable and can service its debt obligations from its own resources/operations, without need for any implicit or explicit government support and holds a rating of not less than BBB- (or equivalent) from one of the top three rating agencies can be treated as a single obligor in accordance with the 4^th line in this table.
    
5. Exposures to banks operating outside the UAE, irrespective of their maturity, are not allowed to exceed 30% of the bank’s capital base. The same applies to exposures of branches of foreign banks to their head offices and other branches abroad, as well as to foreign subsidiaries and affiliates of such head offices; this limit also applies to exposures of UAE incorporated banks vis-à-vis their foreign subsidiaries and affiliates.
    
6. All banks must have strict policies in place (approved by their board of directors) to cover potential conflict of interest where loans are issued to staff members on a “stand- alone” commercial basis. Loans for business purposes should be separately classified as commercial loans and approved on an ‘arms- length’ basis.
    
7. Banks that have exposures that are out of line with the new limits as per the table at the date on which they come into force, must, at a minimum, improve such exposures at the rate of 20% per annum, i.e. full compliance with the limits must be achieved in 5 years.
    
8. The limits contained in this table are subject to review, in line with international regulatory development.
    

All large exposures must be reported to the Central Bank on a consolidated quarterly basis (including subsidiaries and affiliates where applicable), as per the attached special return forms (Special Banking Return Forms-Large Exposures), not later than the end of the month following the end of each calendar quarter. Banks must report any large exposure which existed at any time during that quarter.

The Central Bank may in the future exempt certain exposures from the reporting requirements.

If, in an exceptional case, exposures exceed the limits fixed in section 2 above at any time during any quarter, these must be reported to the Central Bank in writing without delay, indicating the reasons for the non-compliance. The Central Bank may allow banks a limited period of time during which they must comply again with the limits.

Banks are required to take appropriate measures to comply with the limits as soon as possible and in any event not later than the end of the quarter following the over-limit situation.

Exposures to members of a bank's board of directors, or of a similar designated body, must be reported to the Central Bank on a quarterly basis as per the attached special return forms (Special Banking Return Form - Exposures to Board Members) not later than the end of the month following the end of each calendar quarter. The explanatory notes attached to the return forms must be followed.

4.1 General Responsibilities for Credit Policy

The board of directors, or a similar designated body of banks operating in the U.A.E. is responsible for its bank's credit policy and, therefore, must review, for information all facilities above a certain limit and approve all facilities above a higher limit. They must also ensure a fair structure and a balanced composition of their bank's credit portfolio.

Banks must formulate general credit policy instructions aimed at implementing a prudent lending structure, taking into account the risk arising from excessive exposures vis-à-vis governments, public sector entities, particular economic sectors etc., within the U.A.E. and abroad. Banks should exercise utmost prudence with regard to inter-bank exposures. The credit policy instructions must address both on-and off-balance sheet items.

A proper credit evaluation including appropriate documentation must be undertaken prior to granting any credit facility. The credit assessment has to be in line with each bank's general credit policy and must be based on an in-depth analysis of each customer's credit worthiness, reputation as a borrower and any information on loan-repayment history.

4.2 Special Responsibilities for Large Exposures

Notwithstanding the legal effectiveness of a transaction, a bank may only incur a large exposure on the basis of a unanimous resolution on the part of all members of its board of directors, or of a similar designated body, provided that the bank's general credit policy procedures have been followed. The resolution has to be passed prior to the lending and a copy of it must be placed on the customer's file.

4.3 Special Responsibilities for Exposures to Members of a Bank's Board of Director

A bank may only incur an exposure to a member of its board of directors, or of a similar designated body, on the basis of a unanimous resolution on the part of all members, except the member concerned, provided that the bank's general credit policy instructions have been followed. The resolution has to be passed prior to the lending and a copy of it must be placed on the member's file.

4.4 Assessment of Credit-Worthiness

Banks are obliged to ask their major borrowers to disclose reliable evidence of their financial situation by submitting financial statements, other relevant information and signed declarations of their independence from the bank, its principal shareholders, directors and officers. All such information has to be updated regularly. In exceptional circumstances, banks may refrain from doing so, if the requirement to disclose would be clearly unjustified due to the type and level of security provided.

Central Bank of the UAE requires that every bank sets up sound administrative and accounting procedures and adequate internal control systems, especially for the purpose of identifying and recording all large exposures, as defined in these Regulations, and for monitoring and controlling those large exposures according to each bank's own general credit policy.

The implementation of these accounting procedures and internal control systems must be approved by each bank's board of directors, or by a similar designated body, and should be documented appropriately.

These Regulations come into force one month from the date of their publication in the Official Gazette.

Banks not meeting the limit requirements, as defined in these Regulations, may be granted additional period for reduction of their exposures individually and/or in the aggregate, not extending beyond five years from the implementation of these Regulations, as mentioned under Paragraph 7 of the Notes to the Table of Maximum Large Exposure Limits.

Circular No. 16/93 and its amendments shall be cancelled with effect from the date these Regulations come into force.

Yours faithfully,,,