Definitions and Guidance Notes - Limits on Exposures to Non-Bank Counterparties And Banks And Financial Institutions

Definiton of Credit Exposure

This term refers to credit risks arising from actual claims, potential claims and contingent liabilities. Accordingly, it is to include the following items.

1.1 On Balance sheet Items: Direct Claims And Credit Obligations

• Placements.
• Overdraft accounts.
• Loans (secured and unsecured).
• Securities of all forms (CD's, CP's, bonds, equities and debentures).
• Short term trade related transactions.
• Bills, Acceptances and other papers.
• Other claims.
• For banks and financial institutions, Credit balances in the Bank's account (Nostros) with other banks; Overdraft in the other banks account (Vostros) with your bank. While these amounts may be difficult to value due to system and other constraints, a representative or approximate amount may be used such as weighted monthly average, minimum balance requirement etc.

2.1 Off Balance Sheet Items : Potential Claims And Contingent Liabilities.

Direct Credit Substitutes

• Confirming of exports Letters of Credit.
• Irrevocable commitments to extend credit.
• Guarantee of indebtedness.
• Acceptances.
• Standby letters of credit serving as financial guarantees for loans and securities.
• Other direct credit substitutes.

Transaction related contingencies

• Performance bonds.
• Bid or tender bonds.
• Advance payment Guarantees.
• Other related contingencies.

Trade related contingencies.

• Short-term self-liquidating trade related items such as letters of credit collateralized.
• Other trade related contingencies secured by underlying shipments.

Derivative products of Interest rate and Foreign Exchange rate including Swaps, Options, Futures, FRA's etc :

These products involve a smaller credit risk and should be calculated at certain percentage of their notional amounts as given below :

a. Foreign Exchange related contracts (Flat rates)

10% per year up to 2 years.

5% per year for each additional year up to a maximum of 50%.

b. Interest rate Related contracts (Flat rates)

5% per year up to a maximum of 35%.

Other Common commitments and contingent liabilities.

2. Definition of A Group of Related Counterparties:

For the purpose of these rules the term "Related Counterparty" is to be applied as follows :

2.1 A group of related customers means two or more persons whether natural or legal, holding exposures from the same credit institution and any of its subsidiaries, whether jointly or separately but who are mutually associated in that:

a. One of them holds directly or indirectly power of control over the other through.

- Common ownership.

- Common directors.

- Cross guarantees.

- Direct commercial dependency which cannot be substituted in the short term.

b. Their cumulated exposures represent to the institution a single risk in so much as they are so interconnected with the likelihood that if one of them experiences financial problems the others or all of them are likely to encounter repayment difficulties.

2.2For the purpose of this Circular a "Group of closely related customers" means all accounts that may be related as follows :

- In the event the customer is a natural or a legal person, the term shall apply to all sole proprietorship establishments owned by him, all partnerships in which he is a general partner, all establishments owned by such general partnerships, all limited liability companies in which he owns more than 50% of voting shares and all companies that he manages or has direct or indirect control regardless of his share therein.

- In case the customer is a limited, simple or general partnership the term shall apply to all establishments owned by the customer together with all partnerships in which the general partners of the customer are general partners, together with all limited liability companies in which any general partner holds more than 50% of its voting shares or a limited liability company that he manages or over which he has direct or indirect control regardless of his share therein.

- In case the customer is a limited liability company in which one of the shareholder owns more than 50% of its voting share capital, the term shall apply to all establishments owned by the company and to all other establishment owned by the principal shareholder as a sole proprietor, general partner or as a principal shareholder owning more than 50% of the voting shares, together with any other company that he manages or over which he has direct or indirect control, regardless of his shares therein.

2.3For the purpose of this section "control" means;

• One or more persons acting in concert directly or indirectly own, control or have the power to vote 25% or more of the voting shares of an establishment; or
• One or more persons acting in concert control, in any manner, the election of a majority of directors, trustees or other persons exercising similar functions of another person; or
• Any other circumstances exist which indicate that one or more persons acting in concert directly or indirectly exercise a controlling influence over the management or the policies of another person.

3. Capital & Reserves :

The Capital and Reserves for the purpose of these limits is defined as the aggregate of :

1. Paid up capital.
2. Legal Reserves.
3. Other Reserves.
4. Prior Years' undistributed Retained earnings.

4. Adequately Capitalized Banks and Financial Institutions :

This term applies to banks and financial institutions that meet the following :

• An overall risk assets capital adequacy ratio of 8%.
• A tier-1 risk assets capital adequacy ratio of 4%. All banks and financial institutions that have failed to publish their risk assets capital ratio or those that do not meet the minimum requirements noted above will be treated as being "Not Adequately Capitalized".

5. Connected Parties :

The definition of connected parties shall include the following :

• Members of its Board of Directors, and its Auditors.
• Un-incorporated establishments in which any Director or Auditor of the Bank is a partner or manager or has a direct financial interest or is a guarantor.
• Principal owner or shareholder - means a person that directly or indirectly owns, controls or has power to vote more than 10% of the voting shares of the Bank granting the facility.
• Affiliated or Associated companies and partnerships. These include establishment that are connected to the Bank by a common parent or a controlling share holder.

6. Monitoring of Credit Exposures to Banks And Financial Institutions :

The Agency expects all Saudi Banks to have internal systems to monitor on a daily basis credit exposures to other banks and financial institutions and report excesses above the bank's internal limits and prudential limits to senior management. While occasional excesses may arise due to unusual market conditions, volatility and unusual operational problems, procedures must be in place to quickly identify the excesses and to take corrective actions. Banks are expected to monitor other banks and financial institutions on a six-monthly basis to see if they are "Adequately Capitalized". They may use both published and un-published data and sources of information including call reports. However, to the extent possible such data should be verified and confirmed.

7. Other Issues and Notes

• No netting is permitted for reciprocal credit exposures with other banks and financial institutions.
• All off-balance sheet items other than forward foreign exchange and interest rate contracts and derivative products, are to be measured at their gross values.
• These lending limits do not apply to principal shareholders that are foreign banks and to foreign banking subsidiaries of a Saudi Bank. Credit exposures to such institutions when they exceed 50% of capital and reserves must be discussed with and approved by the Agency on a case-by-case basis. Credit exposures to non-banking subsidiaries when in excess of 25% of Capital and Reserves of the Bank must be approved by the Agency.

M-19

Exposures to Non-Banking Counterparties in Excess of 10% of Capital & Reserves

(All Amounts in SR.000'0)

M-18

Exposures to Connected Non-Banking Counterparties in Excess of 5% of Capital & Reserves

(All Amounts in SR.000'0)