Executive Summary

Legal Basis

Evolution of Module

CA-B.1.1

This Module is applicable to all microfinance institution licensees (authorised in the Kingdom, thereafter referred to in this Module as licensees).

Minimum Capital Requirement

Capital Adequacy Ratio (CAR)

Claims on Banks

Deleted

Compliance Officer

Reporting Requirements

CA-1.2.1

A licensee's net liquid assets must be held in a form acceptable to the CBB, in a minimum amount of three months estimated expenditures including salaries, rent, general utilities and other operating costs.

CA-1.2.2

For purposes of Paragraph CA-1.2.1, net liquid assets comprise of unencumbered cash, cash equivalents, treasury bills, and placements and balances with banks maturing within 30 days less any liabilities due within 30 days.

BC-A.1.1

This Module contains requirements that have to be met by microfinance institution licensees with regards to their dealings with customers. The Rules contained in this Module aim to ensure that microfinance institution licensees deal with their customers in a fair and open manner, and address their customers' information needs.

BC-A.1.2

The Rules build upon several of the Principles of Business (see Module PB (Principles of Business)). Principle 1 (Integrity) requires microfinance institution licensees to observe high standards of integrity and fair dealing, and to be honest and straightforward in their dealings with customers. Principle 3 (Due skill, care and diligence) requires microfinance institution licensees to act with due skill, care and diligence when acting on behalf of their customers. Principle 7 (Client Interests) requires microfinance institution licensees to pay due regard to the legitimate interests and information needs of their customers, and to communicate with them in a fair and transparent manner.

Legal Basis

BC-A.2.1

This Module was first issued in January 2014 by the CBB. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG-3 provides further details on Rulebook maintenance and version control.

BC-A.2.2

A list of recent changes made to this Module is provided below:

Superseded Requirements

BC-B.1.1

This Module applies to all microfinance institution licensees authorised in the Kingdom, thereafter referred to in this Module as licensees.

BC-C.1.1

Microfinance institution licensees must ensure that all regulated financial services are provided without any discrimination based on gender, nationality, origin, language, faith, religion, physical ability or social standing.

BC-1.1.1

Licensees must comply with the best practices throughout the lifetime of their relationship with a customer. Chapter BC-1 sets out the minimum standards for microfinance institutions to follow when providing micro-credit and other services on which fees and/or interest (profit margin in case of Shari'a compliant micro-finance) are payable by customers in the Kingdom of Bahrain.

BC-1.1.2

This Chapter applies where any licensee provides to a borrower any type of financial product creating a creditor relationship (including Shari'a compliant credit facilities of all types).

BC-1.1.3

Licensees must put in place appropriate measures across all their business operations and distribution channels to ensure compliance with the requirements of this Chapter, where relevant. Licensees must maintain adequate records to demonstrate compliance with this Chapter.

BC-1.1.4

The CBB may, from time to time, ask the compliance officer to report on the licensee's record of adherence to the requirements of Module BC.

BC-1.1.5

Licensees should implement the requirements of Module BC and ensure that their staff is fully familiar with these.

BC-1.2.1

The six overarching principal commitments are:

BC-1.3.1

For each new (or potentially new) customer, licensees should:

BC-1.4.1

In order to improve customer awareness and enhance transparency of licensee's charging structures, licensees must display in a prominent position, in Arabic and in English, by notice in their offices (both head office and branches), a list of all current charges.

BC-1.4.2

Licensees must also ensure that each customer is in receipt of their current list of charges and must display these on their websites. The list must specify standard charges that will be applied by the licensee to individual services and transactions.

Credit Agreements

General Rules

Minimum Disclosure Requirements

Public Disclosure Requirements for all Credit Agreements

Additional Public Disclosure for Credit Facilities

Disclosure to Customers: Initial Disclosure Requirements of Key Terms

Disclosure to Customers: During the Term of the Credit Agreement

Variation Disclosures Requirements

Request Disclosure

BC-1.5.1

Before a licensee provides a credit facility, it must assess whether the customer will be able to repay, given its knowledge of the customer's current circumstances.

BC-1.6.1

Licensees should deal sympathetically with cases of genuine financial difficulty and treat all customer personal information as private and confidential.

BC-1.6.2

Licensees should always endeavour to discuss financial difficulties with their customers before taking any legal measures.

BC-1.6.3

Where possible, licensees should consider alternative arrangements to enable customers to overcome their repayment difficulties.

BC-1.6.4

Licensees should provide customers with a minimal level of counseling on debt problems.

BC-1.7.1

In accordance with Article 117 of the CBB Law, licensees must not publish or release information to third parties concerning the accounts or activities of their individual customers, unless:

BC-1.8.1

[This Paragraph was deleted in July 2021].

BC-1.8.2

[This Paragraph was deleted in July 2021].

BC-2.1.1

All licensees must have appropriate customer complaints handling procedures and systems for effective handling of complaints made by customers.

BC-2.1.2

Customer complaints procedures must be documented appropriately and their customers must be informed of their availability.

BC-2.1.3

All licensees must appoint a customer complaints officer and publicise his/her contact details at all departments and branches and on the licensee's website. The customer complaints officer must be of a senior level at the licensee and must be independent of the parties to the complaint to minimise any potential conflict of interest.

BC-2.2.1

In order to make customer complaints' handling procedures as transparent and accessible as possible, all licensees must document their customer complaints handling procedures. These include setting out in writing:

BC-2.2.2

Licensees must provide a copy of the procedures to all relevant staff, so that they may be able to inform customers. A simple and easy-to-use guide to the procedures must also be made available to all customers, on request, and when they want to make a complaint.

BC-2.2.3

Licensees are required to ensure that all financial services related documentation (such as credit facility documentation) provided to the customer includes a statement informing the customer of the availability of a simple and easy-to-use guide on customer complaints procedures in the event the customer is not satisfied with the services provided.

BC-2.3.1

Adherence to the following principles is required for effective handling of complaints:

Visibility

Accessibility

Responsiveness

Objectivity and Efficiency

BC-2.4.1

Licensees' internal complaints handling procedures must provide for:

BC-2.4.2

Licensees' internal complaints handling procedures must be designed to ensure that:

BC-2.5.1

Licensees must acknowledge in writing customer written complaints within 5 working days of receipt.

BC-2.5.2

Licensees must respond in writing to a customer complaint within 4 weeks of receiving the complaint, explaining their position and how they propose to deal with the complaint.

Redress

BC-2.6.1

Licensees must maintain a record of all customers' complaints. The record of each complaint must include:

BC-2.7.1

Licensees must submit to the CBB's Consumer Protection Unit, 30 days after the end of the quarter, a quarterly report summarising the following:

BC-2.7.2

The report referred to in Paragraph BC-2.7.1 must be sent electronically to complaint@cbb.gov.bh.

BC-2.7.3

Where no complaints have been received by the licensee within the quarter, a "nil" report should be submitted to the CBB's Consumer Protection Unit.

BC-2.8.1

Compliance with these requirements is subject to the ongoing supervision of the CBB as well as being part of any CBB inspection of a licensee. Failure to comply with these requirements is subject to enforcement measures as outlined in Module EN (Enforcement).

RM-A.1.1

This Module contains requirements relating to the management of risk by microfinance institution licensees.

RM-A.1.2

This Module details the minimum key elements of a sound credit risk management system which the Central Bank of Bahrain ('CBB') requires its microfinance institutions licensees to observe. These minimum requirements reflect the unique environment within which microfinance institutions licensees operate and the range of products which they typically offer. However, the CBB, at its sole discretion, retains the right to impose more stringent requirements and guidelines upon one or more microfinance institution licensees should it consider such action to be in the best interest of the Bahrain financial system at any time.

RM-A.1.3

This Module obliges microfinance institution licensees to identify and document the major risks that they face, and what action will be taken to manage those risks effectively. Effective compliance with this Module will require the risk management framework to be supported by adequate resources and the appropriate tools to identify, monitor and control all material risks.

RM-A.1.4

This Module provides support for certain other parts of the Rulebook, mainly:

Legal Basis

RM-A.2.1

This Module was first issued in July 2014 by the CBB. Any material changes that have subsequently been made to this Module are annotated with the calendar quarter date in which the change was made: Chapter UG 3 provides further details on Rulebook maintenance and version control.

Summary of Changes

Superseded Requirements

RM-B.1.1

This Module applies to all microfinance institution licensees authorised in the Kingdom, thereafter referred to in this Module as licensees.

Board of Directors

Senior Management

Systems and Controls

The Role of Internal Audit

RM-2.1.1

Credit risk is the likelihood that a counterparty of the licensee will not meet its obligations in accordance with the agreed terms. The magnitude of the specific credit risk depends on the likelihood of default by the counterparty, and on the potential value of the licensees' contracts with the customer at the time of default. Credit risk largely arises in assets shown on the balance sheet, but it can also show up off the balance sheet in a variety of contingent obligations.

RM-2.1.2

Exposure to credit risk, notably in the form of traditional and Shari'a compliant financing has historically been the most frequent source of risk.

RM-2.1.3

The lack of continuous credit facility supervision and effective internal controls, and/or the failure to identify the application of effective controls and fraud are also sources of risk.

RM-2.2.1

All licensees which provide credit facilities to resident natural or legal persons in Bahrain must become members of the Credit Reference Bureau (CRB). All requests by residents of Bahrain for new credit facilities must be submitted to the CRB.

RM-2.2.2

All CRB members must implement the requirements of Module BC (Business Conduct), in matters such as the protection of confidential customer data (see Section BC-1.7) and payment of enquiry fees.

RM-2.3.1

Licensees must have a properly documented credit framework. The framework must include a board approved policy which is supported by appropriate procedures and practices designed to bring professional discipline to the credit granting activities and ensure that credit facilities are granted based on clear and relevant criteria.

RM-2.3.2

It is prudent to review the credit policy regularly to ensure that once it is established, it remains flexible enough to be current and continues to accomplish its original purpose taking into consideration market developments.

RM-2.3.3

A sound credit policy should consider which types of credit products and borrowers the licensee is prepared to accept and the underwriting standards the licensee will utilise.

RM-2.3.4

A licensee's credit policy should address all credit matters of significance including:

RM-2.4.1

Licensees must have in place appropriate credit grading systems (sometimes referred to as credit classification systems) to help assess credit quality.

RM-2.4.2

Each licensee must have a credit grading system and provisioning requirements within its credit policy.

RM-2.4.3

Credit facilities must be classified by licensees on an ongoing basis. The classification framework must, at a minimum, include the categories listed below, and licensees must apply provisions (sometimes referred to as "allowances") at or above the minimum levels specified in Paragraph RM-2.4.4. Licensees are free to classify a credit facility in a category which requires a higher level of provisioning if the licensee has information which gives doubt as to the collectability of the facility, even if the concerned credit facility is performing. These standards must also be applied in the case of the suspension of profit and the classification of other non-financing receivables (e.g. fees):

RM-2.4.4

The following categories of credit facilities are defined as 'Non-performing'. Licensees must apply the minimum specific provision levels outlined below:

RM-2.4.5

The minimum provisioning levels set out above must be taken on the net amount of the outstanding facility after deducting the eligible collateral. If a licensee has collateral but is unprepared to exercise it after a facility becomes non-performing, then the collateral is not providing protection to the licensee and therefore provisions must be taken on the full amount of the outstanding balance until either the facility is repaid, the collateral (or guarantees) exercised or the facility rescheduled or restructured.

Non-accrual of Profit/Interest Income

Treatment of Restructured and Rescheduled Facilities and Facilities Which Cease to be Non-performing

RM-2.6.1

The extension of credit is sometime supported by collateral provided by the customer or third parties. In the case of a credit facility supported by a guarantee, an assessment of the guarantor must be made by the licensee on at least an annual basis.

RM-2.7.1

Credit culture is defined as the sum total of a licensee's approach to managing credit risk, including business strategy, credit policy, shared assumptions about credit, the effectiveness of communications, and the composition and quality of the resulting loan portfolio.

The Role of the Board of Directors

The Role of Senior Management

Effective Internal Systems and Controls

RM-2.8.1

Licensees must implement a sound internal controls framework, including an effective credit culture (see Section RM-2.7). Licensees must display and communicate charges and the APR clearly (see Section BC-1.4).

RM-2.8.2

The CBB requires licensees to demonstrate transparency in their dealings with their customers, as regards the costs and terms of their lending.

RM-2.8.3

The measures presented in this Chapter should be viewed as minimum standards, rather than best practice. They are aimed at encouraging prudent lending and full, frank and fair disclosures, rather than dictating comprehensively how licensees should engage in microfinance credit facilities.

Refund/Adjustment of Insurance Premium on Loan Prepayments and Top-Ups

Early Repayment Fees/Charges

RM-3.1.1

Licensees must document their framework for the proactive management of operational risk. This policy must be approved and reviewed at least annually by the board of directors of the licensee.

RM-3.1.2

Operational risk is the risk to the licensee of loss resulting from inadequate or failed internal processes, people and systems, or from external events. In identifying the types of operational risk losses that it may be exposed to, licensees should consider, for instance, the following:

RM-3.1.3

Licensees must assess and evaluate the impact of operational risks on their financial resources and solvency.

Business Continuity Planning

Record Keeping

RM-3.2.1

As part of an effective operational risk management system, licensees must:

RM-3.3.1

Succession planning is an essential precautionary measure for a licensee if its leadership stability — and hence ultimately its financial stability — is to be protected. Succession planning is especially critical for smaller institutions, where management teams tend to be smaller and possibly reliant on a few key individuals.

Vital Records Management

RM-3.5.1

Licensees that maintain cash on their premises must put in place security measures to minimize the risk of theft or fraud.

RM-3.5.2

Licensees are required to install an alarm system for those premises where cash is held.

RM-3.5.3

Where appropriate, licensees may consider the need to maintain a trained security guard on the premises.

RM-3.5.4

All licensees are required to have in place insurance coverage to cover potential losses arising from liability, theft, fire and other potential operational risk.

RM-4.1.1

This Chapter sets out the CBB’s approach to outsourcing by licensees. It also sets out various requirements that licensees must address when considering outsourcing an activity or function.

RM-4.1.2

In the context of this Chapter, ‘outsourcing’ means an arrangement whereby a third party performs on behalf of a licensee an activity which commonly would have been performed internally by the licensee. Examples of services that are typically outsourced include data processing, cloud services, customer call centres and back-office related activities.

RM-4.1.3

In the case of branches of foreign entities, the CBB may consider a third-party outsourcing arrangement entered into by the licensee’s head office/regional office or other offices of the foreign entity as an intragroup outsourcing, provided that the head office/regional office submits to the CBB a letter of comfort which includes, but is not limited to, the following conditions:

RM-4.1.4

The licensee must not outsource the following functions:

RM-4.1.5

For the purposes of Paragraph RM-4.1.4, certain support activities, processes and systems under these functions may be outsourced (e.g. call centres, data processing, credit recoveries, cyber security, e-KYC solutions) subject to compliance with Paragraph RM-4.1.7. However, strategic decision-making and managing and bearing the principal risks related to these functions must remain with the licensee.

RM-4.1.6

Branches of foreign entities may be allowed to outsource to their head office, the risk management function stipulated in Subparagraph RM-4.1.4 (iv), subject to CBB’s prior approval

RM-4.1.7

Licensees must comply with the following requirements:

RM-4.1.8

For the purpose of Subparagraph RM-4.1.7 (iv), licensees as part of their assessments may use the following:

When conducting on-site examinations, licensees should ensure that the data of the outsourcing service provider’s other clients is not negatively impacted, including impact on service levels, availability of data and confidentiality.

RM-4.1.9

For the purpose of Subparagraph RM-4.1.7 (i), the CBB will provide a definitive response to any prior approval request for outsourcing within 10 working days of receiving the request complete with all the required information and documents.

RM-5.1.1

Licensees must design and implement a liquidity risk policy for the management of liquidity risk of the licensee. The policy must be appropriate to the nature, scale and complexity of the activities of the licensee, and it must be approved and regularly reviewed by the board of directors of the licensee.

Risk Measurement and Monitoring

Contingency Planning