Treasures MFB Credit Risk Policy 2023

This document describes the Credit Risk Principles and Policy for Treasures Microfinance Bank with due consideration of the regulatory authorities’ including the Central Bank of Nigeria (CBN) as well as international standards.

This document outlines the general procedures’ framework for credit administration in Treasures Microfinance Bank and incorporates provisions for origination, risk analysis, approval, administration, and reporting of risk exposures.

This document shall serve as primary reference for creating and managing credit risk exposures in Treasures Microfinance Bank.

Version history

The version history for this document is as follows:

Date	Version	Document Owner	Status	Revision Date
02/05/2023	1.0	Enterprise Risk Management	Initial

Policy Review

This policy will be reviewed at least once every two years by the Board. However, more frequent reviews shall be made if there are material reasons to do so.

Glossary of acronyms/terms

Acronyms/terms specific to this document are listed here:

Acronym	Definition
MD	Managing Director
TFMB	Treasures Microfinance Bank
MCC	Management Credit Committee
GHERM	Group Head, Enterprise Risk Management
ECL	Expected Credit Loss
GCFO	Group Chief Financial Officer
GCEO	Group Chief Executive Officer
TMRAC	Target Market Risk Acceptance Criteria

Policy Owner

Group Head, Enterprise Risk management

Approval

Date Approved Approved By Signature

00/05/2023

BOARD CHAIRMAN

00/05/2023

CHARIMAN, BOARD AUDIT AND RISK COMMITTEE

Overview

The Credit Risk Principles and Policy is designed to:

standardize credit policies for the Bank, give employees clear and consistent direction for the creation of risk exposures within the bank.
provide a comprehensive guide and framework in creating and managing risk
ensure prompt identification of problems in credits and prudent management of decline in credit
outline the requirements for administration and reporting of individual exposures and the overall risk asset portfolio.

Core credit policies and standards in this document set guidelines for identifying, measuring, approving, and reporting credit risk in Treasures Microfinance Bank, and are not a substitute for experience, common sense, and good judgment.

The credit risk management policies will be reviewed at least once every two years to ensure that the overall approach to creating and managing risk assets remains relevant and responsive to changes in the environment.

In the event of a fundamental change in direction and/or revision of the risk management strategy of the Bank, a complete reproduction of the entire document will be undertaken.

1.1. Regulatory Background

The principles and policies contained in this document has been documented to apply to the regulatory framework as set out by the CBN, and other applicable regulations.

Concepts and practices defined by the Basel Committee are included where applicable considering that Nigerian financial markets are in different developmental stages than those considered by the Committee.

New developments in the management of credit risk as required by regulation, or by the Group’s internal processes and the external (micro/macro) environment, shall be reflected in this document through its periodic review process.

Credit Risk Framework

The Credit Risk Framework ensures the business strategy of the bank is in consistency with the risk- reward appetite set by the Bank’s Board of Directors as well as stipulated regulatory requirements.

2.1. Credit Risk Definition

Credit risk is defined as the potential failure of a counterparty to meet its contractual obligations. Loans are considered the largest source of credit risk, but it may also be inherent in asset types such as bonds, short-term debt securities and derivatives, and off balance-sheet commitments such as unused credit lines or limits, guarantees and documentary credit.

Direct lending risk, contingent lending risk, issuer risk, counterparty credit risk, pre-settlement risk, and settlement risk are also regarded as credit risk.

2.2. Credit Risk Management Principles

In line with the ERMF, the Bank considers the following guiding principles to ensure adequate credit risk management function.

Credit risks shall be taken within a defined credit granting criteria and credit granting process.
Credit approvals shall be granted after thorough credit analysis and review.
Measurement of credit risks shall be supported by adequate credit risk and information systems management.
Credit limits shall be actively established with risk concentration consistently managed.
Credit management monitoring shall be continuously performed.
Stress tests shall be frequently conducted as part of the effective risk management process.

2.3. Credit Risk Strategy

The credit risk strategy shall define the following elements at minimum:

Preferred customer profile in granting credit
Allocation of credit based on exposure type, industry or economic sector, geographical location, currency and maturity
Target markets
Risk-rating level based on its risk-bearing capacity and principles for diversification of protection against risks
Quality, yield, and growth targets for the credit portfolio

The credit risk strategy is cornerstone to the identification, measurement, monitoring and control of credit risk, it shall be reviewed periodically (at least once in two years).

All loans where credit exposure poses a risk must be considered in the credit strategy.

2.4. Credit Risk Appetite

The Bank’s risk appetite defines the amount of risk exposure, or potential adverse impact from an event, that TMFB as an organization is willing to accept/retain.

2.5. Credit Approval Limit

The Board of Directors has delegated the authority to approve all credits to the Board Credit Management Committee (MCC). Therefore, all credits shall have the approval of the Credit Management Committee (where applicable).

The Board, through the Management Credit Committee (MCC) shall, from time to time, delegate part of its authority to the Group Enterprise Risk Manager and Bank Managing Director as they deem fit.

The approval limits are as follows:

Approval Authority	Approval Limits
MD-MFB and GH-ERM	<250k
MD-MFB, GH-ERM and GCFO	>250k – 500k
MD-MFB, GH-ERM, GCFO, Internal Auditor and CCO	>500k-<1m
GCEO	1m and above

2.6. Credit Risk Framework Elements

The Credit Risk Management of the Bank shall comprise elements that all together constitute the credit risk management process:

Identification and measurement of credit risk
Credit risk mitigation and monitoring
Credit risk governance

This management process of credit risk shall be embedded throughout the credit administration process.

2.6.1. Credit granting criteria and credit granting process

The Bank’s credit granting criteria shall contain the identification of target markets based on the credit risk strategy and credit granting procedures, the purpose of the credit, the repayment and the management of collateral or guarantees. It requires an adequate credit analysis and proper collateral management which the Managing Director/GH-Enterprise Risk Manager will review and sign-off on prior to recommending the request for MCC’s approval.

Credit Granting Process

The risk management function must work with the Bank’s MD with the goal of taking intelligent risk with shared responsibility, without forsaking individual accountability. The Relationship Manager/Officer is the institution’s first line of risk defense given their unique access and proximity to their clients on a real time basis.

Every credit must be recommended by the Relationship Manager/Officer who must have reviewed the profile of the customer to ensure they meet the target market and risk acceptance criteria parameters of the Bank as well as a fit-for-purpose test for the loan amount. A detailed review including credit analysis, analysis of key risk and mitigants, industry and regulatory landscape assessment, management assessment and collateral valuation must be completed and circulated for approval.

All credits shall be assessed on their merit, either under credit programs or under the general terms and conditions by the Board Credit Risk Committee/Group Chief Executive Officer and Credit Analysts before recommendation for Board approval (as applicable).

Credit Analysis

Credit analysis shall provide sufficient information on the credit applicant (borrower) and project to be financed. Credit decisions will be based on credit analysis, which shall include at least:

Historical and future repayment capacity of the borrower
Summary of financial status and creditworthiness of the borrower
Credit purpose and sources of repayment
Own funding that will be provided by the borrower (where applicable)
Overview of the borrower’s industry or economic sector (where applicable)
The borrower’s position within the sector
Collateral coverage
Assessment of risks posed by macro-economic environment
Assessment of risk against expected return

In addition, the Bank will ensure procedures are in place for identifying interconnections between single borrowers, counterparties, and related entities.

Collateral Management

Collateral is one of the key considerations after creditworthiness of the borrower in making credit decisions. However, adequate and sustained cash flow from operations remains a key consideration in our credit decision process.

Yield prospects, market values and possibility of realization of collateral shall be monitored to guarantee repayment. Prudential maximum limits according to type of collateral shall be established as a percentage of market value. Special attention will be paid to the market value of collateral held routinely to preclude any potential loss arising from the impairment of the asset.

Credit Risk Measurement and Information Systems

Information systems and analytical techniques support the production of information on the credit risk portfolio, including identification of risk concentrations that shall be provided to management, MCC, and the Board of the Bank. This information also facilitates monitoring, capital adequacy estimations and credit risk exposure assessment that ensure compliance with the credit risk strategy. Thus, the quality and timeliness of credit information are critical components of credit risk management. Applicable credit risk measurement techniques shall be used in considering the nature of claims, collateral, probability of default and market movements that may affect the value of claims.

Limits:

The Board Credit Management Committee shall set portfolio limits and large single obligor limits according to the Bank’s risk appetite and business strategy in compliance with market/industry regulatory limits where applicable. Single obligor limits for individuals shall be 1% of the Bank’s Shareholder’s Fund unencumbered by losses and 5% of the Bank’s Shareholder’s Fund unencumbered by losses for corporates. By delegated authority, the Enterprise Risk Management department, shall recommend specific exposure limits for certain products, counterparties, particular industries or economic sectors, individual foreign countries, or groups of countries to the Board for approval. These Limits shall be regularly evaluated considering prevailing market conditions, ensuring that credit granting activities and others involving credit risk shall be adequately diversified.

Monitoring functions shall ensure actual utilization of established limits on an ongoing basis, and breaches to limits shall be documented, analyzed and reported. Exceptions to credit limits shall follow established procedures.

Corporate Limits and Review

The Bank shall use corporate review and analysis to establish limits for large quoted/unquoted corporates, conglomerates, and multinational corporations in line with the CBN minimum regulatory limit of 5% of Shareholder’s Fund per corporate. For such counterparties, the following factors shall be considered in the review process:

Business details like ownership, years in business, sector growth prospects, etc.,
Quality and stability of board and management,
Industry performance,
Financial analysis,
Business operations, products, brand strength, etc., and
External rating, market perceptions and other publicly available information.

The review results in a rating score for each corporate based on the above parameters, while the financial ratios are, in addition, moderated by the industry averages. The companies shall be further categorized into tiers based on their final rating score.

The Bank shall maintain a five-tier categorization of large quoted/unquoted corporates, conglomerates, and multinational corporations, which shall determine the counterparty limits established for them as follows:

Tier	Range of Rating Score (%)	Limit (% of Shareholder’s Fund)
1	≥ 85	35
2	80 – 84	27.5
3	70 – 79	22.5
4	55 – 69	15
5	50 – 55	5

The limits represent a percentage of the Company’s full shareholders’ funds.

Risk Concentrations

Identification and management of risk concentration will be an integral part of the credit portfolio management process and the credit risk strategy shall be used as guidance to establish limits to concentrations. Mechanisms and controls shall be in place to manage and mitigate risk concentrations as well as ensure concentrations remain within applicable thresholds.

Direct risk concentrations consist of large amounts of credits involving:

Single counterparty
Group of single counterparties and related entities
Specific industry or economic sector
Counterparties in certain geographic region
Strongly interrelated individual or groups of foreign countries
A type of collateral
Same maturity
Same product/instrument

Indirect risk concentrations may occur when business lines performance react likewise to external factors, e.g., macro-economic and changes in interest rates, and shall be also identified.

Ongoing credit risk management

Procedures for the ongoing management of various credit risk bearing portfolios shall be in place to identify possible problem credits or deteriorating business activities, collateral and guarantees, and to support the need to implement corrective actions such as rating reviews.

Internal Control acts as an independent function and will be responsible for ongoing credit management ensuring all approval conditions have been met with requisite documentation fully executed before limits are availed.

Enterprise Risk Management department shall provide accurate and timely information to facilitate the monitoring of the quality of individual credits and the total portfolio and compliance with policies and procedures.

Information that facilitates the monitoring shall include ongoing internal credit rating and credit stress testing.

Stress Testing

Stress tests shall routinely be undertaken to access potential impact of emerging market issues with a view of proactively implementing action plans to mitigate portfolio impact. The ERM shall ensure the regular execution of stress tests for the credit portfolio.

Credit Risk Governance

Full oversight of all credit risks is ensured through the design of Credit Risk Governance. It also supports the effective decision making and timely escalation to the Management and the Board when necessary.

3.1. Board of Directors

The governance over risk is well defined in the ERMF approved by the Board of Directors, which is at the apex of the risk governance structure, through the Board Risk Management and Compliance Committee. The Board delegates its management functions to the Management which relies on the Management Credit Committee for the purposes of credit risk.

The Board of Directors and its committee (MCC) shall define appetite for risk taking including relevant limits, and established approval and governance framework of relevant limits overseeing the aggregate credit portfolio.

3.2. Management

The following are responsibilities of the Management with regards to credit risk:

Ensure the adoption of the Board’s approved credit risk strategy and policy for credit risk management and control
Reviewing relevant reports periodically submitted to it, on the overall credit risk profile, and ensuring that any material risks identified are promptly and properly addressed.
Regular oversight and review of risk management and control
Ensure availability of timely information on the Bank’s risk-taking position, including key elements of credit portfolio’s risk profile
Supervise that credit sales’ remuneration strategy is not in conflict with the credit risk strategy, so no incentives are created for excessive credit risk taking
Escalate and educate on specific events and concentrations in the credit risk portfolio

3.3. Management Credit Committee

The MCC exercises the powers delegated to it by the Board for overseeing the relevant areas of risk (market, credit, operational, and liquidity) from an enterprise view, ensuring adequate execution of policies, principles and frameworks within the risk management teams. The MCC also reviews information on the Bank’s credit risk developments and reports it to the Group Executive Officer and Board.

The roles and responsibilities of the MCC with regards to credit risk shall include:

Take decisions in relation to credit risks, based on the reports received, and provide oversight on the management of identified risks.
Make suitable recommendations to the GCEO as it deems fit.
Review issues raised by Internal Audit that impact on credit risk management and suggest suitable solutions to amend such issues.
Review and recommend changes to credit risk policies for Board consideration and approval.
Coordinate the risk management function to provide an integrated view of risks faced by the Bank and to effectively implement approved strategies for credit risk management.

Regarding the specifics of the credit risk area, the MCC shall review the Bank’s credit risk exposure to relevant risk factors, market, and environmental outlook, and shall lead appropriate steps aimed at:

Minimizing the potential impact of identified risk factors to portfolio exposures
Reviewing the implementation of strategic initiatives, and make appropriate changes
Improving on performance targets and benchmarks in line with current strategic thrust

Organization and Control

4.1. Enterprise Risk Manager

The Enterprise Risk Manager’s responsibilities are to:

Ensure that the Bank and Relationship Officers properly apply all policies and procedures with respect to credit risk.
Approve credit request.
Immediately advise the Bank (and if material the GCEO), if any violations of the credit risk policies and procedures are observed.
Reduce or curtail business activity until compliance with the policies and procedures have been restored
Ensure that the usage of risk limits accurately reflects current or expected market conditions

4.2. Managing Director

Execute the Bank’s business strategies and objectives.
Manage credit risk in accordance with the approved policies and frameworks.
Ensure that all team members have the competence to meet the business objectives.
Operate at acceptable levels as defined by the Bank’s operating standards and controls.
Maintain the integrity of financial reporting through Financial Control.
Develop product programs to identify all the market risks.
Operate within approved credit risk limits.
Agree corrective actions for limit excesses and implement action plans.
Ensure the continuous development of their knowledge of financial markets and credit risk.

The Bank will continue to pursue the retention of highly competent and independent-minded credit risk officers to ensure that all the credit risk policies and guidelines are properly applied.

Credit Risk Management Process

Credit Risk Management follows a clearly defined and documented credit processes. The key processes are:

Deriving counterparty credit ratings and setting credit limits for counterparties
Approving credit limits with the required credit authority
Following credit approval process up to the Board level
Making use of credit risk mitigants and risk transfers techniques
Monitoring of credit exposures on a counterparty as well as on a portfolio level with special focus on quality trends and concentration risk
Management of higher risk counterparty via Watchlist process and transfer to work out when applicable.
Credit risk reporting

5.1 Credit Limits

Credit Limits are approved or delegated by the Board. In determining a counterparty credit limits, the credit rating shall be used as an indication of counterparty’s credit quality. Credit limits are established and booked in relevant systems and indicate the maximum credit exposures the Bank is willing to assume over specific periods.

The Bank performs a firm-wide consolidation of credit limits and credit exposures under which facilities to a group of borrowers linked to each other are consolidated as one-obligor, in one economic group.

Also note that all limits shall be in accordance with regulatory guidelines as stated by the authority that governs the Bank.

5.2 Credit Authority

Credit decisions are made by the ERM. Credit authority includes:

Approving new credit limits, increasing or extending existing credit limits. These must be specified by borrower, amount, type and tenor of the credit facility, amortisation, documentation, collateral and other important factors.
Assigning a rating.
Taking other risk related decisions to the exposure regarding relevant changes of risk, e.g. required release of collateral in cases of deterioration of creditworthiness or collateral values.

Credit authority is assigned to the ERM, as applicable, to qualifying credit officers. The authority to approve credit shall be exercised in line with the provisions of the Bank’s credit approval policies and guidelines.

5.3 Facility Analysis Memorandum (FAM)

A FAM shows a detailed qualitative, quantitative, and focused analysis of the credit. It contains information about the obligor and the source of repayment. Details of the use of proceed and analysis of repayment capability shall also be included in the FAM which shall be presented by the Relationship Officer (subject to the approval of the Bank’s Managing Director) to the MCC for credit consideration and approval.

5.4 Credit Offer and Acceptance Validity

On approval of a credit facility, a “Credit Facility Offer” letter shall be communicated in writing to the customer, through the Relationship Manager. The Credit facility offer letter shall include clear terms and conditions which must be met by the customer before availment of the facility.

A formal acceptance of the offer letter shall be required from the customer and acceptance of the offer letter must be met within 14 days of facility approval date, failing which, the offer will lapse.
Lapsed offer letters may be revalidated once in the life of an approval subject to highest approval limit of the Managing Director.
In addition to acceptance of the offer letter, the terms and conditions of the offer letter must be met by the borrowing customer within 30 days of facility approval date, failing which the offer will lapse.
Lapsed offer letters under the above condition may be revalidated subject to the highest approval limit of the ERM and MD.
All credits that have lapsed for more than 90 days from approval date or that requires a material change in the previously approved terms, may not be revalidated, but a fresh request shall be submitted for re-consideration by the relevant approving authority.
Materiality of change shall be determined by the Enterprise Risk Manager. Materiality shall include facility limit, tenor, product type, business financial health amongst others.

5.5 Communication of rejected credit report.

Where a credit request is declined by TREASURES MFB it shall be the primary responsibility of the relevant Branch Office to communicate the decision to the applicant in writing. In all cases, copies of the notification letter shall be made out to the Supervising Officer and all other relevant offices.

5.6 Lending Products and Services

Treasures Microfinance Bank operates core and ancillary products, listed below, and faces counterparty risk embedded in the positions of its market portfolio. These products shall not be limited to the list provided below. Products not listed below must have been ratified by the Bank’s management and the Board through its committee.

Credit Risk Products:

Fixed Asset Loan
Working Capital Loans
Customer / General loans
Hire Purchase financing
Equipment leasing
Overdraft
Local Purchase Order
Emergency Loans.

5.7 Approval for Credit Extensions

All credits should be reviewed annually prior to expiry of the line. In the event where an extension is required for a credit facility which is about to expire, such extension which shall not exceed 90 days and shall require the approval of the Managing Director and the Credit Management Committee.

5.8 Excess Over Approved Limits (EOL)

Temporary excess over approved limits is granted to performing credit facilities of obligors whose debt service record have been satisfactory to meet urgent obligations and bridge cashflow gaps. Excess over limits is solely granted on exceptional basis on the following terms:

Excess over limit shall be approved by the MCC provided the aggregate limit is within the Committee’s limit subject to a maximum tenor of 30 days.
Where the aggregate exposure may exceed the MCC’s approval limit, the Committee may approve up to 20% of its approval limit as excess over limit subject to a maximum tenor of 30 days.
Any request for excess over limit that is above the MCC limit shall be considered at the Board level.
Approval for excess over limit at the Board level shall not exceed a maximum tenor of 90days or annual review date, whichever is shorter.
All approved requests for excess over limits that are above the MCC approval limit shall be presented to the Board for ratification.
Excess over limit shall not be granted if Single Obligor Limit (SOL) of the Bank is breached.

5.9 Re-Allocation and Sub-Allocation of Credit Limits

Reallocation is the reassignment of credit limit from one previously approved facility to another pre- approved facility for an obligor or obligors within the same economic group, while sub-allocation is the reassignment of credit limit from a previously approved facility to a new facility.

Sub-allocation of a previously approved facility to a new facility should therefore require more stringent credit evaluation than reallocation.

Reallocation or sub-allocation of lines shall be approved under the following conditions:

Re-allocation or sub-allocation shall be considered only on existing credit facility.
The credit facility shall be for the same obligor or obligors within the same economic group.
The tenor is equal or shorter than the pre-established facility.
Re-allocation shall be approved by the MD and the MCC.
Depending on the materiality of change in risk profile, sub-allocation may be approved by the MD and Enterprise Risk Manager. Maximum approval level for a sub-allocated credit is the MCC.
The Managing Director or the ERM shall determine the materiality of change in risk profile of a credit under sub-allocation scenario and has the discretion to escalate to higher approving authority for final approval.

5.10 Credit Risk Mitigation

The Bank actively uses credit mitigation techniques to optimize the Bank’s credit exposure and reduce potential losses. These techniques may ensure or can be an alternative source of repayment but do not compensate for high quality underwriting standards and throughout due diligence.

Key risk mitigation techniques include:

Comprehensive and enforceable credit documentation with adequate terms and conditions (including covenants where deemed adequate)
Collateral in various forms.

5.11 Non-Performing Credits

Non-performing credits shall be classified into four categories namely, pass and watch, substandard, doubtful, or lost based on the criteria spelt hereunder:

A key objective of problem loan management is to minimize non-performing assets and charge-offs provisions. Non-performing assets include loans on which Treasures MFB does not accrue interest and/or fees (“non-accrual basis”).

Designation of a credit as non-accrual has no effect on the obligation of the client to Treasures MFB and must not be communicated to the customer.

Pass and watch; credits on which unpaid principal and/or interest remain outstanding for more than 1 day but less than 31 days.
Substandard; credits on which unpaid principal and/or interest remain outstanding for at least 31 days but less than 61 days.
Doubtful; credits on which unpaid principal and/or interest remain outstanding for at least 61 days but less than 90 days.

Lost; credit on which unpaid principal and/or interest remains outstanding for more than 91 days.

5.12 Concentration Risk: Counterparty Risk

Concentration risk management on counterparty level is addressed by the credit authority, taking into account relevant credit metrics to define whether an individual or group exposure can be approved.

Risk appetite grids shall be utilized to manage concentration risk across the portfolio, which shall be set out in credit process guidelines.

5.13 Concentration Risk: Industry Risk

Concentration risk managed from an industry or economic sector perspective shall be done by grouping the credit portfolio into respective industry/economic sector sub-portfolios. Reports shall be prepared on a monthly basis at the least showing actual limits against set industry limit and submitted to the management as well as the board as may be required. The industry limit considers macroeconomic and industry outlook, as well as risk-return characteristics of the portfolio and the Bank’s exposures to the industry compared to its size contribution to the economy.

5.14 Monitoring of Risk Positions

Monitoring refers to a post disbursement periodic review of the credit portfolio in evaluating the effectiveness of credit administration functions, the level of compliance with contracts/polices and the quality of loan.

Ongoing active monitoring and management of the Bank’s credit risk positions shall be an integral part of credit risk management. In addition to the ongoing monitoring of credit quality trends in the portfolio, key focus shall be placed on the assessment of potential concentration risk across counterparties, industries, countries and products.

The Risk Analyst is responsible for monitoring the daily risk positions of the credit portfolio and reporting any deviations to the GH-ERM who raises the matter to the management and MCC where applicable.

5.15 Periodic Monitoring and Review

The Enterprise Risk Manager, as part of the Risk Management function, will undertake a constant review of the Bank’s risk asset portfolio to identify facilities to be classified as delinquent. Early detection of deteriorating assets will help in ensuring that such assets that would otherwise be delinquent are salvaged. Early warnings of delinquent facilities are:

Delay or default in payment of principal and interest.
Breach of facility covenants.
Unreasonable request for restructuring / extension of existing facilities.
Performance gaps relative to agreed plan.
Market or industry decline.
Poor cash flow.
Decline physical appearance of business premise.

5.16 Concentration Risk: Product Risk

Concentration risk management on product level aims to prevent correlated losses from specific credit products sensitive to e.g., disruption of financial markets, significant moves in market parameters, adverse macroeconomic scenarios, or other factors. Specific product limits can either be set with regards to exposure to certain industries/regions or affecting the total credit portfolio.

Product limits are set on a selective basis where deemed required from a risk management perspective. Exposures under the approved limits shall be monitored regularly.

5.17 Watch List

The credit risk management framework in the TMFB prevents and minimizes potential credit losses derived from exposure to higher risk counterparties through tools and processes.

Exposures where there is a concern that credit quality has deteriorated or is likely to deteriorate and represent a higher risk of loss should be included on a Watch list. The Watch list is designed to raise management awareness of these points and to develop and follow up on action plans to prevent or reduce potential consequential losses.

Criteria for the addition of counterparties to the Watch list are established and documented by the Enterprise Risk Manager in the Credit Operations Manual. It is the responsibility of credit officers to continuously review their portfolio about a timely inclusion to the Watch list.

Counterparties that are already distressed (acute risk or default) are also included in the Watch list and are managed by workout groups. Detection of such potentially distressed exposures is responsibility of Transaction Teams ensuring that specialist workout functions can become involved at an early stage, where appropriate.

5.18 Remedial Actions

All decisions about changes and remedial actions in specific credit loss provisions (increases or releases), write-offs and debt waivers on specific single transaction level need to be approved by the board or as delegated to the MCC.

Significant restructurings and any need for significant new risk provision are subject to appropriate communication to the MCC and, potentially, the Board.

In the undesired event of decline in quality of assets, prompt identification and management of such delinquency may significantly reduce credit loss to the Bank.

Credit Risk Management Policies

Treasures Microfinance Bank is a financial services institution that, as part of its normal activity, shall engage in the extension of credit to clients that meet the Bank’s target market criteria. Such credit extension must be in line with the risk and return preferences articulated by the Board.

This section articulates the overarching corporate risk management policies of the Bank that outline the principles and rules that form the basis for decision making and approvals in respect of the creation and management of credit risk exposures at the Bank.

6.1. Credit Policies

Credit risk management policies shall be approved by the Board to enable informed decision making and approval, and to establish and maintain an appropriate environment for risk management at the Bank.

All the staff involved in the creation and management of risk exposures shall comply at all times with the credit risk management policies, and procedures as approved. The Board Management Credit Committee shall have specific and overall responsibility for ensuring adherence to the credit risk policy, while compliance shall be monitored on an ongoing basis by the Group’s Risk Management function and by the Internal Audit department (as the third line of defense). Compliance with credit policies shall be reported on a quarterly basis to the MCC and the Board.

6.2. Interest charges commissions and fees

Treasures microfinance bank shall charge interest on its loan assets and charge fees for services rendered to clients, in reflection of its corporate vision, mission and business mandate.

Interest rates, charges and fees shall be established and advised for application from time to time.
Interest rates charges shall always be advised individually to affected existing customers.
Interest shall be accrued and charged periodically but no less than monthly.
Default penalty on a prorate basis of 2% per month shall be charged monthly on all due but unpaid loans.
Charges to clients’ accounts, as for example registration fees, legal fees etc. must be formally advised to clients.

6.3. Legal Documentation and Loan Disbursement

6.3.1 Documentation

Legal documents are all documents which evidence the credit relationship between Treasures MFB and a client, and which preserve the legal rights of TMFB. Such documents evidence the right which TMFB may have to use against the client when necessary.

6.3.2 Disbursement

This refers to the actual draw-down of the loan by the beneficiary. It should be preceded by fulfillment of draw-down conditions, legal and non-legal. All loans above the limit shall be funded from Head Office.

6.4. Loan disbursement, monitoring and repayment

This refers to the process of disbursing and approved loan and the utilization of the loan fund on the activities that will lead to the realization of the “Purpose” for which the loan was approved by the Bank. Loan Disbursement involves the preparation of the implementation plan, spelling out the number of disbursements, the purpose of each disbursement and the manner of disbursement (cash/kind).

Credit Officers of the Bank shall visit every project in which a loan is approved prior to every disbursement to confirm that the previous disbursement has been satisfactorily utilized and that the project is on course.

While the initial disbursement is dependent on the readiness of the client to proceed with the project for which a loan, subsequent disbursement shall be dependent on the judicious utilization of funds of the immediate past disbursements. The process of implementation cases when the loan is fully disbursed and / or the project is actualized and acquires a capacity to pay back the loan disbursed.

6.5. Credit Monitoring

It is the responsibility of the Credit officer and / or Credit group or Branch office to ensure that loans are paid back when they fall due. Every loan shall have an Amortization schedule spelling out periodic amount of payment due (principal + interest) over the loan tenor.

6.6. Credit Review

This refers to any action taken to safeguard the Bank’s Loan Assets where for any reason or action outside the control of the clients, Credit shows signs of deterioration. Credit may be reviewed where a project is unable to generate income to meet repayment due to reasons not caused by the clients. The reasons may include:

Fire outbreak, flood, draught, and other natural disasters.
Changes in government policy can that result in shortage or escalation in price of material inputs of the project financed.
Unfavorable market conditions caused by dumping of substitute products or technological changes.
Faulty loan covenants including unrealistic grace period and loan tenors.

Once a project is showing signs of failure and the credit is showing signs of delinquency, the first step is to clearly identify what went wrong. Having established the key cause(s), any of the following remedial actions could be adopted.

6.7. Project Recast

This involves a critical assessment of the key parameters of the Technical, commercial, and managerial aspect of the project. Having identified the key variables responsible for the project deterioration, approval is obtained for the preparation of a fresh credit paper as an addendum to the original paper where necessary. The recast shall provide adequate information to enable management to take an appropriate decision in the interest of the Bank. One or more of the following decisions may be taken:

Provision of a supplementary loan to actualize the project within the loan tenor.
Extension of the loan tenor with or without a supplementary loan.
Alteration in the size/scope or original project.

6.8. Loan Workout

This is an effort by which a loan is collected in whole or in part from a client experiencing serious financial difficulties. It involves negotiation and restructuring of the loan, its follow-up and collection. The loan workout process first identified what went wrong and could result in the adoption of any of the following remedial measures:

Alteration of the loan terms i.e., tenor, conditions, covenants, collateral etc.
Arrangement to pay within a specified period.
Foreclosure and realization of collateral.

6.9. Loan Repayments

Credit Officer or Branch Officers shall track all loan accounts and ensure that loans are repaid as and when due. Accelerated repayment of loans, i.e., payment made before the due date, shall also be encouraged. Repayment strategies shall include:

use of Demands Notes
Customer Visit.

6.10. Demand Note

A Demand Notice is a written request made to a client to pay that portion of a loan that has fallen due. Thus, a Demand Notice shall be issued periodically within the loan tenure and in accordance with the Amortization schedule agreed to between the Bank and the client. The demand notice shall be served to the client by post or preferably by hand and in a format approved by the Bank.

6.11. Customer Visits

These are visits to a client by an officer of the Bank with the aim of requesting the client to pay an amount that would be due within a short period or that has fallen due. A Demand Note may or may not be served during such visits.

6.12. Loan Recovery

Loan Recovery is a process of collecting back credit that has remained unpaid after facility expiry date or after it has been classified as bad or doubtful. The Credit Administration Department (CAD) shall be responsible for the classification of all loans and advise the relevant credit teams/units/officers & legal department which have recovery strategies depending on the circumstances of each loan. The strategies include the Demand Notes and Statutory Notices, the engagement of solicitors, Debt Collectors or Auctioneers as the case may be.

6.13. Loan Write-Off

As a rule, it is the goal of TREASURES MICROFINANCE BANK to minimize or reduce its problems loans, waivers and/or write-offs. However, it is impossible for a company whose business it is to accept risks, to avoid situations where risk exposures deteriorate to problem loans of doubtful Value (LDV) and eventually write-offs. A Waiver or Write-Off involves the cancellation of the interest or principal liability of a customer in a non-performing account. A Waiver or Write-Off request must be made when all the interest accrued and principal in the account may not be fully collectable. Uncollectible situations are characterized as follows:

All recovery efforts have failed; the cash collateral has been set off, charged assets sold and guarantees called without satisfying fully, the debt obligation.
Company assets have been fully liquidated; no other collateral exists and there is no personal or corporate guarantee in place.
Collateral documentation is defective and legal action unlikely to
The company possesses no assets; guarantors have been determined to be impecunious.
Company’s assets or personal assets cannot be located; Company’s Directors have disappeared.
As a result of negotiations with the customer for final settlement of outstanding the company agrees to a settlement, which leaves part of the cash basis unpaid.

All write-offs will be coordinated by the Management Credit Committee. A write-off does not cancel the customer’s obligation to the company. Write-offs should not therefore be communicated to the customer’s obligations. All Waivers/Write-offs regardless of amount shall only be considered and approved by the Bank’s board and management.

6.14. Collateral Guidelines

To minimize the risk of credit loss to the Bank in the event of a decline in quality or due to delinquency, there shall be a requirement for appropriate collateral coverage for all credit exposures. Guidelines for acceptability of credit collateral shall be approved by the MCC, as delegated to it by the Board, and shall include clear unambiguous articulation of:

Acceptable collateral in respect of each credit product including description, location restrictions in respect of landed property, guidelines in respect of minimum realizable value of such collateral.
Required documentation/perfection of collateral.
Conditions for waivers of collateral requirement and guidelines for approval of collateral waiver; and
Acceptability of cash and other forms of collateral.
Frequency of valuation of collateral where applicable

Absolute title in the name of Treasures Microfinance Bank shall be a minimum requirement for all items pledged as security for credit facilities. Additional criteria, including insurance cover, as may be defined in the Bank’s Credit Risk Management policy provisions shall be met.

6.15. Collateral Discharge

When a facility has been fully repaid including interest, commissions and other bank charges, the following steps should be taken to discharge the collateral.

Branch / cash center advises MCC and obtain clearance for discharge.
Deed of release is prepared by the Group’s Legal Department.
Deed of release is executed, stamped, and registered.
Necessary entries are made to the collateral register.
Collateral documents are delivered to the customers and his/her acknowledgement obtained in writing.

6.16. Credit Files

Credit files must be maintained for each credit customer. Credit files record the history of the relationship which must enable reconstruction of the credit approvals and evidence of credit risk management.

Credit files are confidential and must be kept locked and not taken away from the premises. It is the responsibility of the Risk Management Department to keep safe custody of the credit files and maintain records of their movement and use.

The Bank’s policy should require that credit files contain sufficient information for a user to get a full and complete understanding of the relationship. Completeness, sound physical conditions, and the neatness of the file are the responsibility of the Compliance officer.

Portfolio Management

7.1. Objectives

To ensure optimal earnings through a high-quality risk portfolio, deliberate portfolio strategy planning, performance assessment and reporting shall be emphasized at the Bank. Exposure concentrations to specific industry / market sectors and exposure type shall be limited in line with the Bank’s risk and return preferences.

Portfolio Management is an integral part of the credit process and shall apply across all of the bank–i.e., it shall include all of the Bank’s risk assets / exposures. The MCC shall articulate the risk and return preferences that shall inform the risk asset creation behaviors and decisions across the Bank.

On the recommendation of the Enterprise Risk Management Officer, the MCC shall approve a target credit risk portfolio, as well as the risk acceptance criteria that shall guide the creation of new exposures.

On an annual basis, (and subject to quarterly reviews), the ERM of the Group shall articulate a desired credit portfolio mix for the Bank. This target portfolio shall be reviewed by both the Board Management Credit Committee and Managing Director.

Responsibility for portfolio management at Treasures MFB is shared between the Risk Management function and the Managing Director of the Bank where the exposures reside. Risk Management however takes the lead in this responsibility.

It is the objective of this policy that substantially all the Bank’s credit exposures shall be covered by one or more of the following portfolio management practices: industry reviews, product reviews, risk rating limit exception reviews, high risk reviews, etc.

Portfolio management processes should incorporate the following components, as applicable:

Setting portfolio targets and concentrations
Establishing target market risk acceptance criteria and key success factors
Monitoring the portfolio risk profile, risk-adjusted returns, risk concentrations, as well as economic, market and competition data
Identifying and analyzing trends and concentrations that could affect the risk and performance of the portfolio
Stress testing the portfolio as appropriate to the business or the fundamental nature of the portfolio
Coordinating and communicating portfolio issues with/to the Bank’s risk management officers.

7.2. Minimum portfolio review standards

All portfolio management processes shall include an annual review by Risk Management. These reviews shall be officially documented and shall incorporate the following:

Current portfolio composition compared to the target portfolio.
Noteworthy trends – including major risk concentrations.
Portfolio risk adjusted return.

7.3. Portfolio reporting

For the successful implementation of the requirements of this policy, a comprehensive set of credit risk data generated from all lending activities shall be used to generate portfolio reports on a monthly and quarterly basis, as required by the Bank’s MD, Risk Management, MCC, Board and regulators.

It is the responsibility of Enterprise Risk Management Officer to define, construct and maintain an independent credit risk reporting framework that effectively, consistently and meaningfully communicates portfolio exposures to all the requisite stakeholders/end-users of this information.

It is the responsibility of the Bank’s MD to ensure that all required and relevant credit risk data is captured within independent credit risk systems. It is also their responsibility to ensure that all such data so captured are complete, timely and accurate. The Internal Control/Risk Management team will also have responsibility for establishing an effective quality control process around the credit data capture process, to check for reasonableness, consistency, and completeness.

7.4. Target Market and Risk Acceptance Criteria

Two of the well-established techniques for expressing credit risk appetite, and which shall play critical roles in portfolio management at Treasures MFB, are “Target Market Definition” and “Risk Acceptance Criteria”.

Target Market Definition

The Target Market Definition articulates the desirable and acceptable profiles of clients for the various credit products and service offerings of the Bank.

Target market guidelines shall specify the dimensions for desirable credits at least as follows:

Industry or business
Minimum sales
Quality of audited financial statements
Financial profile
Risk rating
Seasoning of operations
Account profitability
Management’s background, experience and skills profile

Risk Acceptance Criteria

The Risk Acceptance Criteria shall specify the terms and conditions that will be applicable in the extension of credit and in the creation of credit exposure.

Risk Acceptance guidelines shall specify the dimensions for desirable credits at least as follows:

Forms of credit extension.
Pricing or returns.
Covenants and documentation.

For the documentation of credit product programs, the Target Market and Risk Acceptance Criteria shall be clearly articulated in all product programs approved by management on the recommendation of the MCC through the Board.

For credit-based transactions, target market and risk acceptance guidelines must be outlined by the relationship officers and endorsed by the ERM as delegated by the MCC.

Portfolio & Regulatory Considerations

8.1. Concentration Limits

As with all Banks, Treasures MFB is subject to laws and regulations issued by regulatory agencies of the Federal Republic of Nigeria that are established for the regulation of financial institutions in the country.

Concentration limits/aggregate exposure ceilings shall be defined in terms of target markets and risk acceptance criteria defined above. Concentration limits/aggregate exposure ceilings shall relate to collection of credits with common risk characteristics, or where macroeconomic or market developments can have similar impact on a group of credits.

Concentration limits/aggregate exposure ceilings may also be defined by aggregating credits sharing other dimensions, such as: dependency on particular economic variables (e.g. oil prices, interest rate levels, consumer spending rate); or in terms of a dimension which is especially important to a particular business. A credit risk concentration is more than an aggregation of exposures to one borrower, related parties and/or subsidiaries.

8.2. Large Exposure

Large exposures are defined as any credit to a customer or group of related borrowers that is more than 1% (for individuals) and 5% (for corporates) of the Bank’s Shareholders Funds unimpaired by losses.

8.3. Regulatory Permit

Based on prevailing regulations and laws, the approval/permit of relevant regulatory bodies, and governmental ministries/agencies may be required for the granting of some types of loans, and the requirement shall be appropriately stipulated as a condition of the credit.

8.4. Insider Considerations

The Bank shall be fully guided by the provisions on insider-related credit as stipulated from time to time by the regulators. For the purpose of this policy “Insiders” are defined as:

Directors and their related interests to include their wife, husband, father, mother, brother, sister, son, daughter and their spouses. Significant shareholders holding at least 5% (individually or in aggregate) of the Bank’s equity and their related interests.
Employees and their related interest and exclude transactions under employment scheme of
Related party is a party that:
1. Directly, or indirectly through one or more intermediaries:
  - Controls, is controlled by, or is under common control with the Group (this includes parents’ subsidiaries and fellow subsidiaries)
  - Has an interest in Treasures MFB that gives it significant influence over the firm; or
  - Has joint control over the
2. The party is an associate of the

The party is a joint venture in which Treasures MFB or any member of the Group is a

The party is a member of the key management personnel of the Bank or its
The party is a close member of the family of any individual referred to in
The party is an entity that is controlled, jointly controlled, or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (iv) or (v); or

The party is in a post-employment benefit plan for the benefit of employees of the Bank, or of any entity that is a related party of the Bank.

In approving exposures to insiders, necessary due diligence shall be taken to ensure that TMFB’s interest is not compromised, and its risk acceptance criteria is not sacrificed.
Due diligence in the identification and reporting of insider and insider related credits shall not be compromised and the general level of awareness across the Bank shall be elevated through:

Sensitization of relationship managers to obtain relevant insider related information from clients at the point of credit origination.
Obtaining information on directors/significant shareholders and their related interests through the Company Secretary.

All identified insider related credit shall only be processed with the concurrence of the related insider.
All insider credit applications pertaining to directors and parties related to them, irrespective of size shall be presented by the ERM to the MCC for consideration/approval.
All insider credit applications pertaining to top management staff and parties related to them, irrespective of size shall be presented to MCC for consideration/approval, and subsequently presented to the Board for ratification, at its next meeting.
No director, significant shareholder or other insider shall be permitted to exert undue pressure on credit officers with a view to undermining the credit process or circumventing established principles and procedures. No director or staff of Treasures MFB or Emerging Africa Group may approve a loan for him or herself or participate in any committee deliberations on his/her loan application. These provisions do not apply to employee welfare loans and other facilities that are part of employee terms of employment.

Collateral Guidelines and Management
- Credit Collateral Requirements

Treasures MFB recognizes that collateral does not, by itself, convert a bad facility into a good one, while the fact remains that a well-secured credit facility has a lower credit risk than an otherwise equivalent unsecured facility. Therefore, TMFB and MCC are mandated to obtain collateral whenever prudent and in accordance with the product programs and relevant policies.
The choice and required amount of collateral shall be driven primarily by the purpose and risk of each extension of credit, and requirements for collateral, as set forth in this policy, shall be followed for all forms of credit.
Recognizing the importance of collateral to the safe and sound conduct of its lending activities, each relationship officer/Risk Taking Unit is directed to take the utmost care in reviewing collateral values and relating collateral values to credit amounts. Relationship officers and analysts are reminded that these standards are merely minimum guidelines, and that awareness of special circumstances, prudence, and good judgment will require more conservative valuations in many circumstances.
Compliance Officers and Risk Management review and approve all collateral assets in line with obligor rating and acceptable securities / assets for respective tiers.
The risk officers shall be responsible for monitoring and reassessing collateral values with as much frequency as changing market conditions and other circumstances shall require. In general, marketable securities should be verified at least monthly. Other collateral values should generally be re-established annually.
The risk officers shall ensure that all documents are assessed and signed off by the Legal Department for collateral documentation and perfection.
If the collateral for a credit facility is a mortgage property, favorable search reports shall be condition precedent to final approval for availment of the credit facility request.

As a general guiding principle, collateral for loan shall have:

Good Title
Be easy and relatively cheap to value.
Be appreciating or at least stable in value.
Be adequate.
Be realizable and easy to dispose off.

Acceptable securities shall include:

Real estate, preferably buildings in acceptable locations.
Shares of quoted companies discounted by a minimum of 30% of the current market value or accepted at the par value.
Bank guarantees from acceptable banks.
Insurance bonds from reputable and acceptable insurance companies’ cash.
Fixed Assets e.g., equipment.
Key-man Life Assurance.
Any other acceptable form of collateral may be decided from time to time.
- Collateral Acceptability

The guiding principles behind collateral acceptability are adequacy, marketability, and accessibility. All acceptable collateral is required to have a 130% cover except for:

Cash – 110%
Real estate/Landed property with value minimum of 200% cover.
Stock financed (applicable to only non-perishable fast-moving consumer products) under full collateral management. The value of the stock pledged as collateral, in addition to another type of tangible collateral must provide at least 130% on the Bank’s exposure.
Bank Guarantee-principal and interest at default
Corporate Guarantee of an investment grade parent/entity, covering principal and interest at default

Based on sound risk assessment, the Bank may accept collateral that is stamped for a nominal value of the loan amount. The acceptable nominal stamped value shall depend on the approved facility amount and shall not be less than 10% of the amount for bilateral transactions.

For syndicated transactions and admittance into an existing collateral structure, the Bank may accept a lower nominal stamping to the extent that the Bank is not inferior to any of the lenders.

Mortgages

9.3.1 Legal Mortgage

Treasures MFB may extend credit facilities to clients who have pledged landed property as security for the facilities. The legal interest on the property is transferred to Treasures MFB and upon default; the security can be enforced without recourse to the client. The following documents are required:

Memorandum of deposit of title deeds (Two Copies)
Original title This must be a registered title which includes:

Certificate of Occupancy
Deed of conveyance (Duly Registered)
Deed of Assignment (Duly Registered)
Land Certificate
Deed of Sub-Lease.

Power of Attorney to sell the
Building plan for a developed
Copy of executed form 1C (For Lagos State) / Application to alienate interest in landed
Copies of current tax clearance certificate of the
Deed of Legal Mortgage in favor of Treasures MFB (Four Copies)
Valuation report from a reputable firm of Estate
- Real Estate Appraisals
All credit facilities where the primary source of repayment is the cash flow from Real Estate, the sale of Real Estate, and all credit made for the purpose of financing the acquisition of real estate must fully conform with, but not limited to, the following guidelines:
Only valuers listed on the current version of TMFB’s list of approved appraisers may be used at all times. All costs related to the valuation of landed property pledged as collateral shall be borne by the client.
The Estate valuers approved by Treasures MFB must be made to execute indemnities in favor of Treasures MFB.
All undeveloped land/uncompleted building presented as security must be approved by the Board Management Credit Committee prior to acceptance.
A minimum of 200% cover at forced sales value of the estate is required. In addition, the EFSV must be adequate to provide a minimum of 12 months interest cover, at the Group’s approved lending rate on the loan.
In exceptional cases and based on sound risk assessment, the Bank may accept collateral that is stamped for a nominal value of the loan amount. The acceptable nominal stamped value shall depend on the approved facility amount and shall not be less than 10% of the
Acceptability of landed property as collateral for credit exposures shall be limited to developed property situated in:
Highly industrialized and/or commercialized areas in Lagos State, Kano State, Rivers State and the FCT, or
High value residential areas in the above-named states.

The following landed property shall not be acceptable as collateral:

Owner-occupied houses
Property with less than 3 years left to run on its ground
Country home in rural areas
Churches, mosques or places for religious assembly or worship
Cultural/community-owned property, houses or palaces owned by traditional rulers or local
- Bank Guarantee
Bank Guarantee (BG) is primarily issued to guarantee payment or
The Bank shall only accept Guarantees from any commercial or merchant Bank with a minimum credit rating of
The Bank’s Policy on Bank Guarantee shall be in line with Legal

Corporate Guarantee

Treasures MFB shall accept a Corporate Guarantee in addition to another type of tangible collateral subject to the following:

The company must be a duly registered investment grade entity/parent company
There must be a board resolution authorizing the borrowing.
The memart (memorandum and articles of association) must include borrowing and guarantee powers. The credit protection must represent a direct claim on the guarantor. The credit protection must be linked to specific exposures, so that the extent of the cover is clearly defined and unambiguous.
There should be no clause in the protection contract that could prevent the guarantor from honoring the contract in a timely manner if the original borrower fails to make the payment(s) due.
The Guarantee is validly authorized and executed by the legal and compliance department.
The terms of the primary credit agreement are not amended without the guarantor’s consent.
The guarantee is duly registered where required by local legislation.

Collateral Management

Collateral management shall be the joint responsibility of the Relationship Manager, Risk Management and Compliance and legal Services Department.

The Relationship Manager shall ensure that all the documents, sign offs and assignments required by the Compliance and legal Services department for collateral documentation and perfection are made
The Compliance team and legal Services Department shall effect the perfection of all physical collateral in a timely manner, while Risk Management shall monitor the Bank’s collaterals and provide periodic reports to Board Credit Risk Management and Committee.
The Bank shall ensure periodic evaluation and verification of
Physical inspection of collaterals shall be performed at the credit initiation and at least annually
The more volatile the nature/value of the collateral and/or the weaker the obligor financial performance, the more frequent the evaluations should be. Collateral valuation is valid for only 3
Collateral inspection shall be carried out by the Relationship Manager with evidence of such inspections documented as part of the approval/renewal process of the credit.
In additional to frequent physical reviews of Collaterals, inspection of collaterals shall also include the following:

Confirmation of existence of given
Examination of security agreements to determine enforceability of
Verification of adequate insurance
Proper legal registration and renewal of registration.