## tarea2026022-source-pdf - Preface

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### Mission background and objectives
- Mission: Monetary and Capital Markets (MCM) Department visit to Nairobi, October 26 to 30, 2025, at the request of Central Bank of Somalia (CBS).
- Objectives:
  - Review the 2018 regulation on asset classification and provisioning of credit operations, updating concepts, definitions, and criteria with standard-setting bodies and aligning with the regulation on capital adequacy.
  - Deliver training on best practices for banks’ credit risk management and for supervisory assessment of banks’ credit risk management.
- Preparatory work: three online sessions between September 29 and October 5, 2025.
- Stakeholder engagement: in-person meetings with Mr. Mohamed Abdullahi, head of the Bank Supervision Division, and CBS Licensing and Supervision Department (LSD) supervisors; virtual meetings with the LSD team.
- Acknowledgements: CBS, LSD (particularly Mr. Mohamed Abdullahi and supervision team), and Somali IMF Resident Representative Office in Kenya.

### Executive summary — key outcomes and proposed changes
- Training:
  - Clarified definitions and application, provided basis for supervisors to identify and assess credit risk.
  - Training based on BCBS, World Bank, and Toronto Centre materials, adapted to Somalia context.
- Proposed revisions incorporated into draft regulation:
  - a) Delineate minimum prudential classification and provisioning requirements from qualitative requirements for banks’ internal credit risk management.
  - b) Extensive review of definitions; align with Basel Committee and Banking Supervision (BCBS) publications.
  - c) Inclusion of equity-like transactions (e.g., Musharakah and Mudarabah) in scope.
  - d) Enhanced credit risk management requirements emphasizing forward-looking nature and Board responsibilities.
  - e) Redesign prudential asset classification into six categories; add a performing category for past-due up to 30 days; align with BCBS performing/non-performing definitions and IFRS9 three stages; introduce forbearance concept.
  - f) Include minimum provisioning levels for performing categories ranging from 0.1 percent to 1 percent; require overall prudential provisioning not be below consolidated expected credit losses if those exceed prudential levels.
  - g) Add specific hard limit on large exposures corresponding to 25 percent of core capital.
  - h) Include explicit CBS powers to apply sanctions and prescribe corrective measures when a financial institution is not in compliance.
- Supervisory capacity needs: improved onsite and offsite practices, IT platform enhancements, data analysis, and resource allocation.

### Training on credit risk management
- Coverage: design and implementation of banks’ credit risk management frameworks and supervisory assessments.
- Sources: BCBS, World Bank, Toronto Centre documents, tied to Somalia’s context.

### Near-term follow-up tasks for CBS
- (i) Conduct an impact study on distribution of credit transactions under the new six categories.
- (ii) Collect answers to a short questionnaire on financial institutions’ internal credit classification and provisioning frameworks.
- Purpose:
  - Estimate potential impacts of new prudential provisions.
  - Understand materiality of performing operations past-due up to 90 days (currently reported together with non–past-due operations).
  - Identify FIs using internal classification frameworks and their provisioning levels to inform supervisory assessment and adequacy of new qualitative requirements.
- Planned follow-up TA:
  - Review proposed regulation considering impact study and questionnaire results.
  - Update monthly credit transactions data template.
  - Develop written instructions for banks on filling the credit transactions template.

### Recommendations — prioritized actions (Table 1)
- High priority, Near term:
  - Collect data from Somalian FIs on estimated amounts of credit operations distributed between the six new proposed categories.
  - Collect answers from Somalian FIs to a short questionnaire gathering information on internal grids for credit operation classifications, and, for each internal category, the classification criteria and respective provisioning level.
  - Conduct an impact study estimating the new minimum prudential provisioning requirements under the revised regulation and discuss if adjustments to minimum provisioning floors or other corrections are necessary or advisable.
  - Discuss within LSD applicability of the regulation to financial institutions that are not banks (e.g., microcredit entities that perform banking activities).
  - Adjust the draft for the revised regulation on credit classification and provisioning.
- High priority, Medium term:
  - Upgrade the current credit risk data template and develop instructions for financial institutions on how to fill it out.
- Medium priority, Medium term:
  - Adjust supervision practices for all financial entities to ensure coherent implementation of the new regulation within the LSD.
- High priority, Long term:
  - Develop data analysis procedures for monthly information on credit operations based on robust systems and processes.
- Timeframe definitions:
  - Near term: < 12 months
  - Medium term: 12 to 24 months
  - Long term: 24+ months

### Context and linkage to prior TA and action plan
- Action plan approved by the CBA board in July 2024 to improve quality of data submitted by banks.
- Prior MCM TA in April 2024: diagnostic assessment of data collected by banking supervision; informed LSD action plan.
- First step: review reporting templates and elaborate instructions for banks; complementary activities: supervisory training and regulatory review.
- Prudential templates and regulations in scope: Capital Requirements, Liquidity Requirements (Liquidity Coverage Ratio - LCR), Related Party Transactions, and Assets Classification and Provisions.
- Coordination: previous MCM TAs addressed capital and liquidity (February and June 2023) and templates/instructions (April 2025). Asset classification and provisioning is the next priority.
- Funding: capacity development activities funded by the Financial Sector Stability Fund (FSSF) following Somalia 2024 Financial Sector Stability Review (FSSR).

### New draft regulation — Purpose, scope, and definitions
- Purpose (verbatim):
  - “1.2. Purpose  
    The purpose of this regulation is to ensure financial institutions:  
    1.2.1. Assess the credit risk on their portfolios based on internal classification systems that accurately reflect differing levels of credit risk,  
    1.2.2. Grade the credit risk on their portfolios based on the standardized prudential classification included in this regulation, and  
    1.2.3. Account for identified and expected credit losses on their portfolio, estimating consistent provision amounts, including for prudential purposes.”
- Definitions aligned with BCBS and IFRS include: “credit risk”, “general provision”, “specific provision”, “non-accrued status”, “forbearance”, “concession”, “distressed restructuring”, “significant influence”, and “joint control”.
- Equity-like operations (e.g., Musharakah and Mudarabah) included; potential distinction when FI holds significant interest or joint control, subject to consultation with Accounting and Auditing Organization for Islamic Financial Institutions.
- Effectiveness requires CBS improvements in onsite/offsite supervision, IT systems, data analysis, and incorporation of findings into risk assessments.

### Classification and provisioning requirements — qualitative and governance
- Draft requires FIs to have credit risk classification and provisioning policy compliant with BCBS standards, including “2024 Core principles for effective banking supervision” and “Principles for the Management of Credit Risk”.
- Qualitative requirements (principles-based and proportionate) cover:
  - Board responsibilities: formal approval, annual review, consistency with credit risk strategy, integration with risk management, implementation oversight.
  - Prudential consolidated credit provisioning must not be below and should be consistent with expected losses calculated for overall credit risk exposure when expected losses exceed total prudential provisions.
  - Requirement for well-designed credit risk classification system meeting specified conditions.
  - Formal procedures for operations with characteristics such as large exposures, related parties, complexity, and for write-offs and redemptions.
  - Role of three lines of defense, with communication to the Board.
- Note: governance deficiencies are frequently observed in CBS onsite supervision reports.

### Prudential classification and provisioning — current grid and identified gaps
- Current prudential classification: five categories; two performing categories; minimum provisioning required for all categories except PASS.
- Current CBS Classification Grid for Credit Operations (verbatim):
  - PASS — Quality: Performing — Past-due criteria: 0 to 59 days — Minimum provisioning levels: -
  - SPECIAL MENTION — Quality: Performing — Past-due criteria: 60 to 89 days — Minimum provisioning levels: 5%
  - SUBSTANDARD — Quality: Non-performing — Past-due criteria: 90 to 179 days — Minimum provisioning levels: 20%
  - DOUBTFUL — Quality: Non-performing — Past-due criteria: 180 to 364 days — Minimum provisioning levels: 50%
  - LOSS — Quality: Non-performing — Past-due criteria: Over 364 days — Minimum provisioning levels: 100%
- Identified gaps in the 5-level grid:
  - PASS includes both not past-due and past-due up to 59 days, preventing discrimination and collection of important supervisory information.
  - Classification criteria do not align with BCBS definitions of performing and non-performing, do not allow comparison with IFRS9 stages, and lack forward-looking orientation.
  - No minimum provisioning floor for PASS, and no requirement for prudential provisions to be at least equivalent to consolidated incurred and expected losses.
  - No obligation for FIs to have formal processes to reconcile internal and prudential categories.

### Proposed Classification Grid for Credit Operations (Table 3)
- Prudential category — Quality — Past-due criteria — Minimum provisions levels — IFRS equivalence
  - PASS — Performing — 0 days — 0.1% — Stage 1
  - MENTION — Performing — 1 to 30 days — 1% — (no explicit IFRS label in table)
  - SPECIAL MENTION — Performing — 31 to 89 days — 5% — Stage 2
  - SUBSTANDARD — Non-performing — 90 to 179 days — 20% — Stage 3
  - DOUBTFUL — Non-performing — 180 to 364 days — 50% — (no IFRS stage in table)
  - LOSS — Non-performing — Over 364 days — 100% — (no IFRS stage in table)

### Rationale for the adjustments
- Inclusion of MENTION allows discrimination between recently past-due operations and non-past-due performing operations.
- Islamic banking practices: past-due operations cannot be subject to interest charges and contractual penalties are usually not included, creating an incentive for borrowers to remain past due; MENTION addresses this by increasing grid from five to six categories.
- SPECIAL MENTION threshold reduced from 60 to 31 days to align with IFRS9 Stage 2 (more-than-30 days past-due event); PASS and MENTION aligned with IFRS9 Stage 1.
- All categories include forward-looking indicators complemented by past-due metrics.
- Minimum prudential provisioning for performing categories PASS and MENTION signals those operations carry credit risk and provides supervisory backstop.

### Additional requirements in the draft
- If a credit operation with a customer is classified as non-performing, all other operations with that same customer should be reclassified as non-performing.
- Special treatments for forborne operations and operations initially past-due and subsequently fully paid; cure periods required before reclassification to performing category.
- FIs must have conversion tables between internal and prudential provisioning levels to support supervision, especially onsite.
- Specific conditions trigger non-accrued status and mandatory write-off.
- Prudential provisions calculated on gross amounts, disregarding collateral compensation; consolidated amounts must be adequate to absorb identified and expected losses for entire portfolio, not limited to category minimums.
- Aggregate prudential provisions must be approved at least monthly by the Chief Financial Officer.

### Interaction with other regulations and capital treatment
- Draft considers relationships between credit classification/provisioning and qualitative requirements in the Capital Adequacy regulation to avoid inconsistencies or overlaps.
- Identified interactions between the reviewed regulation and calculation of capital requirements, e.g., selecting risk weight for a defaulted operation based on its provisions; potential misalignments and misinterpretations addressed.

### Hard limit on large exposures
- Reviewed regulation introduces a hard limit: individual large exposures cannot surpass 25 percent of the financial institution’s core capital.
- This is in addition to the current definition of a large exposure as representing at least 10 percent of core capital.
- Addition aligns with Basel Core principles for effective banking supervision (sections 40.44.6 and 40.45. b), and was suggested by CBS during Nairobi discussions.

### Reporting, sanctions, and penalties
- Improvements to monthly reporting to CBS on credit risk: include data on gross amounts in prudential categories, forborne operations, and large exposures.
- New section specifies CBS ability to apply sanctions and penalties when a financial institution is non-compliant, mirroring similar provisions in Capital Adequacy and Liquidity Requirements regulations.

### Credit risk management training delivered
- Covered:
  - Definitions, best practices for banks’ credit risk management frameworks, and supervisory practices.
  - Basel Core Principles and BCBS documents: “Principles for the Management of Credit Risk” and “Guidance on credit risk and accounting of expected losses”, complemented by Toronto Centre materials.
  - Manifestations of credit risk (e.g., default, counterparty and wrong-way risk), critical definitions (e.g., performing, nonperforming, forbearance), interactions between prudential and accounting frameworks, and extended discussion on expected credit losses.
  - Best practices for banks’ internal classification practices and supervisory assessment, with emphasis on governance issues.

### List of activities required of CBS before the next TA
- Collect data from Somalian FIs on estimated amounts of credit operations distributed between the six new proposed categories.
- Collect answers from Somalian FIs to a short questionnaire on internal grids for credit operation classifications, classification criteria, and provisioning levels.
- Conduct an impact study estimating the new minimum prudential provisioning requirements and capital ratios under the reviewed regulation; discuss if adjustments to categories, minimum provisioning floors, or other corrections (such as a phased approach) are necessary or advisable. In particular, assess impact for categories “PASS” (0.1 percent in the current draft) and “MENTION” (1% in the current draft).
- Based on questionnaire answers and a peer-review of regional regulations, evaluate if requirements for internal classification and provisioning need adjustments.
- Define if scope should include equity-like investments where the FI has significant interest or joint control, given Islamic banking materiality.
- Agree on specific time threshold triggering automatic write-off for “LOSS” — current draft threshold is 365 days after initial classification.
- Suggest wording for paragraphs 1.1, 3.5, and 9.2.1 of the draft regulation.
- Prepare final discussion of the reviewed regulation considering above items and results of consultation with Somalian financial institutions.
- Suggest a date for the regulation to enter into force, dependent on impact study results.

*IMF Technical Assistance Report — Preface and selected sections*

### Preface ................................................................................................................

### tarea2026022-source-pdf - Preface

### Preface: mission background and objectives
- Mission: Monetary and Capital Markets (MCM) Department visit to Nairobi, October 26 to 30, 2025, at the request of Central Bank of Somalia (CBS).
- Objectives:
  - Review the 2018 regulation on asset classification and provisioning of credit operations, updating concepts, definitions, and criteria with standard-setting bodies and aligning with the regulation on capital adequacy.
  - Deliver training on best practices for banks’ credit risk management and for supervisory assessment of banks’ credit risk management.
- Preparatory work: three online sessions between September 29 and October 5, 2025, to understand current framework and supervisory practices.
- Stakeholder engagement: in-person meetings with Mr. Mohamed Abdullahi, head of the Bank Supervision Division, and CBS Licensing and Supervision Department (LSD) supervisors; virtual meetings with the LSD team.
- Acknowledgements: CBS, LSD (particularly Mr. Mohamed Abdullahi and supervision team), and Somali IMF Resident Representative Office in Kenya.

### Executive Summary: key outcomes and proposed changes
- TA objectives: review CBS 2018 regulation on asset classification and provisioning; deliver training on credit risk management.
- Training: clarified definitions and application, provided basis for supervisors to identify and assess credit risk; training based on BCBS, World Bank, and Toronto Centre materials, adapted to Somalia context.
- Proposed revision of regulation incorporates modifications:
  - a) Clear delineation and differentiation of the minimum requirements on prudential classification of credit operations and provisioning from the qualitative requirements applicable to bankś internal credit risk management framework;
  - b) Extensive review of definitions, particularly those considered as criteria for the prudential classification and provisioning requirements, adding additional definitions and adjusting those currently used, ensuring their consistency with documents published by standard setting bodies, such as the Basel Committee and Banking Supervision (BCBS);
  - c) Inclusion of equity-like transactions in the scope of the regulation, allowed under Islamic banking and comparable to conventional credit operations, such as Musharakah and Mudarabah;
  - d) Enhanced requirements on the credit risk management framework of financial institutions, highlighting its forward-looking nature and Board ́s responsibilities;
  - e) Redesign of the prudential asset classification into six categories. A new category for performing transactions past-due up to 30 days was added to the five categories currently in use. Classification criteria for all categories were aligned with BCBS performing and non-performing definitions and with IFRS9’s three stages of impairment, and the concept of forbearance was introduced;
  - f) Inclusion of minimum levels of provisioning for prudential categories related to performing transactions, ranging from 0.1 percent to 1 percent, also requiring the overall prudential provisioning to not be below the consolidated amount of expected credit losses, in case they are above the prudential provisioning levels;
  - g) Addition of a specific hard limit on large exposures corresponding to 25 percent of   core capital; and
  - h) Inclusion of explicit CBS powers to apply sanctions and prescribe corrective measures and adjustments when a financial institution is not in    compliance with the regulation.
- Supervisory capacity needed: improved onsite and offsite practices, IT platform enhancements, data analysis, and resource allocation to enforce qualitative requirements.

### Training on credit risk management
- Coverage: best practices on the design and implementation of banks’ credit risk management frameworks and supervisory assessments.
- Sources: BCBS, World Bank, Toronto Centre documents, combined with practical discussions tied to Somalia’s context.

### Follow-up tasks for CBS (near term)
- (i) Conduct an impact study on distribution of credit transactions under the new six categories.
- (ii) Collect answers to a short questionnaire on financial institutions’ internal credit classification and provisioning frameworks.
- Purpose of data collection:
  - Estimate potential impacts of new prudential provisions.
  - Understand materiality of performing operations past-due up to 90 days (currently reported together with non–past-due operations).
  - Identify FIs using internal classification frameworks and their provisioning levels, for supervisory assessment and to inform adequacy of new qualitative requirements.
- Planned follow-up TA to:
  - Review the proposed regulation considering impact study and questionnaire results;
  - Update the monthly credit transactions data template;
  - Develop written instructions for banks on filling the credit transactions template.

### Recommendations (Table 1 — prioritized actions)
- High priority, Near term:
  - Collect data from Somalian FIs on the estimated amounts of credit operations distributed between the six new proposed categories for the classification of credit operations.
  - Collect answers from Somalian FIs to a short questionnaire, which gathers information on their internal grids for credit operation classifications, and, for each internal category, the classification criteria and respective provisioning level.
  - Conduct an impact study, by estimating the new minimum prudential provisioning requirements under the revised regulation, discussing if adjustments to the minimum provisioning floors or other corrections are necessary or advisable.
  - Discuss within LSD the applicability of the regulation on financial institutions that are not banks (e.g., microcredit entities that perform banking activities).
  - Adjust the draft for the revised regulation on credit classification and provisioning.
- High priority, Medium term:
  - Upgrade the current credit risk data template and develop instructions for the financial institutions on how to fill it out.
- Medium priority, Medium term:
  - Adjust supervision practices for all financial entities, not only banks, ensuring a coherent implementation of the new regulation within the LSD.
- High priority, Long term:
  - Develop data analysis procedures for the information gathered monthly on credit operations, based on robust systems and processes.

- Timeframe definitions:
  - Near term: < 12 months
  - Medium term: 12 to 24 months
  - Long term: 24+ months

### Introduction: context and linkage to prior TA and action plan
- Action plan approved by the CBA board in July 2024 to improve quality of data submitted by banks.
- Prior MCM TA in April 2024: diagnostic assessment of data collected by banking supervision; informed LSD action plan.
- First step: review reporting templates and elaborate instructions for banks; complementary activities: supervisory training and regulatory review.
- Prudential templates and regulations in scope: Capital Requirements, Liquidity Requirements (Liquidity Coverage Ratio - LCR), Related Party Transactions, and Assets Classification and Provisions.
- Coordination: previous MCM TAs addressed capital and liquidity (February and June 2023) and templates/instructions (April 2025). Asset classification and provisioning is the next priority.
- Funding: capacity development activities (including this TA) funded by the Financial Sector Stability Fund (FSSF) following Somalia 2024 Financial Sector Stability Review (FSSR).

### I. Regulation on classification and provisioning – New draft
- A. Purpose, scope, and definitions
  - New regulation addresses omission in prior regulation by explicitly stating three purposes (text retained verbatim):
    - “1.2. Purpose  
      The purpose of this regulation is to ensure financial institutions:  
      1.2.1. Assess the credit risk on their portfolios based on internal classification systems that accurately reflect differing levels of credit risk,  
      1.2.2. Grade the credit risk on their portfolios based on the standardized prudential classification included in this regulation, and  
      1.2.3. Account for identified and expected credit losses on their portfolio, estimating consistent provision amounts, including for prudential purposes.”
  - Definitions enhanced and aligned with BCBS and IFRS, including: “credit risk”, “general provision”, “specific provision”, “non-accrued status”, “forbearance”, “concession”, “distressed restructuring”, “significant influence”, and “joint control”.
  - Equity-like operations (e.g., Musharakah and Mudarabah) included in scope; potential distinction considered where financial institution holds significant interest or joint control (IFRS IAS28 concepts), subject to consultation with Accounting and Auditing Organization for Islamic Financial Institutions.
  - Emphasis: effectiveness of regulation requires CBS improvements in onsite/offsite supervision, IT systems, data analysis, and incorporation of findings into risk assessments.

- B. Classification and provisioning requirements for financial institutions
  - Draft requires financial institutions to have credit risk classification and provisioning policy compliant with BCBS standards, including “2024 Core principles for effective banking supervision” and “Principles for the Management of Credit Risk”.
  - Qualitative requirements: principles-based and proportionate; cover:
    - Board responsibilities: formal approval, annual review, consistency with credit risk strategy, integration with risk management, implementation oversight.
    - Prudential consolidated credit provisioning must not be below and should be consistent with expected losses calculated for overall credit risk exposure when expected losses exceed total prudential provisions.
    - Requirement for well-designed credit risk classification system meeting specified conditions.
    - Formal procedures for treatment of operations with certain characteristics (large exposures, related parties, complexity), and for write-offs and redemptions.
    - Role of three lines of defense, with communication to the Board.
  - Note: governance deficiencies are frequently observed in CBS onsite supervision reports.

- C. Prudential classification and provisioning
  - Current prudential classification: five categories, two performing categories, minimum provisioning required for all categories except PASS.
  - Current CBS Classification Grid for Credit Operations (verbatim):
    - Prudential category: PASS — Quality: Performing — Past-due criteria: 0 to 59 days — Minimum provisioning levels: -
    - Prudential category: SPECIAL MENTION — Quality: Performing — Past-due criteria: 60 to 89 days — Minimum provisioning levels: 5%
    - Prudential category: SUBSTANDARD — Quality: Non-performing — Past-due criteria: 90 to 179 days — Minimum provisioning levels: 20%
    - Prudential category: DOUBTFUL — Quality: Non-performing — Past-due criteria: 180 to 364 days — Minimum provisioning levels: 50%
    - Prudential category: LOSS — Quality: Non-performing — Past-due criteria: Over 364 days — Minimum provisioning levels: 100%

### Tasks and next steps for CBS before next TA
- Conduct impact study on distribution of credit operations across six proposed categories.
- Collect questionnaire responses on internal credit classification and provisioning frameworks from financial institutions.
- Use collected data to:
  - Estimate impacts of new prudential provisioning requirements.
  - Assess materiality of performing operations past-due up to 90 days.
  - Identify institutions with internal classification frameworks and provisioning practices to inform supervisory assessments and possible regulation adjustments.

*IMF Technical Assistance Report — Preface and selected sections*

### 12. Several gaps were identified in that 5-level classification grid:

### 12. Several gaps were identified in that 5-level classification grid:

### Identified gaps in the existing 5-level grid
- The PASS category includes both operations not past-due and past-due up to 59 days, without requiring financial institutions to discriminate between those operations of different conditions, besides not permitting the collection of important information on those past-due operations to the supervision;  
- The criteria for classification in the five categories do not align with BCBS definitions of performing and non-performing operations, do not allow for a comparison with the IFRS9 stages, and are not forward-looking motivated;  
- There is no minimum provisioning floor for the PASS category, and no requirement for prudential provisions to be at least equivalent to the consolidated incurred and expected losses;  
- There is no obligation on financial institutions to have formal processes and procedures to reconcile internal and prudential categories.

### Proposed Classification Grid for Credit Operations (Table 3)
- Prudential category — Quality — Past-due criteria — Minimum provisions levels — IFRS equivalence
  - PASS — Performing — 0 days — 0.1% — Stage 1
  - MENTION — Performing — 1 to 30 days — 1% — (no explicit IFRS label in table)
  - SPECIAL MENTION — Performing — 31 to 89 days — 5% — Stage 2
  - SUBSTANDARD — Non-performing — 90 to 179 days — 20% — Stage 3
  - DOUBTFUL — Non-performing — 180 to 364 days — 50% — (no IFRS stage in table)
  - LOSS — Non-performing — Over 364 days — 100% — (no IFRS stage in table)

### Rationale for the adjustments
- Inclusion of the MENTION category permits discriminating between operations recently past-due and applying distinct minimum provisions between that category and PASS.  
- Islamic banking practices in Somalian financial institutions: past-due operations cannot be subject to interest charges and contractual penalties are usually not included in contracts, creating an incentive for borrowers to remain past due. This was the main reason for including the MENTION category, increasing the grid from five to six categories and allowing differentiation of non-past due and past due performing operations.  
- SPECIAL MENTION past-due threshold reduced from 60 to 31 days to align that category with IFRS9 Stage 2, which has among its criteria the more-than-30 days past-due event. An additional benefit is aligning PASS and MENTION categories with IFRS9 Stage 1.  
- All suggested categories include forward-looking indicators of creditworthiness, complemented by metrics based on past-due behavior.  
- Inclusion of minimum levels of prudential provisioning for the two performing categories, PASS and MENTION, indicates those operations should not be assumed exempt from credit risk and provides a supervision backstop.

### Additional requirements introduced in the draft
- Once a credit operation with a customer has been classified as non-performing, all other operations with that same customer should be reclassified as such;  
- Special treatments for operations subject to forbearance and that were initially past-due and subsequently fully paid, with cure periods required before reclassification into a performing category;  
- Financial institutions must have conversion tables between internal and prudential provisioning levels to support supervision, specially onsite supervision;  
- Financial institutions must follow specific conditions that trigger the non-accrued status and the mandatory write-off of credit operations;  
- Prudential provisions should be solely calculated based on gross amounts, disregarding any compensation by collaterals or mitigants, and their consolidated amounts must not be limited to those calculated solely based on the minimum provisioning levels of the category mentioned in the regulation, but instead should be adequate to absorb the identified and expected losses associated with the entire portfolio of credit operations;  
- The aggregate amount of prudential provisions must be approved at least monthly by the Chief Financial Officer.

### Interaction with other regulations and capital treatment
- The draft considered potential relationships between the new credit classification and provisioning procedures and qualitative requirements for credit risk management embedded in the Capital Adequacy regulation, aiming to avoid inconsistencies or overlaps.  
- Interactions between the reviewed regulation and the calculation of capital requirements were identified, for instance when selecting the risk weight applicable to a defaulted operation in accordance with its provisions, with potential misalignments and misinterpretations addressed.

### Hard limit on large exposures
- The reviewed regulation introduced a specific hard limit to individual large exposures, which cannot surpass the threshold of 25 percent of the financial institution’s core capital.  
- This is in addition to the current definition of a large exposure as representing at least 10 percent of core capital.  
- The addition of the hard limit is in accordance with the Basel Core principles for effective banking supervision (sections 40.44.6 and 40.45. b), and it was suggested by the CBS during discussions in Nairobi.

### Reporting, sanctions and penalties
- Improvements in requirements for providing a monthly report on credit risk to the CBS, including data on gross amounts in the prudential categories, together with specific data on forborne operations and large exposures.  
- A new section expressly determines the ability of CBS to apply sanctions and penalties whenever a financial institution is deemed not compliant with the regulation, replicating a similar command included in the regulations on Capital Adequacy and Liquidity Requirements.

### Credit risk management training delivered
- Extensive training covering definitions, best practices for banks’ credit risk management frameworks, and guidelines for supervisory practices, reflecting Basel Core Principles and BCBS documents such as “Principles for the Management of Credit Risk” and “Guidance on credit risk and accounting of expected losses”, complemented by Toronto Centre materials.  
- Covered manifestations of credit risk (e.g., default, counterparty and wrong-way risk), critical definitions (e.g., performing, nonperforming, forbearance), interactions between prudential and accounting frameworks, and an extended discussion on expected credit losses.  
- Emphasis on best practices for banks’ internal classification practices and supervisory assessment, with strong emphasis on governance issues.

### List of activities to be performed by the CBS before the next TA
- Collect data from Somalian FIs on the estimated amounts of credit operations distributed between the six new proposed categories for the classification of credit operations;  
- Collect answers from Somalian FIs to a short questionnaire gathering information on their internal grids for credit operation classifications, and, for each internal category, the classification criteria and respective provisioning level;  
- Conduct an impact study, by estimating the new minimum prudential provisioning requirements and capital rations under the reviewed regulation, discussing if adjustments to the categories, its minimum provisioning floors or other corrections, such as a phased approach for implementation, are necessary or advisable. In particular, assess the impact for the categories “PASS” (0.1 percent in the current draft) and “MENTION” (1% in the current draft);  
- Based on the questionnaire answers and a peer-review on similar regulations in the region, evaluate if the requirements for internal classification and provisioning of the reviewed regulation need adjustments or corrections;  
- Define if the scope of the reviewed regulation should include equity-like investments where the FI has a significant interest or joint control of that investment, an important issue considering the materiality of Islamic banking operations in the portfolio of Somalian FIs;  
- Agree on the specific time threshold that triggers the automatic write-off of an operation subject to credit risk classified in the prudential category “LOSS” - in the current draft that threshold is 365 days after its initial classification;  
- Suggest wording for paragraphs 1.1, 3.5, and 9.2.1 of the draft regulation;  
- Prepare for a final round of discussion of the reviewed regulation, taking into consideration the items described above and the results of a planned consultation with Somalian financial institutions;  
- Suggest a date for the regulation to enter into force, which will depend on the results of the impact study.

*IMF Technical Assistance Report*

---


_Source: https://www.imf.org/-/media/files/publications/tar/2026/english/tarea2026022-source-pdf.pdf_