Final Results

NMBZ HOLDINGS LIMITED 

Holding company of

NMB BANK LIMITED (Registered Commercial Bank)

FOR THE YEAR ENDED 31 DECEMBER 2016

FINANCIAL SUMMARY

Enquiries:

NMBZ HOLDINGS LIMITED

Benefit P Washaya, Chief Executive Officer, NMBZ Holdings Limited [email protected]

Benson Ndachena, Chief Finance Officer, NMBZ Holdings Limited [email protected]

Website: http://www.nmbz.co.zw

Email: [email protected]

Telephone: +263-4-759 651/9

CHAIRMAN'S STATEMENT

INTRODUCTION

The Group has continued to make progress towards attaining its short and medium term goals despite an increasingly challenging operating environment. The economy has continued to be dogged by nostro funding challenges, cash shortages, job losses, deflationary pressures and company closures and these have continued to worsen default risk. The operating results were largely underpinned by the banking subsidiary's decision to broaden its target market, stricter credit underwriting standards and concerted efforts to contain non-performing loans and operating costs.

The key financial highlights of the Group's only operating banking subsidiary as at 31 December 2016, achieved under an exceedingly challenging operating environment are:

- Shareholder's funds stood at US$54.7 million;

- Capital adequacy ratio of 23.32% against the RBZ's minimum requirement of 12%; and

- Liquidity ratio of 40.06% versus RBZ's minimum requirement of 30%.

GROUP RESULTS

Financial performance

The profit before taxation was US$6 208 904 during the period under review and this gave rise to total comprehensive income of US$5 055 196. The Group achieved an earnings per share of 1.32 cents (2015 - 1.43 cents).

Operating expenses amounted to US$26 176 706 and these were down 3% from a prior year amount of US$26 872 649 as a net result of cost cutting and containment measures.

Impairment losses on loans and advances amounted to US$8 059 726 for the current period from a prior year amount of US$9 496 601 and the decrease was mainly due to stricter credit underwriting on the back of a deteriorating economic environment. The Board took a decision to write off loans and advances amounting to US$8 337 245 during the year under review after recovery efforts had not yielded the desired results.

Financial position

The Group's total assets decreased by 4% from US$333 831 107 as at 31 December 2015 to US$320 984 926 as at 31 December 2016 mainly due to a decrease of 15% in loans, advances and other assets and this was partly offset by increases of 9% in cash and cash equivalents, 70% in investments securities and 75% in investment properties.

Gross loans and advances decreased by 15% from US$243 241 018 as at 31 December 2015 to US$205 858 392 as at 31 December 2016 mainly due to constrained lending as a result of the challenging operating environment. The Bank surrendered loans amounting to US$12 667 259 to ZAMCO since ZAMCO's inception up to 31 December 2016 and ZAMCO has acquired loans from the market amounting to US$812.52 million.

Investment securities (Treasury Bills and Bonds) increased by 70% from US$14 547 992 as at 31 December 2015 to US$24 744 752 as at 31 December 2016 mainly due to Bills received from ZAMCO for loans surrendered during the year.

The deposits decreased by 6% from US$277 216 769 as at 31 December 2015 to US$260 550 383 as at 31 December 2016 as a result of restricted funding opportunities.

The Bank's liquidity ratio closed the period at 40.06% and this was above the statutory requirement of 30%.

Capital

The banking subsidiary's capital adequacy ratio at 31 December 2016 calculated in accordance with the guidelines of the Reserve Bank of Zimbabwe (RBZ) was 23.32% (31 December 2015 - 19.26%). The minimum required by the RBZ is 12%. We consider the level of our capitalisation to be adequate to support our underwriting pipeline business.

The Group's shareholders' funds have increased by 10% from US$50 543 864 as at 31 December 2015 to US$55 600 406 as at 31 December 2016 as a result of the current year's attributable profit.

The Bank's regulatory capital as at 31 December 2016 was US$50 150 888 and is above the minimum regulatory capital of US$25 million.

DIVIDEND

In view of the need to retain cash in the business and to strengthen the statutory capital requirements for the banking subsidiary, the Board resolved not to pay a dividend.

DIRECTORATE

Mr Jonathan Chenevix - Trench resigned as a director of NMBZ Holdings Limited and NMB Bank Limited with effect from 21 March 2016. Mr Khalid Qurashi and Ms Maureen R Svova resigned from both the boards of NMBZ Holdings Limited and NMB Bank Limited with effect from 20 May 2016. Mr Cheikh I F Ndiaye resigned from the NMBZ Holdings Limited and the NMB Bank Limited boards on 17 November 2016. I would like to thank the four former board members for their invaluable contributions to both NMBZ Holdings Limited and NMB Bank Limited during their tenure.

Mr James de la Fargue was appointed to both boards of NMBZ Holdings Limited and NMB Bank Limited with effect from 4 May 2016. Ms. Sabinah N Chitehwe and Mr Benson Ndachena were appointed to the boards of NMBZ Holdings Limited and NMB Bank Limited with effect from 19 September 2016. I would like to wish the new board members a fruitful tenure on the Board.

Subsequent to year end, Mr Benardus A M Zwinkels, who represented AfricInvest, resigned from the Board and was replaced by Mr Julius Tichelaar effective 1 January 2017. I would like to thank Mr Zwinkels for his fruitful tenure on the Board and welcome Mr Tichelaar to the Board.

OUTLOOK AND STRATEGY

The Group has continued to broaden the market catchment for the banking subsidiary by tapping into some segments of the mass market and this saw the launch in August 2016 of the NMBLite product offering which is targeted at the low income segment. The uptake of the mass market products has been encouraging and this has contributed to the financial inclusion agenda.

The Bank has accelerated the deployment of POS machines throughout the country and has enhanced all the e-channels for the convenience of our transacting customers in the current environment which is characterised by cash shortages.

CORPORATE SOCIAL INVESTMENTS

We remain committed to playing an active role in the communities we serve. Our social investments during the year were channelled into the country's educational system, the disadvantaged, vulnerable groups, protection of the environment, wildlife conservation, the arts and various sporting disciplines. The activities and charities supported during the year included Tinokwirira Special School, Deaf Zimbabwe Trust, Birdlife Zimbabwe, Hockey Association of Zimbabwe, Kwekwe and Sanyati Districts Better Schools Programme initiatives and many other charity golf tournaments.

CORPORATE DEVELOPMENTS

The low cost NMBLite account, which is targeted at the low income sector, was launched in August 2016. The Bank relaunched the mobile banking platform which now incorporates Android and Apple applications.

APPRECIATION

I would like to express my appreciation to our clients, shareholders and regulatory authorities for their continued support. I would also like to thank my fellow Board members, management and staff for their steadfast commitment, dedication and passion which has seen the achievement of these results in the face of an increasingly challenging operating environment.

B. A. CHIKWANHA

CHAIRMAN

15 March 2017

AUDITOR'S STATEMENT

These financial results should be read in conjunction with the complete set of financial statements for the year ended 31 December 2016, which have been audited by KPMG Chartered Accountants (Zimbabwe) and an unmodified opinion issued thereon. The auditor's report which includes key audit matters (valuation of loans and advances, fair value disclosure of investment securities and valuation of properties) on the financial statements which forms the basis of these financial results is available for inspection at the Holding Company's registered office.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2016

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 for the year ended 31 December 2016

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2016

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2016

1. REPORTING ENTITY

The Holding Company is incorporated and domiciled in Zimbabwe and is an investment holding company. Its registered office address is 64 Kwame Nkrumah Avenue, Harare. Its principal operating subsidiary is engaged in commercial and retail banking.

2. ACCOUNTING CONVENTION

Statement of compliance

The condensed consolidated financial statements are prepared and presented on the basis that they reflect the information necessary to be a fair summary of the annual financial statements from which they are derived. This includes financial results that agree with or can be recalculated from the related information in the audited consolidated financial statements and that contain the information necessary so as not to be misleading in the circumstances. The information contained in these consolidated financial results does not contain all the disclosures required by International Financial Reporting Standards, the Companies Act (Chapter 24:03) of Zimbabwe and the Banking Act (Chapter 24:20) of Zimbabwe, which are disclosed in the full consolidated annual financial statements from which this set of condensed financial statements were derived. For a better understanding of the Group`s financial position, its financial performance and cash flows for the year, these condensed financial statements should be read in conjunction with the audited consolidated annual financial statements.

The condensed consolidated financial statements were approved by the Board of Directors on 15 March 2017.

2.1 Basis of preparation

The condensed consolidated financial statements have been prepared under the historical cost convention except for quoted and other investments, investment properties and non-current assets held for sale which are carried at fair value and land and buildings which are stated at revalued carrying amount. These condensed consolidated financial statements are reported in United States of America dollars and rounded to the nearest dollar.

2.2 Basis of consolidation

The Group financial results incorporate the financial results of the Company and its subsidiaries. Subsidiaries are investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until date when control ceases. The financial results of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, income and expenses; profits and losses resulting from intra-group transactions that are recognised in assets and liabilities are eliminated in full. When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interest and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

2.3 Comparative financial information

The comparative information covers a period of twelve months.

2.4 Use of estimates and judgements

In preparation of the Group financial statements, Directors have made judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively.

Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2017 is included in the following notes:

2.4.1 Deferred tax

Deferred taxation is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences arising out of the initial recognition of assets or liabilities and temporary differences on initial recognition of business combinations that affect neither accounting nor taxable profit are not recognised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

2.4.2 Land and buildings

The properties were valued by an independent professional valuer. The determined fair value of land and buildings is most sensitive to significant unobservable inputs. In addition, the property market is currently not stable due to liquidity constraints and hence comparable values are also not readily available.

2.4.3 Investment properties

Investment property were valued by an independent professional valuer. In addition, the property market is currently not stable due to liquidity constraints and hence comparable values are also not readily available.

2.4.4 Investment securities

The Group has treasury bills and government bonds for which there is currently no market information to facilitate the application of fair value principles in determining fair value disclosures. Directors have made a significant judgment in determining that the carrying amount approximates fair value. (refer to note 14.1).

2.4.5 Impairment losses on loan and advances

The Group reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in profit or loss. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Group makes judgements about the borrower's financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident.

The impairment loss on loans and advances is disclosed in more detail under note 8 and note 17.3.

2.4.6 Non-current assets held for sale

Non-current assets were valued by an independent professional valuer. All non-current assets held for sale are measured at their fair values. The determined fair value of non-current assets held for sale is most sensitive to significant unobservable inputs. In addition, the property market is currently not stable due to liquidity constraints and hence comparable values are also not stable.

2.4.7 Going concern

The Directors have assessed the ability of the Group to continue operating as a going concern and believe that the preparation of these condensed consolidated financial statements on a going concern basis is still appropriate.

3. ACCOUNTING POLICIES

The selected principal accounting policies applied in the preparation of these condensed consolidated financial statements are set out below. These policies have been consistently applied unless otherwise stated.

3.1 Financial instruments

3.1.1 Classification

Financial assets and liabilities at fair value through profit and loss include financial assets and liabilities held for trading i.e. those that the Group principally holds for the purpose of short-term profit taking as well as those that were, upon initial recognition, designated by the entity as financial assets or liabilities at fair value through profit and loss.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those classified as held-for-trading and the Group upon initial recognition designates as at fair value through profit or loss and those the Group upon initial recognition designates as available-for-sale.

3.1.1 Classification (continued)

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity.

Financial assets available-for-sale are non-derivative financial assets that are designated as available-for- sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

3.1.2 Recognition

The Group recognises financial assets at fair value through profit and loss and available for sale assets on the date it commits to purchase the assets. From this date any gains and losses arising from changes in fair value of the assets are recognised in the income statement and other comprehensive income respectively.

Held-to-maturity investments and loans and receivables are recognised at cost which is the fair value of the consideration given on the day that they are transferred to the Group.

3.1.3 Measurement

Financial assets and liabilities are measured initially at fair value. Subsequent to initial recognition, financial assets and liabilities measured at fair value through profit and loss and available-for-sale financial assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, less impairment losses.

Held-to-maturity investments and loans and receivables are initially measured at fair value and subsequently measured at amortised cost less impairment losses. Amortised cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument.

3.1.4 Fair value measurement principles

The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques.

Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date.

3.2 Investment properties

Investment properties are measured at fair value. Gains and losses arising from a change in fair value of investment properties are recognised in the statement of comprehensive income. The fair value is determined at the end of each reporting period, by a registered professional valuer.

3.3 Share based payments

The Group issues share options to certain employees in terms of the Employee Share Option Scheme. Share options are measured at fair value at the date of grant. The fair value determined at the date of grant of the options is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is measured using the Black-Scholes option pricing model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and other behavioural considerations.

3.4 Property and equipment

The residual value and the useful life of property and equipment are reviewed at least each financial year-end. If the residual value of an asset increases by an amount equal to or greater than the asset's carrying amount, then the depreciation of the asset ceases. Depreciation will resume only when the residual value decreases to an amount below the asset's carrying amount.

3.5 Intangible assets

Intangible assets are initially recognised at cost. Subsequently, the assets are measured at cost less accumulated armotisation and any accumulated impairment losses.

3.6 Taxation

Income tax

Income tax expenses comprise current and deferred tax. It is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income.

Current

Current tax comprises expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. It is measured using rates enacted or substantively enacted at the reporting date in the country where the Bank operates and generates taxable income and any adjustment to tax payable in respect of previous years.

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities.

Deferred taxation

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for:

· temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss;

· temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and

· taxable temporary differences arising on the initial recognition of goodwill.

Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. For this purpose, the carrying amount of investment property measured at fair value is presumed to be recovered through sale, and the Group has not rebutted this presumption.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

Additional taxes that arise from the distribution of dividends by the Group are recognised at the same time as the liability to pay the related dividend is recognised. These amounts are generally recognised in profit or loss because they generally relate to income arising from transactions that were originally recognised in profit or loss.

3.7 Cash and cash equivalents

Cash and cash equivalents comprise cash and bank balances, and short term highly liquid investments with maturities of three months or less when purchased. Cash and cash equivalents are measured at amortised cost in the statement of financial position.

3.8 Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The specific recognition criteria described below must also be met before revenue is recognised.

3.9 Interest income

For all financial instruments measured amortised cost and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income includes income arising out of the banking activities of lending and investing.

3.10 Interest expense

Interest expense arises from deposit taking. The expense is recognised in profit or loss as it accrues, taking into account the effective interest cost of the liability.

3.11 Shareholders' funds

Shareholders' funds refers to the investment made by the shareholders to the Group and it consists of share capital, share premium, share options reserve, retained earnings, revaluation reserve, redeemable ordinary shares and subordinated term loans.

4. INTEREST INCOME

5. NON INTEREST INCOME

5.1 FEE AND COMMISSION income

5.2 OTHER income

6. Operating EXPENDITURE

7. taxation

8. IMPAIRMENT LOSSES ON LOANS AND ADVANCES

Impairment losses are applied to write off loans and advances in part or in whole when they are considered partly or wholly irrecoverable. The aggregate impairment losses which are made during the year are dealt with as per paragraph 8.3.

8.1 Specific impairment allowance

Specific provisions are made where the repayment of identified loans and advances is in doubt and reflect estimates of the loss. Loans and advances are written off against specific provisions once the probability of recovering any significant amounts becomes remote.

8.2 Portfolio impairment allowance

The portfolio provision relates to the inherent risk of losses which, although not separately identified, is known to be present in any loan portfolio.

8.3 Regulatory Guidelines and International Financial Reporting Standards Requirements

The Banking Regulations 2000 gives guidance on provisioning for doubtful debts and stipulates certain minimum percentages to be applied to the respective categories of the loan book.

International Accounting Standard 39, Financial Instruments Recognition and Measurement (IAS 39), prescribes the provisioning for impairment losses based on the actual loan losses incurred in the past applied to the sectoral analysis of book debts and the discounting of expected cash flows on specific problem accounts.

The two prescriptions are likely to give different results. The Group has taken the view that where the IAS 39 charge is less than the amount provided for in the Banking Regulations, the difference is recognised directly in equity as a transfer from retained earnings to a regulatory reserve and where it is more, the full amount will be charged to the profit or loss.

8.4 Non-performing loans

Interest on loans and advances is accrued to income until such time as reasonable doubt exists about its collectability, thereafter and until all or part of the loan is written off, interest continues to accrue on customers' accounts, but is not included in income. Such suspended interest is deducted from loans and advances in the statement of financial position. This policy meets the requirements of the Banking Regulations, statutory instrument, 2005 of 2000 issued by the RBZ.

9. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary equity holders of NMBZ Holdings Limited by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share is calculated by dividing the profit attributable to ordinary equity holders of NMBZ Holdings Limited adjusted for the after tax effect of: (a) any dividends or other items related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders of the parent entity; (b) any interest recognised in the period related to dilutive potential ordinary shares; (c) any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares; by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

9.1 Earnings

9.2 Number of shares

9.2.1 Basic earnings per share

9.2.2 Diluted earnings per share

9.3 Earnings per share (US cents)

10. SHARE CAPITAL

10.1 Authorised

10.2 Issued and fully paid

10.2.1 Ordinary shares

10.2.2 Redeemable ordinary shares

Of the unissued ordinary shares of 215 million shares (2015 - 215 million), options which may be granted in terms of the 2012 ESOS amount to 28 071 073 (2015 - 28 071 073) and as at 31 December 2016; 4 128 434 share options had been allocated from the Scheme.

Subject to the provisions of section 183 of the Companies Act (Chapter 24:03) of Zimbabwe, the unissued shares are under the control of the directors.

11. REDEEMABLE ORDINARY SHARES

On 30 June 2013 the Group received US$14 831 145 capital from Nederlandse Financierings-Maatschappij Voor Ontiwikkelingslanden N.V. (FMO), Norwegian Investment Fund for Developing Countries (Norfund) and AfricInvest Financial Sector Holdings (AfricInvest) who were allocated 34 571 429 shares each (total 103 714 287) for individually investing US$4 943 715. This amount, net of share issue expenses, was used to recapitalise the Bank in order to contribute towards the minimum capital requirements set by the Reserve Bank of Zimbabwe of US$100 million by 31 December 2020.

NMBZ Holdings Limited (NMBZ) entered into a share buy-back agreement with Norfund, FMO and AfricInvest, where these three strategic investors have a right on their own discretion at any time after the 5th anniversary (30 June 2018) but before the 9th anniversary (30 June 2022) of its first subscription date, to request NMBZ to buy back all or part of its NMBZ shares at a price to be determined using the agreed terms as entailed in the share buy-back agreement. It is a condition precedent that at any point when the share buy-back is being considered, the proceeds used to finance the buy-back should come from the distributable reserves which are over and above the minimum regulatory capital requirements. Further, no buy-back option can be exercised by any investor after the 9th anniversary (30 June 2022) of the effective date.

The share buy-back agreement creates a potential obligation for NMBZ Holdings Limited to purchase its own instruments. The shares issued gave rise to a potential financial liability and are classified as redeemable ordinary shares.

12. SUBORDINATED TERM LOAN

In 2013, the Group received a subordinated term loan amounting to US$1.4 million from a Development Financial Institution which attracts an interest rate of LIBOR plus 10% and has a seven year maturity date (13 June 2020) from the first disbursement date.

The above liability would, in the event of the winding up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. The Group has not had any defaults on the principal and interest with respect to this subordinated loan during the year ended 31 December 2016. However, there were breaches to the financial covenants regarding the open asset exposure ratio that stood at 41.5% instead of a maximum of 30% as well as the aggregate un-hedged open foreign currency positions ratio that stood at 12.6% instead of a cap of 10%. The Bank will apply for a waiver of the non-compliant ratios by 31 March 2017.

13. DepositS and other LIABILITIES

13.1 Deposits and other liabilities

 * The carrying amounts of current and deposit accounts and trade and other payables approximate the related fair values due to their short term nature.

**Included in deposits from banks and other financial institutions is a loan balance of US$5 263 122 due to Societe de Promotion de Participation Pour la Cooperation Economique SA (Proparco) respectively. The Group has not had any defaults on the principal and interest with respect to these loans during the year ended 31 December 2016. However, there were breaches to the financial covenants regarding the following ratios:

· Non-performing loans ratio - 11% (instead of a maximum of 10%); and

· Loan loss reserve ratio - 42.7% (instead of a maximum of 40%).

The Bank will apply for a waiver of the non-compliant ratios by 31 March 2017.

13.2 Maturity analysis

13.3 Sectoral analysis of deposits

14. FINANCIAL INSTRUMENTS

14.1 Investment securities

The Group holds treasury bills and government bonds amounting to US$24 744 752 with interest rates ranging from 2% to 5%. Liquidity induced trades have occurred in the secondary market and there is industry consensus that these trades do not represent free market activity. In light of the absence of an observable active market for the treasury bills, the instruments are recorded at amortised cost. Of the total treasury bills balance, a total of US$22 156 958 has been pledged as security on interbank borrowings.

14.2 Maturity analysis of investment securities held to maturity

14.3 Maturity analysis of investment securities - loans and receivables

14.4 Fair values of financial instruments

The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques.

For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Valuation models

The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements.

· Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments.

· Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

· Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

14.4.1 Financial instruments measured at fair value - fair value hierarchy

During the reporting periods ended 31 December 2015 and 31 December 2016, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements.

Level 3 fair value measurements

Reconciliation

31 December 2016

31 December 2015

14.4.2 Financial instruments not measured at fair value

The below table sets out the fair values of financial instruments not measured at fair value and analyses them by the level in the fair value hierarchy into which each fair value measurement is categorised.

 31 December 2016

31 December 2015

The carrying amount of financial assets and liabilities not measured at fair approximate fair value.

15. CASH AND CASH EQUIVALENTS

Balances with the Central Bank, other banks and cash are used to facilitate customer transactions which include payments and cash withdrawals. During the year the Central Bank through Exchange Control Operational Guide 8 (ECOGAD8) introduced prioritisation criteria which have to be followed when making foreign payments on behalf of customers. After prioritisation, foreign payments are then made subject to availability of bank balances with foreign correspondent banks, resulting in possible delay of payment of telegraphic transfers. However, no delay is expected in the settlement of local transactions through the Real Time Gross Settlement (RTGS) system.

Of the cash and cash equivalents balance an amount of US$526 316 was pledged to Proparco as collateral for offshore lines of credit.

16. INVESTMENT IN DEBENTURES

The Group had convertible debentures with a carrying amount of US$4 787 074 with a maturity of 5 years from inception. The debentures were at an interest of 10% per annum. The Bank had an option to convert the debentures to equity or redeem the debentures at par on or before the maturity date of 9 March 2018. The debentures were redeemed at par on 17 March 2015.

17. LOANS, ADVANCES AND OTHER ASSETS

 17.1 Total loans, advances and other assets

17.1.1 Loans, advances and other assets

17.1.2 Maturity analysis

17.2 Sectoral analysis of utilizations

The material concentration of loans and advances is with individuals at 44% (2015 - 42%) and services sector at 19% (2015 - 17%).

17.3 Allowance for impairment losses on loans, advances and debentures

During the period under review, the Group reviewed the basis and assumptions for recognising the portfolio impairment allowance in view of the current macro and micro economic conditions prevailing in Zimbabwe. The review resulted in an increase in the level of the portfolio impairment allowance recognised by the Group in proportion to its loan book size.

17.4 Non-performing loans and advances

The net non-performing loans and advances on these accounts represents recoverable portions covered by realisable security, which includes guarantees, cessation of debtors, mortgages over residential properties, equities and promissory notes all fair valued at US$17 573 875 (2015 - US$22 797 088).

17.5 Loans to related parties (included under loans, advances and other assets)

18. NON-CURRENT ASSETS HELD FOR SALE

The Group is in possession of land with a fair value of US$2 261 300 at year end. The Group entered into a sale agreement for a portion of the land in 2012 (at a price of US$2 150 000), however the execution and finalisation of the sale under this contract has been pending since then. The buyer has expressed commitment towards finalisation of the sale and the disposal process is now expected to be completed within the next twelve months. The disposal will improve the Group's cash flows. The fair value adjustment is included under non-interest income (note 5.2).

19 INTANGIBLE ASSETS

20. PROPERTY AND EQUIPMENT