Half-year Report

NMB BANK LIMITED (Registered Commercial Bank)

FOR THE SIX MONTHS ENDED 30 JUNE 2017

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 continued to operate in an environment characterised by nostro funding challenges, interest rate and non - funded income price controls, cash shortages, job losses, deflationary pressures and company closures. The Group has however continued to make considerable progress towards attaining its short and medium term goals. The financial results were largely driven by the banking subsidiary's continued expansion into the broader market segment, stricter credit underwriting standards and concerted efforts to contain non-performing loans and operating costs.

The key financial highlights at 30 June 2017, which are commendable in the current harsh operating environment are:

- Shareholders' funds stood at US$59.2 million;

- Capital adequacy ratio of 23.88% against the RBZ's minimum requirement of 12%; and

- Liquidity ratio of 35.7% versus RBZ's minimum requirement of 30%.

GROUP RESULTS

Financial performance

The profit before taxation was US$4 838 174 during the period under review and this gave rise to total comprehensive income of US$3 556 915. The Group achieved an earnings per share of 0.93 cents (2016 - 0.69 cents).

Operating expenses amounted to US$13 627 312 and these were up 1% from a prior year amount of US$13 537 382 as a net result of some non-recurring expenditures incurred in the period.

Impairment losses on loans and advances amounted to US$878 304 for the current period from a prior year amount of US$3 191 396 and the decrease was mainly due to stricter credit underwriting on the back of a deteriorating economic environment as well as concerted effort being put on recoveries.

Financial position

The Group's total assets increased by 5% from US$320 984 926 as at 31 December 2016 to US$337 754 147 as at 30 June 2017 mainly due to an increase of 24% in cash and cash equivalents as well as a 26% increase in investment properties and these were partly offset by decreases in non-current assets held for sale and deferred tax assets.

Gross loans and advances decreased by 2% from US$205 858 392 as at 31 December 2016 to US$201 607 913 as at 30 June 2017 mainly due to constrained lending as a result of the difficult operating environment.

Investment securities (Treasury Bills and Bonds) marginally declined from US$24 744 752 as at 31 December 2016 to US$24 570 139 as at 30 June 2017.

Financial position

The deposits increased by 5% from US$260 550 383 as at 31 December 2016 to US$273 478 790 as at 30 June 2017 as a result of the broadening of the bank's market segment and the non - availability of nostro funding.

The Bank's liquidity ratio closed the period at 35.7% and this was above the statutory requirement of 30%.

Capital

The banking subsidiary's capital adequacy ratio at 30 June 2017 calculated in accordance with the guidelines of the Reserve Bank of Zimbabwe (RBZ) was 23.88% (31 December 2016 - 23.32%). The minimum required by the RBZ is 12%. We consider the level of our capitalisation to be adequate to support our growth strategy.

The Group's shareholders' funds have increased by 6% from US$55 600 406 as at 31 December 2016 to US$59 178 793 as at 30 June 2017 as a result of the current period's total comprehensive income.

The Bank's regulatory capital as at 30 June 2017 was US$52 096 551 and was above the minimum regulatory capital of US$25 million.

DIVIDEND

In view of the need to retain cash in the business in order to fund growth initiatives as well as to strengthen the statutory capital requirements for the banking subsidiary, the Board resolved not to pay a dividend.

DIRECTORATE

There were no changes to the directorate during the period under review. The directors of both NMBZ Holdings Limited and NMB Bank Limited boards remain as follows: Mr Benedict A. Chikwanha (Board Chairman), Mr Benefit P. Washaya (Chief Executive Officer), Mr Benson Ndachena (Chief Finance Officer), Mr Charles Chikaura (Independent Non-Executive Director), Mr Erik Sandersen (Non-Executive Director), Mr James de la Fargue (Non-Executive Director), Ms Jean Maguranyanga (Independent Non-Executive Director), Mr Julius Tichelaar (Non-Executive Director) and Ms Sabinah Chitehwe (Independent Non-Executive Director).

CORPORATE SOCIAL INVESTMENTS

The Group made social investments into the country's educational system, the disadvantaged, vulnerable groups, the arts and various sporting disciplines during the six months under review. The activities and charities supported during the year included the Zimbabwe National Paralympic Games, Tokwe Mukosi Flood victims, Enactus BOOST Fellowship programme for universities, Dominican Convent School, HIFA, Birdlife Zimbabwe, St Monica Parish (Chitungwiza), as well as the Salvation Army Annual Fundraising Pro-AM golf day and many other charity golf tournaments.

CORPORATE DEVELOPMENTS

The Bank's focus was centred on the promotion of digital channels and this saw an increase in the POS devices footprint and the enhancement of the e-banking channels during the period under review.

OUTLOOK AND STRATEGY

The Bank will continue to accelerate the deployment of POS machines throughout the country and enhance all the e-channels for the convenience of our transacting customers. The Group will continue to broaden its target market by widening its catchment area to include segments of the mass market previously not catered for, thereby contributing to the financial inclusion agenda. The Bank will be rolling out its agency banking model in the second half of the year.

APPRECIATION

I remain sincerely grateful to our valued clients, depositors, shareholders and regulatory authorities who have continued to render their unwavering support to the Group. To my fellow board members, management and staff, I extend my heartfelt gratitude for their diligence, dedication and steadfast commitment which have culminated in the Group's remarkable results in the face of an increasingly challenging operating environment.

B. A. CHIKWANHA

CHAIRMAN

17 August 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30 June 2017 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2017

CONSOLIDATED STATEMENT OF CASH FLOWS

for the six months ended 30 June 2017

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

for the six months ended 30 June 2017

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

These condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting. Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position of the Group since the last annual consolidated financial statements as at and for the year ended 31 December 2016. These condensed consolidated interim financial statements do not include all the information required for the full annual financial statements prepared in accordance with International Financial Reporting Standards.

These condensed consolidated interim financial statements were approved by the Board of Directors on 17 August 2017.

2.1 Basis of preparation

The condensed consolidated interim financial statements have been prepared under the historical cost convention except for quoted and other investments, investment properties and financial instruments which are carried at fair value and land and buildings which are stated at revalued amount. These condensed consolidated interim 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 the 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.

Comparative financial information

The interim financial statements comprise consolidated statements of financial position, comprehensive income, changes in equity and cash flows. The comparative information covers a period of six months.

2.4 Use of estimates and judgements

The preparation of the interim financial statements requires Directors to make judgements, 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.

The significant judgements made by management in applying the Group's accounting policies and key sources of estimation and uncertainity were the same as those applied to the consolidated financial statements as at and for the year ended 31 December 2016.

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

In the process of applying the Group's accounting policies, management has made the following judgements which have the most significant effect on the amounts recognised in the consolidated financial statements:

2.4.1 Deferred tax

Provision for 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 directors. 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 properties were valued by directors. The directors considered comparable market evidence of recent sale transactions and those transactions where firm offers had been made but awaiting acceptance. 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 Property and equipment

The directors exercised their judgment in determining the residual values of the other property and equipment which have been determined as nil. If the residual value of an asset increases by an amount equal to or greater than the asset's carrying amount, then depreciation of the asset ceases. Depreciation will only resume when the residual value decreases to an amount below the asset's carrying amount.

2.4.5 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 judgement in determining that the carrying amount approximates fair value. Refer to Note 14.1.

2.4.6 Intangible assets

Intangible assets are initially recognised at cost. Subsequently the assets are measured at cost less accumulated amortisation and any impairment loss.

2.4.7 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 16.3 below.

2.4.8 Non-current assets held for sale

Non-current assets or disposal group are held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. These are measured at the lower of carrying amount and fair value less costs to sell and they are not depreciated.

Non-current assets were valued by the directors who considered comparable market evidence of recent sale transactions and those transactions where firm offers had been made but waiting acceptance. 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 not stable.

2.4.9 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 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 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.

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 stated 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 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 Shareholders' funds

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

3.7 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 Bank 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 Bank 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 Bank 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.

3.8 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.

3.9 Revenue recognition

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank 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.

3.10 Interest income

For all financial instruments measured at 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.

3.11 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.

2. 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 provisions

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 provisions

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 recognized 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 2000 issued by the RBZ.

9. EARNINGS PER SHARE

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

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 dilute 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

9.3 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 214 million shares (2016 - 215 million), options which may be granted in terms of the 2012 ESOS amount to 28 071 073 and as at 30 June 2017, 4 128 434 share options had been issued and of those options 547 191 were exercised.

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

11. REDEEMABLE ORDINARY SHARES

On 30 June 2013 the Company 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 of 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. Thus shares issued gave rise to a potential financial liability and are classified as redeemable ordinary shares. 

12. SUBORDINATED TERM LOAN

In 2013, the Bank 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 of the principal and interest and other breaches with respect to this subordinated loan during the six months period ended 30 June 2017.

13. DepositS and other accounts

13.1 Deposits and other accounts

` 

*Deposits and other payables approximate the related carrying amount due to their short term nature.

**Included in deposits from banks and other financial institutions are loan balances of US$4 178 313 and US$5 015 157 due to Societe de Promotion de Participation Pour la Cooperation Economique SA (Proparco) and Norsard Finance Ltd respectively. The Group has not had any defaults on the principal and interest with respect to these loans during the period ended 30 June 2017. However, there were breaches to the Proparco financial covenants regarding the following ratios:

· Cost to income ratio - 70.5% (instead of a maximum of 65%).

· Open credit exposure - 28.9% (instead of a maximum of 25%).

· Non-performing loans ratio - 10.98% (instead of a maximum of 8%).

The Bank will apply for a waiver of the non - compliant ratios by 30 September 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 totalling US$24 570 139 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 active market for the treasury bills and bonds, the instruments are recorded at amortised cost. Of the total treasury bills and government bonds balance, a total of US$13 700 132 was pledged as security against interbank borrowings.

14.2 Maturity analysis of investment securities held to maturity

14.3 Maturity analysis of investment securities available for sale

14.4 Fair values of financial instruments

14.4.1 Financial instruments measured at fair value - fair value hierarchy

During the reporting period ended 30 June 2017, 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. The trade investments were valued using the net asset value method.

During the reporting period ended 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 of trade investments

14.4.2 Financial instruments not measured at fair value

The table below 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.

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.

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 (ECOGAD 8) 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. LOANS, ADVANCES AND OTHER ACCOUNTS

16. 1 Total loans, advances and other accounts

16.2 Sectoral analysis of utilizations

The material concentration of loans and advances are to individuals at 42% (2016 - 44%) and the services sector at 16% (2016 - 19%).

16.3 Allowance for impairment losses on loans, advances and debentures

16.4 Non-performing loans and advances

The net non-performing loans and advances of these accounts represents recoverable portions covered by realisable security, which includes guarantees, cession of debtors, mortgages over properties, equities and promissory notes all fair valued at US$17 762 125 (2016 - US$17 573 875).

16.5 Loans to related parties (Included under loans, advances and other assets)

17. INTANGIBLE ASSETS

18. PROPERTY AND EQUIPMENT

 18. PROPERTY AND EQUIPMENT (continued)

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

for the six months ended 30 June 2017

Measurement of fair value

Fair value hierarchy

Immovable properties were revalued as at 31 December 2016 on the basis of valuations carried out by independent professional valuers, PMA Real Estate (Private) Limited. The valuation which conforms to International Valuation Standards, was in terms of the policy as set out in the accounting policies section. All movable assets are measured at their carrying amounts which are arrived at by the application of a depreciation charge on their cost values over the useful lives of the assets.

The valuation of land and buildings was arrived by applying yield rates of 10% on rental levels of between US$5 - US$10 per square metre.

As there were no professional valuations done as at 30 June 2017, the land and buildings are recorded at the fair values obtained by the professional valuers as at 31 December 2016.

Level 3

The fair value of immovable properties of US$3 203 599 has been categorised under Level 3 in the fair value hierarchy based on the inputs used for the valuation technique highlighted above.

The following table shows the reconciliation between the opening and closing balances for Level 3 fair values: