Half-year Report

Holding company of

NMB BANK LIMITED (Registered Commercial Bank)

FOR THE SIX MONTHS ENDED 30 JUNE 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 difficult operating environment, evident throughout 2015 persisted in the first half of 2016. This was characterised by nostro funding challenges, liquidity constraints, deflationary pressures, depressed levels of capacity utilisation in the productive sector and company closures. This prompted the Central Bank and the banks to introduce cash withdrawal limits and prioritisation of imports. In this environment, the Group recorded an attributable profit of US$2 640 274 for the period under review which was a 17% decrease from the attributable profit of US$3 166 684 recorded in the comparable period.

Key highlights as at 30 June 2016 which are notable in this challenging environment are:

- The bank's shareholder's funds stood at $52.3 million

- Capital adequacy ratio of 20.8% against RBZ's minimum requirement of 12%

- Liquidity ratio of 32.5% versus RBZ's minimum requirement of 30%

- NPL ratio came down from 14.9% at 30 June 2015 to 11.1%

GROUP RESULTS

Financial performance

The profit before taxation was US$3 558 801 during the period under review and this gave rise to an attributable profit of US$2 640 274 which translated to an earnings per share of 0.69 cents (2015 - 0.82 cents). Total income for the period decreased by 9% from a prior period of US$28 802 534 to US$26 096 925 which is split into interest income of US$17 451 237 (2015 - US$17 583 627), fee and commission income of US$7 584 529 (2015 - US$10 561 243), net foreign exchange gains of US$353 209 (2015 - US$609 218) and non-interest income of US$707 950 (2015 - US$48 446).

Operating expenses amounted to US$13 537 382 and these were 4% down from a prior year of US$14 070 828 as a result of continuing cost cutting and containment measures in the face of downward pressures on income generation.

Impairment losses on loans and advances amounted to US$3 191 396 for the current period from a prior period amount of US$2 644 309 and the increase was mainly due to increased provisioning resulting from the deteriorating economic environment.

Financial position

The Group's total assets decreased by 7% from US$333 831 107 as at 31 December 2015 to US$311 941 890 as at 30 June 2016 and this was mainly due to a fall in cash and cash equivalents and loans, advances and other assets.

Cash and cash equivalents were adversely affected by accelerated cash withdrawals driven by the market-wide cash shortages, but the bank systematically had the cash resources to allow withdrawals of the stipulated daily limits.

Gross loans and advances decreased by 7% from US$243 241 018 as at 31 December 2015 to US$225 292 910 as at 30 June 2016 mainly due to stricter credit management, loans surrendered to ZAMCO amounting to US$11.6 million and collections. The Bank's non-performing loans ratio reduced to 11.1% as at 30 June 2016 from 14.9% as at 30 June 2015.

Total deposits decreased by 10% from US$277 216 769 as at 31 December 2015 to US$249 205 508 as at 30 June 2016 due partly to market reaction to macro-economic pressures and the impending introduction of bond notes as an incentive to exporters.

GROUP RESULTS (continued)

Financial position (continued)

The Bank's liquidity ratio closed the period at 32.5% (31 December 2015 - 30.4%) and this was above the minimum statutory requirement of 30%.

Capital

The banking subsidiary's capital adequacy ratio at 30 June 2016 calculated in accordance with the guidelines of the Reserve Bank of Zimbabwe (RBZ) was 20.8% (31 December 2015 - 19.3%). The minimum required by the RBZ is 12%. We consider the level of our capitalisation to be adequate to support further underwriting when the economic environment improves.

The Group's shareholder funds increased by 5% from US$50 543 864 as at 31 December 2015 to US$53 184 655 as at 30 June 2016 as a result of the attributable profit recorded in the period under review.

The Bank's Tier 1 capital as at 30 June 2016 was US$44 288 514 and we will continue to put strategies in place to work towards meeting the required minimum regulatory capital of US$100 million for a Tier 1 bank by 31 December 2020 subject to improvements in the operating environment as forecast in our capitalisation plan submitted to and approved by the Central Bank.

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 has proposed not to declare a dividend.

CORPORATE SOCIAL INVESTMENTS

We are committed and dedicated to playing an active human development role in the communities that we serve and nurture. Our social investments during the first half of the year were channelled into the country's education system, the disadvantaged and vulnerable groups, protection of the environment and wildlife conservation, the arts and the development of sporting disciplines in young people. The worthy causes we sponsored include, among others, Birdlife Zimbabwe where this year's theme was the protection of the vultures, Petra T24 Cricket tournament which attracted many schools from around Zimbabwe, Arundel Girls Hockey UK tour where we sponsored the team's full kit and the Kwekwe athletic gala. We further channeled our community support to various fundraising golf tournaments to support different causes they were spearheading. These golf tournaments included Petra High school, Milestone school, Midlands Christian College and the Zimbabwe Association of Funeral Assurers. Our contribution towards the disadvantaged communities saw us sponsoring the training of deaf students as teachers at Morgan Zintec College.

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 the 20th of May 2016. Mr James de la Fargue was appointed to both boards of NMBZ Holdings Limited and NMB Bank Limited with effect from the 4th of May 2016. I would like to thank the three former board members for their invaluable contributions to both NMBZ Holdings Limited and NMB Bank Limited during their tenure and welcome and wish Mr James de la Fargue a fruitful tenure on the Board.

OUTLOOK AND STRATEGY

The banking subsidiary continued to make inroads into the broader market segments thereby laying a foundation for a strategic shift towards small to medium sized enterprises.

The Group continued to source more international lines of credit and is in the process of drawing down a US$20 million credit line and finalising the legal documentation for an approved further US$15 million facility.

In view of the downward pressures on revenues and the continued deteriorating operating environment, cost reductions and containment will be a strategic imperative.

POST REPORTING PERIOD DEVELOPMENT

Some of the Group's shareholders, FMO of the Netherlands and Norfund of Norway, who jointly own 17.98% of the company, have joined forces with Rabobank of the Netherlands to pool investments in financial institutions across Africa through a new investment vehicle, Arise, formed out of the partnership. Arise will have a presence in 20 African countries and capital will be allocated to support the current investee companies as well as new minority investments in the market. Banco Montepio, a Portuguese financial group with banking investments in Africa, is expected to join the partnership in the near future. NMBZ Holdings Limited will be able to benefit from a wide network of other African banks that are part of the new partnership and assist our quest for the much needed lines of credit to serve the small and medium enterprises (SMEs), the rural sector and clients who have not previously had access to financial services.

APPRECIATION

I would like to pay tribute to our valued clients, shareholders and regulatory authorities for their continued support in the period under review. My appreciation goes to my fellow board members, management and staff for their unwavering commitment and dedication which has made the achievement of these results possible in the face of a deteriorating operating environment.

B. A. CHIKWANHA

CHAIRMAN

17 August 2016

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30 June 2016

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 June 2016

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2016

CONSOLIDATED STATEMENT OF CASH FLOWS

for the six months ended 30 June 2016

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

for the six months ended 30 June 2016

1. REPORTING ENTITY

The Holding Company is incorporated and domiciled in Zimbabwe and is an investment holding company. Its registered office is 64 Kwame Nkrumah Avenue, Harare. Its principal operating subsidiary is engaged in 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 2015. 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 2016.

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, its subsidiaries and associate company. 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.

An associate is an entity over which the Group has significant influence, as evidenced by the Group holding directly or indirectly 20% or more of the voting power of the investee, representation on the Board and direct involvement with the policy making processes of the investee. The investment in Associate is accounted for using the equity method.

2.3 Comparative financial information

The interim financial statements comprise consolidated statements of financial position, comprehensive income, changes in equity and cash flows. The comparative consolidated statements of comprehensive income, changes in equity and cash flows are for six months.

2.4 Use of estimates and judgements

The preparation of the interim financial statements requires management 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 2015.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

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 made using the liability method 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.

In determining the amounts used for taxation purposes the directors referred to applicable effective exchange rates at the date of acquisition of assets or incurring of liabilities. The Zimbabwe Revenue Authority (ZIMRA), announced methods to account for the deferred tax arising on assets purchased in ZWD. These methods require the preparer to first estimate the equivalent USD value of those assets at the time of purchase. Since the measurement of transactions in Zimbabwe dollars in the prior periods is affected by several economic variables such as mode of payment and hyperinflation, this is an area where the directors have had to apply their judgement and acknowledge there could be significant variations in the results achieved depending on assumptions made.

2.4.8 Impairment losses on loan and advances

The Group reviews all 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 collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilisation, loan to collateral ratios etc.), concentrations of risks and economic data.

The impairment loss on loans and advances is disclosed in more detail under note 8 and note 16.3 below.

2.4.9 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.

2.4.10 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 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 income statement. The fair value is determined at the end of each reporting period.

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

International Accounting Standard 16 (IAS 16) stipulates that the residual value and the useful life of an asset must be 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, AIDS levy 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 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.

4. INTEREST INCOME

5. FEE AND COMMISSION INCOME AND non-interest income

5.1 Fee and commission income

5.2 Non - interest 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.

NOTES TO THE CONDENSED FINANCIAL STATEMENTS

for the six months ended 30 June 2016

9.1 Earnings (US$)

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 215 million shares (2015 - 215 million), options which may be granted in terms of the 2012 ESOS amount to 28 071 073 and as at 30 June 2016, 4 128 434 share options had been issued.

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 for a Tier 1 bank 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 with respect to this subordinated loan during the six months period ended 30 June 2016. However, there was a breach to the financial covenants regarding the open asset exposure ratio that stood at 39.5% instead of a maximum of 30%. The Bank will apply for a waiver of the non-compliant ratio by 30 September 2016.

13. DepositS and other LIABILITIES

13.1 Deposits and other liabilities

` 

*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$6 315 789 and US$7 285 713 due to Societe de Promotion de Participation Pour la Cooperation Economique SA (Proparco) and Norsad Finance Limited respectively. The Group has not had any defaults on the principal and interest with respect to these loans during the period ended 30 June 2016. However, there were breaches to the financial covenants regarding the following ratios for the Proparco facility:

· Cost to income ratio - 66.7% (instead of a maximum of 65%).

· Open credit exposure - 39.5% (instead of a maximum of 25%).

· Non-performing loans ratio (including restructured loans) - 14.2% (instead of a maximum of 10%).

On the Norsad facility there was a breach to the financial covenant regarding the Open loan exposure ratio that stood at 39.5% instead of a cap of 30%.

The Bank will apply for a waiver of the non-compliant ratios by 30 September 2016.

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$25 100 614 with interest rates ranging from 2.5% 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, the instruments are recorded at amortised cost. Of the total Treasury Bills balance, a total of US$21 573 265 has been 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 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. The trade investments were valued using the net asset value method.

During the reporting period ended 31 December 2015, 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 fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:

· The fair values of cash and cash equivalents, advances and other assets and deposits and other liabilities carrying amounts approximate their fair values largely due to the short - term maturities of these instruments.

· Fair value of financial assets and liabilities at fair value through profit or loss is derived from quoted market prices in active markets. If quoted market prices are not available the fair value is estimated using pricing models or discounted cash flow techniques.

15. CASH AND CASH EQUIVALENTS

16. LOANS, ADVANCES AND OTHER ASSETS

16. 1 Total loans, advances and other assets

16.2 Sectoral analysis of utilizations

The material concentration of loans and advances are to individuals at 45% (2015 - 42%) and the services sector at 20% (2015 - 17%).

16.3 Allowance for impairment losses on loans and advances

16.4 Non-performing loans and advances

The residue of these accounts represents recoverable portions covered by realisable security, which includes guarantees, cession of debtors, mortgage bonds over properties, equities and promissory notes all fair valued at US$15 725 229 (2015 - US$22 797 088).

16.5 Loans to related parties (included under loans, advances and other aasets)

Loans to officers amounting to US$2 461 339 were granted at a preferential rate of 6% per annum as part of their overall remuneration agreements, US$2 947 935 were granted at a commercial rate of 13% per annum and the balance amounting to US$578 915 being mortgage loans which were granted at a commercial rate of 12% per annum.

17. INTANGIBLE ASSETS

18. PROPERTY AND EQUIPMENT