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2014 annual report
Vision
To be Zambia’s leading, preferred, admired, and
innovative bank that should provide to each of our
chosen customer segments a fair deal as we also strive
to Bank the Unbanked.
Mission
To be the number one bank in each of our chosen
segments with a special focus on Government, Food
and Agriculture and Retail Banking through appropriate
technology and distribution channels and with
empowered and motivated staff.
Values
• Pride
• Respect
• Integrity
• Excellence
• Teamwork
2
2014 annual report
The launch of a NEW DAWN....
Proudly Zanaco!
3
2014 annual report
Contents
Page
2014 events in photos
5
Brief Profile
6
Financial Highlights
7
Board of Directors
8
Executive Directors
10
Chairman’s Report
12
Managing Director’s Report
15
Directors’ Report
18
Statement of Responsibility for Financial Statements
20
Auditor’s Report
21
Statement of Corporate Governance
22
Corporate Social Responsibility
36
Financial Statements
40
4
2014 annual report
Events in photos
As the leading Bank in innovative solutions, Zanaco introduced Loan a cow product to support emergent and small
holder farmers to buy Dairy Cows without conventional security
Zanaco’s GO BIG for Charity - Civic Centre Branch staff
handing over assorted items during a donation to Our
Lady’s Hospice in Kalingalinga
Director Retail Banking Chibotu Chiyasa explaining Bank
operations to judges during the 2014 Trade Fair
5
2014 annual report
Brief Profile
History
Zambia National Commercial Bank Plc (Zanaco) was established in1969 to service the financial needs of the
Zambian economy and it has since evolved into a leading bank nationwide. In 2007, GRZ sold a 49% stake in the
Bank to Rabo Financial lnstitutions Development B.V (RFID), a subsidiary of the Cooperative Centrale RaiffeisenBoerenleen Bank (Rabobank) of the Netherlands.
Subsequently, RFID sold a 3.41% stake to Lizara Investments Limited (a nominee of the Zambia National Farmers
Union (ZNFU), followed by the Bank’s Initial Public Offering in 2008.
The Bank remains majority-owned by Zambians and thus is considered “citizen owned”. The relationship with
Rabobank enables Zanaco to benefit from technical assistance and best practices in various areas of banking.
Our Customers
In our quest to meet customer expectations, Zanaco’s strategic focus has been centred around improved
service delivery. Guided by our Vision, Mission and Values, we are determined and committed to ensuring
that we not only meet the expectations of our over 850,000 customers, but exceed them. We also strive to
continually improve our service delivery to our customers who cut across the Retail, Corporate, Government,
SME and Agriculture sectors.
Innovation and sustainability for us means doing things better and smarter, driven by the needs of our
customers. It means making efficient use of our resources, empowering the customer with financial services
and products that help them attain their goals and aspirations.
Our People
Our members of staff are our number one resource. We are proud of our 1,391 dedicated, inspired and
motivated staff who drive our agenda. Zanaco is the largest employer in the banking sector. The Bank adopted a
recruitment model through which we recruit people from diverse backgrounds with a good mix of gender.
To ensure we maximise output and get the best out of our employees, we invest in training and ensure we take
good care of their well being.
Ownership Structure
The current ownership structure of Zanaco is as follows:
Rabo Financial Institution Development B.V 45.59%
GRZ 25.00%
ZNFU 3.41%
LuSE Free Float 26%
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2014 annual report
Financial Highlights
Total Revenue - 1,110,000
Net Interest Revenue - 700,00
700,000
1,110,000
600,000
1,000,000
500,000
800,000
400,000
600,000
300,000
400,000
200,000
200,000
100,000
-
2010
2011
2012
2013
2014
Loans and Advances - 3,200,000
2010
2011
2012
2013
2014
Shareholders’ Funds - 1,000,000
3,200,000
1,200,000
3,000,000
1,000,000
2,500,000
800,000
1,500,000
600,000
1,000,000
400,000
500,000
200,000
-
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
7
2014 annual report
Board of Directors
Eric D. Drok - Chairman
Mr. Drok was appointed as Chairman of the
Board of Zambia National Commercial Bank
Plc at the Annual General Meeting held on
5 April, 2013.
Mr. Drok’s banking career spans over 28
years. From 2002 to 2006 he served on the
ING Bank Retail Board in The Netherlands.
In 2006 he was appointed as CEO of ING
Bank in Australia, which was the largest
foreign bank. He later moved to Poland as
Head of Retail at ING Poland up to 2011
when he joined Rabobank.
Until December 2014 he was the Chief International Rural & Retail Banking and a
member of the Management Team of Rural
& Retail Banking of Rabobank International.
He is also board member of Rabobank Australia and Rabobank New Zealand and up
to October 2014 of BGZ Bank in Poland.
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Gertrude M. Akapelwa
(Non Executive Director)
Ms. Akapelwa is the Founder, Vice Chancellor
and Board Chairperson of Victoria Falls
University of Technology (VFU). She is
South Africa’s CEO Magazine 2013 and
2014 prestigious award winner in Africa’s
Most Influential Women in Business and
Government. She is the Owner and CEO of
La Residence Guest House.
She was the Board Chairperson of the
Zambia Information & Communications
Technology Authority (ZICTA). She was also
a member of the Millennium Challenge
Account Zambia Steering Committee and
a member of the Technical Committee
for the Government of the Republic of
Zambia Lands Information Management
System. Prior to that, she served the African
Development Bank in different capacities
and Management for 23 years in both Ivory
Coast and Tunisia
Guy H. Robinson
(Non-Executive Director)
Mr Robinson is a businessman and
farmer. He represents the Zambia
National Farmers Union (ZNFU) where
he serves as Trustee.
He is also a board member of Musika,
Parmalat, Tiger Feeds Ltd and Food
Reserve Agency (FRA) where he serves
as Board Chairman.
2014 annual report
Fred Weenig- (Non Executive
Director)
Ronald M. Simwinga (Non-Executive
Director)
Bruce Dick - Managing Director
Mr Weenig is Chief Executive Officer
of FGH Bank, a member of the Rabo
Vastgoed Group in the Netherlands. FGH
Bank finances commercial real estate
and also analyses social and economic
developments and assesses their impact
on the market for commercial real estate.
Dr. Simwinga is the Director Investments
and Debt Management, Ministry of
Finance and is responsible for initiating
debt portfolio strategies and structuring
issuances for deficit financing and/or
re-financing.
Mr Dick was appointed Managing
Director of Zanaco in January 2014.
He had previously served as Board
Chairman for the period 2010 till
2013. He has over 35 year’s
experience in Retail and Wholesale
Banking.
Before taking up this role, Mr Weenig
was Director Corporate Clients
Rabobank Netherlands. He joined
Rabobank Netherlands in 2004 where
he was Deputy Head of Special Assets
Management Rabobank Group until July
2010.
His research interests include
Macroeconomic Theory and Policy;
Monetary Theory; Financial Economics
and International Economics.
Prior to taking up his role at Zanaco
he was responsible for Rabo
Developments retail bank
investments throughout sub Saharan
Africa and Latin America
9
2014 annual report
Executive Directors
(Standing from left)
Chibotu Chiyasa
Bruce Dick
Ignatius Mwanza
Managing Director Director Corporate Banking Director Retail
Banking
Suzyo Ng’andu Manlio D’Alessandro
Edward Mutale
Bank Secretary
Director Corporate Support Director Finance
(Seated from left)
Lishala Situmbeko
Chimango Chikwanda
Director Treasury & Investments Director Human Resources
10
Hamish Chipungu
Director Internal Audit
Arjan Poels
Director Risk Management
2014 annual report
46 Years in business and on track...Record 3 times winners - 2010, 2011 & 2013 !
We take pride NOT only in living our Mission and Vision of empowering Zambians to be active players in the growth of our
economy through financial inclusion but ALSO in the way we conduct our business.
Having banked over 850,000 people and still counting and with presence in 90 of the 102 districts, we are committed to conducting
our business in a transparent manner by complying with financially approved and recommended standards.
It is with pride that we share our accolade of recognition of the following:
• Best Corporate Governance Award: 2013
• Best Sustainability Reporting Award: 2013
To our customers, this is your success too! Let us celebrate together.
Zanaco’s Go Big for Charity
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2014 annual report
Message from Chairman
12
2014 annual report
I am particularly pleased to be able to report on the year
2014 which was especially challenging. What continues
to motivate, drive and inspire me more than anything
else is the opportunity to contribute to the realisation
of Zanaco’s fascinating mission and vision of financially
including the bankable unbanked population of Zambia
through innovative but affordable products and services.
I am confident that I share this passion with our more
than 1, 350 employees across our 64 branch and agency
network and all business units at Head Office. We all work
relentlessly every day to build on our position as one of
the leading banks in Zambia that greatly improves the
lives of many people through our diverse distribution
channels.
Zanaco would not be in the strong position it is today
without the loyal, capable and experienced Board,
Management and staff members. This is borne from a
culture of empowering and developing our people to
succeed at every level, and encouraging accountability,
innovation and excellence. We are committed to further
embed our people culture and enhance capability in
our staff. We made significant efforts during the year
to ensure that our staff remain our key competitive
advantage. I would like to express on behalf of the board
and indeed on my own behalf, our admiration for the
outstanding contribution made by all staff during a
particularly difficult year.
My accolades also go to our customers who remained
loyal and supported us throughout the year. Customers
are the reason we are in business. Knowing we have
support from our customers gives us the impetus to
always strive to better our service delivery as can be
evidenced by the huge investment we made in the
change of the core banking system during the year. All
these factors confirm that we are committed to sustained
high performance, supported by good governance. We
promise to continue to manage our bank, your bank, in
a manner which is responsible and consistent with our
belief in honesty, transparency and accountability. For
us, good governance means managing our business
well and engaging effectively with our stakeholders.
It is never simply an exercise in compliance, but a key
element underpinning the long-term growth of our
business. As such, it is of key importance in challenging
times, as much as it is in the good times.
Economic operating environment
Zambia’s economy has experienced strong growth in
recent years, with real Gross Domestic Product (GDP)
growth averaging 6.50 percent year after year since
2005. This growth is attributed to the increased copper
mining output whose outcome was increased foreign
exchange earnings which spurred economic growth.
Copper output has increased steadily since 2004, due to
higher copper prices and foreign investment despite the
short depression in 2008. Zambia has made some strides
to improve the cost of doing business having revoked
the Statutory Instrument (SI) Number 33 (mandating
use of the kwacha for domestic transactions) and SI
Number 55 (monitoring foreign exchange transactions).
growth rates of 9 percent, 11 percent and 15 percent for
deposits, total assets, and loans & advances, respectively.
The sector has continued to strongly contribute to the
country’s economic development through its increased
credit extension to productive sectors like agriculture and
manufacturing. Lending to households has continued to
remain strong at 32 percent of banking loans and advances
portfolio. This demonstrates the sector’s contribution
towards improving access to credit and financial inclusion
for Zambians.
With this favourable operating land scape, we are confident
that the empowerment of all our customer segments to
be active players in the growth of our economy through
banking the bankable unbanked people of Zambia is
helping to enrich people’s lives and to develop Zambia,
making it a preferred international business hub. Our
agenda and mandate to do everything we can to bring
banking services closer to the people of Zambia remains
a priority.
2014 successes
We continued to pursue our set targets and performed
very well in the following:
• Our Customers
Being a bank for all, we welcomed to the Zanaco family
Retail, Corporate, Government, SME and Agriculture
customers. We increased our customer base by 11%
in 2014. We recorded remarkable improvement in the
service delivery to our customers following the change
of the core banking system at the beginning of the year
despite the teething challenges faced.
• Our people
We continue to be the largest employer in the banking
sector in Zambia. We recruited personnel from diverse
backgrounds with a good mix of gender. We invested
heavily in training staff during 2014 in order to improve on
their skills and maximise output. We managed to speedily
deliberate and conclude on all staff matters with our
partners, the Union.
• Our partners
We go beyond the banking industry norms to partner with
organisations who share our passion of offering a service
to our customers and the general public. These range
from utility companies to institutions of higher learning
such as Zesco, Multichoice, the Universitiy of Zambia and
the Copperbelt University. We welcomed on board three
organisations during the year bringing the number of our
strategic business partners to over 27.
• Our distribution network
Our agenda to financially include people in Zambia aligns
very well with the nation’s Financial Sector Development
Programme (FSDP). According to the last Finscope Survey
conducted in 2009, the country has 63.3 percent of people
who have remained unbanked. Our robust distribution
network is our vehicle in reaching out to as many Zambians
as possible. We grew our service touch points during the
year to the following:
Despite some volatilities in the first half of 2014, the
banking sector performed well, with year to date
13
2014 annual report
• Presence in 90 out of the 102 districts in Zambia;
• 64 Branch and Agency footprint represented in all 10
provinces of Zambia;
• 184 ATMs;
• 708 Point Of Sale machines;
• 244 Zanaco Xpress Agents.
We are determined more than ever before to consolidate
our business and to remain relevant to our customer
needs. We will resolutely pursue our strategy of targeted
investment within our innovative capability. We will
continue to take the lead in innovation and introduce
products and services that add value to people’s lives.
• Our products
We continue to leverage on our state of the art IT platform
which enables us to come up with innovative products
on the market. Exciting products were launched during
2014 and plans to launch more in 2015 have reached an
advanced preparatory stage.
Our mission to greatly improve on our customer service
delivery remains of paramount importance. I am proud
that we are making steady progress in this aspect of our
business and yes, we still have a lot of work to do. We
want to get to know our customers and engage with
them better. This is the only way we will cement our
relations and remain relevant to them. We will continue
to embrace strategic partnerships with organisations
who share our passion of offering a service to our
customers.
Investment in our communities – Our CSR programme
is on track
I am proud of our achievements in improving the livelihood
of the people in communities in which we operate. The
world of Corporate Social Responsibility (CSR) keeps
evolving by the day. Zanaco has been refining its CSR
activities. For us this is not a mere obligatory public
relations task but a purpose driven and principle based
way of doing things. Zanaco continues to find innovative
business models, revolutionalising processes, products and
services to operate in a manner that is sustainably beneficial
to the communities we operate in.
Generally, CSR will begin to be judged on strict relevance
and how innovative companies are in using products and
processes to tackle social environmental problems. I am
happy to note our CSR programmes are already making a
mark in these aspects. I am proud of how staff exceeded
my expectations in ensuring they made meaningful
contributions to the well being of people in communities
in which we serve throughout our branch network in all the
provinces of Zambia. Through the Go Big for Charity initiative,
staff contributed their own money which Management
matched 100 percent. Various charities benefited from this
initiative leaving a memorable positive impression in the
lives of the people. This is highly commendable.
This was alongside our making meaningful contributions
to the following activities we support in our communities:
•
•
•
•
Financial Fitness;
Raising literacy levels among early grade learners;
Promoting green and clean energy;
Promoting entrepreneurship among students in
collaboration with the University of Zambia;
• Improving access to water and sanitation;
• Supporting quality health care;
• Staff engagement.
Our future prospects
Now let me look to the future. The outlook for 2015 and
going beyond looks promising. It should be anticipated
that competition will continue to be fierce in the banking
industry in Zambia but with focus on our strategy and
armed with supportive staff, customers and other strategic
partners, we are set to maintain and even better our
position in the market.
14
Board and Management/Employees
On behalf of my colleagues on the Board of Directors,
I would like to personally thank our employees
throughout the Bank for making this success possible.
Ultimately it is their dedication and their contributions
that are bringing us closer to our goals.
During the year, we continued to work cohesively as
a Board, with Management assisting us in providing
oversight.
In April 2014, Mr. C.Y. Mulendema retired from the
Board after 7 years of service. On behalf of the Board of
Directors, I wish to thank him for his contribution to the
Bank. In his stead, Dr. R. Simwinga was appointed as a
Non-Executive Director, nominated by GRZ.
We achieved a good deal of success in 2014. We have
since identified our future opportunities and challenges
and are prepared to address them. That is how we will
ensure that Zanaco consistently exploits its exciting
growth potential.
We count on your continuing support in the pursuit
of these objectives. I am confident that Zanaco will
continue to demonstrate resilience in whatever
operating environment. This will be achieved through
our mix of good governance, a clear and consistent
corporate strategy and excellent management and
staff. Our aim as a business is simply to ensure that this
effective combination continues to return enhanced
value to our customers, shareholders, staff and other
stakeholders.
Eric D. Drok
Chairman.
2014 annual report
Message from Managing Director
15
2014 annual report
It is my pleasure to report on the Bank’s performance in 2014
and to provide you with an outlook for 2015.
Business Operating Environment
The business environment was mixed in 2014. The first half of
the year saw the withdrawal of Statutory Instrument (SI) Number 33 (mandating use of the kwacha for domestic transactions) and SI Number 55 (monitoring foreign exchange transactions). This was aimed at easing the cost of doing business
and streamlining implementation hurdles. Other developments occurred in the area of monetary policy following the
rapid depreciation of the Kwacha against major currencies.
The Bank of Zambia also adjusted the Monetary Policy Rate in
June 2014 to 12 percent, to reflect the cost of funding and this
resulted in an increase in the cost of borrowing on the market.
Following the rapid depreciation of the Kwacha, the Monetary
Policy Rate was successively adjusted up to 12.5 percent. The
lending factor used to arrive at the effective lending rate was
also adjusted upwards resulting in a maximum lending rate of
24 percent. Further monetary policy tightening was effected
with the Statutory Reserve Ratio being adjusted to 14 percent
from 8 percent. The overnight lending window at the Bank of
Zambia was further tightened with upward adjustment in the
interest rate and frequency of access.
The tightening of monetary policy resulted in constrained
liquidity on the interbank market with overnight interest rates
reaching as high as 23 percent per annum.
Despite the challenging conditions of the first half of 2014,
the banking sector performed well, with year-to-date growth
rates of 9 percent, 11 percent and 15 percent for deposits,
total assets, and loans & advances. The sector has continued to
strongly contribute to the country’s economic development
through its increased credit extension to productive sectors
like agriculture and manufacturing. Lending to households
has continued to remain strong at 32 percent of banking
loans and advances portfolio. This demonstrates the sector’s
contribution towards improving access to credit and financial
inclusion for Zambians.
16
us and continued to give us feedback on how we were
progressing. We began to see the fruits of BEP in the third
quarter of the year. All systems have tremendously improved
since. We have seen remarkable improvements in processes
such as card issuance and the loan and payments processing.
We are now in the final stage of the project whose activities
are mainly centred around cleaning up all teething problems
that come with the change of any system.
We also suffered a major setback during the third quarter of
the year following a fire occurrence at our Chipata Branch
which damaged our building to the extent it was no longer
usable. Again, the support we got from our customers and
the commitment exhibited by staff in ensuring that there was
business continuity (virtually no service breakage following
the fire incidence while we prepared an alternative site
to operate from), made me and the entire management
very proud. This was a testimony that we indeed have loyal
customers and highly motivated and committed members of
staff.
Getting closer to our customers through marketing
As a way of giving back to our customers, especially after a
challenging period regarding our service delivery, we held
one promotion that saw customers walk away with fabulous
prizes. The Swipe and Win promotion which started in 2014
and continued into 2015, was well received by our customers.
In this promotion, customers were rewarded for using their
Zanaco Visa debit cards via debit to purchase goods and
services. This is a win-win initiative for both the customers
and the Bank because we are rewarding our customers
with fabulous prizes while entrenching the use of electronic
channels to pay for goods and services.
Our performance
Our profit after tax was K143 million in 2014 from K186 million
in 2013. Our customer base country wide grew from about
720,000 in 2013 to over 850,000 in 2014. We continued to
score highly in the advances portfolio which keeps growing
from year to year. We recorded an increase of 5% from K2,987
million in 2013 to K3,139 in 2014. This reaffirms and confirms
our position as one of the leading lenders in the market in
Zambia.
Exploring alternative distribution channels
Our distribution network continues to rank very highly on our
‘to do’ list. We realise and acknowledge that it is only through
bringing banking services closer to the people that we are
going to achieve our mandate of banking the unbanked in
Zambia. In achieving this, we explore all channels possible in
ensuring that we offer a service to as many bankable people
as possible irrespective of where they are geographically
positioned. We adopted the Agent Banking model approved
by the Bank of Zambia (BOZ) a few years ago. Through this
model, we recruit small businesses mostly in places where
we do not have presence, to conduct basic banking business
of deposits and withdrawals on our behalf. Trading under
the brand name Zanaco Xpress, some of these outlets are
in very remote areas of Zambia such as Chilubi Island and
Shang’ombo. We grew the number of Zanaco Xpress Agents
to 244 from 130 in 2013.
Our service delivery improvement promise – not
without a challenge
With our Business Efficiency Programme (BEP) which saw the
ushering in of a new core banking system at the beginning
of 2014, it was envisaged that this would end most of our
service delivery challenges. However, we encountered a
number of difficulties following this change which affected
our customers and other stakeholders. Despite all this,
we received maximum support from you our customers,
regulators and the wider community, who rallied behind
Investing in our communities– Going Big For Charity!
Investing in communities where we serve continues to
be at the top of our agenda. We continue to not only align
our Corporate Social Responsibility (CSR) programmes with
our vision and mission of banking the unbanked but to go
beyond this agenda in ensuring we improve the livelihoods of
the people in communities where we operate. Our Financial
Literacy Programme aimed at educating people about the
importance of managing money well today for a better
tomorrow has grown from strength to strength following its
2014 annual report
inception in 2008. We have reached more than 35,000 people
from 22,275 reached in 2013 and 10,500 in 2012. These
include SMEs, farmers, youth, children and members of staff.
We continue to work with other organisations who share our
passion of helping disadvantaged communities such as the
Ministry of Education, Science, Vocational Training and Early
Education in raising literacy levels among early grade learners.
We supported more than 110 primary schools in Muchinga
province with the Reading Tools in a Box project. Having
expanded our CSR programmes to include Health, Water
and Sanitation support, we have reached over 6,000 citizens
helping them with sanitation facilities. We also contribute to
the preservation of Zambia’s local culture through support to
traditional ceremonies in all the ten provinces of Zambia.
Alongside these activities, we did something special in 2014
dubbed “Go Big For Charity”. Through this initiative, staff raised
a total of K112,690 which Management matched kwachafor-kwacha doubling the amount to K225,380. This was
then donated throughout the country to various charities
identified and chosen by members of staff. The project was
well received by various recipients and a documentary was
produced and shared with the general public on ZNBC TV1.
Innovation, our pride! Towards helping small
businesses grow
We continue to be market leaders in innovation in the banking
industry. We launched the Loan a Cow Product, a facility that
allows smallholder farmers to get a loan for the purpose of
purchasing dairy animals. What makes this product unique
is that the animals purchased are used as security while the
milk they produce generates cash flow for loan repayment,
totally eliminating conventional collateral requirements
which normally prove to be a challenge for many small holder
businesses when accessing financing from banks or indeed
other lending institutions.
We also launched another exciting product called the ‘Buy-ATrailer’ Loan Scheme in partnership with Agro Fuel Investment
Engineering Limited (AFIL) to help local transporters purchase
trailers. Under the scheme, Zanaco will provide the transporter
with 70 percent funding while the transporter will make a 30
percent contribution.
Innovation in top gear – tailor made, innovative but
affordable products for all
We have a number of exciting products lined up to be
launched in the near future. These range from tailor made
products for women, savings accounts for minors aimed at
securing lives for our young to Tractor Lease Financing.
make us proud because it shows that our efforts in
supporting both personal and corporate citizens in rural
and urban Zambia are recognised by other business
organisations and bodies.
The future is ours to make, 2015 will be just as
successful!
With our robust strategy put in place, coupled with
motivated and committed staff, our wide distribution
network, state of the art IT platform and support from our
customers and partners, we are well placed to make 2015
just as successful and even better than 2014.
We continue our journey with a lot of confidence and
remain steadfast in ensuring we empower as many
Zambians as possible to be active players in the growth
of the Zambian economy through financially including
them and bringing banking services closer to them.
Going forward, we will continue to endeavour to stabilise
our systems with the ultimate objective to improve our
customer service delivery, mobilise deposits, develop a
strong connection with our customers and work towards
financial and operational efficiency. We will also focus on
keeping our spend in check, grow our customer base
and keep investing in communities in which we serve.
We will also continue to invest in our human resource
and aim to continuously attract and develop the best
talents, encouraging diversity and creating an enabling
environment for our staff to soar to great heights.
With your support, my one year with Zanaco has been
fulfilling and I am confident that together, we will make
2015 an even better year for our customers and all
stakeholders. The year ahead will bring its own challenges
but I’m sure by working together, remaining focused on
our priorities and putting our customers first, we can
realise our ambitions. These will certainly continue to be
my priorities and I am convinced I can count on the rest
of management and staff at Zanaco to do the same.
We have a lot of work to do ahead and it is important for
us to use our time wisely and move forward as decisively
and swiftly as we can in 2015.
Bruce Dick.
Managing Director
We continue to work hard and it shows
We performed extremely well at both the Zambia International
Trade Fair (ZITF) and the Zambia Agriculture and Commercial
Show (ACSZ) held in Ndola and Lusaka respectively. We
exhibited our products and services and emerged winners in
both shows. We won the Best Exhibit-Financial Institutions at
the Trade Fair. We won three prizes at the Lusaka Show namely,
Best Exhibit-Financial Institutions, Best Theme Interpretation
Overall, and 2nd Best Exhibit Overall. Such achievements
17
2014 annual report
Directors’ Report
The Directors present their report together with the audited financial statements for the year ended 31 December 2014.
Principal activities
The principal activity of the Bank is the provision of commercial banking and related services to the general public. Share capital
There were no changes to the authorised and issued share capital during the year. Results and dividend
The net profit for the year amounted to K142,926,000 (2013: K186,314,000). The Bank paid dividends during the year amounting to K43,313,000 in
respect of the 2013 profit. The Board has recommended a final dividend of K43,313,000 for the year ended 31 December 2014.
Directors
The directors who held office during the year and to the date of this report were:
Mr E D Drok Chairman
Mr C Y Mulendema Vice Chairman - Retired 4 April 2014
Dr R Simwinga Non-Executive Director - Appointed 4 April 2014
Ms G M Akapelwa Non-Executive Director
Mr G H Robinson Non-Executive Director
Mr F Weenig Non-Executive Director
Mr B Dick Managing Director
Number of employees and remuneration The total remuneration of employees during the year amounted to K306,133,000 (2013: K264,730,000) and the average number of
employees for each month of the year was as follows:
Month Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14
Total Headcount 1377 1358 1374 1377 1392 1396 1417 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14
1397 1385 1382 1385 1391
We continue to focus on developing and motivating our staff who are the engine behind the Bank’s continuing success.
In comparison to our competitors and the industry as a whole, our turnover remains low, though we still continue to focus on Corporate
Banking and Internal Audit that have been worst hit by resignations. A review of structures is currently underway to enable the Bank
better respond to the current and projected demands of the labour market
We are happy to report that the Pension Conversion process continues to make steady and good progress with the number of employees
on the Defined Contribution Scheme improving.
Performance Management continues to remain a challenge. We plan to retrain all employees in 2015 on Goal Setting and Assessing
performance so that Managers correctly assess the performance of their respective teams, going forward.
The Realignment of HR Policies and Procedures continues to ensure that the people practices support high levels of workforce
engagement and employee relations and are aligned with the Bank’s strategic goals.
Gifts and donations
During the year the Bank made donations of K2,408,000 (2013: K3,356,000) to charitable organisations and events. Property, plant and equipment The Bank purchased property and equipment amounting to K23,487,000 (2013:K107,004,000) during the year. In the opinion of the
directors, the recoverable amount of property, plant and equipment is not less than the carrying value. Research and development
During the year the Bank did not incur any research and development costs (2013:Nil). However, the Bank incurred K2,521,000 (2013:K7,319,0000)
on development of various products.
18
2014 annual report
Related party transactions
Related party transactions are disclosed in Note 34 to the financial statements.
Directors’ emoluments and interests
Directors’ emoluments and interests are disclosed in Note 34 to the financial statements.
Prohibited borrowings or lendings
There were no prohibited borrowings or lendings as defined under Sections 72 and 73 of the Banking and Financial Services Act, 1994
(as amended).
Risk management and control The Bank through its normal operations is exposed to a number of risks, the most significant of which are credit, market, operational and
liquidity risks. The Bank’s risk management objectives, policies and strategies are disclosed in Note 5 to the financial statements. Compliance function
The Bank has a compliance function whose responsibility is to monitor compliance with regulatory requirements and the various
internal control processes and procedures.
Commission of inquiry
The Commission of Inquiry appointed by the Government of the Republic of Zambia (GRZ) to review the privatisation of the Bank in 2007
completed its hearings and receiving of submissions on 9th February 2012. In line with the Bank’s highest standard of corporate governance
practice, management and the Board fully cooperated with the Commission of inquiry.
As at the reporting date, the announcement of the findings and recommendations of the Commission of Inquiry had not been made public.
Know your customer (kyc) and anti-money laundering (aml) policies The Bank has adopted know your customer (“KYC”) and anti-money laundering (“AML”) policies and complies with current legislation in these
areas.
Auditors
The Bank’s Auditors, Messrs Deloitte & Touche, indicated their willingness to continue in office. A resolution proposing their
reappointment and authorising the Directors to fix their remuneration will be put to the Annual General Meeting.
By order of the Board.
Mrs. S. Ng’andu
Secretary
Date: 19 February 2015
19
2014 annual report
Statement of corporate governance
Introduction
Corporate Governance is described as the relationship and rules which govern the relationship between Management and Shareholders and other
Stakeholders.
Corporate Governance fosters the democratic values of fairness, accountability, responsibility and transparency.
In this segment of the Report, we outline the corporate governance framework and outline the developments in enhancing best practice within
the organization.
The Bank fully maintains a high level of compliance and disclosure as required by our Regulators under the Banking Act, Companies Act and
Securities Act. In addition, the Bank has adopted the LuSE Corporate Governance Guidelines and the BOZ Guidelines on Corporate Governance.
Board Performance
The role of the Board is to provide leadership and direction to the Bank’s management. It is collectively responsible and accountable to the
stakeholders for the long term success of the Bank, and it ensures that it is appropriately managed.
The Board therefore reviews the performances of management and the operating and financial performance of the Bank as a whole. The Board also
ensures that adequate resources are available to meet the objectives of the Bank.
Good board dynamics are maintained and all Board members are fully engaged in the decision making processes relating to key matters including
approval of the company’s operating and capital expenditure budget, Short and Medium Term Strategic Plans. To this end, the Board participated
in the review of the Medium Term Plan which was revised in June, 2014.
The Board also delegates certain types of decisions to Executive Management. In 2014, the Board approved a formal Delegation of Authority Policy,
with a view to consolidate all the various authorities which Management was vested with.
In order to maintain the independence of the Board, there are matters specifically reserved for its decision. Furhermore, there is a clear distinction
between the role of the Chairman and that of the Chief Executive Officer.
The Board makes key decisions to ensure that it retains proper direction and control of the Bank. The Directors bring in experience and expertise
from their own fields of business to ensure that the debate on matters of strategy, policy and performance is robust, informed and constructive.
The Board structure is such that no one individual or group dominates the decision making process and power is not vested in any one individual.
There are established procedures in existence for planning and capital expenditure, making of investments, information, reporting systems and for
monitoring the Bank’s business and performance.
Newly appointed Directors are not only scrutinised and subjected to a fit and proper test by the Bank of Zambia, but are also subjected to a final
approval by shareholders at the Annual General Meeting. The Company’s Articles of Association provide that, on a rotation basis, one third of the
Directors resign every year and, if eligible, they can then offer themselves up for re-election.
In line with accepted best practice, all Directors are subjected to re-election at regular intervals. Board Members are also exposed to continuous
learning through various initiatives.
The Chairman and Managing Director, in consultation with the Bank Secretary, agree on the agenda for Board meetings, but all Board Members are
entitled to raise other matters. The Chairman ensures that all Board Members are properly briefed on all issues arising from the Board meetings. It is
the responsibility of the Executive Management to ensure that the Board is supplied with information in a timely manner and of quality appropriate
enough to enable it to carry out its fiduciary duties.
The Board, which comprises five Non-Executive Directors and the Managing Director, are confident that they have the knowledge, talent and
experience to lead a listed Bank. The Non-Executive Directors are independent of Management and exercise their independent judgment with their
in-depth knowledge and experience. Please refer to the Directors’ Report for a list of the Directors who held office in the year under review.
22
2014 annual report
To ensure transparency, the activities of the Board are documented and planned. Although the Board has ultimate responsibility for the
success of the Bank, this is managed on a delegated basis. The Board appoints the Chief Executive Officer and monitors his or her performance
in leading the Bank and providing operational and performance management in delivering the strategy.
The Chairman, with assistance from the Chief Executive Officer and Company Secretary, is responsible for ensuring that Directors are supplied
with information in a timely manner to enable them to ensure that there is active dialogue and engagement.
The Chief Executive Officer provides a regular report to the Board that includes information on operational matters, the operating environment,
strategic development, corporate social responsibility, human resources and stakeholder relations.
The Board promotes good behavior and ensures that it demonstrates clear values and high ethical standards, mindful of the overriding duty
for each director to act in good faith and promote the success of the company.
The Board has a planned programme for each financial year to ensure that all necessary matters are covered and to allow for sufficient debate
and challenge.
The Board continues to guard against the risk of complacency by encouraging openness and appropriate levels of challenge. While the
Board engages with Management both formally and informally, it strives to ensure that it remains sufficiently detached to maintain its
independence.
The Bank has put in place a formal induction process for new Board members while the different backgrounds and experience of each
director are also taken into account.
In an effort to ensure continuous improvement which is best practice, the Board undertook training on the role of the Audit Committee to
ensure that new developments in the role of this Committee are explained.
During the year under review the Board approved the following Policies:
• Delegation of Authority;
• Insurance Policy;
• Information Security Policy.
Equitable Treatment of Minority Shareholders
The corporate governance framework of the Bank ensures that equitable treatment of shareholders, including minority shareholders, is
achieved. This is done by:
• Ensuring that the Board adopts a shareholders’ perspective when making decisions and ensuring minority interests are protected;
• Improving communications and interactions between minority shareholders, Board Members and Management;
• Appointment of Directors is subjected to the final approval of all shareholders, including minority shareholders, at the Annual
General Meeting;
• Ensuring the minority shareholders are duly accorded with their three basic rights as follows:
• The right to seek information;
• The right to voice an opinion;
• The right to seek redress.
Management Team
Our Executive Management team provided leadership and direction for the organisation. Respective members of the Executive Team
participated in various industry initiatives such as those initiated by the Bankers Association of Zambia (BAZ) and its Committees, the Zambia
Chambers of Commerce and Industry and the Zambia Federation of Employers. In addition, the Management team participated in various
industry initiatives which were driven by the regulators such as the implementation of the Basel II framework
The Board also has overall responsibility for succession planning for the Executive Management team. In an effort to identify staff who
have demonstrated potential, the Board engaged with staff at every opportunity available. In addition, the Board periodically discussed the
Peoples Balance sheet which is a tool for developing and managing talent within the Bank.
23
2014 annual report
Risk Management
The Board continued to manage both risks and controls in the organisation. The Board has approved governance structures and internal
controls which are both prudent and effective. The Board has processes in place to ensure that it receives the right information in the right
form and at the right time to enable it to effectively discharge its duties.
The board continued to maintain rigor in reviewing the strategy for the future of the Bank. For the Board, a key requirement is that the Bank
has robust processes to identify, evaluate and manage risk so that Directors have visibility of the major risks. The Bank has developed a system
of internal controls that encompasses the policies, processes, tasks and behaviours that seek to facilitate the effective and efficient operation
of the Bank.
The Internal Audit team independently reviews the risk identification procedures and control processes implemented by Management.
It provides objective assurance of the operation and validity of the systems of internal control through a programme of cyclical reviews,
making recommendations for business and control improvements as required.
The Bank also developed policies and procedures to drive consistency and clarity on how risks are managed and subsequently reported.
The Board accepts final responsibility for the risk management and internal control systems of the Bank. It is the responsibility of Management
to ensure that adequate internal financial and operational control systems are developed and maintained on an on-going basis in order to
provide reasonable assurance regarding:
•
•
•
•
•
•
Effectiveness and efficiency of operations;
Safeguarding of the Bank’s assets (including information);
Compliance with applicable laws, regulations and supervisory requirements;
Reliability of accounting records;
Business sustainability under normal as well as adverse conditions;
Responsible behaviour towards all stakeholders.
The efficiency of internal control systems is dependent on their compliance with prescribed measures. There is always a risk of staff noncompliance with such measures. Consequently, even a strict and efficient internal control system can provide no more reasonable measures
of assurance in respect of the above mentioned objective.
Internal auditors monitor the operations of the internal controls and report to Management and the Audit Committee on their findings and
recommendations. All critical Information Technology (IT) services are run from a new state of the art Tier 3 Data Centre.
The procedures are tested periodically and the Board is of the opinion that they meet the acceptable criteria.
24
2014 annual report
The table below summarises key principle risks that the Bank faces
RISK COMPONENTS
DEFINITION
Credit risk The risk of loss due to the non-performance of a counterparty in respect of any financial or other obligation. Credit risk also includes concentration risk.
Market risk - Interest The sensitivity of a bank’s financial position and earnings to unexpected, adverse movements in interest rates.
rate risk in banking book
Market risk – Foreign Exchange risk Foreign exchange risk is the risk of losses occurring on its foreign currency denominated assets or
liabilities from movements in the foreign exchange rates.
Liquidity/Funding risk Funding/liquidity risk is the risk that a bank will not be able to meet current and future cash flow and collateral requirements (expected and unexpected) without negatively affecting its reputation, daily operations
and/or financial position.
Operational risk The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes fraud and criminal activity (internal and external), project risk, legal risk, business continuity,
information and IT risk, process and human resources risk. Strategic, business and reputational risks
are excluded from the definition.
Regulatory Risk The risk of statutory or regulatory sanction and material financial loss or reputational damage as a result of failure to comply with any applicable laws, regulations or supervisory requirements.
Strategic risk
Strategic risk is the risk to current or prospective earnings arising from inappropriate business decisions or the improper implementation of such decisions.
Business risk Business risk is the risk to earnings and capital from potential changes in the business environment, client behaviour and technological progress. Business risk is often associated with volume and margin risk and
relates to the Bank’s ability to generate sufficient levels of revenue to offset its costs.
Reputational risk Reputational risk is the risk of reputational damage due to compliance failures, pending litigations, under performance or negative media coverage.
Environmental, social Risks focus on the environmental, social and governance issues which impact the Bank’s ability to successfully and governance
and sustainably implement business strategy.
(ESG) risks.
Risk Governance
The Board has ultimate leadership authority and responsibility for identifying and controlling all risks that affect Zanaco.
The responsibility for managing and monitoring risks has been delegated to other independent bodies such as the Risk Committee and the
Credit Committee.
The Board:
•
•
•
•
provides overall strategic direction and oversight;
ensures implementation of appropriate internal risk management, financial, compliance and audit controls and frameworks;
approves credit and investment policies, budgets and business plans; and
monitors and reviews Zanaco performance against strategy.
25
2014 annual report
Responsibilities of the board committes
Risk Committee
The Risk Committee (“RC”) has overall responsibility for the development of Zanaco’s risk strategy and implementation of risk principles,
frameworks, policies and limits.
The RC reviews and recommends risk management strategy and risk appetite to the Board and is the approval body for risk policies. The
RC is also responsible for reviewing the control framework for the management of risks that the bank is exposed to and defining the risk
management roles and responsibilities across the bank.
Audit Committee
At Zanaco, the Audit Committee reviews Financial Reporting processes, system of internal controls and through the internal audit division of
the Bank undertakes audits throughout Zanaco and its branches to ensure that risks are being identified and appropriately managed, as well
as assessing the adherence to internal control processes and procedures. It also reviews the compliance function within the Bank.
Credit Committee
The Credit committee is responsible for approving all credit exposures exceeding the authority of the management credit committee.
Risk governance framework
Effective risk management also requires multiple points of control or safeguards that should be consistently applied at various levels
throughout the Bank.
Business Units within Zanaco are accountable for executing specific aspects of the bank’s activities. Authority is delegated to the head
of each Business Unit by the Chief Executive Officer (CEO). The head of each functional unit delegates responsibility to individual staff for
carrying out specific tasks in accordance with delegated authorities and with the procedural disciplines of the Bank.
The bank’s profit is directly derived from how successfully the bank manages and prices for risk. Risk management is therefore at the core
of banking and risk awareness must be embedded in the whole organisation. Risk governance is designed according to the three ‘lines of
defence’ as per best banking practise.
There are three lines of defence which are explicitly recognized in the bank:
• The first line is the ‘business’, meaning both commercial, customer facing staff as well as staff in back offices and operational
departments. All departments are directly responsible to identify and manage all risks that will or can materialise in the course of
doing business. This includes the monitoring of risk management in each policy and procedure and making sure procedures are
designed to include checks and balances through internal control activities and the separation of duties as much as possible;
• The second line of defence are the various departments in the risk directorate. These departments play a supporting and controlling
role for the benefit of the first line of defence, ensuring necessary risk activities are executed with the necessary detail and quality;
and
• The third line of defence is the internal audit function. The audit department works independently, objectively and reports to the
Board Audit Committee.
Risk Culture
A strong risk culture is critical to Zanaco’s success and underpins both the business strategy and risk appetite of the bank.
Zanaco’s culture is to actively take risks that are adequately rewarded and that support its objectives and vision. Shareholder value is
added by creating profits measured after charging for the cost of risk or by activities that are of strategic importance and related to a wider
shareholder value growth opportunity.
Risk Appetite and Financial Resource Management
The bank’s risk appetite and resource management process frames its decision making and is integrated with strategic objectives.
The financial resource management process sets minimum targets for these resources.
Risk appetite
The Bank’s risk appetite is defined as the amount of risk that the Bank is willing to seek or accept in pursuit of its long term objectives.
The Bank has chosen to express its risk appetite for different categories of risk, each with their own characteristics and tolerance levels.
Inherent to the banking business, risk is present in the lending and financing activities of the Bank where credit is extended in the form
of loans. In addition to credit risk, Zanaco is exposed to operational risk and other balance sheet risks (interest rate, foreign exchange,
liquidity risk and others).
The Bank has established an active risk culture within the organisation where the correct risk information is utilised across the bank for
decision making. The Bank has developed and embraced a Risk Appetite Statement which is positioned in assisting it in achieving the
strategic targets of the strategic plan.
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2014 annual report
Zanaco has a prudent risk taking culture but acknowledges that some risks need to be taken to achieve strategic goals.
Zanaco has defined risk tolerance parameters to safeguard its robust financial position. In quarterly meetings, portfolio variables are compared
with these risk tolerance variables. The levels of internal risk tolerance are generally stricter than the Central Bank of Zambia requirements. The
Risk Appetite Statement within Zanaco is developed, with reference to key metrics and limits applied throughout the Bank and is aligned to
the strategy and objectives of the bank.
The Risk Appetite Statement is set by the Risk Committee, and ultimately, approved by the Board.
The Bank differentiates between tolerance levels for balance sheet, credit and operational risk:
• Balance sheet risks comprise of interest rate risk, liquidity risk, market risk and other risks, and also encompass management of the
regulatory ratios;
• Credit risk captures the potential loss from a borrower, obligor, or counterparty which fails to honour their contracted debt
obligations in a timely manner; and
• Operational risk is the risk resulting in a direct or indirect loss caused by human error, inadequate internal process and systems or
by external calamities.
Tolerance levels are monitored by various management committees and reviewed by the board’s risk committee.
The board assumes responsibility for ensuring that risks are adequately managed and controlled through the board risk committee.
Risk appetite measures and stress and scenario results are included in risk and management reports across the businesses and at board level
and are continually refined.
Stress testing
Zanaco’s stress testing objective is to ensure that the bank can meet its capital and liquidity requirements in a forward looking manner,
including severe but plausible economic stresses specific to Zanaco’s portfolios and risk profile. The results of the entity-wide stress tests
assist the Bank in ascertaining whether it has sufficient capital and liquidity in periods of stress. Both stress scenarios and sensitivity analysis
are considered during stress testing, with regard to credit, market, operational and liquidity risks. The bank calculates a capital buffer based
on the stress testing results, holding this capital buffer as part of its capital base to ensure that capital remains above the minimum regulatory
ratio should the stresses materialise. Mitigation actions are included to provide a realistic view of the impact on the Bank’s earnings and
capital under the stress scenario.
The Bank’s objective is to offer value by undertaking to deliver sustainable earnings within a desired risk profile. Stress testing is embedded in
the risk management of the Bank and is a key focus area in the strategic planning processes. It is an integral part of the Bank’s internal capital
adequacy assessment process (ICAAP) and is used to assess and manage the adequacy of capital.
Through stress testing and scenario analysis, the Bank is able to assess the performance of its portfolios under potentially adverse economic
conditions. It focusses on the key macroeconomic variables that impact the balance sheet and income statement.
The business plan for the next three years is included in the budget and forecasting process. Scenario planning is then used to assess
whether the desired profile can be delivered and whether the business stays within the constraints it has set itself. The scenarios are based
on changing macroeconomic variables, plausible event risks and regulatory and competitive changes.
Stress testing is employed in the:
•
•
•
•
Strategic planning and budgeting process;
Capital planning and management process including the setting of a capital buffer for the Bank;
Communication with internal and external stakeholders;
Assessment of the impact of changes in the macroecomic factors on the Bank’s performance.
During 2014 the Bank performed stress tests on scenarios defined by the Bank’s internal stress testing policy and portfolio specific tests were
also conducted.
Financial resources management
The strategy, risk and financial resource management processes influence the capital and funding plans of the Bank. The capital position
provides a buffer over and above the minimum regulatory limit against adverse business performance under extremely severe economic
conditions.
The financial, treasury, capital and risk information both actual and budgeted, is used as the basis for risk, capital and financial analysis and
stress testing.
27
2014 annual report
Internal capital adequacy assessment process (ICAAP)
ICAAP outlines the process to ensure the Bank achieves its capital management objectives. In order to achieve these objectives the Bank
needs to:
• ensure that at least the minimum amount of regulatory capital is held at all times for the Bank of Zambia to allow the Bank to
conduct business;
• hold sufficient capital that will instill confidence in the Bank’s ongoing solvency and status as a creditworthy counterparty for all
stakeholders;
• allocate capital to businesses based on an understanding of the risk and reward drivers of the income streams and to ensure that
appropriate returns are earned on capital deployed;
• ensure that the buffer over the minimum regulatory capital requirement is sufficient to cater for income and capital volatility which may
manifest through business disruption or regulatory intervention
• ensure that Zanaco’s capital adequacy ratios and other limits remain within approved thresholds during different economic and
business cycles.
The optimal level and composition of capital is determined after taking into account the Bank’s organic growth plans as well as targeted
capital ratios, future business plans, appropriate buffers in excess of minimum requirements, proposed regulatory changes and risk appetite.
Additionally, this requires that the Bank develops and maintains a capital plan that incorporates, among others, the following:
•
•
•
•
•
•
•
anticipated capital utilisation;
planned issuance of capital instruments;
stress tests and scenario analysis;
appropriation of profits and dividend payments;
desired level of capital, inclusive of a buffer;
expansion and strategic initiatives; and
general contingency plan for dealing with divergences and unexpected events.
ICAAP is an integral tool in meeting the above capital management objectives and is key to the Bank’s risk and capital management processes.
ICAAP allows and facilitates:
•
•
•
•
•
the link between business strategy, introduced risk and capital required to support the strategy;
the establishment of frameworks, policies and procedures for the effective management of material risks;
the embedding of a responsible risk culture at all levels in the organisation;
the effective allocation and management of capital in the organisation;
the development of recognised stress tests to provide useful information which serve as early warnings/triggers, so that contingency
plans can be implemented; and
• the determination of the capital management strategy and how the Bank will manage its capital including during periods of stress.
Capital Management
Capital management is a key contributor to shareholder value. The Bank’s objectives when managing capital, which is a broader concept than
the ‘equity’ on the statement of financial positions, are:
• to comply with the capital requirements set by the Banking and Financial Services Act, 1994 (as amended);
• to safeguard the Bank’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and
benefits for other stakeholders;
• to maintain a strong capital base to support the development of its business;
• to allocate capital to businesses using risk-based capital allocation, to support the Bank’s strategic objectives, including optimising
returns on shareholder and regulatory capital; and
• maintain the dividend policy and dividend declarations of the Bank while taking into consideration shareholder and regulatory
expectations.
Capital adequacy and use of regulatory capital are monitored regularly by management, employing techniques based on the guidelines
developed by the Basel Committee, as implemented by the Bank of Zambia for supervisory purposes. The required information is filed with
the Bank of Zambia on a monthly basis.
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2014 annual report
Capital Target Setting
Capital target setting is key to ensuring that sufficient capital resources are available to meet Zanaco’s regulatory requirements while
supporting Zanaco’s ability to meet its strategic objectives and attain its desired balance sheet growth. Zanaco’s capital target setting is
linked to the results of its stress testing.
The capital targets are defined taking into account the impact of stress testing on Zanaco’s Capital Adequacy Ratios (CAR). The capital
targets are based on the BoZ requirements for minimum Basel II capital adequacy at both the Tier 1 and Total capital levels. These targets are
reviewed and potentially revised based on changes in Zanaco’s capital position, portfolio structure, capital plans and risk appetite. The capital
targets are also guided by regulatory developments.
Financial Reporting
The Directors accept final responsibility for the preparation of the annual financial statements which fairly present:
• The financial position of the Bank as at the end of the year under review;
• The financial results of operations as well as the cash flows for that period.
The responsibility for compiling the annual financial statements was delegated to Management. The external auditors report on whether the
annual financial statements are fairly presented.
The Directors are satisfied that during the year under review:
•
•
•
•
Adequate accounting records were maintained;
An effective system of internal control and risk management monitored by Management was maintained;
Appropriate accounting policies supported by reasonable and prudent judgements and estimates were used consistently;
The financial statements were compiled in accordance with International Financial Reporting Standards approved by the Zambia Institute
of Chartered Accountants (ZICA), the Banking and Financial Services Act, the Zambian Companies Act, the Securities Act and the Stock
Exchange Listing Rules.
Board engagement
The Board continued to meet on a quarterly basis the attendance by the Directors during the year was as follows:
Director’s Name
Mr E D Drok Mr C Y Mulendema Ms G M Akapelwa Mr G Robinson
Mr F Weenig
Dr R Simwinga
Mr B Dick February
June
-
NED NED NED NED
NED
NED
ED 2014
September
December
a a a a
a n/e n/en/e
a a a a
a a a a
a a a a
n/e
n/e
-
a
n/e
a a a
NED - Non-Executive Director
ED - Executive Director
n/e - Not eligible to attend
Dr R. Simwinga was appointed in June 2014 to replace Mr C Y Mulendema whose tenure came to an end in April 2014.
Directors’ Compensation
The disclosure of Directors’ fees and remunerations is made in Note 34 of the financial statements. The Directors do not have any shares in the
Bank and are not entitled to share options. Directors’ fees and any amendments are approved by shareholders at the Annual General Meeting.
Board Evaluation
The Board every year carry out a self assessment of its performance during the year through the engagement of an external third party which
covers the following:
•
•
•
•
•
•
•
Performance against its objectives at the beginning of the year;
Effectiveness with respect to the Bank’s strategic direction;
Responsiveness to shareholders and stakeholders’ concerns;
Maintenance and implementation of the Board’s governance principles;
Access to and review of information from Management and the quality of such information;
Review of the composition and diversity of the skills and exposure of the Board;
Continuous professional development for Board members.
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2014 annual report
Board Committees
In order to enable it to discharge its executive functions, the Board has established four principal standing Committees, each governed by
written terms of reference defining the frequency of meetings, power and duties, and reporting obligations. These Committees continuously
evaluate the progress made towards meeting the Bank’s overall objectives, in addition to ensuring the efficient and effective management
of the entire Bank’s core functions. A Non-Executive Director chairs each of the four Committees. The said committees are Audit, Risk, Credit
and Human Resources and Compensation.
(a) Audit Committee
The Audit Committee is chaired by a Non-Executive Director and consists of two other Non-Executive Directors. The Committee meets at
least four times per year to evaluate, amongst other things, accounting practices, the internal control systems and the auditing and financial
reporting. Its tasks include evaluating critical risk areas identified with the help of Management, as well as reporting on these to the Board.
The Committee operates under a formal charter approved by the Board and the Committee Members have unlimited access to all information.
Certain members of Management are invited to attend and give feedback at Committee meetings. The Audit Committee also recommends
to the Board the remuneration of the external auditors. The Committee also holds separate meetings with the Director of Internal Audit and
the external auditors when required, in order to ensure that matters are considered without undue influence.
The attendance by the Directors during the year was as follows:
Director’s Name
February
F Weenig
Mr C Y Mulendema Ms G M Akapelwa Mr E D Drok Dr R Simwinga
Mr B Dick
-
NED
NED
NED
NED NED
ED June
a a a a n/e
n/e 2014
September
a - a a n/e
a a - a a -
a December
a
a
a
a
a
Dr R. Simwinga was yet to be eligible to attend.
(b) Risk Committee
The Risk Committee is chaired by a Non-Executive Director and consists of two Non-Executive Directors and one Executive Director, who is
also the Chief Executive Officer of the Bank. Certain members of the Executive Management Committee attend by invitation. On a quarterly
basis, the Committee reviews the various risks within the Bank against set risk apetites. It also reviews matters relating to provisions and
allowances for impairment.
Director’s Name
February
2014
June
September
December
Mr F Weenig - NED a a
a a
Mr C Y Mulendema - NED a n/e
n/e
n/e
Dr R Simwinga
- NED
n/e
n/e
-
a
Mr. B Dick
- ED
n/e
a
a a
Dr R. Simwinga was not eligible to attend.
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2014 annual report
(c) Credit Committee
The Credit Committee is chaired by a Non-Executive Director and consists of two other Non-Executive Directors and one Executive Director,
who is also the Chief Executive Officer of the Bank. Certain members of the Executive Management Committee attend by invitation.
The Credit Committee approves credits with values beyond the mandate of Management.
Director’s Name
February
Ms G M Akapelwa Mr G Robinson
Mr E D Drok Mr B. Dick -
NED
NED
NED
ED a
a a n/e
2014
June
September
a a
a a a a a a December
a
a
a
a
(d) Human Resources and Compensation Committee
The Committee provides oversight over the remuneration and compensation for Senior Management and key personnel in the Bank, so as
to retain and motivate staff to perform at the level of quality required.
Currently, the Bank participates annually in local market surveys and those focusing on the rest of Africa in order to ensure market related
salaries are paid and that market related trends are also followed when changes are made to employee benefits. The remuneration of all
managerial staff in the Bank is also linked to their individual performance.
Director’s Name
February
Ms G M Akapelwa Mr G Robinson
Mr C Y Mulendema
Mr E D Drok Dr R Simwinga
Mr B Dick -
NED
NED
NED NED NED
ED June
a a a a
n/e
n/e
2014
a a n/e
a n/e
a September
a a
n/e
a -
a December
a
-
n/e
a
a
a
Dr R. Simwinga was not eligible to attend.
Bank Secretary
The Board appoints the Bank Secretary and all Board Members have access to the services of the Bank Secretary. Where necessary, the Board
may seek independent professional advice on some matters.
The Bank Secretary ensures the following:
•
•
•
•
Annual calendar for Board meetings is circulated to all Board Members after approval;
Adequate information is provided to all the Members prior to commencement of the Board and sub-committee meetings;
Culture of Good Corporate Governance is promoted;
Liaison with Securities and Exchange Commission (SEC), the Lusaka Stock Exchange (LuSE) and Patents and Companies
Registration Agency (PACRA).;
• Statutory registers are maintained;
• Key liaison for investors and contact point for shareholders;
• Board is updated on relevant statutory amendments and developments.
31
2014 annual report
Code of Conduct
The purpose of the Code of Conduct is to regulate the required standards of corporate behaviour by which the Bank is judged in all its
dealings and operations. Therefore, the Code of Conduct stipulates the standards by which individuals within the Bank are judged.
The key topics covered under the code are:
•
•
•
•
•
•
•
•
•
Integrity;
Skill, Care and Diligence;
Relations with Regulators;
Staff Interest and Gifts;
Customer Due Diligence / Know Your Customer;
Conduct of Business / Customer Relationships;
Conduct of Business / Communication with Customers;
Conduct of Business / Conflict of Interest and Duty;
Duty to Supervise.
Members of staff as well as agents are being subjected to continued training on the contents of the Code of Conduct to enable them to
understand and appreciate these important guidelines, which control their conduct in their daily activities as Bank employees.
In tandem with the Code of Conduct, we gave further guidelines to members of staff on the requirements of seeking prior authorisation and
reporting of gifts and hospitality they give or receive in connection with their employment to the Bank as long as such gifts are reasonable
and proportionate in a specific situation. This was done to promote transparency and to avoid the risk of conflict of interest arising from Gifts,
which could potentially lead to suggestions of impropriety by the Bank or its employees.
In 2012, we introduced a formal procedure requesting Board Members and Management to fill out a Declaration of Interest Form on an
annual basis. Directors have a continuing duty to update any changes in these interests at each Board meeting.
External Audit
The external auditors are responsible for reporting on whether the financial statements are fairly presented in accordance with International
Financial Reporting Standards and in the manner required by the Zambian Companies Act and the Banking and Financial Services Act.
Consultation occurs between external and internal auditors to effect an efficient audit process. The external auditors consider all the reports
issued by the Internal Audit Department and which are duly supplied to them by the Bank.
Internal Audit
Internal audit is an independent, objective assurance and consulting activity designed to add value to the Bank as well as to improve its
operations. It helps the Bank accomplish its objectives by bringing a systematic and disciplined approach to evaluating and improving risk
management, control and governance processes.
The internal audit function encompasses the examination and evaluation of the adequacy, effectiveness and efficiency of Governance, risk
management and control processes.
The Internal Audit Division (IAD) evaluates and makes appropriate recommendations for improving the governance process in promoting
appropriate ethical values in the bank as well as ensuring effective bank performance management and accountability.
The IAD evaluates the effectiveness and adequacy of the Risk Management Framework of the Bank and contributes to the improvement of
risk management processes.
Internal audit plans are prepared using a risk assessment model that ensures audit resources are directed towards high risk areas of the
Bank. The plan is developed in consultation with Management and approved by the Audit Committee to ensure independence of the audit
function. The Director Internal Audit functionally reports to the Audit Committee and administratively to the Managing Director.
32
2014 annual report
The internal audit function is governed by the Internal Audit Charter which defines its purpose, authority and responsibility. The Internal
Audit Charter is reviewed and updated to meet best international practices at least once a year.
The IAD assists the bank in maintaining effective controls by evaluating their effectiveness and efficiency and by promoting continuous
improvement. The control processes are expected to ensure, among other things, that:
•
•
•
•
Financial and operational information is reliable and possesses integrity;
Operations are performed efficiently and achieve established objectives;
Assets are safeguarded; and
Actions and decisions of the bank are in compliance with laws, regulations and contracts.
Compliance Function
The Bank has set up an independent Compliance Function, guided by the Compliance Charter, which defines the fundamental principles,
roles and responsibilities of the Compliance Functions within the Bank, as well as its relationship with Executive Management, the Board of
Directors and the business and operational functions.
The Charter is updated from time to time to reflect the legal and regulatory evolution which shall be communicated to all staff. The Board of
Directors is responsible for formally approving the compliance policy set by the Executive Management. The efficiency and implementation
of the policy will be evaluated on a quarterly basis by means of a status report provided by the compliance function to the Board. The
Compliance Function also independently reports to the Board Audit Committee on material compliance issues in the Bank through the
Compliance Quarterly Report to enable the Board to appreciate the level of compliance risk and to solicit for their timely guidance.
The objectives of the Independent Compliance Function are to:
•
•
•
•
•
identify and evaluate the compliance risks within the Bank;
organise, co-ordinate and structure compliance related controls;
control and monitor all measures taken to mitigate compliance risks;
report to the Executive Management and the Board of Directors as appropriate;
act as the compliance advisor within the Bank.
The Compliance Function and Compliance Monitoring programme are subject to an independent review by both an internal and external
audit for the appropriateness of the policies and their implementations.
Anti-Money Laundering Policy
The Bank has in place the Anti-Money Laundering (AML) and Watch List Management (WLM) solutions. The two interrelated systems once
fully implemented will improve the detection and reporting of suspicious activities through automated screening of transactions and names
of customers in line with the Bank of Zambia Anti-Money Laundering Directives, the Financial Intelligence Centre Act and the Bank’s AntiMoney Laundering Policy. Furthermore, the Bank conducts several compliance training programmes where members of staff are trained on
the identification and reporting of suspicious activities as well as the obligations that go with the above regulatory requirements.
Whistleblowing
The Whistle Blowing Policy still remained a vital corporate governance tool. It is intended to make it easier for members of staff to report
irregularities in good faith without needing to fear that those actions may have adverse consequences for them. The Whistle Blowing Policy is a
key element in demonstrating the Bank’s commitment to the highest possible standards of transparency, integrity, probity and accountability
in its operations with all stakeholders and is in line with the provisions of the Public Interest Disclosure (Protection of Whistleblowers) Act.
Protecting the integrity and reputation of the Bank requires the active support of all members of staff who, in most cases, are the first to
notice and who are required to report incidents of suspected fraud, corruption, collusion and coercion and other serious infringements of
the rules and policies in force at the Bank.
To enhance whistleblowing reporting, the Board appointed a Trusted Person, who is an outsider, during the Year 2013 and this appointment
together with the contact details were communicated to staff by Management. Under the act, all Bank staff were advised to report serious
concerns of possible malpractice and wrong doing concerning employees of the Bank under the Whistleblowing Policy, by opting to
identify themselves or anonymously, to the Trusted Person. The Trusted Person will be the entry point for all reports of malpractice under
33
2014 annual report
the Whistleblowing Policy for on-ward submission to the Trusted Committee for consideration and resolution. Further, the Bank issued a
communique to all members of staff reminding them of the existence of the Whistleblowing Policy and the Trusted Person as well as their
duties to report cases of malpractice they may come across.
Gender and Diversity
This continued to be a focus area for the Bank in 2014.The ZANACO women’s forum embarked on Mentorship training with a view to fostering
the number of women who are ready to take up leadership challenges. To celebrate International Women’s Day in March, the Zanaco Women’s
Forum organised an event where a discussion on Gender Based Violence and Intestate Act were discussed.
Environmental and Social Management Policy
Compliance with Legislation on Environmental and Social aspects of business are increasingly becoming focal measurement points for Good
Governance. Our approach as a Bank has been to develop and implement innovative monitoring and screening processes that adhere to both
our internal guidelines and the Zambian Environmental Laws. Alongside the environmental laws, the Bank has developed an Environmental
& Social Policy that is in full compliance with local environmental laws. In order to operationalise this policy, the Bank has also enhanced its
environmental assessment screening process which is an integral part of loan origination and appraisal processes.
Broadly, the process is categorized in three parts:
• Category A – Projects with potential significant adverse social or environmental impacts;
• Category B – Projects with potential limited adverse social or environmental impacts;
• Category C – Projects with minimal or no significant social or environmental impacts.
As a good corporate citizen, Zanaco intends to actively work towards the realisation of sustainable development. Through our business
activities and services, the Bank will support environmental conservation efforts within its operational scope as well as those in the service
supply chain in order to contribute to the realisation of sustainable development in Zambia.
The Bank is committed to raising staff awareness on environmental issues and sustainable development and encourages staff observance of
the following at the workplace:
• Preventing of pollution by reducing, reusing and recycling materials and goods purchased;
• Encourage energy saving, reduce water consumption, and promote good housekeeping practices;
• Improve and maintain the quality of the working environment within the Bank and all our branches/affiliates (internal air quality, water
quality, waste management, paper use, energy use, etc).
Basel II
The implementation of the International convergence of Capital Measurement and Capital Standards also known as Basel II has started in
earnest following the issuance by Bank of Zambia of draft regulations for Credit risk, Operational risk and Market risk under Pillar 1.
Zanaco has structures and resources in place which will ensure full implementation and compliance of the Basel II requirements in line with
guidelines issued by the Central Bank.
During the year 2014 Zanaco developed its Internal Capital Adequacy Assessment Process (ICAAP) document and pillar III disclosures which
have since been submitted to the Bank of Zambia for review. The bank continued with the parallelrunning to assesss the impact of the
application of Basel ll. The bank has enough capital to absorb the additional capital allocation.
Stakeholder Engagement
Following the challenges some customers faced with the upgrade of the core banking platform, a visit was facilitated for the Managing
Director to Mazabuka where he visited farmers in the company of one of the Board members to explain the system challenges the bank was
experiencing and thanked the farmers for their support during the period.
Zanaco also hosted a customer cocktail in December as part of the Bank’s strategy to engage customers and also get feedback on service
delivery on the various products and services which they access. Two investor fora to discuss the full year and interim half year results were
held in April and September respectively, to discuss ways of how we can work better.
34
2014 annual report
Staff participated in the Bank of Zambia Golden Jubilee inter-bank sports tournament and Zanaco was well represented with teams made
in all the eight sports disciplines planned for the competition. All banks participated in the event which provided interaction opportunities
between staff and Bank of Zambia senior staff and management.
Zambia National Farmers Union (ZNFU) congress was held in October and as part of our support, Zanaco provided resources towards the
main Congress and on the sidelines sponsored the Farmers gala. Zanaco staff interacted with farmers drawn from various parts of the country.
As part of the Bank’s support towards the Golden Jubilee celebrations, Zanaco partnered with UNICEF and Zamtel to sponsor about 2,000
children throughout Zambia to paint a 1.5km long painting depicting Zambia’s history in the various areas of the economy including the
independence struggle. The painting was presented to First Republican President, Dr. Kenneth Kaunda by the three organisations. Zanaco
also partnered with the Zambia@50 Secretariat to support the Golden Jubilee National Essay Writing competition in August to ensure that
history is recorded for future generations. The Bank was the first private sector organisation to sponsor a Golden Jubilee activity with the
Zambia@50 secretariat.
To reaffirm its commitment towards gender equality, Zanaco co-sponsored the African Women Economic Summit with the Bank of Zambia
in July. The Bank was on hand to provide banking services to the delegates and financial literacy tips.
Members of staff also had an opportunity to meet Board members in December as a form of fostering interaction.
Employee Wellness
Zanaco values the total well being of its staff and seeks opportunities through which its employees can pursue healthy life styles in their
communities.
Some of the activities which were lined up in 2014 included, Presentation by Ambassador Sheila Siwela on Capturing Opportunities,
Prevention of Cancer by Doctor Msiska, Presentation by Asunta Simoloka on Indigenous Foods and their benefits, Medical checkups by
Vision Care (Blood pressure, weight, Diabetes checking, Corneal scar screening, cataract screening), Health Talk Presentation by Umoyo in
conjunction with Metropolitan on Food and healthy living.
The Bank continues to bench mark its occupational health, safety and welfare policies and procedures to ensure continued safeguarding of
employees.
35
2014 annual report
(a) Introduction
It is Zanaco’s core Corporate Social Responsibility (CSR) to take into account its economic, social and environmental impact and its obligation to
employees and the local community. Zanaco strives to promote sustainable development of the communities in which the Bank operates not
just for the present but for future generations as well.
Zanaco’s CSR engagements in 2014 included:
• Financial Fitness activities for various target groups
• Strategic partnerships with Read to Succeed and CHAZ
• Go Big for Charity drive
• Support to traditional ceremonies
• Internal environmental management
(b) CSR Activities
1. Financial Fitness
(i) Financial Fitness for children and youths
Zanaco continues supporting financial education for children and youth in and out of schools
through branches and strategic partners across the country. During the year, the Bank donated
a supply of 900 soccer balls and sets of financial education supplementary school materials to
benefit 400 schools countrywide.
The items were symbolically presented to the Ministry of Education, Science, Vocational Training
and Early Education during a soccer fun donation event held at Sunset Stadium. The event was
officiated by Dr Patrick Kanza- Permanent Secretary Ministry of Education, Science, Vocational
Training and Early Education. It is estimated that 12,000 pupils across the country will be reached
through this donation. Zanaco has to date provided financial education to children and youth in
schools and through other avenues reaching about 31,000.
(ii) Financial Fitness training for farmers
Financial Fitness trainings for farmers were conducted in 20 districts across the country where 671
small scale farmers were trained. The pre training evaluation done indicated that about 90% of the
participants lacked basic record keeping and entrepreneurial skills before the training. The trainings
conducted covered topics on financial planning; money mind set; net worth calculation; saving;
investment; credit awareness and business simulation.
The objective of the training was to enable farmers understand what entrepreneurial thinking and
acting means , challenges and opportunities of micro enterprises and how to react to them, understand basic accounting and controlling principles, apply simple financial tools and understand the
interface between financial institutions and clients and realise implications thereof. The training
further emphasised the need for personal financial management and separation of business and
personal finances. The trainings were participatory and learner centred where participants were
involved in a business simulation of running businesses in groups.
The post training evaluation revealed that almost all participants had acquired the skills on how to
write financial plans, calculate net worth and generate business financial statements.
(iii) Participation in the Financial Literacy week
Zambia celebrated the Financial Literacy week from 13th to 18th March 2014. This year’s focus was
on promoting saving for children, youth and adults under the theme: ‘A Better Life Through Saving’.
As part of the Bank’s celebrations the following activities were conducted:
A total of 21 Zanaco branches participated in the financial literacy week activities.
• 10 Branches visited 14 schools and members of staff participated in offering financial fitness
lessons to pupils on the importance of saving and the role banks play. Some of the branches
further offered sensitisation talks to teachers on the importance of saving and various savings
products offered by the bank. One of the branches (Kabwe) was able to open 19 SEBA accounts
after the sessions.
• 8 branches hosted pupils from various schools and facilitated a branch tour educating pupils on
how banks operate and products/ services being offered. Talks on the importance of saving were
also offered. One of the branches had an opportunity to host a segment of deaf pupils.
• 3 branches participated in the Provincial Financial Literacy Week exhibitions spearheaded by
BOZ, PIA and SEC.
• The Bank also participated in the Lusaka Exhibition for Financial Institutions organised by BOZ,
PIA and SEC.
36
2014 annual report
(iv) Consumer education through radio
Financial and consumer education programmes were aired on Radio 1 in all 7 major local languages as a continuation of the 13 series. The
programmes aired during the reporting period focused on credit awareness, understanding net worth and money mind set. Financial Fitness
continued being provided to the public on the Zanaco on the Move Radio programme.
(v) Evaluation of the Financial Fitness programme
An external evaluation of the Financial Fitness programme was conducted and revealed that there was very high and positive appreciation by
participants of the financial fitness programme. Most participants started to save more after the training. The Financial Fitness training was also
mentioned to have contributed to growth of business/farm enterprises and the growth of assets/posessions among beneficiaries.
All participants in the evaluation shared knowledge with other people in their direct environment on financial matters. Some of them further
organised more formalised training events in their communities to share their learning points.
Partcipants in the evaluation indicated that the repayment of loans (formal or informal) was easier for most of them after the training. Farmers
and entrepreneurs mentioned that it became easier for them to apply for a loan after the training.
All participants responded positively to the statement that the training influenced education and healthcare of their family positively.
2. Strategic partnerships
(i) Reading Tools in Box roll out to schools
Following the partnership with Read To Succeed Project a USAID funded project and the Ministry of Education, Science, Vocational Training and
Early Education in 2014, targeting schools in Muchinga Province, a follow up partnership was entered for the year 2015. The partnership support
aims to provide Financial Fitness and reading materials to 135 schools in Luapula, Western and North Western Province for use in schools starting
in the 2015 academic calendar.
Zanaco’s contribution in Muchinga province has been considered as an important and critically needed input to the promotion of literacy skills
among young learners. It was timely and relevant. The provincial government has recognized Zanaco as a close partner.
122 boxes sponsored through the financial contribution from ZANACO and delivered to 122 schools in Muchinga Province has resulted in a total
of 1,604 teachers benefiting who in turn supported a total of 53,422 pupils.
(ii) CHAZ Donation
A donation of K40,000.00 was made to CHAZ for the renovation of the Nyanje Hospital Maternity Waiting Home in Sinda District of Eastern Province. The donation will help improve health facility deliveries and better pregnancy outcomes.
This donation was made in response to the situation of maternal and child health in Zambia which is among the worst in Africa. The donation
will enable the hospital improve the conditions of the facility in view of achieving better outcomes of pregnancies, especially that the facility
is serving one of the rural areas with high maternal and neonatal mortalities. The CHAZ Executive Director – Mrs Karen Sichinga received the
donation from the Zanaco Managing Director on behalf of her organisation.
3. Support to traditional ceremonies
As a way of contributing to strengthening the cultural heritage of the nation, Zanaco made donations to Likumbi Lyamize of the Luvale people
of Zambezi District, Kunda Malaila of the Kunda people of Mabwe District and the Ncwala traditional ceremony.
Zanaco believes that traditional ceremonies provide valuable insight of traditional culture that has been passed on from generation to generation. The Bank endeavours to provide in kind support that can help meet the needs of the community over the years including outside
traditional ceremonies.
4. Water and sanitation support
One of the strategic CSR areas is support to health with a major focus on water and sanitation. During the year, three communities received
support and these are Kaboloko Village in Kasempa, Lion School for the Blind in Ndola and Misisi Compound in Lusaka.
Kaboloko Village is located in Kasempa, Njenga Ward. The village has 250 people who do not have access to clean water.
5. Internal environmental management
The Zanaco workplace environmental campaign was initiated. The focus for the year was on paper recycling under the campaign dubbed “Paper
Loves Recycling. Love Nature. Save paper.”
37
2014 annual report
6. Go Big for Charity Drive
A work place charity initiative was introduced and dubbed Go Big for Charity. The theme is based on part of the Bank’s slogan stating that Zanaco is Big therefore providing an opportunity to show it by making a Big difference in the community. The objective of the Go Big for Charity Drive
is to provide a platform for employees to engage in CSR thereby creating awareness of the extent of social needs and allowing the workplace to
be a ‘good neighbour’ and community partner in areas of operation.
With Zambia having many challenges, 5 key areas of support were identified and these are: Financial education, Environment and Health, Water
and sanitation, Culture preservation and Sport. Zanaco tallied staff donations for the selected charities and matched them 50/50. The response
from members of staff was very positive with a commitment of K112,000.00 from various branches and divisions across the country.
Corporate banking staff handing out presents to residents at Matero Aftercare Centre in Matero - Lusaka
Zanaco’s Go Big for Charity....
Caring for the people!
38
2014 annual report
Lusaka city
Market, Findeco
and Easy
banking centre
staff singing
the National
Anthem before
donating items
to Kanyama
Clinic in Lusaka
Mufulira Branch
staff hand over
a gift to a senior
citizen at the old
people’s home
39
2014 annual report
Financials
STATEMENT OF PROFIT OR LOSS
for the year ended 31 December 2014
Notes Interest income
Interest expense
6
7
Net interest income
Impairment losses on loans and advances
17
Net interest income after loans impairment charges
2014 K’ 000 2013
K’ 000
779,442
(133,969)
673,552
(120,169)
645,473
553,383
(48,545)
(31,136)
596,928
522,247
Net fee and commission income
8
291,300
254,490
Foreign exchange income
Other operating income
9
29,065
6,278
21,944
7,758
35,343
29,702
923,571
806,439
(605,520)
(104,494)
(542,175)
-
213,557
264,264
(70,631)
(77,950)
142,926
186,314
0.016
0.022
Total income
Operating expenses
Loss on disposal of Goverment Securities
10
10
Profit before income tax
Income tax expense
11
Profit for the year
Earnings per share
Basic earnings per share (Kwacha)
40
13
2014 annual report
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
for the year ended 31 December 2014
Notes
2014
K’ 000
2013
K’ 000
142,926
186,314
(23,797)
4,102
31
(4,102)
(813)
16
(27,899)
3,289
24
31
31
54,706
7,944
(878)
6,476
171
61,772
6,647
33,873
9,936
176,799
196,250
Profit for the year
Other comprehensive income, net of income tax
Items that may be reclassified subsequently to profit
or loss
Net (loss) gains on available-for-sale financial assets
Net reclassification adjustment for realised net losses
on available-for-sale financial assets
Items that will not be reclassified subsequently to profit
or loss
Surplus on defined benefit plan
Gain on revaluation of property
Income tax relating to items that will not be reclassified
Other comprehensive income for year, net of income tax
Total comprehensive income for the year
41
2014 annual report
STATEMENT OF FINANCIAL POSITION
as at 31 December 2014
2014
K’ 000
2013
K’ 000
1,163,202
399,170
19,530
20,397
1,445,340
3,138,509
274,635
203,020
909,543
284,303
30,593
2,341,501
2,987,685
303,411
114,919
6,663,803
6,971,955
5,053,720
142
32,440
106,087
12,038
458,270
5,514,878
7,209
34,748
5,996
156,824
11,459
373,221
5,662,697
6,104,335
86,625
2,622
86,625
188,479
37,458
599,297
86,625
2,622
86,625
154,746
58,291
478,711
Total equity
1,001,106
867,620
Total equity and liabilities
6,663,803
6,971,955
ASSETS
Cash and balances with Bank of Zambia
Balances with other banks
Withholding tax recoverable
Current tax recoverable
Investment securities
Loans and advances to customers
Property and equipment
Other assets
NOTES
14
15
11
11
16
17
18
21
Total assets
LIABILITIES
Customer deposits
Deposits from other banks
Deferred tax liabilities
Current tax liabilities
Other liabilities
Provisions for liabilities and charges
Borrowings
22
23
20
11
25
26
27
Total liabilities
EQUITY
Share capital
Share premium
Statutory reserve
General banking reserves
Revaluation reserves
Retained earnings
28
28
29
30
31
The financial statements on pages 40 to 100 were approved for issue by the Board of Directors on 19 February 2015 and
signed on its behalf by:
DirectorDirector
DirectorSecretary
42
2014 annual report
STATEMENT OF CHANGES IN EQUITY
As at 31 December 2014
43
2014 annual report
STATEMENT OF CASH FLOWS
NOTES
2014
2013
K’ 000 K’ 000
Cash flows from operating activities
Profit before income tax 213,557
Adjustments for:
Amortisation of staff loan benefit
21
20,183 Impairment loss recognised on loans and advances
17
53,068 Reversal of impairment loss on loans and advances
17
(4,523) Reversal of impairment loss on other assets
21
3,627
Impairment loss recognised on other assets
21
845 Net exchange gains on borrowings
27
44,541 Revaluation deficit on properties recognised in profit or loss 7,868 Gain on sale of property
(202)
Assets written off
18
2,422 Depreciation18 49,809 Cash flows from operating activities before changes in operating assets and liabilities
391,195
Changes in operating assets and liabilities:
- loans and advances to customers
(219,552)
- statutory deposits (321,921)
- other assets (37,867)
- customer deposits (461,159)
- other liabilities
(50,158) - investment securities 939,978
Cash (used in) generated from operations (150,679) Withholding tax suffered
11
(20,936) Income tax paid11 (68,211)
Net cash generated from (used in) operating activities
(239,826) Cash flows from investing activities
Purchase of property and equipment
18
(23,487)
Proceeds from sale of property and equipment
311 Net cash used in investing activities
(23,176)
Cash flows from financing activities
Proceeds from borrowings27 160,250 Repayment of borrowings27
(119,742)
Dividends paid
(43,313) Net cash used in financing activities
(2,805) Net increase in cash and cash
equivalents 125,388
Cash and cash equivalents at start of year 870,864 Cash and cash equivalents at end of year
33 996,252 44
264,264
12,931
32,378
(1,242)
(971)
27,799
13
98
43,289
378,559
(379,660)
(178,659)
(11,214)
1,199,960
(40,893)
(357,733)
231,801
(31,125)
(53,236)
147,440
(107,004)
2,558
(104,446)
(148,643)
(42,013)
(190,656)
230,897
639,967
870,864
2014 annual report
NOTES TO THE FINANCIAL STATEMENTS
1. GENERAL INFORMATION
The Bank is incorporated in Zambia under the Companies Act , 1994 (as amended) as a limited liability Bank, and is domiciled in Zambia. The address
of its registered office is:
Plot 2118-2121
P.O Box 33611 Cairo Road
Lusaka
The Bank’s principal activities are the provision of Commercial banking and related services to the general public.
2. Application of new and revised international financial reporting standards (IFRSs)
2.1 Amendments to IFRSs and the new Interpretation that are mandatorily effective for the current year
In the current year, the Bank has applied a number of amendments to IFRSs and a new Interpretations issued by the International Accounting
Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2014. Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities The Bank has applied the amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities for the first time in the current year. The
amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify
the meaning of ‘currently has a legally enforceable right of set-off’ and ‘simultaneous realisation and settlement’.
The amendments have been applied retrospectively. The Bank has assessed whether certain of its financial assets and financial liabilities qualify for
offset based on the criteria set out in the amendments and concluded that the application of the amendments has had no impact on the amounts
recognised in the Bank’s financial statements.
IFRIC 21 Levies
IFRIC 21 addresses the issue as to when to recognise a liability to pay a levy imposed by a government. The Interpretation defines a levy, and specifies
that the obligating event that gives rise to the liability is the activity that triggers the payment of the levy, as identified by legislation. The Interpretation provides guidance on how different levy arrangements should be accounted for, in particular, it clarifies that neither economic
compulsion nor the going concern basis of financial statements preparation implies that an entity has a present obligation to pay a levy that will be
triggered by operating in a future period. The application of this Interpretation has had no material impact on the disclosures or on the amounts recognised in the Bank’s financial
statements.
2.2 New and revised IFRSs in issue but not yet effective
The Bank has not applied the following new and revised IFRSs that have been issued but are not yet effective: IFRS 9 Financial Instruments 5
IFRS 15
Revenue from contracts with customers 4
Amendments to IAS 16 and IAS 38
Clarifications of Acceptable Methods of Depreciation and Amortisation 3
Amendments to IAS 16 and IAS 41
Agriculture: Bearer Plants3
Amendments to IAS 19
Defined Benefit Plans: Employee Contributions1
Amendments to IFRSs
Annual Improvements to IFRSs 2010-2012 Cycle2
Amendments to IFRSs
Annual Improvements to IFRSs 2011-2013 Cycle1
IFRS 14Regulatory Deferral Accounts3
Amendments to IAS 27
Equity Method in separate Financial Statements (Amendments to IAS 27)3
IFRS 10 an IAS 28
Sale contribution of assets between an Investor and its associate3
Amendments to IFRSs
Annual Improvements to IFRS 2012 – 2014 Cycle various standards3
1 Effective for annual periods beginning on or after 1 July 2014, with earlier application permitted.
2 Effective for annual periods beginning on or after 1 July 2014, with limited exceptions. Earlier application is permitted.
3 Effective for annual periods beginning on or after 1 January 2016, with earlier application permitted.
IFRS 9 Financial Instruments
IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets. IFRS 9 was subsequently
amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in
November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly
to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by
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introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments. Key requirements of IFRS 9 are described as follows:
• All recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required
to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model
whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal
and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods.
Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and
selling financial assets, and that have contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and
equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may
make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in
other comprehensive income, with only dividend income generally recognised in profit or loss;
• With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount
of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other
comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income
would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability’s credit risk
are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability
designated as fair value through profit or loss is presented in profit or loss;
• In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss
model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those
expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer
necessary for a credit event to have occurred before credit losses are recognised;
• The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS
39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically
broadening the types of instruments that qualify for hedging instruments and the types of risk components of non-financial items that
are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an
economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements
about an entity’s risk management activities have also been introduced.
The directors of the Bank anticipate that the application of IFRS 9 in the future may have a material impact on amounts reported in respect of the
Bank’s financial assets and financial liabilities. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until the Bank
undertakes a detailed review.
IFRS 15 Revenue from Contracts with Customers
In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the
related Interpretations when it becomes effective.
The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an
amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard
introduces a 5-step approach to revenue recognition: • Step 1: Identify the contract(s) with a customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation
Under IFRS 15, an entity recognises revenue when (or as) a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying
the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific
scenarios. Furthermore, extensive disclosures are required by IFRS 15. The directors of the Bank anticipate that the application of IFRS 15 in the future may have a material impact on the amounts reported and disclosures
made in the Bank’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 15 until
the Bank performs a detailed review. Amendments to IAS 16 and IAS 38 Clarification of Acceptable Methods of Depreciation and Amortisation
The amendments to IAS 16 prohibit entities from using a revenue-based depreciation method for items of property, plant and equipment. The
amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortisation of an intangible asset. This
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2014 annual report
presumption can only be rebutted in the following two limited circumstances:
(a) when the intangible asset is expressed as a measure of revenue; or
(b) when it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated.
The amendments apply prospectively for annual periods beginning on or after 1 January 2016. Currently, the Bank uses the straight-line method
for depreciation and amortisation for its property, plant and equipment, and intangible assets respectively. The directors of the Bank believe that
the straight-line method is the most appropriate method to reflect the consumption of economic benefits inherent in the respective assets and
accordingly, the directors of the Bank do not anticipate that the application of these amendments to IAS 16 and IAS 38 will have a material impact
on the Bank’s financial statements.
Amendments to IAS 19 Defined Benefit Plans: Employee Contributions
The amendments to IAS 19 clarify how an entity should account for contributions made by employees or third parties to defined benefit plans,
based on whether those contributions are dependent on the number of years of service provided by the employee. For contributions that are independent of the number of years of service, the entity may either recognise the contributions as a reduction in the
service cost in the period in which the related service is rendered, or to attribute them to the employees’ periods of service using the projected
unit credit method; whereas for contributions that are dependent on the number of years of service, the entity is required to attribute them to the
employees’ periods of service.
The directors of the Bank do not anticipate that the application of these amendments to IAS 19 will have a significant impact on the Bank’s financial
statements.
Annual Improvements to IFRSs 2010-2012 Cycle
The Annual Improvements to IFRSs 2010-2012 Cycle include a number of amendments to various IFRSs, which are summarised below. The amendments to IFRS 3 clarify that contingent consideration that is classified as an asset or a liability should be measured at fair value at
each reporting date, irrespective of whether the contingent consideration is a financial instrument within the scope of IFRS 9 or IAS 39 or a nonfinancial asset or liability. Changes in fair value (other than measurement period adjustments) should be recognised in profit and loss.
The amendments to IFRS 3 are effective for business combinations for which the acquisition date is on or after 1 July 2014.
The amendments to IFRS 8 (i) require an entity to disclose the judgements made by management in applying the aggregation criteria to operating
segments, including a description of the operating segments aggregated and the economic indicators assessed in determining whether the
operating segments have ‘similar economic characteristics’; and (ii) clarify that a reconciliation of the total of the reportable segments’ assets to
the entity’s assets should only be provided if the segment assets are regularly provided to the chief operating decision-maker.
The amendments to the basis for conclusions of IFRS 13 clarify that the issue of IFRS 13 and consequential amendments to IAS 39 and IFRS
9 did not remove the ability to measure short- term receivables and payables with no stated interest rate at their invoice amounts without
discounting, if the effect of discounting is immaterial. As the amendments do not contain any effective date, they are considered to be
immediately effective. The amendments to IAS 16 and IAS 38 remove perceived inconsistencies in the accounting for accumulated depreciation/amortisation when
an item of property, plant and equipment or an intangible asset is revalued. The amended standards clarify that the gross carrying amount is
adjusted in a manner consistent with the revaluation of the carrying amount of the asset and that accumulated depreciation/amortisation is the difference between the gross carrying amount and the carrying amount after taking into account accumulated impairment losses.
The amendments to IAS 24 clarify that a management entity providing key management personnel services to a reporting entity is a related party
of the reporting entity. Consequently, the reporting entity should disclose as related party transactions the amounts incurred for the service paid
or payable to the management entity for the provision of key management personnel services. However, disclosure of the components of such
compensation is not required.
The directors of the Bank do not anticipate that the application of these amendments will have a significant impact on the Bank’s financial
statements. The Annual Improvements to IFRSs 2011-2013 Cycle include a number of amendments to various IFRSs, which are summarised below.
The amendments to IFRS 3 clarify that the standard does not apply to the accounting for the formation of all types of joint arrangement in the
financial statements of the joint arrangement itself.
The amendments to IFRS 13 clarify that the scope of the portfolio exception for measuring the fair value of a group of financial assets and
financial liabilities on a net basis includes all contracts that are within the scope of, and accounted for in accordance with, IAS 39 or IFRS 9, even
if those contracts do not meet the definitions of financial assets or financial liabilities within IAS 32.
The amendments to IAS 40 clarify that IAS 40 and IFRS 3 are not mutually exclusive and application of both standards may be required.
Consequently, an entity acquiring investment property must determine whether:
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(a) the property meets the definition of investment property in terms of IAS 40; and (b) the transaction meets the definition of a business combination under IFRS 3.
The directors of the Bank do not anticipate that the application of these amendments will have a significant impact on the Bank’s financial
statements. 3. Significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently
applied to all years presented, unless otherwise stated.
3.1 Statement of compliance
The financial statements are prepared in accordance with International Financial Reporting Standards.
3.2 Basis of preparation The financial statements have been prepared on the historical cost basis except for certain properties and financial instruments that are measured
at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below:
Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the
fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those
characteristics into account when pricing the asset or liability at the measurement date.
In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs
to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described
as follows:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date;
• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly;
and
• Level 3 inputs are unobservable inputs for the asset or liability.
The principal accounting policies are set out below:
3.3 Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value
through profit or loss, are recognised within ‘interest income’ or ‘interest expense’ in profit or loss using the effective interest method.
Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Bank and the amount of income
can be measured reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net
carrying amount on initial recognition.
Effective Interest rate
The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest
income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments
or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial
asset or financial liability. The calculation of the effective interest rate includes all fees paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised
using the rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss.
3.4 Fees and commission income Fees and commissions are generally recognised on an accrual basis when the service has been provided. Loan commitment fees for loans that are
likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan.
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Loan syndication fees are recognised as revenue when the syndication has been completed and the Bank has retained no part of the loan package
for itself or has retained a part at the same effective interest rate as the other participants. Commission and fees arising from negotiating, or
participating in the negotiation of, a transaction for a third party - such as the arrangement of the acquisition of shares or other securities, or the
purchase or sale of business - are recognised on completion of the underlying transaction.
3.5 Translation of foreign currencies
(i) Functional and presentation
Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the
“functional currency”). The financial statements are presented in Kwacha (“K”) which is the Bank’s functional currency.
(ii) Transaction and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions.
Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of
monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss account. Monetary items carried at fair value that
are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items
denominated in foreign currency are not retranslated.
Exchange differences are recognised in profit or loss in the year in which they arise. 3.6 Financial assets Financial assets are recognised when the Bank becomes a party to the contractual provisions of the instruments. Financial assets are initially measured
at fair value. Transaction costs that are directly attributed to acquisition or issue of financial assets (other than financial assets at fair value through
profit or loss) are added to or deducted from the fair value of the financial assets as appropriate, on initial recognition. Transaction costs directly
attributed to the acquisition of financial assets at fair value through profit and loss (FVTPL) are recognised immediately in the profit or loss. The Bank
classifies its financial assets into the following categories: financial assets at fair value through profit or loss; loans, advances and receivables; held-tomaturity financial assets; and available-for-sale assets. The classification depends on the nature and purpose of the financial assets and is determined
at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular
way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or
convention in the marketplace. Management determines the appropriate classification of its financial assets at initial recognition.
(i) Loans, advances and receivables
Loans, advances and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.
Loans and receivables (including bank balances and cash) are measured at amortised cost using the effective interest method, less any impairment.
Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be
immaterial.
(ii) Held-to maturity
Held-to-maturity assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that management has the
positive intention and ability to hold to maturity. Where the Bank sells more than an insignificant amount of held-to-maturity assets, the entire
category would have to be reclassified as available- for-sale. Subsequent to initial recognition, held to maturity investments are measured at
amortised cost using the effective interest rate method less any impairment.
(iii) Available-for-sale (AFS)
AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity
investments or (c) financial assets at fair value through profit or loss. The Bank also has investments in unlisted shares that are not traded in an active market but that are also classified as AFS financial assets and stated
at fair value at the end of each reporting period (because the directors consider that fair value can be reliably measured). Changes in the carrying
amount of AFS monetary financial assets relating to changes in foreign currency rates (see below), interest income calculated using the effective
interest method and dividends on AFS equity investments are recognised in profit or loss. Other changes in the carrying amount of available-forsale financial assets are recognised in other comprehensive income and accumulated under the heading of investments revaluation reserve. When
the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation
reserve is reclassified to profit or loss.
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3.6 Financial assets (Continued)
Dividends on AFS equity instruments are recognised in profit or loss when the Bank’s right to receive the dividends is established.
AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured and
derivatives that are linked to and must be settled by delivery of such unquoted equity investments are measured at cost less any identified
impairment losses at the end of each reporting period.
3.7 Impairment of financial assets The Bank assesses at each Reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. A
financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as
a result of one or more events that occurred after initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on
the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:
(a) significant financial difficulty of the issuer or obligor;
(b) a breach of contract, such as a default or delinquency in interest or principal payments;
(c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider;
(d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation;
(e) the disappearance of an active market for that financial asset because of financial difficulties; or
(f ) observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial
assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial
assets in the portfolio, including: (i) adverse changes in the payment status of borrowers in the portfolio; and
(ii) ational or local economic conditions that correlate with defaults on the assets in the portfolio.
The estimated period between a loss occurring and its identification is determined by management for each identified portfolio. In general,
the periods used vary between 3 months and 6 months.
Assets carried at amortised cost
The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant,
and individually or collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of
impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for
which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment.
If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit
losses that have not been incurred) discounted at the financial instrument’s original effective interest rate. The carrying amount of the asset is
reduced through the use of an allowance account and the amount of the loss is recognised in the profit and loss account. If a loan or held-tomaturity asset has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined
under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument’s fair value using an observable
market price.
The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result
from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e. on
the basis of the Bank’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other
relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the
debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash
flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical
loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on
which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary
procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off
decrease the amount of the provision for loan impairment in profit or loss.
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If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after
the impairment was recognised (such as an improvement in the debtor’s credit rating), the previously recognised impairment loss is reversed by
adjusting the allowance account. The amount of the reversal is recognised in profit or loss.
Assets carried at fair value
In the case of equity investments classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is
considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss
– measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously
recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses recognised in profit or loss on equity
instruments are not reversed through profit or loss account. If, in a subsequent period, the fair value of a debt instrument classified as availablefor-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the
impairment loss is reversed through profit or loss account.
Renegotiated loans
Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer
considered to be past due but are treated as new loans. In subsequent years, the renegotiated terms apply in determining whether the asset is
considered to be past due.
3.8 Derecognition of financial assets
The Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial
asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Bank neither transfers nor retains substantially
all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an
associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial
asset, the Bank continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received
and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised
in profit or loss.
On derecognition of a financial asset other than in its entirety (e.g. when the Bank retains an option to repurchase part of a transferred asset), the
Bank allocates the previous carrying amount of the financial asset between the part it continues to recognise under continuing involvement, and
the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying
amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any
cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognised in profit or loss. A cumulative gain
or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that
is no longer recognised on the basis of the relative fair values of those parts.
3.9 Property and equipment
(i) Recognition and Measurements
All property and equipment except buildings is stated at historical cost. Items of property and equipment are subsequently measured at cost
less accumulated depreciation and accumulated impairment losses and property is subsequently measured at fair value less accumulated
depreciation.
Buildings are stated in the statement of financial position at their revalued amounts, being the fair value at the date of revaluation, less any
subsequent accumulated depreciation and subsequent impairment losses. It is the Banks policy to perform revaluations with regularity such
that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period. The
revaluation differences are credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus” unless it
represents the reversal of a revaluation decrease previously recognized as an expense, in which case it should be recognized as income. A decrease
as a result of a revaluation is recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus
relating to the same asset.
When a revalued asset is disposed off, any revaluation surplus is transferred directly to retained earnings. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost includes the cost of materials and direct labour and
any other costs directly attributable to bringing the assets to a working condition for their intended use. Purchased software that is integral to the
functionality of the related equipment is capitalised as party of that equipment.
When parts of an item of property and equipment have different useful lives, they are componentized as separate items of property and
equipment.
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3.9 Property and equipment (Continued)
Capital work in progress relates to items of property, plant and equipment that are under construction and are yet to be commissioned for use. Work
in progress is measured at the cost incurred in relation to the construction up to the reporting date. The gain or loss on disposal of an item of property and equipment is determined by comparing the proceeds from disposal with the carrying
amount of the property and equipment, and is recognized net within other operating income in statement of profit or loss.
(ii) Subsequent costs
The cost of replacing a component of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that
the future economic benefits embodied within the component will flow to the Bank and its cost can be measured reliably. The carrying amount of
the replaced component is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as
incurred.
(iii) Depreciation
Depreciation is based on the cost of the asset less its residual value. Components of individual assets are assessed and if a component has a useful
life that is different from the remainder of that asset, that component is depreciated separately.
Capital work in progress is not depreciated.
Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant
and equipment.
The estimated useful lives are as follows:
• Leasehold buildings
50 years
• Fixtures, fittings and equipment
5 years
• Motor vehicles
5 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
The Bank assesses at each reporting date whether there is any indication that any item of property and equipment is impaired. If any such indication
exists, the Bank estimates the recoverable amount of the relevant assets. An impairment loss is recognised for the amount by which the asset’s
carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For
the purposes of assessing impairment, assets are banked at the lowest levels for which there are separately identifiable cash flows (cash-generating
units). A reversal of an impairment loss is recognised immediately in the statement of comprehensive income, unless the relevant asset is carried at
a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
3.10 Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in profit or loss because it excludes items
of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Bank’s
liability for current tax is calculated using tax rates that have been enacted by the reporting date.
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding
tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred
tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can
be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is
charged or credited to profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt
with in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and
when they relate to income taxes levied by the same taxation authority and the Bank intends to settle its current tax assets and liabilities on a net
basis.
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3.11 Non-current assets held for sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction
rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in
its present condition subject only to terms that are usual and customary for sales of such asset (or disposal group) and its sale is highly probable.
Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the
date of classification.
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less
costs to sell.
Any impairment loss on a disposal group is allocated to remaining assets and liabilities. Impairment losses on initial classification as held for sale and
subsequent gains or losses on re-measurements are recognised in profit or loss. 3.12 Employee benefits
(i) Retirement benefit obligations
Defined contribution
The Bank operates a defined benefit scheme for non-fixed term contracted employees. The Bank and all its employees also contribute to the
National Pension Scheme, which is a defined contribution scheme. A defined contribution plan is a retirement benefit plan under which the Bank
pays fixed contributions into a separate entity. The Bank’s contributions to the defined contribution schemes are charged to profit or loss in the year in which they fall due.
A defined benefit plan is a retirement benefit plan that is not a defined contribution plan. The Bank has no legal or constructive obligations to pay
further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and
prior periods. The assets of all schemes are held in separate trustee administered funds, which are funded by contributions from both the Bank and
employees. For defined benefit retirement benefit plans, the cost of providing benefits is determined using the projected unit credit method, with actuarial
valuations being carried out at the end of each annual reporting period. Remeasurement, comprising actuarial gains and losses, the effect of the
changes to the asset ceiling (if applicable) and the return on plan assets (excluding interest), is reflected immediately in the statement of financial
position with a charge or credit recognised in other comprehensive income in the period in which they occur. Remeasurement recognised
in other comprehensive income is reflected immediately in retained earnings and will not be reclassified to profit or loss. Past service cost is
recognised in profit or loss in the period of a plan amendment. Net interest is calculated by applying the discount rate at the beginning of the
period to the net defined benefit liability or asset. Defined benefit costs are categorised as follows:
• Service cost (including current service cost, past service cost, as well as gains and losses on curtailments and settlements);
• Net interest expense or income;
• Remeasurement.
The Bank presents the first two components of defined benefit costs in profit or loss in the line item employee benefits expense. Curtailment
gains and losses are accounted for as past service costs.
The retirement benefit obligation recognised in the statement of financial position represents the actual deficit or surplus in the Bank’s defined
benefit plans. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form of refunds
from the plans or reductions in future contributions to the plans.
A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit and
when the entity recognises any related restructuring costs.
(ii) Other entitlements
The estimated monetary liability for employees’ accrued annual leave entitlement at reporting date is recognised as an expense accrual.
53
2014 annual report
3.13 Borrowings
Borrowings are recognised initially at fair value, being their issue proceeds (fair value of consideration received) net of transaction costs incurred.
Borrowings are subsequently stated at amortised cost; any difference between proceeds net of transaction costs and the redemption value is
recognised in profit or loss over the period of the borrowings using the effective interest method.
3.14 Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take
a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are
substantially ready for their intended use or sale.
All other borrowing costs are recognised in profit or loss in the year in which they are incurred.
3.15 Financial liabilities and equity
Classification as debt or equity
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual
agreement.
Financial liabilities
Financial liabilities are classified as borrowed funds, other payables, other liabilities and amounts due to related parties.
Borrowed funds, other payables and other liabilities are initially measured at fair value and are subsequently measured at amortised cost using the
effective interest method.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the
relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the
financial liability, or, where appropriate, a shorter period.
Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Bank after deducting all of its liabilities. Equity
instruments are recorded at proceeds received, net of direct issue costs.
Derecognition of financial liabilities The Bank derecognises financial liabilities when, and only when, the Bank’s obligations are discharged, cancelled or they expire. The difference
between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss.
3.16 Offsetting
Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable
right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 3.17 Sale and repurchase agreements
Securities sold subject to repurchase agreements (‘repos’) are classified in the financial statements as pledged assets when the transferee has the
right by contract or custom to sell or re-pledge the collateral; the counterparty liability is included in amounts due to other banks, deposits from
banks, other deposits or deposits due to customers, as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded
as loans and advances to other banks or customers, as appropriate. The difference between sale and repurchase price is treated as interest and
accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial
statements.
3.18 Share capital
Ordinary shares are classified as ‘share capital’ in equity. Any premium received over and above the par value of the shares is classified as ‘share
premium’ in equity.
54
2014 annual report
3.19 Dividends payable
Dividends on ordinary shares are charged to equity in the period in which they are declared. Proposed dividends are not recognised as a liability
until declared.
3.20 Fiduciary activities
The Bank commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts,
retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are
not assets of the Bank.
3.21 Acceptances and letters of credit
Acceptances and letters of credit are accounted for as off-statement of financial position transactions and disclosed as contingent liabilities.
3.22 Provisions
Provisions are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an
outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. The amount recognised as a provision
is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks
and uncertainties surrounding the obligation.
The Bank recognises no provisions for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will
be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an
outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to the obligation. 3.23 Segment reporting
Operating segments are reported in a manner consistent with the internal reporting to the Executive Management Committee. The Executive
Management Committee allocates resources to and assesses the performance of the operating segments of an entity. The Executive
Management Committee is the Bank’s key management making body.
All transactions between business segments are conducted on an arm’s length basis, with intra-segment revenue and cost being eliminated in
head office. Income and expenses directly associated with each segment are included in determining business segment performance.
4. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Bank’s accounting policies, the directors are required to make judgements, estimates and assumptions about the
carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on
historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The 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 if the revision affects only that period, or in the period of the revision and future periods if the revision affects both
current and future periods.
Critical judgements in applying accounting policies
The following are the critical judgements, apart from those involving estimations, that the directors have made in the process of applying the
Bank’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.
(a) Impairment losses on loans and advances
The Bank reviews its loan portfolios to assess impairment at least on a monthly basis. In determining whether an impairment loss should be
recorded in profit or loss, the Bank makes judgements as to whether there is any observable data indicating that there is a measurable decrease
in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This
evidence may include observable data indicating that there has been an adverse change in the payment status of the borrower, or national or
local economic conditions that correlate with defaults on assets in the Bank. Management uses estimates based on historical loss experience for
55
2014 annual report
4. Critical accounting judgements and key sources of estimation uncertainty (Continued)
assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows.
The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience.
(b) Fair value of financial instruments
The fair values of financial instruments that are not quoted in active markets are determined by using valuation techniques. Where valuation
techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by qualified personnel
independent of the area that created them. All models are certified before they are used, and models are calibrated to ensure that outputs reflect
actual data and comparative market prices. To the extent practicable, models use only observable data. However, areas such as credit risk (both
own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could
affect the reported fair value of financial instruments. For example to the extent that management used a tightening of 2 basis points in the yield
rate, the fair values would be estimated at K523,000,000 as compared to their reported fair values of K575,889,000 at 31 December 2013
(c) Held-to-maturity financial assets
The Bank follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturing
as held-to-maturity. This classification requires significant judgement. In making this judgement, the Bank evaluates its intention and ability to
hold such assets to maturity. If the Bank fails to keep these assets to maturity other than for the specific circumstances – for example, selling an
insignificant amount close to maturity – it will be required to classify the entire class as available-for-sale. The assets are currently measured at
amortised cost.
(d) Discount rate used to determine the carrying amount of the Bank’s defined benefit obligation The Bank’s defined benefit obligation is discounted at a rate set by reference to market yields at the end of the reporting period on high quality
government bonds. Significant judgement is required when setting the criteria for bonds to be included in the population from which the yield
curve is derived. The most significant criteria considered for the selection of bonds include the issue size of the government bonds, quality of the
bonds and the identification of outliers which are excluded.
(e) Revaluation of property
The Bank reviews the fair value of its property at the end of each reporting period. An independent valuation of the Bank’s properties to determine
fair value is carried out by independent valuers. Revaluations are performed with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the reporting date.
5. Financial risk management
The Bank’s activities expose it to a variety of financial risks which include market risk, currency risk, interest rate risk, credit risk and liquidity
risk. Those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is
core to the Bank’s business, and the financial risks are an inevitable consequence of being in business. The Bank’s aim is therefore to achieve an
appropriate balance between risk and return and minimise potential adverse effects on its financial performance.
Risk management is carried out by the Risk Directorate under policies approved by the Executive Management Committee and Board of Directors.
Risk Directorate identifies, evaluates and hedges financial risks in close cooperation with the operating units. In carrying out these functions, Risk
Directorate is guided by policies contained in the Credit policy document, Business Lending standards, Environmental and Social policy, Scheme
Loans Policy and Premier loans policies.
(a) Credit risk
The Bank takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the Bank by failing to pay amounts
in full when due. Credit risk is the most important risk for the Bank’s business: Management therefore carefully manages the exposure to credit
risk. Credit exposures arise principally in lending and investment activities. There is also credit risk in off-statement of financial position financial
instruments, such as loan commitments and guarantees. Credit risk management and control are centralised in the Risk Directorate which reports
regularly to the Board of Directors.
56
2014 annual report
(i) Credit risk measurement
(a) Loans and advances (including commitments and guarantees)
The estimation of credit exposure is complex and requires the use of processes and procedures that will limit the likelihood of default on the
loans in the Bank’s portfolio. The assessment of credit risk of a portfolio of assets entails analysis of various risk aspects and a decision made on
whether the risk is bankable. The risks assessed include business, financial, market, management, security, structural and industry.
The Loan Portfolio of the Bank is segregated into seven rating classes:
2 - Loan has no arrears; 3 - Loan has arrears over 1 day but less than 29 days;
4 - Loan has arrears over 30 days but less than 59 days;
52 - Loan has arrears over 180 days.
(b) Risk limit and mitigation policies
The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower and to industry segments. Such risks are monitored on a revolving basis and subject to annual or more frequent review. The exposure to any one borrower including banks is further restricted by sub-limits covering on and off-statement of financial position exposures.
For example:
(1) There is a single name credit exposure limit of 25% of the regulatory capital.
(2) Clean and secured counterparty limits apply for money market operations conducted by the Treasury Division. (c) Collateral
The Bank employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds
advanced, which is common practice. The Bank implements guidelines on the acceptability of specific classes of collateral or credit risk
mitigation.
The principal collateral types for loans and advances are:
• Mortgages over residential properties;
• Charges over business assets such as premises, inventory and accounts receivable;
• Charges over financial instruments such as debt instruments; and
• Cash cover;
• Longer-term finance and lending to corporate entities are generally secured;
• Certain personal credit facilities are generally unsecured.
(d) Lending limit
Credit risk exposure is managed as part of overall lending limits with customers, together with potential exposures from market movements. Settlement risk arises in any situation where a payment in cash or securities is made in the expectation of a corresponding receipt in cash or
securities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Bank’s market
transactions on any single day.
57
2014 annual report
5 Financial risk management (Continued) (e) Credit related commitments
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of
credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third
parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of
a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised
by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit.
With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent
upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit commitments because longer-term
commitments generally have a greater degree of credit risk than shorter-term commitments.
(i) Impairment and provisioning policies
The impairment allowance shown in the statement of financial position at year end is derived from each of the seven internal rating grades. The
table below shows the percentage of the Bank’s on-statement of financial position credit related obligations.
2014
Rating
2Standard
3
Satisfactory risk
4
Watch risk
5Unacceptable
50Sub-standard
51Doubtful
52Loss
58
2013
Credit exposure
Impairment
allowance
Credit
exposure
%
69
14
7
0
0
1
9
100
%
3
14
2
0
8
15
58
100
%
68
21
3
2
1
1
4
100
Impairment
allowance
%
9
3
4
10
7
5
62
100
2014 annual report
(a) Credit risk (Continued) (i) Credit risk measurement (Continued) (e) Credit related commitments: (Continued)
The bank holds collateral and other credit enhancements against certain of its credit exposures. The table below sets out the principal types of
collateral held against different types of financial assets.
Type of credit exposure
Percentage of exposure that is subject to collateral requirements
2014
2013
Type of collateral held
Loans and adances to banks
Securities borrowing100100
Marketable securities
Loans and adances to retail customers
Mortgage lending 12
10
Residential property
Personal loans
25
32
None
Others
3
3
None
Loans and advances to corporate customers
Corporate Loans
16
13
Guarantees
Others
44
42
New loans issued by taking possession of collateral Detail of financial and non-financial assets obtained by the Bank during the year covered by collateral held as security against loans
and advances as well calls made on credit enhancements and held at the year end are shown below.
2014 2013
K’000 K’000
Property525,641368,225
Debt securities154,385 70,075
Other 54,746 26,286
59
2014 annual report
5. Financial risk management (Continued)
(a) Credit risk (Continued) (ii) Impairment and provisioning policies (Continued)
Maximum exposure to credit risk before collateral held
Investment securities: Credit risk exposures relating to off-statement of financial position items:
- Acceptances and letters of credit
- Guarantee and performance bonds
- Undrawn stand-by facilities, credit lines and other commitments to lend
2014
K’ 000
2013
K’ 000
3,138,509
1,445,340
2,987,685
2,341,501
820,322
44,289
127,581
460,688
12,699
332,814
5,576,041
6,135,387
The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December 2014 and 2013, without taking account of
any collateral held or other credit enhancements attached. For on-statement of financial position assets, the exposures set out above are based
on carrying amounts as reported in the statement of financial position. As shown above, 56% of the total maximum exposure is derived from
loans and advances to banks and customers (2013: 49%).
Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loan
and advances portfolio and debt securities based on the following:
• the Bank exercises stringent controls over the granting of new loans;
• 69% (2013: 68%) of the loans and advances portfolio are neither past due nor impaired;
• 73% (2013: 63%) of the loans and advances portfolio are backed by collateral;
• 100% (2013:100%) of the investments in securities are government securities.
Financial assets that are past due or impaired
2014
K’ 000
2013
K’ 000
Neither past due nor impaired
Past due but not impaired
Individually impaired
Gross
Less: allowance for impairment (Note 17)
2,256,866
792,478
210,112
3,259,456
(120,947)
2,038,189
886,626
135,272
3,060,087
(72,402)
Net
3,138,509
2,987,685
2,256,866
2,038,189
Loans and advances are summarised as follows:
No other financial assets are either past due or impaired.
Loans and advances neither past due nor impaired The credit quality of the portfolio of loans and advances that were
neither past due nor impaired can be assessed by reference to the
internal rating system adopted by the Bank:
60
2014 annual report
Loans and advances past due but not impaired
Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. The
gross amounts of loans and advances that were past due but not impaired were as follows:
2014
2013
K’ 000
K’ 000
Past due up to 30 days
Past due 31–60 days
Past due 61–90 days
Over 90 days
404,091
204,118
36,967
147,302
397,235
379,135
21,913
88,343
Total
792,478
886,626
Fair value of collateral held
1,069,296
1,379,438
Loans and advances individually impaired
Of the total gross amount of impaired loans, the following amounts have been individually assessed:
Loans
Individually assessed impaired loans and advances
2014
2013
K 000
K 000
- Corporate
109,399 65,338
- Retail 100,713 69,934 210,112 135,272 Fair value of collateral held
117,932 106,732
Loans and advances renegotiated
Restructuring activities include extended payment arrangements, approved external management plans, modifications and deferral of payments.
61
62
155,272
Wholesale
and retail
trade
K’000
157,084
Transport &
communi
cation
K’000
154,216
154,216
309,994
Manufacturing
K’000
311,729
311,729
1,655,875
Financials
K’000
6,984
1,345,966
995,535
114,919
2,463,404
At 31 December 2014
2013
Loans and advances customers
Investment securities:
- held-to-maturity
- available-for-sale
Other assets
At 31 December 2013
100,024
-
100,024
155,272
1,397,052
48,288
203,020
157,084
309,994
7,515
Loans and advances customers
Investment securities:
- available-for-sale
Corporates Bonds
Other assets
2014
Financials
K’000
Wholesale
and retail
trade
K’000
Manufacturing
K’000
Transport &
communi
cation
K’000
(b) Concentration of risk
Industry sector risk concentration were as follows for on-and off-statement of financial position.
Credit risk relating to on-statement of financial statement position items
980,428
-
980,428
Agriculture
K’000
463,374
-
463,374
Other
Industries
K’000
754,397
-
933,044
-
754,397
Other
Industries
K’000
-
933,044
Agriculture
K’000
970,930
-
970,930
Individuals
K’000
821,203
-
-
821,203
Individuals
K’000
5,444,105
1,345,966
995,535
114,919
2,987,685
Total
K’000
4,786,869
1,397,052
48,288
203,020
3,138,509
Total
K’000
2014 annual report
5. Financial risk management (Continued) 167,552
Wholesale
and retail
trade
K’000
124
567,846
724,930
Transport &
communi
cation
K’000
151,135
10
151,145
305,361
27,801
30,596
340,590
Manufacturing
K’000
2,657
14,000
16,657
328,386
-
1,655,875
Financials
K’000
11,592
11,592
2,474,996
31 December 2014
2013
121,575
21,551
16,733
3,736
1,082
1,121,623
141,195
141,195
-
Agriculture
K’000
1,009,218
76,174
76,174
-
Agriculture
K’000
927,435
464,061
160,876
303,160
25
Other
Industries
K’000
993,832
239,435
11,037
228,398
-
Other
Industries
K’000
970,930
-
-
-
Individuals
K’000
887,064
65,861
165
21,407
44,289
Individuals
K’000
Total
K’000
6,250,306
806,201
332,814
460,688
12,699
Total
K’000
5,779,061
992,192
127,581
820,322
44,289
Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they
are withdrawn.
The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, and calls on cash settled
contingencies. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds
can be predicted with a high level of certainty. The Bank of Zambia requires that the Bank maintains a cash reserve ratio. In addition, the Board sets limits on the
minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to
cover withdrawals at unexpected levels of demand. The Treasury department monitors liquidity ratios on a daily basis.
The table below presents the undiscounted cash flows payable by the Bank under financial liabilities by the remaining contractual maturities at the reporting date
and from financial assets by expected maturity dates.
(c) Liquidity risk
31 December 2013
Acceptances and letters of credit
Guarantee and performance bonds
Undrawn stand-by facilities, credit lines
and other commitments to lend
12,280
12,280
-
567,722
-
2,795
-
-
Guarantee and performance bonds
Undrawn stand-by facilities, credit
lines and other commitments to lend
2014
Financials
K’000
Wholesale
and retail
trade
K’000
Transport &
communi
cation
K’000
Manufacturing
K’000
Credit risk exposures relating to off-statement of financial position items:
2014 annual report
63
64
Liquidity gap
Assets
Cash and Balances with Bank of Zambia Balances with other Banks
Investment in securities
Other assets
Total assets
At 31 December 2014
Liabilities
Customer deposits
Other liabilities
Borrowings
Total financial liabilities
14%
14%
4.50%
Weighted
average
effective
interest
rate
%
Financial risk management (Continued)
5 Financial risk management (Continued) 193,321
383,022
2,548,042
(1,921,854)
65,437
317,585
-
189,701
4,469,896
1,163,202
399,170
668,051
114,599
203,020
145,855
43,846
1-3
months
K’000
4,363,667
142
106,087
-
Up to
1 months
K’000
331,100
482,664
813,764
407,450
486,621
306,069
406,314
342,437
63,877
6-12
months
K’000
70,796
415,825
-
180,552
144,496
36,056
3-6
months
K’000
345,617
642,366
533,327
109,039
-
296,749
57,265
239,484
1-3
years
K’000
799,531
850,754
845,395
5,359
-
71,223
71,223
3-5
years
K’000
620,888
624,672
624,403
269
-
3,784
3,784
Over 5
years
K’000
731,022
6,349,241
1,163,202
399,170
3,138,509
1,445,340
203,020
5,618,219
5,053,720
142
106,087
458,270
Total
K’000
2014 annual report
Liquidity gap
At 31 December 2013
Liabilities
Customer deposits
Other liabilities
Borrowings
Assets
Cash and Balances with Bank of Zambia Balances with other Banks
Other assets
Total assets
Financial risk management (Continued)
104,265
135,747
240,012
909,543
284,303
459,271
361,728
114,919
2,129,764
64,935
175,077
5,192,229
(3,062,465)
130,459
44,618
1-3
months
K’000
5,028,196
7,209
156,824
-
Up to
1 months
K’000
419,525
544,044
149,207
394,837
-
124,519
110,731
13,788
3-6
months
K’000
336,010
639,808
268,802
371,006
-
303,798
245,393
58,405
6-12
months
K’000
847,278
1,087,509
441,152
646,357
-
240,231
99
240,132
1-3
years
K’000
1,474,059
1,487,081
1,062,564
424,517
-
13,022
13,022
3-5
years
K’000
506,477
509,733
502,424
7,309
-
3,256
3,256
Over 5
years
K’000
585,819
6,637,951
909,543
284,303
2,987,685
2,341,501
114,919
6,052,132
5,514,878
7,209
156,824
373,221
Total
K’000
2014 annual report
65
2014 annual report
5. Financial Risk Management (Continued)
(c) Liquidity risk maturity analysis The amounts in the table have been compiled as follows:
Type of financial instruments
Basis on which amounts are compiled
Non-derivative financial liabilities and financial assets
Undiscounted cash flows, which include estimated interest payments
Issued financial guarantee contracts, and unrecognised Earliest possible contractual maturity. For issued financial
loan commitments
guarantee contracts, the maximum amount of the guarantee is allocated to the
earliest period in which the guarantee could be called.
The Bank’s expected cash flows on some financial assets and financial liabilities vary significantly form the contractual cash flows. The principal
differences are as follows:
• Deman deposits from customers are expected to remain stable or increase; and
• unrecognised loan commitments are not all expected to be drawn down immediately.
As part of the management of liquidity risk arising from financial liabilities, the Bank holds liquid assets comprising cash and cash equivalents and
debt securities which can be readily sold to meet liquidity requirments. In addition, the Bank maintains agreed lines of credit with other banks and
holds unencumbered assets eligible for use as collateral with central banks (these amounts are referred to as the ‘Group’s liquidity reserves’).
Liquidity reserves
The table below sets out the components of the Bank’s liquidity reserves.
Balances with central banks
Cash
Treasury bills
Total liquidity reserves
2014
Carrying
amount
K’000
173,492
315,297
966,765
2014
Fair Value
K’000
173,492
315,297
821,131
2013
Carrying
amount
K’000
347,803
209,248
1,055,069
2013
Fair Value
K’000
347,803
209,248
995,535
1,455,554
1,309,920
1,612,120
1,552,586
Exposure to liquidity risk The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose, net
liquid assets includes cash and cash equivalents and investment-grade debt securities for which there is an active and liquid market less any
deposits from banks, debt securities issues, other borrowings and commitments maturing within the next month. Details of the reported Bank
ratio of net liquid assets to deposits from customers at the reporting date and during the reporting period were as follows:
2014
2013
At 31 December 47.46%
21.37%
Average for the period32.94%
36.32%
Maximum for the period47.46%
51.10%
Undrawn stand-by facilities, credit lines and other commitments to lend
15.07%
21.37%
(d) Market risk Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fair value or future
cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to
general and specific market movements and changes in the level of volatility. The objective of market risk management is to manage and control
market risk exposures within acceptable limits, while optimising the return on risk. Overall responsibility for managing market risk rests with the
Assets and Liabilities Committee (ALCO). 66
2014 annual report
The table below sets out the allocation of assets and liabilities subject to market risk between trading and non-trading portfolios.
31 December 2014
Market risk measure
Assets subject to market risk
Carrying amount
Non-trading portfolio
Cash
Investments in securities
Other assets
Liabilities subject to market risk
Customer deposits
Borrowings
Other liabilities
31 December 2013
19,866
409,142
3,138,509
1,445,340
14,979
19,866
409,142
3,138,509
1,445,340
14,979
5,027,836
5,027,836
5,053,720
458,270
96,066
5,053,720
458,270
96,066
5,608,056
5,608,056
22,900
206,809
2,987,685
4,547
22,900
206,809
2,987,685
4,547
5,563,442
5,563,442
5,514,878
373,221
160,461
5,514,878
373,221
160,461
6,048,560
6,048,560
Assets subject to market risk
Cash
Investments in securities
Other assets
Liabilities subject to market risk
Customer deposits
Borrowings
Other liabilities
The Bank did not have a trading portfolio.
67
2014 annual report
5 Financial risk management (Continued)
(e) Currency risk The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The
Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily.
The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December 2014. Included in the table are the Bank’s
financial instruments, categorised by currency.
At 31 December 2014
Assets
Other financial assets
Total financial assets
Liabilities
Customer deposits
Borrowings
Other liabilities
Net position
USD
K’000
GBP
K’000
Euro
K’000
Total
K’000
396,027
600,320
12,761
1,197
1,157
31,784
1,061
429,008
600,320
14,979
1,009,108
2,354
32,845
1,044,307
358,624
458,270
188,940
1,550
584
1,876
30,928
362,050
458,270
220,452
1,005,834
2,134
32,804
1,040,772
3,274
220
41
3,535
886,776
835,385
2,306
2,032
32,347
32,236
921,429
869,653
51,391
274
111
51,776
At 31 December 2013
Financial assets
Net position
68
193,321
189,701
145,855
43,846
383,022
65,437
317,585
1-3
months
K’000
306,069
180,552
144,496
36,056
486,621
70,796
415,825
3-6
months
K’000
407,450
406,314
342,437
63,877
813,764
331,100
482,664
6-12
months
K’000
345,617
296,749
57,265
239,484
642,366
533,327
109,039
1-3
years
K’000
779,531
71,223
71,223
850,754
845,395
5,359
3-5
years
K’000
620,888
3,784
3,784
624,672
624,403
269
Over 5
years
K’000
(928,141)
5,511,990
5,053,720
458,270
4,583,849
3,138,509
1,445,340
Total
K’000
The table above summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier
of contractual re-pricing or maturity dates. The Bank does not bear any interest rate risk on off statement of financial position items. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks
ever to be completely matched since business transacted is often of uncertain terms and of different types. An unmatched position potentially enhances profitability, but
can also increase the risk of losses.
(3,581,017)
Total interest re-pricing gap
4,363,667
-
Liabilities
Customer deposits
Borrowings
4,363,667
782,650
668,051
114,599
Up to
1 months
K’000
Assets
At 31 December 2014
(f) Interest rate risk
2014 annual report
69
70
5,028,196
-
5,028,196
(3,924,654)
Liabilities
Deposits from customers
Borrowings
Interest re-pricing gap
64,935
175,077
130,459
44,618
240,012
104,265
135,747
1-3
months
K’000
419,525
124,519
110,731
13,788
544,044
149,207
394,837
3-6
months
K’000
336,010
303,798
245,393
58,405
639,808
268,802
371,006
6-12
months
K’000
847,278
240,231
99
240,132
1,087,509
441,152
646,357
1-3
years
K’000
1,474,059
13,022
13,022
1,487,081
1,062,564
424,517
1-3
months
K’000
506,477
3,256
3,256
509,733
502,424
7,309
Over 5
years
K’000
(276,370)
5,888,099
5,514,878
373,221
5,611,729
150,000
132,543
2,987,685
2,341,501
Total
K’000
The table above summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorised by the earlier
of contractual re-pricing or maturity dates. The Bank does not bear any interest rate risk on off statement of financial position items. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Bank. It is unusual for banks
ever to be completely matched since business transacted is often of uncertain terms and of different types. An unmatched position potentially enhances profitability, but
can also increase the risk of losses.
1,103,542
150,000
132,543
459,271
361,728
Up to
1 months
K’000
Assets
Balances with Bank of Zambia
Balances with other Banks
At 31 December 2013
(f) Interest rate risk (Continued)
2014 annual report
2014 annual report
(g) Fair values of financial assets and liabilities
The fair value of held-to-maturity investment securities at 31 December 2014 is estimated at K NIL (2013: K1,345,966,000). The fair values of the
Bank’s other financial assets and liabilities approximate the respective carrying amounts, due to the generally short periods to contractual re-pricing
or maturity dates as set out above. Fair values are based on discounted cash flows using discount rates based upon the yield rates on similar
financial assets at the reporting date.
Fair value hierarchy
IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuations techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank market assumptions. The two
types of inputs have created the following fair value hierarchy:
• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities
and debt instruments on stock exchanges (for example, Lusaka Stock Exchange);
• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices);
• Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes equity investments and debt instruments with significant unobservable components.
This hierarchy requires the use of observable market data when available. The Bank considers relevant and observable market prices in its valuations
where possible.
(g) (i) Fair value of the Bank’s financial assets and financial liabilities that are measured at fair value on a recurring basis
Financial
assets/financial
liabilities
Available for sale
financial assets
Fair value
hierarchy
Fair value as at
31 December
2014
K’ 000
1,397,052
Valuation
technique(s) and
key input(s)
“Significant
unobservable
input (s)”
2013
K’ 000
2,341,501
-
Quoted bid prices
in an active market
-
There were no transfers between level 1 and 2 in the period.
71
2014 annual report
(g) Fair values of financial assets and liabilities (Continued)
(g) (ii) Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value
disclosures are required)
Except as detailed in the following table, the directors consider that the carrying amounts of financial assets and financial liabilities recognised in
the financial statements approximate their fair values.
Financial assets Loans and receivables:
- Loans and advances to customers
Fair value of investment
– Treasury Bills
– Government bonds
Fair values of financial assets and liabilities
Financial liabilities held at amortised cost:
– Loans from other entities – Customer deposits
2014
Carrying
amount
K’000
2014
Fair value
K’000
2013
Carrying
amount
K’000
2013
Fair value
K’000
3,259,456
3,259,456
1,641,931
966,765
675,166
3,138,509
3,138,509
1,397,052
821,131
575,921
3,060,087
3,060,087
2,416,084
1,055,069
1,361,015
2,987,685
2,987,685
2,341,501
995,535
1,345,966
5,511,990
458,270
5,053,720
5,511,990
458,270
5,053,720
5,888,099
373,221
5,514,878
5,888,099
373,221
5,514,878
Level 1
K’000
Level 1
K’000
Level 3
K’000
Total
K’000
-
-
3,138,509
3,138,509
-
-
821,131
575,921
821,131
575,921
-
-
4,535,561
4,535,561
-
-
5,053,720
5,055,720
-
-
5,053,720
5,053,720
Fair value hierarchy as at 31 December 2014
Financial assets
Loans and receivables:
- Loans and advances to customers
Fair value of investment
- Treasury bills
- Government bonds
Total
– Customer deposits
The fair values of the financial assets and financial liabilities included in the level 2 and level 3 categories above have been determined in
accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the
discount rate that reflects the credit risk of counterparties. 72
2014 annual report
(g) (iii) Reconciliation of Level 3 fair value measurement
31 December 2014
Opening balance
Total gains or losses:
– in other comprehensive income
Purchases Disposals/settlements Closing balance
31 December 2013 Opening balance
Total gains or losses:
– in other comprehensive income
Purchases Disposals/settlements Closing balance
Government
bonds
K’000
Treasury
bills
K’000
Total
K’000
1,345,966
995,535
2,341,501
(21,621)
5,581
(754,005)
(6,278)
827,410
(995,536)
(27,899)
832,991
(1,749,541)
575,921
821,131
1,397,052
1,283,537
660,738
1,944,275
(2,030)
349,696
(285,237)
3,289
996,349
(664,841)
1,259
1,346,045
(950,078)
1,345,966
995,535
2,341,501
The total gains for the year included an unrealised loss of K27,899 relating to financial assets that are measured at fair value at the end of each
reporting period (2013: a gain of K3,289). Such fair value gains or losses are included in ‘other gains and losses’.
All gains and losses included in other comprehensive income relate to unlisted shares held at the end of the reporting period and are reported as
changes of ‘Investment revaluation reserve’.
(h) Capital management Capital management is a key contributor to shareholder value. The Bank’s objectives when managing capital, which is a broader concept than the
‘equity’ on the statement of financial positions, are:
• to comply with the capital requirements set by the Banking and Financial Services Act, 1994 (as amended);
• to safeguard the Bank’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits
or other stakeholders;
• to maintain a strong capital base to support the development of its business;
• to allocate capital to businesses using risk-based capital allocation, to support the Bank’s strategic objectives, including optimising
returns on shareholder and regulatory capital; and
• maintain the dividend policy and dividend declarations of the Bank while taking into consideration shareholder and regulatory expectations.
73
2014 annual report
(h) Capital management (Continued)
Capital adequacy and use of regulatory capital are monitored regularly by management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of
Zambia on a monthly basis.
Regulatory capital
The Bank manages its capital base to achieve a prudent balance between maintaining capital levels to support business growth, maintaining
depositor and creditor confidence, and providing competitive returns to shareholders.
The Bank of Zambia requires local banks to:
(a) hold the minimum level of regulatory capital of K104 million; (b) maintain a ratio of total regulatory capital to the risk-weighted assets plus risk-weighted off-statement of financial position assets (the
Basel ratio’) at or above the required minimum of 10%; (c) maintain primary or tier 1 capital of not less than 5% of total risk weighted assets; and
(d) maintain total capital of not less than 10% of risk-weighted assets plus risk-weighted off-statement of financial position items.
Regulatory capital adequacy is measured through risk-based ratio:
• Tier 1 capital (primary capital): common shareholders’ equity, qualifying preferred shares and minority interests in the equity of
subsidiaries that are less than wholly owned;
• Tier 2 capital (secondary capital): qualifying preferred shares, 40% of revaluation reserves, subordinated term debt or loan stock with a
minimum original term of maturity of over five years (subject to a straight-line amortisation during the last five years leaving no more
than 20% of the original amount outstanding in the final year before redemption) and other capital instruments which the Bank of
Zambia may allow. The maximum amount of secondary capital is limited to 100% of primary capital.
Risk-weighted assets are determined on a granular basis by using risk weights calculated from internally derived risk parameters within the regulatory requirements.
The risk weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of – and reflecting an
estimate of the credit risk associated with – each asset and counterparty. A similar treatment is adopted for off-Statement of financial position
exposure, with some adjustments to reflect the more contingent nature of the potential losses.
74
2014 annual report
The table below summarises the composition of regulatory capital and the ratios of the Bank as at 31 December:
Tier 1 capital
Tier 1 + Tier 2 capital
Risk-weighted assets
On-balance sheet
Off-balance sheet
Total risk-weighted assets
Regulatory ratios
Tier 1 (Regulatory minimum – 5%)
Tier 1 + Tier 2 (Regulatory minimum – 10%)
6. Interest income
Arising from:
Loans and advances
Government and other securities
Cash and short term funds
Banks
7. Interest expense
Arising on:
Customer deposits
Deposits by bank
2014
K’ 000
2013
K’ 000
716,020
746,214
635,726
664,744
3,195,064
345,763
3,152,390
165,159
3,540,828
3,317,549
20%
21%
19%
20%
536,092
237,634
89
5,627
441,462
223,013
4,071
5,006
779,442
673,552
106,560
27,409
100,211
19,958
133,969
120,169
75
2014 annual report
8. Net fees and commission income
Account maintenance fees
ATM issuer fees
Payflex
Arrangement and commitment fees
Letters of credit commissions
Commission on encashment of salary cheques
Other
Fees and commission expenses
9. Other operating income
Gain on disposal of property and equipment
Sundry operating income
10. Operating expenses
The following items are included within operating expenses:
Employee benefits expense
Depreciation of property and equipment (note 18)
Loss on disposal of property and equipment
Donations
Directors’ remuneration
- as directors of the Bank
Auditors’ remuneration
Others
The following items are included within employee benefits expense:
Post-employment benefits
- Defined contribution plans
- Defined benefit plans
- Termination benefits
- Other employee benefits
Total employee benefits expense
2014
K’000
2013
K’000
76,476
45,772
17,921
16,270
9,614
3,773
121,474
52,756
40,944
17,796
16,815
13,829
4,907
111,558
291,300
258,605
291,300
(4,115)
254,490
202
6,076
7,758
6,278
7,758
306,133
49,809
2,408
264,730
43,289
13
3,356
1,520
903
244,747
1,422
595
228,770
605,520
542,175
14,701
17,923
8,596
16,917
32,624
25,513
4,290
4,659
269,219
234,558
273,509
239,217
306,133
264,730
Loss on disposal of Government Securities
As a result of the changes to the statutory reserves requirement by the Bank of Zambia in March 2014 and the consequent Bank liquidity
position, the Bank liquidated its government securities portfolio. Due to adverse market prices, Bank incurred a loss of K104,494,000
following disposal.
76
2014 annual report
11. Income tax expense
2014
K’000
2013
K’000
73,817
(3,186)
74,260
3,690
70,631
77,950
At beginning of year
Recoveries offset against tax liability
Withholding tax suffered during the year
(30,593)
31,999
(20,936)
(34,957)
35,489
(31,125)
At end of year
(19,530)
(30,593)
- Tax payable at beginning of year
- Payable in respect of the year
- Tax paid during the year
- WHT tax recoveries in respect of prior years
5,996
73,817
(68,211)
(31,999)
20,461
74,260
(53,237)
(35,488
Tax payable at end of year
(20,397)
5,996
213,557
264,264
74,745
92,492
(20,985)
16,871
(25,113)
10,571
70,631
77,950
Current tax
Deferred tax (note 20)
Withholding tax (‘‘WHT’’) recoverable movement in the
statement of financial position
The movement during the year in the tax accounts is as follows:
The tax on the Bank’s profit before income tax differs from the
theoretical amount that would arise using the statutory income tax rate
as follows:
Profit before income tax
Tax calculated at the statutory income tax rate of 35% (2013: 35%)
Tax effect of:
Bank of Zambia impairment
Expenses not deductible for tax purposes
Income tax expense
77
2014 annual report
12. Dividends per share
The dividend paid in the year 2014 amounted to K43,313,000 in respect of the year ended 31 December 2013 representing K0.005 per share. The
board has recommended a dividend amounting to K43,313,000 (K0.005 per share) for the year ended 31 December 2014.
Payment of dividends is subject to with holding tax (WHT) at the rate of 15% for resident and non-resident shareholders. However, where there
is a double tax treaty, the WHT will be subject to the rates in the treaty. Furthermore the WHT is taxed at zero percent for individuals because the
Bank is listed on the Lusaka Stock Exchange.
13. Earnings per share
Basic earnings per share is calculated by dividing the profit after tax attributed to equity
holders of the bank by weighted average number of shares issued during the year.
Profit attributable to equity holders
Weighted number of ordinary shares in issue (thousands)
2014
K’000
2013
K’000
142,926
186,314
8,662,500
8,662 500
0.016
0.022
315,297
847,905
209,248
700,295
1,163,202
909,543
47,010
47,010
352,160
399,170
57,512
132,543
190,055
94,248
284,303
108,435
712,696
36,719
958,816
821,131
995,535
575,921
1,345,966
48,288
-
1,445,340
2,341,501
1,330,673
114,667
1,263,318
1,078,183
1,445,340
2,341,501
Basic earnings per share
There are no potentially dilutive shares, hence diluted earnings per share is the same as the
basic earnings per share.
14. Cash and balances with Bank of Zambia
Cash in hand
Balances with Bank of Zambia
15. Balances with other banks
Items in course of collection
Placements with other banks
Current balances with other Banks
Balances due from Banks abroad
16. Investment securities
Securities available-for-sale-Treasury bills
Government securities–at fair value
- Maturing within 90 days of the date of acquisition
- Maturing after 90 days of the date of acquisition
Total securities available-for-sale
Securities available-for-sale-Bonds
Government securities–at fair value
- Maturing after 90 days of the date of acquisition
Corporate bonds
Total investment securities
Current
Non-current
78
2014 annual report
16. Investment securities (Continued) The movement in investment securities available-for-sale may be summarised as follows:
At 1 January 2013 Additions
Disposals (redemption)
Gain (loss) from changes in fair value
At 31 December 2013
At 1 January 2014
Additions
Disposals (redemption)
Gain (loss) from changes in fair value
At 31 December 2014
Available-for-sale
Treasury bills
K’000
Available-for-sale
GRZ bonds
K’000
Total
K’000
660,738
996,349
(664,841)
3,289
1,283,537
349,696
(285,237)
(2,030)
1,944,275
1,346,045
(950,078)
1,259
995,535
1,345,966
2,341,501
995,535
827,410
(995,536)
(6,278)
1,345,966
5,581
(754,005)
(21,621)
2,341,501
832,991
(1,749,541)
(27,899)
821,131
575,921
1,397,052
2014
K’000
2013
K’000
1,281,219
928,741
817,340
179,605
52,551
1,303,012
989,831
566,222
148,516
52,506
3,259,456
3,060,087
(114,132)
(6,815)
(67,636)
(4,766)
(120,947)
(72,402)
3,138,509
2,987,685
1,135,384
2,003,125
981,545
2,006,140
3,138,509
2,987,685
17 . Loans and advances to customers
Commercial loans
Personal loans
Overdrafts
Mortgages
Others
Gross loans and advances
Less: Provision for impairment of loans and advances
- Individually assessed
- Collectively assessed Current
Non-current
79
2014 annual report
17. Loans and advances to customers (Continued)
Movements in provisions for impairment of loans and advances are as follows: Personal
overdrafts
K’ 000
Commercial
overdraft
K’ 000
Personal
loans
K’ 000
Commercial
loans
K’ 000
Total
K’ 000
At 1 January 2013
Impairment loss recognised
Reversal of impairment loss
Write- offs
6,732
5,865
(225)
(2,166)
11,142
793
(30)
(669)
18,366
14,238
(546)
(2,232)
10,298
11,482
(441)
(205)
46,538
32,378
(1,242)
(5,272)
At 31 December 2013
10,206
11,236
29,826
21,134
72,402
5,640
763
13,692
11,041
31,136
At 1 January 2014
Impairment loss recognised
Reversal of impairment loss
At 31 December 2014
10,206
15,451
(1,153)
24,504
11,236
11,817
(882)
22,171
29,826
15,096
(1,689)
43,233
21,134
10,704
(799)
31,039
72,402
53,068
(4,523)
120,947
Net impairment charge
14,298
10,935
13,407
9,905
48,545
Net impairment charge
All impaired loans have been written down to their estimated recoverable amount. The aggregate carrying amount of impaired loans
at 31 December 2014 was K210.1 million (2013: K135.2 million). Building at
revalued
amount
K’ 000
Motor
Vehicles
K’ 000
Fixture,
fittings and
equipment
K’ 000
Capital work
in progress
K’ 000
Total
K’ 000
Balance at 1 January 2013
Additions
Disposals
Reclassified from held-for-sale
Write-offs
135,872
9,555
(2,471)
236
-
14,591
2,330
(1,972)
-
219,779
48,774
(123)
24,917
46,345
-
395,159
107,004
(4,443)
236
(123)
Balance at 31 December 2013
Additions
Revaluation decrease
Revaluation increase
Disposals
Write-offs
143,192
5,349
(7,868)
2,499
(1,605)
14,949
415
(1,674)
-
268,430
71,872
(2,240)
71,262
(54,149)
-
497,833
23,487
(7,868)
2,499
(1,674)
(3,845)
141,567
13,690
338,062
17,113
510,432
Balance at 1 January 2013
Eliminated on disposal of assets
Charge for year
Eliminated on write-offs
2,802
(49)
2,863
-
11,898
(1,823)
1,220
-
138,330
39,206
(25)
-
153,030
(1,872)
43,289
(25)
Charge for year
Disposals
Eliminated on revaluation
Eliminated on write-offs
5,616
(5,447)
(59)
11,295
1,037
(1,564)
-
177,511
48,772
(1,364)
-
194,422
49,809
(1,564)
(5,447
(1,423)
110
10,768
224,919
-
235,797
137,576
3,654
90,919
71,262
303,411
141,457
2,922
113,143
17,113
274,635
18. Property and equipment
Cost or valuation
Accumulated depreciation and impairment
Carrying amount
At 31 December 2013
At 31 December 2014
80
2014 annual report
An independent valuation of the Bank’s buildings was performed by Messer’s Sherwood Greene Consulting to determine the fair value of the
building as at 31 December 2014. The valuation conforms to Royal Institute of Chartered Surveyor’s Appraisal and Valuation Manual valuation
standards as determined by reference to IAS 16: – Property, Plant and Equipment. Had the Bank buildings (other than bank building classified as
held for sale) been measured on historical cost basis, their carrying amount would be as follows:
Cost
Accumulated depreciation
Carrying amount 2014
K’ 000
2013
K’ 000
50,204
(3,866)
44,855
(2,391)
46,338
42,464
In accordance with section 193 of the Companies’ Act (as amended), 1994 the Register of Land and Buildings is available for inspection by
members
and their duly authorised agents at the Registered Records Office of the Bank.
2014
2013
K’ 000
K’ 000
19. Capital commitments 4,370
10,315
Authorised and contracted for
The commitments will be met from internally generated funds and borrowings.
20 . Deferred tax
Deferred tax is calculated using the enacted income tax rate of 35% (2013: 35%). The movement on
the deferred tax is as follows:
(Charge) credit to profit or loss (note 11)
Credit to equity (Note 31)
At end of year
(34,748)
3,186
(878)
(31,229)
(3,690)
171
(32,440)
(34,748)
81
2014 annual report
20. Deferred tax (Continued)
At
beginning
of year
K’ 000
Charged
(credited)
to profit
or loss
K’ 000
Credited
to equity
K’ 000
At end
of year
K’ 000
(33,425)
2,025
171
(31,229)
(33,425)
2,025
171
(31,229)
-
(3,690)
171
(3,519)
(33,425)
(1,665)
342
(34,748)
(31,229)
941
(878)
(31,166)
(3,519)
2,245
-
(1,274)
(34,748)
3,186
(878)
(32,440)
2014
K’ 000
2013
K’ 000
Prepayments and other receivables
Allowance for doubtful debts
55,525
(1,878)
53,647
35,927
(4,660)
31,267
Staff loans marked to market
Visa transactions
Defined benefit asset (note 24)
Insurance premiums paid in advance
Investment in Zambia Electronic Clearing House
Limited
89,816
1,041
57,909
300
307
69,315
9,575
3,203
1,252
307
203,020
114,919
4,660
(3,627)
845
3,689
971
1,878
4,660
Year ended 31 December 2013
Deferred tax assets
Other temporary differences
Net deferred tax liability
Year ended 31 December 2014
Deferred tax assets
Other temporary differences
Net deferred tax liability
21. Other assets
Movement in the allowance for doubtful debts
Balance at beginning of year
write backs
Charge for the year
Balance at end of the year
82
2014 annual report
Staff loans marked to market
Current year fair value
Amortisation to profit or loss 2014 K’000 2013
K’000 69,315 40,684 109,999
50,071
32,175
82,246
(20,183)
(12,931)
89,816 69,315
Employee loans and advances are offered on concessionary rates. House, Car and personal development loans are enhanced by collateral of
landed property and in the case of car loans the, motor vehicle registration certificate is endorsed with the Bank as absolute owner.
Where staff loans are issued to members of staff at concessionary rates, fair value is calculated based on market rates. This will result in the long
term staff loans benefit as shown above.
The prevailing interest rates on staff loans were as follows:
2014
2013
% %
House
8 8
Personal loan
12
12
Car loan
8
8
Personal Development loan
12
12
Interest income earned on staff loans
2014
K ‘000
2013
K ‘000
24,218
20,398
The bank adjusted the interest received on staff loans by the market rate of 20.5%.
Zambia Electronic Clearing House Limited The investment in Zambia Electronic Clearing House Limited (“ZECHL”) represents the Bank’s contribution to the set up costs for the establishment
of the National Switch to enhance ZECHL functionality, more specifically to support electronic point of sale transactions to help minimise cash
based transactions and their attendant costs and risks. The principal activity of ZECHL is the electronic clearing of cheques and direct debits and
credits in Zambia for its member banks. The ZECHL is funded by contributions from member banks. As there is no reliable measure of the fair
value of this investment, it is carried at cost, and regularly reviewed for impairment at each reporting date. 83
2014 annual report
22. Customer deposits
Current and demand deposits
Savings accounts
Fixed deposit accounts
Current
Non-current
23. Deposits from other banks
Items in course of collection
Deposits
2014
K’ 000
2013
K’000
3,008,710
1,278,616
766,394
2,987,875
1,730,670
796,333
5,053,720
5,514,878
4,996,455
57,265
5,514,779
99
5,053,720
5,514,878
142
-
7,205
4
142
7,209
24. Retirement benefit obligations 24.1 Defined contribution plans
Defined contribution plans are a pension plan under which the Bank pays fixed contributions into a separate entity. The Bank has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee
service in the current and prior periods.
The bank’s contributions to the defined contribution schemes are charged to profit or loss in the year to which they relate. The Bank has no further obligation once contributions have been paid.
The total expense recognised in profit or loss of K14,707 (2013: K8,596) represents contributions payable to these plans by the Bank at rates specified in the rules of the plans.
National Pension Scheme
The bank and all its employees contribute to the National Pension Scheme (“NAPSA”), which is a statutory defined contribution plan.
Zambia State Insurance Corporation Limited Certain employees of the Bank are also members of a defined retirement contribution plan operated by Zambia State Insurance Corporation
Limited. The Bank is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. 84
2014 annual report
24. Retirement benefit obligations
24.2 Defined benefit plans
The Bank sponsors funded defined benefit plans for qualifying employees. The defined benefit plans are administered by a separate Fund that
is legally separated from the Bank. The board of the pension fund is composed of an equal number of representatives from both employers and
(former) employees. The board of the pension fund is required by law and by its articles of association to act in the interest of the fund and of all
relevant stakeholders in the scheme, i.e. active employees, inactive employees, retirees, employers. The board of the pension fund is responsible
for the investment policy with regard to the assets of the fund. The scheme typically exposes the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and salary risk.
Investment risk
Interest risk
Longevity risk
Salary risk
The present value of the defined benefit plan liability is calculated using a discount rate determined by reference to
high quality corporate bond yields; if the return on plan asset is below this rate, it will create a plan deficit. Currently
the plan has a relatively balanced investment in equity securities, debt instruments and real estates. Due to the
long-term nature of the plan liabilities, the board of the pension fund considers it appropriate that a reasonable
portion of the plan assets should be invested in equity securities and in real estate to leverage the return generated
by the fund.
A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase
in the return on the plan’s debt investments.
The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality
of plan participants both during and after their employment. An increase in the life expectancy of the plan
participants will increase the plan’s liability.
The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan
participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.
The risk relating to benefits to be paid to the dependants of plan members (widow and orphan benefits) is re-insured by an external insurance
company.
No other post-retirement benefits are provided to these employees.
The most recent actuarial valuation of the plan assets and the present value of the defined benefit obligation were carried out as at 31 December
2014 by Independent Actuarial Consultancy of Johannesburg, South Africa. The present value of the defined benefit obligation, and the related
current service cost and past service cost, were measured using the projected unit credit method.
The principal assumptions used for the purposes of the actuarial valuations were as follows:
2014
2013
Discount rate %
19
16
Expected rate of salary increase %
12
10.8
Average longevity at retirement age for current employees (future pensioners) in years
21
21
Males
25
25
Females
85
2014 annual report
24 . Retirement benefit obligations (Continued)
24.2 Defined benefit plans
Amounts recognised in comprehensive income in respect of these defined benefit plans are as follows:
Service cost:
Current service cost
Past service cost and (gain)/loss from settlements
Net interest expense
Components of defined benefit costs recognised in profit or loss
Remeasurement on the net defined benefit liability: Actuarial gains arising from changes in financial assumptions
Actuarial losses arising from experience adjustments
Components of defined benefit income (costs) recognised in other comprehensive income
Total
2014
K’ 000
2013
K’ 000
9,770
(9,474)
11,072
(6,201)
296
4,871
39,908
(3,045)
36,863
13,812
(14,457)
(645)
36,863
(645)
The current service cost and the net interest expense for the year are included in the employee benefits expense in profit or loss. Of the expense
for the year, an amount of K17,923 (2013: K16,917) has been included in profit as an expense (Note 10).
The amount included in the statement of financial position arising from the entity’s obligation in respect of its defined benefit plans is as follows:
31 December
2014
K’ 000
31 December
2013
K’ 000
31 December
2012
K’ 000
(114,215)
172,124
(135,552)
138,755
(132,609)
129,336
57,909
3,203
(3,273)
57,909
3,203
(3,273)
2014
K’ 000
2013
K’ 000
At 1 January At 31 December
3,203
57,909
(3,273)
3,203
Movement in defined benefit obligation
54,706
6,476
Present value of funded defined benefit obligation
Fair value of plan assets
Funded status
Net assets (liability) arising from defined benefit obligation
Reconciled as follows:
86
2014 annual report
Movements in the present value of the defined benefit obligation in the current year were as follows:
2014 2013
K’ 000 K’ 000
Opening defined benefit obligation 135,552
132,609
Current service cost 9,770
2,384
Interest cost 21,248 19,891
Remeasurement (gains) losses:
- Actuarial gains arising from
changes in financial assumptions (39,908)
(13,812)
- Actuarial losses arising from
experience adjustments
3,045 14,457
Benefits paid
(15,492)
(19,977)
Closing defined benefit obligation
114,215 135,552
Movements in the fair value of the plan assets in the current year were as follows:
Opening fair value of plan assets
Remeasurement gain (loss):
Return on plan assets (excluding amounts included
in net interest expense)
Others (funded expenses)
Contributions from the employer
Contributions from plan participants
Benefits paid Closing fair value of plan assets
2014
K’ 000
2013
K’ 000
138,755
129,336
23,078
(1,101)
17,923
8,961
(15,492)
5,033
(1, 012)
16,917
8,458
(19,977)
172,124
138,755
87
2014 annual report
24. Retirement benefit obligations (Continued)
24.2 Defined benefit plans (Continued)
The fair value of the plan assets at the end of the reporting period for each category, are as follows:
2014
K’ 000
2013
K’000
Cash and cash equivalents Equity investments categorised by industry type:
Consumer industry Manufacturing industry Energy and utilities Financial institutions
ICT and telecom Sub total
Debt investments categorised by issuers’ credit rating:
AAA
BBB and lower
not rated Subtotal Properties categorised by nature and location:
Retail shops
Commercial properties Residential properties 2,482
2,364
16,336
13,200
2,767
30,378
156
19,036
11,726
2,217
10,179
111
65,319
45,633
4,656
15,014
15,947
35,617
4,194
14,613
12,268
31,075
1,842
24,047
45,299
1,687
18,879
41,481
71,188
62,047
172,124
138,755
Subtotal Total
The fair values of the above equity and debt instruments are determined based on quoted market prices in active markets whereas the fair values
of properties and derivatives are not based on quoted market prices in active markets. It is the policy of the fund to use interest rate swaps to
hedge its exposure to interest rate risk. This policy has been implemented during the current and prior years. Foreign currency exposures are fully
hedged by the use of the forward foreign exchange contracts.
The actual return on plan assets was 5% (2013: 5%).
Significant actuarial assumptions for the determination of the defined obligation are discount rate, expected salary increase and mortality. The
sensitivity analyses below have been determined based on reasonably possible changes of the respective assumptions occurring at the end of
the reporting period, while holding all other assumptions constant.
• If the discount rate is 100 basis points higher (lower), the defined benefit obligation would decrease by K7,438 (increase by K6,742).
• If the expected salary growth increases (decreases) by 1%, the defined benefit obligation would increase by K7,218 (decrease by K6,628).
• If the life expectancy increases (decreases) by one year for both men and women, the defined benefit obligation would decrease by K1,091
(increase by K1,053).
The sensitivity analysis presented above may not be representative of the actual change in the defined benefit obligation as it is unlikely that the
change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
Furthermore, in presenting the above sensitivity analysis, the present value of the defined benefit obligation has been calculated using the
projected unit credit method at the end of the reporting period, which is the same as that applied in calculating the defined benefit obligation
liability recognised in the statement of financial position.
88
2014 annual report
There was no change in the methods and assumptions used in preparing the sensitivity analysis from prior years.
Each year an Asset-Liability-Matching study is performed in which the consequences of the strategic investment policies are analysed in terms
of risk-and-return profiles. Investment and contribution policies are integrated within this study. Main strategic choices that are formulated in the
actuarial and technical policy document of the Fund are: • Asset mix based on 25% equity instruments, 50% debt instruments and 25% investment property.
The Bank fund the cost of the entitlements expected to be earned on a yearly basis. Employees pay a fixed 10% percentage of pensionable
salary. The residual contribution (including back service payments) is paid by the Bank. The funding requirements are based on the local actuarial
measurement framework. In this framework the discount rate is set on a risk free rate. Furthermore, premiums are determined on a current salary
base. Additional liabilities stemming from past service due to salary increases (back-service liabilities) are paid immediately to the Fund. The average duration of the benefit obligation at 31 December 2014 is 12.6 years (2013: 13.8 years). This number can be analysed as follows:
• active members: 19.2 years (2013 : 19.4 years).
The Bank expects to make a contribution of K17,923 (2013: 16,917) to the defined benefit plans during the next financial year.
2014
K’ 000
2013
K’ 000
(114,215)
172,124
(135,552)
138,755
Deficit
Unrecognised losses
Prepaid pension cost
Asset ceiling restriction
57,909
57,909
-
3,203
3,203
-
Prepaid pension cost after asset ceiling restriction
57,909
3,203
Reconciliation of funded status
Present value of obligations
Fair value of plan assets
89
2014 annual report
2014
K’000
2013
K’ 000
33,133
18,379
28,855
510
5,560
9,580
10,070
56,704
24,059
22,920
20,497
19,405
8,535
3,477
1,227
106,087
156,824
Retirement
benefits
obligations
K’ 000
Provision
for legal
claims
K’ 000
Total
K’ 000
3,795
5,081
(2,000)
(6,476)
11,559
(500)
-
15,354
5,081
(2,500)
(6,476)
400
11,059
11,459
400
4,680
(4,456)
11,059
355
-
11,459
5,035
(4,456)
624
11,414
12,038
25. Other liabilities
Accrued expenses
Advance loan repayment
Statutory payments
Sundry payables
Visa transactions payable
Deferred arrangement fees
Bills payable
Incoming swifts transfers
26. Provisions for liabilities and charges
At 1 January 2013
Provision
Payment
Decrease in defined benefit obligation
At 31 December 2013
At 1 January 2014
Provision
Payment
At 31 December 2014
(i) Retirement benefit obligation represents contributions payable to define contribution plans by the bank at rate specifies in the rules of the plans.
(ii) The Bank is enganged in certain on-going litigation. The Bank has obtained advice from its legal advisors of the legal claims and have accessed the likelihood of a present obligation arising from litigation as probable.
27. Borrowings
Payable to:
Nederlandse Financierings-Maatschappij
Voor Ontwikkelingslanden N.V
International Financing Corporation
Societe de Promotion et de Participation
pour la Cooperation Economique
African Development Bank
Deutsche Investitions-Und Entwicklungsgesellschaft mbh
90
2014
K’ 000
2013
K’ 000
80,125
96,150
110,300
110,299
80,125
41,620
160,250
110,300
42,322
-
458,270
373,221
2014 annual report
The movement during the year was as follows:
Repayments during the year
Proceeds from borrowings
Exchange losses
At end of year
Repayable as follows:
• 1 - 12 months
• 1 - 3 years
• 3 - 5 years
• After 5 years
2014
K’ 000
2013
K’ 000
373,221
(119,742)
160,250
44,541
494,065
(148,643)
27,799
458,270
373,221
143,779
239,484
71,223
3,784
116,811
240,132
13,022
3,256
458,270
373,221
The Bank obtained a foreign currency facility of US$50 million from Nederlandse Financierings-Maatschappij Voor Ontwikkelingslanden N.V
(FMO) and Societe de Promotion et de Participation pour la Cooperation Economique (PROPARCO) in the year ended 31 December 2011.
During the year 2010, 2011 and 2014, the Bank secured further amounts of US$5 million and US$50 million from African Development Bank
(ADB) , International Financing corporations (IFC) and Deutsche investitutions-Und Entwicklungsgesellschaft mbh (DEG) respectively.
Under the terms of the FMO and PROPARCO loan, the Bank is required to observe inter alia, the following financial covenants:
Covenants
• Capital adequacy ratio: Minimum 10%
• Open loan exposure ratio: not to exceed 25%
• Related party lending ratio: not to exceed
20%
• Net interest margin: Minimum
2%
• Cost to income ratio: not exceed 70% after 2010
The only financial covenant to be observed under the terms of the ADB loan is as follow:
The only financial covenant to be observed under the terms of the DEG loan is as follow:
• Open loan exposure ratio: not to exceed 25%
• Related party lending ratio: not to exceed
20%
• Net interest margin: Minimum
2%
• Cost to income ratio: not exceed 70%
• Market Risk 25%
• Liquidity ratio 300
• Single group exposure 25%
91
2014 annual report
27. Borrowings (Continued)
Under the terms of the IFC loan, the Bank is required to observe inter-alia, the following covenants:
Covenants
• Equity to asset ratio not less than 5%
• Economic Group exposure ratio not more than 25%
• Aggregate large exposure ratio of not more than
400%
• Related party exposure ratio of not more than 15%
• Open credit exposure ratio of not more than 25%
• Fixed assets plus equity investment ratio of not more than
35%
• Aggregate foreign exchange exposure of not more than 25%
• Single Currency Foreign Exchange Risk Ratio of not more
10%
• Interest rate risk ratio of not more than 10%
• Aggregate interest rate risk ratio of not more than
20%
• Foreign Currency Maturity Gap of at least
(150%)
• Aggregate negative maturity gap ratio of not less than
(300%)
• Single industry exposure ratio of not more than 30%
28. Share capital
Number of
shares
8,662,500
Ordinary
shares
K’ 000
86,625
Share
premium
K’ 000
2,622
8,662,500
86,625
2,622
The total authorised number of ordinary shares is 10,000 million (2013: 10,000 million) with a par value of 1 Ngwee per share. 8,663 (2013:
8,663) million shares are issued and fully paid.
During the year, the Bank maintained its paid up share capital at K86,625,000 in compliance with the Bank of Zambia minimum capital requirements announced on 30 January 2012.
Below is the shareholding structure:
Rabo International Advisory Services (RIAS)
Government of Zambia
National Pension Scheme Authority
Lizara Investments Limited (as nominees for
Zambia National Farmers Union)
Africa Life Financial Services Limited
managed funds
Public Service Pension Fund
Mukuba Pension Trust Fund
Other
Total
92
2014
%
2013
%
45.59
25.00
8.91
45.59
25.00
8.91
3.41
3.04
3.41
3.04
2.76
2.27
9.02
2.76
2.27
9.02
100.00
100.00
2014 annual report
29. Statutory reserve
2014
K’ 000
2013
K’ 000
Transfer from retained earnings
86,625
-
11,550
75,075
At end of year
86,625
86,625
The regulatory reserve represents an appropriation from
retained earnings to comply with SI No.182 of 1995.
30. General banking reserves
At 1 January 2014
Transfer from retained earnings
154,746
33,733
109,416
45,330
At 31 December 2014
188,479
154,746
The balance in the general banking reserve represents the excess of impairment provisions determined in accordance with the Bank of Zambia
prudential regulations over the impairment provisions recognised in accordance with IFRS. Where the IFRS impairment exceeds the Bank of Zambia
provisioning, a reversal is done from general banking reserves to revenue reserves.
2014
K’ 000
2013
K’ 000
Transfer of excess depreciation
Revaluation surplus on property
Deferred tax on revaluation (note 20)
Deferred tax on excess depreciation
Transfer of revaluation after disposal
54,189
7,944
(878)
-
56,451
(2,361)
171
826
(898)
At end of year
Available-for-sale financial assets
61,255
54,189
Net loss from changes in fair value
Net gain transferred to profit and loss account
4,102
(4,102)
(23,797)
813
(813)
4,102
At end of year
Total revaluation reserves
Available-for-sale-Investment
(23,797)
4,102
61,255
(23,797)
54,189
4,102
37,458
58,291
31. Revaluation reserves
At end of year
93
2014 annual report
32. Off statement of financial position, financial instruments, contingent liabilities and commitments
In common with other banks, the Bank conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties.
2014
2013
K’ 000
K’ 000
Contingent liabilities
820,322
460,688
Guarantees and performance bonds
44,289
12,699
864,611 473,387
Nature of contingent liabilities
An acceptance is an undertaking by a bank to pay a bill of exchange drawn on a customer. The Bank expects most acceptances to be presented,
and reimbursement by the customer is normally immediate. Letters of credit commit the Bank to make payments to third parties, on production
of documents, which are subsequently reimbursed by customers.
Guarantees are generally written by a bank to support performance by a customer to third parties. The Bank will only be required to meet these
obligations in the event of the customer’s default. During the ordinary course of business the Bank is subject to threatened or actual legal proceedings. All such material cases are periodically
reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Bank incurring a liability.
In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management’s
best estimate of the amount required to settle the obligation at the relevant reporting date. In some cases it will not be possible to form a view,
either because the facts are unclear or because further time is needed to properly assess the merits of the case. The Bank has contingent liability
amounting to K29,387,000 on 31 December 2014 relating to staff claims and contigent assets of K11,414,000.
Other commitments
2014
2013
K’ 000
K’ 000
Undrawn stand-by facilities, credit lines and other
commitments to lend
127,581
332,814
Nature of commitments
Commitments to lend are agreements to lend to a customer in future subject to certain conditions. Such commitments are normally made for
a fixed period. The Bank may withdraw from its contractual obligation for the undrawn portion of agreed overdraft limits by giving reasonable
notice to the customer.
33. Analysis of cash and cash equivalents as shown in the statement cash flows statement
Cash and balances with Bank of Zambia (Note 14)
Less: Statutory deposits requirement (see below)
Government and other securities (Note 16)
Balances with other banks (Note 15)
Amounts due to Banking Institutions (Note 23)
94
2014
K’000
2013
K’000
1,163,202
(674,413)
108,435
909,543
(352,492)
36,719
597,224
593,770
399,170
(142)
284,303
(7,209)
996,252
870,864
2014 annual report
33. Analysis of cash and cash equivalents as shown in the statement cash flows statement For the purposes of the statement of cash flows, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with the Bank of Zambia, Treasury Bills and other eligible bills, and amounts due from other banks. Cash and
cash equivalents exclude the cash reserve requirement held with the Bank of Zambia.
Banks are required to maintain a prescribed minimum cash balance with the Bank of Zambia that is not available to finance the bank’s day-to-day
activities. The amount is determined as 8% of the average outstanding customer deposits over a cash reserve cycle period of one week.
34. Related party transactions
The Bank’s major shareholder is Rabo International Advisory Services (RIAS) BV a subsidiary of Cooperation Raiffeisen – Boerenleenbank CV (Rabobank) incorporated in The Netherlands. There are no other companies which are related to Zambia National Commercial Bank Plc, listed on the
Lusaka Stock Exchange. Government of the Republic of Zambia hold a 25% interest in the Bank.
In the normal course of business, current accounts are operated and placings of foreign currencies are made with Rabobank at market rates (arms
length).
2014 2013
K’000 K’000
(a) Loans to Directors Loans and advances to companies controlled by directors 17,873
11,990
(b) Shareholder’s guarantee During the year, the Government had guaranteed outstanding letters of credit and a loan in respect of two public sector entities all amounting to
K 828,802,000.
2014
2013
K’ 000
K’ 000
Provisions on loans given to related parties
-
(c) Deposits from directors
Deposits from Directors -
(d) Key management personnel compensation
Salaries and other short-term employment benefits
29,577
31,685
7,875
7,174
1,520 1,422
(e) Management fees paid to Rabo International
Advisory Services (RIAS)
Fees are computed on the basis of the Management contract.
(f) Directors’ remuneration
- as directors of the Bank
(g) Shareholder deposits Deposits
Interest expense incurred
1,678,905
1,199,200
31,945
16,912
95
2014 annual report
35. Segmental reporting
Following the management approach of IFRS 8, operating segments are reported in accordance with the internal reporting provided to
the Executive Management Committee (the chief operating decision-maker), which is responsible for allocating resources to the reportable
segments and assesses its performance. All operating segments used by the Bank meet the definition of a reportable segment under IFRS 8.
The Bank has two main business segments:
• Retail banking:-incorporating private banking services, private customer current accounts, savings, deposits, investment savings products, safe
custody, credit and debit cards, consumer loans and mortgages;
• Corporate banking:-incorporating direct debit facilities, current accounts, deposits, overdrafts, loans and other credit facilities and foreign
currency.
Other Bank operations comprise Treasury management, Credit and computer services, none of which constitute a separate reportable segment
and business activities. As the Bank segment operations are all financial with a majority of revenues deriving from interest and the Executive
Management Committee relies primarily on net interest revenues to assess the performance of the segment, the total interest income for all
reportable segments is presented on a net basis.
The Banks management reporting is based on a measure of operating profit comprising net interest income, loan impairment charge, net fee
and commission income and other income.
The information provided about each segment is based on the internal reports about segment profit or loss, which are regularly reviewed by
Executive Management Committee.
Business segments
• Corporate Banking
• Retail Banking
• Treasury
Corporate
Retail banking
Business segments as at 31 December 2014
banking
K’ 000
K’ 000
Treasury
K’ 000
Total
K’ 000
Net interest income
195,020
86,706
-
208,933
204,594
6,278
241,520
29,065
645,473
291,300
35,343
Total income
281,726
419,805
270,585
972,116
96,348
79,255
14,254
140,594
143,038
-
225,008
16,070
461,950
222,293
30,324
189,857
283,632
241,078
714,567
Total assets for reportable segments
2,586,660
2,039,312
2,037,831
6,663,803
Total liabilities for reportable segments
3,686,047
1,973,018
3,632
5,662,697
Total assets for reportable segments
2,131,394
1,849,102
2,991,459
6,971,995
Total liabilities for reportable segments
4,220,959
1,689,079
194,297
6,104,335
Net interest income
Total income
Management have considered the requirements of IFRS 8: Operating Segment paragraph 21 which requires an entity to disclose reported
segment profit or loss, segment assets and segment liabilities. On the basis of the information available to management, it is not practical to
disclose profit or loss for each reportable segment.
96
2014 annual report
36. Events after the reporting date There were no material significant events after the reporting date that require disclosure in or adjustment to the financial statements for the
year ended 31 December 2014.
97
2014 annual report
CAPITAL ADEQUACY RATIOS
APPENDIX I
Computation of regulatory capital ( under the Banking and Financial Services Act 1994, as amended)
I Primary (tier 1) capital
(a) Paid up common shares
(b) Eligible preferred shares
(c) Contributed surplus
(d) Retained earnings (e) General reserves
(f ) Statutory reserves
(g) Minority interests (common shareholders’ equity)
(h) Shareholders’ loan capital
(i) Sub-total
Less (j) Goodwill and other intangible assets
(k) Investments in unconsolidated subsidiaries and associates
(l) Lending of a capital nature to subsidiaries and associates
(m) Holding of other bank’s or financial institutions’ capital instruments
(n) Assets pledged to secure liabilities
Sub-total (A) (items i to m)
Other adjustments
Provisions Assets of little or no realisable value - specify details or use separate list if necessary.
Other adjustments (prepaid expenses)
(o) Sub-total (B)
(Sub-total A above + other adjustments)
(p) Total primary capital (h - n)
II Secondary (tier 2)
(a) Eligible preferred shares (regulations 13 and 17)
(b) Eligible subordinated term debt (regulation 17 (b)
(c) Eligible loan stock/capital (regulation 17(b)
(d) Revaluation reserves (regulation 17 (a) (Max. is 40% of res. ratio)
(e) Other (regulation 17)
(f ) Total secondary capital
III Eligible secondary capital
(the maximum amount of secondary capital is limited to 100% of primary capital)
IV Eligible total capital (i) (o)
(Regulatory capital)
V Minimum capital requirement:
(10% of total on and off balance sheet risk-weighted assets as established in the first schedule, or
K104 million, whichever is the higher)
On-balance sheet
Off-balance sheet
VI Excess (deficiency) – (IV minus V)
Regulatory capital as % risk weighted assets
Primary capital as % of risk weighted assets
98
2014
K’000
86,625
2,622
544,165
86,625
720,037
307
719,730
3,710
3,710
716,020
30,194
30,194
30,194
746,214
3,195,064
345,764
3,540,828
21
20
2014 annual report
RISK WEIGHTED ASSETS (CONTINUED)
APPENDIX II
Part 1 - Calculation of risk weighted assets
Assets
Notes and coins - Zambian notes and coins
- Other notes and coins
Balances held with the Bank of Zambia
- Statutory reserves
- Other balances
Balances with commercial banks in Zambia
- With residual maturity of up to 12 months
- With residual maturity of more than 12 months
Balances with commercial banks abroad
- With residual maturity of up to 12 months
Assets in transit
- From other commercial banks
- From branches to reporting bank
Investment in debt securities
- Treasury bills
- Other government securities
- private securities
- Issued by local government units
Bills of exchange
Loans and advances
- Portion secured by cash or treasury bills
- Loans to or guaranteed by the government of Zambia
- Loans repayable in instalments and secured by a mortgage on owner-occupied residential property
- Loans to or guaranteed by local government units
- Loans to parastatals - Other
Risk
Weight
%
Balance (net
of allowance
for losses)
Riskweighted
assets (1
x 2)
0
0
295,431
19,866
0
0
674,413
264,535
20
100
361,314
-
72,263
-
20
100
-
-
50
20
47,010
-
23,505
-
0
20
100
795,851
562,202
48,288
112,440
48,288
0
50
37,582
157,272
78,636
50
100
100
100
859,325
9,533
102,712
1,875,388
429,663
9,533
102,712
1,875,388
6,110,722
2,752,428
100
99
2014 annual report
RISK WEIGHTED ASSETS (CONTINUED)
APPENDIX II
Part 1 - Calculation of risk weighted assets
Risk
Weight
%
Balance brought forward Inter-bank advances and loans/advances - Guaranteed by other banks
- With a residual maturity of 12 months
Bank premises Acceptances
Other assets
Investment in equity of other companies
Total risk-weighted assets (on balance sheet)
Part 2 - Off balance sheet obligations
(Under first schedule - regulations 21 and 24)
Letters of credit
- Sight import letters of credit
- Portion secured by cash/treasury bills
- Standby letters of credit
- Export letters of credit confirmed
Guarantees and Indemnities
- Guarantees for loans, trade and securities
- Performance bonds
- Securities purchased under resale agreement
- Other contingent liabilities
- Net open position in foreign currencies
Total risk-weighted assets (off balance sheet)
Total risk-weighted assets (on and off balance sheet)
100
Balance (net
of allowance
for losses)
Riskweighted
assets (1 x 2)
6,110,722
2,752,428
141,457
300,872
307
141,457
300,872
307
6,553,358
3,195,065
20
0
100
-
304,728
0
2,795
-
60,946
100
0
50
100
100
13,300
523,533
3,065
17,191
0
864,612
261,767
3,065
17,191
345,763
7,417,970
3,540,828
20
100
100
100
100
100
2,795
-
2014 annual report
5 YEAR FINANCIAL TRENDS
STATEMENT OF PROFIT OR LOSS
Interest income
Interest expenses
Net interest income
Commission and others
Operating income
Operating expenses
Impairment
Profit before loss from sale of Bonds
&before tax
Loss on disposal of GRZ bonds
Profit before tax
Tax charge
Profit for the year
2014
K’000
2013
K’000
2012
K’000
2011
K’000
2010
K’000
779,442
(133,969)
645,473
326,643
972,116
(605,520)
(48,545)
673,552
(120,169)
553,383
284,192
837,575
(542,175)
(31,136)
550,876
(88,926)
461,950
252,617
713,567
(476,044)
(243)
453,533
(60,139)
393,394
232,648
626,042
(421,252)
(19,852)
368,023
(43,828)
324,195
244,088
568,283
(361,624)
(34,364)
318,051
(104,494)
213,557
(70,631)
142,926
264,264
264,264
(77,950)
186,314
238,280
238,280
(82,192)
156,088
184,938
184,938
(64,425)
120,513
172,295
172,295
(59,785)
112,510
STATEMENT OF FINANCIAL POSITION
Other assets
Total assets
1,163,202
399,170
1,445,340
3,138,509
274,635
242,947
6,663,803
909,543
284,303
2,341,501
2,987,685
303,411
145,512
6,971,955
470,772
364,860
1,944,275
2,639,161
242,365
150,622
5,812,055
512,896
404,741
1,558,779
1,890,736
229,140
121,329
4,717,621
404,031
122,034
956,252
1,725,504
169,938
142,261
3,520,020
LIABILITIES
Customer deposits
Borrowed funds
Other liabilities
Total liabilities
5,053,720
142
458,270
150,565
5,662,697
5,514,878
7,209
373,221
209,027
6,104,335
4,314,918
22,347
494,065
267,342
5,098,672
3,412,319
1,246
511,076
210,309
4,134,950
2,591,242
24,278
161,894
266,228
3,043,642
86,625
914,481
1,001,106
6,663,803
86,625
780,995
867,620
6,971,955
86,625
626,758
713,383
5,812,055
11,550
571,121
582,671
4,717,621
11,550
464,828
476,378
3,520,020
Equity
Share capital
Reserves
Total
101
2014 annual report
NOTES
102
2014 annual report
NOTES
103

Untitled

Transcription

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