cntents - imperial bank group...anwar hajee members abdulmalek janmohamed naeem shah nina shah (ms.)...

Five Year Financial Review 2

Board of Directors 3

Company Information 4 - 8 Corporate Governance 9 - 11

Chairman’s Statement 12 - 18

Corporate Social Responsibility 19 - 22

Financial Highlights 23 - 24

Report of the Directors 25

Statement of Directors’ Responsibilities 26

Report of the Independent Auditors 27

The Financial Statements:

Income Statement 28

Statement of comprehensive income 29

Statement of financial position 30

Statement of Changes in Equity 31

Cash Flow Statement 32

Significant Accounting Policies 33 - 39

Notes to the Financial Statements 40 - 63

Contents

Co

nten

ts

2Imperial Bank Limited Annual Report and Financial Statements 2009

Interest income Non - fund based income

Total income

Operating expenses Impairment losses on loan and advances Profit before tax Net profit for the year Profit margin Non - fund based income to total income Earnings per share-basic and diluted-(Shs) Dividends per share -(Shs) Dividend pay out ratio

Loans and advances to customers (gross) Provision for impaired loans and advances Unearned interest

Loans and advances to customers (net) Cash and short-term funds Government securities Property and equipment Other assets Total assets

Minimum statutory

requirement 2009

Shs ‘000

2,677,393 522,700

3,200,093

1,027,266 58,551

801,810 555,878 25.06%16.33%

512 207

40.48%

10,399,447 (396,489) (326,848)

9,676,110 2,992,346 2,245,960

277,347 166,345

15,358,108

2008 Shs ‘000

2,412,123 467,390

2,879,513

910,305 44,199

673,427 465,687 23.39%16.23%

429 161

37.58%

9,020,787 (347,877) (396,789)

8,276,121 3,709,506

921,220 392,389 132,468

13,431,704

2007 Shs ‘000

1,989,997 482,580

2,472,577

834,468 46,224

563,958 376,009 22.81%19.52%

416 138

39.89%

7,721,557 (334,297) (386,426)

7,000,834 3,455,308

710,289 416,752 139,954

11,723,137

2006 Shs ‘000

1,649,465 279,164

1,928,629

613,274 49,672

386,582 272,505 20.04%14.47%

356 129

36.70%

5,920,511 (349,786) (150,635)

5,420,090 2,754,544

742,449 351,358 137,397

9,405,838

2005 Shs ‘000

1,246,529 257,858

1,504,387

519,730 (46,344) 304,775 205,540 20.26%17.14%

285 67

24.33%

4,677,812 (280,878) (136,092)

4,260,842 2,526,451

623,595 299,117 63,086

7,773,091

FIVe-YeAR FInAnCIALReVIeW

Customer and banking institutions deposits Other liabilities Total liabilities Net assets

Shareholders’ funds Contingent liabilities

Performance ratios Return on core capital Return on total assets Impairment charges to net advances Statement of financial position ratios Gross advances to deposits Gross advances to deposits and shareholders funds Non performing advances less provisions to total advances Liquidity Core capital to customer deposits Core capital to risk weighted assets Total capital to total risk weighted assets

Other information Gross non - performing advances Number of branches Number of employees Expenditure on intangible assets and property and equipment

20%8%8%

12%

12,862,282 248,984

13,111,266 2,246,842

2,246,842 2,141,969

43%6%

-

81%69%

3%29%16%20%22%

663,508 11

283

62,783

11,211,236 308,851

11,520,087 1,911,617

1,911,617 2,792,910

42%6%

-

80%69%

2%25%15%19%20%

560,674 11

273

73,512

9,749,898 393,156

10,143,054 1,580,083

1,580,083 1,989,475

46%6%

-

79%68%

3%25%15%18%19%

573,773 10

270

213,150

7,732,754 320,066

8,052,820 1,353,018

1,353,018 2,230,420

31%5%

-

77%65%

3%26%16%20%20%

465,097 5

184

155,743

6,432,593 218,484

6,651,077 1,122,014

1,122,014 977,794

31%4%

-

73%62%

4%4%

17%22%22%

337,847 5

163

194,167


DIRECTOR’SNAME

Mr. Alnashir Popat

Mr. AbdulmalekJanmohamed

Mr. Anwar Hajee

Mr. Jinit Shah

Mr. Mukesh Kumar Patel

Mr. Vishnu Dhutia

Mr. Hanif MohamedAmirali Somji

AGE

58

50

53

53

51

50

54

NATIONALITY

Kenyan

Kenyan

Kenyan

Kenyan

Kenyan

Kenyan

Kenyan

POSITION

Chairman

Managing Director

Non - Executive

Non - Executive

Non - Executive

Non - Executive

Non - Executive

DATE OFAPPOINTMENT

24 December 1992

24 December 1992

15 November 1993

3 November 1997

3 November 1997

15 February 1995

31 July 2002

BoARD oF DIReCtoRs

OTHER DIRECTORSHIPS

Pathcare Ltd.Downtown Hire Purchase Co. Ltd.Little BerrySpring Industries Ltd.A Star Properties Ltd.Imaran Ltd.Rising Sun Spares Ltd.Coolxtreme Ltd.

Janco Investments Ltd.Downtown Hire Purchase Co. Ltd.

African Business Consortium Ltd.Abdumal Investments Ltd.Downtown Hire Purchase Co. Ltd.Coolxtreme Ltd.

Kenblest Ltd.Kifaru Textiles Mills Ltd.Nav Plastics Ltd.Mcneel Millers Ltd.Deepna Industries Ltd.Coolxtreme Ltd. Automatic Controls Ltd.Switch Gear & Controls Ltd.Hard Tech. Ind. Supplies Ltd.Tausi Assurance Co. Ltd.Momentum Holdings Ltd.

East African Motor Industries Ltd.East African Motor Industries (Sales & Services) Ltd.

Freight Forwarders Kenya Ltd.The CombinedWarehouses Ltd.Reynolds & Co. Ltd.Craysell Investments Ltd.Coolxtreme Ltd.

QUALIFICATIONS

BA in BusinessStudies

BSC in Finance& ManagementData Systems

ACMACPA (K)

Higher NationalDiploma in BusinessStudies

O’ Levels

Diploma in BusinessAdministration

B.A ( Economic &Accounting)

PERCENTAGE OF INDIVIDUAL SHARE HOLDING IN THE BANK

7.00%

5.00%

7.00%

2.50%

6.25%

5.50%

5.60%


CoMPAnY InFoRMAtIon

PRINCIPAL SHAREHOLDERS Imaran Limited 14%Abdumal Investments Limited 14%Janco Investments Limited 13.5%Rex Motors Limited 12.5%Kenblest Limited 12.5%Momentum Holdings Limited 12.5%E.A. Motor Industries - (Sales & Services) Limited 11%Reynolds & Company Limited 10% PRINCIPAL OFFICERS Naeem Shah Senior Manager, Credit Nina Shah (Ms.) Head of TreasuryJames Kaburu Chief Financial Officer Mustaq Dar Area Manager, MombasaKalpesh Kumar Head of OperationsSanjeet Shah Head of Relationship Banking Donald Ochola Head of Information TechnologyGacheche Ikua AG. Head of Human ResourcesAnil Shah Head of Internal Audit Mehbooba Shamji Senior Business Development ManagerMuthoni Wachira Communications and Public Relations Manager

REGISTERED OFFICE L.R. Plot No. 209/11623Bunyala Road, Upper HillP.O. Box 44905, 00100NAIROBIKENYATelephone: (020) 2874000, 342380Fax: (020) 2719498, 2719705E-mail: [email protected]: www.imperialbank.co.ke

AUDITORSPKF Kenya Certified Public AccountantsKalamu House, Waiyaki WayP.O. Box 14077, 00800NAIROBIKENYA

COMPANY SECRETARYEquatorial Secretaries and RegistrarsCertified Public SecretariesP.O. Box 47323, 00100NAIROBIKENYA

LEGAL ADVISORS Hamilton, Harrison & Mathews Kairu & McCourt Anjarwalla & Khanna Advocates Inamdar & Inamdar Muthaura, Mugambi, Ayugi & Njonjo Theuri Wanjohi & Co Taibjee & Bhalla Advocates Ransley McVicken & Shaw advocates Muriu Mungai & Co Advocates Shah & Shah Advocates PRINCIPAL CORRESPONDENTS United Kingdom:

United States of America:

India:

South Africa: Dubai: Malta: Canada: Germany: Australia:

PRINCIPAL VALUERS Milligan International Peter Huth Knight Frank Kenya Limited RR Oshwald & Co Lloyd Masika Limited Datoo Kithikii Limited Coral Property Consultants Limited Tysons Limited Yusuf Datoo & Associates Valuers Burn & FawcettMwaka Musau Consultants

Citibank N.A., LondonDeutsche Bank, LondonCitibank N.A., New YorkDeutsche Bank, New YorkCitibank N.A., Mumbai, ICICI Bank, MumbaiCitibank N.A., South AfricaCitibank N.A., Wallstreet DubaiFirst International Merchant BankCitibank N.A., Toronto, OntarioDeutsche Bank, FrankfurtCommonwealth Bank of Australia


Continued

CoMPAnY InFoRMAtIon

BRANCH NETWORK Head Office & Upper Hill Branch Bunyala Road, Upper Hill, P.O. Box 44905, 00100, NAIROBIPilot line: (020) 2874000 Telephone: (020) 2719617, 342380 Fax: (020) 2719498, 2719705 E-mail: [email protected]

Mombasa Branch Imperial Bank Building, Kaunda Avenue P.O. Box 16460, 80100 MOMBASAPilot line: (041) 2105000Telephone: (041) 2228915, 2230999 Fax: (041) 2227588, 2229304 E-mail: [email protected] Malindi Branch Galana Centre, Lamu Road P.O. Box 319 MALINDI Telephone: (042) 30054 Fax: (042) 30680 E-mail: [email protected]

IPS Branch 8th Floor, IPS Building, Kimathi Street P.O. Box 44905, 00100 NAIROBI Telephone: (020) 2252175-8, 2252184/5, 2225060 Fax: (020) 2230994, 2250137 E-mail: [email protected]

Parklands Branch & Card Center Regal Plaza, Limuru Road, Parklands P.O. Box 44905, 00100 NAIROBI Telephone: (020) 3752320-2 Fax: (020) 3752325 E-mail: [email protected]

Industrial Area BranchBamburi Road, off Enterprise RoadP.O. Box 44905, 00100NAIROBITelephone: (020) 553610, 553612/13, 553627Fax: (020) 553567Email: [email protected]

Diani Branch Diani Villas, Beach Road P.O. Box 5022 DIANI Telephone: (040) 320314-7 Fax: (040) 3203818 Email: [email protected] Kilifi Branch Kilifi Arcade, Biashara Street P.O. Box 1271, 80108 KILIFI Telephone: (041) 522311/2 Email: [email protected] Karen Branch Cross Roads Mall, Karen P.O. Box 44905, 00100 NAIROBI Telephone: (020) 883074 Fax: (020) 883078 Email: [email protected]

Watamu Branch Tourist Road, P.O. Box 363 WATAMU Telephone: (042) 32411/2 Fax: (042) 31413 Email: [email protected] Eldoret Branch Imperial Court, Eldoret - Nairobi Road P.O. Box 3125, 30100 ELDORET Telephone: (053) 2062864 /2030874/2030494 Fax: (053) 2033036 Email: [email protected]


Continued

CoMPAnY InFoRMAtIon

Executive Committee

Composition Six non-executive and one executive director.

Main function Strategic decision making in accordance with powers conferred by the shareholders.

Frequency of meetings per annum Four times

Chairman Alnashir Popat

Members Abdulmalek Janmohamed Anwar Hajee Vishnu Dhutia Mukesh Patel Jinit Shah Hanif Somji

Board AuditCommittee

CompositionThree non-executive directors and head of internal audit.

Main functionStrengthening the control environment, financial reporting and auditing function.

Frequency of meetings per annumFour times

Chairman Jinit Shah

MembersAnwar HajeeMukesh PatelAnil Shah

Automation Committee CompositionNon-executive director, executive director and head of Information Technology.

Main function Appraisal, budgeting and approval of hardware and software purchases.

Frequency of meetings per annum As and when necessary

Chairman Anwar Hajee Members Abdulmalek Janmohamed Donald Ochola

Ethics Committee

CompositionNon-executive director, executive director, senior credit manager, head of treasury and chief financial officer.

Main functionSet and review ethical standards for the board and the management.

Frequency of meetings per annum As and when necessary

Chairman Anwar Hajee

Members Abdulmalek Janmohamed Naeem Shah Nina Shah (Ms.) James Kaburu

The board committees as at the date of this report comprise:BOARD COMMITTEES

Human Resources Committee

CompositionTwo non executive directors, executive director and head of Human Resources.

Main function Set and review human resources policies and approve senior management appointments.

Frequency of meetings per annumAs and when necessary

Chairman Anwar Hajee

Members Jinit Shah Abdulmalek Janmohamed Gacheche Ikua


Continued

CoMPAnY InFoRMAtIon

Credit

Committee

Composition

Executive director, senior credit

manager and head of relationship

banking.

Main function

Appraisal and approval of credit

applications and reviewing credit

portfolio.

Frequency of meetings per annum

As and when necessary

Chairman

Abdulmalek Janmohamed

Members

Naeem Shah

Sanjeet Shah

Asset and Liability

Committee

Composition

Executive director,

senior credit manager,

head of treasury and

chief financial officer.

Main function

Monitoring and management of the statement

of financial position including liquidity risk,

maturity risk, interest rate risk, foreign

currency risk and compliance with all

statutory requirements.

Frequency of meetings per annum

Weekly

Chairman

Abdulmalek Janmohamed

Members

Naeem Shah

Nina Shah (Ms.)

James Kaburu

The board committees as at the date of this report comprise:MANAGEMENT COMMITTEES

MAnAGeMent teAM

(From L to R)

Abdulmalek Janmohamed, Managing Director•James Kaburu, Chief Financial Officer•Kalpesh Jotangia, Head of Operations•Ikua Gacheche, Ag. Head of Human Resources•Mehbooba Shamji, Senior Business Development Manager•Sanjeet Shah, Head of Relationship Banking•Don Ochola, Head of Information Technology•Naeem Shah, Senior Manager, Credit•Anil Shah, Head of Internal Audit•Muthoni Wachira, Communications & Public Relations Manager•Nina Shah, Head of Treasury•


Corporate governance is the process by which companies

are directed and controlled with the objective of increasing

shareholders value and satisfying shareholders. This is achieved

by establishing a system of clearly defined authorities and

responsibilities which result in the system of internal controls

that is regularly tested to ensure effectiveness.

At Imperial Bank, the board places a high degree of importance

on maintaining a sound control environment and applying the

highest standards of business integrity and professionalism in all

areas of the bank’s activities. The board has adopted the Code

of Best Practice for Corporate Governance issued by the Centre

of Corporate Governance as its benchmark in developing the

corporate governance principles.

RESPECTIVE RESPONSIBILITIES

The shareholders’ role is to appoint the board of directors

and the external auditors. This role is extended to holding the

board accountable and responsible for efficient and effective

governance. The board of directors is responsible for the

governance of the bank, and to conduct the business and

operations of the bank with integrity and in accordance with

generally accepted corporate practices, in a manner based on

transparency, accountability and responsibility.

BOARD OF DIRECTORS

The composition of the board is set out on page 3. The board

is chaired by a non-executive chairman and comprises the

managing director and six other non-executive directors. All

non-executive directors are independent of management.

The board has varied and extensive skills in the areas of

banking, business management, accountancy and information

communication and technology. The directors’ responsibilities

are set out in the Statement of Directors Responsibilities on page

24. The directors are responsible for the development of internal

financial controls which provide safeguards against material

mis-statements and fraud and also for the fair presentation of

the financial statements.

The chairman provides the overall leadership to the board

without limiting the principle of collective responsibility for

board decisions. He acts as the link between the board and the

managing director and plays a lead role in consensus building

between the board members, the managing director and senior

management. The chairman has the casting vote on all decisions

of the board. The board has delegated the authority for day to

day management to the managing director. It however retains

the overall responsibility for financial and operating decisions

and monitoring performance of senior management.

The board meets quarterly and has a formal schedule of matters

reserved to it. The following table shows the number of Board

meetings held during the year and the attendance of individual

directors.

Number of meetings

Board Special Board

Mr. Alnashir Popat 4 2

Mr. Abdulmalek Janmohamed 4 2

Mr. Anwar Hajee 4 2

Mr. Jinit Shah 4 2

Mr. Mukesh Kumar Patel 4 2

Mr. Vishnu Dhutia 4 2

Mr. Hanif Somji 4 2

Board papers are generally circulated two weeks prior to the

board meetings. Performance trends, forecasts as well as actual

performance against budgets and prior periods are closely

monitored. Financial information is prepared using appropriate

accounting policies, which are applied consistently. Operational

procedures and controls have been established to facilitate

complete accurate and timely processing of transactions and

the safeguarding of assets. These controls also include the

segregation of duties, the regular reconciliation of accounts and

the valuation of assets and positions. The board approves the

annual budgets, credit facilities of over 5% of the bank’s core

capital to a single group and the quarterly and annual financial

reports.

CoRPoRAte GoVeRnAnCe


The key function of the board is the identification of current and

future risks including operational risk, liquidity risk, regulatory

risks, legal risk, reputational risk, market risk and credit risk and

to ensure that the necessary systems and controls are in place

to enable such risks to be measured, controlled and effectively

monitored. The Board has established a management structure,

which clearly defines roles, responsibilities and reporting lines.

Directors are required to disclose all areas of conflict of interest

to the board and are excluded from voting on such areas of

conflict. The board has access to the company secretary and

legal counsel.

New directors are required to undergo a formal induction

process to ensure that they are fully familiar with the bank’s

policies, organisation structure and corporate governance

principles. The board of directors’ performance evaluation is

carried out annually including the chairman who is evaluated

separately by other directors. The managing director is again

evaluated annually by the board against pre-set performance

criteria. The board is currently in the process of developing a

formal succession plan for all non - executive directors. Directors

are not subject to retirement by rotation.

The board has appointed various sub-committees to which it

has delegated certain responsibilities with the chairman of the

sub-committees reporting to the board. The composition of the

sub-committees is set out on page 6 - 7.

BOARD COMMITTEES

Executive Committee

The committee, which is the working committee of the board,

is chaired by the chairman and whose other members are

the managing director and six non-executive directors. The

committee meets on a quarterly basis and is responsible for

financial management and review of financial performance,

overseeing the strategic planning function, establishing and

maintaining a system of internal controls and developing the code

of corporate conduct for senior management and overseeing the

credit risk and approving credit facilities over the management

limits.

Board Audit Committee

The committee comprises three non-executive directors.

The committee meets on a quarterly basis and its functions

include:

• Monitoring and strengthening the effectiveness of

management information and internal control systems.

• Review of financial information and improving the quality of

financial reporting.

• Strengthening the effectiveness of internal and external audit

functions and deliberating on significant issues arising from

internal and external audits and inspections carried out by the

Bank Supervision Department of Central Bank of Kenya.

• Increasing the stakeholders’ confidence in the credibility and

stability of the institution.

• Monitoring instances of non-compliance with the International

Financial Reporting Standards, applicable legislation and

Central Bank of Kenya Prudential Regulations and other

pronouncements.

Ethics Committee

To strengthen the corporate governance structures, the Ethics

Committee is mandated with the task of setting and reviewing

the ethical standards for the board and management. It is

chaired by a non-executive director and includes the managing

director and members of senior management. The committee

meets on a need basis.

CoRPoRAte GoVeRnAnCeContinued


CoRPoRAte GoVeRnAnCeContinued

Automation Committee

The committee, headed by a non-executive director with

extensive experience in the field of information communication

and technology, develops the long term automation plan for the

board approval. The committee appraises the capital budgets

for all hardware and software purchases for recommendation to

the board and meets on a need basis.

Human Resources Committee

The committee is headed by a non-executive director and

comprises the managing director, a non-executive director and

the head of human resources.

The committee main functions include:

To discuss and decide on HR issues, policies and programs •

that can be adopted with an end to ensure that the Bank

continues to be employer of choice. The committee will work

with the HR Management Committee to ensure compliance

to the HR and manpower strategy.

To review, on an annual basis Bank’s Performance •

Management (PM) system and ensure compliance to the

tenets of the PM process.

Review the HR implications of any proposed restructuring •

of business and operations and ensure that consequences

thereof are part of the HR strategy.

To set and review the ethical standard for the staff body of the •

bank through a code of conduct. The ethical standards will

be adopted into the bank HR policies and communicated

to all staff.

MANAGEMENT COMMITTEES

The managing director has also set up the following committees

to assist him in the day to day operations of the bank.

Credit CommitteeThe committee is chaired by the managing director and comprises

the head of relationship banking and the senior manager credit

and meets at least once monthly. The functions of the committee

include appraisal and approval of credit applications based on

limits set by the board. The committee also monitors and reviews

non-performing advances and ensures that adequate loan loss

provisions are held against delinquent accounts in accordance

with the guidelines issued by the Central Bank of Kenya and the

board and provides monthly reporting to the board through the

executive committee.

Asset and Liability Committee The committee, chaired by the managing director and

comprising executive director, senior manager credit, head of

treasury and chief financial officer, meets on a weekly basis

to discuss operational issues and to monitor and manage the

statement of financial position to ensure that adequate resources

are available to meet anticipated fund demands and to monitor

compliance with all statutory requirements. The committee is

also responsible for developing a framework for monitoring the

banking risks including operational, liquidity, maturity, interest

rate and foreign exchange rate risks for approval by the board.

DIRECTORS’ REMUNERATION

The remuneration to all directors is based on the responsibilities

allocated to the directors, and is subject to regular review to

ensure that it adequately compensates them for the time spent

on the affairs of the bank. The remuneration paid to the directors

and key management staff is disclosed in note 34 to the financial

statements.

RELATIONSHIP WITH SHAREHOLDERS

The company is a private company with the details of the

shareholders set out on page 4. There is no particular shareholder

who has any powers whether direct or implied to control the

company. Shareholders have full access through the managing

director to all information they require in respect of the bank

and its affairs. In accordance with the guidelines issued by the

Central Bank of Kenya, the bank publishes quarterly accounts

in the dailies.

Alnashir Popat

Chairman 18th March 2010


CHAIRMAn’s stAteMent

It gives me immense pleasure to once again present the bank’s

annual report and financial statements for the year ended 31st

December 2009. The bank continued its tradition of achieving

a strong performance and carrying out strategies focusing on its

client service delivery objectives.

Global Economic ConditionsThe global economy has been experiencing a deep recession

with the world growth rate moving from 3.8% in 2007, 1.8% in

2008 to negative 2.3% in 2009. International trade in volumes

(goods and services) moved from 7.3% in 2007, 3% in 2008

to negative 11.9% in 2009. The collapse in trade during the

crisis was attributed in part to lack of credit to exporters and

importers. Increased uncertainty led exporters and importers to

switch from less secure forms of trade finance to more formal

arrangements.

REVIEW OF THE KENYAN ECONOMYDuring the period under review, the Kenyan economy performed

below its potential after a remarkable five-year economic growth

expansion averaging 5.4% experienced over the period 2003-

2007.

The economy recorded a growth of 7.1% in 2007, 1.7% in

2008 and 2.6% in 2009.The growth reversals experienced in

2008 largely extended to 2009 and was mainly occasioned by

a combination of both domestic and external shocks. In the

domestic scene, the post-election disturbances that followed the

2007 general elections, did not only adversely affect key sectors

of the economy such as Agriculture, Industry and Tourism but

also dented investor confidence.

The associated food supply downturn created by the aftermath of

the elections and adverse weather conditions saw the economy

experience un-preceded rise in food prices and famine episodes.

These internal socio-economic shocks coupled with external

shocks such as the effects of global financial crises and global

economic slowdown dampened the prospects for fast recovery

to the growth experienced between 2003-2007 periods.

On a sector basis the agricultural sector performed dismally in

2009 as a result of poor weather, expensive inputs and depressed

demand in the international market especially for horticultural

produce, with the major sub-sectors of the manufacturing sector

showing remarkable growth.

Cumulative tea production fell for two consecutive years from

a total of 369,606.2 metric tonnes produced in the year 2007,

345,818.0 metric tonnes in 2008 and 314,193.9 metric tonnes

in 2009. The decline in January - December 2009 was equivalent

to 9.1 percent compared with the output for the same period in

2008. This followed the drought experienced in the early part

of the year, and the poorly distributed rainfall in the tea growing

areas. A rise in the average prices of tea worldwide was reflected

in the monthly price of the Kenyan tea which increased to US$

3.10 per kilogram in December 2009 compared with US$ 1.99

per kilogram in December 2008. Similarly, the yearly average

price of Kenyan tea rose from US$ 2.38 per kilogram in 2008 to

US$ 2.56 per kilogram in 2009.

Horticultural export volumes declined by 6.4 percent in the

period January - December 2009 from 193,117.1 metric

tonnes in the same period in 2008. The overall decline reflected

reductions in the export volumes of flowers and vegetables as

a result of insufficient rainfall in 2009. The reverse was true

for fruit exports which increased to 21,223.0 metric tonnes

in January - December 2009 from 17,122.9 metric tonnes in

January - December 2008, equivalent to 23.9 percent increase,

attributed to the dry and sunny weather which facilitated proper

ripening of the fruits.

Coffee proved to be fairly resilient as output continued to grow

despite the unfavourable weather conditions throughout the

year in most parts of the country.

Cumulative production for the period January - December 2009

increased by 10,228.0 metric tonnes to stand at 48,933.0 metric

tonnes compared to 38,705.0 metric tonnes produced during

the same period in 2008. From the beginning of the year, coffee

output responded well to improved export prices, reaching an


CHAIRMAn’s stAteMentContinued

all time high of US $ 4.69 per kilogram in December 2009, an

increase of over 100.0 percent from a price of US $ 2.08 per

kilogram in December 2008.

Total sugarcane deliveries in the period January - December

2009 increased by 11.9 percent to 5.6 million metric tonnes

compared with deliveries amounting to 5.0 million metric tonnes

in the same period in 2008.

In the dairy sector, cumulative milk deliveries rose from 391.0

million litres between January and December 2008 to 406.3

million litres between January and December 2009 as a result

of increased fodder following the rains experienced in the last

quarter of the year.

In the manufacturing sector, cumulative sugar production

increased from 512,192.3 metric tonnes in January - December

2008 to 547,998.0 metric tonnes in the period January -

December 2009, equivalent to 7.0 percent increase.

Similarly, total cement production rose by 5.9 percent in the

year 2009. Production between January and December 2009

amounted to 3.0 million metric tonnes, from 2.8 million metric

tonnes in the period January - December 2008.

In early 2009, soda ash mining was dealt a severe blow by the

stiff competition from cheaper synthetic imports from China,

which forced closure of some plants at Magadi Soda Company.

This affected production in 2009 as a whole, causing a decline

of 21.1 percent in the output. In January to December 2009

production fell to 404,904 metric tonnes from 513,415 metric

tonnes produced in a similar period in 2008.

In the energy sector local monthly generation of electricity, which

has been on the decline since early 2008 reached 425.9 million

Kilowatt hours in December 2009, the lowest it has been since

February 2005. This decline in power production is attributed

to a shortage in hydro-power occasioned by shrinking water

levels in the various electricity producing dams due to drought

conditions experienced in the country.

Tourist arrivals grew by 30.7 percent in 2009 from a total of

729,000 visitors in 2008 to culminate at 952,481 visitors as at

end of December 2009, narrowly missing the 1,000,000 tourists’

target. This increase of over 200,000 tourists in 2009 followed

remarkable recovery from a decline of 30.5 percent, which

resulted from the post election violence experienced during the

same period of the previous year, where the numbers declined

by over 300,000 visitors from 1,048,732 visitors in 2007 to

729,000 visitors in 2008.

The 12-month overall inflation declined from 17.8 percent in

December 2008 to 5.3 per cent in December 2009. This is a

positive development coming from the heightened inflation

experienced in the year 2008, and early part of 2009. During the

first half of the period under review, the economy experienced

high inflationary pressures occasioned by high prices of food

and oil. In the last half of the period under review, both overall

and underlying inflation eased to average at 6.6 percent and 5.4

percent respectively. This was partly due to falling prices in some

items in the inflation basket and partly because of the change in

the computation method from the arithmetic mean based rate

to the geometric mean which excludes the erratic food inflation

behaviour and is therefore more stable. Average annual inflation

decreased from 16.2 percent in December 2008 to 9.3 percent

in December 2009.

The 12-month underlying inflation declined from 8.4 percent in

December 2008 to 5.2 percent in December 2009.

Year 2009 witnessed a steady decline in the average 91 - day

Treasury bills rate from a high of 8.59% in December 2008 to

6.82% in December 2009. The average inter-bank lending rate

also decreased from 6.66% to 2.95% over the same period.

The decrease is attributed to reduction in Cash Reserve Ratio

(CRR) for commercial banks from 6.0% down to 5.0% effective

December 01, 2008 followed by a further reduction from 5.0% to

4.5% effective July 23, 2009. The reduction of Treasury bill rate

and inter-bank lending rate can also be attributed to systematic

reduction of Central Bank Rate (CBR) from a high of 9.0% as



at December 01, 2008 to a low of 7% effective November 24,

2009. These CBK induced stimulus have improved liquidity in

the market leading to reduction in short term interest rates.

Throughout the year 2009, the commercial banks monthly

average lending rates remained high, moving between 14.67%

and 15.09%.

Contrary to turbulent exchange rate movements experienced

in year 2008 mainly due to post-election violence, year 2009

saw the Kenya Shilling recollecting itself and maintaining a fairly

stable exchange rate against major currencies throughout the

year. The Shilling strengthened marginally against US Dollar

and the Japanese Yen but weakened against Sterling Pound

and Euro.

In December 2009, the Kenya Shilling appreciated to exchange

at an average of Kshs 75.43 (2008:78.04) per US Dollar. The

Kenya Shilling also appreciated to exchange at an average of

Kshs 84.12 per 100 Japanese Yen in December 2009 (2008:

85.42). The gain is attributed to increase in dollar inflows from

tourism which was recovering from the effects of post-election

violence, increase in dollar earnings from tea and coffee export

as a result of improved prices and a general weakening of

dollar exchange rate at international foreign exchange market

mainly due to the global financial crisis. The Shilling, however

depreciated against Sterling Pound and Euro to exchange at

an average of Kshs 122.54 and Kshs 110.27 to Sterling Pound

and Euro respectively as at December 2009 compared to Kshs

116.53 and Kshs 105.56 as at December 2008.

Against regional currencies the Kenya Shilling appreciated

against both Uganda and Tanzanian Shilling to exchange at

an average of Ush 25.2 per Kenya Shilling and Tsh 17.65 per

Kenya Shilling in December 2009 compared to Ush 25.07 per

Kenya Shilling and Tsh 16.64 per Kenya Shilling in December

2008.

Kenya’s overall Balance of payments position recorded a surplus

of Kshs 75.2 billion in 2009 compared to a deficit of Kshs 33.2

billion in 2008. This was on account of increased net capital

inflows and improved current account balance from a deficit of

Kshs 137.1 billion recorded in 2008 to a deficit of Kshs 124.4

billion in 2009.

REVIEW OF THE BANKING SECTOR During the period ended 31st December 2009, the Kenyan

Banking sector registered significant growth in asset base

largely supported by growth in deposits, injection of capital and

retention of profits. The sector registered high capital adequacy

and liquidity ratios and a decline in the level of non-performing

loans compared to 2008. Total net assets grew by 14.3 percent,

customer deposits increased by 16.4 percent and profit before

tax rose by 12.9 percent compared to performance in 2008.

Institutions maintained capital adequacy ratios above the

minimum requirement of 12.0 percent. However, return on

equity dropped to 24.9 percent from 26.1 percent registered in

December 2008 occasioned by an increase in equity at a higher

rate than increase in income. The overall performance of the

banking sector was rated strong in December 2009, a similar

rating attained in December 2008.

The banking sector continued to register growth in 2009. Net

assets of the banking sector grew by 14.3 percent from Kshs.

1,183.7 billion in December 2008 to Kshs. 1,353.5 billion as at

December 2009. Gross advances increased from Kshs. 670.3

billion in 2008 to a level of Kshs. 757.8 billion in December

2009. Similarly, net credit and advances from the banking sector

increased by 14.3 percent from Kshs. 631.2 billion in December

2008 to Kshs. 721.6 billion in December 2009. The sector’s

investment in government securities registered significant

growth of 45.4 percent from Kshs. 179.0 billion in December

2008 to Kshs. 260.2 billion in December 2009. Total deposits

which form a major component of the banking sector funding,

grew by 16.4 percent from Kshs. 864.0 billion as at end of

December 2008 to Kshs. 1,006.0 billion as at end of December.

The growth in deposits was mainly supported by aggressive

marketing campaigns adopted by financial institutions, branch

expansion and inflows from exports and remittances.



Non-performing loans, net of interest in suspense, rose by 5.6

percent to Kshs. 50.9 billion in December 2009 from Kshs.

48.2 billion in December 2008. However, the asset quality,

which is measured by the ratio of net non-performing loans to

gross loans improved marginally from 3.4 percent in December

2008 to 3.2 percent in December 2009. Gross Non-Performing

Loans (NPLs) declined by Kshs. 1.1 billion or 1.8 percent from

Kshs. 61.87 billion in December 2008 to Kshs. 60.74 billion in

December 2009. As a result, the ratio of gross non-performing

loans to gross loans stood at 8.0 percent as at December 2009,

compared with 9.2 percent registered in December 2008. The

decline in gross NPLs was largely attributed to enhanced credit

appraisal standards adopted by the financial institutions in

2009.

The loans and advances classified in the normal risk category

increased by 18 percent from Kshs. 549.5 billion in December

2008 to Kshs. 646.1 billion in December 2009 occasioned by

increased demand and the general improved credit appraisal

standards employed by the banks. Similarly, loans and advances

classified in the Watch, Substandard and Doubtful categories

registered a decrease during the period under review. However,

loans and advances classified in the loss category increased by

42.6 percent from Kshs. 6.1 billion in 2008 to Kshs. 8.7 billion in

2009 as a result of losses from the normal course of business.

The banking sector capital adequacy which is measured by the

ratio of Total Capital to Total Risk Weighted Assets improved

in 2009. The ratio rose from 20.0 percent in December 2008

to 21.0 percent in December 2009 well above the 12 percent

minimum statutory limit. The capital and reserves of the banking

sector increased by 18.5 percent from Kshs. 165.6 billion in

December 2008 to Kshs. 196.3 billion in December 2009. The

increase in capital and reserves was occasioned by fresh capital

injection and retention of profits. In line with the Finance Act

2008, the minimum statutory core capital for banking institutions

as at 31st December 2009 was Kshs. 350 million. This is set to

increase to Kshs. 500 million by December 2010, Kshs. 700

million by December 2011 and Kshs. 1 billion by December

2012.

Liquidity which represents the ability to fund increases in assets

and meet obligations as they fall due is crucial to the continued

viability of any banking institution. The importance of liquidity

goes beyond the individual bank as a liquidity shortfall at an

individual bank can have systemic repercussions.

The liquidity ratio closed at 39.8 percent at the end of December

2009 in comparison with 37.0 percent reported in December

2008 and all institutions met the minimum liquidity ratio

requirement of 20%.

Notwithstanding the tight economic conditions, the banking

sector pre-tax profits increased by 12.9 percent from Kshs. 43.3

billion in December 2008 to Kshs. 48.9 billion in December

2009. The growth was largely supported by expansion in credit,

cost control and reduced bad debts charge. Total income rose

by 13.6 percent from Kshs. 151.8 billion in December 2008

to Kshs. 172.5 billion in December 2009. This was occasioned

by an increase in interest on advances by 21.3 percent from

Kshs. 75.2 billion in December 2008 to Kshs. 91.2 billion in

December 2009.

Interest income accounted for 52.9 percent of total income in

2009 up from 49.5 percent in 2008. The increase in interest

income was attributed to expansion of credit and an improvement

in the quality of the loan portfolio.

Total expenses increased by 13.8 percent from Kshs. 108.5

billion in December 2008 to Kshs. 123.5 billion in December

2009. The increase in expenses was attributed to increase in

interest expenses and salaries and wages. Interest expenses

increased from Kshs. 30.2 billion in 2008 to Kshs. 35.1 billion

in 2009. Salaries and wages increased from Kshs. 33.5 billion

in 2008 to Kshs. 38.8 billion in 2009 as institutions focused on

retaining high calibre staff to support expansion initiatives.

DEVELOPMENTS IN SUPERVISORY FRAMEWORK.During the period ended 31st December 2009, CBK in

conjunction with the Ministry of Finance undertook a number

of reforms geared towards the stability, safety, efficiency,



accessibility and integrity of the banking sector. Consequently,

the Proceeds of Crime and Anti-Money Laundering Act (AML

Act), was enacted into law in December 2009 and the President

also assented to the Finance Act in December 2009.

Finance Act, 2009The Finance Act amends several statutes including the Banking

Act, the Central Bank of Kenya Act and the Microfinance Act.

The commencement date of the amendments to the Banking

Act, the Central Bank of Kenya Act and the Microfinance Act

was 1st January 2010.

The key amendments to the three statutes are:

Introduction of agent banking. Under this model, •

commercial banks, financial institutions and mortgage

finance companies are allowed to contract third parties

(agents) to conduct banking business on their behalf.

Introduction of the definition of the term “place of business”. •

The Central Bank has been given the mandate to prescribe

to commercial banks what premises constitute places of

business.

Institutions have been permitted to invest more than 25% •

of their core capital in foreign institutions, subject however

to the prior approval of the Central Bank.

Institutions are now required to make provisions for other •

assets before declaring dividends.

The Central Bank is permitted to share bank information •

with fiscal or tax agencies and fraud investigation agencies.

Introduction of a general penalty clause for offences arising •

from foreign exchange dealings in cases where no specific

penalty is provided for.

Introduction of a general penalty clause for offences whose •

penalties are not specifically provided for under the Central

Bank of Kenya Act.

Deposit-taking microfinance institutions are permitted to •

share information on non-performing loans with the Deposit

Protection Fund Board.

The Central Bank and deposit-taking microfinance •

institutions are permitted to share any other information

apart from information on non-performing loans.

The Central Bank has been given the power to issue •

guidelines and directions to deposit taking microfinance

institutions for the better carrying out of their functions.

The Proceeds of Crime and Anti-Money Laundering Act, 2009.The Proceeds of Crime and Anti-Money Act, 2009 was passed

by Parliament in December 2009 and assented to by His

Excellency the President on December 31st 2009. The Minister

for Finance is now expected to gazette an operational date for

the Act by July 2010.

The Act criminalizes the offence of money laundering,

establishes the Financial Reporting Centre, the Assets Recovery

Agency and the Anti-Money Laundering Advisory Board. The

AML Act also stipulates anti-money laundering obligations for

Reporting Institutions and spells out elaborate procedures for

both civil and criminal forfeiture. These procedures are essential

in establishing a robust framework that would deny money

launderers the opportunity to enjoy their ill-gotten wealth. The

AML Act also establishes procedures for international assistance

in investigations and proceedings. These procedures are

important as they give our national authorities engaged in the

fight against money laundering the much needed tools to enable

them cooperate with their counterparts across the globe in

combating the money laundering menace given that is a Trans-

national crime.

Agent BankingThe Finance Bill, 2009 sought to introduce agent banking.

Institutions would be allowed to conduct banking business

through third party agents duly approved by the Central Bank.

The Central Bank would be required to prescribe the manner of

carrying out agent banking business.

A SOLID PERFORMANCE AT IMPERIALI am indeed very pleased to report that despite a very challenging

year, the bank continued with its exceptional all round

performance in 2009.



Profit before tax increased to Kshs. 802 million from Kshs. 673

million in 2008 which represents a growth of 19% (2008: 19%).

The growth was largely driven by interest from lending and non-

funded incomes.

The total income grew from Kshs 2,880 million in 2008 to

Kshs. 3,200 million in 2009. Overall total operating expenses

as a percentage of total income of 32% still remained below the

industry average.

The average interest rate on advances and deposits remained

stable at 13% and 4% respectively.

The bank achieved earnings per share of Shs 512 (2008: Shs

429). Return on core capital and return on gross assets stood at

43% and 6% respectively, again above the industry averages.

Although the Kenyan economy performed below its potential

because the growth reversals experienced in 2008 largely

extended to 2009, there was overall growth in our lending

portfolio.

Net loans and advances to customers grew from Shs 8.3billion

to Shs 9.7billion an increase of 17%. The bank continued to

exercise caution in lending by adopting risk based credit policies.

Gross non-performing advances stood at Shs 664 million. After

a specific provision of Shs. 396 million, the carrying value of

these advances is Shs 268 million. Non-performing advances

less total provisions to total advances stood at 3%, making the

asset quality of the bank strong.

Total assets grew by 14.3% from Shs 13.432 billion to Shs.15.358

billion in 2009. The increase was largely attributed to a 17%

increase in loans and advances and investments in government

securities of 144%. The growth was funded by an 18% increase

in customer deposits which grew from Shs 10.414 billion to

Shs.12.27 billion and a 22% increase in shareholders’ funds.

The sustained growth in our customer deposit base is largely

attributed to the level of confidence our customers have in our

bank and the expansion strategies adopted by the bank.

The ratio of core capital to total risk weighted assets and total

capital to total risk weighted assets stood at 20% and 21%

respectively, in excess of the statutory requirement of 8% and

12%.

Once again, the above reflects a strong performance in all areas

of the bank’s activities.

CORPORATE GOVERNANCEThe bank will continue to maintain strong governance structures

by defining the roles of the board, board committees, chairman,

managing director and the management. These are covered in

the Corporate Governance Report.

The bank fully complies with the CBK Prudential Guidelines,

the Banking Act and other statutory requirements as required

bylaw. Risks are only warranted when they are understandable,

measurable, controllable and within the banks capacity to readily

withstand adverse results. The bank continued to enhance

its sound risk management framework in the year 2009 that

enabled the managers to take risks knowingly, reduce risks

where appropriate and strive to prepare for a future that cannot

be predicted with absolute certainty. This has and will continue

to assist the management and the board to respond to changes

in the risk profiles in a very effective manner.

OTHER DEVELOPMENTSThroughout the year the bank has continuously looked into

enhancing and rejuvenating the existing products to meet the

needs and requirements of their target segment.

The bank also launched Insurance Premium Financing as a

value added product to our existing product offering, that is

Asset Financing. This is a product that provides a tool for entities

to stagger their insurance premium payment so as not to disrupt

their cash flows.

In order to support the growth and expansion strategy, a

Management Development Programme was introduced during


the year to augment staff learning and development initiatives as

well as reinforce the Bank’s talent management strategy.

FUTURE DEVELOPMENTSIn line with the institution’s expansion strategy the bank plans to

extend its presence within the East Africa region in 2010.

Imperial Bank has signed up with Oracle Financial Services

Software Limited to provide solutions that will see the bank

meeting regulatory requirements that govern diverse areas of

banking operations such as anti-money-laundering and risk

mitigation. Imperial Bank views these regulations as business

as well as compliance imperatives that will provide a platform

to effectively manage the aggressive expansion plan over the

next couple of years. Implementation of these solutions will be

carried out over the next six months.

Locally the Bank has widened its service delivery network by

opening its 12th branch in Thika town and will continue to

open more branches within the country in line with our prudent

expansion strategy.

The domestic economy is expected to continue on a recovery

path in 2010 with real GDP projected to grow by a rate between

4% and 5%. However, going forward this projected economic

recovery may be dampened by happenings in the global

economy. The slow and fragile recovery in advanced countries is

likely to continue impacting adversely on the demand for Kenya’s

main exports, reduce earnings from tourism, remittances and

private capital flows. On the domestic front, while the short

rains registered in the fourth quarter have helped to reduce the

magnitude of food, water and energy shortage, the negative

effects of climate change is likely to worsen the situation unless

deliberate and appropriate policy measures are taken up by the

policy makers.

The focus in 2010 will once again remain on providing

personalized services to our clients and increasing the range of

banking products making it easier for the customers to access

deposits and services through new and innovative delivery

channels.

In addition, the bank will further enhance the existing risk

management parameters through the effective use of the core

banking software.

The Bank will continue to focus on prudent management of

its human resources through application of best practice in its

policies and procedures.

The key focus for HR for 2010 and beyond will be provision

of enhanced and integrated Human Resource Management

offerings in order to drive performance and meet business

objectives.

ACKNOWLEDGEMENTThe success of the bank would not have been possible without

the continued support of our customers and other stakeholders.

On behalf of the board, I take this opportunity to once again

extend my sincere gratitude to them for their valuable support

and confidence in our bank.

I would like to thank the managing director in particular and all

the staff for their dedication and hard work that has ensured that

the bank has continued to maintain a sound position in Kenya’s

banking industry.

Finally, I would like to thank my fellow board members for

their vision and unstinting commitment to the bank and for the

support they have accorded to me.

Alnashir Popat

Chairman

18th March, 2009



CoRPoRAte soCIAL ResPonsIBILItY RePoRt

Companies in Kenya are becoming increasingly aware of their

need to commit to sustainable business practices. With corporate

strategy shifting globally, businesses are not only considering the

financial bottom line but are adopting what is known as the ‘Triple

Bottom Line’ strategy. This considers people in terms of human

capital and the community, the planet through sustainable

environmental practices and profit in terms of creating a lasting

impact in the economy. Imperial Bank has always had a well

articulated and vibrant Corporate Social Responsibility (CSR)

policy. The key thematic areas of the bank’s CSR policy include

promoting education, improving the livelihood of disadvantaged

children and creating sustainable partnerships for community

development.

KCSE examinations, 5 of these students passed with A’s while

the rest had a B score. The bank has also contributed over two

million shillings to support school feeding programmes in Ndula

and Kililmambogo primary schools. It has equipped Sunrise

Africa schools in Kitengela and Nairobi with furniture and office

equipment as well as paid school fees for their bright students.

Improving the livelihood of disadvantaged childrenImperial Bank is concerned about future generations and is

committed to improving the livelihood of disadvantaged children.

The bank has therefore supported street children rehabilitation

centers such as the Eldoret Rescue Centre, the Street Children’s

Assistance Network in Nakuru and the Imani Children’s home

in Nairobi. It also supports children’s homes such as Kipchoge

Keino’s Lewa Children’s home and the Hi-Jung Oh Children’s

home in Nairobi.

Imperial Bank staff members hand over a cheque of 50,000 to the orphans at Imani Children’s Home in Kayole where they spent the day feeding and playing with the children. Imani Children’s Home is a registered charitable institution which takes care of orphans and vulnerable children.

Yasir Hydar, the Mombasa Branch Relationship Manager and Maimuna Ali, the Service Delivery Manager, donate foodstuff to a madrassa for the less fortunate children during the holy month of Ramadhan.

Promoting educationImperial Bank’s CSR policy focuses on supporting schools to

provide learning opportunities for children with special needs.

For the last three years, the bank has paid fees for 20 bright

but needy students at MERC High School in Matuu. In the last


Partnership with UNICEF

CSR in Imperial Bank is recognized as an integral part of the

overall corporate strategy. The bank’s CSR policy is in line

with the Millennium Development Goals (MDGs) and Kenya’s

development plans. Three of the MDGs include reducing

maternal mortality; child mortality and combating HIV/AIDS,

malaria and other diseases. Kenya needs to improve maternal

health and reduce the number of children who die before they

reach five years of age. 500,000 women die each year due to

complications related to pregnancy and childbirth while about 4

million newborns die within the first 28 days of life. Most of these

deaths occur in under-served communities and from largely

preventable causes. One organization that has focused on

achieving the MDG targets in Kenya is UNICEF. UNICEF’s goal

is to reduce maternal and child mortality rates by approximately

one third through their Child Alive campaign.

Imperial Bank is privileged to have been in partnership with

UNICEF for some years now. In 2008 the bank entered into a

Memorandum of Understanding with UNICEF to raise funds for

the Child Alive campaign by using the PesaPoint ATM network.

This agreement made Imperial Bank the first bank in East and

Central Africa to use ATM technology for fundraising. Since

then, Imperial Bank has carried out awareness campaigns that

have seen the public donate to UNICEF in over 120 PesaPoint

ATMs countrywide. To date the bank has donated to close to

forty thousand dollars. In the past, the bank also supported

UNICEF especially through the Watoto Kwanza trust and has

also been UNICEF’s best corporate buyer.


Continued

Nelson Mandela Mother Teresa

Dr. Martin Luther King Jnr. Mama Caro

WALL OF FAME

Be a hero just like Mama Caro.

Key in your donation to UNICEF at any PesaPoint ATM today.

Imperial Bank. The first Kenyan bank to use ATMs for fundraising.


A team of Imperial Bank staff members participated in the Mater Heart Run 2009. This is part of the bank’s contribution back to the community. The Mater Heart Run takes place every year to raise funds for medical treatment for children with heart ailments.

Other partnerships Imperial Bank shares its expertise, financial and human

resources to support community initiatives. It endeavors to work

in partnership with community groups, civil society organizations,

NGOs and other companies whose goals are consistent with the

bank’s CSR focus areas. To this end, the bank partnered with

the American Women’s Association to empower low income-

earners by introducing a savings account for them. The bank

has partnered with the Lions clubs in a number of projects in

Mombasa and Malindi including the annual free plastic and

reconstructive surgery camp at the Malindi District hospital.

Muthoni Wachira (centre), Communications & PR Manager at Imperial Bank listens to Dr. Anil Tibrewala (extreme left) as he explains the surgical procedure he is performing on a burns patient. Looking on is Ali Mohamed (right), the Imperial Bank Malindi Branch Manager. Imperial Bank was one of the sponsors to the Lions Club of Mombasa Bahari annual FREE PLASTIC & RECONSTRUCTIVE SURGERY CAMP. This is an operative camp which was held at Malindi District Hospital in February. Dr. Tibrewala is a renowned plastic & reconstructive surgeon from Mumbai, India.

Staff involvement Imperial Bank commits its resources to creating a positive

impact in the community especially in the areas where we have

a presence. The bank continues to live its values by achieving

commercial success in ways that honor ethical values and

respect people and communities. The bank’s most important

asset is its people. It is committed to providing an enabling and

friendly working environment and also invests in training of its

staff members to ensure that they reach their full potential. In so

doing they contribute to the growth of the bank and give back to

the community. Imperial Bank staff members not only support

bank-sponsored campaigns but also nationwide initiatives such

as the annual Mater Heart run and the Nairobi Hospice Walk.


Continued


0

4,000

8,000

12,000

14,000

10,000

6,000

2,000

2000 2001 2002 2003

Shill

ing

s in

Mill

ion

s

2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

2,4292,988 3,382

3,903

4,681

6,433

7,733

9,750

11,211

12,862

Loans and Advances

2,170 2,993 3,206

3,2834,324

4,6785,920

7,722

9,021

10,399

0

200

400

600

700

800

900

500

300

100

2000 2001 2002 2003

Shill

ing

s in

Mill

ion

s

2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

113 148 188

254268

305

387

564

673

802

Profit Before Tax Profit After Tax

78102 127

175 184

206 273

376

466

556

0

500

1,000

1,500

2,000

2,500

2000 2001 2002 2003

Shill

ing

s in

Mill

ion

s

2004 2005 2006 2007 2008 2009

458

560

652 792

926

1,0721,253

1,580

1,911

2,247

Shareholders’ Funds

0

4,000

8,000

12,000

16,000

20,000

18,000

14,000

10,000

6,000

2,000

2000 2001 2002 2003

Shill

ing

s in

Mill

ion

s

2004 2005 2006 2007 2008 2009

3,013 3,6454,181

4,921

5,814

7,773

9,406

11,723

13,431

15,358

Total Assets

Deposits

FInAnCIAL HIGHLIGHts


FInAnCIAL HIGHLIGHts

Loans and advances to customersDeposits with banking institutionsGovernment securitiesCash and Central Bank of Kenya BalancesProperty and equipmentOther assets

Customer depositsCore capitalOther reservesOther liabilitiesProposed dividendsDeposits from banking institutions

Interest expenseOther operating expensesStaff expensesRetentionGovernmentImpairment lossesShareholders’ dividends

2008Shs’ Million

8,276 2,879

921 830 399 127

13,432

2008Shs’ Million

10,414 1,725 102309 85

797 13,432

2008Shs’ Million

1,25250640429120844

1752,880

2009Shs’ Million

1,31250652133124659

2253,200

2009Shs’ Million

12,270 2,042

180 249 25

592 15,358

2009Shs’ Million

9,676 2,137 2,246

856 288 155

15,358

DISTRIBUTION OF ASSETS

LIABILITIES, SHAREHOLDERS AND EQUITY COMPOSITION

Shareholders’ dividends

Government

Retention

Staff expenses

Other operating expenses

Interest expenses

Impairment losses

2%43%

6%

18%

14%

10%

7%

6%

1%1%

2%

13%

77%

4%

0% 1%

2%

13%

80%

Cash and Central Bank of Kenya Balances

Government securities

Deposits with banking institutions

Loans and advances to customers

Other assets

Property and equipment

1%

2%

6%

15% 14%

62%

62%

6%

7%

21%

3%

1%

44%

9%

11%

17%

17%

2%

2008

2009

2008

2009

2008

2009

Deposits from banking institutions

Proposed dividends

Other liabilities

Core capital

Customer deposit

Other reserves

DISTRIBUTION OF INCOME

Continued


The directors submit their report and the audited financial statements for the year ended 31 December 2009, in accordance with Section 22 of the Banking Act and Section 157 of the Companies Act, which disclose the state of affairs of the company.

PRINCIPAL ACTIVITIES The bank is licensed under the Banking Act and provides banking, financial and related services. RESULTS 2009 2008 Shs ‘000 Shs ‘000Profit before tax 801,810 673,427 Tax (245,932) (207,740)

Profit for the year 555,878 465,687

DIVIDEND The directors propose a final dividend of Shs. 23.04 per share (2008: Shs. 78.34 per share) amounting to Shs. 25 million (2008: Shs. 85 million).

During the year an interim dividend of Shs. 184.33 per share (2008: Shs 82.95) was paid amounting to a total of Shs. 200 million (2008: Shs.90 million). The total dividend for the year is therefore Shs. 207.37 per share (2008: Shs. 161.29) amounting to a total of Shs. 225 Million (2008: Shs. 175 Million).

DIRECTORS The directors who held office during this year and to the date of this report are shown on page 3. In accordance with the bank’s Articles of Association, no director is due for retirement by rotation.

AUDITORS The bank’s auditors PKF Kenya, have indicated their willingness to continue in office in accordance with Section 159(2) of the Companies Act (Cap. 486), subject to approval of the Central Bank of Kenya in accordance with Section 24(1) of the Banking Act (Cap. 488).

By Order of the Board

Equatorial Secretaries and Registrars

Company SecretaryNAIROBI

18th March 2010

RePoRt oF tHe DIReCtoRs


The Companies Act (Cap. 486) requires the directors to prepare financial statements which give a true and fair view of the state of affairs of the bank as at the end of the financial year and of the results for that year. It also requires the directors to ensure that the bank maintains proper accounting records which disclose with reasonable accuracy the financial position of the bank.

The directors are also responsible for safeguarding the assets of the bank. The directors accept the responsibility for the financial statements which have been prepared using appropriate accounting policies supported by reasonable and prudent judgements and estimates, consistent with previous years, and in conformity with International Financial Reporting Standards and the requirements of the Companies Act (Cap. 486).

The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs of the bank as at 31 December 2009 and of its operating results for the year then ended. The directors further confirm the accuracy and completeness of the accounting records maintained by the bank which have been relied upon in the preparation of the financial statements, as well as on the adequacy of the systems of internal financial controls. Nothing has come to the attention of the directors to indicate that the bank will not remain a going concern for at least the next twelve months from the date of this statement. Approved by the board of directors on 18th March 2010 and signed on its behalf by:

Alnashir Popat Abdulmalek JanmohamedChairman Managing Director

stAteMent oF DIReCtoRs ResPonsIBILItIes


Report on the financial statementsWe have audited the accompanying financial statements of Imperial Bank Limited set out on pages 28 to 63, which comprise the statement of financial position as at 31 December 2009 and the income statement, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statementsThe directors’ are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act (Cap. 486). This responsibility includes designing, implementing and maintaining internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Auditor’s responsibilityOur responsibility is to express an independent opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risk of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the accompanying financial statements give a true and fair view of the state of financial affairs of the bank as at 31 December 2009 and of its profit and cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act (Cap. 486).

Report on other legal requirements As required by the Companies Act (Cap. 486) we report to you, based on our audit, that: (i) we have obtained all the information and explanations

which to the best of our knowledge and belief were necessary for the purposes of our audit;

(ii) in our opinion proper books of account have been kept by the bank, so far as appears from our examination of those books; and

(iii) the bank’s statement of financial position and income statement are in agreement with the books of account.

PKF Kenya

Certified Public Accountants PIN NO. P051130467RNairobi. 19th March 2010 105/10

RePoRt oF tHe InDePenDent AUDItoRs to tHe MeMBeRs oF IMPeRIAL BAnK LIMIteD


Interest income Interest expense NET INTEREST INCOME Fees and commission income Foreign exchange trading income Gains arising from disposal of investment securities Other income

OPERATING INCOME Net increase in impairment losses on loans and advances Other operating expenses

PROFIT BEFORE TAX Tax

NET PROFIT

EARNINGS PER SHARE Basic and diluted (Shs. per share)

DIVIDEND Interim dividend for the year Proposed final dividend for the year Total dividend for the year DIVIDEND PER SHARE (Shs. per share)

InCoMe stAteMent

Notes

1 2

34

5 6

7

8

99

9

2009 Shs’000

2,677,393 (1,312,466)

1,364,927 299,547 138,585

- 84,568

1,887,627 (58,551)

(1,027,266)

801,810 (245,932)

555,878

512

200,000 25,000

225,000

207

2008 Shs’000

2,412,123 (1,251,582)

1,160,541 266,805 123,675

93 76,817

1,627,931 (44,199)

(910,305)

673,427 (207,740)

465,687

429

90,000 85,000

175,000

161

For the year ended 31 December 2009

The significant accounting policies on pages 33 to 39 and the notes on pages 40 to 63 form an integral part of these financial statements. Report of the independent auditors - page 27.


2009 2008 Notes Shs’000 Shs’000 Profit for the year 555,878 465,687 Reversal of deferred tax on prior year fair value of government securities (320) (2,826)Reversal of prior years valuation loss on disposed bonds 1,067 9,420 Gain/(loss) in fair value of government securities 63,599 (1,067)Deferred tax on fair value of government securities - 320 Total comprehensive income for the year 620,225 471,534

The significant accounting policies on pages 33 to 39 and the notes on pages 40 to 63 form an integral part of these financial statements. Report of the independent auditors - page 27.

stAteMent oF CoMPReHensIVe InCoMe



ASSETS

Cash in hand Balances with Central Bank of Kenya Government securities: Available-for-sale Placements with and loans and advances to other banking institutions Other assets Loans and advances to customers Investment securities - held-for-trading Property and equipment Prepaid operating lease rentals Capital work - in - progress Intangible assets Deferred tax TOTAL ASSETS LIABILITIES Customer deposits Deposits from other banking institutions Other liabilities Current tax TOTAL LIABILITIES SHAREHOLDERS’ EQUITY Share capital Retained earnings Loan loss reserve Proposed dividend Fair value reserve TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY The financial statements on pages 28 to 63 were approved for issue by the board of directors on 18th March 2010 and were signed on its behalf by: Alnashir Popat Abdulmalek JanmohamedChairman Managing Director

Anwar Hajee Equatorial Secretaries and Registrars

Director Company Secretary

The significant accounting policies on pages 33 to 39 and the notes on pages 40 to 63 form an integral part of these financial statements. Report of the independent auditors - Pages 27.

stAteMent oF FInAnCIAL PosItIon

Notes

10 11 12 13 14 15 16 17 18 19 20

21 22 23

24

9

2009Shs’000

145,305710,518

2,245,9602,136,523

108,6049,676,110

-225,145

-10,84852,20246,893

15,358,108

12,269,906592,376231,37017,614

13,111,266

1,085,000956,610116,63325,00063,599

2,246,842

15,358,108

2008Shs’000

217,962 612,468 921,220

2,879,076 89,473

8,276,121 -

323,226 9,066 6,589

60,097 36,406

13,431,704

10,414,043 797,193 293,437 15,414

11,520,087

1,085,000 639,662 101,955 85,000

-

1,911,617

13,431,704

As at 31 December 2009


Year ended 31 December 2008

At start of year

Total comprehensive income for the year

Decrease in fair value of government securities

Transfer to retained earnings

Increase in general provisions

Dividends:

- 2007 dividend paid during the year

- 2008 interim dividend declared during the year

- 2008 interim dividend paid during the year

- 2008 final dividend proposed

At end of year


At start of year

Total comprehensive income for the year

Increase in general provisions

Dividends:

- 2008 dividend paid during the year

- 2009 interim dividend declared during the year

- 2009 interim dividend paid during the year

- 2009 final dividend proposed

At end of year

Note

9

9

9

9

9

9

9

9

Share

capital

Shs’000

1,085,000

-

-

-

-

-

-

-

-

1,085,000

1,085,000

-

-

-

-

-

-

-

1,085,000

Fair

value

reserve

Shs’000

-

(747)

747

-

-

-

-

-

-

-

63,599

-

-

-

-

-

-

63,599

Loan

loss

reserves

Shs’000

81,415

-

-

-

20,540

-

-

-

-

101,955

101,955

-

14,678

-

-

-

-

-

116,633

Retained

earnings

Shs’000

363,668

472,281

-

(747)

(20,540)

-

(90,000)

-

(85,000)

639,662

639,662

556,626

(14,678)

-

-

(200,000)

-

(25,000)

956,610

Dividends

Shs’000

50,000

-

-

-

-

(50,000)

90,000

(90,000)

85,000

85,000

85,000

-

-

-

(85,000)

200,000

(200,000)

25,000

25,000

Total

Shs’000

1,580,083

472,281

(747)

-

-

(50,000)

-

(90,000)

-

1,911,617

1,911,617

620,225

-

-

(85,000)

-

(200,000)

-

2,246,842


stAteMents oF CHAnGes In eQUItY


CASH FLOWS FROM OPERATING ACTIVITIES Interest receipts Interest payments Fees and commission receipts Payments to employees and suppliers Tax paid Cash flows from operating activities before changes in operating assets and liabilities Changes in operating assets and liabilities: - loans and advances - other assets - customer deposits - other liabilities Net cash generated from operating activities CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of property and equipment Purchase of intangible assets Purchase of government securities Investment in capital work - in - progress Purchase of investment securities Proceeds from disposal of investment securities Proceeds from prepaid operating lease rentals Proceeds from disposal of property and equipment Net cash (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividend paid Net cash (used in) financing activities Net (decrease)/increase in cash and cash equivalents CASH AND CASH EQUIVALENTS AT START OF THE YEAR CASH AND CASH EQUIVALENTS AT END OF THE YEAR


CAsH FLoW stAteMent

Notes

16 19 11 18 15

25

25

2009Shs ‘000

2,607,763 (1,221,565)

511,974 (916,679) (254,539)

726,954

(1,388,910) 66,953

1,764,967 (76,468)

1,093,496

(57,946)

(578) (1,324,740)

(4,259) - -

9,066 79,036

(1,299,421)

(285,000)

(285,000)

(490,926)

2,400,340

1,909,415

2008Shs ‘000

2,369,696 (1,333,640)

465,248 (832,300) (242,519)

426,485

(1,277,059) 496,419

1,907,978 (27,491)

1,526,332

(65,790) (7,167)

(921,220) (555)

(42,326) 42,419

- 2,643

(991,996)

(140,000)

(140,000)

394,335

2,006,005

2,400,340



Imperial Bank Limited is incorporated in Kenya under the Companies Act as a private limited company and is domiciled in Kenya. The bank offers banking, financial and related services. 2. SUMMARY OF 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 the years presented, unless otherwise stated. (a) Basis of preparationThe financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements comprise the income statement and statement of comprehensive income (has two statements), the statement of financial position, the statement of changes in equity, the cash flow statement, significant accounting policies and the notes to the financial statements. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the bank’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed.

Although these estimates and judgements are based on the management’s best knowledge of current events and actions, actual results may differ from those estimates. Accounting policy ‘b’ on ‘critical accounting estimates and assumptions’ highlights the areas that involve a higher level of judgement, or where the estimates or assumptions used are significant to the financial statements. The following standards, amendments and interpretations, which became effective in the financial year ending 31 December 2009 are relevant to the bank and have been adopted: - International Financial Reporting Standard 7 (IFRS 7) on ‘Financial

Instruments: Disclosures’ - the amendment to this standard requires enhanced disclosures about fair values and liquidity risk. The adoption of this standard has led to additional disclosures and has had no impact on the operating results of the bank.

- International Accounting Standard 1 (IAS 1) (revised) on ‘Presentation of financial statements’ - the amendment to this standard prohibits

the presentation of items of income and expense in the statement of changes in equity. These ‘non-owner changes in equity’ are presented separately in the statement of comprehensive income. The adoption of this standard has led to the re-presentation of comparative information. Since this change only impacts the overall presentation of the financial statements, there is no impact on retained earnings.

The following standards and interpretations have been issued and are mandatory for the banks accounting periods beginning on or after 1 January 2010 and are expected to be relevant to the bank: - International Financial Reporting Standard (IFRS 9) on ‘Financial

Instruments: Classification and Measurement’ - The standard was issued in November 2009 and will replace the areas in International Accounting Standard 39 (IAS 39) that relate to classification and measurement of financial assets. Adoption is mandatory from 1 January 2013 although early adoption is permissible.

The main changes are:- Financial assets will be categorised into two categories of

measurement: those to be measured subsequently at fair value • those to be measured subsequently at amortised cost •

The decision on the above classes will need to be made at the point of initial recognition of the transaction. The classification will depend on the bank’s business model for managing its financial assets and the characteristics of the contractual cash flows of the asset. An asset will be subsequently measured at amortised cost only:

- if it is a debt instrument; - if the objective of the entity’s business model is to hold the asset to

collect the contractual cash flows; and - if the asset’s contractual cash flows represent only payments of

principal and interest. All other debt instruments will be measured at fair value through profit or loss.

All equity instruments will be measured subsequently at fair value.

Equity instruments that will be held for trading will be measured at fair value through profit or loss. For all other equity instruments, an irrevocable election can be made at the point of initial recognition, to recognise both unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This choice may be made on an instrument-by-instrument basis. Dividend income will be presented in profit or loss, as long it represents the return on an investment.

sIGnIFICAnt ACCoUntInG PoLICIes

1. GENERAL INFORMATION


(b) Critical accounting estimates and assumptions The bank’s financial statements and its financial results are influenced by its accounting policies and the assumptions, estimates and judgements made by management. These estimates, assumptions and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the prevailing circumstances. - Key sources of estimation uncertainty Management has made the following estimates that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year:

- Impairment of loans and advances: Critical estimates have been made by the management in arriving at the discounted values of securities in order to arrive at the impairment charges for non-performing loans and advances. The values of securities are discounted using both the International Financial Reporting Standards and the Prudential Guidelines issued by the Central Bank of Kenya. The Prudential Guidelines provide a specific basis of discounting securities whilst discounting according to International Accounting Standard 39 (IAS 39) on Financial Instruments: ‘Recognition and Measurement’ is based on historical experience and other relevant factors, discounted to net present values. (c) Critical accounting judgements - Significant judgements made by management in applying the

bank’s accounting policies Management has made the following judgements that are considered to have the most significant effect on the amounts recognised in the financial statements: - Impairment losses on loans and advances: The bank reviews its loan portfolio to assess the likelihood of impairment at least on a quarterly basis. In determining whether a loan or advance is impaired, the management makes judgement as to whether there is any evidence indicating that there is a measurable decrease in the estimated future cash flows expected from that loan or advance. Management use judgement based on historical experience for such assets with credit risk characteristics and as to whether there are any conditions that would indicate potential impairment. 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.

- Non - financial assetsThe bank reviews its non financial assets to assess the likelihood of impairment on an annual basis. In determining whether such assets are impaired, management make judgements as to whether there are any conditions that indicate potential impairment of such assets.

- Impairment of financial assets classified as ‘available for sale’The bank determines that available-for-sale financial assets are impaired when there has been a significant or prolonged decline in their fair values below its original cost. This determination of what is significant or prolonged requires significant judgement. In making this judgement, the bank evaluates among other factors, the volatility in share price. In addition, objective evidence of impairment may be deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

(d) Revenue recognition Revenue is recognised only when it is probable that the economic benefits associated with the transaction will flow to the bank.

The bank recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when the specific criteria have been met for each of the bank’s activities as described below. The amount of revenue is not considered to be reliably measured until all contingencies relating to the sale have been resolved. The bank bases its estimates on historical results, taking into consideration the type of customer, type of transaction and specifics of each arrangement.

Interest income is recognised on an accruals basis in the income statement using the effective yield on the asset. Interest income includes income from loans and advances, income from placements with and loans and advances to other banking institutions and income from government securities. When financial assets become impaired, interest income is thereafter recognised at rates used to discount future cash flows for the purposes of measuring the recoverable amount. Finance lease income is recognised to reflect a constant rate of return on the investment and is accrued over the agreement period using the reducing balance method.

Fees and commissions income and hire purchase option fees are recognised at the time of effecting the transaction.

sIGnIFICAnt ACCoUntInG PoLICIes Continued


sIGnIFICAnt ACCoUntInG PoLICIes

Foreign exchange trading income is recognised at the time of effecting the transaction. It includes income from spot and forward deals and translated foreign currency assets and liabilities.

Dividend income is recognised when declared.

(e) Translation of foreign currencies Transactions in foreign currencies during the year are converted into Kenya Shillings (functional currency), at rates ruling at the transaction dates. Assets and liabilities at the statement of financial position date which are expressed in foreign currencies are translated into Kenya Shillings at rates ruling at that date. The resulting differences from conversion and translation are dealt with in the income statement in the year in which they arise.

(f) Property and equipment All property, plant and equipment is initially recorded at cost and thereafter stated at historical cost less depreciation. Historical cost comprises expenditure initially incurred to bring the asset to its location and condition ready for its intended use. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the company and the cost can be reliably measured. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial year in which they are incurred. Depreciation is calculated on a straight line basis to write down the cost of each asset to its residual value over its estimated useful life using the following annual rates: Rate - % Buildings 2.5 Office renovations Over the lease period of the building Computers, copiers and faxes 30 Motor vehicles 25 Furniture and fittings 12.5 Office equipment 20

The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. An asset’s carrying amount is written down immediately to its

recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.Gains or losses on disposal of property and equipment are determined by comparing the proceeds with the carrying amount and are taken into account in determining profit before tax. (g) Impairment of non-financial 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 grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

Non-financial assets that suffered an impairment are reviewed for possible reversal of the impairment as at the date of the statement of financial position.

(h) Intangible assets

Computer software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over 10 years. (i) Pension obligations The bank operates a defined contribution pension scheme for its employees, the assets of which are held in a separate trustee administered guaranteed scheme managed by an insurance company. The pension plan is funded by contributions from the employees and the bank. The bank’s contributions are charged to the income statement of the year to which they relate.

The employees and the bank also contribute to the National Social Security Fund, a statutory defined contribution scheme registered under the NSSF Act. The bank’s contribution to the defined contribution scheme are charged to the income statement in the year to which they relate. (j) Employee entitlements The estimated monetary liability for employees’ accrued annual leave entitlement at the statement of financial position date is recognised as an expense accrual.

Continued


(k) Impairment of financial assets - Assets carried at amortised cost The bank assesses at each statement of financial position date whether there is objective evidence that a financial asset is impaired. A financial asset is impaired and impairment losses are incurred only if there is evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset and that a certain event has an impact on the estimated future cash flows of the financial asset. The criteria that the bank uses to determine that there is objective evidence of an impairment loss include: • Default in contractual payments of principal or interest;

• Cash flow difficulties experienced by the borrower or issuer (for

example, declining financial ratios)

• Breach of loan covenants or conditions;

• Initiation of bankruptcy proceedings;

• Deterioration of the borrower’s or issuer’s competitive position;

• Deterioration in the value of collateral and • The disappearance of an active market for that financial asset

because of financial difficulties - Impairment of loans and advances Loans and advances are recognised when cash is advanced to borrowers. Loans and advances are initially recognised at fair value and are subsequently carried at amortised cost less provision for impairment losses.

A specific credit risk provision for loan impairment is established to provide for management’s estimate of credit losses as soon as the recovery of an exposure is identified as doubtful. In arriving at such provisions, present value of future expected cash flows, including amounts recoverable from securities, discounted at effective interest rates of loans are taken into account.

A general credit risk provision for loan impairment is also provided for in accordance with the requirements of the Prudential Guidelines issued by the Central Bank of Kenya. This ranges from between 1% to 3% of the gross advances classified as Normal and Watch categories.

Where provisions computed in accordance with the Prudential Guidelines exceed those under International Accounting Standard 39 (IAS 39) on Financial Instruments: Recognition and Measurement, the excess is credited to reserves under the loan loss reserve. The Prudential Guidelines and IAS 39 are used by the bank to determine when a loan becomes impaired. 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.

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 effective interest rate and the discounted value of the collateral. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss.

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 banked 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 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. 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 currently exist. Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in



unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the bank to reduce any differences between loss estimates and actual loss experience. 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.

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 in the statement of comprehensive income. - Renegotiated loans Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are considered to be past due. They will continue to be treated as past due unless all past due interest is paid in cash at the time of renegotiation and a sustained record of performance has been maintained. - Assets classified as available - for - sale

The bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or a group of financial assets is impaired. 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 objective evidence of impairment resulting in the recognition of an impairment loss. If any such evidence exists, the cumulative loss (the difference between the acquisition cost and the current fair value, less any impairment losses previously recognised in profit or loss) is eliminated from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the consolidated income statement.

(l) Leases

Finance leases as a lessor Leases of property and equipment including hire purchase agreements where the company transfers substantially all the risks and rewards of ownership are classified as finance leases. Assets held under finance leases are recognised as receivables at the amount equal to the net

investment in the lease. Subsequently, the net investment in leases is carried at amortised cost, less provision for impairment losses. Each lease repayment is treated as repayment of principal and finance income so as to reflect a constant rate of return on the investment. At the end of the lease term the lessee has an option to purchase the asset. Operating leases as a lessee Leases of assets where a significant proportion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight line basis over the lease period. Prepaid operating lease rentals are recognised as an asset and are subsequently amortised over the lease period. (m) Taxation The tax expense for the period comprises current and deferred tax. Tax is recognised in profit or loss, except to the extent that it relates to items recognised in equity. In which case, the tax is also recognised in equity.

Current tax Current tax is provided on the basis of the results for the year, adjusted in accordance with tax legislation. Deferred tax Deferred tax is provided using the liability method for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. Currently enacted tax rates at the statement of financial position date are used to determine deferred tax. Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which temporary differences can be utilised. (n) Financial instruments Financial assets The bank’s financial assets which include cash in hand, balances with Central Bank of Kenya, government securities, placements with and loans and advances to other banking institutions, other assets, loans and advances to customers and investment securities fall into the following categories: Held-to-maturity: financial assets with fixed or determinable payments and fixed maturity where the management have the positive intent and ability to hold to maturity. Such assets are initially recognised at fair



value and subsequently carried at amortised cost using the effective interest rate method. Changes in the carrying amount are recognised in the statement. of comprehensive income Available-for-sale: financial assets that are held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rate. ‘Available-for-sale’ financial assets are carried at fair value where fair value gains are recognised directly in equity, net of deferred tax, until the financial asset is derecognised or impaired. At this time, the cumulative gain or loss previously recognised in equity is recognised in the income statement. However, interest calculated using the effective interest method and gains and losses on disposal of assets classified as available-for-sale are recognised in the income statement. Dividends on available-for-sale equity instruments are recognised in the income statement when the entity’s right to receive payment is established. Loans and receivables: financial assets with fixed or determinable payments that are not quoted in an active market other than: - those that the entity intends to sell immediately or in the short term,

which are classified as held - for - trading, and those that the entity upon initial recognition designated as ‘fair value through profit or loss’;

- those that the entity upon initial recognition designates as ‘available for sale’; or

- those for which the holder may not recover substantially all of its initial investment, other than because of credit deterioration.

Such assets are carried at amortised cost using the effective interest rate method. Changes in the carrying amount are recognised in the income statement. Financial assets at fair value through profit and loss: financial assets that are acquired or incurred principally for the purpose of generating a profit from short term fluctuation in price or dealer’s margin. Such assets are carried at fair value where fair value gains or losses are included in the income statement. This category has two sub-categories: - financial assets held-for-trading and;

- those designated at fair value through profit or loss at inception. A financial asset is classified as held-for-trading if it is acquired or incurred principally for the purpose of selling or repurchasing in the near term or if it is part of a portfolio of identified financial instruments

that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. Financial assets and financial liabilities are designated at fair value through profit or loss when:

• Doing so significantly reduces measurement inconsistencies that would arise if the related assets were treated as held-for-trading and the underlying financial instruments were carried at amortised cost for such as loans and advances to customers or banks and;

• Certain assets, such as equity investments, that are managed and evaluated on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis are designated at ‘fair value through profit or loss’.

• The fair values of quoted investments classified as ‘held-for-trading’ in active markets are based on current bid prices.

The management classifies financial assets at fair value through the income statement and available - for - sale financial assets based on the qualitative characteristics of the fair valuation as at the financial year end. The three hierarchy levels used by management are: Level 1: where fair values are based on non-adjusted quoted prices in active markets for identical financial assets. Level 2: where fair values are based on adjusted quoted prices and observable prices of similar financial assets. Level 3: where fair values are not based on observable market data.Purchases and sales of financial assets are recognised on the trade date i.e. the date on which the bank commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the bank has transferred substantially all risks and rewards of ownership. Gains and losses on disposal of investments whose changes in fair value were initially recognised in the income statement are determined



by reference to their carrying amount and are taken into account in determining profit before tax. On disposal of investments whose changes in fair value were initially recognised in equity, the gains/losses are recognised in the reserve, where the fair values were initially recognised. Any resultant surplus/deficit after the transfer of the gains/losses are transferred to retained earnings.

Management classifies financial assets as follows: • Cash in hand, balances with Central Bank of Kenya, placements with other banking institutions, other assets and loans and advances to customers are classified as ‘Loans and receivables’. Government securities are classified as ‘Available-for-sale’. • The fair values are based on market prices as at the date the statement of financial position. Investment securities are classified as ‘Held-for-trading’. •

Financial liabilities The bank’s financial liabilities which include customer deposits, deposits due to other banking institutions, other liabilities and current tax fall into the following categories: Financial liabilities measured at amortised cost: These are initially measured at fair value and subsequently measured at amortised cost, using the effective interest rate method.

All financial liabilities are classified as current liabilities unless the bank has an unconditional right to defer settlement of the liability for at least 12 months after the date of the statement of financial position. Financial liabilities are derecognised when, and only when, the bank’s obligations are discharged, cancelled or expired.

(o) Offsetting financial instruments 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 offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (p) Dividends

Proposed dividends are shown as a separate component of equity until declared. Dividends are recognized as liabilities in the period in which they are approved by the bank’s shareholders.

(q) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash, balances due to and from banking institutions, balances with Central Bank of Kenya (excluding cash reserve ratio) and

government securities maturing within 91 days from the date of the statement of financial position. (r) Contingent liabilities Letters of credit, acceptances, guarantees and performance bonds are accounted for as off - balance - sheet transactions and disclosed as contingent liabilities. Estimates of the outcome and of the financial effect of contingent liabilities is made by the management based on the information available up to the date the financial statements are approved for issue by the directors. Any expected loss is charged to the income statement. (s) Financial guarantee contractsFinancial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities. (t) Foreign exchange forward contracts Foreign exchange forward contracts are marked to market and are carried at their fair value and shown as commitments. Gains and losses on foreign exchange forward contracts are dealt with on a net basis in the income statement in the year in which they arise. (u) Provisions under other liabilitiesProvisions under other liabilities are recognised when the bank has a present legal or constructive obligation, as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can be made. (v) Share capitalOrdinary shares are classified as equity. (w) Segment ReportingThe major part of the business of the bank falls under the category of banking with other income comprising less than .05% of the total operating income. Also, the bank operates wholly within Kenya. Segment reporting is therefore not considered of any value.

(x) ComparativesWhere necessary comparative figures have been adjusted to conform with changes in presentation in the current year.



1. INTEREST INCOME Loans and advances including finance lease income Government securities Placements with and loans and advances to other banking institutions Others

2. INTEREST EXPENSES Customer deposits Deposits from other banking institutions

3. GAIN ARISING FROM HELD-FOR-TRADING INVESTMENT SECURITIES Gain on disposal of quoted investments 4. OTHER INCOME Others Gain on disposal of property and equipment

5. IMPAIRMENT LOSSES ON LOANS AND ADVANCES Loans and advances to customers: - net increase in specific provision (Note 14 (b))

6. (a) OTHER OPERATING EXPENSES Staff costs (Note 6 (b)) Directors’ emoluments: - fees - other Depreciation on property and equipment (Note 16) Amortisation of prepaid operating lease rentals (Note 17) Amortisation of intangible assets (Note 19) Auditors’ remuneration: - current year - under provision in prior year Contribution to Deposit Protection Fund Operating lease rentals Other administrative expenses (Notes 6(c)) Other operating expenses (Notes 6(d))

2009Shs’000

2,460,394187,144

7,60722,248

2,677,393

1,194,711117,755

1,312,466

-

73,84210,726

84,568

58,551

458,431

14,00043,25987,717

-8,473

3,000397

15,35256,416

254,97285,249

1,027,266

2008Shs’000

2,274,41580,948

30,06326,697

2,412,123

1,070,836180,746

1,251,582

93

74,7682,049

76,817

44,199

404,475

10,50038,06398,261

2108,417

3,0001,221

13,15254,565

201,76776,674

910,305

notes to tHe FInAnCIAL stAteMents


6. (b) The following items are included in staff costs: Staff leave accrual Pension costs: - defined contribution scheme - national social security fund

7. TAX Current tax Deferred tax (credit) (Note 20) Under provision of tax in prior years current tax The tax on the bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows: Profit before tax Tax calculated at a rate of 30% (2008: 30%) - expenses not deductible for tax purposes - income not subject to tax - Under provision of tax in prior years current tax Tax charge

notes to tHe FInAnCIAL stAteMents Continued

2009Shs’000

2,072

29,540660

2008Shs’000

(820)

29,279656

AdvertisingComputer expensesPostages, telephones, telex and faxSubscriptions and periodicalsTravelling and motor vehicle

Electricity and waterInsuranceRepairs and maintenanceSecurity

2009Shs ‘000

40,33210,59532,22918,76624,888

2009Shs ‘000

16,1356,119

33,07522,110

2008Shs ‘000

50,78119,39829,80115,12818,741

2008Shs ‘000

11,6603,287

35,50418,816

(c) The following have been included in the other operating expenses:

(d) The following have been included in the other administrative expenses:

254,045(10,807)

2,694

245,932

801,810

240,5436,281

(3,586)2,694

245,932

214,590(6,850)

-

207,740

673,427

202,0285,712

--

207,740


9. DIVIDEND

Proposed dividends are accounted for as a separate component of equity until they have been ratified at an annual general meeting.

At the forthcoming annual general meeting a final dividend in respect of the year ended 31 December 2009 of Shs 23.04 per share

(2008: Shs. 78.34) amounting to Shs. 25 million (2008: Shs. 85 million) is to be approved.

During the year an interim dividend of Shs. 184.33 per share (2008: Shs 82.95) was paid amounting to a total of Shs. 200 million

(2008: Shs.90 million). The total dividend for the year is therefore Shs. 207.37 per share (2008: Shs. 161.29) amounting to a total

of Shs. 225 Million (2008: Shs. 175 Million).

In accordance with the Kenyan Companies Act, these financial statements reflect this dividend which is accounted for in the

shareholders’ funds as an appropriation of retained profits in the year ended 31 December 2009.

Where applicable, payment of dividends is subject to deduction of withholding tax at a tax rate of 5% for residents.

There are also qualifying dividends for residents whose shareholding is above 12.5% hence are exempt from withholding tax.


8. EARNINGS PER SHARE Basic earnings per share is calculated on the profit attributable to the shareholders and on the weighted average number of shares outstanding during the year adjusted for the effect of the bonus share issue during the year. 2009 2008 Shs’000 Shs’000

Net profit for the year attributable to shareholders (Shs. ‘000) 555,878 465,687 Adjusted weighted average number of ordinary shares in issue 1,085,000 1,085,000 Earnings per share - basic and diluted (Shs.) 512 429

There were no potentially dilutive shares outstanding as at 31st December 2009 and 31st December 2008


10. BALANCES WITH CENTRAL BANK OF KENYA 2009 2008 Shs’000 Shs’000 Balances with Central Bank of Kenya - cash reserve ratio 490,555 511,973 - other (Note 25) 219,963 100,495 710,518 612,468

The cash reserve ratio balance is non interest bearing and is based on the value of customer deposits as adjusted in accordance with Central Bank of Kenya requirements. As at 31 December 2009 the cash reserve ratio requirement was 4.5% (2008: 5%) of all customer deposits. These funds are not available to finance the bank’s day to day operations.

2009 200811. GOVERNMENT SECURITIES Shs’000 Shs’000 Treasury bonds - available-for-sale 2,245,960 921,220 Comprising: Maturing after 91 days from the statement of financial position date (Note 25) 2,245,960 921,220 2,245,960 921,220

The fair values of government securities disclosed above are categorised under Level 1 based on the information set out on the accounting policy (n).

12. PLACEMENTS WITH AND LOANS AND 2009 2008 ADVANCES TO OTHER BANKING INSTITUTIONS Shs’000 Shs’000 Balances with banking institutions in Kenya 72,321 253,962 Balances with banking institutions abroad 1,774,455 2,081,222 Term deposits with banking institutions abroad 121,602 170,964 Items in course of collection from banking institutions 168,145 372,928 2,136,523 2,879,076 13. OTHER ASSETS Receivables and prepayments 96,401 82,318 Foreclosed assets (Note 14(e)) 12,203 7,155 108,604 89,473

Foreclosed assets comprise hire purchase assets recovered following default of contractual terms of the loans and advances to customers. These are held for sale. In the opinion of the directors, adequate allowance has been made for impairment in the values of these assets.



a) Loans and advances to customers Overdrafts Commercial loans Bills discounted Gross investment in finance leases (Note 14 (d)) Gross loans and advances to customers Unearned interest on finance leases (Note 14 (d)) Provision for impaired loans and advances (Note 14 (b)) Loans and advances to customers net of provision for impairment b) Provision for impaired loans and advances Year ended 31 December 2009 At start of year New provisions Increased provisions Provisions no longer required Net increase in provision for impairment charged to income statement (Note 5) Provisions utilised during the year for write off At end of year Year ended 31 December 2008 At start of year New provisions Increased provisions Provisions no longer required Net increase in provision for impairment charged to income statement (Note 5) Provisions utilised during the year for write off At end of year


2009 Shs’000

4,677,446 3,006,639

144,716 2,570,646

10,399,447

(326,848) (396,489)

9,676,110

SpecificprovisionShs ‘000

347,877

40,569 58,764

(40,782)

58,551 (9,939)

396,489

SpecificprovisionShs ‘000

334,297

22,219 44,516

(22,536)

44,199 (30,619)

347,877

TotalShs ‘000

347,877

40,569 58,764

(40,782)

58,551 (9,939)

396,489

TotalShs ‘000

334,297

22,219 44,516

(22,536)

44,199 (30,619)

347,877

2008 Shs’000

3,826,302 2,091,945

68,032 3,034,508

9,020,787

(396,789) (347,877)

8,276,121

14. LOANS AND ADVANCES TO CUSTOMERS


Loans and advances have been written down to their recoverable amount. Non performing loans and advances on which provisions for impairment have been recognised amount to Shs 663.508 million (2008: Shs. 560.674 million). These are included in the statement of financial position net of provisions at Shs. 267.019 million (2008: Shs. 212.797 million). In the opinion of the directors sufficient securities are held to cover the exposure on such loans and advances. Interest income amounting to Shs 34.881 million (2008: Shs. 31.328 million) on impaired loans and advances has not been recognised as the management feels no economic benefit of such interest will flow to the bank. From past experience, the management is of the opinion that 1% provision for normal accounts and 3 % provision for watch accounts is adequate to cover any accounts which might become delinquent in the future.

c) Concentration Economic sector risk concentrations within the loans and advances portfolio are as follows: Manufacturing Wholesale, retail trade and hotels Transport and communications Agriculture Hire purchase and insurance Business services Building, construction and real estate Social, community and personal services Others

d) Finance leases The loans and advances to customers include finance lease receivables, which may be analysed as follows: Gross investment in finance leases: - maturing not later than 1 year - maturing later than 1 year and not later than 5 years Unearned future finance income Net investment in finance leases The net investment in finance leases may be analysed as follows: - not later than 1 year - later than 1 year and not later than 5 years


2009Shs ‘000

612,099

1,958,547

2,570,646

(326,848)

2,243,798

394,787 1,849,011

2,243,798

2009 Shs’000

945,659 791,534

1,751,312 298,689 341,657 576,913 694,710 173,942

4,825,031

10,399,447

2008 Shs’000

529,311 745,978

1,334,611 306,179 54,292

384,162 236,790 126,667

5,302,799

9,020,787

2009 %

9%8%

17%3%3%6%7%2%

46%

100%

2008 %

6%8%

15%3%1%4%3%1%

59%

100%

2008Shs ‘000

611,893

2,422,615

3,034,508

(396,789)

2,637,719

346,842 2,290,877

2,637,719

14. LOANS AND ADVANCES TO CUSTOMERS (continued)


e) Loans and advances neither past due nor impaired, past due but not impaired and individually impaired 2009 2008 Shs’000 Shs’000 Neither past due nor impaired 8,281,992 6,997,566 Past due but not impaired 1,127,100 1,065,758 Individually impaired 663,507 560,674 Gross 10,072,599 8,623,998 Less: allowance for impairment (396,489) (347,877) Net loans and advances 9,676,110 8,276,121 Loans and advances that are less than 90 days past due are not considered impaired.

The credit quality of the portfolio of loans and advances that were past due but not impaired can be assessed by reference to the internal rating system adopted by the bank. The loans and advances past due but not impaired can be analysed as follows:

2009 2008 Shs ‘000 Shs ‘000 Watch 1,127,100 1,065,758

The loans and advances past due but not impaired can be analysed as follows: Year ended 31 December 2009 30 to 90 days Total Shs ‘000 Shs ‘000 Commercial loans and gross investment in finance leases 182,518 182,518 Overdrafts 944,582 944,582 1,127,100 1,127,100 Year ended 31 December 2008 30 to 90 days Total Shs ‘000 Shs ‘000l Commercial loans and gross investment in finance leases 288,741 288,741 Overdrafts 777,017 777,017 1,065,758 1,065,758 The fair value of the collateral for loans and advances past due but not impaired is considered adequate. Loans and advances individually impaired The fair value of the collateral for loans and advances individually impaired is Shs. 242.820 million.



Loans and advances renegotiated Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a substandard status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgment of the credit committee indicate that payment will most likely continue. These policies are kept under continuous review. Repossessed collateral The following were obtained by the bank by taking possession of collateral held as security. 2009 2008 Shs ‘000 Shs ‘000Asset financed under finance leases (Note 13) 12,203 7,155

15. INVESTMENT SECURITIES - HELD-FOR-TRADING 2009 2008 Shs ‘000 Shs ‘000

Quoted equity investments: At start of year - - Additions - 42,326 Disposals - (42,326) At end of the year - -

Cost At start of year Additions Disposals At end of year Depreciation At start of year Charge for the year On disposal At end of year Net book value

BuildingsShs’000

74,379 -

(74,379)

-

7,400 -

(7,400)

-

-

Officerenovations

Shs’000

7,243 --

7,243

7,243 --

7,243

-

Computers,copiers

and faxesShs’000

143,582 18,760

(157)

162,185

129,282 16,203

-

145,485

16,700

MotorvehiclesShs’000

66,296 7,566

(7,108)

66,754

41,029 12,986 (5,934)

48,081

18,673

Furniture and

fittingsShs’000

277,177 17,697

-

294,874

129,536 31,464

-

161,000

133,874

Officeequipment

Shs’000

155,275 13,923

-

169,198

86,236 27,064

-

113,300

55,898

TotalShs’000

723,952 57,946

(81,644)

700,254

400,726 87,717

(13,334)

475,109

225,145

In the opinion of directors there is no impairment of property and equipment. All additions to property and equipment during the year were made on cash basis.


16. PROPERTY AND EQUIPMENT Year ended 31 December 2009

14. LOANS AND ADVANCES TO CUSTOMERS (continued)



Cost At start of year Additions Disposals At end of year Depreciation At start of year Charge for the year On disposal At end of year Net book value

BuildingsShs’000

74,379 --

74,379

5,541 1,859

-

7,400

66,979

Officerenovations

Shs’000

7,243 --

7,243

7,243 --

7,243

-

Computers,copiers

and faxesShs’000

138,438 5,270 (126)

143,582

106,663 22,733

(114)

129,282

14,300

MotorvehiclesShs’000

59,993 15,412 (9,109)

66,296

35,410 14,146 (8,527)

41,029

25,267

Furniture andfittings

Shs’000

252,135 25,042

-

277,177

94,917 34,619

-

129,536

147,641

Officeequipment

Shs’000

128,047 27,228

-

155,275

61,332 24,904

-

86,236

69,039

TotalShs’000

660,235 72,952 (9,235)

723,952

311,106 98,261 (8,641)

400,726

323,226

17. PREPAID OPERATING LEASE RENTALS Amounts paid on acquisition of leasehold land are classified under prepaid operating lease rentals. The movement in prepaid operating lease rentals during the year was as follows: 2009 2008 Shs’000 Shs’000 Cost At start of year 10,506 10,506 Disposals (10,506) - At end of year - 10,506 Amortisation At start of year 1,440 1,230 Amortisation - 210 Disposal (1,440) - At end of year - 1,440 Net book value - 9,066 18. CAPITAL WORK - IN - PROGRESS At start of year 6,589 10,949 Additions 4,259 555 Amount capitalised - (4,915) At end of year 10,848 6,589 The capital work - in - progress relates to the construction of the Changamwe and Thika branch.



19. INTANGIBLE ASSETS - SOFTWARE COSTS

2009 2008 Shs’000 Shs’000 Cost At start of year 84,148 73,981 Additions 578 10,167 At end of year 84,726 84,148 Amortisation At start of year 24,051 15,634 Charge for the year 8,473 8,417 At end of year 32,524 24,051 Net book value 52,202 60,097 In the opinion of directors there is no impairment in the value of intangible assets. All additions to intangible assets during the year were made on a cash basis. Amortisation costs are included in other operating expenses in the statement of comprehensive income.

20. DEFERRED TAX Deferred tax is calculated on all temporary timing differences under the liability method using a principal tax rate of 30% (2008: 30%). The movement on the deferred tax account is as follows: 2009 2008 Shs’000 Shs’000 At start of year 36,406 32,062 Income statement credit (Note 7) 10,807 6,850 Credited to equity (Note 7) (320) (2,506) At end of year 46,893 36,406 Deferred tax assets and deferred tax credit/(charge) in the income statement and equity are attributable to the following: Credited At start (Charged) to income At end of year to equity statement of year Shs’000 Shs’000 Shs’000 Shs’000 Property and equipment - historical cost 27,955 - 6,586 34,541 Provision for staff leave accrual 2,131 - 622 2,753 General provision for bonus 6,000 - 3,600 9,600 Fair value loss on available-for-sale investments- prior year 320 (320) - - 36,406 (320) 10,807 46,893



2009 200821. CUSTOMER DEPOSITS Shs’000 Shs’000 Call deposits 866,845 275,956 Current and demand accounts 3,694,826 4,539,547 Savings accounts 184,122 142,238 Term deposits 5,008,394 4,567,751 Foreign currency deposits 2,515,719 888,551 12,269,906 10,414,043 Analysis of customer deposits by maturity:

Payable within 90 days 10,379,180 8,481,831 Payable after 90 days and within one year 1,880,932 1,849,133 Payable after one year 9,794 83,079 12,269,906 10,414,043 Concentration: The economic sector concentrations within the customer deposits portfolio were as follows: 2009 2009 2008 2008 Shs’000 % Shs’000 % Non private institutions and individuals 9,359,184 76% 8,238,593 79% Private companies 2,872,813 24% 2,165,579 21% Insurance companies 37,595 0% 9,871 0% Hire purchase companies 314 0% - - 12,269,906 100% 10,414,043 100% Included in customer accounts were deposits of Shs.1,384 million (2008: Shs.1,435 million) held as collateral for loans and advances. The fair value of these deposits approximates to the carrying amount.

22. DEPOSITS DUE TO OTHER BANKING INSTITUTIONS 2009 2008 Shs’000 Shs’000 Overnight borrowings 462,344 - Term deposits 130,032 797,193 592,376 797,193



23. OTHER LIABILITIES Outstanding bankers cheques 101,500 105,448 Staff leave accrual 9,175 7,103 Sundry creditors 120,693 180,886 231,368 293,437 Other liabilities are expected to be settled within no more than 12 months after the statement of financial position date. No. of Issued and ordinary paid up shares capital 24. SHARE CAPITAL 2009 2008 2009 2008 ‘000 ‘000 Shs’000 Shs’000 At start and end of year 1,085 1,085 1,085,000 1,085,000 The total authorised number of ordinary shares is 1,085,000 (2008: 1,085,000) with a par value of Shs. 1,000 per share. All issued shares are fully paid.

25. CASH AND CASH EQUIVALENTS Changes during the 2009 2008 year Shs’000 Shs’000 Shs’000 Cash in hand 145,305 217,962 (72,657) Balances with Central Bank of Kenya (Note 10) 219,963 100,495 119,468 Placements with and loans and advances to other banking institutions (Note 12) 2,136,523 2,879,076 (742,553) Deposits due to other banking institutions (Note 22) (592,376) (797,193) 204,817 1,909,415 2,400,340 (490,925) 26. OFF - STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS In common with banking business, the bank conducts business involving acceptances, guarantees, performance bonds and letters of guarantees. The majority of these facilities are offset by corresponding obligations from third parties. 2009 2008 Contingent liabilities Shs’000 Shs’000 Letters of credit 679,866 987,077 Letters of guarantees 1,056,533 1,135,819 Acceptances 381,332 650,381 Bills sent for collection 16,934 19,633 Client treasury bonds 7,304 - 2,141,969 2,792,910


2009 2008 Shs’000 Shs’000

For the purposes of the cash flow statement, cash and cash equivalents comprise the following:


An acceptance is an undertaking by a bank to pay a bill of exchange on a specified due date. 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 credit compliant documents which are subsequently reimbursed by customers’.

Guarantees are generally written by a bank to support the performance of a customers’ to third parties. The bank will only be required to meet these obligations in the event of the customers default.

Based on the estimate of the financial effect of the contingencies and the corresponding obligations from third parties, no loss is anticipated. The bank has open lines of credit facilities with correspondent banks. The liability outstanding at the year-end is Shs 1,061.198 million (2008: Shs. 1,637.458 million). These facilities are unsecured. Commitments 2009 2008 Shs ‘000 Shs ‘000Undrawn formal stand-by facilities, credit lines and other commitments to lend 1,335,105 753,267 Foreign exchange forward contracts 727,562 511,365 2,062,667 1,264,632

Commitments to lend are agreements to lend to customers 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 facilities by giving reasonable notice to the customer. Foreign exchange forward contracts are agreements to buy or sell a specified quantity of foreign currency, usually on a specified future date at agreed rates. Capital commitments There was no capital expenditure contracted as at the statement of financial position date. Operating lease commitments 2009 2008The future minimum lease payments under non-cancellable Shs’000 Shs’000operating leases are as follows: - not later than 1 year 58,533 60,992 - later than 1 year and not later than 5 years 147,604 261,484 - later than 5 years 11,703 51,665 217,840 374,141 The directors are of the view that future net revenues and funding will be sufficient to cover these commitments.


26. OFF - STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)


26. OFF - STATEMENT OF FINANCIAL POSITION FINANCIAL INSTRUMENTS, CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED) 27. FINANCIAL RISK MANAGEMENT

The bank’s activities expose it to a variety of financial risks and those activities involve analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the financial business, and the operational 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 the bank’s financial performance.

The bank’s risk management policies are designed to identify and analyse these risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date management information systems. The bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.

Risk management is carried out by the bank’s treasury and credit department under policies approved by the Board of Directors. The bank’s treasury and credit departments identify, evaluate and mitigate financial risks in close co-operation with various other departmental heads. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as credit risk, market risk, liquidity risk and operational risk.

In addition, the internal audit department is responsible for the independent review of risk management and the overall control environment. The most important types of risk are credit risk, liquidity risk, market risk and operational risk. Market risk includes currency risk, interest rate and other price risk.

Credit risk The bank takes on exposure to credit risk, which is the risk that a customer will cause a financial loss for the bank by failing to fulfil a contractual obligation. Credit risk is the most important risk for the bank’s business. Management therefore carefully manages its exposure to credit risk. Credit risk mainly arises from customer loans and advances, credit cards, investing activities and loan commitments (off - statement of financial position financial instruments).

The credit risk management and control are centralised in credit and treasury departments of the bank. - Measurement of credit risk

a) Loans and advancesIn measuring credit risk of loans and advances to customers, the bank reflects on various components. These include:

i) the probability of default by the borrower/client on their contractual obligations; ii) current exposures on the borrower/client and the likely future

development, from which the bank derives the exposure at default; and

iii) the likely recovery ratio on the defaulted obligations.

These credit risk measurements, which reflect expected loss, are embedded in the bank’s daily operational management. The operational measurements can be contrasted with impairment allowances required under IAS 39 and the Banking Act which are based on losses that have been incurred at the statement of financial position date rather than expected losses.

The bank assesses the probability of default of individual borrower/client using internal rating methods tailored to the various categories of the borrower/client. These have been developed and combine statistical analysis with the credit department’s judgment and are validated, where appropriate, by comparison with externally available data.

Management assesses the credit quality of the customer, taking into account their financial position, past experience and other factors. Individual limits are set based on internal or external information in accordance with limits set by the management. The utilisation of credit limits is regularly monitored. Corrective action is taken where necessary.

b) InvestmentsFor investments, internal ratings taking into account the requirements of the Banking Act are used by the bank for managing the credit risk exposures. The investments in those securities are viewed as a way to gain a better credit quality mapping and maintain a readily available source to meet the funding requirement at the same time.

Risk limit control and mitigation policies The bank manages, limits and controls concentrations of credit risk wherever they are identified. The bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group’s of borrowers, and to industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by product and industry sector are approved as and when required by the credit committee. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Some other specific control and mitigation measures are outlined below:



a) CollateralThe bank employs a range of policies and practices to mitigate credit risk. The most common one is to obtain collateral for loans and advances to customers. The types of collateral obtained include: • Mortgages over properties;• Charges over business assets such as land and buildings, inventory and receivables;• Charges over financial instruments such as investments:• Deposits placed under lien. b) Credit-related commitmentsThe primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and Letters of Credit carry the same credit risk as loans. 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 advance or loan. 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. Impairment and provisioning policiesThe bank’s internal and external systems focus more on credit-quality mapping from the inception of the lending of the loan or advance. In contrast, impairment provisions are recognised for financial reporting purposes only for losses that have been incurred at the statement of financial position date based on objective evidence of impairment.

The impairment provision shown in the statement of financial position at the year-end is derived after taking various factors into consideration as described in accounting policy (k). The bank’s management uses the basis under IAS 39- ‘Financial instruments: Recognition and Measurement’ and the Prudential Guidelines to determine the amount of impairment.

Exposure to credit riskThe 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 other financial assets based on the following:

• The maximum exposure to credit risk arises from loans and advances to customers which form 63% (2008: 62%) of total financial assets; 15% (2008: 7%) represents investments in government securities and quoted investments).

• 93.4 % (2008: 93 %) of the loans and advances portfolio is categorised in the top two grades of the internal rating system (Normal and Watch).

• 0.9 % (2008: Nil %) of the loans and advances portfolio are considered to be past due but not impaired (note 14).

• Most of its loans and advances to customers are performing as per the covenants and the non-performing ones have been provided for. The loans and advances are also secured.

• Cash in hand, balances with Central Bank of Kenya, placements with other banking institutions and investment securities are held with sound financial institutions.

• Government securities are considered stable investments as the risk is considered negligible.

• Management considers the historical information available to assess the credit risk on investment securities.

Exposure to this risk has been quantified in each financial asset note in the financial statements along with any concentration of risk.

Market riskMarket Risk is the risk that changes in the market prices, which includes currency exchange rate and interest rates, will affect the fair value or future cash flows of financial instruments. 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 objectives of market risk management is to manage and control market risk exposures within acceptable limits, while optimising on the return on risk. Overall management of market risk rests with the Assets and Liability Committee (ALCO).

The treasury department is responsible for the development of detailed risk management policies, subject to review and approval by ALCO, and for the day to day implementation of these policies.

Market risks arise mainly from trading and non-trading activities.

Trading portfolios include those positions arising from market-making transactions where the bank acts as a principal with clients or with the market.

Non-trading portfolios primarily arise from the interest rate management of the entity’s retail and commercial banking assets and liabilities. Non-trading portfolios also consist of foreign exchange and equity risks arising from the bank’s available-for-sale investments.

The major measurement techniques used to measure and control market risk are outlined below :


27. FINANCIAL RISK MANAGEMENT (continued)


a) ALCO reviewALCO meets on a adhoc basis to review the following:• A summary of the bank’s aggregate exposure on market risk• A summary of the bank’s maturity/repricing gaps• A report indicating that the bank is in compliance with the board’s set exposure limits• A comparison of past forecast or risk estimates with actual results to identify any shortcomings.

b) Review by the treasury departmentThe treasury department monitors foreign exchange risk in close collaboration with the board of directors. Regular reports are prepared by the treasury department of the bank and discussed with the board of directors.

Some of these reports include:• Net overnight positions by currency• Maturity distribution by currency of the assets and liabilities for both on and off statement of financial position items• Outstanding contracts (if any) by settlement date and currency• Total values of contracts, spots and futures• Aggregate dealing limits• Exceptional reports for example limits or line excesses

c) Stress test Stress test provides an indication of the potential size of losses that could arise in extreme conditions. The stress tests carried out by the treasury department include: risk factor, stress testing where stress movements are applied to each risk category, emerging market stress testing, where emerging market portfolios are subject to stress movements and adhoc stress testing, which includes applying possible stress events to specific positions or regions - for example the stress outcome to a region following currency peg break. The results of the stress tests are reviewed by senior management in each business unit. The stress test is tailored to the business and typically uses scenario analysis.

Operational riskOperational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the bank’s processes, personnel, technology and infrastructure and from external factors other than credit, market and liquidity risks such as those arising out of legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risk arises from the bank’s operations and is faced by all other business entities.

The bank endeavours to manage the operational risk by creating a balance between avoidance of cost or financial losses and damage to the bank’s reputation within overall cost effectiveness and to avoid control procedures that restrict creativity and initiative. The key responsibility for development policies and programs to implement the bank’s operational risk management is with the senior management of the bank.

The above is achieved by development of overall standards for the bank to manage the risk in the following areas:1) Segregation of duties including independent authorisation of

transactions2) Monitoring and reconciliation of transactions3) Compliance to regulatory and legal requirement4) Documentation of control and procedure5) Assessment of the operational risk on a periodic basis to address

the deficiencies observed, if any6) Reporting of operational losses and initiation of remedial action7) Development of contingency plans8) Giving training to staff to improve their professional competency9) Ethical and business standards10) Obtaining insurance wherever feasible, as a risk mitigation

measure.

Compliance of bank’s standards is supported by periodic reviews undertaken by Internal Audit. The observations of the Internal Audit is discussed with the management of the bank and the summaries are submitted to the Audit Committee of the Board.

Risk measurement and control Interest rate, currency, credit, liquidity and other risks are actively managed by management to ensure compliance with the bank’s risk limits. The bank’s risk limits are assessed regularly to ensure their appropriateness given its objectives and strategies and current market conditions. A variety of techniques are used by the bank in measuring the risks inherent in its trading and non-trading positions.


27. FINANCIAL RISK MANAGEMENT (continued)


28. CURRENCY RISK The bank operates wholly within Kenya and its assets and liabilities are reported in the local currency. It conducts trade with correspondent banks and takes deposits and lends in other currencies. The bank’s currency position and exposure are managed within the exposure guideline of 20% of the core capital as stipulated by the Central Bank of Kenya. This position is reviewed on a daily basis by the management. The significant currency positions are detailed below:

AT 31 DECEMBER 2009 Assets Cash and bank balances Balances with banks abroad Loans and advances to customers Other assets Total assets Liabilities Customer deposits Other liabilities Total liabilities Net statement of financial position position Off - statement of financial position net notional position

AT 31 DECEMBER 2008 Total assets Total liabilities Net statement of financial position position Off - statement of financial position net notional position

US $ Shs ‘000

175,451 1,702,264 1,333,285

20,901

3,231,901

1,422,266 26,711

1,448,977

1,782,924

1,304,098

3,246,377 1,338,151

1,908,226

1,839,120

GB £ Shs ‘000

18,972 90,605 42,474

487,572

639,623

613,497 2,288

615,785

23,838

102,689

554,826 551,152

3,674

69,134

Euro Shs ‘000

54,358 73,697

122,793 258,426

509,274

446,961 1,881

448,842

60,432

122,163

425,894 415,831

10,063

123,689

Indian Rupee

Shs ‘000

- 2,248 1,308

-

3,556

- -

-

3,556

-

3,679 -

3,679

-

South African

Rand Shs ‘000

15,969 15,937

- -

31,906

16,897 -

16,897

15,009

418

2,274 125

2,149

-

Others Shs ‘000

3,875 11,306

241 -

15,422

16,097 -

16,097

(675)

40,596

17,050 9,823

7,227

80,193

Total Shs ‘000

268,625 1,896,057 1,500,101

766,899

4,431,682

2,515,718 30,880

2,546,598

1,885,084

1,569,964

4,250,101 2,315,082

1,935,019

2,112,136

Foreign exchange risk sensitivity The table below summarises the effect on post-tax profit had the Kenya Shilling weakened by 10% against each currency, with all other variables held constant. If the Kenya shilling strengthened against each currency, the effect would have been the opposite.

Year 2009 Other US $ GB £ Euro Currencies Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Effect on profit - increase 124,805 1,669 4,230 1,252 131,956 Year 2008 Other US $ GB £ Euro Currencies Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Effect on profit - increase 133,576 257 704 914 135,451



29. INTEREST RATE RISK The bank is exposed to various risks associated with the effects of fluctuation in the prevailing levels of market interest rates on its financial position and cash flows. The management closely monitors the interest rate trends to minimise the potential adverse impact of interest rate changes. The table over leaf summarises the exposure to interest rate risk at the statement of financial position date. Included in the table are the assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. The bank does not have any derivative financial instruments. The bank does not bear an interest rate risk on off - statement of financial position items.

AT 31 DECEMBER 2009 ASSETS Cash in hand Balances with Central Bank of Kenya Government securities Placements with and loans and advances to other banking institutions Other assets Loans and advances to customers Property and equipment Intangible assets Capital work in progress Deferred tax Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Customer deposits Deposits from other banking institutions Other liabilities Current tax Shareholders’ equity Total liabilities and shareholders’ equity

On statement of financial position interest sensitivity gap AT 31 DECEMBER 2008 Total assets Total liabilities and shareholders’ equity

On statement of financial position interest sensitivity gap

Upto1 monthShs’000

- - -

121,483 -

9,259,143 - - - -

9,380,627

4,039,336 585,000

- - -

4,624,336

4,736,703

8,283,294 4,583,700

3,699,594

3 - 12months

Shs’000

- - -

- - - - - - -

-

1,752,374 - - - -

1,752,374

(1,752,374)

99,906 2,567,076

(2,467,170)

1 - 3months

Shs’000

- - -

- - - - - - -

-

2,616,221 - - - -

2,616,221

(2,616,221)

- 1,542,234

(1,542,234)

1 - 5years

Shs’000

- - -

- - - - - - -

-

9,794 - - - -

9,794

9,794

- 83,079

(83,079)

Over5 years

Shs’000

- -

2,171,700

- - - - - - -

2,171,700

- - - - -

-

2,171,700

813,146 -

813,146

Non interestbearing

Shs’000

145,305 710,518 74,260

2,015,040 108,604 416,967 225,145 52,202 10,848 46,893

3,805,782

3,852,181 7,376

231,370 17,614

2,246,842

6,355,383

(2,549,601)

4,235,358 4,655,615

(420,257)

TotalShs’000

145,305 710,518

2,245,960

2,136,523 108,604

9,676,110 225,145 52,202 10,848 46,893

15,358,108

12,269,906 592,376 231,370 17,614

2,246,842

15,358,108

-

13,431,704 13,431,704

-



The table below summarises the effective interest rates calculated on a weighted average basis, by major currencies for monetary financial assets and liabilities: 2009 2008 Shs. US $ GB£ Euro Shs. US $ GB£ Euro % % % % % % % %Government securities 14 - - - 14 - - - Deposits and balances due from banking institutions 4 1 1 1 9 4 2 4 Loans and advances to customers 14 8 8 7 15 9 8 8 Customer deposits 5 2 3 1 9 3 4 2 Deposits and balances due to banking institutions 6 1 1 1 10 4 3 4

Interest rate risk sensitivity At 31 December 2009, if the weighted average interest rate for loans and advances at that date had been 10 percent higher with all other variables held constant, post-tax profit for the year would have been Shs. 77,480,257 (2008: Shs.78,298,997) higher, arising mainly as a result of higher interest income.

At 31 December 2009, if the weighted average interest rate for customer deposits and deposits from other banking institutions, at that date had been 10 percent higher with all other variables held constant, post-tax profit for the year would have been Shs. 35,123,907 (2008: Shs. 46,454,174) lower, arising mainly as a result of higher interest expense.

30. PRICE RISK SENSITIVITYThe bank is exposed to price risk on government securities because of investments that are classified on the statement of financial position as ‘Available-for-sale’

The table below summarises the impact on increase in the market price on the bank’s equity net of tax. The analysis is based on the assumption that the market prices had increased by 5% with all other variables held constant and all the banks equity instruments moved according to the historical correlation with the price:

Impact on equity 2009 2008 Shs. Shs.Effect of increase 112,298,000 40,936,470

31. LIQUIDITY RISKLiquidity 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 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. The maturity of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the bank and its exposure to changes in interest and exchange rates. The bank does not maintain cash resources to meet all liabilities as they fall due as experience shows that a minimum level of reinvestment of maturing funds can be predicted with high level of certainty. The management has set limits on the minimum portion of maturing funds available to meet such withdrawals and on the level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The management reviews the maturity profile on a weekly basis and ensures that sufficient liquidity is maintained to meet maturing deposits which substantially are generally rolled over into new deposits. The bank fully complies with the Central Bank of Kenya’s minimum cash reserve ratio (4.5 %) and liquidity ratio (20 %) requirements, with the average liquidity maintained a 30.4% (2008: 25%) during the year.

The table overleaf analyses assets and liabilities into the relevant maturity groupings based on the remaining period at the statement of financial position date to the contractual maturity date.


29. INTEREST RATE RISK (continued)


AT 31 DECEMBER 2009

ASSETS Cash in hand Balances with Central Bank of Kenya Government securities Placements with and loans and advances to other banking institutions Other assets Loans and advances to customers Property and equipment Intangible assets Capital work - in - progress Deferred tax Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Customer deposits Deposits from other banking institutions Other liabilities Current tax Shareholders’ equity Total liabilities and shareholders’ equity

Net liquidity gap AT 31 DECEMBER 2008 Total assets Total liabilities and shareholders’ equity Net liquidity gap

Upto1 monthShs’000

145,305 529,645 74,260

2,136,523 77,212

6,052,089 - - - -

9,015,034

7,749,906 592,376 231,370

- -

8,573,652

441,382

7,803,020 7,095,977

707,043

1 - 3months

Shs’000

- 105,214

-

- -

436,031 - - - -

541,245

2,629,274 - - - -

2,629,274

(2,088,029)

559,072 2,476,484

(1,917,412)

3 - 12months

Shs’000

- 75,267

-

- -

1,251,596 - - - -

1,326,863

1,880,932 - -

17,614 -

1,898,546

(571,683)

1,525,472 1,949,547

(424,075)

1 - 5years

Shs’000

- 392

605,700

- -

1,743,224 - - - -

2,349,316

9,794 - - - -

9,794

2,339,522

1,965,434 83,079

1,882,355

Over5 years

Shs’000

- -

1,566,000

- 31,392

193,170 225,145 52,202 10,848 46,893

2,125,650

- - - -

2,246,842

2,246,842

(121,192)

1,578,706 1,826,617

(247,911)

TotalShs’000

145,305 710,518

2,245,960

2,136,523 108,604

9,676,110 225,145 52,202 10,848 46,893

15,358,108

12,269,906 592,376 231,370 17,614

2,246,842

15,358,108

-

13,431,704 13,431,704

-


31. LIQUIDITY RISK (continued)


32. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

The fair values of government securities have been disclosed under note 11. In the opinion of the directors, the fair values of financial assets

and financial liabilities are not materially different from their carrying values.

33. CAPITAL MANAGEMENT

The bank’s objectives when managing capital, which is a broader concept than the ‘equity’ on the face of the statement of financial position

are:

• To comply with the capital requirements set by the Central Bank of Kenya;

• 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; and

• To maintain a strong capital base to support the development of its business.

The bank monitors the adequacy of its capital using ratios established by Central Bank of Kenya. These ratios measure capital adequacy

by comparing the bank’s core capital with total risk-weighted assets plus risk weighed off-statement of financial position items, total deposit

liabilities and total risk-weighted off - statement of financial position items.

Assets are weighted according to broad categories of notional credit risk, being assigned a risk weighting according to the amount of capital

deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50% and 100%) are applied. e.g. cash in hand

(domestic and foreign), balances held with Central bank of Kenya including securities issued by the Government of Kenya have a zero risk

weighting, which means that no capital is required to support the holding of these assets. Property, plant and equipment carries a 100% risk

weighting. Based on these guidelines it means that they must be supported by capital equal to 100% of the carrying amount. Other asset

categories have intermediate weightings.

Off-statement of financial position credit related commitments such as guarantees and acceptances, performance bonds, documentary credit

etc., are taken into account by applying different categories of credit risk conversion factors, designed to convert these items into statement

of financial position equivalents. The resulting credit equivalent amounts are then weighted for credit risk using the same percentages as for

statement of financial position assets.

Core capital (Tier 1) consists of paid-up share capital, retained profits less non-dealing investments. Supplementary capital (Tier 2) includes

general provisions and non-dealing investments.



33. CAPITAL MANAGEMENT (continued)

Statement of financial position Risk weighed amount nominal amount Cash in hand Balances with Central Bank of Kenya Government securities Placements with and loans and advances to other banking institutions Other assets Loans and advances to customers Property and equipment Prepaid operating lease rentals Capital work in progress Intangible assets Deferred tax Total assets Off - statement of financial position positions Credit related commitments Total risk weighed assets Capital adequacy requirement calculation

2009 2008 Shs’000 Shs’000 Tier 1 2,041,610 1,724,662 Tier 2 capital 116,633 101,955

Risk weighted amounts for loans and advances to customers are stated net of impairment losses. These balances have also been offset against fixed deposits and short term deposits placed by customers as securities. There is no borrower with either funded or non-funded facilities, exceeding twenty five percent of core capital. Actual ratios Minimum requirement 2009 2008 2009 2008 % % % % Core capital to risk assets ratio 20% 19% 8% 8% Core capital to deposits ratio 16% 15% 8% 8% Total capital to risk assets ratio 21% 20% 12% 12%


2009Shs’000

145,305 710,518

2,245,960

2,136,523 108,604

9,676,110 225,145

- 10,848 52,202 46,893

15,358,108

1,003,403

16,361,511

2008Shs’000

217,962 612,468 921,220

2,879,076 89,473

8,276,121 323,226

9,066 6,589

60,097 36,406

13,431,704

1,175,417

14,607,121

2009Shs’000

- - -

561,820 108,604

8,106,903 225,145

- 10,848 52,202 46,893

9,112,415

906,492

10,018,907

2008Shs’000

- - -

874,157 89,473

6,673,275 323,226

9,066 6,589

60,097 36,406

8,072,289

998,377

9,070,666


34. RELATED PARTY TRANSACTIONS The details of the bank’s principal shareholders have been disclosed on page 3 of the annual report and financial statements. Included in loans and advances and customer deposits are amounts advanced to/received from certain directors and companies in which directors are involved either as shareholders or directors (related companies). In addition, contingent liabilities (Note 26) include guarantees and letters of credit which have been issued to related companies.

The following transactions were carried out with related parties:

2009 2008a) Interest received from loans and advances to: Shs’000 Shs’000 Related companies 43,854 21,935 Senior management employees 2,488 1,957 Other employees 9,934 7,621 56,276 31,513 b) Interest paid on deposits from: Directors 17,645 13,151 Related companies 61,679 62,605 Senior management employees 16,211 1,334 Other employees 9,253 2,945 104,788 80,035


c) Outstanding loans and advances At start of year Advances during the year Interest charged Repayments during the year At end of year Contingent liabilities The loans and advances to related parties are performing . No provisions have been recognised in respect of the loans and advances to directors, related parties or staff as they are performing well.

2009Shs’000

137,365 383,805 43,854

(41,430)

523,594

74,525

2008Shs’000

132,314 70,873 21,935

(87,757)

137,365

51,368

2009Shs’000

35,523 5,929 2,488

(2,267)

41,673

-

2009Shs’000

118,851 70,620 9,934

(83,302)

116,103

-

2008Shs’000

84,823 98,306

7,621 (71,899)

118,851

-

2008Shs’000

26,095 12,974 1,957

(5,503)

35,523

-

2008Shs’000

----

-

-

2009Shs’000

----

-

-

DirectorsRelated

companiesSenior management

employeesOther

employees


d) Deposits At start of year Deposits received during the year Interest paid during the year Withdrawals during the year At end of year

2009

Shs’000

162,717 318,452 17,645

(339,417)

159,397

2008Shs’000

304,156 343,254 13,151

(497,844)

162,717

2009Shs’000

1,183,945 1,499,717

61,679 (1,374,685)

1,370,656

2008 Shs’000

687,584 1,659,505

62,605 (1,225,749)

1,183,945

2009Shs’000

23,041 100,623 16,211

(88,622)

51,253

2008Shs’000

21,064 74,796 1,334

(74,153)

23,041

2009

Shs’000

30,562 160,109

9,253 (161,292)

38,632

2008Shs’000

20,791 621,139

2,945 (614,313)

30,562

e) Undrawn formal stand by facilities, credit lines 2009 2008 and other commitments to lend: Shs ‘000 Shs ‘000 Related companies - 30,000 f) Directors emoluments -fees 14,000 10,500 -others 43,259 38,063 57,259 48,563 g) Key management personnel compensation Short-term employee benefits 86,294 74,661 Post-employment benefits 5,859 5,400 92,153 80,061 All transactions with related parties were at arms length and at terms and conditions similar to those offered to other major customers. 35. PRESENTATION CURRENCY The financial statements are presented in to the nearest thousand Kenya Shillings (Shs’000).


RELATED PARTY TRANSACTIONS (continued)

DirectorsRelated

companies

Senior managementemployees

Otheremployees

Imperial Banknow in Thika

Thika BranchNkrumah RoadTel: 067 20095, 20097-99Fax 067 20101Email: [email protected]: www.imperialbank.co.ke

We have now opened our 12th branch in Thika, giving you a dozen reasons why you should bank with us. Come experience our excellent banking services, products and competitive forex rates.

Branch operating hours:Weekdays 9:00am - 4:00pm Saturdays 9:00am - 1:00pm

Call us today and have a new banking experience.

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