t a ble of contents 1 - imperial bank limited...anwar hajee abdulmalek janmohamed pramila aggarwal...

1

Imperial Bank Limited 2006 Annual Report and Financial Statements

Table of Contents

Five-Year Financial Review 2

Company Information 3-6

Corporate Governance Statement 7-8

Chairman's Statement 9-12

Financial Highlights 13-14

Report of the Directors 15

Statement of Directors’ Responsibilities 16

Report of the Independent Auditors 17

The Financial Statements:

Income Statement 18

Balance Sheet 19

Statement of Changes in Equity 20

Cash Flow Statement 21

Accounting Policies 22-24

Notes to the Financial Statements 25-44


2


Minimum

statutory 2006 2005 2004 2003 2002

requirement Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

Interest income 1,649,465 1,246,529 920,431 743,296 680,915

Non - fund based income 279,164 257,858 222,757 185,899 110,826

Total income 1,928,629 1,504,387 1,143,188 929,195 791,741

Operating expenses 613,274 519,730 338,348 282,286 233,015

Impairment losses on loans and advances 49,672 (46,344) 96,420 30,472 46,446

Profit before tax 386,582 304,775 267,682 253,879 187,480

Net profit for the year 272,505 205,540 184,368 175,021 127,377

Profit margin 20.04% 20.26% 23.42% 27.32% 23.68%

Non - fund based income to total income 14.47% 17.14% 19.49% 20.01% 14.00%

Earnings per share-basic and diluted (Shs) 356 365 260 350 255

Dividends per share (Shs) 129 67 100 100 88

Dividend pay out ratio (%) 36.70 24.33 27.12 28.57 27.48

Loans and advances to customers (gross) 5,920,511 4,677,812 4,323,562 3,282,928 3,206,006

Provision for impaired loans and advances (349,786) (280,878) (328,204) (274,640) (274,445)

Unearned interest (150,635) (136,092) (125,514) (111,775) (345,761)

Loans and advances to customers (net) 5,420,090 4,260,842 3,869,844 2,896,513 2,585,800

Cash and short-term funds 2,754,544 2,526,451 1,025,414 1,155,459 898,041

Government securities 742,449 623,595 588,941 620,624 496,984

Property and equipment 351,358 299,117 265,658 181,584 157,437

Other assets 137,397 63,086 63,898 66,410 42,865

Total assets 9,405,838 7,773,091 5,813,755 4,920,590 4,181,127

Customer and banking institutions deposits 7,732,754 6,432,593 4,680,607 3,902,703 3,381,548

Other liabilities 320,066 218,484 206,674 225,781 147,494

Total liabilities 8,052,820 6,651,077 4,887,281 4,128,484 3,529,042

Net assets 1,353,018 1,122,014 926,474 792,106 652,085

Shareholders’ funds 1,353,018 1,122,014 926,474 792,106 652,085

Contingent liabilities 2,230,420 977,794 1,140,042 885,450 731,624

Performance ratios:

Return on core capital 33.25% 31.28% 33.08% 34.80% 31.46%

Return on total assets 4.50% 4.49% 4.99% 5.58% 4.79%

Impairment charges to net advances - - 8.48% 9.48% 10.61%

Balance sheet ratios:

Gross advances to deposits 76.56% 72.72% 92.37% 84.12% 94.81%

Gross advances to deposits and shareholders funds 65.16% 61.92% 77.11% 69.93% 79.48%

Non performing advances less

provisions to total advances 2.99% 4.01% 4.10% 2.63% 1.88%

Liquidity 20% 26% 24% 24% 25% 27%

Core capital to customer deposits 8% 16% 17% 18% 19% 18%

Core capital to risk weighted assets 8% 20% 22% 20% 25% 21%

Total capital to total risk weighted assets 12% 20% 22% 20% 27% 23%

Other information:

Gross non - performing advances 465,097 427,171 467,319 341,905 283,006

Number of branches 5 5 5 5 4

Number of employees 184 163 129 107 89

Expenditure on intangible assets and

property and equipment 125,441 194,167 114,327 53,759 50,877

Five-Year Financial Review

3


Company Information

BOARD OF DIRECTORS

Director’s Age Nationality Position Date Other Qualifications Percentage

Name of Directorships of

Appointment Individual

Share

Holding

in the Bank

Mr. Alnashir Popat 55 Kenyan Chairman 24th Dec 1992 Simba Colt Motors Ltd. BA in 2.40%

Downtown Hire Purchase Co. Ltd. Business Studies

Mr. Abdulmalek 47 Kenyan Managing 24th Dec 1992 Janco Investments Ltd. BSC in Finance

Janmohamed Director Downtown Hire Purchase Co. Ltd. & Management 5.00%

Data Systems

Mr. Anwar Hajee 50 Kenyan Non-Executive 15th Nov 1993 African Business Consortium Ltd. ACMA 7.00%

Interconnect Ltd. CPA (K)

Abdumal Investments Ltd.

Downtown Hire Purchase Co. Ltd.

Mr. Jinit Shah 50 Kenyan Non-Executive 3rd Nov 1997 Kenblest Ltd. Higher National 2.50%

Kifaru Textiles Mills Ltd. Diploma in

Nav Plastics Ltd. Business Studies

Mcneel Millers Ltd.

Deepna Industries Ltd.

Mr. Mukesh Kumar 48 Kenyan Non-Executive 3rd Nov 1997 Automatic Controls Ltd. O’Levels 6.25%

Patel Switch Gear & Controls Ltd.

Hard Tech. Ind. Supplies Ltd.

Tausi Assurance Co. Ltd.

Momentum Holdings Ltd.

Mr. Vishnu Dhutia 47 Kenyan Non-Executive 15th Feb 1995 East African Motor Industries Ltd. Diploma 5.50%

East African Motor Industries in Business

(Sales & Services) Ltd. Administration

Mr. Hanif Mohamed 51 Kenyan Non-Executive 31st July 2002 Freight Forwarders Kenya Ltd. BA in Business 5.60%

Amirali Somji The Combined Warehouses Ltd. (Economics &

Reynolds & Co. Ltd. Accounting)

Craysell Investments Ltd.


4


COMPANY SECRETARY

Equatorial Secretaries and Registrars

Certified Public Secretaries

P.O. Box 47323, 00100, Nairobi, Kenya

INDEPENDENT AUDITORS

PKF Kenya (Formerly KLSA Pannell Kerr Forster)

Certified Public Accountants

Kalamu House, Waiyaki Way


PRINCIPAL VALUERS

Knight Frank Kenya Limited

Hass Consult Real Estate

RR Oshwald & Co

Bum & Fawcett

Lloyd Masika Limited

Mwaka Musau Consultants

Datoo Kithikii

Peter Huth Valuation Surveyor

Coral Property Consultants Limited

Milligan International Limited

Tysons Limited

Simba Colt Motors 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%

There has not been any movement in the shareholding during the year.

PRINCIPAL SHAREHOLDERS

Company Information

C O N T I N U E D

LEGAL ADVISORS

Hamilton, Harrison & Mathews

Muriu Mungai & Company Advocates

Kairu & McCourt

Muthaura Mugambi Ayugi & Njonjo

Anjarwalla & Khanna Advocates

Taibjee & Bhalla Advocates

Inamdar & Inamdar

Ransley, McVicker & Shaw Advocates

A. B. Patel and Patel

Shah & Shah Advocates

Theuri Wanjohi & Co

Ghalia & Ghalia

Ahmednasir Abdikadir & Company Advocates

PRINCIPAL CORRESPONDENTS

United Kingdom: Citibank N.A., London,

Deutsche Bank, London

United States of America: Citibank N.A., New York,

Deutsche Bank, New York

India: ICICI Bank, Mumbai

South Africa: Citibank N.A., South Africa

Dubai: Citibank N.A., Wallstreet Dubai

Malta: First International Merchant Bank

Canada: Citibank N.A., Toronto, Ontario

Germany: Deutsche Bank, Frankfurt

Australia: Commonwealth Bank of Australia

5


Company Information

C O N T I N U E D

PRINCIPAL OFFICERS

Pramila Aggarwal (Ms.) (General Manager)

Naeem Shah (Senior Manager Credit )

Nina Shah (Ms.) (Treasury Manager)

James Kaburu (Finance Manager)

Mustaq Dar (Branch Manager - Mombasa)

Kalpesh Kumar (Head of Operations)

Donald Ochola (Head of IT)

Assad Hassan (Branch Manager - Malindi)

Carolyn Munyua (Head of HR)

Muthoni Wachira (Head of Communications)

Anil Shah (Head of Audit)

REGISTERED OFFICE

LR. Plot No. 209/11623

Bunyala Road, Upper Hill


Telephone: (020) 2719617, 342380

Fax: (020) 2719498, 2719705

E-mail: [email protected]

BRANCH NETWORK

Head Office/Upper Hill Branch

Bunyala Road, Upper Hill


Tel: (020) 2719617-19, 342380-89 Pilot Line: 2874000

Fax: (020) 2719498, 2719705


IPS Branch/Card Centre

8th Floor, IPS Building, Kimathi Street


Tel: (020) 252175-8, 252184/5, 225060

Fax: (020) 230994, 250137


Parklands Branch

1st Floor, Chevron Plaza, Limuru Road, Parklands


Tel: (020) 3752320, 3752321, 3752322

Fax: (020) 3752325


Industrial Area Branch

Bamburi Road, off Enterprise Road


Tel: (020) 553610, 553612/13, 553627

Fax: (020) 553567


Mombasa Branch

Imperial Bank Building, Kaunda Avenue

P.O. Box 16460, 80100, Mombasa, Kenya

Tel: (041) 2228915, 2230999 Pilot Line: 2105000

Fax: (041) 2227588, 2229304


Malindi Branch

Galana Centre, Lamu Road

P.O. Box 319, Malindi, Kenya

Tel: (042) 30054

Fax: (042) 30680


6


Company Information

C O N T I N U E D

Composition

Chairman

Members

Asset and Liability

Committee

Executive director, general

manager, senior credit manager,

treasury manager and finance

manager

Abdulmalek Janmohamed

Pramila Aggarwal (Ms.)

Naeem Shah

Nina Shah (Ms.)

James Kaburu

Main Function

Monitoring and management of

the balance sheet including

liquidity risk, maturity risk,

interest rate risk, foreign

currency risk and compliance

with all statutory requirements

Frequency of meetings per annum

Weekly

Composition

Chairman

Members

Credit

Committee

Executive director, general

manager and senior manager

credit



Naeem Shah

Main Function

Appraisal and approval of

credit applications and

reviewing credit portfolio


As and when neccessary

MANAGEMENT COMMITTEES

The management committees as at the date of this report comprise:

Composition

Chairman

Members

Human Resources

Committee

Two non executive directors,

executive director and general

manager

Alnashir Popat

Jinit Shah



Main Function

Set and review human

resources policies and approve

senior management

appointments


As and when necessary

Composition

Chairman

Members

Automation

Committee

Non-executive director, executive

director and head of IT

Anwar Hajee


Donald Ochola

Main Function

Appraisal, budgeting and

approval of hardware and

software purchases


As and when neccessary

Composition

Chairman

Members

Ethics

Committee

Non-executive director, executive

director, general manager, senior

credit manager, treasury

manager and finance manager

Anwar Hajee



Naeem Shah

Nina Shah (Ms.)

James Kaburu

Main Function

Set and review ethical standards

for the board and the

management


As and when necessary

Composition

Chairman

Members

Board Audit

Committee

Three non-executive directors

Anwar Hajee

Jinit Shah

Mukesh Patel

Main Function

Strengthening the control

environment, financial

reporting and auditing function


Quarterly

Composition

Chairman

Members

Executive

Committee

Six non-executive and one

executive director

Alnashir Popat


Anwar Hajee

Vishnu Dhutia

Mukesh Patel

Jinit Shah

Hanif Somji

Main Function

Strategic decision making in

accordance with powers

conferred by the board


Quarterly

BOARD COMMITTEES

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

7


Corporate Governance Statement

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, 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 five 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 16. The directors are responsible

for the development of internal financial control 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. Board papers are generally

circulated two weeks prior to the board meetings.

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. The key function

of the board is the identification of current and future

risks 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 approves

the annual budgets, credit facilities of over 5% of the

banks core capital to a single group and the quarterly

and annual financial reports.

New directors are required to undergo a formal induction

process to ensure that they are fully familiar with the

banks 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. Directors are not subject to retirement by

rotation.

8



C O N T I N U E D

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.

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 five non-

executive directors. The committee meets on a monthly

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 comprising three non-executive directors

is chaired by a non-executive director who is a member

of ICPAK. 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 strength 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.

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 the chairman and comprises

the managing director, a non-executive director and the

general manager. The committee develops and reviews

human resources policies and approves senior

management appointments and remuneration. The

committee meets on a need basis. The committee is

currently developing a new organisation structure for the

bank and setting performance based remuneration

structure for all senior management staff.

MANAGEMENT COMMITTEES

The managing director has also set up various

committees to assist him in the day to day operations of

the bank.

9


CREDIT COMMITTEE

The committee is chaired by the managing director and

comprises the general and the advances managers 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 all departmental heads meets on a weekly

basis to discuss operational issues and to monitor and

manage the balance sheet 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

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 director and key

management staff is disclosed in note 31 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

16th March 2007


C O N T I N U E D

10


Chairman's Statement

It gives me immense pleasure in presenting the bank’s

annual report and financial statements for the year ended

31st December 2006. The bank continued its tradition of

achieving a strong performance and carrying out

expansion strategies successfully focusing on its client

service delivery objectives.

REVIEW OF THE KENYAN ECONOMY

The economy continued on a recovery path growing at

6.1% in 2006 against a revised growth of 5.7% in 2005.

The growth was recorded in virtually all the sectors of

the economy. The Government continued to lay a solid

foundation for social development and for the agriculture

and tourism sectors. This growth would have been higher

if it had not been impacted by the drought in the earlier

part of 2006, the rising cost of global fuel prices, high

cost of business and lack of an effective approach against

rising insecurity.

On a sector basis, agriculture, manufacturing,

construction, wholesale and retail trade, tourism, and

transport and communication sectors grew by 5.4%, 6.9%,

6.3%, 10.9%, 14.9% and 10.8% respectively in 2006. The

slow growth in the agricultural sector was due to the

drought which negatively impacted the production of

tea and other crops. However, production of maize,

coffee, sugarcane and beans showed remarkable

increases. While the production of fresh horticultural

exports remained constant in volume at 163.2 thousand

tonnes, the value of the exports rose from Shs. 38.8 billion

in 2005 to Shs. 43.1 billion in 2006 as a result of increase

in high value vegetable exports.

Overall inflation increased from 10.3% in 2005 to 14.5%

in 2006 due to the drought in the early part of 2006 and

high international oil prices. The money supply grew by

17.1% in 2006 against 9.1% in 2005.

The trade deficit widened as imports outstripped exports

resulting in deterioration in the export/import ratio from

58.8% in 2005 to 48.1% in 2006. Petroleum, industrial

machinery, plastics, motor vehicles and iron and steel

jointly accounted for half of the total import bill.

Interest rates on the 91-day treasury bill fluctuated

between 5.8% and 8.0%, while lending and deposit rates

remained around 13% and 4% respectively. Total public

debt increased from Shs. 688.0 billion in June 2005 to Shs.

708.9 billion in June 2006. Domestic debt rose from Shs.

253.5 billion to Shs. 277.7 billion, while external debt

declined marginally from Shs. 434.5 billion to Shs. 431.2

billion over the same period. Ratio of domestic debt to

GDP has decreased from 22.9% in 2002 to 18.0% in 2006.

The Shilling strengthened against the US Dollar and

Japanese Yen trading in December 2006 at Shs. 69.4 and

Shs. 58.3 respectively as compared to Shs. 72.4 and Shs.

61.7 in December 2005. It however depreciated against

the Sterling Pound and Euro trading at Shs. 136.3 and

Shs. 91.4 respectively as compared to Shs. 125.0 and Shs.

85.9 over the same period. On the regional front, the

Shilling appreciated against the Tanzanian and Ugandan

Shillings by 15.5% and 4.2% respectively making Kenyan

goods further uncompetitive in the region. The import

cover increased marginally from 3.1 months to 3.2

months.

Kenya also received the Standards and Poor’s Rating for

its long-term foreign currency debt - B+; short-term

foreign currency debt - B; long-term local currency debt

- BB-; and short-term local currency debt - B. These are

the highest ratings for sub-Saharan counties with the

exception of mineral producing countries.

REVIEW OF THE BANKING SECTOR

Total assets stood at Shs. 760.8 billion in December 2006

from Shs. 643.1 billion in December 2005, an increase of

18.3%, while deposits grew by 21.5% from Shs. 514.2

billion to Shs. 624.9 billion during the same period.

Average liquidity in 2006 was 44.8%, well over the

minimum level of 20.0%. Pre-tax profit increased by

43.7% from Shs. 19.0 billion to Shs. 27.3 billion.

Gross non-performing advances reduced from Shs. 104.9

billion in December 2005 to Shs. 100.4 billion in December

2006. Provision for impaired advances was at Shs. 43.3

billion. Total non-performing advances as a percentage

of gross advances reduced from 17.6% in 2005 to 14.8%

in 2006, still far higher than the accepted benchmark of

5%.

The Central Bank of Kenya issued Risk Management

Guidelines in November 2005. During the year, the

Central Bank has taken measures to ensure compliance,

with each institution required to provide an

implementation plan. The key thrust of these Guidelines

11



C O N T I N U E D

is to ensure that banking institutions effectively manage

their operational, reputational and regulatory risks. There

are also indications that the core capital requirements for

banking institutions will be increased to Shs. 1 billion.

Imperial’s core capital stood at Shs. 1.25 billion at

December 2006, well above this minimum requirement.

A SOLID PERFORMANCE AT IMPERIAL

Once again, I am pleased to report that the bank

continued with its exceptional all round performance in

2006.

Pre-tax profit increased from Shs. 304.8 million in 2005

to Shs. 386.6 million in 2006. The growth was largely

attributed to a growth in net interest income and ability

to contain operating expenses. Total income grew from

Shs. 1,503.9 million to Shs. 1,928.7 million, with non-fund

based income growing by Shs. 19.9 million, an increase

of 7.7%. Overall total operating expenses as a percentage

of total income at 31.8% remained below the industry

average.

The average interest rate on advances and deposits

decreased from 15% and 7% in 2005 to 14% and 6%

respectively in 2006.

The bank achieved an earnings per share of Shs. 356.

Return on core capital and return on gross assets stood

at 33.3% and 4.5% respectively, well above the industry

averages.

The continued recovery in the economy saw expansion

in credit particularly to the private sector. Net loans and

advances to customers grew by 27.2% to Shs. 5.420 billion.

The bank continued to exercise caution in lending by

adopting prudent credit policies. Gross non-performing

advances stood at Shs. 465.1 million. After a specific

provision of Shs. 288.3 million, the carrying value of these

advances is Shs. 176.8 million. Non-performing advances

less total provisions to total advances stood at 2.99%,

making the asset quality of the bank strong.

Total assets grew by 21.0% from Shs. 7.773 billion to Shs.

9.406 billion. The increase was largely attributed to a

27.2% increase in loans and advances. The growth was

funded by a 24.6% increase in customer deposits which

grew from Shs. 5.679 billion to Shs. 7.074 billion and a

20.6% 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.

Average liquidity through the year remained at 26%

while the year-end liquidity was 33%, in excess of the

Central Bank of Kenya requirement of 20%. The capital

base strengthened with retention of Shs. 172.5 million

from the current year’s profit and an increase in share

capital of Shs. 25.0 million to stand at Shs. 1.253 billion.

The ratio of core capital to total risk weighted assets and

total capital to total risk weighted assets stood at 20.0%

and 20.0% 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 GOVERNANCE

The bank has continued to maintain a strong governance

structure by defining the roles of the board, board

committees, chairman, managing director and the senior

management. These are covered in the Corporate

Governance Report.

The bank fully complies with the revised Prudential

Guidelines which came into effect on 1st January 2006.

Effective management of banking risks has continued to

be a core thrust of 2006 with a review of the risk bearing

capacity of the bank and setting appropriate limits. The

bank also implemented a new comprehensive core

banking software which went live in December 2006. This

software will greatly enhance the bank’s capacity to

monitor compliance to the limits set not only at the

overall branch and bank levels but also at an individual

client level. This will assist the management and the

board to respond to changes in the risk profiles.

CORPORATE SOCIAL RESPONSIBILITY

Imperial Bank’s long-term goal is to be viewed as a

progressive and trustworthy bank that contributes

actively to communities in the regions in which we have

a presence. Our Corporate Social Responsibility (CSR)

is our value system.

12



C O N T I N U E D

We therefore commit our resources to projects where our

efforts can have the greatest impact. By concentrating

on key themes and working in partnership with others,

we have put in place a CSR policy that focuses on:

a. Sustainable community development

b. Improving the livelihood of disadvantaged children

c. Building on skills for life through education, youth

entrepreneurship and the use of art to promote

creativity

During the year, the bank was involved in various

initiatives in the above mentioned focus areas. These

include Luci Village Integrated Children Programme, the

Annual Mombasa Road clean up in conjunction with St.

John’s Ambulance and the Unicef / Watoto Kwanza

Trust. We also made donations of computers and desks

to various schools, supported children’s orphanages,

mosques, churches and other charitable organizations.

Imperial Bank has committed a significant amount of its

profits towards CSR.

We are also determined to be the ‘employer of choice’ by

providing a friendly working environment, having an

equitable reward system, engaging in open and flexible

communication with employees and investing in staff

development through training. We recognize that our

staff is the most important asset that gives us the

competitive edge both in business and in service delivery.

We are committed to realizing their full potential and

have put in place robust procedures to ensure that this

happens.

As we continue to expand our branch network, we strive

to achieve commercial success in ways that honour

ethical values, comply with legal requirements and

respect people, communities and the natural

environment.

OTHER DEVELOPMENTS

The launch of the Visa debit cards in 2006 has continued

to be met with a huge success. The credit and debit

cardholders at the year-end is 3,676 and 3,256

respectively.

On 10th January 2007 the bank expanded its branch

network with the opening of a branch in the Industrial

Area of Nairobi. The branch will augment our Nairobi

branch network in our pursuit of providing a

comprehensive range of banking services to our clients

in the vicinity of their business operations.

FUTURE DEVELOPMENTS

The bank will continue to explore expansion strategies.

There are plans to open five branches in strategic

locations with the aim of developing a seamless bank

with a centralised back office, credit and treasury

functions.

Economic growth is expected to continue the current

momentum. Inflation is expected to stabilise at around

10% to 12% while interest rates on the 91-day treasury

bill will remain at the same levels with regional partners.

The focus in 2007 will once again remain on providing

personalised services to our clients and increasing the

range of banking products making it easier for the

customers to access deposits and services through new

delivery channels. In addition, the bank will enhance the

existing risk management parameters through the

effective use of the core banking software.

ACKNOWLEDGEMENT

The success of the bank would not have been possible

without the continued support of our customers. On

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

extend my 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 commitment that

has ensured that the bank maintains a sound position in

Kenya’s banking industry.

I would like to thank my fellow board members for their

vision and their dedication to the bank and for the

support they have accorded to me and the bank.

Alnashir Popat

Chairman

16th March 2007

13


DEPOSITSSHS MILLIONS

8400

7700

7000

6300

5600

4900

4200

3500

2800

2100

1400

700

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1,988 2,088 2,182 2,429

2,988

3,3823,903

ADVANCESSHS MILLIONS

6000

5500

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1,4691,627

1,884

2,170

2,9933,206 3,283

PROFIT AFTER TAXSHS MILLIONS

300

275

250

225

200

175

150

125

100

75

50

25

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

272.5

36.951.9

65.978.1

101.6

127.4

175.0

TOTAL ASSETSSHS MILLIONS

9600

8800

8000

7200

6400

5600

4800

4000

3200

2400

1600

800

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

2,2482,583 2,661

3,013

3,645

4,181

4,921

184.4

5,814

PROFIT BEFORE TAXSHS MILLIONS

480

440

400

360

320

280

240

200

160

120

80

40

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

64.978.1

101.6112.8

253.9

147.6

187.5

267.7

SHAREHOLDERS FUNDSSHS MILLIONS

1440

1320

1200

1080

960

840

720

600

480

360

240

120

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1,353

204

314380

458

560

652

792

926

4,681

4,324

304.8

7,7731,122

4,678

6,433

205.5

7,733

9,406

5,920

386.6

Financial Highlights


14


Financial Highlights

C O N T I N U E D

DISTRIBUTION OF INCOME

LIABILITIES, SHAREHOLDERS

AND EQUITY COMPOSITION

2005 2006

Customer deposits 5,679 7,074

Core capital 1,072 1,253

Other liabilities 218 320

Proposed dividends 50 100

Deposits from banking institutions 754 659

7,773 9,406

2005 2006

Interest expense 726 879

Other operating expenses 273 311

Staff expenses 247 302

Retention 156 173

Government 99 114

Impairment losses - 50

Shareholders dividends 50 100

1551 1,929

DISTRIBUTION OF ASSETS

2005 2005 2006

Loans and advances to customers 4,261 5,420

Deposits with banking institutions 2,089 2,174

Government securities 624 742

Cash and Central Bank of 426 529Kenya balances

Property and equipment 299 384

Other assets 74 157

7,773 9,406

2006

75%

13% 3% 1%7%

58%

23%

8% 6%4%

2%

46%

16%

9% 6% 3%5%

16%

2005

2006

2005

2006

55%

27%

8% 5%

1%4%

73%

14% 3% 1%10%

47%

16%

10% 6% 0%3%

18%

15


The directors submit their report together with

the audited financial statements for the year ended

31st December 2006, 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 company is licensed under the Banking Act and

provides banking, financial and related services.

RESULTS

2006 2005

Shs ‘000 Shs ‘000

Profit before tax 386,582 304,775

Tax (114,077) (99,235)

Net profit for the year 272,505 205,540

SHARE CAPITAL

The authorised share capital of the company was

increased on 25th May 2006 from Shs 750 million

representing 750,000 ordinary shares of Shs 1,000

each to Shs 775 million representing 775,000 ordinary

shares of Shs 1,000 each.

The issued and paid up share capital of the company

was increased on 25th May 2006 from Shs 750,000

to Shs 775,000 by the issuance of 25,000 ordinary

shares of Shs 1,000 each.

DIVIDEND

The directors propose a final dividend of Shs 129.03

per share (2005: Shs 66.67 per share) amounting to

Shs 100 million (2005: Shs 50 million).

Report of the Directors

F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 6

FINANCIAL RISK MANAGEMENT

OBJECTIVES AND POLICIES

The bank’s activities expose it to a variety of

financial risks, including credit risk and the effects

of changes in liquidity, foreign currency exchange

rates and interest rates. The bank’s overall risk

management programme focuses on the acceptable

level of risk and the unpredictability of financial

markets and seeks to minimise potential adverse

effects on its financial performance.

The bank has policies in place to ensure that

banking services are availed to customers with

performance and credit history.

DIRECTORS

The names of the directors who held office during

the year to the date of this report are set out on

page 3.

In accordance with the company’s Articles of

Association, no director is due for retirement by

rotation.

AUDITORS

The bank’s auditors, KLSA Pannell Kerr Forster,

changed their name to PKF Kenya. Accordingly,

PKF Kenya have expressed 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

Company Secretary

Nairobi

16th March 2007

16


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 31st December 2006 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 16th March 2007 and signed

on its behalf by:

Alnashir Popat Abdulmalek Janmohamed

Chairman Managing Director

Statement of Directors' Responsibilities


17


Report of the Independent Auditors

T O T H E M E M B E R S O F I M P E R I A L B A N K L I M I T E D

We have audited the accompanying financial

statements set out on pages 18 to 44 of Imperial

Bank Limited, which comprise the balance sheet

as at 31st December 2006 and the profit and loss

account, 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. 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.

DIRECTORS’ RESPONSIBILITY FOR THE

FINANCIAL STATEMENTS

The directors’ are responsible for the preparation

and fair presentation of these financial statements

in accordance with International Financial

Reporting Standards. 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 RESPONSIBILITY

Our responsibility is to express an 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 risks 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.

OPINION

In our opinion, proper books of account have been

kept and the financial statements, which are in

agreement therewith give a true and fair view of

the financial position of Imperial Bank Limited as

of 31st December 2006, and of its financial

performance and its cash flows for the year then

ended in accordance with International Financial

Reporting Standards and the Companies Act

(Cap. 486).

PKF Kenya

Certified Public Accountants

PIN NO. P051130467R

Nairobi

16th March 2007

18


Income Statement


2006 2005

Note Shs '000 Shs '000

Interest income 1 1,649,465 1,246,529

Interest expense 2 (879,101) (725,776)

NET INTEREST INCOME 770,364 520,753

Fees and commission income 178,859 159,905

Foreign exchange trading income 98,089 97,148

Dividend income 3 500 233

Increase/(decrease) in fair value of investment securities 4 1,669 (450)

Gains arising from disposal of investment securities 4 12 -

Other income 5 35 572

OPERATING INCOME 1,049,528 778,161

Impairment losses/decrease in

provisions on loans and advances 6 (49,672) 46,344

Other operating expenses 7 (613,274) (519,730)

PROFIT BEFORE TAX 386,582 304,775

Tax 8 (114,077) (99,235)

NET PROFIT 272,505 205,540

EARNINGS PER SHARE

Basic and diluted (Shs per share) 9 356 365

DIVIDEND

Proposed dividend for the year (Shs ‘000) 10 100,000 50,000

DIVIDEND PER SHARE (Shs per share) 10 129.03 66.67

The accounting policies on pages 22 to 24 and the notes on pages 25 to 44 form an integral part of the

financial statements. Report of the independent auditors - page 17.

19


2006 2005

ASSETS Note Shs '000 Shs '000

Cash in hand 59,163 37,707

Balances with Central Bank of Kenya 11 469,549 387,711

Government securities - Held-to-maturity 12 - 562,918

- Available-for-sale 12 742,449 60,677

Placements with and loans and advances

to other banking institutions 13 2,174,341 2,089,422

Other assets 14 70,135 37,617

Loans and advances to customers 15 5,420,090 4,260,842

Investment securities - held for trading 16 51,491 11,611

Property and equipment 17 267,738 270,375

Prepaid operating lease rentals 18 18,238 18,554

Capital work in progress 19 32,619 2,317

Intangible assets 20 65,382 7,871

Deferred tax 21 34,643 25,469

TOTAL ASSETS 9,405,838 7,773,091

LIABILITIES

Customer deposits 22 7,073,955 5,678,757

Deposits from other banking institutions 23 658,799 753,836

Other liabilities 24 309,560 190,033

Current tax 10,506 28,451

TOTAL LIABILITIES 8,052,820 6,651,077

SHAREHOLDERS’ EQUITY

Share capital 25 775,000 750,000

Retained earnings 474,195 322,014

Fair value reserve 3,823 -

Proposed dividend 10 100,000 50,000

TOTAL SHAREHOLDERS EQUITY 1,353,018 1,122,014

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 9,405,838 7,773,091

Alnashir Popat - Chairman Abdulmalek Janmohamed - Managing Director

Anwar Hajee - Director Equatorial Secretaries and Registrars - Company Secretary

Balance Sheet

A S A T 3 1 D E C E M B E R 2 0 0 6



The financial statements on pages 18 to 44 were approved for issue by the board of directors on 16th March

2007 and were signed on its behalf by:

20


Statements of Changes in Equity




Fair

Share value Retained

capital reserve earnings Dividends Total

Note Shs ’000 Shs ’000 Shs ’000 Shs ’000 Shs ’000

Year ended 31 December 2005

At start of year 500,000 - 376,474 50,000 926,474

Net profit for the year - - 205,540 - 205,540

Bonus issue of shares 210,000 - (210,000) - -

Issue of shares 40,000 - - - 40,000

Dividends:

- 2004 dividend paid during the year - - - (50,000) (50,000)

- proposed for 2005 10 - - (50,000) 50,000 -

At end of year 750,000 - 322,014 50,000 1,122,014

Year ended 31 December 2006

At start of year 750,000 - 322,014 50,000 1,122,014

Net profit for the year - - 272,505 - 272,505

Dividends:

- 2005 dividend paid during the year - - - (50,000) (50,000)

- proposed for 2006 10 - - (100,000) 100,000 -

Issue of shares 25,000 - - - 25,000

Increase in general provisions - - (20,324) - (20,324)

Increase in fair value of government

securities - 5,462 - - 5,462

Deferred tax on increase in fair value

of government securities - (1,639) - - (1,639)

At end of year 775,000 3,823 474,195 100,000 1,353,018

21




Cash Flow Statement


CASH FLOWS FROM OPERATING ACTIVITIES 2006 2005

Note Shs '000 Shs '000

Interest receipts 1,629,555 1,265,309

Interest payments (880,487) (724,763)

Fees and commission receipts 276,948 257,053

Payments to employees and suppliers (566,977) (464,746)

Tax paid (142,834) (35,999)

Cash flows from operating activities before

changes in operating assets and liabilities 316,205 296,854

Changes in operating assets and liabilities:

- loans and advances (1,208,245) (363,434)

- other assets (106,922) (82,669)

- customer deposits 1,396,584 1,276,331

- other liabilities 142,756 (19,945)

Net cash generated from/(used in) operating activities 540,378 1,107,137

Cash flows from investing activities

Purchase of property and equipment 17 (60,568) (76,204)

Purchase of intangible assets 20 (64,873) (8,745)

Investment in capital work in progress 19 (30,302) (1,404)

Purchase of investment securities 16 (62,066) (12,061)

Purchase of prepaid operating lease rentals 18 - (402)

Dividends received 500 233

Proceed from disposal of investment securities 23,867 -

Proceeds from disposal of property and equipment 1,940 2,188

NET CASH (USED IN) INVESTING ACTIVITIES (191,502) (96,395)

Cash flows from financing activities

Increase in share capital 25,000 40,000

Dividend paid (50,000) (50,000)

NET CASH (USED IN) FINANCING ACTIVITIES (25,000) (10,000)

Net increase/(decrease) in cash and cash equivalents 323,877 1,000,742

CASH AND CASH EQUIVALENTS AT START OF THE YEAR 26 1,862,724 861,982

CASH AND CASH EQUIVALENTS AT END OF THE YEAR 26 2,186,601 1,862,724

22


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 preparation

The financial statements are prepared in accordance with

and comply with International Financial Reporting

Standards and are prepared under the historical cost

convention as modified by fair value adjustment to

certain financial instruments.

The preparation of financial statements in conformity

with generally accepted accounting principles requires

the use of estimates and assumptions that affect the

reporting amounts of assets and liabilities and disclosure

of contingent assets and liabilities at the date of the

financial statements and the reporting amounts of

revenues and expenses during the reporting period.

Although these estimates are based on the directors’ best

knowledge of current events and actions, actual results

may differ from those estimates. Accounting policies ‘b’

and ‘c’ on ‘critical accounting estimates and

assumptions’ and ‘critical accounting judgements’

highlights the areas that involve a higher level of

judgement, or where the estimates or assumptions used

are significant to the financial statements.

(b) Critical accounting estimates and assumptions

In the process of applying the bank’s accounting policies,

the bank’s management makes certain estimates and

assumptions about future events. In practice, the

estimated and assumed results would differ from the

actual results. Such estimates and assumptions, that have

a significant risk of causing a material adjustment to the

carrying amounts of assets and liabilities within the next

financial year, are described below:

- Property and equipment

Critical estimates are made by the management in

determining depreciation rates for property and

equipment. The rates used are set out in the accounting

policy for property and equipment.

- Intangible assets

Critical estimates are made by the management in

determining amortisation rates for intangible assets. The

rates used are set out in the accounting policy for

intangible assets.

These estimates 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.

(c) Critical accounting judgements

In the process of applying the bank’s accounting policies,

the bank’s management makes certain judgements, that

are continuously assessed based on prior experience and

other determinants, including expectations of future

events, that, under the circumstances are deemed to be

reasonable, as described below:

- 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 judgements 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 judgements 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 assets

The company reviews its non financial assets to assess

the likelihood of impairment on an annual basis. In

determining whether such assets are impaired, the

management makes judgements as to whether there are

any conditions that indicate potential impairment of such

assets.

(d) Revenue recognition

Interest income is recognised on an accruals basis in the

profit and loss account using the effective yield on the

asset. Interest income includes coupons earned on fixed

income investment securities and accrued discount and

premium on treasury bills and bonds. 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.

Dividend income is recognised when declared.

Revenue is recognised only when it is probable that the

economic benefits associated with the transaction will

flow to the bank.

(e) 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 balance sheet 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 profit

and loss account in the year in which they arise.

(f) Property and equipment

All property and equipment is initially recorded at cost

and thereafter stated at historical cost less depreciation.

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 bank 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 period 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:

Accounting Policies


23


The assets residual values and useful lives are reviewed,

and adjusted if appropriate, at each balance sheet date.

Property and equipment are periodically reviewed for

impairment. Where the carrying amount of property and

equipment is greater than its estimated recoverable

amount, it is written down immediately to its recoverable

amount.

Gains or losses on disposal of property and equipment

are determined by reference to their carrying amount and

are taken into account in determining operating profit.

(g) 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 their

estimated useful lives.

(h) 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 company. 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 national retirement

benefit scheme. Contributions are determined by local

statute and the company’s contribution are charged to

the income statement of the year to which they relate.

(i) Employee entitlements

Employee entitlements to long term service awards are

recognised when they accrue to employees. A provision

is made for the estimated liability for such entitlements

as a result of services rendered by employees up to the

balance sheet date.

The estimated monetary liability for employees’ accrued

annual leave entitlement at the balance’ sheet date is

recognised as an expense accrual.

(j) Loans and provisions for loan impairment

Loans and advances are recognised when cash is

advanced to borrowers 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 provision for loan impairment is established

to cover losses that are adjudged to be present in the

lending portfolio at the balance sheet date but which have

not been specifically impaired as such. The provision is

based on the directors’ assessment of the latent risk of

default known to be present in the portfolio of the bank’s

advances.

Where a loan or an advance is deemed uncollectible, it is

written off against the related provision for impairment.

Subsequent recoveries of amounts previously written off

are credited to the income statement in the year of

recovery.

(k) 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 incident to

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.

(l) Taxation

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 balance sheet date are used to determined 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.

(m) Financial instruments

The bank’s financial instruments fall into the following

four categories:

• Financial asset at fair value through profit or loss -

financial instruments that are acquired or incurred

principally for the purpose of generating a profit from

short term fluctuation in price or dealer’s margin. Such

instruments are carried at fair value where fair value

gains or losses are included in the net profit or loss for

the period.

Accounting Policies

F O R T H E Y E A R E N D E D 3 1 D E C E M B E R 2 0 0 6 ( C O N T I N U E D )

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

24


• Held-to-maturity- financial instruments with fixed or

determinable payments and fixed maturity where the

management have the positive intent and ability to hold

to maturity. Such instruments are carried at amortised

cost using the effective interest rate method.

• Loans and receivables - financial instruments that are

created by the company by providing money or products

directly to a debtor other than those with the intent to

be sold immediately or in the short term. Such

instruments are carried at amortised cost using the

effective interest rate method.

• Available-for-sale - financial instruments that are held

for an indefinite period of time, which may be sold in

response to needs for liquidity or changes in interest rate.

Such instruments are carried at fair value where fair

value gains or losses are recognised directly in equity,

net of deferred tax.

A financial asset is impaired if its carrying amount is

greater than its estimated recoverable amount. The

amount of the impairment loss for assets carried at

amortised cost is calculated at the difference between

the assets carrying amount and the present values of

expected future cash flows, including security

realisation, discounted at the financial instrument’s

effective interest rate. Impairment losses are taken into

account for determining operating profit.

Management classifies financial instruments as

follows:

(i) Cash in hand and balances with Central Bank of Kenya

and other banking institutions are classified as originated

loans and are carried at amortised cost.

(ii) Treasury bills are classified as held-to-maturity and are

carried at amortised cost.

Treasury bonds are classified as available-for-sale and

are carried at fair value as the bank does not intend to

hold them to maturity.

Previously treasury bonds acquired on first issue directly

from the government were classified as originated loans

and were carried at amortised cost and those acquired

from the secondary trading market were classified as

available-for-sale and were accordingly carried at fair

value.

(iii) Loans and advances to customers are classified as

originated loans and are carried at amortised cost.

(iv) Investment securities are classified as held-for-trading

and are carried at fair value. Where the securities are

disposed off, gains or losses are taken into account in

determining operating profit.

Financial liabilities

Financial liabilities are recognised initially at cost and

subsequently measured at amortised cost.

Customer deposits are classified as financial liabilities

and are carried at amortised cost.

(n) Dividends

Dividends are recognised as a liability in the period in

which they are declared. Proposed dividends are shown

as a separate component of equity until declared.

(o) Cash and cash equivalents

For the purposes of the cash flow statement, cash and

cash equivalents comprise balances with less than 91

days maturity from the date of acquisition and include

cash and balances with the Central Bank of Kenya

(excluding cash reserve ratio), government securities

and deposits and balances due to and from banking

institutions.

(p) 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.

(q) 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.

(r) Sale and Repurchase Agreements

Securities sold under sale and repurchase agreements

(Repos) are retained in the financial statements with the

counter party liability included in amounts due to

banking institutions.

Securities purchased under agreement to resell (Reverse

Repos) comprise of treasury bills that are held until

maturity of the Reverse Repo agreement after which they

are re-sold and as such they are not negotiable/

discountable during the tenure of the Reverse Repo

agreement. These are included in government securities.

Cash flows from Repo agreements are included as part

of cash flows from operating activities.

(s) Offsetting

Financial assets and liabilities are offset and stated at

net amounts in the balance sheet when there is a legally

enforceable right to set off, and there is an intention to

settle on a net basis or realise the asset and settle the

liability simultaneously.

(t) Provisions

Provisions 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.

(u) Segmental Reporting

The major part of the business of the bank falls under

the category of banking with other income comprising

less than 0.05% of the total operating income. Also, the

bank operates wholly within Kenya. Segmental

reporting is therefore not considered of any useful value.

(v) Comparatives

Where necessary comparative figures have been

adjusted to conform with changes in presentation in the

current year.

Accounting Policies


25


1. INTEREST INCOME 2006 2005

Shs '000 Shs '000

Loans and advances including finance lease income 1,503,754 1,203,278

Government securities 55,827 18,313


to other banking institutions 35,316 20,730

Others 54,568 4,208

1,649,465 1,246,529

2. INTEREST EXPENSE

Customer deposits 764,837 567,840

Deposits from other banking institutions 114,264 157,817

Others - 119

879,101 725,776

3. DIVIDEND INCOME

Dividends from investment securities 500 233

4. GAIN/(LOSS) ARISING FROM

INVESTMENT SECURITIES

Increase/(decrease) in fair value of investment securities (Note 16) 1,669 (450)

Gain on disposal of investment securities 12 -

5. OTHER INCOME

Gain on disposal of property and equipment 35 572

35 572

6. IMPAIRMENT LOSSES ON LOANS AND ADVANCES

Loans and advances to customers:

- net increase/(decrease) in specific provision

charged to the profit and loss account (Note 15(b)) 49,125 (49,246)

- net increase in general provision

charged to profit and loss account (Note 15(b)) - 2,902

- Loans and advances written off 547 -

49,672 (46,344)

Notes to the Financial Statements


26


7. (a) OTHER OPERATING EXPENSES 2006 2005

Shs '000 Shs '000

Staff costs (Note 7(b)) 302,013 246,778

Directors' emoluments: - fees 21,000 10,500

- other 17,553 17,244

Depreciation on property and equipment (Note 17) 61,299 50,490

Amortisation of prepaid operating lease rentals (Note 18) 316 316

Amortisation of intagible assets (Note 20) 7,362 874

Auditors' remuneration: - current year 2,128 1,835

- under provision in prior year 342 349

Contribution to Deposit Protection Fund 9,064 6,871

Operating lease rentals 8,293 10,388

Other administrative expenses 143,982 134,755

Other operating expenses 39,922 39,330

613,274 519,730

(b) STAFF COSTS

The following items are included in staff costs:

Staff leave accrual 1,695 7,173

Pension costs: - defined contribution scheme 18,934 16,152

- National Social Security Fund 420 361

8. TAX 2006 2005

Shs '000 Shs '000

Current tax 124,889 103,496

Deferred tax (credit) (Note 21) (10,812) (4,261)

114,077 99,235

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 386,582 304,775

Tax calculated at a rate of 30% (2005: 30%) 115,975 91,433

Expenses not deductible for tax purposes 3,804 7,872

Income not subject to tax (5,702) (70)

Tax charge 114,077 99,235



27


9. 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.

2006 2005

Net profit for the year attributable to shareholders (Shs '000) 272,505 205,540

Adjusted weighted average number of ordinary shares in issue 764,583 562,500

Earnings per share - basic and diluted (Shs) 356 365

There were no potentially dilutive shares outstanding at 31 December 2006 and 31 December 2005.

10. DIVIDEND

At the forthcoming annual general meeting a final dividend in respect for the year ended 31 December

2006 of Shs 129.03 per share, amounting to Shs 100 million is to be proposed (2005: Shs 66.67 per share

amounting to Shs 50 million).

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

residents.

11. BALANCES WITH CENTRAL BANK OF KENYA 2006 2005

Shs '000 Shs '000

Balances with Central Bank of Kenya

- cash reserve ratio 421,317 347,234

- other (Note 26) 48,232 40,477

469,549 387,711

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 2006 the cash

reserve ratio requirement was 6% (2005: 6%) of all customer deposits. These funds are not available to

finance the company's day to day operations.



28


12. GOVERNMENT SECURITIES 2006 2005

Shs '000 Shs '000

Treasury bills - held to maturity - 448,954

Treasury bonds - held to maturity - 113,964

- 562,918

Treasury bonds - available-for-sale 742,449 60,677

Comprising

Maturing within 91 days of the date of acquisition (Note 26) 563,664 448,954

Maturing after 91 days of the date of acquisition 178,785 174,641

742,449 623,595

The treasury bonds which were held-to-maturity have now been reclassified as available-for-sale as the

bank does not intend to hold them to maturity.

13. PLACEMENTS WITH AND LOANS AND

ADVANCES TO OTHER BANKING INSTITUTIONS 2006 2005

Shs '000 Shs '000

Balances with banking institutions in Kenya 39,833 76,449

Balances with banking institutions abroad 1,584,298 1,303,549

Term deposits with banking institutions in Kenya - 184,968

Term deposits with banking institutions abroad 152,673 162,825

Items in course of collection from banking institutions 397,537 361,631

2,174,341 2,089,422

14. OTHER ASSETS 2006 2005

Shs '000 Shs '000

Receivables and prepayments 59,956 36,138

Foreclosed assets 10,179 1,479

70,135 37,617

Foreclosed assets comprise moveable properties (motor vehicles) 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 of the values of these assets.



29


15. LOANS AND ADVANCES TO CUSTOMERS 2006 2005

(a) Loans and advances to customers Shs '000 Shs '000

Overdrafts 2,638,443 2,191,155

Commercial loans 2,031,853 1,040,369

Bills discounted 62,623 33,947

Gross investment in finance leases (Note 15(d)) 1,187,592 1,412,341

Gross loans and advances to customers 5,920,511 4,677,812

Unearned interest (150,635) (136,092)

Provision for impaired loans and advances (Note 15(b)) (349,786) (280,878)

Loans and advances to customers net of

provision for impairment 5,420,090 4,260,842

(b) Provisions for impaired loans and advances

Specific General

provision provision Total

Year ended 31 December 2006 Shs '000 Shs '000 Shs '000

At start of year 239,729 41,149 280,878

New provisions 31,443 - 31,443

Increased provisions 74,169 20,324 94,493

Provisions no longer required (56,487) - (56,487)

Net increase in provision for impairment

charged to profit and loss account 49,125 - 49,125


charged to equity - 20,324 20,324

Provisions utilised during the year for write off (541) - (541)

At end of year 288,313 61,473 349,786



30


15. LOANS AND ADVANCES TO CUSTOMERS (CONTINUED)

(b) Provisions for impaired loans and advances (continued)

Specific General

provision provision Total

Year ended 31 December 2005 Shs '000 Shs '000 Shs '000

At start of year 289,957 38,247 328,204

New provisions 51,600 - 51,600

Increased provisions 32,610 2,902 35,512

Provisions no longer required (133,456) - (133,456)


charged to profit and loss account (49,246) 2,902 (46,344)

Provisions utilised during the year for write off (982) - (982)

At end of year 239,729 41,149 280,878

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 465.097

million (2005: Shs 427.171 million). These are included in the balance sheet net of provisions at Shs

176.784 million (2005: Shs 187.443 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 23.513 million

(2005: Shs 38.836 million) on impaired loans and advances has not been recognised as the manage-

ment feels no economic benefit of interest on such interest will flow to the bank.



31



(c) Concentration

Economic sector risk concentrations within the loans and advances portfolio are as follows:

2006 2006 2005 2005

Shs '000 % Shs '000 %

Manufacturing 467,275 8 435,658 10

Wholesale, retail trade and hotels 1,094,132 18 904,067 20

Transport and communications 725,890 12 611,702 13

Agriculture 171,695 3 158,705 3

Hire purchase and insurance 5,270 - - -

Business services 480,309 8 296,703 6

Building, construction and real estate 173,686 3 244,074 5

Social, community and personal services 23,464 - 13,701 -

Others 2,778,790 48 2,013,202 43

5,920,511 100 4,677,812 100

(d) Finance leases

The loans and advances to customers include finance lease receivables, which may be analysed as

follows:

2006 2005

Shs '000 Shs '000

Gross investment in finance leases:

- maturing not later than 1 year 366,883 317,688

- maturing later than 1 year and not later than 5 years 820,709 1,094,653

1,187,592 1,412,341

Unearned future finance income (150,635) (136,092)

Net investment in finance leases 1,036,957 1,276,249

The net investment in finance leases may be analysed as follows:

- not later than 1 year 266,878 234,177

- later than 1 year and not later than 5 years 770,079 1,042,072

1,036,957 1,276,249



32



(e) Credit risk

The bank undertakes an exposure to credit risk, which is the risk that a counterparty will be unable

to pay amounts in full when due. The bank structures the levels of credit risk it undertakes by placing

limits on amounts of risk accepted in relation to one borrower or groups of borrowers. Such risks are

monitored on a revolving basis and subject to annual or more frequent review.

The exposure to any one borrower including banks is further restricted by sub-limits covering on

and off-balance sheet exposures and daily delivery risk limits in relation to trading items such as

forward exchange contracts. Actual exposures against limits are monitored daily.

Exposure to credit risk is managed through regular analysis of the liability of borrowers and potential

borrowers to meet interest and capital repayment obligations and by changing lending limits where

appropriate. Exposure to credit risk is also managed in part by obtaining collateral, corporate and

personal guarantees. Credit risk is spread over a diversity of personal and commercial customers as

set out in note 15 (c). The credit risk exposure relating to contingencies and commitments is further

outlined in Note 27.

16. INVESTMENT SECURITIES HELD-FOR-TRADING 2006 2005

Shs '000 Shs '000

Quoted equity investments:

At start of year 11,611 -

Additions 62,066 12,061

Disposals (23,855) -

Fair value gain/(loss) (Note 4) 1,669 (450)

At end of the year 51,491 11,611



33


17. PROPERTY & EQUIPMENT

Year ended 31 December 2006 Computers,

Office copiers Motor Furniture Office

Building renovations & faxes vehicles & fittings equipment Total

Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

COST

At start of year 140,725 15,107 77,921 45,272 126,526 54,416 459,967

Additions 1,517 - 45,336 7,793 776 5,146 60,568

Disposals - - - (3,655) (1,605) - (5,260)

At end of year 142,242 15,107 123,257 49,410 125,697 59,562 515,275

DEPRECIATION

At start of year 9,949 15,107 54,034 29,175 48,192 33,135 189,592

Charge for the year 3,556 - 24,855 9,422 15,653 7,813 61,299

On disposal - - - (2,953) (401) - (3,354)

At end of year 13,505 15,107 78,889 35,644 63,444 40,948 247,537

NET BOOK VALUE 128,737 - 44,368 13,766 62,253 18,614 267,738

In the opinion of directors there is no impairment of property and equipment. Property and equipment with a cost of

Shs 89.257 million (2005: Shs 77.895 million) was fully depreciated at the balance sheet date. The depreciation charge in

respect of these assets for the year would have been Shs 23.008 million (2005: Shs 19.785 million) had they not been fully

depreciated.

Year ended 31 December 2005 Computers,

Office copiers Motor Furniture Office

Building renovations & faxes vehicles & fittings equipment Total

Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

COST

At start of year 67,863 15,107 48,209 35,183 79,962 33,914 280,238

Additions 11,439 - 30,097 12,189 9,414 13,065 76,204

Capitalised during the year (Note 19) 61,423 - - - 39,923 7,470 108,816

Disposals - - (385) (2,100) (2,773) (33) (5,291)

At end of year 140,725 15,107 77,921 45,272 126,526 54,416 459,967

DEPRECIATION

At start of year 6,431 15,107 41,777 20,301 35,135 24,026 142,777

Charge for the year 3,518 - 12,642 9,399 15,789 9,142 50,490

On disposal - - (385) (525) (2,732) (33) (3,675)

At end of year 9,949 15,107 54,034 29,175 48,192 33,135 189,592

NET BOOK VALUE 130,776 - 23,887 16,097 78,334 21,281 270,375



34


Capital work in progress relating to the construction of bank premises in Mombasa has been capitalised in 2005.

The ongoing construction relates to bank premises in Industrial Area, Nairobi.

20. INTANGIBLE ASSETS

Software costs 2006 2005

Shs '000 Shs '000

Cost

At start of year 8,745 -

Additions 64,873 8,745

At end of year 73,618 8,745

Amortisation

At start of year 874 -

Charge for the year 7,362 874

At end of year 8,236 874

Net book value 65,382 7,871

18. 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: 2006 2005

Shs '000 Shs '000

Cost

At start of year 20,313 19,911

Additions - 402

At end of year 20,313 20,313

Amortisation


Amortisation 316 316


Net book value 18,238 18,554

19. CAPITAL WORK IN PROGRESS


Additions 30,302 1,404

Transfer to fixed assets (Note 17) - (108,816)




35


Credited/

At start (Charged) (charged) At end

of year to Equity to P & L of year

Shs '000 Shs '000 Shs '000

Excess depreciation over capital allowances 8,263 - 4,707 12,970

General provision for bad and doubtful debts 12,345 - 6,097 18,442

Provision for staff leave accrual 4,861 - 509 5,370

Fair Value gain on held for trading investments - - (501) (501)

Fair Value gain on available for sale investments - (1,639) - (1,639)

25,469 (1,639) 10,812 34,643

Deferred tax assets/(liabilities) and deferred tax credited/(charged) to the profit and loss account are

attributable to the following:

21. DEFERRED TAX

Deferred tax is calculated on all temporary timing differences under the liability method using a

principal tax rate of 30%. The movement on the deferred tax account is as follows:

2006 2005

Shs '000 Shs '000


Credited to income statement (Note 8) 10,812 4,261

(charged) to equity (1,639) -

At end of year 34,643 25,469



36


22. CUSTOMER DEPOSITS 2006 2005

Shs '000 Shs '000

Call deposits 119,409 77,740

Current and demand accounts 1,538,227 766,931

Savings accounts 875,667 567,334

Term deposits 3,040,840 2,709,481

Foreign currency deposits 1,499,812 1,557,271

7,073,955 5,678,757

Analysis of customer deposits by maturity:

Payable within 90 days 5,349,218 4,000,824

Payable after 90 days and within one year 1,709,336 1,641,421

Payable after one year 15,401 36,512

7,073,955 5,678,757

Concentration:

The economic sector concentrations within the customer deposits portfolio were as follows:

2006 2006 2005 2005

Shs '000 % Shs '000 %

Non private institutions and individuals 4,900,272 69 3,991,069 70

Private companies 2,142,008 30 1,648,508 29

Insurance companies 29,451 1 38,590 1

Hire purchase companies 2,224 - 590 -

7,073,955 100 5,678,757 100

23. DEPOSITS DUE TO OTHER BANKING INSTITUTIONS 2006 2005

Shs '000 Shs '000

Current and demand accounts 154,463 -

Term deposits 504,336 753,836

658,799 753,836

24. OTHER LIABILITIES

Outstanding bankers cheques 157,623 86,152

Staff leave accrual 17,900 16,204

Sundry creditors 134,037 87,677

309,560 190,033



37


The total authorised number of ordinary shares is 775,000 (2005: 750,000) with a par value of Shs 1,000 per

share. All issued shares are fully paid.

The issued and paid up share capital of the company was increased on 25th May 2006 from Shs

750,000,000 to Shs 775,000,000 by the issuance of 25,000 ordinary shares of Shs 1,000 each.

2006 2005

Contingent liabilities Shs '000 Shs '000

Letters of credit 1,231,713 430,882

Letters of guarantees 651,484 312,677

Acceptances 347,223 234,235

2,230,420 977,794

27. OFF BALANCE SHEET 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.

No. of ordinary shares Issued and paid up capital

Changes

during the

26. CASH AND CASH EQUIVALENTS 2006 2005 year

Shs '000 Shs '000 Shs '000

For the purposes of the cash flow statement, cash

and cash equivalents comprise the following:

Cash in hand 59,163 37,707 21,456

Balances with Central Bank of Kenya (Note 11) 48,232 40,477 7,755

Government securities (Note 12) 563,664 448,954 114,710

Placements with and loans and advances to

other banking institutions (Note 13) 2,174,341 2,089,422 84,919

Deposits due to other banking institutions (Note 23) (658,799) (753,836) 95,037

2,186,601 1,862,724 323,877

25. SHARE CAPITAL

2006 2005 2006 2005

'000 '000 Shs '000 Shs '000

At start of year 750 500 750,000 500,000

Bonus issue of shares - 210 - 210,000

750 710 750,000 710,000

Issue of shares for cash 25 40 25,000 40,000

At end of year 775 750 775,000 750,000



38


27. OFF BALANCE SHEET FINANCIAL INSTRUMENTS,

CONTINGENT LIABILITIES AND COMMITMENTS (CONTINUED)

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 customer 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 1,578.936 million (2005: Shs 665.117 million). These facilities are unsecured.

Commitments 2006 2005

Shs '000 Shs '000

Undrawn formal stand-by facilities, credit lines

and other commitments to lend 700,314 156,057

Foreign exchange forward contracts 589,386 679,548

1,289,700 835,605

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 agreed rates.

Capital commitments

Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements

is as follows:

2006 2005

Shs '000 Shs '000

Property and equipment (Capital work-in-progress) - -

Operating lease commitments

The future minimum lease payments under non-cancellable

operating leases are as follows:

- not later than 1 year 12,130 4,079

- later than 1 year and not later than 5 years 37,185 5,408

49,315 9,487

The directors are of the view that future net revenues and funding will be sufficient to cover these

commitments.



39


South

Indian African

US$ GB£ Euros Rupee Rand Others Total

At 31 December 2006 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

Assets

Cash and bank balances 21,639 6,125 27,942 - 20 177 55,903

Balances with banks abroad 1,705,934 5,415 7,504 988 1,055 16,074 1,736,970

Loans and advances to customers 490,599 78,709 34,985 - - - 604,293

Other assets - 1,245 - - - - 1,245

Total assets 2,218,172 91,494 70,431 988 1,075 16,251 2,398,411

Liabilities

Customer deposits 843,079 316,890 332,182 - 130 7,532 1,499,813

Deposits due to other

banking institutions - - 12,386 - - - 12,386

Other liabilities 61,855 4,172 7,604 - - 3,954 77,585

Total liabilities 904,934 321,062 352,172 - 130 11,486 1,589,784

Net balance sheet position 1,313,238 (229,568) (281,741) 988 945 4,765 808,627

Off balance sheet net

notional position 1,647,186 26,553 98,094 - - 10,133 1,781,966

At 31 December 2005

Total assets 1,956,143 177,209 25,777 1,284 616 3,192 2,164,221

Total liabilities 991,754 351,037 272,879 - 206 - 1,615,876

Net balance sheet position 964,389 (173,828) (247,102) 1,284 410 3,192 548,345

Off balance sheet net

notional position 573,284 75,565 35,411 - - 11,073 695,333

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:



40


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 below summarises the exposure to interest rate risk at the balance sheet 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 company does not bear an interest rate risk on off balance sheet items.

Non

Upto 1-3 3-12 1-5 Over interest

1 month months months years 5 years bearing Total

At 31 December 2006 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

ASSETS

Cash in hand - - - - - 59,163 59,163

Balances with Central Bank of Kenya - - - - - 469,549 469,549

Government securities 440,241 123,423 178,785 - - - 742,449


to other banking institutions 153,333 - - - - 2,021,008 2,174,341

Other assets - - - - - 70,135 70,135

Loans and advances to customers 5,091,650 - - - - 328,440 5,420,090

Investment securities - - - - - 51,491 51,491

Property and equipment - - - - - 267,738 267,738

Intangible assets - - - - - 65,382 65,382

Prepaid operating lease rentals - - - - - 18,238 18,238

Capital work in progress - - - - - 32,619 32,619

Deferred tax - - - - - 34,643 34,643

Total assets 5,685,224 123,423 178,785 - - 3,418,406 9,405,838

LIABILITIES AND SHAREHOLDERS'

EQUITY

Customer deposits 3,323,150 1,087,409 1,368,472 19,188 - 1,275,736 7,073,955

Deposits from other

banking institutions - 504,336 - - - 154,463 658,799

Other liabilities - - - - - 309,560 309,560

Current tax - - - - - 10,506 10,506

Shareholders' equity - - - - - 1,353,018 1,353,018

Total liabilities and shareholders' equity 3,323,150 1,591,745 1,368,472 19,188 - 3,103,283 9,405,838

On balance sheet interest sensitivity gap 2,362,074 (1,468,322) (1,189,687) (19,188) - 315,123 -

At 31 December 2005

Total assets 4,836,975 75,000 - 95,000 24,700 2,741,416 7,773,091

Total liabilities and shareholders' equity 1,049,494 2,433,099 1,779,144 36,299 - 2,475,054 7,773,091

On balance sheet interest sensitivity gap 3,787,481 (2,358,099) (1,779,144) 58,701 24,700 266,362 -



41


Shs US$ GB£ Euro Shs US$ GB£ Euro

% % % % % % % %

Government securities 12 - - - 9 - - -

Deposits and balances due

from banking institutions 7 4 4 3 8 2 4 2

Loans and advances to customers 14 7 8 7 15 7 6 7

Customer deposits 6 4 4 2 7 3 4 2

Deposits and balances due

to banking institutions 8 5 5 3 11 4 5 2

2006 2005

29. INTEREST RATE RISK (CONTINUED)

The table below summarises the effective interest rates calculated on a weighted average basis, by major

currencies for monetary financial assets and liabilities:



42


Upto 1-3 3-12 1-5 Over

1 month months months years 5 years Total

At 31 December 2006 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

ASSETS

Cash in hand 59,163 - - - - 59,163

Balances with Central Bank of Kenya 309,125 75,288 84,744 392 - 469,549

Government securities 440,241 123,423 178,785 - - 742,449


to other banking institutions 2,174,341 - - - - 2,174,341

Other assets 47,676 10,179 - - 12,280 70,135

Loans and advances to customers 1,855,700 834,891 945,773 1,673,909 109,817 5,420,090

Investment securities - - - - 51,491 51,491

Property and equipment - - - - 267,738 267,738

Intangible assets - - - - 65,382 65,382

Prepaid operating lease rentals - - - - 18,238 18,238

Capital work in progress - - - - 32,619 32,619

Deferred tax - - - - 34,643 34,643

Total assets 4,886,246 1,043,781 1,209,302 1,674,301 592,208 9,405,838

LIABILITIES AND SHAREHOLDERS' EQUITY

Customer deposits 4,581,340 1,138,152 1,347,900 6,563 - 7,073,955

Deposits from other banking institutions 184,634 401,573 72,592 - - 658,799

Other liabilities 305,292 4,065 203 - - 309,560

Current tax - - 10,506 - - 10,506

Shareholders' equity - - 3,823 - 1,349,195 1,353,018

Total liabilities and shareholders' equity 5,071,266 1,543,790 1,435,024 6,563 1,349,195 9,405,838

Net liquidity gap (185,020) (500,009) (225,722) 1,667,738 (756,987) -

At 31 December 2005

Total assets 4,309,241 1,362,306 846,442 760,676 494,426 7,773,091

Total liabilities and shareholders' equity 2,759,609 1,325,954 2,564,476 1,038 1,122,014 7,773,091

Net liquidity gap 1,549,632 36,352 (1,718,034) 759,638 (627,588) -

30. LIQUIDITY RISK

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 company 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. The bank fully complies with the Central Bank of Kenya's

minimum cash reserve ratio (6%) and liquidity ratio (20%) requirements, with the average liquidity maintained at 26% (2005: 24%)

during the year.

The table below analyses assets and liabilities into the relevant maturity groupings based on the remaining period at the balance sheet

date to the contractual maturity date:



43


Senior

Related management Other

Directors companies employees employees

31. RELATED PARTY TRANSACTIONS

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 27) include guarantees and letters of credit which

have been issued to related companies.

The following transactions were carried out with related parties:

2006 2005

(a) Interest received from loans and advances to: Shs '000 Shs '000

Related companies 16,678 5,995

Senior management employees 131 196

Other employees 4,881 2,766

21,690 8,957

(b) Interest paid on deposits from:

Directors 1,862 4,391

Related companies 66,213 24,268

Senior management employees 1,602 1,186

Other employees 830 356

70,507 30,201

2006 2005 2006 2005 2006 2005 2006 2005

(c) Outstanding loans Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

and advances:

At start of year - - 18,180 27,253 3,127 3,655 44,213 30,755

Advances during the year - - 184,016 273,761 - 1,400 53,707 23,485

Interest charged - - 16,678 5,995 131 196 4,881 2,766

Repayments during the year - - (36,635) (288,829) (1,303) (2,124) (15,580) (12,793)

At end of year - - 182,239 18,180 1,955 3,127 87,221 44,213

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.



44


2006 2005 2006 2005 2006 2005 2006 2005

(d) Deposits Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000 Shs '000

At start of year 25,400 109,455 748,111 360,765 42,805 14,515 12,296 12,043

Deposits received

during the year 63,225 38,970 688,713 643,605 70,683 98,923 309,846 168,770

Interest paid during the year 1,862 4,391 66,213 24,268 1,602 1,186 831 356

Withdrawals during the year (71,793) (127,416) (670,356) (280,527) (63,872) (71,819) (291,854) (168,873)

At end of year 18,694 25,400 832,681 748,111 51,218 42,805 31,119 12,296

Senior

Related management Other

Directors companies employees employees

31. RELATED PARTY TRANSACTIONS (CONTINUED)

All transactions with related parties were at arms length and at terms and conditions

similar to those offered to other major customers.

32. COUNTRY OF INCORPORATION

Imperial Bank Limited is incorporated in Kenya under the Companies Act as a private limited liability

company and is domiciled in Kenya.

33. CURRENCY

The financial statements are presented to the nearest thousand Kenya Shillings (Shs ’000)

2006 2005

(e) Undrawn formal stand by facilities, credit lines Shs '000 Shs '000

and other commitments to lend:

Related companies 81,000 -

(f) Directors emoluments:

- fees 21,000 10,500

- others 17,553 17,244

38,553 27,744

(g) Key management personnel compensation:

Short-term employee benefits 86,132 61,409

Post-employment benefits 6,348 3,767

92,480 65,176



t a ble of contents 1 - imperial bank limited...anwar hajee abdulmalek janmohamed pramila aggarwal...

Documents