Integrated Report and Financial Statements

| 2018 | S S T N TEME TA S L IA C AN IN F AND T R O EP R D TE A GR TE N I KCB AND FIN ANC I N TEGRA IAL Regulated bytheCentral BankofKenya 2

S TED TATEME N 018

R EPO R T S T

1 HIGHLIGHTS

TABLE OF CONTENT

Overview ABOUT THIS REPORT Our Regional Presence 4 2018 Highlights 5 Our Footprint 6 KCB Group Plc Integrated Report and Financial Statements 2018 has Digital Channel Performance 7 been prepared for the period 1 January 2018 to 31 December 2018 Our Strategy 8 and covers the business activities of KCB Group. Our Value Creation Process 10 Framework Our Capitals 12 The report has been prepared in compliance with global best practice Our Material Issues 15 and prudent accounting frameworks for existing and prospective Operating Environment 18 investors. It is aligned to the parameters of the Kenya Companies Act, 2015, Capital Markets Authority (CMA) guidelines, the Nairobi Control Environment Securities Exchange (NSE) Listings Manual, and Central Bank of Kenya Risk Management 24 (CBK) Prudential Guidelines. This report is also in compliance with Risk Appetite 28 the International Integrated Reporting Council (IIRC) Guidelines. The Risk Governance 30 Group’s Annual Financial Statements were prepared in accordance with the International Financial Reporting Standards (IFRS). The 2019 Outlook 31 report is part of our promise to be transparent and accountable to Who Governs Us our stakeholders. Group Chairman’s Statement 32 Materiality Determination Taarifa ya Mwenyekiti 34 This report presents a balanced and succinct analysis of the Group’s Group Board of Directors 36 strategy, performance, governance and prospects. Potential material Group CEO & MD’s letter to Shareholders 38 matters were identified through a broad range of processes, from engagement with our stakeholders to our own internal processes Barua ya Afisa Mkuu Mtendaji wa Kundi na Mkurugenzi Mkuu 42 such as risk assessments and considering international trends. Executive Committee 46 Report from the Group CFO 48 Assurance The Group Annual Financial Statements, KCB Bank Kenya, KCB Bank Five Year Review 50 South Sudan and KCB Bank Rwanda were audited by KPMG. KCB Value Added Statement 51 Bank Uganda and KCB Bank Tanzania were audited by PwC while A Review of Our Strategic Themes 52 KCB Bank Burundi was audited by Deloitte. KCB Foundation 62 Our Sustainability Agenda 68

Statement of Corporate Governance 70

Board of Directors’ Profiles 77

Shareholding 78 Financial Statements & Notes 79 Notice of the 48th Annual Genaral Meeting 178 To ensure that we report on issues that matter to our stakeholders Proxy Form 182 please provide any feedback and questions to: [email protected] or visit www.kcbgroup.com HIGHLIGHTS OVERVIEW

3 Overview

For over 120 years, KCB Group has offering banking services on a 24/7 basis ventures, achieve operational and supported East Africa’s economic growth in East Africa. This is complemented by strategic autonomy for the Group’s agenda. We have a solid footprint in the mobile banking and internet banking operating entities and enhance corporate region covering Kenya, Tanzania, South services with a 24-hour contact center governance across the Group in addition Sudan, Uganda, Rwanda, Burundi and service for our customers to get in touch to providing oversight in management of Ethiopia (representative office). with the Group. The Group also has a wide subsidiaries. KCB Group plc is a registered non- network of correspondent relationships Our shares are quoted at the Nairobi operating holding company that oversees totaling over 200 banks across the globe Securities Exchange (NSE), Dar es KCB Bank Kenya and all the regional and our customers are assured of a Salaam Stock Exchange (DSE), Uganda subsidiaries. It also owns KCB Insurance seamless facilitation of their international Securities Exchange (USE), and Rwanda Agency, KCB Capital, KCB Foundation and trade requirements wherever they are. Stock Exchange (RSE). Our story is one other associate companies. The holding company was set up in of innovation growth, resilience, and The Group has the largest branch network January 2016 to enhance the Group’s adaptation. This, we believe, is what in the region with 258 branches, 946 capacity to access unrestricted capital has kept us in business for the past 12 ATMs, 16,642 POS/Merchants and agents and also enable investment in new decades.

Our Regional Presence

KCB Bank Kenya Ltd ( Ethiopia Representative Office)

KCB Bank South Sudan

KCB Bank Kenya KCB Bank Uganda KCB Insurance Agency KCB Foundation KCB Capital

KCB Bank Rwanda

KCB Bank Burundi

KCB Bank Tanzania

KShs.

KShs. 113,661,138,000 258 Branches 6,220 Staff

Total Equity 946 ATMs, 16,642 Agents 17.4 million customers & POS / Merchants 4 (KShs. Million) Profit Before Tax Non-Financial Financial Score Net Promoter (KShs. Million) Dividends 2018 Highlights 33,859 29,114 2017 2018 emissions Greenhouse Gas Reduction in Ratio Female/Male 42% 2017 2018 43% 10,731 9,198 2017 2018 Average Equity Return on 2018 15% 2017 23% 43:57 2017 2018 43:57 Million) (KShs. and Advances Net Loans on Equity Return Advances and Net Loans Complaints Customer 19.5% 2017 22.0% 2018 455,880 422,685 2017 2018 Total equity Total debt / 972,439 2018 729,676 (in thework place) and safety incidences Number ofstaffhealth 2017 paper used Reams of 19.8% 14.0% 2017 60,625 2018 68,850 2018 2017 Million) (KShs. Loans Performing Non 2018 9 5 2017 Ratio Income Cost to Contact Resoultion Settlement -First Complaints

32,692 38,643 2017 2018 48.3% 2018 51.0% 2017 (Million Kw\h) Kencom HeadOffice Consumption at Electricity Water use 83.8% 2017 2018 86.1% Million) (KShs. Capitalization Market 2018 187M Litres 235M Litres 2017 Million) (KShs. Deposits Customer 3.35 2018 2017 3.86 131,072 2017 114,822 2018 Benefits (KShs.M) Total Employee 499,549 2017 537,460 2018 2018 17,007 19,146 2017

5 5 HIGHLIGHTSOVERVIEW Our Footprint

Branches 10 Ethiopia South ATMs 2 Sudan Staff 138 (Representative Office) Agents 0

Branches 15 Uganda ATMs 17 Staff 322 Branches 200 Agents 227 Kenya ATMs 369 Branches 14 Staff 5,058 Agents 8,604 Rwanda ATMs 25 Staff 288 Agents 270 Branches 14 Tanzania ATMs 17 Branches 5 Staff 292 Burundi ATMs 7 Agents 49 Staff 122 Agents 172 Branch vs Non-Branch Transactions

2016 2017 2018

Branch Transactions 36% 23% 12%

64% 77% 88% Non-Branch Transactions

6 Non-Branch Transactions Br anch T r ansactions Br anch v s Non-Br 2016 64% 36% anch T 2017 77% 23% r ansactions 2018 88% 12% 22.8 2017 CHANNEL TRANSACTIONS (KShs.Millions) 2017 7.3 Digital ChannelPerformance Agency 9% Merchant POS 52% 2018 7.9 34.7 2018 54.4 2018 2017 29.60 B 52.0 18.6 2017 2017 B Branch Teller -13% 20% Mobile 16.2 2018 62.1 2018 14.0 2016 B

Mobile Loans Advanced 2017 15.0 (KShs.) 0.9 2017 8.5 2015 B ATMs 44% Internet 2% 1.3 2018 15.4 2018 2014 0.4 B

7 7 HIGHLIGHTSOVERVIEW Our Strategy

Our Vision What drives us How we achieve it How we performed To be the preferred financial solutions provider in Business Growth while addressing the -Loans: KShs. 456 Billion Africa with global reach. Customer Women and Youth agenda -Deposits: KShs. 537 Billion Perspective -Yield: 11.4% Our Mission -Market Share -Shared Value -Loans under women proposition: KShs. 5.2B To drive efficiency whilst -Brand Position growing market share in -Net Promoter Score: 43% order to be the preferred financial Customer Centricity solutions provider in -Customer Growth: 44% Africa with global reach. -Brand Power: 29% -Agency and Merchant Network: 16,642 Our Purpose Simplifying your world to enable your progress Financial -Return on Average Equity: 22.0% -Profit Before Tax Drive Shareholder Value -Efficiency -Dividend per share: KShs. 3.50 Our Values -Shareholder Value -2jiajiri beneficiaries: 23,059 • Inspiring 2015-2019 Strategy: -Inua Jamii beneficiaries: 717,342 • Simple • Friendly (Transformative Partnerships) Growth in Digital Financial Services -Non-Funded Income: 32.2% Our Promise -Mobile Loans Issued/Minute: 21 Go Ahead -Digital Inclusion reach: 13.2M Customers Internal Business -Non-Branch Revenue: KShs. 5.2 Billion Processes Our Behaviour -System Reliability • I am a leader -Sustainability -Control Environment Operational Efficiency -Cost-to-Income Ratio: 48.3% • I find solutions -Non Performing Loans: 6.9% • I drive efficiency -System Uptime: 99.9% • I simplify work -Carbon footprint reduction: 23% • I listen and care Learning and • I am positive and committed Growth -Staff Productivity -Number of Staff: 6,220 -Staff Development Talent Management -Culture Change -Average Training Days/Staff: 7.1 Days -Staff Cost-to-Income Ratio: 23.7% -Revenue/Staff: KShs.13.6 Million

Enablers

88 Financial Management Robust Risk Management Brand & Innovation Information & Technology Human Resources Sustainability Agenda enable yourprogress Simplifying yourworldto Our Purpose Go Ahead Our Promise • Friendly • Simple • Inspiring Our Values Africa withglobalreach. solutions providerin order tobethepreferredfinancial growing marketsharein To driveefficiencywhilst Our Mission Africa withglobalreach. solutions providerin To bethepreferredfinancial Our Vision • Iampositiveandcommitted • Ilistenandcare • Isimplifywork • Idriveefficiency • Ifindsolutions • Iamaleader Our Behaviour (Transformative 2015-2019 Strategy: Partnerships) Financial Management Enablers What drivesus -Brand Position -Shared Value -Market Share Perspective Customer -Culture Change -Staff Development -Staff Productivity Growth Learning and Robust RiskManagement -Control Environment -Sustainability -System Reliability Processes Internal Business -Shareholder Value -Efficiency -Profit BeforeTax Financial Brand &Innovation

Information &Technology Talent Management Operational Efficiency Growth inDigitalFinancialServices Drive ShareholderValue Women andYouthagenda Business Growthwhileaddressingthe How weachieveit Customer Centricity Human Resources Sustainability Agenda How weperformed -Loans underwomenproposition:KShs.5.2B -Yield: 11.4% -Deposits: KShs.537Billion -Loans: KShs.456Billion -Revenue/Staff: KShs.13.6 Million -Staff Cost-to-IncomeRatio: 23.7% -Average TrainingDays/Staff: 7.1Days -Number ofStaff:6,220 -Carbon footprintreduction:23% -System Uptime:99.9% -Non PerformingLoans:6.9% -Cost-to-Income Ratio:48.3% -Non-Branch Revenue:KShs.5.2Billion -Digital Inclusionreach:13.2MCustomers -Mobile LoansIssued/Minute:21 -Non-Funded Income:32.2% -Agency andMerchantNetwork:16,642 -Brand Power:29% -Customer Growth:44% -Net PromoterScore:43% -Inua Jamiibeneficiaries:717,342 -2jiajiri beneficiaries:23,059 -Dividend pershare:KShs.3.50 -Return onAverageEquity:22.0%

9 9 HIGHLIGHTSOVERVIEW Our Value Creation Process

Our role as a ﬁnancial services institution is to support and stimulate economic, social and environmental progress. We create shared value by providing products and services that help people to improve their lives Highlights and fuel economic growth. 31.3% 18.2% Of wealth created, distributed in Of our wealth created, distributed Employees-Salaries, Wages, and in Government Taxes. Other Benefits. SDGs OUR CAPITALS PROCESSES OUTPUTS 24.4% Decent work Accounts Of our wealth created, retained to support future business growth and economic growth We enable the progress of our customers through FINANCIAL Customer Centricity various money management solutions: -Current -Transactional •Equity: KShs. 113.67B - NPS score of 43% in 2018 Peace, justice •Deposits: KShs. 537.46B -Mobile -Savings and strong •Borrowings: KShs. 22.45B OUTCOMES institutions Payments & Transactions Investors Operational Efﬁciency Enabling Funds transfer through: -Mobile -Agents • Return on Average Equity: 22.0% Cost-to-Income Ratio: MANUFACTURED -Internet -POS/Merchants • Return on Assets: 3.8% 2018 – 48.3%; -Branches -ATMs • Earnings per share: KShs. 7.83 • 88% Out of branch transactions 2017 – 51.0% • Dividends per share: KShs. 3.50 Loans Industry, We extend credit incorporating responsible innovation INTELLECTUAL Talent Management lending practices servicing: Employees and infrastructure -Innovations in 2018: Staff Cost-to-Income Ratio: -Personal - Corporate -Mortgage • KShs. 17B salaries and benefits paid • Revamped KCB M-PESA 2018 – 23.7%; -SME - Micro • Jaza Duka Initiative 2017 – 26.9% • Employee Engagement score: 83% Investments • 155 promotions in 2018 Generation of yields by way of: Drive Shareholder value -FDR (Fixed Deposit Receipt) Regulators ROAE of 22.0% in 2018 -Call -Custody -Savings products • Continuous streamlining with all required regulations No poverty Forex • Smooth transition into IFRS 9 reporting HUMAN • Corporation tax paid in 2018: KShs. 9.9B Provision of brokerage services to buy and •Staff Count: 6,220 Business Growth •Average Tenure: 8.7 Years sell foreign currencies through: •Revenue/Staff: KShs13.6 Million - Market Share of Loans: 17% in 2018 -SWAPS -Swift Reduced -Futures -T-Bill/Bonds Customers inequalities • 140M Transactions facilitated across all channels. People • KShs. 456B growth in net loans advanced in 2018 Career development & advancement • KShs. 537B growth in deposits mobilized in 2018 Partnership for SOCIAL Growth in Digital opportunities to ensure we attract and the goals •17.4 million Customers Financial Services retain top talent •108,260 MobiGro Accounts Communities - NFI Contribution of 32.2% in 2018 • Strategic Partnerships • KShs. 50 billion committed to youth entrepreneurship • Average supplier performance of 87% on all deliverables • KShs. 12.9B distributed to elderly and disabled Responsible • Reduction of resource usage: water by 20%, fuel by 29% consumption and and paper by 12% production NATURAL •Carbon-Neutral operations Sustainable cities •Monitored resource usage and communities (water, fuel, power and paper) •KCB Green Agenda

10 Our r ec pr and fuelec o onomic, socialandenvir P inequalities Reduc and inf inn Indus ins and st P gr and ec and c Sus pr c Responsibl the goals Dec No po viding pr onsumption and artner eac SDGs o oduction ol titutions o wth t ent w e asaﬁnancialservicesins v ainabl e, justice ation ommunities try v ed r onomic erty r ong ship f as , onomic gr oducts andservic ork tructure e cities e or o wth. onment es thathelppeopl al pr titution ist OUR C ogr es s. W o supportands •KCB GreenAgenda (water, fuel,powerandpaper) •Monitored resourceusage •Carbon-Neutral operations • JazaDukaInitiative • RevampedKCBM-PESA -Innovations in2018: • 88%Outofbranchtransactions MANUF NA INTELLEC •Revenue/Staff: KShs13.6Million •Average Tenure:8.7Years •Staff Count:6,220 HUMAN • StrategicP •108,260 MobiGroAccounts •17.4 millionCustomers e t •Borrowings: KShs.22.45B •Deposits: KShs.537.46B •Equity: KShs.113.67B FINANCIAL SOCIAL e cr APIT o impr TURAL eat e sharedv A o ALS C v e theirliv TUAL artner TURED timulat ships alue by es e Cus - NFIContributionof32.2%in2018 Financial Services Oper Growth inDigital t PROCES omer Centricity - NPSscoreof43%in2018 - MarketShareofLoans:17%in2018 ational Efﬁciency Driv Business Gr T e Shar al Cost-to-Income Ratio: ent Management

SES Staff Cost-to-IncomeRatio: 2018 –48.3%; 2017 –51.0% eholder v o ROAE of22.0%in2018 wth 2018 –23.7%; 2017 –26.9% alue OUTPUTS We enabletheprogressofourcustomersthrough opportunities toensureweattractand Career development&advancement various moneymanagementsolutions: P ayments &T -Current -Transactional Provision ofbrokerageservicestobuyand retain toptalent People -Mobile -Savings Accounts Enabling Fundstransferthrough: sell foreigncurrenciesthrough: -Internet -POS/Merchants We extendcreditincorporatingresponsible -Futures -T-Bill/Bonds r ansactions -Branches -ATMs -Mobile -Agents -SWAPS -Swift -Personal -Corporate-Mortgage F lending practicesservicing: orex Generation ofyieldsbywayof: -FDR (FixedDepositReceipt) Inv -Savings products -SME -Micro es Loans -Call -Custody tments Other Benefits. Employees-Salaries, Wages,and Of wealthcreated,distributedin Of ourwealthcreated,retainedtosupportfuturebusinessgrowth 31.3% Highlights OUT • Dividendspershare:KShs.3.50 • Earningspershare:KShs.7.83 • ReturnonAssets:3.8% • ReturnonAverageEquity:22.0% andpaperby12% • Reductionofresourceusage:waterby20%,fuel29% • KShs.12.9Bdistributedtoelderlyanddisabled • Averagesupplierperformanceof87%onalldeliverables • KShs.50billioncommittedtoyouthentrepreneurship • KShs.537Bgrowthindepositsmobilized2018 • KShs.456Bgrowthinnetloansadvanced2018 • 140MTransactionsfacilitatedacrossallchannels. • Corporationtaxpaidin2018:KShs.9.9B • SmoothtransitionintoIFRS9reporting • Continuousstreamliningwithallrequiredregulations • 155promotionsin2018 • EmployeeEngagementscore:83% • KShs.17Bsalariesandbenefitspaid Inv Communities Cus Regulators Empl 24.4% COMES es t omer o t or y ees s s in GovernmentTaxes. Of ourwealthcreated,distributed 18.2%

11 11 HIGHLIGHTSOVERVIEW Our Capitals

1. Financial Capital earnings make up part of the financial capital used in the execution and growth The International Integrated Reporting of our strategic investments. Whichever Council (IIRC) define financial capital form of funding KCB Group sources, it is as a store of value or a pool of funds done at competitive rates, leveraging our available to an organization. KCB Group financial might to efficiently create and sees Financial Capital as a medium of maximize shareholder value. exchange that realizes its value through conversion into other forms of capital. The Group will continue building a i.e. Our investors, both debt and equity, resilient and diverse balance sheet, ready play a big part in the makeup of our to capitalize on emerging opportunities financial capital and operationalization in our existing markets. of our strategy. Additionally, our retained

2. Human Capital • Performance based assessment. This is wholesomely, the capability, knowledge, • Competitive remuneration packages including skills and experience that make-up the people that benefits such as credit facilities among others. drive our strategy - our staff. We recognize that our • Employee wellness programmes including people are instrumental in the utilization of our various leave programmes, prayer rooms, capitals leading to the realization of shared value. medical insurance and checkups. The Group strives to ensure our staff have the key KCB endeavors to have an inclusive workforce while competencies required to carry out organizational also striking a balance between experience and activities. We do this through: youth. This allows for better business continuity • Varied development initiatives such as training management. sessions on key strategic areas such as Sustainability, Ethics, Anti-Money Laundering & Age Cyber-Security, Risk management and Business Gender Continuity Management. Furthermore, these Male 57% 20-30 14% trainings are supplemented with compulsory Female 43% 31-40 61% E-Learning courses that are refreshed annually for relevance. 41-50 18% 51-60 7%

We put great impetus on harnessing 3. Intellectual Capital Social Media Platform (As of 31 Dec. 2018) intellectual capital and undertaking good Our intellectual assets, such as brand management of knowledge from Research value, innovative products, innovation Facebook and Development (R&D). As a result, we capacity and reputation also play a generate innovations that improve customer 1,350,769 key role in growing the business. experience, system efficiencies and unlocking Strong brand affinity and Twitter of big data potential for product development. exceptional innovation capacity In 2018, we rolled out several products 294,600 keeps us ahead of the curve. In which is testament to the budding innovation LinkedIn 2018, the bank achieved a brand emanating from the Group as seen by the power score of 29% up 600 basis revamping of KCB M-PESA. 37,198 points from 2017. The research arm of the bank undertakes annual Additionally, we have a huge brand following, Instagram review of our Brand Health with with our social media channels very active 29,813 Brand drivers identified and aspects for given our customers demonstration and preference to engage through these channels. YouTube improvement noted. 13,828

12 supply baseso asto improve security andqualityofsupply inorder to KCB Group eyes strategic development oftheprocesses, people and Supply-Chain relationships in place to protect theinterests ofboththecustomer andtheBank. our customers withmeasures ondata handling andclientconfidentiality that they willnotbefailed bysystem failure. We alsoprotect theprivacy of systems’ uptime is above 95%, allowing them to transact at will knowing and timely service to ourcustomers. Thisisalsodriven byensuringour their world comes about through a consistent focus on delivering quality Our drive to excel inenablingtheprogress ofourcustomers bysimplifying Customer Centricity create shared value amongst ourstakeholders, improving thecollective stakeholders. TheGroup works to foster theserelationships in order to collaborations that the Group forms with bothour internal and external Our social and relationship capital involves the existing and potential 5. Social&Relationship Capital wellbeing. We look to build thetrust thatwe have been vi) Partnerships endowed with, as a bank for the generations, having business growth in two facets. Firstly, the Group’s flexibility The Group’s manufactured capital iskey to sustainable platforms we interact withourcustomers. infrastructure andtechnology, leased orwholly owned and Manufactured capital isdefinedasthosematerial goods, 4. Manufactured/Infrastructural Capital whose value is realized in the delivery of products and v) Competitor relationships and structures. Thesedrive thechannelswhichare the been there for over 120years. services. Asstated earlier, theGroup strives to seethe including information technology software, systems iv) Regulatory relationships The relationships we have include, but aren’t resources forms thebasisuponwhichwe runthebank, realization ofFinancialCapital through conversion to capital to allow resources towards it.Thisallocation of is reliant onthedeployment andflow offinancial other forms ofcapital. Thus,manufactured capital iii) Communityengagements limited to: ii) Customer experience i) Supply-Chain relationships an eye onachieving efficienciesandsynergies. agreement. SmootheningofthisP2Pprocess isconstantly beingdonewith completion, we ensure thatthey are fully compensated asperthecontract ensure suppliers provide timely andqualityservices orgoods,andupon at securing a performance contract. Close co-operation is required to followed, we make every effort to offer alloursuppliers anequalchance our immediate communities. Once theonboarding processes have been local percentage ofoursuppliers inorder to create opportunitiesfor We have systems andpoliciesinplace to ensure thatwe achieve ahigher optimize value from thetotal procurement spendoftheorganization. and governance. TheGroup’s culture isembodiedaround transparency, We prideinhavingethical values thatcontribute to ouroutstanding conduct Regulatory Relationships community welfare. collaborations bringustogether intheinterest ofthebankingsector and on the M-Pesa Foundation, creates shared value for our communities. Our the betterment ofsocietal welfare, suchasourpartnership withSafaricom Banking industry intheregion. Relationships withotherorganisations for and indoingsowe setindustry standards, forming thebenchmark for the Whether intentional ornot,we form relationships withourcompetitors Competitors program. More onthiscan befound onpage62. both held graduations in2018where over 23,000youth graduated from the women agenda.Ouryouth flagshipprogram, 2jiajiri,andIgire inRwanda, grow business in key customer segments, while unlocking the youth and inclusivity andapushfor creation ofshared value. In2018,we purposedto KCB hasembedded inits strategy anintentional bidfor increased Community engagements without havingto walk into abranch. out different channels that ease access to banking services, our vast distribution ofcustomers inentirety. We have rolled tirelessly working ondeveloping platforms thatwillserve convenience wherever andwhenever you may need, we are From thetraditional brickandmortar branches to ensuring sustainable growth. thus enhancingbothoperational andcost efficiencies, technology can reduce resource use,andsystem downtime, services to themarket. Secondly, manufactured capital and needs, beinnovative, andefficiently deliver new products and of manufactured capital, allowing it to respond to societal and resilience inthemarket isenabled bytheefficientuse

13 13 HIGHLIGHTSOVERVIEW Our Capitals

5. Social & Relationship Capital (continued)

disclosure, integrity and adherence of the laws and regulations that are actively engages the regulators from the different markets and adjusts active in regions we operate in. The Group is committed to utmost Legal its operations to apply the strictest of the requirements as the minimum and regulatory compliance in each of these jurisdictions. for the businesses. This has enabled the development of systems and Having operating commercial subsidiaries in 6 markets, the Group procedures to monitor and confirm adherence.

6. Natural Capital adopted and embedded 8 SDG’s into our strategy and quantifying these, to ensure measurability and monitoring. In order to maximize the impact Our Natural Capitals are those stocks of environmental assets/resources of this adoption, we have revised part of our supplier requirements to that provide a flow of useful goods and/or services. These relate to our include measures and processes that encourage and build on sustainable impact, directly and indirectly on the environment, and the impact practices. Beyond this, during the year 2018, we joined a group of which our customers, suppliers and other stakeholders may have 28 other global banks that took part in drafting the 6 Principles on the natural resources. for Responsible Lending, that was coordinated by the UNEP We have made significant strides to deepen our commitment Financial Initiative (FI). These principles have been designed towards driving a sustainable business for the future since with a suitability for banks in both emerging and developed the KCB Green Agenda that was launched in 2009. We markets. The 6 Principles are Alignment, Impact, Clients approved Social and Environmental Management System and Customers, Stakeholders, Governance and Target (SEMS) in 2015 which are integrated into our credit system. Setting, and finally, Transparency and Accountability. This This allows us to conduct social & environmental due is yet another milestone in the further entrenchment of the diligence prior to loan disbursement, during loan tenure sustainability agenda into our strategy and business. and upon repayment of the loan. Furthermore, in 2017, we

A decade of KCB KCB joined a group of 28 other global banks that took part in drafting the 6 Principles for Respon- Green Agenda sible Lending, that was coordinated by the UNEP Financial Initiative (FI).

2018 Mainstreaming of the SDGs adopted

14 CORPORATE CONDUCT Brand consistency Integrity, Values, Confidentiality, Professionalism, Communication, Engagement, Structured Transparency, Compliance, Regulatory Culture (Trust), Accountability, Ethics, Governance, substantial difference. of theseengagements atthetimeofworkshop didnotreveal any held in the course of the year. A light touch review of the outcomes Access to external stakeholders was madethrough otherengagements achieving its strategy. workshop where they discussed issues that may hamper KCB from cross-functional staff were invited to participate inamateriality To establish aKCB perspective onmaterial issues affecting theGroup, Issue Identification below: Methodology andfindingsofourlatest assessment are described basis ofthisreport. materiality assessment informed the strategic themes and form the engagement process undertaken bytheGroup. Theresults ofthe Our material issues assessment ispartofawidersetstakeholder prioritizing ourstrategy policiesandactionplansinthearea ofESG. KCB Group undertakes annualmateriality reviews thatassist in Our Material Issues Rewarding competence, engagement, Strategy consideration, Disability Promotion, Remuneration, competencies, – matching Future, Placement equipping for Succession, Capacity-Building, Nurture, Retain, Identify, Alignment, Capacity, TALENT MANAGEMENT CUSTOMER CENTRICITY Flexibility Innovation, Dynamism, Agility, Relationships, Accessibility, consistency, Brand experience, Seamless shop, One Stop Culture, Trust, Culture Convenience, Reliability, Technology, (TAT)), (Responsiveness People, Process OPERATIONAL EFFICIENCY categorization istabulated below: recurrent, assumed to have higherimportance. Thesummaryofthe The issues were grouped into 7broad categories andthemost perception. aligned to the7categories, resulting intheformation ofthestakeholder mentions formed theKCB perception while thelighttouch review was which they were alluded to duringthe workshop. The frequency ofthese the importance ofthecategories was basedonthefrequency with broad categories aforementioned and highlighted on page 17. Ranking This process yielded 21uniquedescriptors eachaligned to oneofthe7 onboarding processes ofsuppliers amongothers. of procurement processes, payment processes, turnaround time, issues combined to onedescriptor e.g.P2P(Procure-to-Pay) comprised The outputfrom bothengagements was thencollated andsimilar Collation &Prioritization Markets Emerging Trends/ diligence in (PESTEL), Due environment Monitoring the Policies, Audit, Relevant Diversification, Portfolio Compliance, Planning, Anticipation, not Reactive, Proactive and Prudence, engagement, Strategy Succession, RISK MANAGEMENT SHARED VALUE, DIVERSITY financial inclusion experience, personalized consideration, Disability in Remuneration, Equity &Parity Procurement) SME andLocal Youth, Women, Green Agenda, AND INCLUSIVITY BUSINESS GROWTH inclusion financial opportunities, andcreating Region, Nurturing Capacity, Partnerships, Diversification, Growth, Portfolio Value, Sustainable Value, Market Shareholder Execution, Strategy and

15 15 HIGHLIGHTSOVERVIEW Materiality Matrix

Materiality Matrix Output The categories were placed in the matrix below relative to the degree of A continuous scale of 1-5 was used to rate the importance of the material stakeholder perception and KCB perception. The 7 categories collectively issues where: represent the material issues facing our business and experience has demonstrated some form of interdependency between them. Further, 1 –Low importance, this assessment informs how the board and management approach the 2- Moderate importance, strengths, weaknesses, opportunities and threats to long term value 3 – High importance, creation. 4 – Very high Importance 5 – Utmost importance.

Customer Centricity Utmost Corporate Business Growth Conduct Importance Operational Efficiency Risk Management

Shared Value, Diversity and Inclusivity Talent Management Very High Importance STAKEHOLDER PERCEPTION

High Importance Very High Importance Utmost Importance KCB PERCEPTION

“KCB Group undertakes annual materiality reviews by actively inviting selected groups amongst our stakeholders to give us feedback on a range of issues that may give rise to Environmental Social and Governance issues.”

16 individually weighted, averaged andgrouped accordingly. For greater understanding, we broke down the7categories inthematrix,withdescriptors undereachexplained. Thesefactors were Materiality Issues Explained and payment ofpartners facilitating theonboarding, retaining Efficiency andtimeliness in P2P -Procure to Pay time. our customers’ progress ingood solution oriented services to enable Enhanced capacity to execute Service Delivery surpass KPItargets executing themto meetand Groups’ strategic themesand Engagement indetermining the Strategy communities. integrity inourbusinesses and Maintaining sustainable ethics and Ethics, Integrity &Governance stakeholders inatimely manner relevant information to our Clarity indisseminating usefuland Disclosure &Transparency simplifying theirworld Enabling customer’s progress by Culture jurisdictions we operate in. the Laws andRegulations ofall Upholding utmost compliance to Compliance Operational Efficiency Corporate Conduct Constant product andsector innovation thatwillallow theGroup to grow andsurvive through changing periods. Innovation Maximizing shareholder value and ensuringaconsistent dividendpayout to ourshareholders. Shareholder Return Driving towards consistent, sustainable financialpositionwhile sustainably investing inourcore businesses. Sustainable Economic Growth Business Growth 1 4 including necessary engagement. with allofourstakeholders needs; relevant skillsto enable themto deal Developing theGroup’s staff with Upskilling environment. also ensuringfor apositive working and fairly compensating them,while Ensuring thewellness ofourstaff Benefits/Remuneration growth. disruptions may beopportunitiesfor also researching onways these may have ontheGroup’s strategy, but Vigilance ontheimpactnew technologies Digital Disruption and resolution ofissues. ensuring efficiencyinresponsiveness Reducing system down-time while also System Stability prior to loan disbursement. social &environmental duediligence and environmental risks byconducting and manageloans withpotential social processes allowing theGroup to avoid risk managementinto business Integrating oursocialandenvironmental ESG Risk ecosystem. efforts to secure ourbusiness risks through training andproactivity in Raising vigilance andawareness ofsuch Cyber-crime, Fraud &Theft Civil procedures. as drafted inParliament orbyway of Actively coping withpertinentlegislation Legislation Talent Management Risk Management 2 5 and costless aspossible. customer experience asseamless Commitment to makingthe Customer Experience maintaining clientprivacy. Protecting customer data and Confidentiality their easeofuseandefficiency. customers’ needsandensuring affordable products tailor-made to Providing innovative, unique& Products Specificity enable theirprogress. Supporting ourkey stakeholders to Partnerships 10-point actionPlanonpage68) waste andresponsible lending. (see reduction ofcosts, emissions, Sustainable enterprise through Embracing thepursuit ofa KCB Green Agenda/SEMS scholarships. start-ups, SME’s, sponsorships, avenues, notlimited to supporting empowerment, through various Striving to provide economic Enabling Communities Inclusivity Diversity and Shared Value, Customer Centricity 7 6 3

17 17 HIGHLIGHTSOVERVIEW BOARD OF DIRECTORS Operating Environment KENYA

Estimates of Gross Domestic Product (GDP) year. The period was characterized by declining Adil Khawaja indicate that the economy grew on average yields on treasury bills with oversubscriptions Chairman by 6.0% during the first three quarters of on all the three different tenure bills. 2018 compared to 4.7% in a similar period Domestic credit grew by 4.6% in the month of 2017. Favorable weather conditions and a of December 2018, averaging 2.4% in the 12 stable macroeconomic environment created a months to December 2018. Strong growth in conducive environment for the growth during private sector credit was observed mainly in the period. The growth was mostly supported finance and insurance; consumer durables; by pickup in agriculture, trade and transport. business services and private households. A rebound in activities of the manufacturing sector also contributed significantly to the Public debt in Kenya grew by 15.4% year on year improved performance during the period. driven by 15.9% growth in external debt, while Tom Ipomai Julius Mutua Accommodation and food service and domestic debt grew 14.8%. (Alternate to Henry Rotich*) information and communication recorded 2019 looks to be a strong year for Kenya the highest growths of 16.0% and 9.1%, supported by the ‘handshake’ which eased respectively. political tension, creating renewed political Overall inflation in 2018 averaged 4.7% momentum, while spurring business confidence compared to 8.0% in 2017. The high inflation and continued macroeconomic stability will in 2017 was driven by high food prices. In 2018 contribute to growth. Moreover, Kenya’s Big adequate rainfall drove food prices to low Four economic plan envisages enhancing levels and inflation during the year was due to structural transformation, addressing deep- increase in fuel and electricity prices. seated social and economic challenges, and accelerating economic growth to at least 7% a Simeon Rono Njeri Onyango Year on year, the shilling appreciated 1.4% (only year. By implementing the B4 strategy, Kenya African currency to do so) to close the year at hopes to reduce poverty and create decent jobs. 101.85 to the USD. The shilling averaged 101.30 to the USD in 2018 compared to 103.42 in 2017 (a 2.05% appreciation). This was as a result of increased exports of tea and horticulture, Our performance increased diaspora remittances, strong receipts from tourism, and lower imports of 2017 2018 food and SGR-related equipment relative to 2017. KShs. KShs. million million Caroline Rabar-Okongo Joseph Muigai The CBK usable foreign exchange reserves remained strong at USD 8,001 million (5.2 Total income 61,795 63,627 months of imports cover) as at end of December 2018. This fulfilled the requirement to endeavor Operating expense (29,245) (29,165) to maintain at least 4 months of imports cover, and the EAC region’s convergence criteria of PAT 18,717 22,366 4.5 months of imports cover. The Central Bank Rate (CBR) averaged 9.3% in Total assets 641,068 692,765 2018 compared to an average of 10% in 2017. During the year under review, the monetary Joshua Oigara Samuel Makome Group CEO and MD policy committee reviewed the CBR downwards Ratios Group Chief Operating Officer twice, each by 50 basis points (bps) (March and 2017 2018 July). This reduced on the commercial banks’ NPL 8.5% 6.9% lending rate, averaging 13.06% in 2018 from 13.67% in 2017. CIR 46.8% 45.1% The yield on the 91-day treasury bill averaged ROA 3.6% 3.8% 7.74% in 2018 compared to 8.37% in the previous ROE 22.6% 24%

Bonnie Okumu 1818 Company Secretary * Cabinet Secretary National Treasury in August 2018,from 9%to 7%,andwe expect year, with the BOT slashing its discount rates monetary policywas accommodative in the respectively. From aregulatory standpoint, closing theyear at3.0%,5.22%and8.74% day T-bills were stable throughout theyear, Treasury Bills yields for the91,182and364 in Dec2017. rate easedto 17.39%inDec2018from 17.60% 2017, depreciating at2.3%.Theaverage lending 2,281.23 compared to TZS2,230.06inDecember firm levels against thedollarclosing theyear at The Tanzanian Shilling(TZS)maintained its government spending. 5.2% in2019and5.1%2020dueto increased inflation isprojected to marginally increase to to 4.3%from 3.2%recorded in2017.Headline items annualaverage inflationrate increased to 3.7%from 9.6%in 2017.However, non-food in annualaverage inflation rate for food items decrease was mainly attributed to decrease 3.5% in2018from 5.3%recorded in2017.The Annual Average HeadlineInflationdecreased to political stability inthecountry. with opportunitieslikely to arisefrom peace and supported bylarge infrastructure spending, growth projected at6.6%inboth2019and2020, The medium-term outlook ispositive, with this continued GDPgrowth. welcome boost to tourism whichallsupported industry, trade sector, aswell asproviding a Tanzania resulted inthegrowth oftheservice GDP growth. Furthermore, theexpansion ofAir (SGR) andRural Energy Agency(REA)triggering projects suchasthe Standard GaugeRailway expansion intheconstruction sector with The performance was mainly driven bythe estimated at6.7%in2018,from 6.8%in2017. The GDPperformance for theyear was manufacturing companies. credit, especially to households, andtrade and by domestic demandandexpansion ofbank This year’s performance was mainly driven 3 years. solid and sustained performance over the past 2018 was apositive year for theeconomy with TANZANIA sector into one ofthefastest growing inAfrica. investment andrevive themanufacturing attracting close to $1billioninforeign direct the country achieve structural transformation accelerated manufacturing exports andhelped The ExportZoneProcessing Agencyhas development potential for tourism. strategic geographic location, andimmense country’s abundantnatural resources, a opportunities are mainly borne from the around peace andpolitical stability. These that may arisein2019,whichare centered The country, however, seesgreat opportunities to 7.3%in2016,compared with5.7%in2012. result ofyouth unemplyment, whichincreased despite high economic growth, largely as a poverty andincome inequality remain high with stunted private sector growth. Moreover, largely from economic policyuncertainty Some headwinds that may be expected arise banks to seekmergers oracquisitions. requirements andhighNPLscould prompt liquidity environments, highercore capital With regards to thebankingsector, tightening this to bemaintained inthesamelevel in2019. PAT Operating expense Total income Total assets 6.7% GDP Performance Our performance million KShs. 2017 (1,518) 23,440 2,113 8 million KShs. 2018 (1,503) 26,654 2,397 434 Fatuma Chillo Georgina Malombe John Nyerere Company Secretary Antonia Kilama BOARD OF DIRECTORS Chairman Zuhura Muro Dr. Alex Nguluma John Ulanga Managing Director Cosmas Kimario

19 HIGHLIGHTS BOARD OF DIRECTORS Operating Environment SOUTH SUDAN

The Republic of South Sudan steadily inflation to moderate at an average 45% Gen. (Rtd) Joseph Kibwana Chairman recovered from years of civil conflict, with in 2019. However, this is premised on the country’s economic conditions improving some key assumptions, including the state following the signing of the peace agreement implementing proposed fiscal adjustments. late last year. Should the peace agreement bring This comes at the back of a combination resolution to the conflict, a fiscal deficit of internal conflict, weak global oil prices, no larger than 3% of GDP is estimated by the closure of oil fields and poor rains that the IMF with exchange rate stability and a resulted in economic activity contracting, recovery in both oil production and non-oil between 2016-18. These events led to GDP to follow. the declaration of the hyperinflationary Economic prospects remain promising in Charity Muya-Ngaruiya Nyiel Kuol economy. 2019 and beyond after signing the peace GDP growth improved by 2% from agreement late last year. Oil production -8.20% in 2017 to -6.30% in 2018 due to is expected to hit an all-time after the improved security and the signing of the signed agreement with China to develop comprehensive peace agreement. Annual the dilapidated infrastructure in exchange GDP is expected to grow by 5.40% in 2019 of crude oil. This will in return increase the due to the anticipated tailwinds. country’s non-oil revenue collection. Oil accounted for over 99% of South However, given the country’s over- Sudan’s export revenues during 2014-2018, dependence on crude oil exports, slight with sesame seeds the only other export changes in oil production, prices, and Prof. Festus Abduleziz James Yacoub Leju Kenyi commodity of some significance. However, demand can quickly translate into massive the country’s oil production was on an economic shocks. upward trend in 2018 with on-and-off conflict The country has one of the most constrained disrupting output and transport processes. business and investment climates in the However, output is expected to recover in world but is expected to improve with 2019 going forward to a tune of 350,000 the introduction of large infrastructural barrels a day. projects.

Lawrence Kimathi Harun Kibongong -6.3% Managing Director GDP Performance

Our performance Monetary Policy: 2017 2018 The country is still facing a severe shortage of foreign currency, with little reason to KShs. KShs. believe that the weakening trend would stop million million heading into 2019, especially due to the oil- Mary Oganga dependent economy. The sharp depreciation Total income 3,174 1,298 Company Secretary in the currency placed significant pressure on imported consumer prices. Operating expense (1,057) (590) Headline inflation peaked at 831% year- on-year in Oct 2016 and has subsequently PAT 11 428 been on a broadly downward trajectory to stop at 32% in Dec 2018. The IMF expects Total assets 19,068 14,113

2020 with anaccommodative monetary policy interest rates have beendeclininginline Through FY2017/2018, Money Market 1.4% whencompared to December 22017. energy, consumer price index went upby the previous month.Excluding food and 3.4% inDecember 2018andby3.3% imported items whosecost went upby Annual inflationwas mainly driven by export crops andlivestock. banana, whichled to growth infood crops, growth in maize, bush beans, cassava and 2018. Theseconditions permitted good that were experienced in the region in supported bypositive weather conditions Lastly, theagriculture sector grew by8%, increase intheinternational metal prices. sectors alsomarked growth following the Moreover, theconstruction andmining ICT sectors which all recorded growth. by theservice, trade, transport and Economic growth hasmainly beendriven RWANDA agriculture exports. with anincreasing share innon-traditional agriculture, initially incoffee andtea but and relatively strong performance in donors, majorinfrastructure projects policies, government-led investment with been maintained through soundeconomic growth above 7%onaverage since 2007has 3.4% reported in2017.Thestory ofsteady 7.2%, and550basispoints higherthanthe markedly higherthantheprojected rate of that the economy grew by 8.6% in 2018, previous two years. It was estimated the trade balance gap compared to the increasing growth andnarrowing of improvement ofeconomic activities, The year 2018showed acontinued 8.6% GDP Performance Total assets PAT Operating expense Total income term development goals. implementing reforms to achieve its long- through the country’s strong record of which willboost tourism andfinally, as theBugesera International Airport, policy, continued publicinvestments such growth resulting from theMadeinRwanda These forecasts are supported byexport to grow at7.8%in2019and8.0% 2020. general, withtheeconomy isprojected Rwandan economy and banking in 2019 holds great prospects for the the RWF. currencies intheeconomy, supporting in Rwanda injected furtherforeign initiative andinternational conferences 7%. Additionally, the ‘Made in Rwanda’ 23.8% increase, while imports grew by to thesignificant increase inexports, at exchange rate remained moderate due finance imports. However, pressures on increased demandfor dollars to in 2018,majorly dueto therelatively depreciated by4.8%against theUSD currencies inthesub-Saharan Region, The Rwandan Franc (RWF), like most compared to 17.4%in2017. rates slightly declined to 15.6% in 2018 in 2017to 6.64%in2018while lending rate ofT-Bills decreased from 8.78% liquidity conditions. Theweighted normal stance and improved banking system Our performance million KShs. 2017 (1,251) 19,023 1,879 375 million KShs. 2018 (1,498) 24,001 1,842 226 Managing Director George Odhiambo Antonia Muturo Speciose Ayinkamiye Tom Ipomai BOARD OF DIRECTORS Chairman John Bosco Birungi Molly Rwigamba Daniel Zitunga Timothy KariukiMwai Company Secretary Brice Manzi

21 HIGHLIGHTS BOARD OF DIRECTORS Operating Environment UGANDA

Uganda’s economy is expected to grow 6.3 owing to higher import growth that is likely to Aga Sekalala Jr. percent in 2019 (International Monetary Fund, continue outpacing the growth in exports in Chairman IMF), slightly higher than the 2018 growth rate addition to the volatile international economic of 5.3%, helped by robust activity in sectors environment. including manufacturing, foreign direct 2019 has potential to be a good year for Uganda investment in the oil and mining subsectors, given that the 2016 elections went by peacefully, and reforms to improve the business despite some disputes. Upsides come from the operating environment. 2018’s growth was improved credit to the private sector anchored an improvement from 5.0% in 2017. On the supply side, industry and services contributed considerably to this growth while agriculture showed slower growth. On the demand side, Dr. Jeff Sebuyira- Mukasa Apollo Obbo greater investment in public infrastructure 5.3% was the main contributor to growth while the current account registered a deficit due GDP Performance to growing imports of capital goods, thereby stymieing growth. by supportive monetary policy stance. Moreover, Treasury Bills yields for the 91, 182 and 364 anticipated expansion of the manufacturing, day T-bills all increased slightly to 10.8%, construction, and services sectors will also 12.0% and 13.0% as at the end of December support growth in 2019. This outlook is 2018 from 8.69%, 12.5% and 13.1% at the premised on the continued favourable weather beginning of the year. conditions, external demand, increased Getrude Karugaba Edgar Omoto Inflation reduced to an estimated 3.2% in 2018 Foreign Direct Investment (FDI) inﬂows as oil due mainly to lower food inflation and prudent exports draw closer, and prudent expenditure monetary policy. In the near term, inflation on public infrastructure projects, as planned. outlook is slightly lower than the previous These tailwinds are however hampered by forecasts, mainly on account of lower food potential downside risks to the economy such prices. Both headline and core inflation are as adverse weather impact on the agricultural forecast to converge on the 5.0% target in the sector. Furthermore, the slow implementation medium term. of infrastructure investments, low commodity prices and demand for the country’s exports in The fiscal deficit widened to an estimated major markets, appreciation of the US dollar 4.7% in 2018, driven largely by ongoing public and tightening of global financing conditions Paul Russo Samuel Makome infrastructure investments supported by that could discourage FDI and adverse spill borrowing from both domestic and external over shocks from fragile regional neighbors. sources. The country’s debt to GDP ratio was estimated at 40.0% in 2018. Despite this ratio, the country’s debt sustainability assessment Our performance indicated a low risk of debt distress. The fiscal deficit is projected to narrow to 4.4% in 2019 with the current account deficit stabilizing at 2017 2018 4.9%. KShs. KShs.

The Uganda shilling on average remained million million Edgar Byamah relatively stable during 2018 with a year Acting Managing Director on year average depreciation rate of 3.2% Total income 1,693 1,825 against the US dollar. Going forward, the Uganda shilling may remain relatively stable Operating expense (1,343) (1,379) in the very near term on account of increased inflows. Over the medium term however, PAT 317 317 the shilling may come under pressure on account of the weak current account position Total assets 21,085 18,770

2222 BURUNDI to December, butfor 2019,theGovernment the budget has been runningfrom January calendar ofBurundioccurred in2018,where An important changeinthefinancial 2.3% in2018from 4.6%2017. depreciation oftheofficialexchange rate to transactions, which resulted inthelimited and restrictions onforeign exchange interventions, includingliquidityinjections remittances). TheCentral Bankmade (exports, foreign direct investment, and limited othersources offoreign exchange the depletion of international reserves with external supportafter 2015hasresulted in import ofessential goods.Thedeclinein continued, withshortages constraining the Foreign exchange pressures have decline offood prices. agricultural harvest andthesubsequent inflation of-8.4%,largely dueto agood saw thecountry record anall-timelow as perthenationalstatistics. October 2018 average being-2.58%( indeflation) but begandecliningin2018,withthe2018 Headline inflationaveraged 16.1% in2017 international coffee and tea prices. rest primarily onweather conditions and earnings andits abilityto pay for imports, generated from coffee. Burundi‘s export to have anegative impactontherevenues commodities declinedby3%.Thisislikely the international prices ofagricultural of foreign exchange earnings.However, are coffee andtea, whichaccount for 90% population. Burundi‘s primaryexports GDP andemploys more than90%ofthe Agriculture accounts for over 40% of on estimates from theWorld Bank. to 0.5%in2017to 2.8%in2018,based with annualGDPgrowth improving from economy continues to recover slowly After three years ofcontraction, Burundi’s 2.8% GDP Performance PAT Operating expense Total income Total assets boost theeconomic growth ofBurundi. next to theDRC border isalsoexpected to Special Economic Zone(BSEZ) inWarubondo trade hub. Theestablishment oftheBurundi 10 ports, whichcould make itaninterregional 650-kilometer-long Lake Tanganyika, hometo This willsupplement development ofthe MW, withcurrently less than40MWtapped. Burundi’s hydropower potential of1,300 there ismassive room for exploitation of vanadium and carbonatites. Moreover, limestone, nickel, tantalite, phosphates, underexploited miningpotential for peat, on growth andjobcreation. Theseinclude if tapped, willhave aconsiderable impact several strengths andopportunities,that for a brighter future. Furthermore, there are which hasspurred onthecountry, givinghope participation inthe2020general elections, incumbent president furtherrenounced his referendum thatwas held inMay 2018.The especially after the successful and peaceful 2019’s outlook for Burundi is promising, average was 3.82%in2018. 10.5% while the364-day T-bill rate annual is thelowest intheEAC region atarate of trend from December 2017.The 5-year Bond 2018. Ingenaral, there hasbeenadeclining The low interest rate regime continued in January to June2019. will operate onapreliminary budgetfrom the rest ofEAC. Thismeansthatthecountry decided to harmoniseits budgetingyear with Our performance million KShs. 2017 7,160 (582) 731 69 million KShs. 2018 7,279 (566) 224 813 Margaret Kositany Consolata Ndayishimiye Managing Director Gloria Nyambok Chairman Julius Mutua BOARD OF DIRECTORS Company Secretary Janet Mwaluma Adrien Sibomana Joseph Muigai

23 HIGHLIGHTS Control Environment

RISK MANAGEMENT such risks. Within the ICAAP (the Internal Capital i. Credit Risk KCB Group has adopted an enterprise-wide Adequacy Assessment Process), the Bank defined Credit risk is the risk that a borrower or debtor risk management framework with the overall the following risks as material risks: credit risk, may default on obligations to the Group under objective of ensuring that risks are identified, concentration risk, market risk, operational risk a credit agreement. (including IT risk and cyber risk), interest-rate risk quantified, managed and monitored to achieve The credit portfolio is a major component of in the banking book, liquidity risk, reputational risk, an optimal-risk reward profile. This in turn the asset portfolio of the Group; therefore, strategic risk, regulatory risk, and compliance risk. enhances shareholder value by managing deterioration in the stability of the various risks proactively and intelligently in order to The risk-management strategy of the Group borrowers may have an adverse effect on the maximize earnings potential, ensure earnings is designed to support the achievement of the Group’s asset value and profitability. stability and take measures to protect KCB strategic objectives of the Group as a whole while Activities that create credit risk include: Group against unforeseen losses. identifying and quantifying risks, establishing risk • Balance sheet exposures – Present liabilities KCB Group has adopted integrated risk ownership, and maximizing business value, taking to the Group, such as credit and mortgages to management that seeks to protect the Group’s into consideration costs in terms of risk, by every the public, credit to banks and deposits with solvency through preservation of high asset responsible function at all levels of the organization. banks and credit to governments. quality, efficient operations and forward Risk management at the Group is based on a looking capital management resulting in uniform methodology, from a comprehensive • Off-balance sheet exposures – Potential sustained earnings that augment core capital, perspective, adapted to regulatory requirements, (unrealized) liabilities to the Group, such as enabling regulatory compliance, enhancing with the aim of supporting informed risk-taking in guarantees, unutilized commitments to grant market reputation and stakeholder support. order to maximize the Group’s profitability at a risk credit and unutilized credit facilities. Risk Management Framework level aligned with its risk appetite. Another risk arising from the portfolio of credit exposures is concentration risk. KCB Group has established and implemented The Group actively takes risks, as allowed within Concentration risk arises from non-optimal required risk management framework, its risk appetite and risk tolerance. Risks are taken diversification of specific risks in the credit appropriate policies and procedures for while examining the adequacy of the benefit in portfolio, such that the credit portfolio is managing the risks across the Group that can business terms. Unacceptable risks are risks at insufficiently diversified across the various be seen in the diagram below. a level that exceeds the maximum risk tolerance level, as defined by the Group board of directors, or risk factors; for example, when the credit Risk assessment and management risks that may impair the strategic position of the portfolio is composed of a small number of The Group performs comprehensive Group to the extent of disruption of the successful borrowers (name concentration) or has a high examinations to assess the risks to which it continuation of its core activity. degree of exposure to a particular economic is exposed and to determine the materiality of sector (sector concentration). Management of credit risks Risk Management Framework The goal of credit-risk management is to allow the Group to operate, and to ensure that it Business Plan Risk Appetite Statement ( RAS) operates, in accordance with the policies and The approach for delivering the Group’s Strategy The approach for delivering the Group’s Strategy strategic objectives established and within the risk appetite defined in the area of credit, Risk Management Approach (RMA) from the level of the single transaction to the A. Foundational Componenets overview of the credit portfolio. The Group’s credit risk management policy is based on diversification of the credit portfolio Our Risk Risk Culture Trust and controlled management of risks. Risk Principles & Conduct Risk & Reputation diversification is reflected by the distribution of the Group’s credit portfolio among different B. Key Operational Elements sectors of the economy, a large number of borrowers, different linkage segments, and different geographical regions. Policies & The policy of distributing risks among Governance Reporting Infrastructure Procedures economic sectors is based on an evaluation of anticipated developments in the different C. Our Approach For Each Material Risk Type sectors. For this purpose, the Group conducts industry-level economic feasibility studies to evaluate the risk and business potential related to activity in the various economic Lending Market Operational Compliance Information Forensic Risk Risk Risk Risk Risk Services

Strategic Risk 2424 financial institution, asafunctionoftherisklevel exposure limits byeconomic sector, country, or with the risk appetite of the Group, including limits onthecredit portfolio, inaccordance and in the economy. This policy includes various according to changesinthefinancialmarkets which isexamined andupdated routinely, Board ofDirectors sets forth thecredit policy • Credit policies and procedures – TheGroup approval committee. thresholds and thresholds for transfer to provides adefinitionofindividualcredit approval credit transactions. Thehierarchy ofauthority control over theprocess ofapproving new and problematic debtclassifications, allowing debt of the borrower or group, the risk rating, of credit authorizations,according to thelevel of hierarchy ofauthoritythatoutlinesasequence • Hierarchy of authority–TheGroup hasa success. business success andremuneration for such considerations, inparticularconsiderations of is objective and isnotinfluenced byother senior managementandtheboard ofdirectors, to managementfunctions,andinparticularto that theinformation regarding risks reported balances. Thegoalofthisprinciple isto ensure interest andcreate asystem ofchecks and governance, inorder to prevent conflicts of is anessential element ofproper corporate • Independence –Theprinciple of independence the following principles: borrowers. Credit riskmanagementisbasedon to managers onnegative signsrelated to and report to theresponsible functionand Credit review systems identify, monitor, determined inaccordance withthesestudies. sectors. The Group’s business objectives are improved significantlyto95% audit issuesover thepastfew stood at70%whichhassince improved theclosure rate of years. In2015,theclosure rate ofGroup auditissues “We have“We significantly in 2018.” and hedgingoftherisk. provide solutionsfor themeasurement, control, the extent andmateriality ofsuchrisk,and identify allrisks involved intheproduct, assess for eachnew product attheGroup inorder to which specifiestheprocesses to befollowed products relies onthepolicyfor new products, various levels. The identification of risk in new measurement, andcontrol processes atthe products isbasedonriskmanagement, The identification ofcredit riskinexisting Group. of riskmanagementandcontrol policiesatthe methodologies, including the implementation management procedures andrisk-assessment the implementation and effectiveness ofrisk- responsible, amongothermatters, for reviewing In thethird lineofdefense, Internal Auditis presentation ofgeneral riskindicators. analysis ofconcentration, stress scenarios, and compliance withlimits, specialevents, and including thelevel ofcredit riskintheportfolio, trends andchangesinthecredit portfolio, management and board of directors regarding Divisions coordinate reports to thesenior to materiality thresholds. TheCredit andRisk first andsecond linesofdefense, according credit item to thelevel oftheportfolio, inthe are appliedfrom thelevel ofeachindividual conducted by the three lines of defense. Controls of reviewing andidentifyingcredit risks is • Controls and risk identification – Theprocess borrowers. level, aswell asamaximum limitfor agroup of borrower, which reflects the borrower’s risk according to thecredit rating assigned to the on themaximum exposure to asingle borrower, assessed bythe Group. Limits are alsoimposed Reports on compliance with risk-appetite limits of astandardized modeldefinedby theGroup. respect ofoperational risk assets, onthe basis and processes. TheGroup allocates capital in as awhole andatthelevel ofspecific units various parameters, atthelevel oftheGroup risk appetite established inthepolicy, using periodically inrelation to theoperational The operational risk profile is monitored • Training andAwareness • Controlling /MitigatingofOperational risks. • Reporting; • Monitoring; • Assessment; • Identification; consists offollowing components. Operational Risk Managementprocess inKCB decisions involved to manageOperational Risk. Process outlines the sequence of activities and The Group hasOperational RiskManagement Operational Risk Management recommended byBaselIIaccord. - Loss Events, Loss Effect andCausalFactors as operational losses primarily inthree dimensions: language around ORM,theGroup breaks down In order to provide clarityandacommon Operational Risk definition: highlights common Operational risks withinthe strategic andreputational risks. Thechartbelow well asprivate settlements. Itdoesnotinclude damages resulting from supervisoryactions,as to, exposure to fines,penalties,orpunitive It includes legal risk covering, but not limited people andsystems orfrom external events. from inadequate or failed internal processes, Operational Risk istheriskofloss resulting ii. Operational Risk 25 25 25 HIGHLIGHTSCONTROL ENVIRONMENT Risk Management

are submitted on a quarterly basis, within the respect of money defrauded. consolidated risk document. • Raising awareness of fraud and its prevention The ORM risk governance model details the within the Group and to give guidance on structure and relevant roles and responsibilities. reporting of suspected fraud and how the Various committees are set up to manage People Process investigations will be conducted. the risk agenda led by the Group Operational Employeee fraud, Payment/ Settlement/ Fraud Risk Framework applies to the Risk and Compliance Committee (GORCCO), Rogue trading, Delivery, Documentation Employment law, or Contract, Valuation/ prevention, detection and response to any which is a senior management committee that Workforce Pricing, Internal/ External disruption, Loss or Reporting, Compliance/ fraud, or suspected fraud, involving staff provides oversight of significant risk issues and lack of key Project risk / Change personnel Management, Selling of KCB Group as well as shareholders, divisional meetings DORCCO where risk issues consultants, suppliers, contractors, outside are discussed. The branches also hold their agencies doing business with employees of monthly risk meetings to deliberate on risk Operational Risk such agencies, and/or any other parties with a matters. business relationship with KCB Group. Various tools developed under the Operational Legal/public liability, Technology All Stakeholders of the Group has a Risk framework ensure that adequate measures criminal activities, investment, Systems outsourcing / supplier development and responsibility in respect to the fight against are put in place to mitigate Operational risks. risk, Insourcing, implementation, Disaster and Systems capacity, fraud and other illegal acts. It is everybody’s The Group may retain certain level of risks to Infrastructure utilities systems failures, responsibility to prevent and report fraud, carry out business, while the decision to insure failures, Regulatory, Systems security Political/ government breach misappropriation, and other inappropriate risks is taken in accordance with the overall External Systems conduct within their knowledge and ability. business strategy and risk appetite. Hence, the employees are trained on fraud iii. Fraud Risk awareness in their respective areas of work. KCB has adopted the Association of Certified We have built in mandatory checks into our Fraud Examiners (ACFE) definition of fraud as processes/operations as fraud prevention being all those activities involving dishonesty measures. There is a management level and deception that can drain value from a Disciplinary Committee which decides on the business, directly or indirectly, whether or not “Risk management at consequences for cases depending on their there is personal benefit. severity. Fraud Risk Management the Group is based on a iv. Market and Liquidity Risk The Group Board has approved Fraud Risk Market Risk is the risk of loss arising from Framework/ policy which covers both internal uniform methodology, potential adverse changes in the value of and external frauds. It is applicable across the Group’s assets and liabilities due to the KCB Group including Board of Directors. It fluctuations in market risk factors including covers Prevention, Detection and Investigation from a comprehensive but not limited to interest and foreign exchange of Frauds. rates. The Fraud Risk Management Framework aims perspective, adapted Liquidity Risk is the risk that the Group is to reinforce the KCB values of honesty, integrity unable to meet its contractual or contingent and ethics and in this regard has a “Zero to regulatory obligations or that it does not have the Tolerance” approach to fraud and corruption. appropriate amount, tenor and composition of KCB is committed to ensuring that a fraud free requirements, with funding and liquidity to support its assets. environment exists and high ethical standards Market and Liquidity Risk Management are upheld in the organization. the aim of supporting Market Risk exposures arising from the The key objectives of Fraud Risk framework trading book are managed by the Treasury are: informed risk-taking in department whilst those arising from the non- • Development of a suitable environment for trading activities are managed through the fraud management. ALM (Asset and Liability Management) and • Maximum deterrence of fraud. order to maximize the ICAAP processes. Oversight of market and liquidity risk is provided by ALCO (the asset • Successful prevention of fraud which cannot liability committee). be deterred. Group’s profitability Market and Liquidity Risk measurement, limit • Professional investigation of detected fraud. at a risk level aligned setting, reporting and oversight is conducted • Effective sanctions, including legal action by the Market Risk department under the against people committing fraud. with its risk appetite.” CRO. The relevant market risks are Foreign • Effective methods for seeking redress in Exchange Risk (FX Risk) and Interest Rate Risk (IRR).

2626 vulnerability. trigger orintentionally exploit aspecific for athreat-source to exercise, accidentally and operations. Asystem threat isthepotential which can impactanyorallofits ICT systems The Group issubjectto various forms ofthreats inconsequential to catastrophic loss. business processes or mission, ranging from can cause adverse impactontheGroup’s and communication technology. ICT risk inadequate use of the Group’s information an inadequate ICT strategy andpolicyor technology and processing, or arises from arises asaresult ofinadequate information infrastructure for its various activities. ICT risk The Group isdependentuponITsystems and v. Information Risk place. There isalsoaContingencyFunding Planin bank borrowing anddepositconcentration. review ofthefundinganalysis looking atinter and Loanto DepositRatio limits aswell asthe Liquidity riskismonitored through theLiquidity authorization. record for allbreaches aswell asthebreach weekly /monthly /quarterly basis,keeping a respective limits are monitored onadaily / units to take riskinacontrolled manner. The a limit approval matrix that allows the Business risk (PV01)andstop loss limits. TheGroup has limits including,butnotlimited to exposure, The Group monitors riskthrough thevarious Market, LiquidityandCountryRiskMonitoring limits. statements andsettingoftherespective risk liquidity andcountry riskthrough riskappetite KCB expresses its acceptable level ofmarket, oversight atthemanagementlevel. responsibilities, withtheALCO providing key governance structure andrelevant roles and manner across KCB Group. Itdefinestherisk liquidity andcountry risks inaconsistent monitoring andcontrol /mitigationofmarket, identification, assessment, measurement, Management Processes thatresult inthe Market RiskFramework establishes Risk by whichKCB achieves thoseobjectives. The management and the approach and processes for Market, LiquidityandCountryRisk that govern KCB’s strategy andobjectives management practices. Itoutlinesthepolicies Framework whichensures soundrisk KCB hasaBoard-approved Market Risk the riskofpenetration, unauthorizedaccess to cyber defense processes inorder to minimize using advanced technologies. The Group operates defense framework consists oflayers ofprotection with thedevelopment ofthesethreats. TheGroup’s security andcyberdefense system, inorder to cope and technological) instrengthening its information The Group invests extensive resources (bothhuman exposure to cyberrisks. attackers, ontheotherhand,have led to higher on one hand, and the advanced tools available to developments and the expansion of digital services, sector have grown inrecent years. Thetechnological severity ofcyber-attacks ontheglobal financial as a result of a cyber event. The sophistication and damage to reputation ortheconfidence of thepublic theft ofproperty, collection ofintelligence, or disruption, disturbance, shutdown ofoperations, Cyber riskistheofdamage,including Risk Cyber of service attack • Malicioussoftware, computer hacking,anddenial • Natural disaster, fire etc. • Espionage,sabotage andvandalism, • Computer-assisted fraud, • Cybercrime, including butnotlimited to: against current andemerging sources ofthreats The Group’s information assets are protected investments andbusiness opportunities. minimize business risk,andmaximize return on and vulnerabilities to ensure business continuity, suitably protected from agrowing variety of threats Information isanimportant business asset andto be that handle these data. KCB understands that security ofdata andtheinformation systems Security policyto govern themanagementand The Group Board hasalsoapproved Information and control processes. considered andaddressed inkey approval, review framework in which information risks are identified, It alsoprovides aconsistent riskmanagement of occurrence andtheconsequences are significant. parties from information risks where thelikelihood the Group, its staff, customers andotherthird business opportunities.Theobjective isto protect damage andmaximize return oninvestments and ensure business continuity, minimizebusiness internal orexternal, deliberate oraccidental, to Group’s information assets from all threats, whether Technology RiskPolicy to govern theprotection ofthe The Group hasBoard approved Information Information RiskManagement

high standards andbest practice. reference to theGroup activitywhichreflects and maintain aneffective compliance planin objectives and goals in order to implement regular basis,its compliance strategy, the and/or services. The Group examines, on a exploiting theGroup’s network, products offences, orotherfinancialcrimes,from laundering, terror financing, fraud, tax steps to prevent persons engagedinmoney the policyofGroup to take appropriate regulations onmatters ofcompliance. Itis standards andto stringently maintain the employees and managers to adhere to high In thisframework, theGroup requires its policy istheresponsibility ofallemployees. Adherence andcompliance to thegroup and subsidiaries. programs, whichapply alsoto its branches implemented anAMLandCFT compliance The Group in its Compliance Policy has (AML) and Counter-Terror Financing (CFT). relationship, Anti-Money Laundering to the Group with regard to Bank/customer as anyotherprovisions which,bylaw, apply comply withallrules andstandards aswell The Group iscommitted to strictly uphold and vi. AML/CFTCompliance framework accordingly. work plans for improvement of the defensive the effectiveness ofdefenses, andto build identify targets to defend, threats, risks, and databases. TheGroup continually works to availability, andconfidentiality ofits of attacks, andto ensure thecorrectness, information systems, andmaterialization CONTROL

IDENTIFY RISK

MANAGEMENT

MONITOR ANALYZE

ACTION 27 27 27 HIGHLIGHTSCONTROL ENVIRONMENT Risk Management (continued)

The Group has developed and implemented is based on detailed action plans, working and ensures that emerging risks or risk-taking written AML/CFT policies, procedures, internal procedures, and periodic tests and drills, defined activities are identified, assessed, escalated, and controls as well as systems, which include but are in a system of emergency procedures. As part of addressed in a timely manner. not limited to the following:- its emergency preparedness, the Group defines The risk-management culture instilled at the • A customer identification program and reference scenarios, map and analyze critical Group emphasizes the importance of: processes and the resources required for the procedures; (1) Achieving the proper balance between recovery of such processes during an emergency • Customer Due Diligence and Enhanced Due compensation and risk, subject to the risk (BIA), and update its action plans based on the Diligence based on risk approach methodology; appetite; prevalent methodologies. The Group Business • Monitoring of customer transactions and activity; Continuity Committee meets quarterly to ensure (2) An effective system of controls congruent with • Screening of names and relevant information that should anything happen, we should still be the scale and complexity of the Group; against watch lists; able to operate and run the critical functions. (3) The ability to challenge the quality of risk • Reporting of suspicious activity; However, in the case of actualization of inherent models, the level of accuracy of the data, the ability risks, we have dedicated recovery teams and sites of the available tools to measure risks correctly, • Record retention; and that ensure business continuity with minimal and the justifications for taking risks; • Training impact to workflow. These sites have the critical (4) Monitoring violation of limits and divergence Application capabilities used by business units so as to from established policies, and application As an enterprise-wide program the Group’s ensure that we should be able to switch over of proportional disciplinary proceedings, as Compliance Policy applies to all subsidiaries. seamlessly in case of a disaster. The activation of necessary; a contingency plan is under the responsibility of Wherever there is a conflict between local laws of (5) Cultivating integrity, with a focus on fair service the BCP Steering Committee. a subsidiary and the Group Policy in regard to the to customers. prohibition of money laundering and financing of In the year under review, we had a target of testing terror, the stricter provision will apply. The policies 100% of the 80% of the critical functions and RISK APPETITE have been implemented with the appropriate surpassed the target by testing 100% of the 90 Risk appetite at the Group constitutes an effective changes and to an extent that this does not critical functions. framework for risk management and a key constitute any contradiction with local law. Additionally, we have established a disaster tool linking the organization’s strategy, capital vii. Emergency preparedness recovery site, to ensure the availability and allocation, and risk management. The risk- appetite document declares the risk appetite of Our strategic pillars are underpinned by our protection of our information systems and of the the Group. The Board of Directors establishes the aim to be future-proof, by putting in place information itself. risk-appetite framework, taking into consideration our sustainability pillars (Financial Economic RISK CULTURE the recommendations of Senior Management. The Environmental and Social) to ensure business The Group develops and maintains a risk- risk appetite is translated into targets and limits continuity. management culture that aids awareness of for the business lines. The risk-appetite document The Group maintains and implements a risk and appropriate behavior and judgment also establishes the roles and responsibilities of continuous plan for emergency preparedness and in connection with risk taking in the context of the Board of Directors and senior management in business continuity (BCMP – business continuity corporate governance, supports effective risk formulating the risk-appetite statement. The riskmanagement plan). The Group’s preparedness management, promotes appropriate risk taking, appetite framework includes policies, processes,

Risk Heat Map & Appetite High Considerable Must manage and Extensive management management required monitor risks essential

Risk may be worth accepting Management Management effort Medium with monitoring effort Worthwhile required

Impact

Low Accept risks Accept, but monitor Management risks monitor risks

Low Medium High

Probability

2828 • manage manage •F & •P O •Inci •L •New •IT ri andM •O •K (R R pe egal i i eopl ut e nance s C P r y k at s S r de

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k components: The framework includesthefollowing main realize thebusiness strategy oftheGroup. Management isexpected to operate inorder to explicitly defines the boundaries within which that they are willingto accept. Theframework understand, and evaluate the level ofrisk and theBoard ofDirectors to communicate, structure andmeansfor seniormanagement risk-appetite framework provides ashared business strategy and risk capacity. An effective the riskprofile inalignmentwiththeGroup’s to thematerial risks to theGroup, andestablishes framework. Therisk-appetite framework refers implementation andcontrol oftherisk-appetite responsibilities of those charged with the risk limits, anddescriptionsoftheroles and statement ofriskappetite andriskcapacity, The risk-appetite framework includesa communicate, andsuperviseriskappetite. controls, and systems used to implement, ys r

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S Management •Business Continuity •Reputational RiskManagement •Strategic RiskManagement •Business Ethics •Governance, &Codeofconduct •Regulatory compliancerigour •AML/KYC CMA,NSE,CDSC CBK,BankingAct,Co’s •External Laws&Regulation- •(Reputational/Strategic Risk) C ubs om pliance i

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C o I Lending Risk •Basel II/IIIReporting CollectionModels Developingandmaintain •Stress TestingofPortfolios Models •Risk RatingsandScoring Reporting •Credit RiskMonitoringand Reporting •Credit RiskMonitoringand Model •Risk AdjustedLoanPricing •Risk Appetitelimits •Sector ConcentrationRisk EO &MD n f Ris terna C k -T o Gro its business objectives inaccordance withthe its definedriskcapacity, inorder to achieve risk thattheGroup iswillingto bear, within • Riskappetite: The maximum total aggregate scenario. as aresult ofthematerialization ofastress impact ontheBank’s profit andcapital adequacy applying stress tests designed to estimate the shall beexamined, amongothermatters, by customers. Compliance withtheriskcapacity from theperspective ofshareholders and capital limits relevant to stress tests, including the Bankisable to sustain withoutviolating • Riskcapacity: Themaximum level ofriskthat relevant means,asnecessary, including: capital, riskindicators, liquidity, andother reports aswell asquantitative metrics ofprofits, its business objectives, including qualitative Group isinterested inbearingorder to achieve of theextent andtypesofaggregate riskthatthe • Risk-appetite statement: Written formulation G m l r o

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Ri n C hief R z s i t k a Man ( ALC n As warningmechanism andprovidetherelevantearly confidentialityandconsistency dataintegrity,availability, institutions’ICTsystems,ensure controltherisksinherentin •Identify, measure,monitor,and Inform i i a s O a k , s g / at Ug Offic u GORCC e i on men r R a i a s k e n nda r t c O commitee e Board

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S s k a o t u EM th S •Fraud riskawareness investigationandresponse prevention,detection, •Develops strategiesforfraud •Fraud riskassessment •Day todaymanagementoffraud F RF i ore uda ns i c S e s r n v

i ce w , parties asshown below. responsibilities andexpectations for allrelevant of thesignificant risks. Itdefinesclear processes andapproaches for management governance whichfocuses onthestructures, governance isanintegral aspectofcorporate Risk Managementgovernance structure. Risk The diagram below presents theKCB Group management responsibilities. management through articulation of risk This ensures accountability regarding risk oversight andmanagementintheGroup. responsibilities for decisions on risk taking, The riskgovernance structure setoutthe RISK GOVERNANCE appetite statement oftheBank. practical expression to theaggregate risk- • Risklimits: Quantitative indicators thatgive requirements, risk/return characteristics, etc.). as sources ofcapital andliquidity, regulatory strategic plan,undervarious constraints (such s B o r u king) r

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Enterprise Wide Risk Management 29 29 29 HIGHLIGHTSCONTROL ENVIRONMENT Risk Governance

Our Three Lines of Defence

3rd Line of Defence External Audit Assure / Independent challenge to the levels of assurance provided by business operations and oversight functions Monitor Internal Audit Other independent review Assurance over Risk Management Assure / Oversight functions Monitor 2nd Line of Defence Oversight functions who also set directions, define policy and procedures, and have functional oversight Perform Policies and Procedures

Internal Control Assessment Self (Business Improvement Focus) Assurance Self- assurance st Core Risk Business units/ teams / 1 Line of Defence Management Processes Oversight functions who also set directions, define policy and procedures, and have functional oversight Perform

Risk management is performed based on a mitigating, and reporting all risks inherent in ICAAP global view of the Group’s activity in Kenya and products, activities, processes, and systems KCB Group has undertaken various initiatives to of activity at the Subsidiaries’ in the Region, under their responsibility, as well as for achieve compliance with CBK ICAAP guidance with due attention to the activity of subsidiaries managing an appropriate control environment notes, regulatory prudential guidelines and risk with exposure significant for the Group. The in the context of risk management. management guidelines. The Group’s ICAAP is subsidiaries are instructed to manage risks Further controls are performed at the second comprehensive and provides for identification, based on the risk strategy and policy of the level of the first line of defense, in addition to quantification and reporting of all the material Group, with adjustments according to the those carried out in the units that create risk risks. It has established internal capital adequacy circumstances, which are reported to the as part of the routine management of their goals and a process for internal control, review parent company. Risks are managed separately business. and audits. A detailed framework for stress by each company in the Group, according to Second line: The second line of defense testing risks, such as Credit related risks, policy formulated by each company’s board of supplements the risk-management activities of Credit Concentration Risk, Forex Risk, Liquidity directors. the business lines. They challenge and advise Risk, Interest Rate Risk in the Banking Book, The approach taken with regard to control the first line and serve as a countervailing Operational Risk etc., has been developed by of all financial and operational risks at the power. A Risk Committee, chaired by a non- the Group. The results indicate that the Group’s Bank involves identification and assessment executive director, oversees the implementation position remains moderate under scenarios of of the risks, and control of compliance with of risk policies and monitors risk appetite low and medium stress conditions. risk-appetite limits and with additional limits across the Group. The Group’s Chief Risk Officer Considering the risk profile and operating stipulated in the various internal regulations, reports on risk issues across all risk types environment of KCB, the material risks to which through three lines of defense: to the Group Operational Risk & Compliance the Bank is exposed to are mentioned in the KCB Group has adopted the three lines of defense Committee (GORCCO) who ensure risk control ICAAP table. model that provides a simple and effective way to and compliance oversight. Planning and management of capital by the enhance communications on risk management Third line: Internal Audit operates independently Group and controls by clarifying essential roles and and objectively as a third line of defense. Its Capital planning is an annual process with duties. It provides a fresh look at operations thus goals include helping the Group achieve its a rolling planning horizon of three years. helping to assure the ongoing success of risk objectives by recommending risk mitigation Capital management is performed routinely, management initiatives. This strategy gives the through improved control. We have significantly as an integral part of the Group’s strategic and board and senior management three clear line improved the closure rate of audit issues over financial plan. Capital planning at the Group functions to rely on, to ensure the effectiveness the last few years. In 2015, the closure rate of is based on the workplan of the Group and on of the risk management framework. Group audit issues stood at 70% which has since regulatory directives, which are translated First line: The business units are responsible for improved significantly to 95% in 2018. into risk-adjusted assets and changes in the identifying, assessing, measuring, monitoring, various tiers of capital, while maintaining safety

3030 in thecase ofsuchastress event. place for areturn to regulatory capital adequacy capital-adequacy ratios; accordingly, a plan is in also examines theeffect ofstress scenarios on Process (ICAAP). Within the ICAAP, theGroup in theInternal Capital AdequacyAssessment adequacy required to cover therisks, asassessed Regulator, and not lower than the level of capital higher than the minimum ratio required by the Group isto maintain capital adequacyatalevel established capital targets. Thepolicyofthe the actionsneededinorder to maintain the result andplanning,and,asnecessary, examines as compared to planning,andthegapsbetween The Group also routinely monitors actual results within theplanningofcapital andcapital ratios. margins. Various sensitivitytests are applied Pillar 2 Pillar 1 12 11 10 9 8 7 6 5 4 3 2 1 achieved usingtheappropriateestablished Identification ofrisksisundertakenonan on-going basisforallproducts,activities, product/systems/market rollout.Thisis processes, systemsincludingnew Types ofRisk Pension Risk Country Risk ICT Risk Compliance Risk Reputation Risk Strategic Risk Liquidity Risk Interest Rate Risk Concentration Risk Operational Risk Market Risk Credit Risk Risk Identification methodologies. Material Material Material Material Material Material Material Material Material Material Material Material Materiality prioritize risks,andrecognizeanincreaseor qualitatively. TheGrouphasestablishedthe inherent andresidualrisks,associated impact iscategorizedinmonetarytermsor methodologies tobeablecompareand This processincludestheassessmentof controls. Risksareassessedintermsof appropriate riskmeasurementtoolsand probability ofoccurrenceandresulting earnings, orcapitalreputation,and against theGroup’sriskappetite.The decrease inoverallperceptionofrisk impact ontheachievementofGroup KCB GroupRiskManagementProcess Risk Assessment & Measurement our AML/CFTmonitoring, whichwillinthelong Customer requirements inorder to fully enhance Moreover, we look to have heightened Know Your enhance service delivery. position usto grow ‘good’market share and enhance credit scoring models which willbetter on BigData andArtificialIntelligence (AI)to from achieving ourtargets. We seekto capitalize vigilant oftheinherent risks thatmay hamperus In striving for business growth in2019,we remain 2019 OUTLOOK Risk monitoring andreporting. assessment andmeasurement, Riskmitigation, summarized into riskidentification, Risk is comprised ofinterrelated elements, are processes to ensure RiskManagement,which KCB Group hasputinplace systems and KCB GROUP RISKMANAGEMENT PROCESS exposure. No Yes No No No No No Yes Yes Yes Yes Yes Capital Charge Implication response tomanagerisksacceptablelevels selected aredeterminedbytheappetitesand The Groupestablishestheappropriaterisk implementation oftheappropriaterisk accepting, mitigating,transferringand avoidance ofrisks.Theriskresponses tolerance levelsdefinedbytheBoard. mitigation strategies.Theseincludes Management isresponsibleforthe and withinreasonablecosts. Risk Mitigation Fund shortfall analysis Excess over RiskLimits Incident monitoring Internal andRegulatory submissions andcompliance Reputation Events, SocialMediamanagement Scorecard, ROE deviations Ratio Analysis andCashFlow GapAnalysis EVE approach to assess theimpactofchangeinInterest Rates HerfindahlHirschman Index (HHI)andExcess over Limits Standardized Approach Standardized Approach Standardized Approach Methodology 2018. and losses, lower thanthe24%drop we hadin will drive ustowards afurtherreduction infraud which willgolive inthecourse oftheyear. This comprehensive Fraud Management System controls, withexpected enrollment ofour Finally, enhancingourdetection andprevention to achieve optimalmonitoring andreporting. Improved flow ofinformation istargeted inorder through ourmonthly DORCCO’s andGORCCO’s. enhancing ourOperational RiskManagement Increasingly, we willcontinue stress testing and arise intheseareas. management and prediction ofrisks thatmay scrutiny ofcustomer behaviors andhelpsinthe lending behavioral modelswhichgives usbetter We additionally rolled outretail andmobile seamless onboarding andservice enablement. run enhance thecustomer experience, from acceptable risklevels,andthatemergingrisksare key metricsandlimits.Continuousriskmonitoring are escalatedwithappropriate mitigationplansto and assesswhetherriskmitigationstrategiesare significant risksandassociatedmetricstosenior oversight ofeachrisktypealongwithtracking ensure riskexposuresaremaintainedwithinthe controls implemented.Thisisachievedthrough indicators thatareabovethe established levels identified risksarebeingmanagedasexpected identified inatimelymannerandappropriate Risks andcontrolactivitiesaremonitoredto is undertakentoprovideassurancethatthe highlights thekeyandemergingrisks.Risk ensure suchrisksareadequately managed. Internal riskreportingincludesof management andtheBoard.Thisreporting effective andadequatelydesigned. Risk Monitoring and Reporting 31 31 31 HIGHLIGHTSCONTROL ENVIRONMENT CB Group delivered on its promises for 2018 on the back of a sustained and managed lending strategy, coupled with the step change in our digital offering. My assessment of the Group’s performance Kis good and within the overall budget. This success was not without headwinds such as the aftermath of the 2017 electioneering period in Kenya and changes to the regulatory landscape, both somewhat redefining the business growth trajectory. Despite this, economic growth chugged along at a healthy average of 6% across the countries we operate in, driven by ICT, manufacturing, services and construction sectors. The Kenya business played an anchor role, contributing substantially to the Group’s profitability. The international businesses, together with KCB Capital and KCB Insurance Agency also helped push up the bottom line. The target is for the subsidiaries to contribute at least 20% of the Group’s profit by 2020, from the current 6%. The priority and significance of this focus led the Board to appoint a seasoned executive, Paul Russo, as the Group Regional Businesses Director with effect from January 1, 2019. The mandate given to him is to drive the agenda from the Group strategy perspective to ensure that the subsidiaries are operating at the optimum and are well integrated with the Group’s aspirations. At the same time, his appointment will ensure that the Group CEO has an improved span of control to concentrate on strategic initiatives that enhance shareholder value. We expect the subsidiaries to have a return on investment equal to or greater than the Kenya operation. We, however appreciate that each subsidiary operates in a unique environment and any strategic changes in terms of the direction each business will take would have to take this into account in addition to obtaining local regulatory approvals. As part of our regional footprint strategy, we are excited to see increased momentum towards liberalization of the key economic sectors taking place in Ethiopia. The Group has a representative office in Addis Ababa which has been operational for 3 years now. We feel that we

32 and riskmanagementpractices. From to strengthen andenhance ouroversight The Board recognizes that we must continue Corporate Governance agile inanevolving digital landscape. to themanagement to ensure thatwe remain remain focused onproviding policyguidelines top players interms ofdigital loans. We will and ithaspaidoff. Today, we are amongthe such, we have continued to invest inFintech, and churnare changingdramatically. As serve, do-it-yourself, product differentiation, such asdynamics of timeto serve, cost to business. Incurrent day environment, factors impact ontheeconomy anddirectly to our Our digital transformation hashadaprofound Digital transformation further grow thefinancialsector. sector. KCB remains opento opportunitiesto for higherreturns inthefinancialservices Tanzania have demonstrated thecapacity South Africa. Economies like Rwanda and to continental peers such as Nigeria and you look atit,Kenya isover-banked compared consolidation to take place. Whichever way level, there isaneedfor afaster pace of competitive at the regional and continental However, for the sector to remain strong and some consolidation in the past few years. The Kenyan bankingsector haswitnessed Future Outlook • • • • • part ofourstrategy. Thistranslates to: around usandourstaff form asignificant the regulators, customers, the community us bytheshareholders, theengagementwith aptly deliver ontheresponsibility placed upon role KCB plays inthewiderenvironment. To The Board appreciates the ever increasing when theopportunityarises. market whichhasover 100millionpeople are well positionedto make anentryinto this lives ofcommunities around us. aimed atsolving problems andupliftthe Investing in impactful programmes Providing jobsto 6,220staff. invest theirfundsinprimeassets Offering opportunitiesto customers to and regulatory requirements. Adoption andadherence to legislation and generally improve theirlives. businesses, meettheirfinancialneeds Supporting customers to grow their Statement Group Chairman’s Initiative Principles onResponsible Banking. of theregional anchors of theUNEPFinance Goals (SDGs)andplaying aleading role asone mainstreaming theSustainable Development responsibly, reducing ourcarbon foot print, expectations. We intend to continue lending operate within social and environmental ensure theBankcontinues to grow butalso put inplace measures thatwillnotonly longer. For usto achieve thisfeat, we must 120 years. We hope to be around for much KCB hasbeenoperational for more than environmental pillars ofdevelopment. give due attention to the economic, social and focus must gobeyond financialreturns to also sustainability isingrained inour business. Our and have optimalimpactiftheprinciple of we recognize that we can only be successful and aworld-class team. More importantly, efficient execution, asolidbalance sheet, business model,strong riskdiscipline, long-term value. Thisisthrough adiversified focused onmanagingthebusiness to achieve placed their trust in KCB Group and we are We recognize thatourshareholders have Sustainability and in-country laws. on diversity inlinewithglobal best practices transition, the Board hasmaintained its focus I amhappyto report thatthroughout this broad range ofcrucialcapabilities andskills. members. The new Board members bringa tapping into the experience ofexisting Boards to bringinnew perspectives while We alsoreconstituted ourvarious subsidiary on thethingsthatmatter most to thebusiness. changes, theBoard willremain laserfocused to theBoard. We are confident thatwiththese improve on the reporting and analysis provided and worked withtheGroup managementto the numberofcommittees from sixto five, changes to Board composition, reconstituted these efforts, we have madesignificant the interests ofourstakeholders. To support of ourregulators andprotecting andserving We are committed to meetingtheexpectations that appropriate actionistaken. system, raising early red flagsandensuring guidelines thatserve asanearly warning As such,we have strict AMLandKYC banking sector. (KYC) requirements are essential cogs inthe Laundering (AML)andKnow Your Customer an operational perspective, Anti-Money Group Chairman Andrew Wambari Kairu over thecoming two to three years. ambition ofbeinga trillion-shilling company is more work to doifwe are to reach ourstated However, we cannot rest onourlaurels; there guidance to therunningofbusiness. fellow Board members for providing strategic I would alsolike to record myappreciation to my support andwe are grateful to themtoo. and shareholders have extended to usinvaluable countries which we operate in. Our customers remains akey pillarinthedevelopment ofthe by themanagementinensuringthatBank As aBoard, we appreciate theinvaluable efforts our positive growth trajectory. therefore, we are optimistic we willmaintain sector isexpected to grow intandem and and arebound intheeconomies. Thebanking in 2019,driven byrenewed investor confidence We expect highergrowth andnew opportunities Looking ahead agenda. continually roll outinitiatives to supportthe set out thespecificgrowth ambitions. We will Governments inalltheothermarkets too have the otherbutwe now seebigger opportunities. years supported allthesepillars inoneway or and food security. KCB Group hasover the healthcare, affordable housing,manufacturing be peggedoninthecoming years: universal pillars onwhichthecountry’s development will The Kenya government hasidentifiedfour Big Four successful entrepreneurs. a dynamicenvironment for theyouth to be shown thatwiththerightfocus, we can create and entrepreneurship programme –we have With KCB 2Jiajiri–ouryouth empowerment

33 33 WHOHIGHLIGHTS GOVERNS US ampuni ya KCB lilitimiza ahadi zake za 2018 kutokana na mkakati endelevu wa ukopeshaji pamoja na uboreshaji wa huduma za kidijitali. Utathmini wangu wa matokeo ya Kampuni ni kwamba ni ya Kkuridhisha na yanalingana vyema na bajeti kwa jumla. Ufanisi huu ulipatikana licha ya changamoto kadha kama vile athari za kipindi cha uchaguzi mkuu wa 2017 nchini Kenya. Uchaguzi huo uliathiri kwa jumla mazingira ya uendeshaji biashara. Pia, kulitokea mabadiliko ya kisheria. Mambo haya mawili yaliathiri kwa kiasi fulani ukuaji wa biashara yetu. Licha ya haya, ukuaji wa kiuchumi uliendelea kwa kiwango cha kuridhisha, ambapo kulikuwa pato la jumla la taifa lilikuwa 6% katika mataifa ambayo huwa tunaendesha shughuli zetu. Biashara yetu Kenya Ilichangia kwa kiwango kikubwa faida yetu. Kampuni zetu tanzu katika mataifa hayo mengine pamoja na KCB Capital na Wakala wa Bima wa KCB zote zilichangia mapato ya Kampuni kwa njia ya kuridhisha. Lengo sasa ni kuhakikisha kampuni tanzu zinachangia zaidi ya 20 % ya faida ya Kampuni kufikia 2020, kutoka kwa kiwango cha sasa cha 6%. Kutokana na kulipatia kipaumbele suala hili na umuhimu wake, Bodi iliamua kumteua afisa mtendaji mwenye uzoefu mwingi, Paul Russo, kuwa Mkurugenzi wa Biashara za Kanda wa Kampuni hii kuanzia Januari 1, 2019. Amepewa jukumu la kuongoza ajenda hii kuanzia ngazi ya juu kabisa ya Kampuni kuhakikisha kampuni tanzu zinafanya kazi kwa njia bora zaidi na zimefungamanishwa na maono ya Kampuni. Siku zijazo, tunatarajia kampuni tanzu zivune matunda ya uwekezaji ya kiwango sawa au hata bora zaidi kuliko biashara yetu Kenya. Bodi hata hivyo inatambua kwamba kila kampuni tanzu hutenda kazi katika mazingira tofauti ya kibiashara. Mabadiliko yoyote ya kimikakati yanayohitajika katika kila kampuni tanzu ni lazima yazingatie hilo pamoja na kufuata masharti na sheria katika nchi husika. Kama sehemu ya mkakati wetu katika kanda hii, tunafurahia kwamba kuna 34 kila uchao. katika ulimwengu huuwa kidijitali unaobadilika kuhakikisha tunasaliawepesi wa kuchukuahatua mwongozo wa kisera kwa wasimamizi wa kampuni wa dijitali. Kamabodi,tutazidi kuangaziakutoa kwa kutoa mikopo kwa wingikupitiamfumo Leo hii,tupomiongonimwa kampuni zinazoongoza kama Fintech, namatunda yake yameonekana. teknolojia kutoa hudumazakifedha, maarufu tumeendelea kuwekeza katika matumiziya na kuathiri pia biashara yetu. Kama Kampuni, Mabadiliko ya kidijitali yamebadilisha sanauchumi Mabadiliko ya kidijitali fursa zakukuzazaidisekta ya kifedha. kifedha. Kampuniya KCB inaendelea kutafuta mkubwa wa mapato zaidi kutoka kwa sekta ya na Tanzania zimedhihirishakuwepo kwa uwezo Nigeria naAfrika Kusini.Katika kanda hii,Rwanda ya kiwango sawa kiuchumi barani kwa mfano kupita kiasiukilinganishanamataifa mengine kuungana hukukwa benki.Kenya inabenkinyingi yenye ushindani,kunahitajika kasi zaidikatika Hata hivyo, ndiposekta hiiibakikuwa thabitina kuungana kwa benkikadha miaka ya karibuni. Sekta ya benkinchiniKenya imeshuhudia Mustakabali hali ya maisha katika jamii. lengo lakutatua shidambalimbalinakuboresha • Kuwekeza pesanakutekeleza miradi yenye • Kutoa ajira kwa wafanyakazi 6,220. unaozalisha riba kuwekeza pesazaozaziadakatika uwekezaji • Kutoa fursa kwa wateja kuweka akibana viwango vya ubora namatakwa ya kisheria. • Kukumbatiwa nakuzingatiwa kikamilifu kwa maisha yao kuwasaidia kukuzabiashara zaonakuboresha • Mabilioniya pesayametolewa kwa wateja Tunatekeleza hilikupitia: kutekeleza vyema wajibu tuliopewa nawenyehisa. wetu nisehemumuhimuya mkakati wetu katika maeneo tunayofanyia kazi pamojanawafanyakazi Uhusiano wetu naserikali, wateja, najamiikatika KCB katika kanda hii unaoendelea kuongezeka. Bodi inatambua mchangounaotekelezwa na na watu zaidiya milioni100fursa hiyo itakapotokea. katika nafasi nzuri ya kuingia katika soko hilo lililo kutosha wa soko nchinihumonahivyo basitupo Ni matumainiyetu kwamba tumepata ufahamu wa Addis Ababa. imekuwa ikifanya kazi kwa miaka mitatu sasa yetu imekuwa naafisiya uwakilishi ambayo muhimu zakiuchuminchiniEthiopia.Kampuni kuongezeka kwa kasi katika kufanya hurusekta wa Kundi Taarifa ya Mwenyekiti itakayohakikisha benkihiiinaendelea kuwepo, na tuweze kutimizahili,nilazima tuweke mikakati Tunatumai tutakuwepo kwa miaka mingi. Ndipo KCB imekuwepo kwa zaidi ya miaka 120. mazingira. tatu zamaendeleo ambazoniuchumi,jamiina kutengeneza faida. Nilazimatuzingatiepianguzo biashara zetu.Lengoletu nilazimaliwe zaidiya matokeo bora iwapo tutazingatia uendelevu katika kwamba tunaweza tu kufanikiwa nakupata mrefu ya kampuni hii.Muhimuzaidi,tunatambua kusimamia kampuni hii kutimizamalengo ya muda imani yao katika Kampuniya KCB. Tunaangazia Tunatambua kwamba wenyehisa wetu wameweka Uendelevu sheria zawafanyakazi katika kanda hii. kwa viwango vya kimataifa nakwa kuheshimu asili mbalimbalinakwa kufuata kanuni namaadili imeendelea kuzingatiakujumuishwa kwa watu wa kwamba katika kipindihikichampito, bodi na masualaya kisheria.Ninafuraha kuwajulisha na uhasibu, utoaji huduma za hisani kwa jamii wa hatari, teknolojia, usimamizi wa vipaji, fedha utaalamu katika hudumazakifedha, usimamizi wanatuletea uwezo mbalimbali ukiwemo wakihudumu. Wanachama wapya wa bodi uzoefu wa wanachama ambaobadowamekuwa mipya huku tukiendelea kufaidi kutokana na mbalimbali katika kanda ilikuleta mitazamo kampuni. Tulifanyia piamabadiliko bodizetu masuala ya umuhimu mkubwa zaidikwa bodi kusalia kuwa makini zaidi katika kuangazia Tuna imanikwamba mabadiliko haya yataisaidia utathmini nauwasilishaji wa taarifa kwa bodi. na wasimamizi wa KundilaKCB kuimarisha sita haditano. Aidha,tumefanya kazi kwa pamoja na tukabadilisha idadiya kamati zabodi kutoka mabadiliko makubwa kwenye muundo wa bodi, kazi. Ilikuunga mkono juhudihizi,tumefanya na jamii katika mataifa ambayo tunafanyia maslahi ya wenyehisa wetu, wateja, wafanyakazi zinazosimamia sekta hiinakulindakutetea jumla. Tumejitolea kutimizamatarajio ya mamlaka pamoja namadhara menginekwa sekta hiikwa AML/KYC unaweza kusababishia kampuni yetu, Tunatambua madhara ambayo udhaifukatika kuhakikisha hatuazifaazo zinachukuliwa. macho kilawakati nahutoa tahadhari mapemana miongozo thabitisanaya AMLnaKYC ambayo huwa yana umuhimusanakwa sekta ya benki.Tuna wa Fedha (AML)naMfahamu Mteja Wako (KYC) Mahitaji ya kisheriaya Kukabiliana naUtakatishaji utathmini napiakuzingatiahatari mbalimbali. kuimarisha na kuboresha juhudi zetu katika Bodi inatambua kwamba tunapaswa kuendelea Usimamizi wa Kampuni Mwenyekiti wa Kundi Andrew Wambari Kairu ijayo. moja katika kipindichamiaka miwilihaditatu kampuni ya thamaniya zaidiya shilingitrilioni zaidi ya kufanywa kutimizalengo letu lakuwa hatuwezi kulegeza juhudizetu.Badokunakazi benki inayoongoza katika kanda hii.Hata hivyo, umehakikisha Kampuni ya KCB inasalia kuwa bodi kwa uongozi na ushauri wao bora ambao kuwashukuru wanachama wenzangu kwenye na kifani natunawashukuru pia.Ningependapia wetu na wenye hisa nao wametupa usaidizi usio zinazohudumu. Tunatambua bidiiyao. Wateja nguzo muhimu katika maendeleo katika nchi kuhakikisha kwamba benki hii inasalia kuwa sana zinazotekelezwa nawasimamizi katika Kama Bodi,tunatambua juhudimuhimu tutaendeleza ukuajiwa kuridhishamwaka huu. kwa hivyo, tunamatumainimakubwa kwamba kukua sambamba na ukuajiwa kiuchumina ya kanda hiikiuchumi.Sekta ya benkiinatarajiwa imani ya wawekezaji na kujikwamua kwa mataifa mpya mwaka 2019 kutokana na kufufuliwa kwa Tunatarajia ukuajihalisinakutokea kwa fursa Mustakabali juhudi hizo. ukuaji. Tutaendelea kuzinduamikakati ya kusaidia za mataifa menginepiazinamalengo yake ya nyingine. Lakinisasatunaonafursa kuu.Serikali juhudi zake katika nguzo hizi kwa njia moja au la KCB kwa miaka mingi limekuwa likichangia nyumba zabeinafuu,viwanda nachakula.Kundi ijayo: hudumabora ya afya kwa wote, makao na itaangazia katika maendeleo ya taifa kwa miaka Serikali ya Kenya imetaja nguzonnekuuambazo Nguzo nnekuu wanaofanikiwa. ya kuwawezesha vijanakuwa wajasiriamali kwamba tunaweza kufanikisha mazingira bora vijana naujasiriamali–tumedhihirisha KCB 2Jiajiri–mpangowetu wa kuwawezesha utoaji hudumazaBenkikwa Uwajibikaji. Kupitia UNEP wa Mkakati wa Maadiliya Kifedha kuhusu wadau muhimu katika kanda hii wa mpango wa katika mstari wa mbele kama mmojawapo wa Endelevu (SDGs)nakutekeleza mchangomuhimu joto duniani,kuzingatiaMalengo ya Maendeleo uzalishaji wa gesizinazochangiaongezeko la kwa uadilifu,kupunguzamchangowetu katika Tunakusudia kuendelea kukopesha wateja ya jamiinauhifadhi wa mazingira. kunaendesha shughulizetutukizingatiamaslahi

35 35 WHOHIGHLIGHTS GOVERNS US BoardGROUP OF DIRECTORS

“The board appreciates the ever increasing role KCB plays in the wider environment. To aptly deliver on the responsibility placed upon us by the shareholders, the engagement with the regulators, customers, the community around us and our staff form a significant part of our strategy.”

ANDREW WAMBARI KAIRU Group Chairman

36 Julius Mutua* Managing Director Group ChiefExecutive Officer and Joshua Oigara Georgina Malombe Ngeny Biwott John Nyerere Group ChiefFinance Officer Lawrence Kimathi Adil Khawaja Group CompanySecretary Joseph Kania Lawrence MarkNjiru Tom Ipomai * Alternate to Cabinet Secretary NationalTreasury* Alternateto CabinetSecretary of Kenya

37 37 HIGHLIGHTSWHO GOVERNS US eflecting on last year, the Group’s performance to a large extent mirrors what was happening across the East African region with a general Rrebound of most economies and the strength witnessed in an otherwise difficult operating environment. This positive performance is a reflection of the business model that we employed to serve our customers, a highly motivated staff, a visionary Board and continued support from you, our esteemed shareholder. As you read this report, you will gather more details on our detailed performance. Allow me for a moment to highlight the significant outcomes of this performance: 15% market share in customer deposits and 17% market share on loans and advances. Some call this banking 101. In the context of the basics and fundamentals of banking, we remain the strongest player, able to attract and retain deposits and from this, offer affordable loans to our customers. It therefore follows that our earnings remained strong with approximately 20% market share and a growth of 24%. Looking back to 2018, the sector encountered significant challenges. The interest rates we are permitted to charge for offering loans in Kenya were reduced twice within the year thus impacting the key revenue lines for the Bank’s interest income. The impact of the tough environment did not spare businesses in other sectors, probably some in which you work for or own. From a financier’s point of view, we witnessed a number of businesses going into administration during the year while several others issued profit warnings. This reinforces my earlier observation that the operating environment was quite challenging. Notwithstanding these setbacks, I am glad our business teams across the markets we operate in found ways and means to support our customers. Gladly, all was not doom and gloom; we witnessed businesses recover and grow in line with, and at times ahead of, the economy’s growth trajectory.

38 grew over 65%year-on-year. Despite this As ofDecember 2018,theregional businesses foreign banks to operate withinthemarket. the possibility ofamendingthelaws to permit the regulators andgovernment agencieson are keeping aclose eye onthediscussion from and the size of the addressable population. We considering thegrowth rate withinthemarket Ethiopian market bodeswell for thefuture of ourgrand strategy more recently. The South SudanandEthiopiaintroduced aspart plan withthebroader East African Community, regional businesses have beenabigpartofthe subsidiary inTanzania in1997.Since then,our and willremember whenwe openedourfirst has remained ontheregister for decades A significant partofourshareholder base Regional business withglobal outlook their financialandinvestment ambitions. helping people to fulfiltheirhopesandrealise East African region to prosper, andultimately businesses to thrive andeconomies across the customers to bewhere growth is,enabling Our focus isto proactively supportour that suits theirneeds. by engagingthemwithabouquetofproducts customers, butwe expand thecustomer base efforts inensuringthatwe notonly retain our That iswhy we have purposedto refocus our us to become thebiggest bankintheregion. customers are thepillarthathave propelled renewed focus oncustomer experience. Our the product hasbecome standardized isa way to remain relevant in aspace where As abusiness, we have realized thattheonly dividend pershare by17%to KShs3.50. is ofpriority, thisenabled usto increase the approach to resolve. Overall andwhatIbelieve non-performing loans thatrequire adifferent assets unitto address thesticky andlarge of theasset quality, we introduced aspecial average of 12% . To fast-track the turnaround dropped to 6.9%compared to anindustry loans reduced andthenon-performing ratio inflation while thestock ofnon-performing managed andgrew below average rate of grew to KShs23.9billion.Ourcosts were well the year, you willobserve theprofit after tax take aquicklook athow we performed during Group to continually remain atthetop. Ifwe a strong return andgrow thecapacity ofthe You have tasked meandmyteam to deliver Business Operations Shareholder Dear Market share ofcustomerdeposits The Groups’ profit aftertaxfor the NPL ratio oftheGroup a against increase individendpershare KShs. 23.9B Market share ofloansand 12% 6.9% 17% 15% 17% advances inKenya to KShs.3.50 Industry average Industry year 2018 in Kenya Nations effort aimedatshiftingbanks’ focus in theSustainable Finance Initiative, aUnited this. Aspartofourinput,we play aleading role generations; there can benocompromise on hinged oncreating abetter tomorrow for future its operations, adecade ago.Ourattitudeis in theregion to integrate sustainability into Your Group was among the first organisations Sustainability region. and securingthefinancialsector withinthe support the measures aimed at strengthening in theevent ofsuspicioustransactions. We the regulations andprocesses to befollowed taken measures to reacquaint ourstaff onall of Terrorism (AML/CFT)framework. We have Money Laundering/Countering theFinancing penalized bytheregulator undertheAnti- Despite ourefforts, KCB BankKenya was banks. other global partners including correspondent enhancing ourreputation andrelationship with advantageous to our customers as well as against financial crime.Ibelieve thiswill be to safeguard customers andourselves We continue to strengthen our ability practices. money laundering through ingrained KYC we are building astrong reputation for fighting crime. Asaregional bankwithaglobal outlook, the financialsystem plays intackling financial KCB Group recognizes the significant role that Combating financialcrime Brexit. States andChina andthelooming dealon the more recent trade war between theUnited by the actions of the larger economies such as Collectively, theglobal economies are affected political crises to macro-economic uncertainty. faced numerous challenges ranging from The regional businesses have individually global economy willimpactouroperations. We realise thatdevelopments abroad andthe by 2022. achievement ofa20%contribution to earnings Director, whosemandate isto guidethe appointing inplace aGroup Regional Business addressing thembothfrom acountry level by are known andthemanagementteam is circumstances for the low contribution to earningsremained below 10%.The seemingly significant growth, thecontribution

39 39 HIGHLIGHTSWHO GOVERNS US towards sustainable finance in our operations. able to deliver what I call stellar performance Internally, we are pulling all stops to ensure that consistently. Our people strategy has remained we are continuously striving to reduce our carbon consistent over the years and this has been footprint. In this report, we have gone into some tied well with the adoption of technology. On detail demonstrating the activities and outcome upskilling, our training programmes are both of adopting the tenets of sustainability, which can in class and online, with the 2019 requirement be read on page 68. for all staff, including myself, comprised of To scale our sustainability agenda, we continue eLearning courses on sustainability, health and to engage our customers and suppliers on the safety, ethics, anti-money laundering, business More than 90% of Loans and Advances need to operate sustainably. Amongst other continuity, IT security and additional content initiatives, we held a sensitization workshop available to the job and for personal development. screened for ESG Risks. for our suppliers, training them on Sustainable The demand for new capabilities in the Development Goals (SDGs) implementation development and maintenance of systems has in their organisations and through the entire never been as high as it is today. Competition value chain. We will continue to help businesses for the scarce expertise is high yet we have act in a socially responsible way by; supporting maintained a good balance of developers who have businesses as they cut their carbon emissions delivered on the products and services enjoyed and make the transition to the green economy; within the markets we operate in. Additionally, financing innovation and developments in green we have invested in people specifically to secure technology; encouraging businesses to operate our network and platform from the now common in a way that supports local communities, respect threat of cyber-attacks. The security of our KShs. 9.9 billion paid in Corporation Tax for human rights and encourages inclusive growth. systems and network is pivotal to the protection 2018 to the Tax Regulator. I believe we are way ahead of the pack in these of customer information. This remains a top efforts. priority in our day to day operations as a single As part of this agenda, KCB has adopted the event has the potential and capacity to undo years Environmental Social and Governance (ESG) of hard work. standards and working with various partners During 2018, there were several senior trained and certified over 250 credit staff on the management changes aligned to the strategy and application of the principles and applied ESG progression of the bank. At senior management, screening to over 90% on loans. We publish a we appointed a Group Regional Businesses Sustainability Report separately and annually Director as mentioned earlier, and also the where details of our initiatives and outcomes of Director Corporate Banking. Within 2018, 155 KShs. 50 billion committed to these activities are provided. staff were promoted after demonstrating capacity entrepreneurship and small-scale to handle greater responsibilities and the desire The people that make it possible to derive the Group’s strategy. Recruitment enterprises over the next 5 years. To run the Group, we have employed 6,220 for some key positions is targeted for closure staff from different countries, background and within this year. These include the Group Human experiences. It is through the team that we are Resources Director (previously held by our Group “KCB is a firm believer in using technology to

promote sustainable development, to reduce 155 Promotions amongst our employees socioeconomic inequalities, to give everyone in the year 2018. access to digital opportunities. That is why we have made digital an integral part of our strategy to help stimulate access to credit.”

22% Return on Investment for our investors.

40 In supportingbusiness growth through this of innovations towards simplifyingyour world. the individual.Theseare thefirst ofaseries products ashave beendelivered onmobile to opportunity to score enterprises for similar for credit byowners ofbusinesses andthe The higherlimithasrevealed theappetite customer’s baseandcapacity oftheplatform. 100,000 –demonstrating thevariety of the have customers withlimits inexcess ofKShs is closer to KShs5,000 percustomer, butwe mobile lending products. Ouraverage lending you have usedor had some exposure with our based onbehaviorandpatterns. Iamsure to accurately model scores and specific limits made possible bythe useofdata scientists credit scores for customers. Thishasbeen differentiated pricinglevels andimproved Through theuseoftechnology, we have applied shareholders. while yielding positive returns to you, our the cost ofservice delivery to ourcustomers improving customer service andlowering enabled usbroaden access to financing, while launch ofanew digital platform. Thishas In 2018,ourbiggest achievement was the credit andenhance ourcustomer experience. part of ourstrategy to helpstimulate access to have made“digital first andfast” anintegral specifically financialservices. Thatiswhy we access to life changingopportunities, socioeconomic inequalitiesandgive everyone promote sustainable development, reduce I amaproponent ofusingtechnology to accessible platform. Ihave observed and banking solutionsthrough asimple and One ofmystrong beliefs isthedelivery of Fintech strategy performers across theGroup. awards ceremony to recognize the exemplary and finally concluding theyear withtheSimba forums, town hallforums andteam building sessions, women andmeninleadership Group includingbranch managerleadership with over 130staff engagements across the employee engagementpenetration to 142% and resolved. Theteam furtherincreased the case, outstanding from 2017, was approached is withthisinmindthatthelabourrelations balance ofmotivation andcommitment. It proven instrumental inmaintaining the Employee relations andengagementhave and MDKCB BankUganda. insurance Agency, MD KCB Bank South Sudan Operations, ChiefTechnology Officer, MDKCB Regional Businesses Director), Director and credit scoring. use oftechnology to address theissues ofpricing the sectors andtheentrepreneurs including the various local andinternational players to support We are committed to explore partnerships with ambitions ofeachthesecountries. is alignedto theneedto supporttheeconomic sized enterprises. Inallthemarkets, ourstrategy the region primarily driven bysmalland medium foreseeable future remain thegrowth enginesfor horticulture, manufacturing andtrade willfor the realizing these goals. Consumer, agriculture/ looking athow we can play anexpanded role in these pillars, we are rededicating ourselves to we have afootprint oneway ortheotherinall security and manufacturing. In as much as affordable housing, universal healthcare, food pillars which economic growth willhingeon: The Government ofKenya hasidentifiedfour The opportunityaheadofus total revenues from non-interest income activities. deliver our ambitious target of40% contribution of to market through alternative channels that will modes ofbusiness. Itisouringenuityandspeed returns are unlikely to allbedelivered from existing With theconstantly shiftingenvironment, future innovation. enterprises. We therefore are relentless withour the product orservice isdelivered to individualsor increasingly assignificant to thespeedwithwhich transparency andindividualcredit scores are risk parameters in pricing loan facilities. Price customers have exposure beyond thetraditional competitors thathitherto didnotexist. Our model, we are today faced withunprecedented “We are“We committedto with various localand international players and entrepreneurs to explore partnerships support theBigFour Agenda” Director Group Chief Executive Officer &Managing Joshua Oigara, CBS makes. the overall contribution andimpacttheGroup I call upon your continued supportto elevate excited atwhatthefuture holds for theGroup. shareholder, I’m not only confident but also engagement withthebrand. Asafellow thank allourstaff and customers for their customers as part of my duties: I wish to interact withnumerous staff andmetmany our customers. Ihave hadanopportunityto resources to deliver products andservices to common denominator remains thestaff using challenges and theplanswe have inplace, the Having addressed themilestones, the the increased customer basewillprovide. generate transaction revenue from synergies franchise, competitive pricingandabilityto strengthening ofthecombined entity’s deposit be enjoyed for years to come through the (NBK). Thebenefitofthesetransactions will to purchase theNationalBankofKenya assets of Imperial Bank (IR) and the offer proposals leading to thetransfer ofselected enhancing shareholder value through the The Group hasboldly madesteps towards make payments. will enhance thecapacity oftheplatform to opportunity to take thisregional. Further, we in smallloans across thecountry andthe to disburse over KShs.100billionannually lending channel hasgenerated, targeted Our prideremains thetraction themobile The closure rate ofGroup auditissuesstood at 95%in2018.

41 41 HIGHLIGHTSWHO GOVERNS US Lorem Ipsum Wanahisa

atokeo ya Benki hii kwa kiwango kikubwa ni sawa na hali ilivyokuwa kanda ya Afrika Mashariki ambapo mataifa mengi yalianza Mkuimarika tena kiuchumi na kuwa na nguvu, licha ya mazingira ya kibiashara kuwa magumu. Matokeo haya ya kuridhisha ni ishara ya muundo bora wa kibiashara ambao tumekuwa tukiutumia kuwahudumia wateja wetu. Tuna wafanyakazi wenye motisha, Bodi yenye maono na tunapokea uungwaji mkono kutoka kwako, mwenyehisa mpendwa. Unaposoma ripoti hii, utapata kwa kina hali halisi ya matokeo yetu ya kifedha. Niruhusu nikudokezee mambo makuu kuhusu matokeo haya. Tunashikilia asilimia 15% ya amana, ambazo ni pesa zilizowekwa na wateja kwenye benki sokoni. Tunashikilia pia 17% ya mikopo eneo hili. Baadhi hueleza hili kuwa somo la msingi katika sekta ya benki. Kwa kuangalia mambo ya msingi, tunasalia kuwa benki yenye nguvu Zaidi eneo hili. Tunavutia kwa wingi na kuweka pesa za wateja, jambo ambalo linatuwezesha kutoa mikopo ya bei nafuu kwa wateja pia. Si ajabu kwa hivyo kwamba mapato yetu yalisalia kuwa ya juu. Kwa mapato tulipata 20% ya mapato yoyote sokoni, na ukuaji wa 24%. Tukiuchambua mwaka 2018, sekta hii ilikumbana na changamoto nyingi. Viwango vya riba tunavyoruhusiwa kutoza vilipunguzwa mara mbili katika mwaka huu. Hii iliathiri sehemu muhimu ya mapato ya benki hii, ambayo ni mapato kutoka kwa riba. Mazingira magumu ya kibiashara pia yaliathiri biashara katika sekta nyingine, ambazo pengine mwenyewe unafanyia kazi au una hisa. Kwa mtazamo wa mfadhili, tulishuhudia biashara kadha zikiwezwa chini ya mrasimu katika mwaka huo na nyingine zikatoa tahadhari ya kupungua pakubwa kwa faida. Hii inatilia mkazo kauli yangu ya awali kwamba mazingira ya kibiashara yalikuwa magumu kweli. Lakini licha ya changamoto hizi, nina furaha kwamba wafanyakazi wetu katika maeneo tunayoendesha biashara walitafuta njia

42 Tulijumuisha Jumuiya ya Afrika Mashariki, hii zimekuwa sehemu kubwa ya mpango wetu. kampuni zetutanzu katika mataifa ya kanda Tanzania mwaka 1997.Tangu wakati huo, tulipofungua kampuni yetu tanzu ya kwanza nao kwa miongominginawanakumbuka Sehemu kubwa ya wenyehisa wetu tumekuwa Biashara ya kanda namtazamo wa kimataifa uwekezaji. matamanio yao nandoto zaozakifedha na Mwishowe, tutawasaidia watu kutimiza kanda ya Afrika Masharikikunawirikiuchumi. kuwezesha biashara kukua na mataifa ya wetu hadikwenye maeneoyenye ukuaji, Lengo letu nikuwaelekeza makusudiwateja yao. kwa kutoa hudumaambazozinakidhimahitaji wateja wetu, napiakuwavutia wengine zaidi, katika kuhakikishakwamba tunawahifadhi tumeamua nilazimatuelekeze upya juhudizetu kubwa zaidikatika kanda hii.Ndiomaana nguzo ambayo imetuwezesha kuwa Benki huduma bora kwa wateja. Wateja wetu ndio ambayo bidhaazinafanana nikwa kuangazia pekee ya kuendelea kuwepo katika biashara Kama biashara, tumegundua kwamba njia kwa kilahisakwa 17% hadiKShs3.50. hili lilituwezesha kuongezamgawo wa faida na jamboambalo naamini nilamaanasana, inahitaji njiatofauti kuishughulikia.Kwa jumla, mikubwa ambayo hailipwikwa sasanaambayo mali yetu ambacho kitashughulikia mikopo tulianzisha kitengo maalum cha kuangazia kujikwamua kwa ubora wa mikopo tuliyoitoa, katika sekta hiicha12%.Ilikuharakisha 6.9% ukilinganishanakiwango chawastani ambayo hailipwi nacho kilishuka na kufikia ya kiwango chamfumko. Kiwango chamikopo na ziliongezeka kwa kiwango kilichokuwa chini KShs 23.9bilioni.Gharama zilidhibitiwa vyema yetu baadaya kulipaushuruilipanda nakufikia yalivyokuwa mwaka huo, utaona kwamba faida kileleni. Ukitazama jinsimatokeo yetu uwezo wa Benkihiikuhakikishatunasalia kufanikisha matokeo mazurinakuimarisha Mmenipa jukumu,miminakundilangu, Shughuli zakibiashara ukuaji wa uchumi. kukua kwa kiwango sawa auhata zaidiya tulishuhudia biashara zikijikwamua nahata Inaridhisha kwamba haikuwa masikitiko kote, na namnaya kuwasaidia wateja wetu. Mpendwa Kwa Mwenyehisa Faida ya kampunibaadaya kutozwa benki Kenya zilizowekwa benkiyetu Kiwango chamikopo tunayoishikilia ya kipimochawastani sokoni cha kwa kila hisa kufikiaKShs.3.50 Kipimo chaNPLKundidhidi Kiwango chapesazilizowekwa Ongezeko lamgawo wa faida KShs. 23.9B 6.9% 17% 15% ushuru mwaka 2018 17% sokoni Kenya 12% tena wafanyakazi wetu wote kuhusukanuni CFT). Tumechukua hatua zaidi kuwakumbusha Fedha /Kukabiliana naUfadhili wa Ugaidi(AML/ kisheria wa Kukabiliana naUtakatishaji wa iliadhibiwa naserikali chiniya mfumowa Licha ya juhudizetu,Benkiya KCB Kenya nyingine. washirika wengine kimataifa, zikiwemo benki na kuimarisha sifa zetunauhusiano wetu na litakwua namanufaa kwa wateja wetu pamoja dhidi ya uhalifuwa kifedha. Tunaamini hili kuwakinga wateja wetu nasisi wenyewe Tunaendelea kuimarisha uwezo wetu wa vyema wateja wetu. fedha kwa kufuata maadiliya kuwafahamu za kukabiliana nautakatishaji naulanguzi wa yenye mtazamo wa kimataifa, tutajijengea sifa kukabiliana na uhalifuwa kifedha. Kamabenki unaotekelezwa namfumowa kifedha katika Kampuni ya KCB inatambua mchangomkubwa Kukabili uhalifu wa kifedha kwa Umojawa Ulaya na Uchina,kujiondoakwa Uingereza kutoka vya kibiashara vya hivimajuzikati ya Marekani yenye nguvukubwa kiuchumi.Mfano nivita huathiriwa pianamatukiokatika mataifa kiuchumi. Kwa pamoja,uchumiwa mataifa mwake mizozoya kisiasanamisukosuko ya zimeathirika nachangamoto nyingimiongoni zetu katika mataifa menginekadha hiibinafsi kimataifa yataathiri biashara zetu.Biashara Tunatambua kwamba matukionjeya nchina kufikia 2022. ni kuhakikishamchangohuuunafikia20% Kanda wa Kampuniambaye wajibu wake mkuu uelekezi wa Mkurugenziwa Biashara za wanaziangazia katika ngaziya nchinakwa chini hivizinafahamika nawasimamizi ya Kampuni. Sababu zamchangohuuwa kuwa chiniya 10%kwa mapato ya jumla ukuaji huumkubwa, mchangowake ulisalia mwaka baadaya mwaka. Lakinilichaya kampuni zetutanzu ilikuakwa zaidiya 65% Kufikia Desemba 2018, biashara katika za njekuhudumunchinihumo. kufanyia marekebisho sheriakuruhusubenki na mamlaka zaserikali kuhusu uwezekano wa kwa karibu mazungumzoyetu nawasimamizi kiuchumi naidadikubwa ya watu. Tunafuatilia zetu zasikuusoni,ukizingatiaukuajiwake hizi majuzi.Ethiopiainaendanavyema nandoto Sudan naEthiopiakwenye mkakati wetu mkuu

43 43 HIGHLIGHTSWHO GOVERNS US na taratibu zinazofaa kufuatwa kukitokea shughuli Kama sehemu ya ajenda hii, KCB imekumbatia za kibiashara za kutiliwa shaka. Tunaunga mkono viwango vya ubora vya Mazingira, Jamii na Usimamizi juhudi hizi zenye lengo la kuimarisha na kulinda (ESG) na kwa ushirikiano na washirika mbalimbali sekta ya kifedha katika kanda hii. tumetoa mafunzo na vyeti kwa wafanyakazi 250 wa utoaji mikopo kuhusu utekelezaji wa maadili hayo, Uendelevu kuhakikisha wanatumia ESG katika kutathmini Benki yako ilikuwa miongoni mwa kampuni za zaidi ya 90% ya mikopo. Huwa tunachapisha Ripoti kwanza kanda hii kukumbatia uendelevu kwenye ya Uendelevu kando kila mwaka, ambapo huwa shughuli zake, mwongo mmoja uliopita. Mtazamo tunaeleza kwa kina miradi yetu na matokeo yake. wetu unaangazia kuhakikisha mustakabali bora Zaidi ya 90% ya mikopo inatolewa kwa kwa vizazi vijavyo; hatuwezi kubadilisha msimamo Watu wanaofanikisha mambo kufuata vigezo vya ESG huu. Kama sehemu ya mchango wetu, tunatekeleza Ili kuendesha Benki hii, tumewaajiri wafanyakazi mchango muhimu na kuwa katika mstari wa mbele zaidi 6,200 kutoka nchi na asili mbalimbali. Ni kupitia katika Mkakati wa Maadili ya Kifedha kuhusu utoaji kungi hili ambapo tunaweza kuandikisha matokeo huduma za Benki kwa Uwajibikaji. Huu ni mkakati ya kuridhisha mwaka baada ya mwaka. Mkakati wa Umoja wa Mataifa unaolenga kuhakikisha wetu wa kuwaangazia wafanyakazi umesalia na benki zinaangazia uendelevu katika shughuli kusaidia pakubwa katika kukumbatia kwa teknolojia zake. Tunafanya kila juhudi kuhakikisha kwamba mpya. Kuhusu kuongeza ujuzi, mafunzo yetu tunapunguza uzalishaji wa gesi zinazochangia hutolewa darasani na mtandaoni. Mwaka 2019, ni ongezeko la joto duniani. Katika ripoti hii, tumeeleza hitaji kwa wafanyakazi wote, nikiwemo, kumaliza kwa kina baadhi ya shughuli tunazozifanya na kozi za mtandaoni kuhusu uendelevu, afya na Jumla ya KShs. 9.9 bilioni zililipwa na Kundi matokeo yake katika kuhakikisha uendelevu. usalama, maadili, kukabiliana na utakatishaji Ili kuendeleza ajenda yetu ya uendelevu, wa fedha, uendelevu wa biashara, usalama wa mwaka 2018 tunaendelea kuwashirikisha wateja wetu na teknolojia ya habari na mawasiliano, na mafumzo kampuni zinazotuuzia bidhaa na huduma kuhusu mengine muhimu kwa kazi ya kila mfanyakazi na haja ya kuendesha shughuli kwa njia endelevu. kwa kujiendeleza mwenyewe. Miongoni mwa mengine, tuliandaa warsha ya Kuna hitaji kubwa la uwezo mpya katika utengenezaji kuwahamasisha wanaotuuzia bidhaa na huduma na usimamizi wa mifumo mpya ya teknolojia na na kuwafunza kuhusu utekelezaji wa Malengo ya hazina data kwa sasa. Ushindani katika kupata Maendeleo Endelevu (SDGs). Tutaendelea kusaidia wataalamu wachache waliopo ni wa juu mno lakini kampuni na biashara nyingine kupunguza uzalishaji tumefanikiwa kuwafihadhi wataalamu ambao wa gesi zinazochangia ongezeko la joto duniani wameandaa na kudumisha bidhaa na huduma KShs. 50 bilioni zimeahidiwa kuendeleza na kuhamia katika ‘uchumi wa kijani’. Tutafadhili bora zinazotumiwa na wateja wetu. Kadhalika, uvumbuzi wa teknolojia za kuhifadhi mazingira, tumewekeza katika watu wa kulinda mifumo na ujasiriamali na biashara ndogo ndogo katika kuhamasisha kampuni kuhudumu katika njia mtandao wetu dhidi ya wahalifu wa mtandaoni. miaka 5 ijayo zinazosaidia jamii, kuheshimu haki za kibinadamu Usalama wa mifumo na mtandao wetu ni muhimu na kuangazia maendeleo yanayowajumuisha wote. sana katika kulinda fedha za wateja wetu. Tutalipa Ninaamini kwamba tunaongoza katika juhudi hizi. kipaumbele suala hili kwani tukio moja la uvamizi linaweza likaharibu matunda ya juhudi za miaka “KCB inaamini sana katika matumizi ya teknolojia

kuchochea maendeleo endelevu, kupunguza pengo Wafanyakazi 155 wetu walipandishwa katika uwezo wa kiuchumi na kijamii na ngazi mwaka 2018 kuhakikisha kila mtu anafikia fursa za kidijitali. Ndio maana tumefanya dijitali kuwa sehemu muhimu ya mkakati wetu wa kurahisisha kupatikana kwa mikopo.” Kiwango cha 22% cha mavuno kutoka kwa uwekezaji kwa wawekezaji wetu

44 huduma napiakuimarisha alama zauwezo wa wa ngazimbalimbalikatika kuamuagharama ya Kupitia kutumiateknolojia, tumetumiamfumo wetu. hivyo kuongezamapato kwako wewe, mwenyehisa gharama ya utoaji hudumakwa wateja wetu na utoaji huduma kwa wateja. Aidha,tumepunguza upatikanaji wa mikopo hukutukiboresha ubora wa kidijitali. Hililimetusaidiakupanuanakurahisisha uzinduzi wa mfumompya wa utoaji huduma Mwaka 2018,mafanikio yetu makuuyalikuwa wateja wanafurahia utoaji hudumawetu. kurahisisha kupatikana kwa mikopo nakuhakikisha na kwa haraka” kuwa sehemuya mkakati wetu wa kifedha. Ndio maana tumefanya “dijitali kwanza kuboresha maishayake, hasakupitiahudumaza kuhakikisha kilamtuanafikiafursa zakumsaidia pengo katika uwezo wa kiuchuminakijamii kufanikisha maendeleo endelevu, kupunguza muungaji mkono wa matumiziya teknolojia katika inayofikiwa nawengi. Nimefuatiliana mimi ni utoaji wa huduma zabenkikupitianjiarahisi na Mojawapo ya mamboninayoyathamini sanani Mkakati wa kutumiateknolojia katika kanda hii. Tuzo zaSimbaya kuwatuza wafanyakazi bora kote wenyewe. Tulihitimisha mwaka kwa sherehe ya ya kuimarisha uhusiano baina ya wafanyakazi na wanaume walio uongozini, mabaraza na hafla mameneja wa matawi, majukwaa ya wanawake mikutano 130nawafanyakazi, ikiwemo vikao vya na wafanyakazi hadi142%ambapokulikuwa na 2017 ilitatuliwa. Tuliongeza piamikutano yetu kesi katika mahakama ya leba iliyokuwepo tangu kazini. Nikwa kutiliamaananijambohiliambapo katika kuhakikishawana motishanapiawanajitolea Uhusiano na wafanyakazi umekuwa muhimu sana MD wa Benkiya KCB Uganda. KCB, MDwa Benkiya KCB BankSudanKusinina MD (MenejaMkurugenzi)wa Wakala wa Bimawa wa Biashara zaKanda),Mkurugenziwa Shughuli, (nafasi iliyoshikiliwa naMkurugenziwa Kampuni huu. HizinipamojanaMkurugenziwa Wafanyakazi nyingine muhimuinatarajiwa kukamilishwa mwaka Shughuli ya kuwatafuta watu wa kujazanafasi zaidi nahamuya kuendeleza mkakati wa Kampuni. baada ya kudhihirishauwezo wa kufanya makujumu walipandishwa ngazi na kupewa majukumu mapya Wakubwa. Katika mwaka 2018,wafanyakazi 155 na piaMkurugenziwa HudumazaBenkiWateja Mkurugenzi wa Kampuniwa Biashara zaKanda hii. Katika ngaziya wasimamizi wakuu, tulimteua na mkakati wetu nahatuazinazopigwa nabenki kwenye wasimamizi wa ngaziya juuyaliyoendana Katika mwaka huo,kulikuwa namabadiliko kadha mingi. kutimizwa kwa AjendaNneKuu” tunayofanyia biashara, mkakati wetu umewekwa kampuni ndogonazawastani. Katika mataifa yote vikuu vya ukuajiwa uchumi kanda hii, kupitiaZaidi na biashara kwa siku zijazovitakuwa vichocheo wa bidhaa, Kilimo/MboganaMatunda,viwanda zaidi katika kutimizamalengo haya. Watumiaji tunatafakari jinsiya kutekeleza mchangomuhimu kwa kiasiFulani katika kilamojaya nguzo hizi, viwanda. Ingawa badotumekuwa tukichangia afya kwa wote, kujitosheleza kwa chakula,na makao nanyumba zabeinafuu,hudumabora ya kuhakikisha ukuaji wa kiuchumi ambazo ni: Serikali ya Kenya imetaja nguzonnekuuza Fursa kuumbele yetu jumla kutoka kwa shughulizisizohusiananariba. kutimiza lengo letu lakupata 40%ya mapato ya mbadala ndioutakaotupa mapato ya kutuwezesha na kasi katika kutangaza hudumazetukupitianjia biashara zasasapekee nimdogomno.Ujuziwetu uwezekano wa mapato sikuzausonikutoka kwa Kutokana namabadiliko yanayoshuhudiwa sikuhizi, zetu katika uvumbuzi. mkopo unatolewa. Kwa hivyo, hatulegezi juhudi binafsi ni muhimusiku hizi sawa na kasi ambayo mkopo naalamazauwezo wa kukopeshwa zamtu ya mkopo. Uwazi katika kukadiria gharama ya kawaida ambayo awali ilitumiwa kukadiria gharama Wateja wetu wana mambomengikando ya hatari ya la washindani wetu ambaohawakuwepo zamani. muundo huu,leo hiitunakabiliwa na changamoto Katika kusaidiaukuajiwa biashara kupitia unaotarajiwa kurahisisha mambo. Huu nimwanzo tuwa msururuwa uvumbuzi mbalimbali kama ilivyofanyika kwa wateja binafsi. kutoa fursa ya kutoa alama zauwezo wa kampuni ya kukopa miongoni mwa wamiliki wa biashara, na mfumo wetu. Kipimochajuukimedhihirisha hamu tofauti zilizopo bainaya wateja wetu na uwezo wa uwezo wa kukopa zaidiya KShs100,000–ishara ya kinakaribia KShs5,000lakinitunawateja wenye wateja. Kiwango chetuchawastani chaukopeshaji kuweka vipimo kwa kuzingatia tabia na uwezo wa data kukadiria alamazauwezo wa kukopeshwa na kupitia kutumiateknolojia nawanasayansi wa kukopeshwa za wateja wetu. Hili limewezekana ushirika nawadau mbalimbali na wajasiriamali kusaidia “Tumejitolea kukumbatia wa kitaifa na kimataifa wa nakimataifa kitaifa Mkuu Afisa MkuuMtendaji wa KundinaMkurugenzi Joshua Oigara, CBS sana kwa kuamuakuitumiabenkiyetu. Nathamini sanauhusianowetu naasanteni wateja kwa kuendelea kufanya kazi nasi. kuwashukuru wafanyakazi wetu wote na ambayo nisehemuya kazi yangu: Ningependa kukutana nawafanyakazi nawateja wengi, na bidhaabora kwa wateja. Nilipata fursa ya kutumia rasilimali tulizonazokutoa huduma la muhimuzaidibadoniwafanyakazi wetu changamoto namipangotuliyonayo, jambo Baada ya kuangaziamafanikio makuu, kibiashara zawateja watakaoongezeka. wa kupata mapato kutoka kwa shughuliza kutoa mikopo kwa gharama nafuunauwezo fedha zilizowekwa nawateja benki,kuweza nguvu inayotokana nakuunganishwa kwa yatajivuniwa kwa miaka mingi ijayo kupitia ya Kenya (NBK).Matundaya hatuahizimbili pia pendekezo la kununua Benki ya National baadhi ya mali ya Benkiya Imperial(IR) na pendekezo la kuhamishwa kwa umiliki wa kuimarisha thamanikwa wenyehisa kupitia Kampuni hiiimechukuahatuajasirikatika malipo. tutaongeza uwezo wa hudumahiikufanikisha kueneza huduma hii kanda yote. Isitoshe, ya KShs 100B kote nchini, na kuna fursa ya imepiga. Tunalenga kutoa mikopo ya zaidi huduma yetu ya kukopesha kupitiasimu Fahari yetu imesaliakuwa hatuaambazo kukopeshwa. ya mikopo na utoaji wa alama za uwezo wa ya teknolojia kutatua masualaya gharama na wajasiriamali ikiwemo kupitiamatumizi kitaifa na kimataifa kusaidia sekta muhimu kukumbatia ushirika nawadau mbalimbaliwa husika. Tumejitolea natunajiweka sawa mahsusi kusaidiandoto zakiuchumitaifa ukaguzi wa hesabukilikuwa 95%mwaka Kiwango chakutatuliwa kwa maswali ya 2018

45 45 HIGHLIGHTSWHO GOVERNS US Executive COMMITTEE

“ It’s my primary role to guide the Group towards sustainable long-term success through the exercise of objective and informed judgement in determining strategy, and it is through having the best team that we are able to deliver what I call stellar performance consistently. ”

JOSHUA OIGARA, CBS Group Chief Executive Officer & Managing Director

46 & Regulatory Affairs Group HeadCorporate Judith SidiOdhiambo Group ChiefFinance Officer Lawrence Kimathi KCB Foundation Managing Director Jane Mwangi Chief RiskOfficer John Mukulu Group ChiefOperating Officer Samuel Makome Group Company Secretary Joseph Kania Group Regional Businesses Director Paul Russo* Director, Credit Apollo Ongara previously Group*previously Human Resource Director

47 47 HIGHLIGHTSWHO GOVERNS US Overview of Operating Environment The Group delivered a strong bottom-line performance on the back of operational efficiency supported by implementation of IFRS 9 (day one adjustments). However, top-line growth was subdued, an indication of the tough business environment we operated in across all our markets. As anticipated, the hangover of 2017’s double election in Kenya hit businesses in the first half of 2018 with tight liquidity that pushed up both cost of funds and non-performing loans. The law capping interest rates further exacerbated subdued growth by limiting our ability to pass on cost increases and risk. It was a mixed bag for our international businesses with sustained reduction in risk free interest rates in both Tanzania and Uganda, stable inflation and GDP growth in all markets except Burundi and South Sudan. Business performance Our Kenya business continued to deliver strong growth; total assets were up 12% mostly driven by loans and advances which posted an 8% growth. Customer deposits also performed well with an 8% increase over 2017. Profit after tax closed at KShs.22.4 billion reflecting a growth of 17% primarily due to a 7% reduction in costs. Benefits from our restructuring investment done in 2017 coupled with focused cost management have delivered savings that fueled profit growth. Collectively, international businesses profit before tax (PBT) grew by 64% increasing their contribution to overall Group profits to 7.3% (up from 5.6% in 2017). KCB Bank Tanzania, Uganda and Burundi had stellar performances in 2018. The fundamentals are in place for all the businesses and we expect them to continue on this growth trajectory. The Group’s total assets grew to KShs. 714.3 billion from KShs. 646.7 billion, driven by growth in the traditional loan book and mobile loans, which grew by 8% to close at KShs. 455.9 billion. Customer deposits were up KShs. 38 billion to KShs.537.5 billion Net interest income grew to KShs. 48.8 billion while non-interest income remained stable at KShs. 23 billion. Operating expenses went down to KShs. 35 billion from KShs.36.4 billion following improved efficiencies across the entire business. Our continued efforts

4848 Strategy Status Key: be seeninthesummarybelow: KCB Group well for thefuture. OurGroup performance oflast year’s strategic themescan environment. Thisrobust performance aidedinthedelivery ofkey milestones thatpositions 2018 sawusdeliver astrong performance against ourstrategy despite thetough business -2018performance somewhat atparwithstrategy target (95-100% achieved) -2018performance behind strategy target (<95%achieved) -2018performance achievement aheadofstrategy target (100%+achieved) Services Digital Financial Themes Strategic Value Shareholder Management Talent Efficiency Operational Growth Business Centricity Customer respectively. against regulatory targets of 10.5% and 14.5% 18.1% for core capital and19.5%for total capital The Group’s capital positionclosed strongly at the previous year’s KShs.19.7billion. profit by22%to KShs.24.0billioncompared to These results pusheduptheGroup’s after tax 4.8 billion. improvement innon-performing loans ofKShs. to improve asset qualitybore fruits withan Indicators Performance Key (KShs. B) Mobile LoansAdvanced Non-Funded Income % Female Employment Staff Cost-to-incomeRatio UptimeSystem Cost offunds Cost-to-Income ratio Net Interest Margin Net LoansGrowth Customer DepositGrowth Net Promoter Score Customer Satisfaction Return onEquity Return onAssets NPL Ratio Chief Finance Officer Report From TheGroup 2017 9.6% 13.9% 22.6% 3.6% 8.5% 42.0% 23.6% 99.8% 2.9% 46.8% 42% 74% 29.6 27.7% 8.9% the fragile, ongoingpeace talks inSouthSudan. in Kenya onGDPandinflationisaconcern asis do business in.Impactoftheprolonged dryspell environment willimprove across themarkets we We are cautiously optimistic that theoperating Outlook substantially by17%to KShs.3.50pershare. performance while dividendpershare improved improvement over theprevious year’s Return on average equitywas 22.0%, an 24.0% 3.8% 6.9% 43.0% 23.0% 99.9% 3.2% 45.1% 54.4 29.5% 2018 8.1% 7.3% 8.0% 43% 83% Status Strategy 2019 KEYINITIATIVES Journey Customer Simplified Efficiency Operational and fast Digital first Group ChiefFinance Officer Lawrence Kimathi strength andrecently launcheddigital platform. growth in2019anchored onourbalance sheet We expect to continue delivering goodprofit investment. therefore continue to beanarea we focus our challenge for usandfor theindustry andwill Internally we seecyber-security remaining abig Asset quality Asset Sheet anddrive Optimize Balance agenda Sustainability Business Business on Regional Maximize

49 49 HIGHLIGHTSWHO GOVERNS US Five Year Review

Consolidated statement of financial position

31 Dec 14 31 Dec 15 31 Dec 16 31 Dec 17 31 Dec 18 KShs. million KShs. million KShs. million KShs. million KShs. million Audited Audited Audited Audited Audited Assets Government and other securities 97,198 96,948 102,470 109,737 120,070 Loans and advances to customers (net) 283,732 345,969 385,745 422,685 455,880 Property and equipment 8,838 9,028 9,373 10,454 11,007 Other assets 100,570 106,149 97,652 103,792 127,356 Total Assets 490,338 558,094 595,240 646,668 714,313

Liabilities Customer Deposits 377,272 424,391 448,174 499,549 537,460 Lines of Credit 27,030 43,268 36,105 25,934 42,552 Other Liabilities 10,402 9,181 14,395 15,220 20,640 Total Liabilities 414,704 476,840 498,674 540,703 600,652 Total Equity 75,634 81,254 96,566 105,965 113,661 TOTAL LIABILITIES AND EQUITY 490,338 558,094 595,240 646,668 714,313

Consolidated statement of profit and loss

31 Dec 14 31 Dec 15 31 Dec 16 31 Dec 17 31 Dec 18 KShs. million KShs. million KShs. million KShs. million KShs. million Audited Audited Audited Audited Audited

Interest Income 47,478 56,443 62,806 63,673 66,280 Interest Expense (11,527) (17,148) (15,779) (15,288) (17,450) Net Interest Income 35,951 39,295 47,027 48,385 48,830 Non-Interest Income 19,233 19,732 22,449 23,000 22,973 Operating Income 55,184 59,027 69,476 71,385 71,803 Operating Expenses (28,308) (30,310) (33,104) (34,996) (34,698) Impairment on Loans and Advances (3,089) (2,179) (3,823) (5,914) (2,944) Total Expenses (31,397) (32,489) (36,927) (40,910) (37,642) Profit Before Tax and Loss on Monetary Position 23,787 26,538 32,549 30,475 34,161 Loss on Monetary Position - - (3,458) (1,361) (302) Profit Before Tax and Loss on Monetary Position 23,787 26,538 29,091 29,114 33,859 Income Tax Expense (6,938) (6,915) (9,368) (9,410) (9,864) Profit for the Year 16,849 19,623 19,723 19,704 23,995

5050 Wealth Created Interest paidonborrowings Cost ofOtherServices Interest Paid to Depositors and sion andOtherRevenues Interest Income,Fees,Commis- VALUE ADDED Other Benefits Employees-Salaries, Wages and Distribution ofWealth Government-Tax Shareholder's Dividends -Retained Earnings Business Growth: Retention to supportfuture -Depreciation andAmortization Social Capital-KCB Foundation Wealth Distributed revenues with KShs.71.8billionin total Top amongbanksintheregion Revenue cost efficiencies Digital Financial Services and net income through growth in Achieved KShs.24.0billionin Profitability Key Facts Value AddedStatement East Africa’s No.1Bankinterms of: 40,370 13,994 10,798 KShs. million 6,939 6,050 2,388 (25,447) 201 40,370 66,771 2014 (894) 100.0% 34.7% 17.2% 15.0% 26.7% 5.9% 0.5% regional banks. assets, largest amongst KShs. 714.3billionintotal Total Assets 44,522 15,311 13,573 KShs. million 6,915 6,050 2,435 238 (29,801) (1,852) 44,522 76,175 2015 100.0% 34.4% 15.5% 13.6% 30.5% 5.5% 0.5% 49,504 17,719 10,525 KShs. million 9,369 9,198 2,428 265 (34,454) (1,298) 49,504 85,256 2016 100.0% 35.8% 18.9% 18.6% 21.3% 4.9% 0.5% distribution intheregion. across theregion, greatest Network of258branches Branches the region. Customer Deposits,highest in Mobilized KShs.537.5billion Total Deposits 51,342 19,146 10,506 KShs. million 9,410 9,198 2,791 291 (33,205) (2,126) 51,342 86,673 2017 37.3% 18.3% 17.9% 20.5% 100% 5.4% 0.6% 17,007 54,351 10,731 13,264 KShs. million 9,864 3,146 339 (32,916) 54,351 (1,986) 89,253 2018 31.3% 18.1% 19.7% 24.4% 100% 5.8% 0.7%

51 51 HIGHLIGHTSWHO GOVERNS US A Review of Our Strategic Themes

Our 2018 business strategy was anchored on six themes namely – building a customer centric organization, exponential growth in digital financial services, driving operational efficiency, grow business in key customer segments and unlocking the youth and women agenda, effective talent management and drive shareholder value. The Group has further aligned these business initiatives with our four sustainability pillars– social, environmental, economic and financial stability. We also embarked on mainstreaming our adopted eight Sustainable Development Goals (SDGs) into our strategic themes and monitored these for progress in line with the Global Reporting Initiative (GRI) guidelines. During the year, we also kicked off the process of adopting the six new UNEP FI – Principles for Responsible Banking, joining 28 other banks around the globe in redefining and affirming the banking industry's role and responsibilities in shaping and financing a sustainable future.

1. Building a Customer Centric Organization that exceptional customer experience starts instant and seamless experience just as with preparing employees for the task. We have they would find if they stepped into any of At KCB Group, our desire is to be the provider of subsequently trained our employees and instilled our branches. We are empowering people choice for financial solutions to our customers in them a culture where they are always ready to by enabling access and providing financial to deepen financial inclusion. Due to the provide outstanding service to our customers. education through various channels. ubiquitous nature of the service banks provide, our commitment is to meet customers’ Our employees know that whether they are directly Considering that today’s customer is more expectations by providing a differentiated, or indirectly in contact with the customer or work exposed and enlightened, we work to make affordable and accessible service. in the back office, they have a stake in customer every touchpoint with the Group end with engagement and customer management. To do this, we demystify banking by integrating technology into our operations thereby easing That has been the essence of the training and the customer journey and reducing the pain the culture change that we are driving within the points. This brings a whole new self-serve organization. sense to banking. Our 360-degree view of The introduction of the Electronic Customer customers and their needs enables us to offer Relationship Management system (eCRM) has personalised experience. This has helped us created a central repository that allows teams grow the business and become a pioneer in across the business to have a view of customer many customer offerings. concerns for tracking and resolution. In addition, According to a 2018 M-Survey Customer we have other channels for interacting with our Loyalty Industry Benchmark Report, KCB customers including a 24-hour call center and social Group topped the financial sector as the best media platforms. As a result, staff are ultimately in customer service, driven by the Bank’s responsible for driving customer satisfaction. uptake of social media in customer experience We are simplifying our customers’ world through The bank’s Net Promoter Score for management. A Hamburg-based firm Digital digitization to provide a similar or better, personal, Scouting ranked KCB Group as one of the customer excellence peaked at world’s top lenders in digital banking. KCB 43%, against an industry average Group was listed position 13 in the Top 100 of 21% and against our own Digital Banks, securing 89 Power Score out of a possible 100. internal – and quite ambitious – Over the past few years, KCB Group has target of 45%. transformed from a product centric to a customer centric organization which has a positive outcome. This ensures that the helped us entrench enduring customer loyalty. customers become our brand ambassadors, Today the Group boasts of over 17 million because we believe there is a nexus between customers across East Africa with a growing exceptional customer experience and brand youthful market segment. health. We look at customer experience as a long- The Net Promoter Score (NPS) is a global term strategy and therefore seek to have a We receive approximately 17,000 calls business advocacy indicator that we have long-term engagement with all our customers. used to benchmark ourselves on customer We offer products and services which suits our a day at the Call Center which is a major excellence. In the period under review, KCB customers in their life’s journey. point of interaction with our customers. Group’s NPS was 43% well above the industry Apart from the Group’s values that align with average of 21%. great customer experience, we acknowledge

5252 upgrading andinnovation. of economic activitythrough technological We believe thiswillalsolead to higherlevels M-PESA, InuaJamiiandKCB 2jiajiriprogramme. on theshared value we create through KCB a socialreturn oninvestment study focusing to the stakeholders, we continuously carry out to evaluate theimpactofourbusiness initiatives providing uniquepropositions to them.Inorder customers better sothatwe can continue (AI) to create insights andunderstand our leveraging bigdata andArtificialIntelligence reliability. Goingforward ourfocus willbeon to 99.9% in2018effectively guaranteeing resulted inanimprovement insystem uptime Our continuous investment intechnology has enhance transparency andtrust withcustomers. protocols for thebenefitofconsumers andto in-market andglobal consumer protection such, KCB Group iscompliant onallexisting promote consumer rights across markets. As The Group iscognizant oftheneedto proactively customer journeys. The4Esare: we have adopted the4E’s modelofcustomer experience excellence, whichdrives ouroffering towards simplified We strive to offer delightful and memorable experiences to our customers at our various touch points and as such, We willcontinuesensitizingtheemployees onthe4Esandalsocreate aprogram where wealsocelebrate thosewhooffer tocustomers. excellent service increase profitability. the Group tomodernizecustomerinteractions drivingchanneloptimization,improve by customerengagement, andidentifytherightcustomers to These 4Esare criticalinourcustomerexperience journeyandwewillcontinuetoanchorourinteractions withcustomers basedonthismodel.Itallows those unresolved beingreactivated for proper qualityclosure. As partoftheCustomerExperiencecompliancechecks takingplacethroughout theyear, wewillbefocusing onqualityofcaseresolution oneCRM,with customer experience/emotion. exerteddiminishesthe increased e ort our customersas experience ise ortless their expectations.We strive to ensure that interest aswe seekto deliver at heart on Efforts - Emotions – customer retention. experiences play adecisive role in promoters andthesepositive customer home. Positive experiences leadto more real that back product thecustomer carries any customer interaction, emotionisthe This ishaving thecustomer’s At every touch At point, upon every Speed Efficiency that cometogether todelightcustomers. TheseInclude: as well asoverall customer which service, isdriven by various components According tomSurvey, KCB Bankcustomers citefriendlierrates andcharges 4Es Accessibility Rates they expect fromthey expect us. customers, we have to anticipate what be positive. To our e ectively serve customer experiences /emotionsshall areand whenexpectations exceeded, ofthecustomerintegral emotion part Expectations – responsive o erings. inourproduct agile inourdelivery, whilebeing to thecustomer. We strive to befastand getting tasksdonewhichisofimportance Executions – Mobile/ Internet Banking These are an These are theways of Customer Service Loans Staff Source:

53 53 HIGHLIGHTSA REVIEW OF OUR STRATEGIC THEMES A Review of Our Strategic Themes

2. Exponential Growth in Digital Financial Services “Enhanced digital and The past decade has been characterized by digital transformation, and in the banking IT capabilities has sector particularly, the growth has been significant impacting on customer experience enabled the Group to and access to financial products and services. 717,342 Customers today use various digital devices automate processes to transact – from opening accounts, making Elderly persons, orphans and payments, borrowing and saving – all without disabled are served through use of and boost efficiency ever setting foot in the branch. The potential digital channels under the Inua Jamii for digital technology to reach and meet the financial needs of consumers based on their programme. thereby reducing existing circumstances and aspirations is greater than ever before. costs.”

“ To meet current From a sustainability perspective, the enhanced digital and IT capabilities has enabled the Group to automate processes and needs and anticipate boost efficiency thereby reducing costs. This has helped the Group lower its environmental future trends of our footprint as a result of reduced paper consumption and fewer branches. customers, we are To mitigate the inherent risks from digital innovation among them, malware, phishing developing innovative and scamming, the Group has put in place measures to safeguard our operations. We have tightened our risk management products and services framework and invested in staff training to 98.2% proactively handle the emerging threats. aimed at simplifying Mobile loans repayment rate We believe this platform is the right response to digital disruptions that will enable us to roll the customers out new and targeted products while growing banking journey.” our market share in the digital payments. For the past three years, approximately 30% To meet current needs and anticipate future of the Group’s investment in technology has trends of our customers, we are developing been channeled towards the development and innovative products and services aimed at implementation of a Financial Technology (Fintech) simplifying the customers banking journey. platform, which was rolled out in September 2018. We continually seek partnerships to build The proposition brings agility and efficiency in our on this proposition, effectively allowing us to financial offering to meet the quickly evolving set of provide banking services to Micro, Small and customer expectations. Medium Enterprises (MSMEs), unbanked and The performance of our mobile banking products underserved individuals. As a result, we have has grown in transaction numbers and volumes been able to, among others, serve 717,342 with loans of over KShs.54 billion in 2018. After elderly persons, orphans and disabled through the launch of the platform, our monthly volumes use of digital channels under the Inua Jamii grew substantially peaking at KShs.10.1 billion in programme. This is a state-run social welfare December from a low of KShs.2.9 billion in February. programme where the Bank disburses funds Majority of these are micro-loans averaging on behalf of the government. Additionally, the KShs.5,000. The repayment rate for the mobile Bank’s MobiGrow programme continues to loans stands at 98.2%. This platform anchors KCB post impressive impact on financial inclusion Mobi and KCB M-PESA that have driven financial by boosting credit access to farmers in arid and inclusion by providing banking services to hitherto semi-arid areas in Kenya and Rwanda. underserved populations.

5454 Deposits Banking Agency Advanced Loans Mobile KShs. 149,068,732 every 24 hours billion KShs. 2.9 February billion KShs. 9.0 54,410,087,538 KShs. MOBILE L 2014 In 2018-10,700,632 Per hour-1,222 Per day-29,317 Mobile loans Number of Per min-20 O ANS AD V ANCED KShs. 6,211,197 every hour 2018 -1,184,023 2017- 763,084 2016 -351,259 downloads Bill Payment, *Account opening, cards and fundstransfer KCB App mini-statement, load Balance Enquiry, KShs. 5,084.8 borrowed onmobile Average amountofloan KShs. 103,519 every minute Transaction Types Cash Deposit- *Others– School Fees– Cash Withdrawal– billion KShs. 10.1 billion KShs. 153.3 December 2018 Agency 8.9% 12.1% 64.6% 14.4%

55 55 HIGHLIGHTSA REVIEW OF OUR STRATEGIC THEMES A Review of Our Strategic Themes

3. Driving Operational Efficiency ago, KCB Group has continuously improved In the wake of digital disruption, increased its efficiency in power, water, paper and fuel corporate conduct scrutiny, tighter regulatory usage, bringing down resource use and costs. environment and a challenging business In 2018, the Group’s carbon footprint – fuel and environment, the need for efficiency has power consumption— declined by 23% with become ever more important. We are a target to be a carbon neutral bank by 2028. therefore continually improving our processes, We are continually redefining our portfolio upskilling staff and harnessing systems to and expanding our products to incorporate meet customer expectations and reduce the solutions that address climate change related cost of banking. risks. KCB Group is working with suppliers to further instill responsible production During the year under review, the Group and consumption in their operations as a updated Credit Quest – an end-to-end solution prerequisite for working with us. for managing, reviewing and analyzing credit applications – that speeds up loan processing As a result of our focus in driving up operational and provides better tracking and analysis 68 efficiency, the Group’s cost-to-income ratio has of customer credit history. Additionally, it Intelligent ATMs rolled out in Kenya. improved. In 2018, it stood at 48.3% compared provides for faster decision making, annual to 51.0% in 2017 credit renewals and performance of periodic Going forward, we will align the drive for credit reviews. operational efficiency with our revenue goals We also enhanced our procure-to-pay (P2P) to deliver value to customers. As customers process to speed up the procurement cycle, migrate to digital platforms, guaranteeing from the onboarding of new suppliers, service security of transactions and system availability delivery, and payment of suppliers. Further, on all platforms will be core in delivery of we appraised a majority of our suppliers as value. We will continue managing our risks part of our annual performance management and adhering to all compliance requirements. exercise meant to improve turn-around time. The Group also rolled out 68 intelligent ATMs (Recyclers and Depositors) in Kenya. These 2018 ATMs allow customers to deposit cash into Cost to Income 48.3% their accounts with real time credits. During Ratio the year, KShs.22.5 billion was deposited 2017 by customers through these ATMs. Agency KShs.22.5 billion 270bps banking continues to be a big driver of our 51.0% non-branch business. In 2018, customers Deposited through deposited KShs.153 billion via our agency intelligent ATMs. network compared KShs.9 billion four years ago. As stated earlier, the Group strives to see The Group also invested in initiatives to the realization of financial capital through enhance system security to guarantee conversion to other forms of capital. Thus, integrity, availability, and confidentiality of our this realization is reliant on the deployment platforms thereby leading to a reduction in the Water and flow of financial capital to allow resources threat of system breach. We implemented a towards it. Operational efficiency drives customer data and privacy model where staff 20.0% the allocation of resources and informs the can only access information they need when Fuel effectiveness of the systems, structures upon serving customers. The Group monitors all Resource which we run the bank, including information IT systems real-time and conducts random 29.0% technology software, systems and structures. Usage The Group’s efficiency is key to sustainable quality checks to ensure consistent service Paper and system integrity. business growth in two facets: firstly, the 17.3% 12.0% Group’s flexibility and resilience in the market Employees remain the biggest drivers of is enabled by the efficient use of manufactured efficiency in our business. As such, we Electricity capital, allowing it to respond to societal needs, continued to invest in programs aimed at 13.2% be innovative, and efficiently deliver new enhancing the skillset across the Group products and services to the market. Secondly, through training and retooling. manufactured capital and technology can The drive towards a more efficient Bank is reduce resource use, and system downtime, in line with our sustainability agenda. Since thus enhancing both operational and cost the launch of our “Green Agenda” 10 years efficiencies, ensuring sustainable growth.

5656 Distribution ofworkthetop100suppliers Corporate 52% SME 36% Foreign 12% 2017 Corporate 52% SME 36% Foreign 12% 2017 Distribution ofworkthetop100suppliers retail andcredit divisions. capacity building for staff inthecorporate, screening andreporting, we conducted impact risks. To improve onthequalityof Due Diligence (ESDD)to abate theclimate KShs.126.7 billionfor Environmental, Social In 2018,we successfully screened loans worth responsibility inshapingasustainable future. to redefine thebankingindustry’s role and and Accountability andtransparency—seek stakeholders, governance andtarget setting, alignment, impact,customers andclients, for Responsible Banking.Theprinciples— banks inadoptingthesixUNEPFIPrinciples world, KCB Group joined28otherglobal To further bolster the push for a sustainable available onthewebsite. effectiveness and efficiency. The report is on three data points—appropriateness, to measure the achievement of social impact three programmes. Thisenables stakeholders financial andnon-financialoutcomes ofthe true value report attaches avalue onboth Inua Jamii,andKCB 2jiajiriprogramme. The social investments, focusing onKCB M-PESA, on amission to measure the true value of our As acontinuous driver ofchange,we embarked fora andthecarbon neutrality assessment. supplier engagements, global engagement and environmental due diligence for SMEs, social return on investment study, social These includestaff awareness programmes, agenda into theday-to-day business activities. carried out to internalize the sustainability In thepast year various initiatives were eight SDGsadopted bytheGroup. mainstreaming andoperationalization of the KCB Group strategy. This is exemplified by value agendaforms anintegral partofthe term profits, thesustainability andshared value, as opposed to a sole focus on short In our bid to create long term shareholder 4. DrivingShareholder Value SME 37% Foreign 16% SME 37% Foreign 16% 2018 2018 makes reference to thegreen agendaandgreen corporate andSME.Moreover, thenew policy purchases, youth andwomen inbusiness allocation, out categories such as local and international to bring inequitable allocation. Thishasmapped suppliers, theGroup hasadopted anew policymeant them better. Indistributing work andvalue to the feedback from the partners to enable us serve made sofar. Theforums are alsousedto tap create awareness on sustainability and progress department, we hosted suppliers’ conferences to In thecourse oftheyear, through ourprocurement Corporate 47% “As acontinuousdriver of KShs. 126.7billionthevalue ofloansscreened for Environmental, SocialDueDiligence (ESDD) a missiontomeasure the change, we embarked on true value ofoursocial Corporate 47% investments, focusing Jamii, andKCB 2jiajiri on KCBInua M-PESA, to abatetheclimateimpactrisks. programme. 2017 Distribution ofthevaluework Corporate 52% SME 36% Foreign 12% 2017 Distribution ofthevaluework Corporate 52% SME 36% Foreign 12% SME 30% SME 30% Foreign 12% system. that facilitate andenhance ahealthy financial strengthening ofthesystems andprocesses of thebiggest regional bankwe supportthe to theGroup CodeofEthical Conduct.Asone all employees andservice providers to adhere business practice attheworkplace. Itrequires to allforms ofcorruption, briberyandunethical procurement. TheGroup hasazero tolerance Foreign 12% 6 5 4 3 2 1 The sixUNEPFIPrinciplesfor Responsible the SDGs,P Align ourbusinessstr ALIG negative impacts,andourcontributiontosociety’sgoals Commit totransparencyandaccountabilityforourpositive A TRANSP frameworks shared prosperityforcurrentandfuturegenerationsother Work responsiblywithourclientsandcustomerstocreate CLIE achieve society’sgoals Consult, engageandpartnerwithrelevantstakeholdersto STAKEHOLDERS our negativeimpacts Continuously increaseourpositiveimpactswhilereducing IMP S targets forourmostsignificantimpacts Implement commitmentsthrougheffectivegovernanceandsetting G 2018 CCOUN E O T V A T N ERN NME 2018 aris ClimateAgr C ING T T S &CUST A Banking. T ategy withsociety ANCE N ABILI RENCY & T eement andotherfr & T ’ s goalsasexpr

Y OMERS T Corporate 58% A ameworks RGE Corporate 58% essed in T

57 57 HIGHLIGHTSA REVIEW OF OUR STRATEGIC THEMES A Review of Our Strategic Themes

5. Business Growth the grooming of the next generation of agricultural The Group instituted definitive measures “The international entrepreneurs. designed to drive the business forward while These accounts are fully mobile meaning that all a maintaining the prudent fundamentals that business was on a farmer needs to open and operate an account is a have ensured growth is anchored on a solid mobile phone. The account allows farmers to grow foundation. These overarching measures their savings, withdraw and transfer cash and also have had a positive effect on the bottom line resurgence, significantly access affordable loans. and have helped the Group ride out the macro So far, the Group has opened 65,429 accounts valued environment slowdown that has dogged the growing its contribution at KShs.80.8 million through MobiGrow. region over the past couple of years. In conjunction with other partners, KCB Bank Overall, the Group’s corporate and retail to the Group’s Kenya has rolled out an overdraft facility for traders franchises continued to post impressive dubbed ‘Jaza Duka’. This product— which has so returns, helping the Group to ring fence performance.” far signed up 30,000 storekeepers— allows them its market share. The performance was underpinned by a strong human resource base, on the back of higher customer numbers, salaried robust risk management, effective compliance accounts and optimized value chain. and governance framework and sustainable shared value creation. The Kenyan business remains the strongest contributor to the Group’s performance despite the interest rate cap that constrained lending to “The performance some segments of the economy. The international business was on a resurgence, significantly growing its contribution to the Group’s performance. Profit was underpinned before tax for the international subsidiaries grew So far, the bank has opened 65,429 accounts 64%, with a 7.3% contribution to overall Group by a strong human profits, up from 5.6% in 2017. valued at KShs.80.8 million through MobiGro. The Bank deepened its investments in supporting resource base, robust East Africa’s economic growth agenda, with specific to stock goods on credit from the Bank based on a focus on key sectors such as infrastructure, credit score derived from inventory turnover. risk management, hospitality, manufacturing, agriculture, healthcare, housing, transport and communication. Women Segment effective compliance Under our corporate banking arm, the Bank has not In the year under review, the retail business took only financed big economic projects but also ensured a special focus on increasing credit to women that they are duly screened for environmental and alongside providing technical and non-financial and governance social issues under our sustainability framework. support. KCB Bank Kenya expanded the accessibility This has seen the Group take a leadership role in of this product from 5 branches to 23 branches framework and increasing its green lending portfolio, targeted to countrywide resulting in deposit mobilization of grow 5% annually. KShs.3.16 billion and a loan book of KShs.5.16 billion. The repayment rate is 100%. This success sustainable shared MobiGro is attributed to financial literacy, capacity building Targeting two specific production areas - and exposure to other markets. The programme is value creation.” pastoralists in arid and semi-arid areas (ASALs) anchored within the Group’s sustainability agenda and smallholder crop and dairy farmers in high potential value chains - the programme prioritizes The Group’s loan book grew from KShs.422.7 billion in 2017 to KShs.455.9 billion this year “The women proposition driven by a higher uptake in the agriculture, manufacturing, household lending, and trade sectors. This was partly supported by 84% has led to deposit growth in mobile lending, stamping the bank’s commitment to deepen financial inclusion. mobilization of KShs.3.16 The stock of non-performing loans declined by KShs.4.8 billion improving the non- billion and a loan book performing loan ratio to 6.9% against 8.5% in 2017 and the industry average of 12%. We MobiGro programme continues to post of KShs.5.16 billion. were proactive in instituting stricter controls impressive impact on financial inclusion by on the management of the loan book for both new and existing customers. boosting credit access to farmers in Arid and The repayment rate is Deposits grew by 8.0% to KShs.537.5 billion Semi-Arid areas in Kenya and Rwanda. 100%.”

5858 billion tobeextended to MSMEsinthe next under review, KCB BankKenya through affordable housingsolutions.Intheperiod continued to build its capacity indelivering In thehousingsector, KCB BankKenya Mortgage wealth products thatfocus oncapital markets. new frontiers through digitization,creation of bond market. Further, thebusiness willtap into bring backinvestor confidence incorporate for transaction advisoryasthisisexpected to presents KCB Capital withnew opportunities The emerging green bondsmarket inKenya projects across East Africa. restructuring andadvisoryonstate funded advisory front, emanatingfrom corporate debt market and increased opportunities in the prospects from improved activityintheequities Going forward, KCB Capital foresees better market. the Group for abiggerslice ofthefast growing the brokerage andadvisoryspace, positioning KCB Capital continued to strengthen its play in performing African currency intheyear. to theUSdollarin2018andwas thebest subsidiary. TheKenya Shillinggained1.4% opportunities for KCB Capital, aKCB Group resilient during the year, offering business East Africa’s money andcapital markets were KCB Capital be extended to MSMEsinthenext five years. The Group hascommitted KShs.50billionto rates. able to access credit facilities at concessionary billion .Asaresult, start-ups enterprises are The Group’s MSMEloan bookstood atKShs.40 is oneofthekey drivers ofeconomic growth. region inlightoftherealization thatthesector Small and Medium Enterprises across the The Group alsoincreased its focus onMicro, SME groups. sustaining income growth to thevulnerable which focusses on reducing inequality and committed KShs.50 “The Bank has “The five years.” is ameansto de-risktheportfolio. has distinct commercial andsocialadvantages and regulatory environment asgreen building designs building designs aswell assupportingtheenabling continuously seeks opportunitiesto finance green Across its real estate and mortgage portfolio KCB application andappraisal process. digitising its mortgage operations to simplifythe and affordable housing.TheBankisalsolooking at is in line with the Bank’s commitment to drive access development of suburban and social amenities. This medium-to-low income housingmarket and opportunities in serving the underdeveloped Going forward, theBankseessignificant under themortgage portfolio. resulted ina14%increase intheprofit before tax increasing thevolume oftheloan bookby3%.This deposits compared to the previous year, while also The mortgage business mobilized42%more lending to themarket. of addressing affordability andfixed rate mortgage liquidity to primarymortgage lenders withtheaim state runagencyismandated to offer long term Mortgage Refinancing Company(KMRC). The expressed ashareholding interest intheKenya quality andaffordable houses.TheBankhasalso government agenciesto meetthedemandfor stakeholders inthebuilding sector largely its mortgages business partnered withkey the African Interest-free Banking&Finance Awards. the ‘Best African Retail IslamicBanking’category at Islamic finance inKenya, KCB Sahlemerged tops in In recognition of our contribution to the growth of during theyear. posted a32%profit growth to KShs.500million With anasset baseofKShs.3billion,Sahlbanking indicators. double digitgrowth year-on-year inallkey financial banking. TheIslamicbankingproposition achieved a 2018 marked thefourth year ofoperations for Sahl S AHL Banking Customers Total SAHL Loan book SAHL Banking 19% 15% 28,374 23,884 2017 2018 KShs.2.8B KShs.2.4B 2017 2018 Developers Club. session, mediafora, Biashara Cluband premium corporate banking engagement Bank runstheKCB Power Talks, aquarterly sectors. Understakeholder engagements, the general sponsorships cuttingthrough different Den that is now onits fourth edition and brand value include the business show Lions’ athletics. Otherinitiatives aimedatenhancing golf, rugby, volleyball, chess, motorsports and competitions across disciplines—football, to compete inlocal, regional andinternational develop andnurture acritical mass oftalent deepened its sponsorships towards sports to thought leadership. Over theyear, KCB Group sponsorships, stakeholder engagements and investments to boost brand value through the organization hasbeenmakingtargeted awareness andfamiliarity. To build this, trust, believability, favourability, advocacy, to build a strong brand that isanchored on sustainable business growth, there isneed KCB Group recognizes thatto achieve Brand Value visibility. demand driven areas, to enhance access and centres willbeopenedin2019thespecific As partofourgrowth agendafour new Sahl invested by theLionssinceshow KShs. 79million,amountinvested in KShs. 372million,total amount started. KShs. Season 3

59 59 HIGHLIGHTSA REVIEW OF OUR STRATEGIC THEMES A Review of Our Strategic Themes

6. Effective Talent Management KCB Group is a firm believer in our people, who have been instrumental to the success of the business over the years. The acquisition, onboarding, development, succession and compensation of employees form an integral part of our human capital strategy and future- proofs the business. For the past year, we rolled out a management trainee programme for upskilling at least 50 staff from across the Group and preparing them for future leadership. We also continued with an annual leadership development training for branch managers and other mid-level managers. Additionally, KCB Group carried out a senior level leadership development programme for the executive committee members, covering areas such as sustainability, business continuity and risk management. To complement classroom trainings, all employees were required to undertake mandatory online courses on Sustainability, Health & Safety, Ethics, IT Security, Anti-Money The KCB UN Gigiri Branch receiving the prize for Best Performing Branch in Kenya under the Large Branches Category at the 2018 KCB Simba Awards. Laundering and HR Policies. In 2018, the average learner days target was 5 days and we manged to achieve 7.1 days, primarily driven KCB Group continued to improve recognized for her long service award, by the increased uptake of the e-learning its employee proposition for both having served in the organization for platform from 15% to 100% within the year. “KCB Group unionisable and non-unionisable 42 years. To entrench our subsidiary integration model, staff. During the year, we Further, to buttress staff engagements, we enhanced cross border staff exchange has achieved enhanced engagements with the the Group CEO and MD as well as the programmes during the year, with several unionisable staff over a number senior management regularly engage senior staff members moving to new stations its target of of outstanding issues which were staff through various platforms like across the borders in the areas of Credit, Risk, resolved following a year-long the KCB Chat, KCB Cascade Café and Retail, IT and HR. having 50% court dispute. Stategy Cascade sessions to better In line with the Sustainability agenda on The Group Staff Recognition understand their expectations and diversity within our workforce, KCB Group has women in Scheme – the Simba Awards also receive feedback. achieved its target of having 50% women in – remains a central cog in The Group believes in having a healthy managerial positions ahead of the 2020 goal. staff motivation by rewarding workforce to drive productivity. As This is attributed to the Group’s deliberate managerial employees for exemplary such, the Group continually enhances investment in the Women in Leadership performance. In 2018, the staff its health benefits in the out-patient Network (WILN) and the Men’s Forum positions recognition panel reviewed 839 and in-patient packages. Additionally, awareness sessions. nominations across the Group the Group carried out an annual ahead of its out of which the panel identified medical check-up for all staff and 22 individuals and 8 teams as has rolled out a robust wellness 26% 2020 goal.“ outstanding. One individual was programme meant to reduce staff exposure to lifestyle diseases and Female composition in senior management other complications. Some of the against a target of 33% by 2020. initiatives under this programme are Chronic Disease Programme, The focus is now on senior management roles KCB Clinic, KCB fitness Centre, KCB currently at 26% against a target of 33% by Nest (mother-child room), employee 2020. Subsequently in acknowledging the 75% of staff are aged less than assistance programme and health youth population, the Bank is deliberate in education. filling new positions to at least 15% of under 40 years 30 population. KCB Group’s compensation offering is in the 75th percentile in Kenya’s

6060 Awards. Noel Wamai (right)receives awards for UnsungHero andLongest Servingemployee atthe2018KCB Simba taken Leave Days Number of Average of Interns Number Total Days taken Sick Off Number of Average staff Total 195 2017 1.53 2017 18.6 2017 6,483 2017 199 1.65 19.1 6,220 2018 2018 2018 2018 Staff CosttoIncomeRatio % Exits Number of Total of Hires Number Total 57.0% Employee Distribution 26.90% 2017 Male 428 2017 86 2017 179 58 43.0% 2018 2018 23.70% 2018 Female and service providers. and harassment related to staff ethics andintegrity, disciplinary address various issues including place afeedback mechanismto the organisation, theGroup hasin practice andtransparency within In compliance withglobal best employees. to improve productivity ofour a goodworking environment Additionally, we aim at providing growth agenda. the righttalent mixto drive its organisation to attract andretain Labour market, enablingthe Million) (KShs. per staff Revenue Million) (KShs. per staff Cost South Sudan7yrs 3.8yrsUganda Rwanda 5.2yrs Tanzania 5.5yrs Burundi 3.24yrs Kenya Average Tenure (AllStaff) 8.7yrs Group to achieve its strategic goals. ensure our workforce enables the the employee value proposition to and we willcontinue to develop Our people are core to ourstrategy value offraud incidences. posted thelowest numberand and are happyto report that2018 maintain zero tolerance to fraud across theGroup. We continue to is standardization andconsistency strategy for theyear andthatthere that allemployees understand the As partofthisexercise, we ensure be alignedto thebusiness strategy. important for allstaff members to To move theGroup forward, itis 2,953 2017 11,011 2017 2,734 11,544 2018 2018

61 61 HIGHLIGHTSA REVIEW OF OUR STRATEGIC THEMES KCB Foundation

A Decade of KCB Foundation

ver the last 10 years, the KCB Foundation will get opportunities to open businesses under the in Rwanda. The Foundation through KCB Bank Rwanda has moved from doing mere philanthropy, brands of the four companies while leveraging on and the Rwanda National Youth Council launched a Owhere the focus was on relief, into shared the strong brand identity and the standards already partnership in April 2018 to sponsor the youth for a value, which is a business management strategy established. The Foundation will provide business six-month vocational skills training to prepare them focused on solving societal challenges. development services to support the 2jiajiri for self-employment. The graduands were trained on beneficiaries into developing thriving enterprises. Information and Communications Technology, Culinary Today, 80 percent of the Foundation’s annual The franchising idea rose out of the challenges Art and Domestic Electrical Installation at Integrated budget goes to shared value programmes, 15 most 2jiajiri trainees face with regard to salon Polytechnic Regional Centres in Kigali, Ngoma and percent to CSR and 5 percent to philanthropy. The management competencies and acquisition of Huye. Foundation’s philanthropic work is done when supplies and equipment. there is a crisis and immediate relief is needed. In Tanzania, over 1,500 women have benefited from In Mifugo Ni Mali, the big ticket achievement for the 2jiajiri women empowerment programme which The main focus of our CSR initiatives is the high 2018 was the Radio Frequency Identification Device addresses challenges women face in the course of school scholarship programme, which supports (RFID), which is used to tag animals, and which doing business as well as better their entrepreneurship 240 students every year and pays for their four comes in handy in the Amaya Triangle – Baringo, skills, capacity and opportunities. years of secondary school. A total of 16 percent of Isiolo, Laikipia, Turkana, Samburu and West Pokot the students are people with disability. Currently In 2019 KCB Foundation will grant the women who – where 40,000 cattle were tagged. The cattle are have been trained, and who will have viable business about 200 of them are in national and top tier tagged using different colours per county and the extra-county schools. The secondary school proposals, seed capital amounting to TZS 91 million tags are then geo-located, making it possible to each to bolster their enterprises. scholarship programme has expanded with the track all the cows. The device also helps to track entry of partners such as Tullow Oil Kenya BV the cattle’s productivity and therefore their value, where an additional 100 students in Turkana, for purposes of credit scoring, which is important Garissa, Isiolo, Meru, Samburu, West Pokot and for insurance and for access to loans. Lamu counties are benefiting. The Foundation successfully graduated 90 90 One of the key achievements under this initiative beneficiaries of the inaugural class of “Igire”, its Graduands of the inagural was the signing of a Memorandum of Agreement flagship youth wealth and job creation programme with the M-PESA Foundation Academy to admit 40 class of 2018 “Igire” of the students who have disabilities. The Foundation is looking to establish a programme in The Foundation’s targeted skills training and Uganda while its work in South Sudan remains limited entrepreneurship development programme “The Foundation to the secondary school scholarships. Work in Burundi for Kenyan youth - 2jiajiri - and livestock value will require further discussions with the authorities chain development programme - Mifugo Ni Mali successfully enabled there. - are the main programmes under shared value component. 2jiajiri seeks to prepare youth for self- 6,592 beneficiaries For 2019, the Foundation will pilot a training employment by training them on vocational skills programme for 259 jua kali artisans. This will be done while Mifugo Ni Mali seeks to create value for by giving them access to tools that have been availed pastoralists by treating their livestock as assets. to obtain Business by Gearbox, a Kenyan company. There were two significant achievements under Development Services In line with Sustainable Development Goal 17, KCB 2jiajiri in 2018: 10,000 beneficiaries graduated Foundation continues to reach out to strategic partners from the programme in December, bringing (BDS) support, where within its programmes. 2jiajiri is implemented using the total to over 23,000. The Foundation also a collaborative partnership model that pools both embarked on expanding opportunities for the they were taken through technical and financial resources to facilitate improved youth through pilot franchising projects with access to institutional infrastructure and skills for leading small and medium enterprises (Franchise the steps of setting up a enterprise development. Champions) for the 2jiajiri beneficiaries. KCBF Some of the partners who have added great value to will leverage the established local SMEs brands in business by a team with a the Foundation’s programmes include the national the Beauty and Personal Care; Domestic Services government, county governments, technical training and Automotive sectors. Franchising agreements lawyer, an institutions and local and international development were reached with four mid corporate companies: partners. Our notable global partners include the Naivas (for the bakery business), Top Quality German International Development Cooperation Motors (carwash), Sheffield (equipment for the accountant and a agency GIZ, and USAID. bakeries) and Ashleys (beauty and personal care). marketer.” Under the franchising agreement, beneficiaries

6262 2jiajiri CaseStudy N Foundation provides thefinancing,” sheadds. we helpthemstart theirown salons. KCB and for those interested inentrepreneurship, and supportthemtransition into employment; “Under the 2jiajiri partnership, we train students 2003. opened Ashleys HairandBeautyAcademy in four students inaclass,” says MsMungai,who Foundation, we guaranteed jobs to the best “Even before thepartnership withKCB and founder ofAshleys Kenya Limited. one of13branches owned byTerry Mungai,CEO employment attheAshleys salon inLavington, training, KCB Foundation secured her Once Nancycompleted herseven-month programme along withseveral partners. invests KShs.10billionayear into the2jiajiri and indirect) over five years. KCB Foundation entrepreneurs and 2.5 million jobs (both direct programme, whichaimsto create 500,000youth 2016. Thepartnership ispartofthe2jiajiri and Ashleys HairandBeautyAcademy since a partnership between theKCB Foundation Nancy isoneof203students trained under pursuing hairdressing. apply. Thatishow Nancyachieved herdream of and personal care training andurged herto Foundation was offering scholarships for beauty to ashersecond mum-informed herthatKCB mother’s employer -whomNancyfondly refers the fees to take her to college. Thenoneday, her live-in househelpinKileleshwa, could notafford ‘Franchising Foundation Promoting Model’ in Industry 46, where shelives. Hermother, a that ofotherchildren inKawangware hours styling hersister’s hairand to beahairdresser. Shewould spend ANCY MNANGA, 25,always wanted Beauty Beauty KCB KCB salon, they will get thesameservice butata “When acustomer visits an‘Ashleys Mashinani’ added advantage ofindustry knowledge. provided bytheKCB Foundation team withthe role shallbeto substitute theincubationservices financial management and reporting and their operations support,ensure loan repayment and Ashleys willprovide business management, trained undertheAshleys -2jiajiripartnership. different counties in2019 to absorball203students Under thismodel,10new salons willbeopenedin ‘Ashleys Mashinani’andwillbepriced differently. and Spas,thenew salons willcarry thebrand name these businesses from theexisting Ashleys Coiffure under theAshleys brand name. To differentiate partnership 2jiajirigraduates willopensalons through aco-ownership model.Underthis with Ashleys Kenya to roll outsalon containers It isfor thisreason thatKCB Foundation partnered do nothave access to capital. inadequate salon managementcompetencies and investment. However, many oftheyouth have private equityinvestors interested insocialimpact the industry hasimmensepotential to attract for young people to become self-employed. Further, be tapped onto to create business andopportunities potential hasbeenapproached haphazardly. Itcan to tap onto themulti-billionbeautysector, butwhose 2jiajiri beautyandpersonal care graduates yearning Nancy’s story issimilarto thoseoftheover 2,000 provide mewithaloan to start meoff,” shesays. Foundation promised thatwhenIamready, they will experience andlearn how to handle clients. The salon andemploy otherpeople. Ineedto first gain “After 5years orsoIwould like to have myown business, sheisnotyet ready to take theplunge. Although Nancydreams ofopeningherown the lives oftheyouth. institutions share asimilarvision–improving works well for herbrand because the two She says thepartnership withKCB Foundation our otherbeautycentres,” shesays. salons are managedto thesamestandard as “No. We willmaintain oversight to ensure the dilute theAshleys brand? Is sheworried thatthe franchising modelwill subsidised price,” says MsMungai. Foundation provides the their own salons.KCB students andsupport partnership, we train employment; andfor them transition into we helpthemstart those interested in entrepreneurship, “Under the2jiajiri financing,”

63 63 HIGHLIGHTSKCB FOUNDATION 2jiajiri Case Study 2jiajiri transcends borders

n November 2018, KCB Foundation graduated 90 they reside by molding a practical, knowledge-based During the colourful graduation, the five best Ibeneficiaries of the inaugural class of “Igire”, its labour force for the region’s sustainable growth and proposals from the graduating class were each flagship youth wealth and job creation programme development. awarded Rwf 3,000,000 (KSh. 345,000) seed in Rwanda. The Rwanda Ministry of Youth Affairs Permanent capital to start their own business projects. The graduands will be linked to the industry through The Foundation through KCB Bank Rwanda in Secretary Emmanuel Bigenimana hailed KCB opportunities to work with potential employers partnership with Rwanda National Youth Council Foundation for its collaboration with the Rwanda and investors. launched Igire in April 2018 to support 100 youth National Youth Council on the initiative, saying the youth for six months to equip them with vocational skills form a key component of Rwanda’s work force. Graduates with viable business proposals will get to enable self-employment. a chance to interact with investors known to turn The graduands were trained on Information and Communications Technology, Culinary Art and Domestic Electrical Installation at Integrated “The value of vocational training cannot be gainsaid. By Polytechnic Regional Centres in Kigali, Ngoma and Huye. The courses were selected according to the empowering the youth to take charge of their future, we are general skills gaps in the market and the students’ preferences. reducing the need to rely on formal employment to earn a living. Speaking during the graduation of the pioneer The skills students acquire throughout the training are essential class in Kigali, KCB Foundation Managing Director Jane Mwangi said “Igire” is a direct investment in for the market, where we all know there is a skills gap,” the youth in recognition of their role in building the Rwanda’s economy. “The value of vocational training cannot be “Acquisition of technical skills will not only enable our ideas into thriving businesses across East Africa. gainsaid. By empowering the youth to take charge young people to get into self- employment, but will The five best proposals will be given seed capital of their future, we are reducing the need to rely also promote their contribution to the economy when to start their own business projects. on formal employment to earn a living. The skills beneficiaries create jobs for their peers,” he said. students acquire throughout the training are The National Youth Council (Rwanda) and KCB essential for the market, where we all know there KCB Rwanda Managing Director George Odhiambo Bank Rwanda are working together to ensure the is a skills gap,” said Ms Mwangi. affirmed the Bank’s commitment to continue supporting youth empowerment programme maintains the the youth and thanked the Rwanda National Youth remarkable steps it is already making towards The Foundation’s vision is to enable the youth Council for its collaborative efforts in supporting youth realising the objectives of the initiative. be their own leaders within the communities empowerment.

6464 estates inKisumu. savings to tryhishandathawkingbagsaround After four years, hedecidedto quitandusehis of four. sell around Kisumu,” recalls the 41-year-old father quit andusedmysavingsto purchase five bagsto was notonly hard, butthepay was low. Itherefore “Being anunskilled worker ataconstruction site involved. the pay was not commensurate to the hard work took up casual jobsatconstruction sites. Hesays He dropped outofschoolinForm Two in1994and about. Hislife hasnotalways beeneasy. He isnow abeautician,career thatheispassionate W business Starting agarage has accorded himadecent life. unique career pathwhichhesays would have it,hechanced upona of working inasalon. Butasfate ilson AdhiamboOpiyo never dreamt From hustler to employer his earnings.Hedecidedto concentrate onhisbeauty After honinghisskill,clientbasegrew andsodid visited salons to learn theart,” herecalls. “I lacked expertise innailpolishapplication andI if heappliedthenailpolish. realized thathiscustomers were willingto pay more he earnedKShs.250sellingnailpolish.Wilsonalso each, whichhehawked alongside hisbags.Thatday, day heboughtmore bottles ofnailpolishatKShs.25 Bouyed bythe‘quick’money, hesays thefollowing money Ihadearnedinmylife” hesays. did the job. They paid me KShs.30. It was the easiest had never doneitbefore, butIsteeled myself and polish andrequested meto apply itontheirnails.I On myfirst day, three ladiessawmecarrying thenail “One ofmycustomers asked meto hawknailpolish. hawking nailpolishto supplement hisearnings. his hawkingbusiness, afriendadvisedhimto start It would take days to sellasingle bag.Ayear into sun, calling outfor customers around theestates. He would walk long distances under the scorching Facebook page anddeveloped officer, Iformally registered scholarship. Hewas successful andenrolled Mutai took aleap offaith andappliedfor the cars, butalsosellingspare parts,” Mutai recalls. I could earnmuchmore notonly from repairing for aloan to start mybusiness. Healsotold methat I would undergo training andthenbecome eligible “He advisedmethatifIappliedandwas successful, about the2jiajiriprogram. their conversations, themanagerinformed Mutai They gotto know eachotherwell and,inoneof One oftheircustomers was atea estate manager. break came. the garage, anditiswhile working here thathisbig and while there secured ajobasspannerboy at Mutai had goneto Kericho to stay withhis relatives, job atagarage inthehighlandsofKericho. was doing at the time — a mechanic training on the He, however, knew thathecould domore thanhe him thathecould beabeneficiary. 2jiajiri program, butithadnever quite occurred to Joseph Kipkorir Mutai, 32,hadheard aboutKCB’s a fundablebusinessplan,” “With thehelpofBDS “With In March 2018,hetookaKShs.206,000loanfrom 2jiajiriand He completedhiscourse andopenedagarage inKapsabet. my business,openeda invested itinhisnew business. 60,000 andintends to open a second salon inKisumu. Banking officer. He applied for a second loan of KShs. 2jiajiri where heisundertheguidance ofaKCB BankMicro 100,000. Consequently, hewas transitioned to PhaseIIIof Wilson was able to clear hisfirst 2jiajiriloan ofKShs. Thanks to the business training from the BDS officer, Obunga slums,” Wilsonsaid. purchased land,build ahouseandmoved myfamily from “My business hasgrown. I have four employees. I daily withearningsofaboutKShs.6,000perday. salon, hasincreased threefold; hetends to 40customers Today, thenumberofcustomers atKodhis Cutex, his where Iamtoday.” not for KCB Foundation’s 2jiajiriprogramme, Iwouldn’t be Wilson says 2jiajirihashelpedtransform hislife. “Were it fundable business plan,” hesays. my business, openedaFacebook pageanddeveloped a “With thehelpofBDSofficer, Iformally registered open his business and purchase the necessary equipment. KCB loaned himKShs.100,000,money whichheused conceptualize andopenabusiness outlet. Development Service (BDS)officer whohelpedhim 2Jiajiri programme, where hewas assigned aBusiness After graduating, Wilsonmigrated to PhaseIIofthe as massage. among otherthings,pedicure, manicure, facials, aswell pursue a course in Hairdressing andBeauty. Helearnt, 2jiajiri programme andheenrolled atYMCA Kisumuto In 2016,aclientinformed himaboutKCB Foundation’s would charge clients KShs.30for every application. business andstopped hawkingbagsin2008.Hesays he the next five years. youth and entrepreneurs in the informal sector, in The program seeks to reach 50,000people, mostly available. youth to apply for thesameonce they become training under2jiajiri,healways encourages fellow After seeingfirst-hand thebenefits ofundergoing which hebuys from Nairobi andKampala. His shop, Ex-Japana Spares, sell spare parts contract. five permanentemployees, andthree others on to make while working asanapprentice. Hehas says hisearningsare afar cryfrom whatheused spares business inKapsabet,NandiCounty. He Mutai is now a proud owner of a motor vehicle business. loan from 2jiajiriandinvested itinhisnew Kapsabet. InMarch thisyear, hetook aSh206,000 He completed hiscourse andopenedagarage in automotive mechanical course. at theLessos Technical Institute inNandifor an

65 65 HIGHLIGHTSKCB FOUNDATION Mifugo ni Mali Case study KCB Foundation promotes value addition among dairy farmers

esidents of Mumberes in Eldama Ravine surplus is sold to nearly 200 households in the area as David says the society has immensely benefitted RSub-County, Baringo County are reaping well as in schools and nearby Equator shopping centre from KCB Foundation’s support including capacity the benefits of value addition from the milk they along the Nakuru -Eldoret road. building on business development and financial supply to a local farmers’ Co-operative. The “We were spending a lot on water given the nature of literacy, risk management and insurance, 3,300-member Mumberes Farmers Cooperative our undertaking. Moreover, there is no permanent river governance, leadership and management, value Society has ventured into value addition, thanks in this area and it gets worse during the dry season. It is addition, market development activities and to support from KCB Foundation’s Mifugo Ni for this reason that we decided to invest in a borehole to collective bargaining. Mali programme. From just supplying milk to supply us with water as well as give us some additional “KCB Foundation has been part and parcel of our processors, the Society is now processing yoghurt growth. The dairy farming benchmarking support and fermented milk, locally known as ‘Maziwa Mala’. Starting off with a handful of members in 1972, “KCB Foundation has been part and parcel of our growth. The Mumberes has grown to become one of the largest cooperative societies in Baringo County. “From 50 dairy farming benchmarking support has widened knowledge of litres, we are now collecting over 13,000 litres of milk per day from our members. We pasteurise the our farmers and we are seeing the results from the high standards milk and supply 80% of the collection to our main processor while we use the remainder to process our members have set for themselves,” yoghurt and fermented milk as part of our value addition initiatives,” says Mumberes Farmers’ Co- operative Society Manager David Kimutai. income from selling the surplus to the community has widened knowledge of our farmers and we are In order to scale up value addition, the Society around,” says David. He adds that as a result of water seeing the results from the high standards our received KCB Foundation’s Mifugo Ni Mali availability, their operational costs have drastically members have set for themselves,” says David. discounted loan of Ksh 3.5 million, that it used to reduced, resulting into more earnings to the members. The society’s earnings has seen it diversify purchase a milk pasteuriser and to sink a bore The official is grateful to KCB Foundation for extending into other agribusiness investments including hole. them the loan facility, saying they look forward to settling operating an agrovet, artificial insemination Given that milk processing is a water-intense the loan this year. “We are determined to clear the loan services and real estate. activity, the society sunk a 150-litre borehole to and apply for another one to enable us expand our help the society meet it’s water requirement. The investment,” he says.

6666 2jiajiri Beneficiaries Mifugo NiMali Number ofcattletagged using KShs. 123M Amount ofmoney disbursed as loans toCooperatives inASAL 36,391 RFID technology KCB Foundation Highlights KShs. Counties Personal Care Agribusiness 13,953 Beauty and Beauty and 2,119 Number of Counties the Mifugo Number ofCountiestheMifugo KShs. 55M Amount ofmoney repaid by Ni Maliprogramme isbeing Cooperatives inASAL implemented 10 Beneficiaries 23,059 Numberoffarmers reached Number oflivestock markets through Nimali Mifugo 36,000 Construction Domestic Domestic Engineering 1,145 Building and Building and Automotive Services 1,383 4,459 constructed 2

Number ofCooperatives trained development andcredit access on governance, businessplan KShs. 25M Amount ofmoney raised for livestock keepers through 74 auction

67 67 HIGHLIGHTSKCB FOUNDATION Our Sustainability Agenda 10 Point Action Plan (2015-2020) helps us track and monitor the progress in creating shared value while staying true to our four sustainability pillars. The Plan clearly demonstrates our inclusive progress approach and drives the Group’s sustainability efforts moving forward . The Key indicators of the Plan highlights are as follows:

3% Percentage of portfolio 4.56% in lending for Percentage of Portfolio reimagining affordable portfolio lending housing to SMEs

77,762 1,082 Number of schools Number of operating accounts active local through KCB suppliers Added-value partnership

34.7M 717,342 10 POINT Financial Inclusion Agency Banking Inua Jamii Beneficiaries Transactions Reached ACTION PLAN

12,707 Electricity consumption (MWh) 1,316,958 Diesel consumption for Environmental footprint generators and fleet (ℓ)

4,136 4.56% of KCB Group Critical patches staff trained within our networks on cyber Cyber security awareness security & fortification

6868 ACTION PLAN 10 POINT OUR FOUR SUSTAINABILITYOUR FOUR PILLARS Economic Stability- compliance,innovative Regulatory androbust securityandethicsare systems, criticalcomponentsthatform thefoundation ofastableandprosperous economyinwhichweoperate. Financial Stability- Social Stability- Ourcommitmenttodevelopequitable,inclusiveproducts andcommunitiestoprosper andtosupportouryouth andthrive,enablesustocreate shared value. Environmental Stability- Wesupportresponsible financeandconsumption,greenourCarbonFootprint financeandlowering toprotect andenhancetheenvironment onwhichwedepend.

Transformative partnerships helpusprovide thatleadstoinclusiveprogress. accesstofinancialproducts andservices No. ofsocial-environmental assessments undertaken Scholarship Programme No. ofscholarships under undergone sustainability No. ofemployees having awareness training 4,582 250 84 dismissals No. ofnew relating to employee launched products No. of fraud 10

have undergone social the SDGsframework needs asexpressed in resonate to thesocietal and solutionsthat provide bankingproducts We enedeavour to Value offacilities that internal fraud attempts spent onlocal No. ofunsuccessful & Environmental 126.7B procurement Proportion 86% KShs. Assessments Staff attritionrate 4.10% 319

Responsible lending and community Empowering youth and diversity Talent management & Innovation Product development Ethics &integrity

69 69 HIGHLIGHTSOUR SUSTAINABILITY AGENDA Corporate Governance Statement

The Board of Directors (“Board”) of KCB Group Plc. (“Company ”) recognizes This statement details the key corporate governance arrangements and that it has responsibilities to its shareholders, customers, employees, business practices of KCB Group Plc. and its affiliate companies (collectively, the partners as well as to the communities in which the entities it controls (“Group”) “Group”). The statement sets out the key components of KCB Group Plc.’s operates. Corporate Governance Framework, which provides guidance to the Board, management and employees and defines the roles responsibilities and conduct The Board has ultimate authority over, and oversight of, the Group and regards expected of them. corporate governance as a critical element in achieving the Group’s objectives. The Group believes that good corporate governance is based on a set of values Governance Structure and behaviours that underpin it’s day-to-day activities; provide transparency and fair dealing; and promote financial stability and healthy economic growth Governance Framework that can deliver better outcomes for the Group’s stakeholders and help its The ultimate overall collective responsibility for the stewardship and oversight customers get ahead. of the organization is held by the Board. KCB Group operates within a clearly KCB Group regularly reviews its corporate governance arrangements and defined governance framework which provides for delegated authority and practices and ensures that the same reflects the developments in regulation, clear lines of responsibility without abdicating the responsibility of the Board. best market practice and stakeholder expectations. The Group continuously Through the framework, the Board sets out the strategic direction of the Group embraces the changes and remains at the forefront in adopting best practices while entrusting the day-to-day running of the organization to the executive in corporate governance and risk management in the rapidly evolving financial management led by the Chief Executive Officer & Managing Director, with their markets and business landscape. performance against set objectives and policies closely monitored. The Board operates through five Committees mandated to review specific areas and The Board and management of the Group continue to comply with the Corporate assist the Board undertake its duties effectively and efficiently. Governance Guidelines as prescribed by the Central Bank of Kenya being the primary regulatory authority of the Group and KCB Bank Kenya Limited as The fundamental relationships between the Board, Board Committees and well as the Capital Markets Authority Code of Corporate Governance Practices for Executive Management is illustrated below: Issuers of Securities to the Public, 2015.

Corporate Governance Shareholders Framework

Delegated Authority

Board of Directors

• Non-Executive • Executive

Independent Board Assurance Committees • External Auditors •Audit • Group Assurance Management Delegated Authority •Finance & Strategy • (Internal Audit & •IT & Innovation Risk Management) • Legal and other •Risk Management professional advice •HR & Nomination Group Chief Executive Officer & MD

GORCCO: EXCO: ALCO: BMC: Group Executive Asset Liability Business Operational Committee Committee Management Risk & Compliance Committee Committee

7070 Management Commitees The Board Charter, which has been approved and is regularly reviewed by the The Board Board, provides for a clear definition of the roles and responsibilities of the KCB Group Plc. is governed by a Board of Directors (“Directors” or “Director”) Group Chairman, directors as well as the Company Secretary. The roles and each of whom is, with the exception of the Group Chief Executive Officer and responsibilities of the Group Chairman and the Group Chief Executive Officer Group Chief Finance Officer, elected by the Company’s shareholders. are separate and distinct with a clear division of responsibility between the running of the Board and the executive responsibility of running KCB Group’s The Board is accountable to the shareholders for the overall Group performance business. and is collectively responsible for the long term success of the Group. The Board achieves such success by setting appropriate business strategy and Key roles & responsibilities overseeing delivery against the set strategy. It ensures that the Group manages Group Chairman Chief Executive risks effectively and monitors financial performance and reporting. • Provide overall leadership to the • Manage the day-to-day The Articles of Association of the company provides that the Board shall Board. operations of the organization. comprise of a maximum of 11 Directors. The current Board structure comprises of 2 Executive Directors, one as a Non-Executive Director and eight • Ensures that the board is • Effectively execute the as Independent Non-Executive Directors including the Group Chairman. The effective in its duties of setting business strategy and plans Board determines its size and composition, subject to the Company’s Articles out and implementing the to deliver shareholder value of Association, Board Charter and applicable law. Group’s strategy. and ensure sustainability and market share growth in line • Ensures Board committees with the policies set by the are properly structured with As at 31 December, 2018, the Board comprised of ten Board. appropriate terms of reference. Directors. Mrs. Josephine Djirackor was appointed as • Builds, protects and enhances • Ensures directors receive a Director on 3 January, 2018 and resigned on 27 April, the Group’s brand value. accurate, timely and clear 2018. Mr. Andrew W. Kairu was appointed as a director information. • Consults with the Chairman on 4 June, 2018 and Mr. Lawrence Njiru appointed on 7 and Board on matters which • Ensures the development needs may have a material impact on August, 2018. There is currently one vacancy on the Board of directors are identified and the Group. to be substantially filled in. that appropriate training is provided to continuously update • Acts as a liaison between the their knowledge and skills. Board and the management. Full details of the current Directors, their qualiﬁcations, skills and experience are set out on page 77 of the 2018 Integrated Report. • Manage, monitor and evaluate • Provides leadership and the performance of the directors. direction to the senior management. Role of the Board • Oversees and ensures there is The Board appoints the CEO, sets the strategic objectives of the Group with input adequate succession planning. from management, and oversees management, performance, remuneration and • Maintains sound relationships governance frameworks of the Group. In performing this role, the Board: with shareholders and i. Approves the strategic and financial plans to be implemented by stakeholders. management. ii. Oversees the Risk Management Framework and its operation by management. The Board Company Secretary iii. Sets the Group’s risk appetite within which management is expected to • Contribute to the development of • Ensures compliance with operate. the Group strategy. all relevant statutory and iv. Approves capital expenditure for investments and divestments and capital regulatory requirements. • Analyse and monitor the and funding proposals. performance of management • Ensures good information v. Reviews succession planning for the management team and makes against the set objectives. flows as well as provides senior executive appointments, organizational changes and high level comprehensive practical • Ensure that the Group has in remuneration issues. support to the directors. place proper internal controls as vi. Provides oversight over performance against targets and objectives. well as a robust system of risk • Facilitates proper induction vii. Provides oversight over reporting to shareholders on the direction, management. of directors and provides governance and performance of the Group as well as other processes that guidance in terms of their require reporting and disclosure. • Ensure that financial information roles and responsibilities. released to the market and viii. Providing oversight over the activities of the subsidiaries of the Group. shareholders is accurate. • Develops and circulates the Authority and Delegation agenda for Board meetings • Actively participate in The Board Charter sets out the Board authority and matters reserved for and ensure all relevant Board decision-making and determination and approval by the Board. These include decisions concerning information is made available constructively challenge strategy and long term objectives of the Group, the Group’s capital, financial to the directors. proposals presented by planning and financial budgets, significant contracts and various statutory and Management. • Assists the Chairman in regulatory approvals. Matters related to the approval of the remuneration policy, governance processes resource management, risk management framework and risk appetite are also • Remain permanently bound by including Board evaluation. Board reserve matters. To assist it in discharging these responsibilities, the fiduciary duties and duties of Board has established Board Committees to give detailed consideration to key care and skill. issues. STATEMENT OF CORPORATE GOVERNANCE CORPORATE OF STATEMENT

71 Corporate Governance Statement

Further details of the Board Committees including documented and cover areas such as operating of the Company and succession planning. their respective roles, key responsibilities, expenditure, capital expenditure and investments. The Group Chairman, in conjunction with the Group composition and membership are provided later in These delegations balance effective oversight with Chief Executive Officer and the Group Company this Statement. appropriate empowerment and accountability of Secretary, sets the agenda for each meeting. Typically The Group Chairman is responsible for the strategic senior executives. the Board works to an annual agenda encompassing leadership of the Board and is pivotal in creating To adequately undertake responsibilities in the periodic reviews of the Group operating business conditions for the overall effectiveness of the Board. day-to-day management of the business, in units and site visits; approval of strategy, business He promotes an open environment for debate and line with the authority delegated by the Board, plans, budgets and financial statements; and review ensures all Directors are able to speak freely and management committees have been established. of statutory obligations and other responsibilities contribute effectively. The Group Chairman plays The management committees include the Executive identified in the Board Charter. a pivotal role in fostering constructive dialogue Management Committee (EXCO), the Assets and The notice, agenda and detailed board papers are between shareholders, the Board and management Liabilities Management Committee (ALCO), the circulated in advance of the meetings. Directors are at the Annual General Meeting and other shareholder General Management Committee (GMC) and the entitled to request for additional information where meetings. Group Operational Risk and Compliance Committee they consider further information is necessary to The Board, in the Board Charter, delegates (GORCCO). support informed decision-making. responsibility for the day-to-day management Board Meetings During the year ending 31 December, 2018, the of the business to the Group Chief Executive The Board has in place an annual work plan that sets Board held eight Board meetings. A strategic Officer. The Group Chief Executive Officer in turn out the Board activities in a year. The Board meets planning session was held in conjunction with the delegates aspects of his own authority to members at least once every quarter, and additionally when Board meeting held in November 2018. Details of the Group Executive Committee. The scope of, necessary, to consider all matters relating to the of Directors’ attendance at Board and Committee and limitations to, these delegations are clearly overall control, business performance and strategy meetings are set out in the table below:

Board Audit Risk Finance & HR & IT & Supply Chain strategy Nominations Innovation Number of meetings 8 6 4 5 9 4 5 Andrew Kairu(1) 4 Julius Mutua (Alternate to Henry Rotich) 7 1 4 7 1 Ngeny Biwott 8 1 1 Adil Khawaja 6 3 1 Tom Ipomai 7 9 4 5 Georgina Malombe 7 6 4 4 5 John Nyerere 6 6 4 4 7 4 Josephine Djirackor(2) 2 Lawrence Njiru(3) 4 2 1 1 Joshua Oigara 7 2 1 7 3 2 Lawrence Kimathi (4) 8 4

(1) Appointed to the board on 4 June, 2018 and appointed as Group Chairman on 24 October, 2018 The key findings against the prior year review and (2) Appointed on 3 January, 2018. Resigned on 27 April, 2018 the progress against them were as follows: (3) Appointed on 7 August, 2018. (4) Lawrence Kimathi was a permanent attendee of the Finance & Strategy Committee.

Key Succession planning and ensuring appropriate mix Board Evaluation on the Board to support implementation of strategic The Board reviews its performance and that of the Board Committees and individual directors Finding goals annually. Every third year, the review is facilitated by an external consultant. The review in respect of the 2018 financial year was conducted internally by the Group Chairman through the coordination of the Group Company Secretary. The evaluation process was based The Nominations Committee has continued to focus on on a detailed questionnaire which was distributed to the Directors for their consideration. succession planning for the year 2018 and will continue to do Action so in the year 2019. The Board reviewed the skills matrix in Results were collated confidentially by the Group Company Secretary and reviewed by the 2018 and identified skill sets relevant for succession planning Group Chairman. Taken which will be instrumental in identifying director to be nominated for consideration and appointment. The detailed questionnaire examines the balance of the skills of the directors, the operation of the Board in practice, including governance issues, and the content of the Board meetings. Feedback from the process is used to identify opportunities to improve the performance of the Board and the Directors. The questionnaire also included a series of questions for each Board materials – Standardization of director to assess their own performance and the performance of each other individual director Key board presentation formats and to identify development opportunities. Finding completeness of the board packs and information provided. The Board evaluation was conducted in February 2019 and the results presented to the Central Bank of Kenya in March 2019 in line with regulatory requirements.

Action The activity has been undertaken and is Taken continuous. 7272 emerging issues andeffectively guidemanagement in overall collective competence to dealwith current and knowledge andexperience andwhojointly have the mix ofindividuals withrelevant attributes skills, KCB Group seeks to have aBoard thathasthe right the overall strategy oftheGroup. provide theoversight neededto develop andachieve knowledge andexperience to enable theBoard to level, the Group looks for adiversity ofskills, and critique and leadership qualities. At a collective view, integrity, preparedness to question, challenge demonstrate sound business judgment,astrategic expectation thateachDirector should beable to are ascritical astheskillsthey bring.There isan purpose, the individual attributes of each Director Having regard to theGroup’s vision,values and Board Composition–Skills,Experience &Diversity 76. undertaken during the year 2018 are setout on page Committees, current members andkey activities January 2019).Asummaryoftherole ofthecurrent number ofcommittees from 6to 5(effective 1 of theexisting committees andreduced theoverall During theyear 2018,theBoard undertook areview Kenya. Prudential Guidelinesissued bytheCentral Bankof executive directors inlinewiththeprovisions ofthe Audit Committee ismadeupofonly independentnon- independent directors andanindependentChair. The composed ofatleast three members, amajorityof Under theprocedural rules, eachcommittee must be the procedural rules that apply to the committee. that sets out the roles and responsibilities and Each committee hasinplace terms ofreference and key decisionsatthefollowing Board meeting. of eachcommittee onsignificant areas ofdiscussion The Board receives averbal report from theChairman collaboration with the HR & Nominations Committee. on anannualbasisbytheGroup Chairmanin implications for another. Membership isreviewed matters raised inonecommittee may have memberships take into account instances where Board andshare responsibility. Aswell, overlapping make thebest useoftherange ofskillsacross the memberships, theGroup Chairmanendeavours to undertake its mandate. Indecidingcommittee Committees to beable to effectively andefficiently The Board hasdelegated authority to various Board Board Committees performance evaluation process. assessed bytheBoard aspartoftheannualBoard The performance oftheGroup CompanySecretary is access to theGroup CompanySecretary. of Directors. EachmemberoftheBoard hasdirect Directors andtheongoingprofessional development and management as well as the induction of new and its Committees andbetween theDirectors facilitating goodinformation flow withintheBoard Group Company Secretary is also responsible for give practical effect to theBoard’s decisions.The and implementing thegovernance framework to monitoring compliance withtheBoard’s procedures The Group CompanySecretary isresponsible for highest standard ofprobity andcorporate governance. supporting Non-Executive Directors inmaintaining the Company Secretary places particularemphasison providing practical supportfor Directors. TheGroup Board and is responsible for advising the Board and The Group CompanySecretary isappointed bythe The Group CompanySecretary on theBoard can befound below. The current skillsandindustry experience represented take thisinto consideration inits nominations. The HR & Nominations Committee has been tasked to to beplaced ondiversifying theskillsetandgender. diversity issues and has determined thateffort needed From thereview in2018,theBoard considered the skills andexperience neededto deliver thestrategy. and experience represented ontheBoard against the The Board regularly reviews theskills,knowledge thereby addingvalue to theGroup. challenge thestrategic thinkingof the executives robust andconstructive debate andaugments and Directors seeks to challenge management,ensure The aggregate mixofskillsandexperience ofthe Group operates. as knowledge oftheindustry andmarkets inwhichthe understanding ofthestrategy oftheCompanyaswell Non-Executive Directors are expected to have aclear ensuring thehighest performance for theGroup. The from theNominationsCommittee. of Directors only after receiving recommendations Appointments to theBoard are donebythewhole Board follows aformal, rigorous andtransparent procedure. The appointmentofnew directors to theBoard fill inthecasual vacancy. the Board ofDirectors may appointanew Director to the Articles ofAssociation oftheCompanyprovide that Where avacancy occurs intheBoard for anyreason, Board Appointments The Board recognizes the importance ofindependent Independence OfDirectors AndConflict OfInterest their appointment. for election by shareholders atthefirst AGM following fill casual vacancies are alsoexpected to stand down Directors retire from theBoard. Directors appointed to applicable, atleast one-third ofthenon-executive Annual General Meeting (”AGM”), andasmay be As provided for in the Articles of Association, at every that capacity. be expected to serve amaximum term offive years in applicable law. The Group Chairman would normally Articles ofAssociation, theBoard Charter and by shareholders asrequired undertheCompany’s exceeding a total of eight years, subject to re-election Directors are normally expected to serve aterm not The Board Charter provides thatNon-Executive Board Tenure, Election and Re-election Lawrence Kimathi Joshua Oigara Lawrence Njiru John Nyerere Georgina Malombe Tom Ipomai Adil Khawaja Ngeny Biwott Henry Rotich (Represented byJuliusMutua) Andrew Kairu DIRECTOR Financial advisory, Financialaccounting, Business management Business management,Financialaccounting andFinancialServices Audit, QualityAssurance, Accounting andFinancialadvisory Strategy andEconomics Audit, QualityAssurance, Accounting andFinancialadvisory Information Technology, AuditandAccounting Legal andCommercial services andAdvisory Strategy, Riskandcrisismanagement Financial services, Publicsector Business Management,Corporate Governance INDUSTRY EXPERIENCE to take informed decisions.The Directors are also of their duties and responsibilities and to enable them senior management, to assist them inthedischarge times, to all relevant company information and to enabling theDirectors to have access, atreasonable Board Chairman andtheGroup CompanySecretary, source. Procedures are inplace, through theGroup requires from anyGroup employee orfrom anyother The Board isentitled to seek any information it Access to Information andIndependentAdvice abstained from discussing and voting onthepaper. his interest was declared, noted andtheDirector where adirector hadapersonal interest inthematter, one of2018,inthediscussion ofoneboard paper Directors. DuringtheBoard meetingheld inquarter interest were identifiedfor anyofthenon-executive independent. No incidences of material conflict of all otherdirectors ofthecompany were considered directorship held bytheCabinetSecretary, Treasury, During theyear 2018,withtheexception ofthe discussed andconsidered. on thematter orbepresent whenthematter isbeing during anyBoard ofCommittee meetingwillnotvote personal interest inanymatter beingconsidered for theBoard to review. AnyDirector withamaterial required to declare thepotential conflict ofinterest any matter concerning theCompanyisimmediately conflict ofinterest oramaterial personal interest in Any Director whoconsiders thatthey may have a Board may determine. All Directors oftheCompanymust avoid anysituation shareholders generally. to act in the best interest of the Company or the judgement to bearonissues before theBoard and with, thedirectors capacity to bringanindependent with, orreasonably beperceived to materially interfere or otherrelationship thatcould materially interfere independent ofmanagementandfree ofanybusiness considers directors to be independent where they are In accordance with the Board Charter, the Board only be independent. Kenya, provides thatamajorityofits directors should Prudential Guidelinesissued bytheCentral Bankof The Board Charter, prepared inlinewiththe and its stakeholders asawhole. having regard to thebest interest oftheorganization interfere withtheexercise ofobjective judgement, relationship orcircumstances thatwould materially independent ofmanagementandfree ofanybusiness views andjudgementto Board deliberations thatare under consideration. Directors are expected to bring judgement andconstructive debate onallissues and limitations asthe subject to conditions authorise theconflict, permit theBoard to Articles ofAssociation as they arise.The situations assoon conflict ofinterest any actualorpotential Company Secretary of and theGroup the Group Chairman responsible to notify The Directors are each and that oftheGroup. their personal interest to aconflict between which mightgive rise

73 STATEMENT OF CORPORATE GOVERNANCE Corporate Governance Statement

entitled to obtain independent legal, accounting or material information on its website Policies and Codes of Conduct other professional advice at the Company’s expense. www.kcbgroup.com. Shareholders are encouraged KCB Group maintains and has in place policies and With the implementation of IFRS 9 coming into force to visit the website for general information about codes of conduct that captures not only our legal fully with effect from 1 January, 2018, the Directors the Group and to be able to view annual reports and obligations, but also the reasonable expectations of sought for and obtained independent professional results briefing presentations. our stake holders, including our customers. These advice on the level of compliance of the Bank with the The Group additionally releases material information policies apply to all employees and Directors of the compliance requirements of the reporting standard. to the Capital Markets Authority and the Nairobi KCB Group, and to anyone working on the Group’s Directors are expected to strictly observe the Securities Exchange as well as the Central Bank of behalf, including contractors and consultants. provisions of the statutes applicable to the use and Kenya in line with all disclosure requirements in the The Group adopts zero tolerance to all forms of confidentiality of information. Capital Markets Act, the Banking Act, the Prudential corruption, bribery and unethical business practices. Guidelines as well as all other relevant regulation. Director Induction and Professional Development Being cross listed in the region, material information Ethical Conduct Each new Director is provided with a letter of is also released to the securities exchanges in Our Code of Ethical Conduct covers a range of appointment and participates in a comprehensive Tanzania, Uganda and Rwanda. areas including personal conduct, integrity, honesty, and tailored induction program. Typical induction Annual General Meetings transparency, accountability, fairness and prevention of corruption. It emphasizes the importance of programmes consist of a series of meetings with The Group recognizes the importance of shareholder other Directors and senior executives to enable new making the right decisions and behaving in a manner participation in meetings. Shareholders are strongly that builds respect and trust in the organization. The Directors familiarise themselves with the business. encouraged to attend and participate in the annual Directors also receive comprehensive guidance from Code sets out clear behavioural requirements and general meetings. The AGM provides an opportunity where these are not met, there are consequences. the Group Company Secretary on Directors’ duties for shareholders to engage with us in person. The and liabilities. Group encourages shareholders to attend and The Group has in place a suite of policies and practices Two new directors, Andrew Kairu and Lawrence Njiru participate in its annual general meeting. As well as in place to promote a culture of compliance, honesty joined the Board in 2018 and met with the Group attending in person or voting by proxy, shareholders and ethical behaviour including in relation to anti- Company Secretary to review an induction pack can use direct voting. money laundering and counter-terrorism financing, whistle blower protection and conflicts of interest. which provided relevant information to enable the The Group makes use of the Annual General Meeting directors understand their role and responsibilities (AGM) as well as the published annual report as an Whistle Blowing as well as the governance structure of the Group. opportunity to communicate with its shareholders. Andrew and Lawrence, as part of their induction, KCB Group does not tolerate fraud, corrupt conduct, At the meeting, a reasonable opportunity is allowed bribery, unethical behaviour, legal or regulatory held meetings with the Company’s executives to gain for shareholders as a whole to ask questions about a better understanding of the business. non-compliance or questionable accounting or or make comments on the management of the auditing by employees, Directors, customers and All Directors are expected to maintain the skills Group. contractors. KCB Group is committed to a culture required to carry out their obligations. The Chairman Investment Community that encourages all people to speak up about issues regularly reviews the professional development or conduct that concerns them. needs of each Director. The program of continuing Our investor relations program facilitates two- education ensures that the Board is kept up to way communication between the organization The KCB Group whistle-blower program encourages date with developments in the industry both locally and its shareholders and fosters participation at the reporting of any wrong doing in a way that and globally. It includes sessions with local and shareholder meetings. The program incorporates protects and supports whistle-blowers. The program overseas experts in the areas of general corporate a number of ways in which the shareholders can provides confidential and anonymous communication governance and also in the particular fields relevant access information and provide feedback. channels to raise concerns. The confidential to the Group’s operations. and anonymous communications channels are The investor relations team has the primary supported and monitored independently by Deloitte As part of the requirement to continuously develop responsibility for managing and developing the details of which are provided below: knowledge and skills, amongst other individual Group’s external relationships with existing and professional development courses, the Board of potential institutional equity investors. Supported Telephone Communication: Directors underwent training sessions in 2018 on by the Group Chief Executive Officer and the Group Toll free number: 0800 720 990 (Kenya) corporate governance, emerging areas in audit, Chief Finance Officer, they achieve this through a block chain and information technology as well as a combination of briefings to analysts and institutional Toll free number: 0800 110 025 (Tanzania) session on risk management. investors (both at results briefings and throughout International calls: +27 315 715 795 (Uganda, South the year). Sudan, Rwanda and Burundi) Engagement with Shareholders Their responsibilities include drafting certain market E-mail Communication: [email protected] KCB Group is committed to giving its shareholders announcements, providing feedback to management All people are encouraged to raise any issues appropriate information and facilities to enable them and the Board on market views and perceptions involving illegal, unacceptable or inappropriate exercise their rights effectively. As a result, the Group about the Group, liaising with rating agencies, behaviour or any issue that would have a material seeks to provide shareholders with information providing assistance to investors, brokers and impact on the organisations customers, reputation, that is timely, of high quality and relevant to their analysts and coordinating roadshows, including for profitability, governance or regulatory compliance. investment, and to listen and respond to shareholder the half-year and full-year results announcements. feedback. The Board recognizes the importance There is zero tolerance for any actual or threatened of maintaining transparency and accountability All shareholders queries, application for registration act of reprisal against any whistle-blower and to its shareholders and works to ensure that all of transfer of shares of the company, immobilization the Group takes reasonable steps to protect a shareholders are treated equitably and their rights of shares and dividend queries as well as the person who makes disclosure of any inappropriate are protected. collection of share certificates and dividend cheques behaviour including taking disciplinary action are handled by the company’s appointed shares potentially resulting in dismissal for any person Communication and Periodic Continuous registrar – Image Registrars Limited. The registrar taking reprisal against a whistle-blower. Disclosure can be reached at their offices 5th Floor, Barclays Restrictions on Insider Trading Key shareholder communication include the Group’s Plaza, Loita Street, P. O. Box 9287-00100, Nairobi Annual Integrated Report, the Group Sustainability or through their e-mail address kcbshares@image. In line with the approved KCB Group Insider Dealing Report and full year and half-yearly and quarterly co.ke and also through their telephone numbers Policy, directors, employees and contractors (and financial results. The Group additionally posts all 0709 170 000, 0724 699 667, 0735 565 666. their associates) are prohibited from dealing with any securities and other financial products if they

7474 External Auditor • • • • following: The Audit Committee responsibilities include the independence andperformance. reporting responsibilities includingexternal audit providing oversight oftheGroup’s financial The AuditCommittee assists theBoard by Audit Committee the annualfinancialreport A Directors’ declaration to thiseffect isincludedin the financialpositionandperformance oftheGroup. accounting standards andgive atrue and fair view of with theCompaniesAct,2015,comply with the financialstatements andnotes are inaccordance The Directors are responsible for assessing whether Board • • • protected through thefollowing elements: The integrity offinancialreporting to Shareholders is Financial Reporting • • • • emphasizes theimportance of: The riskmanagementculture instilled attheGroup timely manner. identified, assessed, escalated andaddressed ina that emerging risks and risk taking activities are promoting appropriate risktaking andensures supports inensuringeffective riskmanagement, the context ofcorporate governance, theBoard and judgement in connection with risk taking. In awareness andpromotes appropriate behaviour management culture thataidsinthecreation ofrisk The Group develops and maintains arisk Assurance andControl KCB Group securities. contractors (andtheirassociates) must nottrade in which allrelated persons directors, employees and to therelease oftheGroup’s financialsduring KCB Group hasclosed periodseachquarter prior company’s securities. may usetheinsideinformation to trade inthe from passing oninsideinformation to others who possess indieinformation. They are alsoprohibited and accounting anddisclosure requirements Monitoring developments instatutory reporting changes inGroup accounting policies Reviewing andapproving anynew orproposed financial reports. and judgments usedfor thepreparation ofthe Reviewing significant accounting estimates Board. financial reports for recommendation to the Reviewing thehalf-year andfull-year statutory External Auditor Oversight from theAuditCommittee Board oversight andresponsibility Cultivating integrity. Monitoring violationofriskappetite limits; and Effective system controls; the organisation for anyrisktaken; Risk reward to ensure compensating returns to Report Remuneration Report atpage83oftheIntegrated Additional details are provided intheDirectors’ of theCompany’s shares. Directors acquired benefits bymeans of acquisition to whichtheCompanyisaparty, underwhich time duringtheyear, didthere exist anyarrangement Neither attheendoffinancialyear, noratany on page83. is disclosed inNote Ato theFinancialStatements Directors for services rendered duringtheYear 2018 The aggregate amountofemoluments paidto the Non-executive Directors remuneration policy. the Board isresponsible for settingandadministering The HumanResources &NominationsCommittee of Directors Remuneration More onthiscan befound onpage24-29. monitors theGroup’s riskprofile andriskappetite. Committee. TheRiskManagementCommittee Board withtheassistance oftheRiskManagement The Risk Management Framework is overseen by the practice approaches andregulatory expectations. from thechangingbusiness environment, better regularly reviewed inlightofemerging risks arising of material risk.TheRiskManagementFramework is control or mitigate both internal and external sources that identify, measure, evaluate, monitor, report and systems, structures, policies,processes andpeople The RiskManagementFramework covers all within aBoard-approved riskappetite. allow theGroup identify, measure andmanagerisks and oversees aRiskManagementFramework to The Group’s riskmanagementfunctionhasdesigned Risk ManagementFramework Group. foundation for effective riskmanagementacross the the ‘three line of defence’ model. These act as the activities. The Group’s risk management is based on management to undertake prudentrisk-taking support ahighstandard ofgovernance. Thisenables management policies,processes andpractices that financial risks andiscommitted to havingrisk The Group isexposed to bothfinancialandnon- Risk ManagementandAssurance year Board meetings. independently anddirectly to theBoard attheend or others beingpresent. Theexternal auditor report Committee from timeto timewithoutmanagement auditor isinvited to meetingswiththeAudit to the integrity oftheaudit function. The external Independence of theexternal auditor isimportant on thereasonableness ofthefinancialstatements. external auditor examines andgives theiropinion view ofthefinancialpositionCompany, the the accounts andfor presenting abalanced andfair Whereas thedirectors are responsible for preparing external auditor. engagement, andassessing theperformance ofthe reviewing andapproving theexternal auditplanand oversees theexternal auditfunction.Thisincludes the financialstatements. TheAuditCommittee a furtherlevel ofprotection oftheintegrity of The auditorreview bytheexternal auditor provides Financial CrimeCompliance the business donebythe Bank. ensure thatcompliance isalways attheforefront of policy documents and accompanying manualsto framework, well-documented andestablished KCB Bankhasinplace arobust AML/KYC prevent money laundering. Reporting Centre andCentral BankofKenya to and applicable guidelines issued bytheFinancial Bank fully adheres to the relevant Kenyan laws We wish to reiterate that as a regulated entity, KCB impose a penalty of KShs.149.5 million on the Bank. the 14days asrequired. Theregulator proceeded to issues raised inthetarget inspectionreport within submitted to theregulator adetailed response to the regulator duringthetarget inspectionperiodand KCB Bankfully cooperated withtheCBKas regulations. the FinancingofTerrorism (AML/CFT) laws and Kenya’s Anti-Money Launderingand Combating compliance byKCB Bankoftherequirements of (CBK) undertook atargeted inspection to assess During theyear 2018,theCentral BankofKenya CBK Target Inspection the Central BankofKenya inNovember 2018. as ‘Medium’. Theriskassessment was presented to the residual overall ML/FTriskprofiles assessed factors thatwere together combined to re-adjust internal environment ismoderated byexternal were considered to be ‘efficient’ or ‘adequate’. The was found to behighwhile theinternal controls the year 2018,theBank’s inherent riskprofile and external factors affecting theBank.During adequacy ofthecontrols inplace relative to internal Financing (ML/TF)riskassessment to review the undertakes aMoney Laundering&Terrorism Every year, theBoard oftheBankinKenya network, products orservices. other financial crimes from exploiting the Group’s money laundering,terrorism financing,fraud or appropriate steps to prevent persons engagedin requirements. ItisthepolicyofGroup to take and to ensure stringent compliance with regulatory requires employees to adhere to highstandards all employees. Withinthisframework, the Group the Group KYC/AML policiesistheresponsibility of of thisarea ofrisk.Adherence andcompliance to to ensure increased confidence in the managing controlling financialcrimeacross allits operations processes for monitoring, managing,reporting and crime hasseenalot ofwork donetowards uplifting all business units. Theincreasing focus onfinancial sanctions, anti-briberyandcorruption) andacross aspects offinancialcrime(includingAML/CFT including through increased coverage across all in thisrecognizing thecrucialrole thatitplays financial crimecapabilities andisheavily investing The Group continues to work towards strengthening resourcing andstrengthening training ofourstaff. our process documentation, investing infurther and enhancingourAML/CFTtechnology, updating on AML/CFTcompliance, includingupgrading The Group continues to make significant investment terrorism financing. customer relationship, anti-money launderingand operations of the organization with regard to bank- any otherprovisions whichbylawappliesto the comply withallrules andstandard aswell as The Group iscommitted to strictly uphold and

75 75 HIGHLIGHTSSTATEMENT OF CORPORATE GOVERNANCE BOARD COMMITTEES

Audit Risk Management Chairman: Lawrence Njiru Chairman: Tom Ipomai Profile: Profile: In accordance with regulatory requirements, the Committee comprises of only The Committee oversees the enterprise-wide view of risks and non-executive members of the Board who are independent of the day-to-day controls and brings together the overall risk appetite and risk management of the Company’s operations. It takes a largely backward-looking profile of the business. It meets quarterly to advise the business view, focused on financial reporting and control issues, including overseeing on all matters pertaining to credit, market, operations, legal, any control issue remediation plans. environmental, compliance and other risks. Business continuity 2018 Activities: issues are also discussed by this Committee. In line with its mandate, the Committee reviewed the unaudited and audited 2018 Activities: financial statements for the full year 2018 and ensure that the same was During the year 2018, the Risk Management Committee reviewed ultimately approved by the Board. The Committee further reviewed the the emerging AML/CFT risk across the Group and ensured all internal audit reports presented by the Internal Auditor for audits undertaken subsidiaries undertook AML/CFT assessment. The Committee during the year in line with the approved audit plan. further reviewed the model risks policy that provides overriding Members: guidance and linkages for all risk model implemented by the Group. The Committee further reviewed ICAAP for the entire Georgina Malombe Group ensuring all business risk were identified and the Group John Nyerere had sufficient capital to cover the identified risks. Members: Julius Mutua Finance & Strategy Ngeny Biwott Chairman: John Nyerere Lawrence Kimathi Profile: The Committee reviews and recommends Group Board to the Board for approval matters Chairman: Andrew Wambari Kairu pertaining to: business strategic plans including its implementation and monitoring process; new markets expansion; significant investment The Board achieves such success by setting and divestment decisions; annual appropriate business strategy and overseeing business and financial plans and delivery against the set strategy. It ensures that HR & Nomination budgets and sustainability. Committee 2018 Activities: the Group manages risks effectively and monitors Chairman: Adil Khawaja The Committee reviewed the financial performance and reporting. To assist it Profile: performance of the Group against This Committee reviews human the set strategy. The Committee in discharging these responsibilities, the Board resource policies and makes further reviewed the proposed 2019 suitable recommendations to strategic initiatives, financial plans has established Board Committees to give detailed the Board on senior management and budgets proposed by management. consideration to key issues. appointments. This Committee also Members: oversees the nomination functions Julius Mutua and senior management performance Adil Khawaja reviews. The Committee keeps under Joshua Oigara review the structure, size and composition of the Board as well as succession planning for Directors. It leads the process for identifying, nominating for approval by the Board, candidates to fill Board vacancies. IT & Innovation 2018 Activities: Chairman: Julius Mutua During the year, the Committee made recommendations Profile: to the Board for the appointment of both non-executive The Committee reviews the scope and the effectiveness of IT operations and provide directors as well as senior management. New non- direction on enhancing the utility of IT resources through clearly laid down processes, executive directors were appointed to the board procedures and time frames. and the Group Regional Business Director (a senior management role) was filled. 2018 Activities: In line with its mandate, the Committee reviewed The Committee reviewed the IT operations over the year and provided guidance on the senior management performance for the year. proposed It related projects. The Committee further undertook an evaluation of The Committee received a report on an audit undertaken in respect of the IT systems and jobs for senior management and reviewed the Board operations to ensure overall compliance with set policies and procedures. succession plans. Members: Members: Georgina Malombe Tom Ipomai Ngeny Biwott Lawrence Njiru Lawrence Kimathi Joshua Oigara

7676 BOARD OF DIRECTORS’ PROFILES

Board Member Profile/ Experience Board Member Profile/ Experience NAME: ANDREW EDUCATION AND PROFESSIONAL BACKGROUND: NAME: : GEORGINA EDUCATION AND PROFESSIONAL BACKGROUND: WAMBARI KAIRU Andrew holds a Bachelor of Commerce degree from University MALOMBE Georgina Malombe is an audit professional. She holds a Bachelors degree (61 years) of Nairobi. He has also attended executive programs in Executive (44 years) in Agribusiness Management from Egerton University and a Master of DESIGNATION: GROUP Development at the Wharton School, University of Pennsylvania DESIGNATION: Business Administration, Finance Option from the University of Nairobi. CHAIRMAN and in Corporate Governance at Harvard Business School, DIRECTOR She is a Certified Public Accountant (CPA (K)) and professional trainer. DATE OF APPOINTMENT Harvard University. His banking career spans over 30 years and DATE OF She also holds a Certificate in Arbitration. Her key technical competencies TO DESIGNATION: includes stints at Commercial Bank of Africa, Standard Chartered APPOINTMENT TO include Audit Quality Assurance, Auditing, Accounting, Finance and Financial Appointed Group Bank and Citibank N.A culminating in his posting to London to BOARD: Reporting. Previously, she worked for The Registration of Accountants Chairman in October head Citibank’s Emerging Markets Financial institution Business. June 2014 Board as the Executive Officer, The Institute of Certified Public Accountants 2018 In 2004, he joined Ghana International Bank PLC London as the of Kenya (ICPAK) as Manager, Public Policy and Governance as well as Chief Operating Officer and Executive Director, a position he held the Head of Compliance and Regulatory Affairs. Malombe is currently the DATE OF APPOINTMENT for over 10 years. Prior to his appointment as Group Chairman, Managing Partner of audit firm, Gemal and Company. TO BOARD: he served as a Non-Executive Director of KCB Bank Kenya from June 2018 OTHER DIRECTORSHIPS: Georgina currently serves in the Board of November 2016 and was Chair of the Risk Management and Audit the Association of Women Accountants of Kenya (AWAK) as the Vice Committees and a member of the HR Committee. Chairperson. She is also a member of Professional Trainers Association of OTHER DIRECTORSHIPS: Andrew is a non-executive director of Kenya (PTAK). Dalberg Research Limited, a member of the audit committee of She is also a member of Professional Trainers Association of Kenya (PTAK). the Commonwealth Secretariat, London and is also a Trustee of NAME: JOHN EDUCATION AND PROFESSIONAL BACKGROUND: the Citizens Advice Bureau of Caterham and Warlingham, United NYERERE John Nyerere is a HHH (Fulbright) fellow and holds an MBA, Bachelor of Kingdom. (57 years) Arts (Hons.) Economics, MBA General Management and Bachelor of Arts DESIGNATION: Economics and Sociology. He lectures on business management at the DIRECTOR United States International University. He has experience in corporate DATE OF planning, operations management and transformation leadership and his NAME: HENRY ROTICH EDUCATION AND PROFESSIONAL BACKGROUND: APPOINTMENT TO key technical competencies include strategy development and economics. (50 years) Henry Rotich is Kenya’s Cabinet Secretary for the National BOARD: He also serves as a member of KCB Bank Tanzania Limited and KCB Treasury. He holds a Master’s Degree in Public Administration DESIGNATION: June 2014 Foundation Boards and is the Chairman of KCB Capital Limited. DIRECTOR (MPA) from the Harvard Kennedy School, Harvard University. In addition, he holds a Master’s degree in Economics and a DATE OF APPOINTMENT NAME: LAWRENCE EDUCATION AND PROFESSIONAL BACKGROUND: Bachelor’s degree in Economics (First Class Honours), both from TO BOARD: The office of NJIRU the University of Nairobi. Lawrence holds a Bachelor of Commerce (Accounting) degree from the Cabinet Secretary of (47 years) Kenyatta University and is a member of the Institute of Certified Public ALTERNATE APPOINTED: the National Treasury is DESIGNATION: Accountants of Kenya (CPA-K). He has over 20 year’s senior management Julius Mutua (48 years) serves as alternate on the Board an institutional director DIRECTOR experience in business strategy, finance, commercial, audit and accounting. of KCB Group Plc. (Appointed September 2014). DATE OF He worked at Standard Media Group Kenya Limited as Assistant Group He is the Chairman of KCB Bank Burundi Limited and also a APPOINTMENT TO Commercial Director and also served as Group Financial Controller in the member of the Boards of KCB Bank Kenya Limited and KCB BOARD: same Group. Prior to this, he worked as a senior auditor at KPMG East Capital Limited and is a trustee of KCB Foundation. August 2018 Africa. OTHER DIRECTORSHIPS: Lawrence is a non-executive director of Kenya Seed Company Limited where he chairs the Audit committee. He also serves NAME: NGENY BIWOTT EDUCATION AND PROFESSIONAL BACKGROUND: as the Chairman of Simlaw Seeds Company Limited. Ngeny Biwott has over 39 years’ experience in the aviation (67 years) NAME: JOSHUA EDUCATION AND PROFESSIONAL BACKGROUND: industry and holds an MSc Degree in Civil Emergency, Risk and DESIGNATION: OIGARA Joshua Oigara holds a Masters degree in Business Administration with Crisis Management from University of Hertfordshire. In addition, DIRECTOR (44 years) a distinction in International Business Management from Edith Cowan he obtained specialised certification in risk and strategy from DATE OF APPOINTMENT DESIGNATION: University, Australia, a Bachelor of Commerce Degree, Accounting Cranfield University, the University of Southern California, and TO BOARD: CHIEF EXECUTIVE Option, from the University of Nairobi and is an Advanced Management the Langley NASA Research Centre College. June 2011 OFFICER & Program Graduate from INSEAD, Fontainebleau, France. He is a graduate OTHER DIRECTORSHIPS: Ngeny is a member of the board of the MANAGING of the Program for Management Development (JuMP), Fuqua School of Unclaimed Financial Assets Authority. DIRECTOR Business, Duke University, North Carolina, USA as well as a Certified Public DATE OF Accountant of Kenya, CPA (K), having studied at the School of Accountancy, APPOINTMENT TO Strathmore University, Kenya. NAME: ADIL KHAWAJA EDUCATION AND PROFESSIONAL BACKGROUND: BOARD: OTHER BOARD/SOCIETY/MEMBERSHIP: (48 years) Adil Khawaja holds an LLB (Hons.) degree from the University January 2013 Joshua serves in the board of KCB Bank Kenya Limited and is a trustee of DESIGNATION: of Sheffield England, a diploma in Law from the Kenya School of the KCB Foundation and also as the Chairman of the Energy Regulatory DIRECTOR Law and is a Certified Public Secretary of Kenya (CPSK). He is a Commission as well as the Chairman of the Kenya Bankers Association member of the London Court of International Arbitration (LCIA) Governing Council. He is a member of the Vision 2030 Board and also serves DATE OF APPOINTMENT and is currently the Managing Partner of law firm, Hamilton as a board member of YALI (Young Africa Leaders Initiative). TO BOARD: Harrison and Mathews, Advocates. June 2012 NAME: EDUCATION AND PROFESSIONAL BACKGROUND: SOCIETY/MEMBERSHIP: Adil serves as trustee of Kenya Wildlife LAWRENCE Lawrence joined KCB Group in May 2015 as the Chief Finance Officer. He has Services (KWS). KIMATHI over 20 years senior leadership experience having worked in a number of He also serves as Chairman of the KCB Bank Kenya Limited (49 years) multinational organization which include BAT, AIG and East Africa Breweries Board and is also the Chairman of KCB Insurance Agency DESIGNATION: both in Kenya and UK. Limited. GROUP CHIEF Lawrence holds a Bachelor of Science degree from the United States FINANCE International University - Africa (USIU) majoring in accounting. He is a OFFICER qualified Certified Public Accountant of Kenya (CPAK), a member of Institute DATE OF of Certified Public Accountants of Kenya (ICPAK) and Institute of Directors. NAME: TOM IPOMAI EDUCATION AND PROFESSIONAL BACKGROUND: APPOINTMENT TO Lawrence is currently writing his MBA thesis at Warwick Business School Tom Ipomai is a corporate finance specialist. He holds a degree (46 years) BOARD: (UK). Lawrence also serves as a trustee of the KCB Staff Pension Fund in Computer Science from the University of Nairobi (1st Class DESIGNATION: May 2015 (Defined Benefit Scheme). He is a member of the KCB Bank South Sudan DIRECTOR Honours) and a Master of Philosophy (MPhil) in Management Limited Board and also serves as a trustee of the KCB Staff Pension Fund Studies from the University of Cambridge (Jesus College). He is a DATE OF APPOINTMENT (Defined Benefit Scheme). Certified Chartered Accountant (ACCA). Previously, Tom worked TO BOARD: OTHER DIRECTORSHIPS: Lawrence is a non-executive director in Pozin for the Central Bank of Kenya, Barclays Bank in the UK, Kenya July 2013 Investments Limited and Westacres Limited and Zambia and with Deloitte in its Corporate Finance Advisory division. Tom runs a boutique consulting firm. NAME: JOSEPH EDUCATION AND PROFESSIONAL BACKGROUND: He also serves as a member of the KCB Bank Kenya Limited KANIA Joseph has over 25 years’ experience as an Advocate of the High Court Board and is Chairman of KCB Bank Rwanda Board. (53 years) and 10 years’ experience as a Company Secretary. He holds an LLB degree DESIGNATION: from the University of Nairobi and is an Advocate of the High Court of GROUP COMPANY Kenya. He is a Notary Public, Commissioner of Oaths as well as a Certified SECRETARY Public Secretary of Kenya. He previously served as Company Secretary at DATE OF Housing Finance Limited. Other roles held include Senior Legal Officer at APPOINTMENT: the Industrial and Commercial Development Corporation and the Legal June 2013 Officer at Senator Cards/Southern Credit Corporation. SHAREHOLDING The Company files monthly investor returns to meet the continuing obligations as prescribed by the Capital Markets Authority and the Nairobi Securities Exchange. DIRECTORS’ INTERESTS AS AT 31ST DECEMBER, 2018 Name of Director Number of Shares % Shareholding Permanent Secretary to the Treasury of Kenya 537,378,947 17.53 Mr. Adil A. Khawaja 38,500 - Mr. Joshua Nyamweya Oigara 35,157 - Mr. J.O.A. Nyerere 10,455 - Mr. Ngeny Biwott 1,537 - Mr. Andrew Wambari Kairu 0 - Mr. Tom Ipomai 0 - Ms. Georgina M. Malombe 0 - Mr. Lawrence Mark Njiru 0 - Mr. Lawrence Kimathi Kiambi 0 - Mr. Joseph Kania 0 -

Shareholders' Profile as at 31st December, 2018 Number of Sharesholders Number of Shares Held % Shareholding Kenyan Individual Investors 147,554 842,712,245 27.49 Kenyan Institutional Investors 5,237 1,409,511,673 45.97 East African Individual Investors 224 4,561,509 0.15 East African Institutional Investors 64 113,371,894 3.70 Foreign Individual Investors 530 42,742,507 1.39 Foreign Institutional Investors 131 653,163,659 21.30 153,740 3,066,063,487 100.00

Summary of Totals Shares Range Shareholders Number of Shares % Shareholding 1 to 5,000 125,072 200,153,731 6.53 5,001 to 50,000 26,666 280,001,951 9.13 50,001 to 100,000 779 53,485,447 1.74 100,001 to 1,000,000 923 274,721,730 8.96 1,000,001 to 10,000,000 265 778,935,933 25.41 10,000,001 & above 35 1,478,764,695 48.23 153,740 3,066,063,487 100.00

Major Shareholders Major Shareholders Number of Shares Held % Shareholding Permanent Secretary to the Treasury of Kenya 537,378,947 17.53 National Social Security Fund 187,634,448 6.12 Stanbic Nominees Ltd NR3530153-1 85,000,000 2.77 Standard Chartered Nomunees Non Resd. A/C 9069 56,920,595 1.86 Standard Chartered Nominees Non Resd. A/C 9867 48,276,780 1.57 Standard Chartered Kenya Nominee A/C 9688 45,778,323 1.49 Standard Chartered Kenya Nominees Ltd a/c KE002382 33,067,087 1.08 Standard Chartered Nominees Ltd a/c 9687 31,680,986 1.03 Standard Chartered Nominees a/c KE17682 30,290,760 0.99 Sandip Kana Sinh Babla & Alka Sandip Babla 28,728,500 0.94 1,144,120,355 35.38 7878 STATEMENTS FINANCIAL FOR THEYEARENDED 31 DECEMBER2018 & NOTES

79 HIGHLIGHTS TABLE OF CONTENT

Directors and Statutory Information 81

Report of the Directors 82

Directors’ remuneration report 83

Statement of Directors’ Responsibilities 88

Report of the Independent Auditors 89

Consolidated Statement of Profit or Loss 92

Consolidated Statement of Other Comprehensive Income 93

Consolidated Statement of Financial Position 94

Company Statement of Profit or Loss 95

Company Statement of Other Comprehensive Income 96

Company Statement of Financial Position 97

Consolidated Statement of Changes in Equity 98

Company Statement of Changes in Equity 100

Consolidated Statement of Cash Flows 102

Company Statement of Cash Flows 103

Notes to the Financial Statements 104

80 Various. Alist isavailable atthe Company SOLICITORS Email: [email protected] Phone: +254(732)187000 Addis Ababa,Ethiopia Bole Medhanialem Morning Star Mall4thfloor KCB BankKenya Ltd (EthiopiaRepresentative Office) Email: [email protected] Phone: +250788140000 Kigali, P.O. Box 5620 Avenue delaPaix KCB BankRwanda Limited Rwanda [email protected] Bujumbura, Email: [email protected] Phone: +254(20)2287000 Juba, SouthSudan Burundi P.O. Box 47 Ministry Road KCB KCB BankSouthSudanLimited Email: [email protected] Plaza Commercial Phone: :+254(711)087001 Nairobi, Kenya P.O. Box 48400-00100 Plaza Moi Avenue Kencom KCB Group PLC REGISTERED OFFICESANDPRINCIPAL PLACES OFBUSINESS House KCB BankTanzania Limited Nairobi, Kenya P.O. Box 40612–00100 Harambee ABC Place, Waiyaki Way 8th Floor, ABCTowers Certified PublicAccountants Plaza KPMG Kenya AUDITORS Nairobi, Kenya P.O. Box 48400–00100 Mr. JosephKania SECRETARY Ms. JosephineT. Djirackor Mr. Lawrence Kimathi Mr. Lawrence MarkNjiru Ms. Georgina M.Malombe Mr. JohnOkoth A.Nyerere Mr. Tom D.Ipomai Mr. AdilA.Khawaja Mr. NgenyBiwott Mr. HenryKRotich Mr. Joshua.N.Oigara Mr. Andrew Wambari Kairu (Chairman) DIRECTORS FOR THEYEARENDED31DECEMBER2018 DIRECTORS ANDSTATUTORY INFORMATION Boulevard Patrice Lumumba -Appointed 3January2018andresigned on27April2018 -Appointed 7thAugust 2018 Email: [email protected] Phone: +25775052206 P.O. Box 6119 KCB BankBurundiLimited Email: [email protected] Phone: +256(20)0508220 Kampala, Uganda P.O. Box 7399 7 KampalaRoad KCB BankUgandaLimited Email: [email protected] Phone: +255788805050 Dar esSalaam,Tanzania P.O. Box 804 Ali Hassan MwinyiRoad/Kaunda Road Junction -Group ChiefFinance Officer -Alternate Mr. JuliusMutua -ChiefExecutive Officer &ManagingDirector -Appointed 4thJune2018

81 81 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC REPORT OF THE DIRECTORS FOR THE YEAR ENDED 31 DECEMBER 2018

The Directors submit their report together with the audited financial statements ever changing needs. Going forward the focus is to improve the non-funded for the year ended 31 December 2018, in accordance with the Kenyan Companies income ratio through alternative channels and technology. Act, 2015 which disclose the state of affairs of KCB Group PLC (the “Group”) and The Group’s activities exposes it to a variety of financial risks, including credit its subsidiaries. risk, liquidity risk, market risks and operational risks. The Group’s overall risk management program focuses on the unpredictability of financial 1. Principal activities markets and seeks to minimize potential adverse effects on the Group’s The company is licensed as a non-operating holding company under the financial performance. The Board of Directors has overall responsibility Banking Act (Cap 488). for the establishment and oversight of the Group’s risk management framework. The Board of Directors of the Group has established various The principal activities of its main subsidiaries is provision of corporate, committees including Credit, Audit, Risk, Human Resources, Procurement investment and retail banking services. and Information Technology committees, which are tasked with developing and continuous monitoring of the Group risk management policies in their 2. Results specified areas. The detailed description and analysis of the key risks is set The results of the Group and the Company are set out on pages 92 to 93 and out on note 4 of the financial statements. 95 to 96 respectively. 6. Relevant audit information 3. Dividend The Directors in office at the date of this report confirm that: An interim dividend of KShs. 3,066 million was approved and paid during the year (2017 – 3,066). The Directors recommend a final dividend of KShs. (i) There is no relevant audit information of which the Group’s auditor is 7,665 million, this together with the interim dividend brings total dividend unaware; and to KShs. 10,731 million. (2017: KShs. 9,198 million) which represents KShs. (ii) Each director has taken all the steps that they ought to have taken as a 3.50 per share in respect of the year ended 31 December 2018 (2017 – KShs. director so as to be aware of any relevant audit information and to establish 3.00 per share). that the Group’s auditor is aware of that information. 4. Directors 7. Auditors The Directors who served during the year and up to the date of this report The auditors of the Company, KPMG Kenya, have indicated their willingness are set out on page 81. to continue in office in accordance with Section 721 of the Kenyan Companies All the Directors are non-executive other than the Chief Executive Officer Act, 2015. and the Chief Finance Officer. 8. Approval of financial statements 5. Business overview The financial statements were approved and authorised for issue by the The Group Consolidation includes the results of the entities owned by ‘KCB Group PLC’. The entities operate in Kenya, Tanzania, South Sudan, Rwanda, Board of Directors on 5 March 2019. Uganda and Burundi mainly in the Banking Business. The Profit before Tax increased by 16% from KES 29.1B to KES 33.9B mainly attributable to management of staff costs which declined by 13% coupled BY ORDER OF THE BOARD with the increase in funded income by 1%. The year 2018 saw IFRS 9 come into effect. The major impact of the implementation has been the increase in provisions on loans and advances which was mitigated by the excess regulatory provisions that the bank had in its books pending the implementation. Total Operating expenses were down 1% from KShs. 35 billion to KShs. 34.7 billion mainly attributable to the staff rationalization undertaken in 2017. Customer deposits were up 7% from KShs. 500 billion to KShs. 537 billion Mr. Joseph Kania attributable to customer number growth and improved customer confidence GROUP COMPANY SECRETARY with the KCB brand. Loans and advances improved by 8% from KShs. 423 billion to KShs. 456 Date: 5 March 2019 billion. The Group will continue to innovate products to satisfy its customers

8282 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC DIRECTORS’ REMUNERATION REPORT following areas: questionnaire designedto obtain feedback ontheboard’s performance onthe externally facilitated after every two years. Eachdirector completes adetailed that ofits committees andindividualdirectors. Evaluation oftheboard is The Board has in place a formal process of reviewing its performance and the Company. the prevailing market trends for companies ofasimilarsizeandcomplexity of and enumerated underthepolicyare competitive andreviewed according to All theremuneration andprivileges accorded to theNon-executive Directors and related privileges received bythe Non-Executive Directors oftheCompany. The Group hasputinplace apolicythatadequately definestheremuneration Privileges Policy B. Non-Executive Directors’ Remuneration and Directors acquired benefits bymeansofacquisition oftheCompany’s shares. there exist anyarrangement to whichtheCompanyisaparty, underwhich Neither attheendoffinancialyear, noratanytimeduringthe year, did the Year 2018isdisclosed inNote 18and38to theFinancialStatements. The total amountofemoluments paidto Directors for services rendered during Directors remuneration was KShs.72million(2017-85million). For thefinancialyear ended31December, 2018,thetotal Non-executive A. Directors’ Emoluments During theyear ended31December, 2018,theBoard ofDirectors consisted of: provisions ofTheCompaniesAct,2015. which provides guidelinesonDirector’s remuneration andinlinewiththe Corporate Governance Practices for Issuers ofSecuritiesto thePublic,2015 ended 31December, 2018inlinewithTheCapital Markets AuthorityCodeof KCB Group Plc. presents theDirector’s Remuneration report for theyear the overall success oftheGroups’ business. individuals are adequately compensated andrecognized for theirrole towards The KCB Group Plc. approach towards reward andrecognition isto ensure that • • • • • • • c) Maximum ofeightindependentNon-Executive Directors: b) OneNon-executive Director: a) directors. Performance ofChairman,respective committees andindividual Performance ofgovernance functions. Board interaction andsupport. Board meetings andpreparation. Board composition andskills. Risk governance. Strategic objectives. Two Executive Directors: (viii).Lawrence Njiru(appointed 7August, 2018) April, 2018) (vii).Josephine Djirackor (appointed 3 January, 2018;resigned 27 (vi).John Nyerere (v).Georgina Malombe (iv).Tom Ipomai (iii).Adil Khawaja (ii).Ngeny Biwott. (i).Andrew Kairu(appointed 4June,2018) Julius Mutua) (i).Henry Rotich (CabinetSecretary -NationalTreasury) (Alternate: (ii). Lawrence Kimathi–Group ChiefFinance Officer Director (i). JoshuaOigara –Group ChiefExecutive Officer &Managing (and backto) hisregular station inorder to attend to dutiesoftheCompany. An allowance ispaidto aNon-Executive Director for anyday oftravel away from Duty Travel-day(s) Allowance Committees. a duly convened andconstituted meetingoftheBoard orofanythe A sittingallowance ispaidto each Non-Executive Directors for attending Sitting Allowance sponsibility asaDirector oftheCompany. Theseare paidmonthly These are paidto theNon-Executive Directors taking into account theirre - Monthly Fees The following components are provided to theNon-executive Directors: entitlements underthepolicyto ensure theseare alignedto themarket. The HumanResources &NominationsCommittee continuously reviews the rates. Noadjustments were therefore recommended oreffected. that theremuneration assetwas sufficientandinlinewithprevailing market benchmarking exercise undertaken byanexternal consultant andconsidered reviewed theentitlement undertheRemuneration Policy following a During theyear 2018,theHuman Resources &NominationsCommittee policy. for settingandadministering theNon-executive Directors remuneration The HumanResources &NominationsCommittee oftheBoard isresponsible the following table: The details ofthetenure ofthecurrent Non-executive Directors isprovided in termination orendoftheirtenure asamemberoftheboard. serving ontheBoard. NoDirector isentitled to anycompensation uponthe required to resign andmay offer themselves for reappointment to continue of Association oftheCompany, one-third oftheNon-executive Directors are years from thedate ofappointment.However, inaccordance withtheArticles Each Non-executive Director serves for atotal non-renewable periodof8 Mr. AdilKhawaja Mr. NgenyBiwott (Alt. Mr. JuliusMutua) Mr. HenryRotich Mr. Andrew Kairu(Chairman) Name Mr. Lawrence Njiru Mr. JohnNyerere Ms. Georgina Malombe Mr. Tom Ipomai 24 September 2014 Appointment Date 7 August, 2018 13 June,2014 16 June,2014 15 June,2011 14 June2012 4 June,2018 8 July, 2013 Retirement Date 6 August, 2026 14 June,2020 13 June,2022 16 June,2022 15 June,2019 3 June,2026 8 July, 2021 -

83 83 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC DIRECTORS’ REMUNERATION REPORT FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED)

Duty Day Allowance Bonus An allowance paid to a Non-Executive Director for any day away his regular Executive Directors are entitled to a performance based bonus pay. The bonus station in order to attend to duties of the Company. is paid in full on an annual basis. Telephone Allowance Allowances Non-Executive Directors are entitled to a telephone allowance paid monthly. Allowances paid include a house allowance, a car allowance, a telephone Club Membership allowance and an allowances related to loan benefit adjustment. Non-Executive Directors are entitled to paid membership to a social or fitness club. Gratuity This is paid to Executive Directors at the rate of 20% of the annual Medical Insurance Cover consolidated basic salary. The total gratuity earned is paid at the end of the Provided to all Non-Executive Directors for their individual medical contract term. During the year 2018, the Human Resources & Nominations requirements covering both out-patient and in-patient requirements. Committee reviewed the entitlement of gratuity and adjusted the same to 30% Professional Indemnity Cover (effective 1 January 2019) This is provided in line with best market practice to provide protection for the Club Membership Non-Executive Directors in undertaking their duties in such capacity. Executive Directors are entitled to paid membership to a social or fitness C. EXECUTIVE DIRECTORS’ REMUNERATION club. Medical Insurance Cover The remuneration for Executive Directors is as per the negotiated employment As provided to all employees, Executive Directors are entitled to medical contracts. Each Executive Director is employed on a fixed term basis. The insurance cover for their individual and family medical requirements covering fixed term contracts run for a period not exceeding 5 years. The contracts are both out-patient and in-patient requirements. renewable. Professional Indemnity Cover The details of the contracts for the Executive Directors are as follows: This is provided in line with best market practice to provide protection for the Executive Directors in undertaking their duties in such capacity. Name Commencement Duration Unexpired Termination Notice During the year 2018, there was a 5% adjustment to the basic pay of the two Date term* Executive Directors sitting on the board with effect from 1 January, 2018.

Joshua 1 January 2018 4 years 3 years 3 months Oigara

Lawrence 1 January 2016 5 years 2 years 3 months Kimathi

Executive Directors performance is measured on the basis of a Balanced Score Card. Annual business performance targets are derived from the KCB Group five year (2015-2019) strategic plan. The key initiatives under the strategic plan include:

• Building a customer centric organization; • Exponential growth in digital financial services; • Excellence in operational efficiency; • Business growth; • Effective talent management; and, • Driving shareholder value. Key performance measures under the Balances Score Card cover areas around: • Financial performance; • Customer and stakeholder satisfaction; • Human capital, culture, learning and growth; and, • Efficiency in internal business processes.

Executive Directors are entitled to the following remuneration: Consolidated Basic Pay This is the consolidated base salary paid to the Executive Director that includes an element of housing.

8484 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC DIRECTORS’ REMUNERATION REPORT Notes: DECEMBER, 2018 i. NON-EXECUTIVEDIRECTORS’ FEES,ALLOWANCES ANDOTHER BENEFITSFOR THEYEARENDED31 7. 6. 5. 4. 3. 2. 1. Director’s Name Mr. Andrew Wambari Kairu-Chairman GRAND TOTAL Mr. Lawrence Njiru Mr. NgenyBiwott CS NationalTreasury Mr. AdilKhawaja Mr. JuliusMutua(Alt.to CS) Mr. Tom Ipomai Ms. Georgina Malombe Mr. JohnNyerere Mrs. JosephineDjirackor KCB Foundation. TheGroup Board nominates atleast 2ofits members to sitoneachsubsidiaryboard. Limited, KCB BankUgandaLimited, KCB BankRwanda Limited, KCB BankBurundiLimited, KCB Capital Limited, KCB Insurance AgencyLimited and The amountincludesfees, allowances andotherbenefits inrespect ofKCB BankKenya Limited, KCB BankTanzania Limited, KCB Bank SouthSudan Appointed 7August 2018 Appointed 3January2018.Resigned 27April2018. Bank BurundiLimited. Earns asittingallowance for KCB Group PLC, KCB BankKenya Limited, andKCB Foundation andearnsbothamonthly andsittingallowance for KCB Appointed 4June2018.Appointed as Chairmanon24October 2018. Non-cash benefits includesmedical insurance cover cost, clubmembership andprofessional indemnitycover cost. Other allowances includesthetelephone allowance, amealallowance andthedutyday travel anddutyday allowance. (7) (6) (5) (4) (3) DIRECTORS’ FEES KShs. million 1 1 3 3 3 3 4 5 3 3 SITTING ALLOWANCE KShs. million 1 7 2 1 2 5 3 5 - - (CONTINUED) OTHER ALLOWANCES KShs. million 4 2 2 1 4 2 2 - - - (1) NON CASH BENEFIT KShs. million ------(2) KShs. million TOTAL 72 14 14 10 1 7 2 3 6 7 8

85 85 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC DIRECTORS’ REMUNERATION REPORT FOR THE YEAR ENDED 31 DECEMBER 2018 (CONTINUED)

ii.NON-EXECUTIVE DIRECTORS’ FEES, ALLOWANCES AND OTHER BENEFITS FOR THE YEAR ENDED 31 DECEMBER, 2017 DIRECTORS’ FEES SITTING ALLOWANCE OTHER ALLOWANCES(1) NON CASH BENEFIT(2) TOTAL Director’s Name KShs. million KShs. million KShs. million KShs. million KShs. million Mr. Ngeny Biwott – Chairman 6 2 4 1 13 CS National Treasury 3 - - - 3 Mr. Julius Mutua (Alt. to CS)(3) 1 7 2 - 10 Mr. Adil Khawaja 4 1 1 - 6 Mr. Tom Ipomai 6 5 3 - 14 Ms. Georgina Malombe 3 3 2 - 8 Mr. John Nyerere 3 5 2 - 10 Mrs. Charity Muya-Ngaruiya (4) 2 4 1 - 7 Gen. (Rtd.) Joseph Kibwana (5) 3 3 1 - 7 Mrs. Catherine Kola (6) 3 1 1 - 5 Dr. Nancy A. Onyango (7) 1 1 - - 2 GRAND TOTAL (8) 85

Notes: (1) Other allowances includes the telephone allowance, a meal allowance and the duty travel-day and duty day allowance. (2) Non-cash benefits includes medical insurance cover cost, club membership and professional indemnity cover cost. (3) Earns a sitting allowance for KCB Group PLC, KCB Bank Kenya Limited, KCB Foundation and earns both a monthly and sitting allowance for KCB Bank Burundi Limited. (4) Retired from KCB Group PLC on 21 April, 2017. She continues to serve as a director of KCB Bank South Sudan Limited. (5) Retired from KCB Group PLC on 21 April, 2017. He continues to serve as a director of KCB Bank South Sudan Limited. (6) Retired from KCB Group PLC on 1 June, 2017. (7) Appointed 7 August, 2017. Resigned 3 January, 2018. (8) The amount includes fees, allowances and other benefits in respect of KCB Bank Kenya Limited, KCB Bank Tanzania Limited, KCB Bank South Sudan Limited, KCB Bank Uganda Limited, KCB Bank Rwanda Limited, KCB Bank Burundi Limited, KCB Capital Limited, KCB Insurance Agency Limited and KCB Foundation. The Group Board nominates at least 2 of its members to sit on each subsidiary board.

iii. EXECUTIVE DIRECTORS’ REMUNERATION FOR THE YEAR ENDED 31 DECEMBER, 2018 SALARY BONUS ALLOWANCES GRATUITY NON CASH BENEFIT(1) TOTAL

Director’s Name KShs. million KShs. million KShs. million KShs. million KShs. million KShs. million Mr. Joshua Oigara 68 180 10 14 1 273 Mr. Lawrence Kimathi 32 43 - 6 1 82

Note: 1. Non-cash benefits includes medical insurance cover, club membership and professional indemnity cover.

8686 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC DIRECTORS’ REMUNERATION REPORT iv. EXECUTIVEDIRECTORS’ REMUNERATION FOR THEYEARENDED31DECEMBER,2017 1. Note: Date: 5March 2019 GROUP COMPANY SECRETARY Mr. JosephKania By order oftheBoard Director’s Name Mr. JoshuaOigara Mr. Lawrence Kimathi (1) Non-cash benefits includesmedical insurance cover, clubmembership andprofessional indemnitycover. KShs. million SALARY 65 29 KShs. million BONUS 147 23 ALLOWANCES KShs. million (CONTINUED) 30 - KShs. million GRATUITY 13 6 KShs. million NON CASH BENEFIT 1 1 (1) KShs. million TOTAL 256 59

87 87 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR THE YEAR ENDED 31 DECEMBER 2018

The Directors are responsible for the preparation and presentation of the consolidated and separate financial statements of KCB Group PLC set out on pages 92 to 176 which comprise the consolidated and company statements of financial position at 31 December 2018, consolidated and company statements of profit or loss and consolidated and company statements of other comprehensive income, statements of changes in equity and statements of cash flows for the year then ended, and notes to the financial statements including a summary of significant accounting policies and other explanatory information.

The Directors’ responsibilities include: determining that the basis of accounting described in note 2 is an acceptable basis for preparing and presenting the financial statements in the circumstances, preparation and presentation of financial statements in accordance with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015 and for such internal control as the Directors determine is necessary to enable the preparation of financial sttements that are free from material misstatements, whether due to fraud or error.

Under the Kenyan Companies Act, 2015 the Directors are required to prepare financial statements for each financial year which give a true and fair view of the financial position of the Group and of the company as at the end of the financial year and of the profit or loss of the Group and of the company for that year. It also requires the Directors to ensure the company and its subsidiaries keep proper accounting records which disclose with reasonable accuracy the financial position of the Group and the company.

The Directors accept responsibility for the annual consolidated and separate financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with International Financial Reporting Standards and in the manner required by the Kenyan Companies Act, 2015. 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 Group and the company and of its operating results.

The Directors further accept responsibility for the maintenance of accounting records which may be relied upon in the preparation of financial statements, as well as adequate systems of internal financial control.

The Directors have made an assessment of the Group and the Company’s ability to continue as a going concern and have no reason to believe the Group and the Company will not be a going concern for at least the next twelve months from the date of this statement.

Approval of the financial statements

The financial statements, as indicated above, were approved and authorised for issue by the Board of Directors on 5 March 2019.

______Andrew Wambari Kairu Joshua N. Oigara Chairman Chief Executive Officer and Managing Director

______Lawrence Mark Njiru Joseph Kania Director Secretary

Date: 5 March 2019

8888 TO THEMEMBERSOFKCB GROUP PLC REPORT OFTHEINDEPENDENTAUDITORS opinion thereon, andwe donotprovide aseparate opiniononthesematters. of thecurrent period.Thesematters were addressed inthecontext ofouraudittheconsolidated andseparate financialstatements asawhole, andinforming our Key auditmatters are thosematters that,inourprofessional judgment,were ofmost significance inourauditoftheconsolidated andseparate financialstatements Key auditmatters IESBA Code.We believe thattheauditevidence we have obtained issufficientandappropriate to provide abasisfor ouropinion. are relevant to ourauditofthefinancialstatements inKenya, andwe have fulfilled ourotherethical responsibilities inaccordance withtheserequirements andthe with theInternational Ethics Standards Board for Accountants’ Codeof Ethics for Professional Accountants (IESBA Code)together withtheethical requirements that Responsibilities for theAuditof FinancialStatements theConsolidated andSeparate sectionofourreport. We are independentoftheGroup andCompanyinaccordance We conducted ourauditinaccordance withInternational Standards onAuditing(ISAs).Ourresponsibilities underthosestandards are furtherdescribedintheAuditors Basis for opinion accordance withInternational FinancialReporting Standards andtheKenyan CompaniesAct,2015. Group PLC asat 31 December 2018, and theconsolidated andseparate financialperformance and consolidated andseparate cash flows for theyear thenendedin In ouropinion,theaccompanying consolidated andseparate financialstatements give atrueandfair view oftheconsolidated andseparate financialpositionofKCB summary ofsignificant accounting policies andotherexplanatory information. comprehensive income, statements ofchangesinequityandstatements ofcash flows for theyear thenended,andnotes to thefinancialstatements, includinga consolidated andcompany statements offinancialpositionasat31December 2018,theconsolidated andcompany statements of profit orloss, statements ofother We have audited theconsolidated andseparate financialstatements ofKCB Group PLC (the“Group andCompany”)setoutonpages92to 176,whichcomprise the Opinion Report ontheauditofconsolidated andseparate financialstatements judgements and material inputs to theIFRS9ECLresults. to understanding thechangefrom IAS39aswell asexplaining thekey The disclosures regarding theGroup’s initialapplication ofIFRS9are key Disclosure quality whole, andpossibly manytimesthatamount. outcomes greater thanourmateriality for thefinancialstatements asa high degree ofestimation uncertainty, withapotential range ofreasonable determined thattheimpairmentofloans andadvances to customers hasa The effect ofthesematters isthat,aspart ofourriskassessment, we significant judgemental aspectoftheGroup’s ECLmodellingapproach. used are thekey drivers of the Group’s ECLresults andare therefore most Default (‘LGD’), andExposures atDefault (‘EAD’).ThePDandLGD models ECLs whichinvolves determining Probabilities ofDefault (‘PD’),Loss Given - Modelestimations –Inherently judgemental modellingisusedto estimate or lifetime provision isrecorded. the Group’s ECLcalculation asthesecriteria determine whethera12month identify asignificant increase incredit riskisakey area ofjudgementwithin - Significant Increase inCredit Risk(‘SICR’)–Thecriteria selected to the corporate portfolio. scenarios used and the probability weightings applied to them especially for Significant managementjudgementisappliedto determining theeconomic a forward-looking basisreflecting arange offuture economic conditions. - Economic scenarios –IFRS9requires theGroup to measure ECLson implementation ofIFRS9are: judgement andtherefore increased levels ofauditfocus intheGroup’s earnings. Thekey areas where we identified greater levels ofmanagement out ofwhichKShs10,207millionwas recorded through openingretained as at 31 December 2017to KShs 20,649millionasat31December 2018, During theyear, credit loss provisions increased from KShs15,958million and resulted inanincrease incredit loss provisions. financial instruments, whichinvolves significant judgementandestimates standard requires theGroup to recognise expected credit losses (‘ECL’) on The Group implemented IFRS9 on1January2018.Thisnew andcomplex The Key auditmatter See accounting policynote 3(f)-Significant accounting policiesanddisclosure note 27–Loansandadvances to customers (Net). Impairment allowances onloans andadvances atamortisedcost, includingoff-balance sheetelements oftheallowance • • • • Our auditprocedures inthisarea included,amongothers: How thematter was addressed inouraudit was sufficiently clear. assessing whetherthedisclosure ofthekey judgements andassumptions made which exists whendetermining theexpected credit losses. Asapartofthis, Assessing whetherthedisclosures appropriately disclose thejudgements and realisation ofcollateral, andothersources ofrepayment for defaulted loans; to ascertain thereasonableness of the forecast of recoverable cash flows, Performing credit assessment onstage 3facilities for thecorporate segment used bytheGroup for thedifferent loan categories; Evaluating theappropriateness of thesignificant increase incredit riskcriteria economic forecasts, weights, andPDassumptions applied; and assumptions impactingECLcalculations to assess thereasonableness of exposure atdefault assumptions. Testing ona sample basisthekey inputs and independently assessing probability ofdefault, loss given default and evaluating theappropriateness oftheGroup’s IFRS9impairmentmethodologies Involving ourown financialriskmodellinganddata analytics specialists in

89 89 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF KCB GROUP PLC Report on the audit of the consolidated and separate financial statements (Continued) The Key audit matter (continued) Hyperinflation

See accounting policy note 3 (c) (ii) – Significant accounting policies; disclosure note 19 – Loss on monetary position and disclosure note 48 –Hyperinflation. The Key audit matter How the matter was addressed in our audit The Group has applied hyperinflationary accounting during the year. The Our audit procedures in this area included, among others: directors evaluated and determined that the economy of South Sudan • Assessing and testing for the indicators of hyperinflation on the South continues to be hyperinflationary. As a result of this, KCB Bank South Sudan Sudan economy; Limited, a significant foreign subsidiary of the Group has complied with the • Assessing the trends in the economic environment of South Sudan, requirements of IAS 29 Financial Reporting in Hyperinflationary Economies on considering their likely impact on the entity and using this information to the individual financial statements for the year ended 31 December 2018. focus our testing on the key risk areas; • Testing the computations including evaluating the rationale for the Hyperinflation is a key audit matter due to the significance of the economic indicators included (such as the inflation rate, cumulative subsidiary affected by hyperinflation and complexity and subjectivity over inflation rate, consumer price indices from various sources), testing and the application of hyperinflationary reporting. hyperinflationary reporting validating key assumptions and the parameters used among others. requires significant judgments to be made by Directors considering Comparing the assumptions used to selected externally available industry, guidelines provided in IAS 29. financial and economic data; • Challenging the judgments and assumptions made by the Directors in the application of hyperinflation accounting requirements; and • Assessing whether disclosures in the financial statements appropriately reflect the effects of hyperinflation accounting Information Technology (IT) systems and controls The key audit matter How the matter was addressed in our audit The Group’s financial accounting and reporting processes are highly Our audit procedures in this area included, among others: dependent on the automated controls over the information systems such • Testing general IT controls around system access and testing controls over that there exists a risk that gaps in the IT control environment could result in computer operations within specific applications which are required to be the financial accounting and reporting records being materially misstated. operating correctly to mitigate the risk of misstatement in the financial statements; For example interfaces between the operating systems and financial • With the support of our IT specialists assessing whether appropriate reporting systems, or automated controls that prevent or detect inaccurate restrictions were placed on access to core systems through reviewing the or incomplete transfers of financial information. If these systems or permissions and responsibilities of those given that access; and controls fail, a significant risk of error in reported financial information can • Where we identify the need to perform additional procedures, placing arise from the failure to transfer data appropriately between systems or reliance on manual compensating controls, such as reconciliations inappropriate changes being made to financial data or systems. between systems and other information sources or performing additional testing, such as extending the size of our sample sizes, to obtain sufficient Our audit effort focused on key systems used by the Group. This is an area appropriate audit evidence over the financial statement balances that were requiring particular audit attention in our audit due to the complexity of the impacted. IT infrastructure.

Other information The directors are responsible for the other information. The other information comprises the information included the Integrated Report and Financial Statements but does not include the consolidated and separate financial statements and our auditors’ report thereon. Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

9090 • • • • and maintain professional skepticism throughout theaudit.We also: As partofanauditinaccordance withISAs,we exercise professional judgment taken onthebasisoftheseconsolidated andseparate financialstatements. they could reasonably beexpected to influence theeconomic decisionsofusers fraud orerror andare considered material if, individually orintheaggregate, detect amaterial misstatement whenitexists. Misstatements can arisefrom is notaguarantee thatanauditconducted inaccordance withISAswillalways includes ouropinion.Reasonable assurance isahighlevel ofassurance, but misstatement, whetherdueto fraud orerror, andto issue anauditors’ report that consolidated andseparate financialstatements asawhole are free from material Our objectives are to obtain reasonable assurance about whether the financial statements Auditors’ responsibilities for theauditofconsolidated andseparate reporting process. The directors are responsible for overseeing theGroup’s andCompany’s financial alternative butto doso. liquidate theGroup and/orCompanyor to cease operations, orhave norealistic using thegoingconcern basisofaccounting unless thedirectors eitherintend to going concern, disclosing, asapplicable, matters related to goingconcern and responsible for assessing theGroup’s andCompany’s abilityto continue asa In preparing theconsolidated andseparate financialstatements, directors are whether dueto fraud orerror. and separate financial statements that are free from material misstatement, the Directors determine isnecessary to enable thepreparation ofconsolidated required bytheKenyan CompaniesAct,2015,andfor suchinternal control as accordance withInternational FinancialReporting Standards, andinthemanner consolidated andseparate financialstatements thatgive atrueandfair view in As stated onpage88,thedirectors are responsible for thepreparation of Directors’ responsibilities for the consolidated and separate financialstatements Report ontheauditofconsolidated andseparate financialstatements (Continued) TO THEMEMBERSOFKCB GROUP PLC REPORT OFTHEINDEPENDENTAUDITORS future events orconditions may cause the Group and/or Companyto cease audit evidence obtained upto thedate ofourauditors’ report. However, are inadequate,to our opinion. Ourconclusions modify arethe based on in theconsolidated andseparate financial statements or, ifsuchdisclosures required to draw attention in our auditors’ report to the related disclosures going concern. Ifwe conclude thatamaterial uncertainty exists, we are significant doubtontheGroup’s andCompany’s abilityto continue asa material uncertainty exists related to events orconditions thatmay cast basis ofaccounting and,basedontheaudit evidence obtained, whethera Conclude ontheappropriateness of theDirectors’ useofthegoingconcern the Directors. reasonableness ofaccounting estimates andrelated disclosures madeby Evaluate theappropriateness of accounting policies usedandthe and Company’s internal control. for thepurposeofexpressing anopinionontheeffectiveness oftheGroup’s design audit procedures that are appropriate in the circumstances, but not Obtain anunderstanding ofinternal control relevant to theauditinorder to internal control. forgery, intentional omissions, misrepresentations, or the override of higher thanfor oneresulting from error, asfraud may involve collusion, The riskofnotdetecting amaterial misstatement resulting from fraud is evidence thatissufficientandappropriate to provide abasisfor ouropinion. and perform auditprocedures responsive to thoserisks, andobtain audit and separate financialstatements, whetherdueto fraud orerror, design Identify andassess therisks ofmaterial misstatement oftheconsolidated Nairobi PO Box 40612,00100 Certified PublicAccountants auditors’ report isCPA JosephKariuki-P/2102. The (iii) Ouropinionontheannualfinancialstatements isunqualified. Companies Act,2015;and pages 83to 87hasbeenproperly prepared inaccordance withtheKenyan (ii) Inouropinion,theauditable partofthedirectors’ remuneration report on is consistent withthefinancialstatements; (i) Inouropinion,theinformation given inthe report ofthedirectors onpage82 audit, that:- As required bytheKenyan Companies Act,2015we report to you, basedonour Report onotherlegal andregulatory requirements expected to outweigh thepublicinterest benefits ofsuchcommunication. our report because theadverse consequences ofdoingsowould reasonably be rare circumstances, we determine thatamatter should notbecommunicated in regulation precludes publicdisclosure aboutthematter orwhen,inextremely audit matters. We describethesematters inourauditors’ report unless lawor separate financial statements of the current periodand are therefore thekey matters that were of most significance in the audit of the consolidated and From the matters communicated with the Directors, we determine those bear onourindependence, andwhere applicable, related safeguards. with themallrelationships andothermatters thatmay reasonably bethoughtto relevant ethical requirements regarding independence, andto communicate We alsoprovide theDirectors withastatement thatwe have complied with significant deficienciesininternal control thatwe identifyduringouraudit. scope andtimingoftheauditsignificant auditfindings,includingany We communicate withDirectors regarding, amongothermatters, theplanned • • Signing Partner responsible for theauditresulting inthisindependent solely responsible for ouraudit opinion the direction, supervisionandperformance oftheGroup audit.We remain an opinionontheconsolidated financialstatements. We are responsible for information oftheentitiesorbusiness activitieswithintheGroup to express Obtain sufficientappropriate auditevidence regarding thefinancial transactions andevents inamannerthatachieves fair presentation. the consolidated and separate financial statements represent the underlying and separate financialstatements, includingthedisclosures, andwhether Evaluate theoverall presentation, structure andcontent oftheconsolidated to continue asagoingconcern. 5 March 2019

91 91 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 Note KShs.’million KShs.’million Interest income 9 66,280 63,673 Interest expense 9 (17,450) (15,288) Net interest income 48,830 48,385

Fees and commission income 10 15,046 15,151 Fees and commission expense 10 (808) (457) Net fees and commission income 14,238 14,694

Net foreign exchange income 11 4,374 4,666 Other operating income 13 4,361 3,640 Total income 71,803 71,385 Loss allowance on financial assets 14 (2,944) (5,914) Net operating income 68,859 65,471 Employee benefits 15 (17,007) (19,146) Depreciation and amortization 16 (3,146) (2,791) Other operating expenses 17 (14,545) (13,059) Profit before tax and loss on monetary position 18 34,161 30,475 Loss on monetary position on hyperinflation 19 (302) (1,361) Profit before income tax 33,859 29,114 Income tax expense 20 (9,864) (9,410) Profit for the year 23,995 19,704

Attributable to: Owners of the parent 23,995 19,704 Earnings per share (KShs.) Basic earnings per share 21 7.83 6.43 Diluted earnings per share 21 7.83 6.43 Dividends (KShs. millions) Interim dividend declared and paid 42 3,066 3,066 Proposed final 42 7,665 6,132 Total dividends 10,731 9,198

The notes set out on pages 104 to 176 form an integral part of these financial statements.

9292 KCB GROUP PLC STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 Note KShs.’million KShs.’million Profit for the year 23,995 19,704

Other comprehensive income, net of income tax Items that will not be reclassified subsequently to profit or loss Re-measurement of defined benefit pension fund 46 (486) 100 Financial assets at FVOCI (equity investments) 1,316 46 Related tax at 30% 33 (249) (30)

581 70 Hyperinflation translation 664 2,080 Items that are or may be reclassified subsequently to profit or loss

Exchange differences on translation of foreign operations (1,967) (1,474) Fair value through other comprehensive income financial assets (2017-AFS) : - Unrealized gain arising from measurement at fair value 1,094 1,833 Related tax at 30% - current year 33 (328) (550) 766 1,283

Other comprehensive income for the year, net of income tax 44 1,959 Total comprehensive income for the year 24,039 21,663 Attributable to: Owners of parent 24,039 21,663

The notes set out on pages 104 to 176 form an integral part of these financial statements. FINANCIAL STATEMENTS & NOTES & STATEMENTS FINANCIAL

93 KCB GROUP PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2018

2018 2017 Note KShs.’million KShs.’million ASSETS Cash and balances with Central Banks 22 50,101 50,714 Loans and advances to banks 23 32,017 21,711 Financial assets at fair value through OCI (2017-AFS) 24 83,805 71,743 Clearing house 25 1,217 1,222 Other assets and prepayments 26 30,646 20,006 Loans and advances to customers (Net) 27 455,880 422,685 Financial assets at amortized cost (2017-HTM) 28 37,174 38,264 Tax recoverable 20 - 524 Property and equipment 29 11,007 10,454 Intangible assets 30 3,003 3,371 Prepaid operating lease rentals 31 129 132 Retirement benefit asset 46 658 1,018 Deferred tax asset 33 8,676 4,824 TOTAL ASSETS 714,313 646,668 LIABILITIES AND EQUITY Liabilities Deposits from banks 34 20,105 11,039 Deposits from customers 35 537,460 499,549 Bills payable 36 5,514 6,141 Other liabilities and accrued expenses 37 14,817 8,653 Deferred tax liability 33 - 160 Tax payable 20 309 266 Borrowings 39 22,447 14,895 Total liabilities 600,652 540,703 Equity Share capital 40 3,066 3,066 Share premium 41 21,647 21,647 Statutory credit risk reserve 41 1,222 11,233 Other reserves 41 (4,995) (5,039) Retained earnings 41 85,056 68,926 Proposed dividend 42 7,665 6,132 Total equity 113,661 105,965 TOTAL LIABILITIES AND EQUITY 714,313 646,668

The financial statements set out on pages 92 to 176 were approved and authorised for issue by the Board of Directors on 5 March 2019

Andrew Wambari Kairu Joshua N. Oigara Lawrence Mark Njiru Joseph Kania Chairman Chief Executive Officer & Managing Director Director Secretary

The notes set out on pages 104 to 176 form an integral part of these financial statements.

9494 The notes setoutonpages104to 176form an integral partofthesefinancialstatements. FOR THEYEARENDED31DECEMBER2018 COMPANY STATEMENT OFPROFIT ORLOSS Total dividends Proposed final Interim dividenddeclared andpaid Dividends (KShs.millions) Diluted Basic Earnings pershare (KShs.) Owners oftheparent Attributable to: Profit for theyear Income tax credit /(expense) Profit before income tax Other operating expenses Depreciation andamortization Employee benefits Net operating income Total income Other operating income Dividend income Net foreign exchange (loss) /gain Net interest income Interest expense Interest income Note 42 42 21 21 20 18 17 16 15 13 12 11 9 9 KShs.’million (399) (272) 16,864 7,665 3,066 (91) (14) (4) 104 105 317 10,731 16,610 16,610 16,506 17,000 17,000 5.42 5.42 45 2018 KShs.’million (256) (527) 12,417 6,132 3,066 (37) (47) (3) 116 580 6 12,249 12,249 12,286 12,592 12,592 9,198 4.00 4.00 53 2017 95 95 95 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES COMPANY STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 Note KShs.’million KShs.’million

Profit for the year 16,610 12,249 Other comprehensive income, net of income tax Items that are or may be reclassified subsequently to profit or loss Fair value through other comprehensive income financial assets (2017-AFS) - Unrealized (loss)/gain arising from measurement at fair value (27) (6) Related tax at 30% - current year 33 8 2 (19) (4)

Other comprehensive income for the year, net of income tax (19) (4) Total comprehensive income for the year 16,591 12,245

Attributable to: Owners of the parent 16,591 12,245

The notes set out on pages 104 to 176 form an integral part of these financial statements.

9696 The notes setoutonpages104to 176form anintegral partofthesefinancialstatements. Chairman ChiefExecutive Officer &ManagingDirector Director Andrew Wambari KairuJoshuaN.Oigara ______The financialstatements setoutonpages92to 176were approved andauthorisedfor issue bytheBoard ofDirectors on5March 2019. AS AT 31DECEMBER2018 COMPANY STATEMENT OFFINANCIALPOSITION TOTAL LIABILITIESANDEQUITY Total equity Proposed dividend Retained earnings Other reserves Share premium Share capital Equity Total liabilities Borrowings Deferred tax liability Other liabilities Balances dueto related companies Bills payable Liabilities LIABILITIES ANDEQUITY TOTAL ASSETS Deferred tax asset Tax receivable Investment insubsidiaries Balances duefrom related companies Property andequipment Other assets andprepayments Financial assets atfair value through OCI (2017-AFS) Cash andbankbalances ASSETS Lawrence MarkNjiru ______Note 42 41 41 41 40 39 33 37 38 36 33 20 32 38 29 26 24 22 JosephKania Secretary (43) 43,773 21,647 68,036 7,665 3,066 7,105 731 102 649 899 KShs.’million 55 69 34 76,894 76,108 76,894 786 - - - - 2018 (24) 37,894 21,647 67,649 6,132 3,066 7,755 1,267 8,569 561 888 KShs.’million 70 69 53 20 2 77,809 68,715 77,809 9,094 - - 2017

97 97 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES - - 664 (340) 1,687 Total Total KShs. 23,995 (7,145) (1,967) (3,066) (6,132) 24,039 98,820 (9,198) 105,965 113,661 Millions ------664 664 2,320 2,984 2,320 KShs. Hyper- reserve reserve Millions inflation ------44 384 384 (340) (340) KShs. benefit reserve reserve Millions Defined - - - - - KShs. 68,926 23,995 10,011 (7,145) (3,066) (7,665) 85,056 34,006 61,781 Millions (10,731) earnings Retained Retained ------134 134 Fair Fair 1,687 1,821 1,687 value value KShs. reserve reserve Millions ------KShs. (1,967) (7,877) (9,844) (1,967) (7,877) reserve reserve Millions Foreign Foreign Currency Currency translation translation ------6,132 7,665 7,665 1,533 6,132 KShs. (6,132) Millions Dividend Proposed Proposed ------risk 1,222 credit credit KShs. 11,233 11,233 (10,011) reserve reserve Millions (10,011) Statutory Statutory ------KShs. 21,647 Share Share 21,647 21,647 Millions premium premium ------3,066 3,066 3,066 KShs. Share Share capital capital Millions

46 42 42 Note 3 a (i) Change in fair value of Fair value through other comprehensive other comprehensive through value of Fair value Change in fair Adjustment on initial application of IFRS 9, net taxes on initial application Adjustment At 31 December 2018 At 31 December Other comprehensive income (net of taxes) income Other comprehensive operations foreign for differences translation currency Foreign Hyperinflationary impact At 1 January 2018 Interim dividend paid - 2018 Interim Total comprehensive income comprehensive Total Total contributions and distributions contributions Total Profit for the year for Profit Transfer from statutory credit risk reserve credit statutory from Transfer

as at 1 January 2018 Balance Restated (net of tax) (2017-AFS) investments income (net of taxes) of defined benefit asset/liability Re-measurement in equity directly recorded with owners Transactions Dividend paid – 2017 – 2018 Dividend proposed The notes set out on pages 104 to 176 form an integral part of these financial statements. an integral 176 form set out on pages 104 to The notes KCB GROUP PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY STATEMENT CONSOLIDATED PLC GROUP KCB 31 DECEMBER 2018 AS AT

9898 KCB GROUP PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2017

Statutory Foreign credit currency Fair Defined Hyper- Share Share risk Proposed translation value Retained benefit inflation capital premium reserve Dividend reserve reserve earnings reserve reserve Total KShs. KShs. KShs. KShs. KShs. KShs. KShs. KShs. KShs. KShs. Note Millions Millions Millions Millions Millions Millions Millions Millions Millions Millions

At 1 January 2017 3,066 21,647 10,240 9,198 (6,403) (1,149) 59,413 314 240 96,566

Profit for the year ------19,704 - - 19,704

Other comprehensive income (net of taxes)

Foreign currency translation differences for foreign operations - - - - (1,474) - - - - (1,474)

Change in fair value of FVTOCI increments (net of tax) - - - - - 1,283 - 1,283

Transfer to statutory credit risk reserve - - 993 - - - (993) - - -

Re-measurement of defined benefit asset/liability (net of taxes) 46 ------70 - 70

Hyperinflationary impact ------2,080 2,080

Total comprehensive income - - 993 - (1,474) 1,283 18,711 70 2,080 21,663

Transactions with owners recorded directly in equity

Dividend paid – 2016 - - - (9,198) - - - - - (9,198)

Interim dividend – 2017 42 - - - - - (3,066) - - (3,066)

Dividend proposed – 2017 42 - - - 6,132 - - (6,132) - - -

Total contributions and distributions - - - (3,066) - - (9,198) - - (12,264)

At 31 December 2017 3,066 21,647 11,233 6,132 (7,877) 134 68,926 384 2,320 105,965

The notes set out on pages 104 to 176 form an integral part of these financial statements.

99 99 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES - - (19) Total KShs. 68,715 16,610 (6,132) (3,066) 16,591 (9,198) Millions 76,108 - - KShs. 37,894 16,610 (7,665) (3,066) 16,610 (10,731) Millions Retained Retained earnings 43,773 - - - - - (19) (24) (19) Fair Fair value value KShs. reserve reserve Millions (43) - - - - 7,665 6,132 1,533 KShs. (6,132) Millions 7,665 Dividend Proposed ------KShs. Share 21,647 Millions 21,647 premium ------3,066 KShs. Share capital Millions 3,066 42 42 Note - Total contributions and distributions contributions Total 2018 At 31 December Total comprehensive income comprehensive Total At 1 January 2018 the year for Profit (net of taxes) income Other comprehensive other comprehen through value of Fair value Change in fair Interim dividend paid - 2017 Interim sive income increments (net of taxes) increments income sive in equity directly recorded with owners Transactions Dividend paid – 2017 2018 Dividend proposed part of these financial statements. an integral 176 form set out on pages 104 to The notes COMPANY STATEMENT OF CHANGES IN EQUITY STATEMENT COMPANY 31 DECEMBER 2018 AS AT

100100 COMPANY STATEMENT OF CHANGES IN EQUITY AS AT 31 DECEMBER 2017

Fair Share Share Proposed value Retained capital premium Dividend reserve earnings Total KShs. KShs. KShs. KShs. KShs. KShs. Note Millions Millions Millions Millions Millions Millions

At 1 January 2017 3,066 21,647 9,198 (20) 34,843 68,734

Profit for the year - - - - 12,249 12,249

Other comprehensive income (net of taxes) - Change in fair value of Fair value through other comprehensive income increments (net of taxes) - - - (4) - (4)

Total comprehensive income - - - (4) 12,249 12,245

Transactions with owners recorded directly in equity

Dividend paid – 2016 - - (9,198) - (9,198)

Interim dividend paid -2017 42 - - - (3,066) (3,066)

Dividend proposed 2017 - - 6,132 - (6,132) -

Total contributions and distributions 42 - - (3,066) - (9,198) (12,264)

At 31 December 2017 3,066 21,647 6,132 (24) 37,894 68,715

The notes set out on pages 104 to 176 form an integral part of these financial statements. 101 101 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2018

2018 2017 Note KShs.’million KShs.’million

Net cash flows generated from operating activities 43(b) 7,908 20,158 Investing activities

Proceeds from disposal of property and equipment 17 14 Purchase of intangible assets 30 (921) (1,244) Purchase of property and equipment 29(a) (2,959) (2,496) Effects of exchange rate changes on translation of foreign operation 882 (1,625) Net cash flows used in investing activities (2,981) (5,351)

Financing activities

Net movement in borrowings 39 7,426 (8,087) Dividends paid 42 (9,198) (12,264) Net cash flows used in financing activities (1,772) (20,351) Decrease in cash and cash equivalents 3,155 (5,544) Cash and cash equivalents at the beginning of the year 47,474 53,018

Cash and cash equivalents at the end of the year 43(b) 50,629 47,474

The notes set out on pages 104 to 176 form an integral part of these financial statements.

102102 The notes setoutonpages104to 176form an integral partofthesefinancialstatements. FOR THEYEARENDED31DECEMBER2018 COMPANY STATEMENT OFCASH FLOWS Cash andcash equivalents attheendofyear Cash andcash equivalents atthebeginningof theyear (Decrease)/increase incash andcash equivalents Net cash flows usedinfinancingactivities Dividends paid Net movement inborrowings Financing activities Net cash flows usedininvesting activities Investment insubsidiaries Net cash flows generated from operating activities Purchase ofproperty andequipment Investing activities 43(c) 43(b) Note 44 42 39 32 29 (9,198) (7,755) (387) KShs.’million (16,953) (92) 888 (479) 11 17,443 899 2018 KShs.’million (12,264) (519) (12,264) (63) (519) 951 12,720 888 - - 2017 103 103 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

1. GENERAL INFORMATION c. Functional and presentation currency On 1 January 2016, KCB Group PLC, transferred certain assets and liabilities The financial statements are presented in Kenya Shillings (KShs.), to KCB Bank Kenya Limited at book values in exchange for equity in KCB which is the functional currency of the parent company and Kenyan Group PLC. KCB Group PLC is now the parent company to KCB Bank Kenya subsidiaries. Except as otherwise indicated, financial information Limited. presentation in Kenya shillings has been rounded to the nearest million (KShs.‘million). Foreign currency transactions are translated The Group is incorporated in Kenya under the Kenyan Companies Act, 2015 into the functional currency using the exchange rates prevailing at the and has subsidiaries in Kenya, South Sudan, Tanzania, Uganda, Rwanda dates of the transactions or valuation where items are re-measured and Burundi. The consolidated financial statements of the Company as d. Use of estimates and judgements at and for the year ended 31 December 2018 comprise the Group and its In preparing these consolidated financial statements, management subsidiaries (together referred to as the “Group” and individually referred has made judgements, estimates and assumptions that affect the to as the “Company”) and the Group’s interest in associates. The address of application of the Group’s accounting policies and the reported its registered office is as follows: amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Kencom House Moi Avenue Estimates and underlying assumptions are reviewed on an ongoing PO Box 48400 - 00100 basis. Revisions to estimates are recognised prospectively. Nairobi, Kenya The areas involving a higher degree of judgment or complexity, or areas The Company has a 100% ownership in KCB Bank Kenya Limited, Kenya where assumptions and estimates are significant to the consolidated Commercial Finance Company Limited, Savings & Loan Kenya Limited, financial statements are disclosed in Note 5. Kenya Commercial Bank Nominees Limited, Kencom House Limited, KCB Bank Tanzania Limited, KCB Bank South Sudan Limited, KCB Bank Rwanda 3. SIGNIFICANT ACCOUNTING POLICIES Limited, KCB Bank Uganda Limited, KCB Bank Burundi Limited, KCB The accounting policies set out below have been applied consistently to all years Insurance Agency Limited, KCB Capital Limited and a 45% ownership in presented on these financial statements and have been applied consistently by United Finance Limited. the Group.

The shares of the Company are listed on the Nairobi Securities Exchange, (a) New standards, amendments and interpretations Uganda Securities Exchange, Dar-es-Salaam Stock Exchange and Rwanda Stock Exchange. (i) New standards, amendments and interpretations effective and adopted during the year A number of new standards are also effective from 1 January 2018 but 2. BASIS OF PREPARATION they do not have a material effect on the Group’s financial statements. Due to the transition method chosen by the Group in applying IFRS a. Statement of compliance 9, comparative information throughout these financial statements has The consolidated financial statements of the Company and its not generally been restated to reflect its requirements. subsidiaries as well as the separate financial statements of the Company, together referred to as “the financial statements”, have The adoption of IFRS 15 did not impact the timing or amount of fee been prepared in accordance with International Financial Reporting and commission income from contracts with customers and the Standards (IFRSs) as issued by the International Accounting Standards related assets and liabilities recognised by the Group. Accordingly, the Board (IASB) and in the manner required by the Kenyan Companies impact on the comparative information is limited to new disclosure Act, 2015. requirements.

For the Kenyan Companies Act, 2015 reporting purposes, the balance The effect of initially applying these standards is mainly attributed to sheet is represented by the statement of financial position and the the following: profit and loss account by the statement of profit or loss in these • an increase in impairment losses recognised on financial assets; financial statements. • additional disclosures related to IFRS 9; and • Additional disclosures related to IFRS 15 Details of significant accounting policies are included in note 3. Except for changes noted below, the Group has consistently applied the accounting policies to all periods presented in these financial statements b. Basis of measurement • IFRS 15 Revenue from Contracts with Customers The financial statements have been prepared on the historical cost This standard replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 basis except for the following: Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of • Financial instruments at fair value through profit or loss are Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC-31 Revenue – measured at fair value; Barter of Transactions Involving Advertising Services. • Financial assets at FVTOCI are measured at fair value; • The liability for defined benefit obligations is recognised as The standard contains a single model that applies to contracts with customers the present value of the defined benefit obligation less the net and two approaches to recognising revenue: at a point in time or over time. The total of the plan assets, plus unrecognised actuarial gains less standard specifies how and when the Company will recognise revenue as well unrecognised past service cost and unrecognised actuarial as requiring such entities to provide users of financial statements with more losses. informative, relevant disclosures. • KCB Bank South Sudan Limited’s financial statements were The Company applied IFRS 15 on 1 January 2018 using the modified retrospective stated in terms of the measuring unit current at 31 December approach in which the cumulative effect of initially applying this Standard is 2018 before they were consolidated. recognised at the date of initial application as an adjustment to the opening

104104 the reclassifications setoutinthetable above andexplained below. under IFRS9are setoutinabove. Theapplication ofthesepoliciesresulted in The Group’s accounting policiesonthe classification offinancialinstruments financial assets andfinancialliabilitiesasat1January2018. with IAS39andthenew measurement categories underIFRS9for theGroup’s The following table shows theoriginalmeasurement categories inaccordance application ofIFRS9 Classification offinancialassets andfinancialliabilitiesonthedate ofinitial out inNote 4a). of IFRS9are summarisedbelow. Thefullimpactofadoptingthestandard isset The key changesto theGroup’s accounting policiesresulting from its adoption disclosures about2018,buthave notbeenappliedto thecomparative information. amendments to IFRS7FinancialInstruments: Disclosures thatare appliedto As aresult oftheadoptionIFRS9,Group hasadopted consequential assets andto certain aspects oftheaccounting for financialliabilities. The new standard brings fundamental changesto the accounting for financial replace IAS39FinancialInstruments: Recognition andMeasurement. which replaces earlierversions ofIFRS9andcompletes theIASB’s project to On 24July 2014theIASBissued thefinalIFRS9FinancialInstruments Standard, IFRS 9:FinancialInstruments (2014) retained earningswas required. There was nomaterial impactofapplication ofIFRS15andnoadjustment to periods. balance ofretained earningsasat1January2018withoutrestating comparative FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS adopted duringtheyear (continued) (i) (a) New standards, amendments andinterpretations (continued) New standards, amendments andinterpretations effective and • • Central Treasury seeks to minimise the costs of managing these separate portfolios to meeteveryday liquidityneeds. TheGroup Certain debtsecuritiesare held bytheGroup Central Treasury in at amortisedcost underIFRS9. contractual cash flows. These assets are classified as measured business modelwhoseobjective isto hold assets to collect the The Group considers thatthesesecuritiesare held withina sold, butsuchsales are notexpected to bemore thaninfrequent. a separate portfolio for long-term yield. Thesesecuritiesmay be Certain debtsecuritiesare held bytheGroup Central Treasury in amounts underIFRS9ontransition to IFRS9on1January2018. The following table reconciles thecarrying amounts underIAS39to thecarrying application ofIFRS9–continued Classification offinancialassets andfinancialliabilitiesonthedate ofinitial Opening balance Loans andadvance Financial assets Remeasurement lsn balance Closing • • assets. the adoptionofIFRS9,thesesecuritieswere measured atFVTOCI purposes have been designated under IFRS 9 as at FVOCI. Before Certain equityinvestments held bytheGroup for strategic under IFRS9. are notSPPI.Theseassets are therefore measured atFVTPL certain asset-backed securitieshave contractual cash flows that the securities’ performance andto make decisions.Inaddition, on fair value information andusesthat information to assess of realising cash flows through sale. TheGroup primarily focuses Treasury inseparate portfolios andare managedwithanobjective Certain non-trading debtsecuritiesare held bytheGroup Central financial assets. achieved bybothcollecting contractual cash flows andselling securities are held within a business model whoseobjective is significant invalue. TheGroup considers thatunderIFRS9these The investment strategy often results insales activitythatis as well asgainsandlosses from thesale offinancialassets. portfolio. Thatreturn consists ofcollecting contractual payments liquidity needs and therefore actively managesthereturn on the KShs. million amount 31 December Carrying 422,685 422,685 IAS39 2017 - Reclas million sifica KShs. tion - - - - - surement Remea (10,207) (10,207) million KShs. - - 1 January2018 KShs. million Carrying (10,207) amount 422,685 412,478 IFRS9 105 105 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

Financial assets and financial liabilities

Classification of financial assets and financial liabilities on the date of initial application of IFRS 9 The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group’s financial assets and financial liabilities as at 1 January 2018.

Classification Under Original Carrying New Carrying Classification Under IAS 39 IFRS 9 Amount Amount Note Millions Millions FINANCIAL ASSETS Cash and balances with Central Banks 22 Loans & Receivables Amortised Cost 50,714 50.714 Loans and advances to banks 23 Loans & Receivables Amortised Cost 21,711 21,711 Financial assets available-for-sale 24 Available For Sale FVOCI 71,743 71,743 Clearing house 25 Loans & Receivables Amortised Cost 1,222 1,222 Other assets and prepayments 26 Loans & Receivables Amortised Cost 20,006 20,006 Loans and advances to customers 27 Loans & Receivables Amortised Cost 422,685 412,478 Financial assets held to maturity 28 Held to maturity Amortised Cost 38,264 38,264 FINANCIAL LIABILITIES Liabilities Deposits from banks 34 Amortised Cost Amortised Cost 11,039 11,039 Deposits from customers 35 Amortised Cost Amortised Cost 499,549 499,549 Bills payable 36 Amortised Cost Amortised Cost 6,141 6,141 Other liabilities and accrued expenses 37 Amortised Cost Amortised Cost 8,653 8,653 Borrowings 39 Amortised Cost Amortised Cost 14,895 14,895

The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Company’s financial assets and financial liabilities as at 1 January 2018.

Classification Under Original Carrying New Carrying Classification Under IAS 39 IFRS 9 Amount Amount Note Millions Millions FINANCIAL ASSETS Cash and balances with Central Banks 22 Loans & Receivables Amortised Cost 888 888 Financial assets available-for-sale 24 Available For Sale FVOCI 53 53 Other assets and prepayments 26 Loans & Receivables Amortised Cost 20 20 Balances due from related companies 38 Loans & Receivables Amortised Cost 8,569 8,569 FINANCIAL LIABILITIES Liabilities Bills Payable 34 Amortised Cost Amortised Cost 1,267 1,267 Balances due to related companies 38 Amortised Cost Amortised Cost 70 70 Borrowings 39 Amortised Cost Amortised Cost 7,755 7,755

106106 Classification offinancialassets andfinancialliabilitiesonthedate ofinitialapplication ofIFRS9–continued IFRS 9:FinancialInstruments (2014) (i) New standards, amendments andinterpretations effective andadopted duringtheyear -continued a. New standards, amendments andinterpretations (continued) 3. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES(Continued) FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS on othercomponents ofequity. The following table summarisestheimpactoftransition to IFRS9ontheopeningbalance oftheliabilitycredit reserve, retained earningsandNCI.There isnoimpact

2017 represent theallowance for credit losses andreflect themeasurements basisunderIAS39. The table below shows the reconciliations from the openingto theclosing balance of theloss allowance byclass of financial instruments. Comparative amounts for Restatement oftheprioryear December Corporate &Retail Loss allowance asat31 Loans andadvances to customers atamortisedcost Restatement oftheprioryear Loss allowance asat1January – Transfer to stage 1 Changes intheloss allowance – Transfer to stage 2 – Transfer to stage 3 – Write-offs derecognition – Changesdueto modifications thatdidnotresult in New financialassets originated orpurchased Financial assets thathave beenderecognised Changes inmodels/riskparameters Foreign exchange andother movements Loss allowance asat31December Opening balance underIFRS9(1January2018) contracts) Recognition ofexpected credit losses underIFRS9(includinglease receivables, loan commitments andfinancialguarantee Closing balance underIAS39(31December 2017) Retained earnings In KShs.millions

KShs.m (14,019) Stage 1 12,236 4,115 4,590 4,885 (109) (132) 295 996 168 - - -

KShs.m Stage 2 (9,935) 3,444 2,176 3,034 9,323 (336) (230) 858 618 942 28 - - 2018 KShs.m Stage 3 13,090 (8,367) (7,920) 14,805 18,246 10,451 3,441 1,915 (660) (509) (428) 362 - (31,784) KShs.m (8,367) 15,958 10,207 26,165 32,010 20,649 3,025 (400) Total - - - - - KShs.m Collective 1,153 1,173 1,173 (18) (2) ------2017 Individual KShs.m 14,805 (2,837) (9,479) 11,708 11,708 15,436 (23) ------

adopting IFRS 9 at 1 January 1 9 at Total KShs.m Impact of (7,145) 61,781 68,926 (2,837) (9,497) 12,881 12,881 15,436 15,958 2018 (25) ------107 107 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) a. New standards, amendments and interpretations (continued) (ii) New standards, amendments and interpretations issued but not adopted

The Company does not plan to adopt these standards early. These are summarised below;

New Standard or amendments Effective for annual periods beginning on or after IFRS 9 Prepayment Features with Negative Compensation 1 January 2019 IAS 28 Long-term Interests in Associates and Joint Ventures 1 January 2019 IFRS 16 Leases 1 January 2019 IFRIC 23 Uncertainty over income tax treatments 1 January 2019 IFRS 17 Insurance contracts 1 January 2022 Annual improvements cycle (2015-2017) 1 January 2019

Sale or Contribution of Assets between an Investor and its Associate To be determined or Company (Amendments to IFRS 10 and IAS 28). IAS 19 Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) 1 January 2019 IFRS 3 Definition of a Business 1 January 2020 Amendments to references to the Conceptual Framework in IFRS Standards 1 January 2020

Amendments to IAS 1 and IAS 8 Definition of Material 1 January 2020

All standards and interpretations will be adopted at their effective date (except assets and liabilities for all leases with a term of more than 12 months, unless for those standards and interpretations that are not applicable to the entity). Of the underlying asset is of low value. A Company recognises the present value of those standards that are not yet effective, IFRS 16, IAS 19, amendmentss to IAS the unavoidable lease payments and shows them either as lease assets (right- 1 and IAS 8 and IFRIC 23 are expected to have a significant effect on the Group’s of-use assets) or together with property, plant and equipment. If lease payments financial statements in the period of initial application. are made over time, a Company also recognises a financial liability representing its obligation to make future lease payments. (a) depreciation of lease assets and interest on lease liabilities in profit or loss IFRS 16: Leases over the lease term; and On 13 January 2016 the IASB issued IFRS 16 Leases, completing the IASB’s (b) separate the total amount of cash paid into a principal portion (presented project to improve the financial reporting of leases. IFRS 16 replaces the previous within financing activities) and interest (typically presented within either leases standard, IAS 17 Leases, and related interpretations. operating or financing activities) in the statement of cash flows IFRS 16 sets out the principles for the recognition, measurement, presentation IFRS 16 substantially carries forward the lessor accounting requirements in IAS and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) 17. Accordingly, a lessor continues to classify its leases as operating leases or and the supplier (‘lessor’). The standard defines a lease as a contract that finance leases, and to account for those two types of leases differently. However, conveys to the customer (‘lessee’) the right to use an asset for a period of time in compared to IAS 17, IFRS 16 requires a lessor to disclose additional information exchange for consideration. about how it manages the risks related to its residual interest in assets subject A Company assesses whether a contract contains a lease on the basis of whether to leases. the customer has the right to control the use of an identified asset for a period The standard does not require a Company to recognise assets and liabilities for: of time. (a) short-term leases (i.e. leases of 12 months or less) and; The standard eliminates the classification of leases as either operating leases or finance leases for a lessee and introduces a single lessee accounting model. All (b) leases of low-value assets leases are treated in a similar way to finance leases. The new standard is effective for annual periods beginning on or after 1 January Applying that model significantly affects the accounting and presentation of 2019. Early application is permitted insofar as the recently issued revenue leases and consequently, the lessee is required to recognise: Standard, IFRS 15 Revenue from Contracts with Customers is also applied.

108108 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS (ii) New standards, amendments andinterpretations issued butnotadopted a. New standards, amendments andinterpretations (continued) 3. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES(CONTINUED) The amendments clarifythat: 19) — IAS19PlanAmendment,Curtailment orSettlement (Amendments to IAS from theapplication ofIFRIC23. The Group isassessing thepotential impactonits financialstatements resulting 2019. The new Standard iseffective for annualperiodsbeginningonorafter 1January (c) (b) (a) requirements, about The entitywillalsoneedto provide disclosures, underexisting disclosure measuring anuncertainty). use eitherthemost likely amountmethodortheexpected value methodwhen that best predicts the resolution of the uncertainty (that is, the entityshould The entityisrequired to measure theimpactofuncertainty usingthemethod reflected intheoverall measurement oftax andseparate provision isnotallowed. accounting in the period in which that determination is made. Uncertainty is will beaccepted, itshould reflect the effect oftheuncertainty inits income tax tax treatment. Ifanentityconcludes thatitisnotprobable thatthetreatment return, itshould determine its accounting for income taxes consistently withthat uncertain tax treatment thathasbeentaken orisexpected to be taken onatax If anentityconcludes thatitisprobable thatthetax authoritywillaccept an is uncertainty over whetherthattreatment willbeaccepted bythetax authority. An uncertain tax treatment is any tax treatment applied by an entity where there tax assets andliabilitieswhere there isuncertainty over atax treatment. IFRIC 23explains how to recognise and measure deferred andcurrent income accepted bytax authorities,whilst alsoaimingto enhance transparency. IFRIC 23clarifiestheaccounting for income tax treatments thathave yet to be IFRIC 23Clarification onaccounting for Income tax exposures of theGroup’s financialstatements. The Group isstill assessing thepotential impactontheamounts anddisclosures • • • • potential impactofuncertainties notreflected. assumptions andotherestimates used;and judgments made; calculation ofgainor loss onsettlement. be disregarded whendetermining theplanassets aspartofthe Further, ifadefined benefitplanissettled, anyasset ceiling would end. would nothave updated thecalculation ofthesecosts untiltheyear- current service cost andnetinterest for the period.Previously, entities entities willnow useupdated actuarialassumptions to determine the Consistent withthecalculation ofagainor loss onaplanamendment, other comprehensive income (OCI). or loss onanysettlement oftheplanandisdealtwithseparately in the effect oftheasset ceiling isdisregarded whencalculating thegain current service cost andnetinterest for theperiod;and a Companynow usesupdated actuarialassumptions to determine its on amendment,curtailment orsettlement ofa defined benefitplan, on thefinancialstatements oftheGroup. The following amended standards are not expected to have a significant impact Other Standards from theapplication oftherefined definitionofmateriality. The Group isassessing thepotential impactonits financialstatements resulting The amendments are effective from 1January2020butmay beappliedearlier. Estimates andErrors. or misstatements from IAS8Accounting Policies, ChangesinAccounting However, theamendmenthasalsoremoved thedefinitionofmaterial omissions information aboutaspecificreporting entity.” statements make onthebasisof those financialstatements, whichprovide financial expected to influence users decisionsthat theprimary purposefinancial of general “Information ismaterial ifomitting,misstating orobscuringitcould reasonably be expected to influence’ asbelow. also addstheincreased threshold of‘could influence’ to ‘could reasonably be the existing references to ‘omitting’and‘misstating’. Additionally, theamendment The amendmentincludestheconcept of‘obscuring’to thedefinition,alongside and aligningthedefinitionacross IFRSStandards andtheConceptual Framework. The amendmentrefines thedefinitionofMaterial to make iteasierto understand IAS 1and8DefinitionofMaterial • • • • • • • The Group isasssesssing theimpactonfinancialstatements the amendments are first applied.Earlierapplication ispermitted. settlements thatoccur onorafter 1January 2019,orthedate onwhich The amendments apply for planamendments, curtailments or IFRS 17Insurance Contracts Standards Amendments to References to theConceptual Framework inIFRS IFRS 3DefinitionofaBusiness IAS 28) Long-term Interests inAssociates andJointVentures (Amendmentto Annual improvement cycle (2015–2017)various standards 109 109 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Basis of consolidation

(i) Subsidiaries (iv) Transactions eliminated on consolidation The consolidated financial statements comprise the financial statements of the Intra-group balances and transactions, and any unrealised income and expenses Group and its subsidiaries as at 31 December 2018. The subsidiaries are shown (except for foreign currency transaction gains or losses) arising from intra-group in Note 32. transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only Subsidiaries are entities controlled by the Group. Control exists when the Group to the extent that there is no evidence of impairment. has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights (c) Foreign currency translation that presently are exercisable are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the (i) Transactions and balances date that control commences until the date that control ceases. The financial Foreign exchange gains and losses resulting from the settlement of such statements have been prepared using uniform accounting policies for like transactions and from the translation at year-end exchange rates of monetary transactions and other events in similar circumstances. assets and liabilities denominated in foreign currencies are recognized as profit Losses within a subsidiary are attributed to the non-controlling interest even or loss, except when deferred in other comprehensive income as qualifying cash if that results in a deficit balance. A change in the ownership interest of a flow hedges and qualifying net investment hedges. subsidiary, without a loss of control, is accounted for as an equity transaction. If Foreign exchange gains and losses that relate to borrowings and cash and cash the Group loses control over a subsidiary, it: equivalents are presented in the income statement within “finance income • Derecognises the assets (including goodwill) and liabilities of the or costs”. All other foreign exchange gains and losses are presented in the subsidiary; statement of profit or loss for the year within “other gains/losses-net”. • Derecognises the carrying amount of any non-controlling interest; Changes in the fair value of monetary securities denominated in foreign currency classified as FVTOCI are analysed between translation differences resulting from • Derecognises the cumulative translation differences, recorded in changes in the amortised cost of the security and other changes in the carrying equity; amount of the security. • Recognises the fair value of the consideration received; Translation differences related to changes in amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in other • Recognises the fair value of any investment retained. Subsequently, it comprehensive income. is accounted as an equity accounted investee or as an FVTOCI financial asset depending on the level of influence retained; and Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as • Recognises any surplus or deficit in profit or loss. part of the fair value gain or loss. (ii) Associate Translation differences on non-monetary financial assets, such as equities The Group has an investment in an associate which is dormant. classified as FVTOCI, are included in other comprehensive income. Associates are entities in which the Group has significant influence, but not (ii) Group Companies control, over the financial and operational policies. The Group’s investment in The results and financial position of all the group entities (one of which has the its associate is accounted for using the equity method and is recognized initially currency of a hyper-inflationary economy as at 31 December 2018) that have a at cost. functional currency different from the presentation currency are translated into The cost of the investment includes transaction costs. Subsequent to initial the presentation currency as follows: recognition, the financial statement includes the Group’s share of the profit or (i) assets and liabilities of foreign subsidiaries are translated into Kenya Shillings loss and other comprehensive income of equity accounted investee until the date at the rate of exchange ruling at the reporting date; in which significant influence ceases. (ii) income and expenses for each statement of comprehensive income are When the Group’s share of losses exceeds its interest in an equity accounted translated at the weighted average exchange rates for the period; and investee, the carrying amount of the investment including any long-term interests that form part thereof, is reduced to zero, and the recognition of further (iii) exchange differences arising on translation are recognised in other losses is discontinued except to the extent that the Group has an obligation or comprehensive income and accumulated in equity in the translation reserve. On has made payments on behalf of the investee. disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is reclassified from equity to profit or The Group’s investment in associate is accounted for at cost in its separate loss when the gain or loss on disposal is recognised. financial statements. The financial statements for KCB Bank South Sudan Limited have been presented (iii) Loss of control in line with IAS 29 for hyperinflationary economies. Judgment has been used in When the Group loses control over a subsidiary, it derecognizes the assets and the various assumptions used such as the consumer price indices for the various liabilities of the subsidiary, and any related non-controlling interest and other years due to limitation of data available. Refer to Note 48. components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.

110110 FOR THEYEARENDED31DECEMBER2018 NOTES TO THEFINANCIALSTATEMENTS financial instrument to: estimated future cash payments orreceipts through theexpected life ofthe interest method.The‘effective interest rate’ istherate thatexactly discounts Interest income andexpense are recognised inprofit orloss usingtheeffective (i) Interest income andexpenses 3. SIGNIFICANT ACCOUNTING POLICIES Policy applicable after 1January2018 (d) Recognition ofincome statement ofprofit orloss andOCI includes: Interest income calculated usingtheeffective interest methodpresented inthe For information onwhenfinancialassets are credit-impaired, seeNote 4 a gross basis,even ifthecredit riskoftheasset improves. amortised cost oftheasset. Thecalculation ofinterest income doesnotrevert to income iscalculated byapplying thecredit-adjusted effective interest rate to the For financialassets thatwere credit-impaired oninitialrecognition, interest impaired, thenthecalculation of interest income reverts to thegross basis. rate to theamortisedcost ofthe financialasset. Iftheasset isnolonger credit- initial recognition, interest income iscalculated byapplying theeffective interest However, for financialassets that have become credit-impaired subsequentto hedge adjustments atthedate amortisationofthehedgeadjustment begins. market rates ofinterest. The effective interest rate isalsorevised for fair value re-estimation of cash flows of floating rate instruments to reflect movements in cost oftheliability. Theeffective interest rate isrevised asaresult ofperiodic amount oftheasset (whentheasset isnotcredit-impaired) orto theamortised income andexpense, theeffective interest rate isappliedto thegross carrying initial recognition ofafinancialasset orafinancialliability. Incalculating interest The effective interest rate ofafinancial asset orfinancialliabilityiscalculated on financial asset before adjusting for anyexpected credit loss allowance. The ‘gross carrying amountofafinancialasset’ istheamortisedcost ofa credit loss allowance (orimpairmentallowance before 1January2018). and thematurityamountand,for financialassets, adjusted for anyexpected using the effective interest method of any difference between that initial amount minus theprincipalrepayments, plusorminusthecumulative amortisation which thefinancialasset orfinancialliabilityismeasured oninitialrecognition The ‘amortisedcost’ ofafinancial asset orfinancialliabilityistheamountat acquisition orissue ofafinancialasset orfinancial liability. Transaction costs includeincremental costs thatare directly attributable to the and points paidorreceived thatare anintegral partofthe effective interest rate. The calculation oftheeffective interest rate includestransaction costs andfees ECL. effective interest rate is calculated using estimated future cash flows including For purchased or originated credit-impaired financial assets, a credit-adjusted flows considering allcontractual terms ofthefinancialinstrument, butnotECL. purchased or originated credit-impaired assets, the Group estimates future cash When calculating theeffective interest rate for financialinstruments otherthan • • • • • • • the amortisedcost ofthefinancialliability. the gross carrying amountofthefinancialasset; or Other interest income presented inthestatement ofprofit orloss and derivatives designated infair value hedges ofinterest rate risk. the effective portion offair value changesinqualifyinghedging income/expense; and cash flows, inthesameperiodashedgedcash flows affect interest derivatives designated incash flow hedgesofvariability in interest the effective portionoffair value changesinqualifyinghedging interest ondebtinstruments measured atFVOCI; amortised cost; interest onfinancialassets andfinancialliabilitiesmeasured at (CONTINUED) to theacquisition orissue ofafinancialasset orfinancialliability. rate. Transaction costs included incremental costs that were directly attributable and points paidorreceived thatwere anintegral partoftheeffective interest The calculation oftheeffective interest rate includedtransaction costs andfees contractual terms ofthefinancialinstrument, butnotfuture credit losses. the effective interest rate, theGroup estimated future cash flows considering all the carrying amountofthefinancialasset orfinancialliability. Whencalculating financial asset orfinancialliability(or, where appropriate, ashorter period)to the estimated future cash payments andreceipts through theexpected life ofthe interest method.Theeffective interest rate was therate thatexactly discounted Interest income and expense were recognised in profit or loss using the effective Effective interest rate Policy applicable before 1January2018 established, whichin thecase ofquoted securitiesistheex-dividend date. Dividend income is recognised when the Group’s right to receive payment is (i) Dividendincome statement ofprofit orloss andOCI includes: Interest income calculated usingtheeffective interest methodpresented inthe Presentation Interest expense presented inthestatement ofprofit orloss andOCI includes: includes interest income onfinance leases. Other interest income presented in the statement of profit or loss and OCI FVTPL are presented innetincome from otherfinancialinstruments atFVTPL Interest income andexpense onotherfinancialassets andfinancial liabilitiesat income. other changesinthefair value oftrading assets andliabilitiesinnettrading incidental to theGroup’s trading operations andare presented together withall Interest income andexpense onalltrading assets andliabilitiesare considered • • • • • • • • • derivatives designated infair value hedges ofinterest rate risk. the effective portionoffair value changesinqualifyinghedging income/expense; and cash flows, inthesameperiodashedgedcash flows affect interest derivatives designated incash flow hedgesofvariability ininterest the effective portionoffair value changesinqualifyinghedging interest ondebtinstruments measured atFVOCI; amortised cost; interest onfinancialassets andfinancialliabilitiesmeasured at income/expense. cash flows, inthesameperiodashedgedcash flows affect interest derivatives designated incash flow hedgesofvariability ininterest the effective portionoffair value changesinqualifyinghedging financial liabilitiesmeasured atamortised cost; and income/expense. cash flows, inthesameperiodashedged cash flows affect interest derivatives designated incash flow hedgesofvariability ininterest the effective portionoffair value changesinqualifyinghedging financial liabilitiesmeasured atamortisedcost; and includes: Interest expense presented inthestatement ofprofit orloss andOCI OCI includesinterest income onfinance leases 111 111 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Policy applicable before 1 January 2018 (continued) Effective interest rate (continued) (ii) Fees and commission income In determining the amount of current and deferred tax, the Group considers the impact of tax exposures, including whether additional taxes and interest may be Fee and commission income and expense that are integral to the effective interest due. This assessment relies on estimates and assumptions and may involve a rate on a financial asset or financial liability are included in the effective interest series of judgments about future events. New information may become available rate. that causes the Group to change its judgment regarding the adequacy of existing Other fee and commission income – including account servicing fees, investment tax liabilities; such changes to tax liabilities would impact tax expense in the management fees, sales commission, placement fees and syndication fees – is period in which such a determination is made. recognised as the related services are performed. If a loan commitment is not (f) Financial assets and liabilities expected to result in the draw-down of a loan, then the related loan commitment fee is recognised on a straight-line basis over the commitment period Policy applicable from 1 January 2018 A contract with a customer that results in a recognised financial instrument in the IFRS 9 Financial Instruments Group’s financial statements may be partially in the scope of IFRS 9 and partially in the scope of IFRS 15. If this is the case, then the Group first applies IFRS 9 to IFRS 9 sets out requirements for recognising and measuring financial assets, separate and measure the part of the contract that is in the scope of IFRS 9 and financial liabilities and some contracts to buy or sell non-financial items. This then applies IFRS 15 to the residual. standard replaces IAS 39 Financial Instruments: Recognition and Measurement. The requirements of IFRS 9 represent a significant change from IAS 39. The new Other fee and commission expenses relate mainly to transaction and service fees, standard brings fundamental changes to the accounting for financial assets and which are expensed as the services are received. to certain aspects of the accounting for financial liabilities. (iii) Rental income As a result of the adoption of IFRS 9, the Group has adopted consequential amendments to IAS 1. Rental income in respect of operating leases is accounted for on a straight-line basis over the lease terms on ongoing leases. Presentation of Financial Statements, which require separate presentation in the statement of profit or loss and OCI of interest revenue calculated using the (iv) Net trading income effective interest method. Previously, the Group disclosed this amount in the notes Net trading income comprises gains less losses related to trading assets and to the financial statements. liabilities and includes all realised and unrealised fair value changes, interest and Additionally, the Group has adopted consequential amendments to IFRS 7 foreign exchange differences. Financial Instruments: Disclosures that are applied to disclosures about 2018, but (e) Income tax have not been applied to the comparative information. Income tax expense comprises current tax and change in deferred tax. Income tax The key changes to the Group’s accounting policies resulting from its adoption of expense is recognized in profit or loss except to the extent that it related to items IFRS 9 are summarised below. The full impact of adopting the standard is set out recognized directly in equity or other comprehensive income. in Note 4(a). Current tax is the expected tax payable or receivable on the taxable income or loss Recognition and measurement for the year, using tax rates enacted or substantively enacted at the reporting date, Financial assets and financial liabilities are recognised in the Groups’s statement and any adjustments to tax payable in respect of previous years. The amount of tax of financial position sheet when the Group becomes a party to the contractual payable or recoverable if the best estimate of the tax amount expected to be paid provisions of the instrument. or received that reflects uncertainty related to income taxes, if any. Recognised financial assets and financial liabilities are initially measured at fair Deferred tax is recognised on all temporary differences between the carrying value. Transaction costs that are directly attributable to the acquisition or issue of amounts of assets and liabilities for financial reporting purposes and the amounts financial assets and financial liabilities (other than financial assets and financial used for taxation purposes, except differences relating to the initial recognition liabilities at FVTPL) are added to or deducted from the fair value of the financial of assets or liabilities in a transaction that is not a business combination and assets or financial liabilities, as appropriate, on initial recognition. Transaction which affects neither accounting nor taxable profit. It is also not recognised for costs directly attributable to the acquisition of financial assets or financial temporary differences related to investments in subsidiaries and associates to the liabilities at FVTPL are recognised immediately in profit or loss. extent that it is probable that they will not reverse in the foreseeable future and the investor is able to control the timing of the reversal of the temporary difference. If the transaction price differs from fair value at initial recognition, the Group will account for such difference as follows: Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been • if fair value is evidenced by a quoted price in an active market for an enacted or substantively enacted by the reporting date. A deferred tax asset is identical asset or liability or based on a valuation technique that uses recognised only to the extent that it is probable that future taxable profits will be only data from observable markets, then the difference is recognised in available against which the asset can be utilized. Deferred tax assets are reviewed profit or loss on initial recognition (i.e. day 1 profit or loss); at each reporting date and are reduced to the extent that it is no longer probable • in all other cases, the fair value will be adjusted to bring it in line with the that the related tax benefit will be realized. transaction price (i.e. day 1 profit or loss will be deferred by including it in the initial carrying amount of the asset or liability). Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets and they relate to income After initial recognition, the deferred gain or loss will be released to profit or taxes levied by the same tax authority on the same taxable entity or on different tax loss on a rational basis, only to the extent that it arises from a change in a factor entities, but they intend to settle current tax assets and liabilities on a net basis or (including time) that market participants would take into account when pricing the their tax assets and liabilities will be realized simultaneously. asset or liability.

112112 3. SIGNIFICANT ACCOUNTING POLICIES Recognition andmeasurement (continued) Policy applicable from 1January2018(continued) (f) Financialassets andliabilities Financial assets Classification andmeasurement offinancial instruments whole hybrid instrument isassessed for classification. financial asset inthe scope of the standard are never bifurcated. Instead, the for sale. UnderIFRS9,derivatives embeddedincontracts where thehost isa previous IAS 39 categories of held to maturity, loans and receivables and available cash flow characteristics ofthefinancialassets. Thestandard eliminates the entity’s business modelfor managingthefinancialassets andthecontractual to besubsequently measured atamortisedcost orfair value onthebasisof All recognised financial assets that are within the scope of IFRS 9 are required receivable includinginterest accruals. amount presented on the statement of financialposition represent allamounts FVTPL are recognised immediately inprofit orloss. For allfinancialassets the costs directly attributable to theacquisition offinancialassets classified asat costs, except for those financialassets classified asatFVTPL.Transaction market concerned, andare initially measured atfair value, plustransaction require delivery ofthefinancialasset withinthetimeframe established bythe the purchase orsale ofafinancialasset isunderacontract whoseterms All financialassets are recognised andderecognised onatrade date where recognised immediately inprofit orloss. attributable to theacquisition offinancialassets classified asatFVTPLare for thosefinancialassets classified asatFVTPL.Transaction costs directly concerned, andare initially measured atfair value, plustransaction costs, except delivery ofthefinancialasset withinthetimeframe established bythemarket purchase or sale of a financial asset is under a contract whose terms require All financialassets are recognised andderecognised onatrade date where the IFRS9specifically requires: option). or significantly reduces an accounting mismatch (referred to as the fair value amortised cost or FVTOCI criteria as measured atFVTPL if doing so eliminates (ii) theGroup may irrevocably designate adebtinstrument thatmeets the OCI; and recognised byanacquirer inabusiness combination to whichIFRS3applies, in an equityinvestment thatisneitherheld for trading norcontingent consideration (i) theGroup may irrevocably elect to present subsequentchangesinfair value of FOR THEYEARENDED31DECEMBER2018 NOTES TO THEFINANCIALSTATEMENTS • • • • asset basis: designation atinitialrecognition ofafinancialasset onanasset- by- However, theGroup may make thefollowing irrevocable election / measured atFVTPL. value basis,orheld for sale) andequity investments are subsequently all otherdebtinstruments (e.g.debtinstruments managedonafair Comprehensive Income (FVTOCI); are SPPI,are subsequently measured atFair Value Through Other the debtinstruments, and thathave contractual cash flows that objective is both to collect the contractual cash flows and to sell debt instruments thatare held withinabusiness modelwhose measured atamortisedcost; interest ontheprincipalamount outstanding (SPPI),are subsequently contractual cash flows thatare solely payments ofprincipal and objective isto collect thecontractual cash flows, andthathave debt instruments thatare held withinabusiness modelwhose

(continued) (CONTINUED) evidence available suchas: ‘worst case’ or ‘stress case’ scenarios. The Group takes into account all relevant scenarios thattheGroup doesnot reasonably expect to occur, suchasso-called model assessment. However thisassessment isnotperformed onthebasisof The Group considers allrelevant information available whenmaking thebusiness or both. flows willresult from collecting contractual cash flows, sellingfinancial assets to generate cash flows. TheGroup’s business modelsdetermine whethercash instruments whichreflect how theGroup managesits financialassets inorder The Group hasmore thanonebusiness model for managingits financial aggregation rather thanonaninstrument-by-instrument basis. therefore thebusiness modelassessment isperformed atahigherlevel of does not depend on management’s intentions for an individual instrument, together to achieve aparticular business objective. The Group’s business model models atalevel thatreflects how groups offinancialassets are managed to theclassification ofafinancialasset. TheGroup determines thebusiness An assessment ofbusiness modelsfor managingfinancialassets isfundamental a loan inits legal form. financial asset can beabasiclending arrangement irrespective ofwhetheritis give riseto contractual cash flows thatare SPPI. An originated oranacquired such asexposure to changesinequityprices orcommodity prices, donot the contractual cash flows thatare unrelated to abasiclending arrangement, arrangement. Contractual terms thatintroduce exposure to risks orvolatility in Contractual cash flows thatare SPPIare consistent withabasiclending made inthecurrency inwhichthefinancialasset isdenominated. basic lending risks and costs, as well as a profit margin. The SPPI assessment is principal amountoutstanding duringaparticularperiodoftimeandfor other consideration for thetimevalue ofmoney, for thecredit riskassociated withthe financial asset (e.g.ifthere are repayments ofprincipal).Interest consists of at initialrecognition. Thatprincipalamountmay changeover thelife ofthe For thepurposeofSPPItest, principalisthefair value ofthefinancialasset contractual terms should give riseto cash flows thatare SPPI. For anasset to beclassified andmeasured atamortisedcost oratFVTOCI, its business modelfor managingtheasset. based on the contractual cash flow characteristics of the asset and the Group’s The Group assesses theclassification andmeasurement ofafinancialasset Debt instruments atamortisedcost oratFVTOCI gain/loss previously recognised inOCI isreclassified from equityto profit or When adebtinstrument measured atFVTOCI isderecognised, thecumulative reporting period theGroup hasnotidentifiedachange inits business models. models have changedsince thepreceding period. For thecurrent andprior its business modelseach reporting periodto determine whether thebusiness they reflect thecommencement ofanew business model.TheGroup reassess recognised financialassets are partofanexisting business modelorwhether At initial recognition of afinancial asset, the Group determines whether newly • • • the contractual cash flows collected). compensation isbasedonthefair value oftheassets managedoron how managers ofthebusiness are compensated (e.g.whetherthe the way inwhichthoserisks are managed;and financial assets held withinthatbusiness model)and,inparticular, the risks thataffect theperformance ofthebusiness model(andthe entity’s key management personnel; held withinthatbusiness modelare evaluated andreported to the how theperformance ofthebusiness modelandthefinancialassets 113 113 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Financial assets and financial liabilities (continued) Policy applicable after 1 January 2018 (continued)

loss. In contrast, for an equity investment designated as measured at FVTOCI, the • debt investment securities; cumulative gain/loss previously recognised in OCI is not subsequently reclassified • lease receivables; to profit or loss but transferred within equity. • loan commitments issued; and • financial guarantee contracts issued. Debt instruments that are subsequently measured at amortised cost or at FVTOCI are subject to impairment. See note 4. No impairment loss is recognised on equity investments. Non-recourse loans With the exception of Purchased Originated Credit Impaired (POCI) financial assets (which are considered separately below), ECLs are required to be measured In some cases, loans made by the Group that are secured by collateral of the through a loss allowance at an amount equal to: borrower limit the Group’s claim to cash flows of the underlying collateral (non- • 12-month ECL, i.e. lifetime ECL that result from those default events recourse loans). The Group applies judgment in assessing whether the non- on the financial instrument that are possible within 12 months after the recourse loans meet the SPPI criterion. The Group typically considers the following reporting date, (referred to as Stage 1); or information when making this judgement: • full lifetime ECL, i.e. lifetime ECL that result from all possible default • whether the contractual arrangement specifically defines the amounts events over the life of the financial instrument, (referred to as Stage 2 and dates of the cash payments of the loan; and Stage 3). • the fair value of the collateral relative to the amount of the secured • A loss allowance for full lifetime ECL is required for a financial financial asset; instrument if the credit risk on that financial instrument has increased • the ability and willingness of the borrower to make contractual payments, significantly since initial recognition. For all other financial instruments, notwithstanding a decline in the value of collateral; ECLs are measured at an amount equal to the 12-month ECL. More • whether the borrower is an individual or a substantive operating entity details on the determination of a significant increase in credit risk are or is a special-purpose entity; provided in note 4. • the Group’s risk of loss on the asset relative to a full-recourse loan; The Group’s policy is always to measure loss allowances for lease receivables as • the extent to which the collateral represents all or a substantial portion lifetime ECL. of the borrower’s assets; and • whether the Group will benefit from any upside from the underlying ECLs are a probability-weighted estimate of the present value of credit losses. assets. These are measured as the present value of the difference between the cash flows due to the Group under the contract and the cash flows that the Group expects Financial assets at FVTPL to receive arising from the weighting of multiple future economic scenarios, discounted at the asset’s EIR. Financial assets at FVTPL are: • assets with contractual cash flows that are not SPPI; or/and • for undrawn loan commitments, the ECL is the difference between the • assets that are held in a business model other than held to collect present value of the difference between the contractual cash flows that contractual cash flows or held to collect and sell; or are due to the Group if the holder of the commitment draws down the • assets designated at FVTPL using the fair value option. loan and the cash flows that the Group expects to receive if the loan is drawn down; and These assets are measured at fair value, with any gains/losses arising on • for financial guarantee contracts, the ECL is the difference between remeasurement recognised in profit or loss. Fair value is determined in the the expected payments to reimburse the holder of the guaranteed debt manner described in note 6- Fair value of financial instruments. instrument less any amounts that the Group expects to receive from the Reclassifications holder, the debtor or any other party. If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day Policy applicable after 1 January 2018 (continued) of the first reporting period following the change in business model that results The Group measures ECL on an individual basis, or on a collective basis for portfolios in reclassifying the Group’s financial assets. During the current financial year and of loans that share similar economic risk characteristics. The measurement of the previous accounting period there was no change in the business model under loss allowance is based on the present value of the asset’s expected cash flows which the Group holds financial assets and therefore no reclassifications were using the asset’s original EIR, regardless of whether it is measured on an individual made. Changes in contractual cash flows are considered under the accounting basis or a collective basis. policy on Modification and derecognition of financial assets described below. Credit impaired financial assets Impairment of financial assets A financial asset is ‘credit-impaired’ when one or more events that have a The Group recognises loss allowances for ECLs on the following financial detrimental impact on the estimated future cash flows of the financial asset have instruments that are not measured at FVTPL: occurred. Credit-impaired financial assets are referred to as Stage 3 assets. • loans and advances to banks; Evidence of credit-impairment includes observable data about the following events: • loans and advances to customers;

114114 The Group considers thefollowing asconstituting anevent ofdefault: of ECLsandtheidentification ofasignificant increase incredit risk. component oftheprobability of default (PD)whichaffects boththemeasurement whether theloss allowance isbasedon12-monthorlifetime ECL,asdefault isa of default isusedinmeasuringtheamountofECLanddetermination of Critical to thedetermination of ECL is the definition of default. The definition Definition ofdefault impairment gain. recognised inprofit orloss. Afavourable changefor suchassets creates an lifetime ECLsince initialrecognition asaloss allowance withanychanges at initialrecognition. For theseassets, theGroup recognises allchangesin POCI financialassets are treated differently because theasset iscredit-impaired Purchased ororiginated credit impaired (POCI) financialassets amounts are overdue for 90days ormore. of default (seebelow) includesunlikeliness to pay indicators andaback- stop if of credit-impairment includingmeetingthedefinitionofdefault. Thedefinition granted theasset isdeemedcredit impaired whenthere isobservable evidence of impairment. For financial assets where concessions are contemplated butnot contractual cash flows hasreduced significantly andthere are nootherindicators is evidence thatasaresult ofgranting theconcession the riskofnotreceiving the borrower dueto a deterioration in theborrower’s financialcondition, unless there A loan isconsidered credit-impaired whenaconcession isgranted to the the borrower to raise funding. the Group considers factors suchasbondyields, credit ratings andtheabilityof date. To assess ifsovereign andcorporate debtinstruments are credit impaired, measured atamortisedcost orFVTOCI are credit-impaired ateachreporting impaired. TheGroup assesses whetherdebtinstruments thatare financialassets effect ofseveral events may have caused financialassets to become credit- It may notbepossible to identifyasingle discrete event—instead, thecombined qualitative indicator usedisthebreach ofcovenants, which is notrelevant for assessed dependsonthe typeoftheasset, for example incorporate lending a takes into account bothqualitative andquantitative indicators. The information When assessing iftheborrower isunlikely to pay its credit obligation,theGroup 3. SIGNIFICANT ACCOUNTING POLICIES (f) Financialassets andfinancialliabilities(continued) FOR THEYEARENDED31DECEMBER2018 NOTES TO THEFINANCIALSTATEMENTS • • • • • • • • incurred credit losses. the purchase ofafinancialasset ata deep discount thatreflects the financial difficulties;or the disappearance ofanactive market for asecuritybecause of borrower aconcession thatthelender would nototherwiseconsider; relating to theborrower’s financialdifficulty, havinggranted to the the lender oftheborrower, for economic orcontractual reasons a breach ofcontract suchasadefault orpast dueevent; significant financialdifficultyoftheborrower orissuer; smaller thanthecurrent amountoutstanding. customer hasbreached anadvisedlimitorhasbeenof a limit types ofassets. Overdrafts are considered asbeingpast dueonce the is appropriately tailored to reflect different characteristics ofdifferent aligned to theregulatory definition of default. Thedefinitionofdefault as well asfor internal credit riskmanagementpurposesandisbroadly This definitionofdefault isusedbytheGroup for accounting purposes the borrower isunlikely to pay its credit obligationsto theGroup infull. obligation to theGroup; or the borrower ispast duemore than90days onany material credit (CONTINUED) comparing: significant increase incredit riskandisbasedonthechangeinlifetime PDby on theircredit quality. Thequantitative information isaprimaryindicator of allocates its counterparties to arelevant internal credit riskgrade depending internally generated information ofcustomer payment behaviour. TheGroup particularly for regions withaconcentration to certain industries, aswell as as corporate lending withadditionalforecasts oflocal economic indicators, retail, lending forward-looking information includesthesameeconomic forecasts internal andexternal sources ofactualandforecast economic information. For think-tanks andothersimilarorganisations, aswell asconsideration ofvarious economic expert reports, financialanalysts, governmental bodies,relevant of theindustries inwhichtheGroup’s counterparties operate, obtained from For corporate lending, forward-looking information includesthefuture prospects default thatisusedto determine whethercredit riskhassignificantly increased. different scenarios thatforms thebasisofaweighted average probability of scenarios willlead to adifferent probability ofdefault. Itistheweighting ofthese default atinitialrecognition andatsubsequentreporting dates. Different economic Multiple economic scenarios form the basis of determining the probability of experience andexpert credit assessment includingforward-looking information. that isavailable withoutunduecost oreffort, basedontheGroup’s historical supportable, includinghistorical experience andforward-looking information considers bothquantitative andqualitative information thatisreasonable and financial instrument was first recognised. Inmakingthisassessment, theGroup anticipated for theremaining maturityatthecurrent reporting date whenthe remaining maturityoftheinstrument withtheriskofadefault occurring thatwas occurring onthefinancialinstrument atthe reporting date basedonthe significantly since initialrecognition, theGroup compares theriskofadefault In assessing whether the credit riskon a financialinstrument hasincreased subject to impairmentfor significant increase incredit risk. assets, issued loan commitments andfinancialguarantee contracts thatare a significant increase in credit risk. As a result the Group monitors all financial assets with‘low’ credit riskatthereporting date are deemednotto have had Group’s accounting policyisnotto usethepractical expedient thatfinancial measure the loss allowance based on lifetime rather than 12-monthECL.The recognition. Ifthere hasbeenasignificant increase incredit risk theGroup will assess whether there hasbeen a significant increase in credit risk since initial guarantee contracts thatare subjectto theimpairmentrequirements to The Group monitors allfinancialassets, issued loan commitments andfinancial Significant increase incredit risk The qualitative factors thatindicate significant increase in credit riskare reflected and data usedto measure theloss allowance for ECL (please refer to note 4). The PDsusedare forward-looking andtheGroup usesthesamemethodologies impaired isbroader thanthedefinitionofdefault. assets, but will also include other non-defaulted given the definition of credit asset iscredit impaired. Therefore credit impaired assets willincludedefaulted definition ofcredit impaired financialassets above, default isevidence thatan either developed internally or obtained from external sources. Asnoted inthe The Group usesavariety ofsources ofinformation to assess default whichare on anotherobligationofthesamecounterparty are key inputs inthisanalysis. retail lending. Quantitative indicators, suchasoverdue status andnon-payment • • the exposure. based onfacts and circumstances atthe timeofinitialrecognition of the remaining lifetime PDfor thispointintimethatwas estimated the remaining lifetime PDatthereporting date; with 115 115 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f.) Financial assets and financial liabilities (continued) Significant increase in credit risk (continued)

in PD models on a timely basis. However the Group still considers separately some substantially different leading to derecognition. When performing a qualitative factors to assess if credit risk has increased significantly. For corporate quantitative assessment of a modification or renegotiation of a credit- lending there is particular focus on assets that are included on a ‘watch list’ given impaired financial asset or a purchased or originated credit-impaired an exposure is on a watch list once there is a concern that the creditworthiness of financial asset that was subject to a write-off, the Group considers the the specific counterparty has deteriorated. For retail lending the Group considers expected (rather than the contractual) cash flows before modification or the expectation of forbearance and payment holidays, credit scores and events such renegotiation and compares those with the contractual cash flows after as unemployment, bankruptcy, divorce or death. modification or renegotiation. Given that a significant increase in credit risk since initial recognition is a relative In the case where the financial asset is derecognised the loss allowance for ECL is measure, a given change, in absolute terms, in the PD will be more significant for a remeasured at the date of derecognition to determine the net carrying amount of financial instrument with a lower initial PD than compared to a financial instrument the asset at that date. The difference between this revised carrying amount and the with a higher PD. fair value of the new financial asset with the new terms will lead to a gain or loss on derecognition. The new financial asset will have a loss allowance measured based As a back-stop when an asset becomes 30 days past due, the Group considers on 12-month ECL except in the rare occasions where the new loan is considered to that a significant increase in credit risk has occurred and the asset is in stage 2 of be originated- credit impaired. This applies only in the case where the fair value of the impairment model, i.e. the loss allowance is measured as the lifetime ECL. In the new loan is recognised at a significant discount to its revised par amount because addition loans that are individually assessed and are included on a watch list are in there remains a high risk of default which has not been reduced by the modification. stage 2 of the impairment model. As noted if there is evidence of credit-impairment The Group monitors credit risk of modified financial assets by evaluating qualitative the assets are at stage 3 of the impairment model. and quantitative information, such as if the borrower is in past due status under the More information about significant increase in credit risk is provided in note 4. new terms. Modification and derecognition of financial assets When the contractual terms of a financial asset are modified and the modification does not result in derecognition, the Group determines if the financial asset’s credit A modification of a financial asset occurs when the contractual terms governing risk has increased significantly since initial recognition by comparing: the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the • the remaining lifetime PD estimated based on data at initial recognition amount and/or timing of the contractual cash flows either immediately or at a future and the original contractual terms; with date. In addition, the introduction or adjustment of existing covenants of an existing • the remaining lifetime PD at the reporting date based on the modified loan would constitute a modification even if these new or adjusted covenants do not terms. yet affect the cash flows immediately but may affect the cash flows depending on whether the covenant is or is not met (e.g. a change to the increase in the interest For financial assets modified as part of the Group’s forbearance policy, where rate that arises when covenants are breached). modification did not result in derecognition, the estimate of PD reflects the Groups’s ability to collect the modified cash flows taking into account the Group’s previous The Group renegotiates loans to customers in financial difficulty to maximise experience of similar forbearance action, as well as various behavioural indicators, collection and minimise the risk of default. A loan forbearance is granted in cases including the borrower’s payment performance against the modified contractual where although the borrower made all reasonable efforts to pay under the original terms. If the credit risk remains significantly higher than what was expected at contractual terms, there is a high risk of default or default has already happened initial recognition the loss allowance will continue to be measured at an amount and the borrower is expected to be able to meet the revised terms. The revised equal to lifetime ECL. terms in most of the cases include an extension of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repayment), If a forborne loan is credit impaired due to the existence of evidence of credit reduction in the amount of cash flows due (principal and interest forgiveness) and impairment (see above), the Group performs an ongoing assessment to ascertain if amendments to covenants. The Group has an established forbearance policy which the problems of the exposure are cured, to determine if the loan is no longer credit- applies for corporate and retail lending. impaired. The loss allowance on forborne loans will generally only be measured based on 12-month ECL when there is evidence of the borrower’s improved When a financial asset is modified the Group assesses whether this modification repayment behaviour following modification leading to a reversal of the previous results in derecognition. In accordance with the Group’s policy a modification results significant increase in credit risk. in derecognition when it gives rise to substantially different terms. To determine if the modified terms are substantially different from the original contractual terms Where a modification does not lead to derecognition the Group calculates the the Group considers the following: modification loss by comparing the gross carrying amount before and after the modification (excluding the ECL allowance). Modification losses for financial assets • Qualitative factors, such as contractual cash flows after modification are are included in the profit or loss account in ‘Losses on modification of financial no longer SPPI, change in currency or when rights to cash flows between assets’. Then the Group measures ECL for the modified asset, where the expected the original counterparties expire because a new debtor replaces the cash flows arising from the modified financial asset are included in calculating the original debtor (unless both debtors are under common control), the expected cash shortfalls from the original asset. extent of change in interest rates, and maturity. If these do not clearly indicate a substantial modification, then; The Group derecognises a financial asset only when the contractual rights to the asset’s cash flows expire (including expiry arising from a modification with • A quantitative assessment is performed to compare the present value substantially different terms), or when the financial asset and substantially all the of the remaining contractual cash flows under the original terms with risks and rewards of ownership of the asset are transferred to another entity. If the contractual cash flows under the revised terms, both amounts the Group neither transfers nor retains substantially all the risks and rewards of discounted at the original effective interest. If the difference in present ownership and continues to control the transferred asset, the Group recognises its value is greater than 10% the Group deems the arrangement is retained interest in the asset and an associated liability for amounts it may have to

116116 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES Modification andderecognition offinancialassets (continued) (f.) Financialassets andfinancialliabilities(continued) follows: Loss allowances for ECLare presented inthestatement offinancialpositionas position Presentation ofallowance for ECLinthestatement offinancial assets’ inthestatement ofprofit orloss. impairment gains,whichwillbepresented in‘netimpairmentloss onfinancial off. Recoveries resulting from theGroup’s enforcement activitieswillresult in event. TheGroup may apply enforcement activitiesto financialassets written the amounts subjectto thewrite-off. Awrite-off constitutes aderecognition assets or sources ofincome that could generate sufficientcash flows to repay it). Thisisthecase whentheGroup determines thattheborrower doesnothave expectations of recovering the financial asset (either in its entirety or a portion of Loans anddebtsecuritiesare written offwhentheGroup hasnoreasonable Write off previously recognised inOCI isnotsubsequently reclassified to profit orloss. investments designated asmeasured atFVTOCI, asthecumulative gain/loss the basisofrelative fair values ofthoseparts. This doesnotapply for equity part thatcontinues to berecognised andthepartthatisnolonger recognised on A cumulative gain/loss thathadbeenrecognised inOCI isallocated between the recognised inOCI isrecognised inprofit orloss. no longer recognised andanycumulative gain/loss allocated to itthathadbeen is no longer recognised and the sum of theconsideration received for the part transfer. Thedifference between thecarrying amountallocated to thepartthat recognises onthebasisofrelative fair values ofthoseparts onthedate ofthe continues to recognise undercontinuing involvement, andthepartitnolonger allocates theprevious carrying amountofthefinancialasset between thepartit Group retains anoptionto repurchase partofatransferred asset), theGroup On derecognition ofafinancialasset otherthaninits entirety (e.g.whenthe recognised inOCI isnotsubsequently reclassified to profit orloss. designated asmeasured atFVTOCI, where thecumulative gain/loss previously in equityisrecognised inprofit orloss, withtheexception ofequityinvestment and thecumulative gain/loss thathadbeenrecognised inOCI andaccumulated asset’s carrying amountandthesumofconsideration received andreceivable On derecognition ofafinancialasset inits entirety, thedifference between the and alsorecognises acollateralised borrowing for theproceeds received. transferred financialasset, theGroup continues to recognise thefinancialasset pay. If the Group retains substantially all the risks and rewards of ownership of a • • • • the loss allowance over thegross amountofthedrawn component is the gross carrying amount of the drawn component. Any excess of components. The combined amountispresented asadeductionfrom component: theGroup presents acombined loss allowance for both loan commitment component separately from those on the drawn undrawn component, andtheGroup cannot identifytheECLon where a financial instrument includesbothadrawn andan provision; and for loan commitments andfinancialguarantee contracts: asa (see note 41); part oftherevaluation amountintheinvestments revaluation reserve amount isatfair value. However, theloss allowance isincludedas recognised inthestatement offinancialpositionasthecarrying for debtinstruments measured atFVTOCI: noloss allowance is the gross carrying amountoftheassets; for financialassets measured atamortisedcost: asadeductionfrom (CONTINUED) loss, underIFRS9fair value changesare generally presented asfollows: liabilities designated underthefair value optionwere recognised inprofit or of financialliabilities.However, althoughunderIAS39allfair value changesof IFRS 9largely retains theexisting requirements inIAS39for theclassification Financial liabilities held for trading if: for trading, or(ii)itisdesignated asatFVTPL.Afinancialliabilityisclassified as Financial liabilitiesare classified asatFVTPLwhenthefinancialliabilityis(i)held accruals. statement offinancialpositionrepresent allamounts payable includinginterest financial liabilities’. For allfinancialliabilitiestheamountpresented onthe Financial liabilitiesare classified aseitherfinancialliabilities‘atFVTPL’ or‘other see below: For anexplanation ofhow theGroup classifies financialliabilitiesunderIFRS9, may bedesignated asatFVTPLuponinitialrecognition if: consideration thatmay bepaidbyanacquirer aspartofabusiness combination A financialliabilityotherthanaheld for trading orcontingent recognition oftheeffects ofchangesintheliability’s credit riskinOCI would create to changesinthecredit riskofthatliabilityisrecognised inOCI, unless the the amount of change in the fair value of the financial liability that is attributable However, for non-derivative financial liabilities that are designated as at FVTPL, in theprofit orloss account. included inthe‘netincome from otherfinancialinstruments atFVTPL’ line item in profit orloss incorporates anyinterest paidonthefinancialliabilityandis are notpartofadesignated hedgingrelationship. Thenetgain/loss recognised arising onremeasurement recognised inprofit orloss to theextent thatthey Financial liabilitiesatFVTPLare stated atfair value, withanygains/losses • • • • • • • • presented asaprovision. or loss. the remaining amountofchangeinthefair value ispresented inprofit in thecredit riskoftheliabilityispresented inOCI; and the amountofchangeinfair value thatisattributable to changes instrument. it isaderivative thatisnotdesignated andeffective asahedging pattern ofshort-term profit-taking; or instruments thattheGroup managestogether andhasarecent actual on initialrecognition itispartofaportfolio ofidentifiedfinancial the nearterm; or it hasbeenincurred principally for thepurposeofrepurchasing itin embedded derivative isnotprohibited. contract, oritisclear withlittle ornoanalysis thatseparation ofthe embedded derivatives that significantly modifiesthecash flows ofthe it forms partof a hybrid (combined) contract, containing oneormore about thebankingisprovided internally onthatbasis;or documented riskmanagementorinvestment strategy, andinformation is evaluated onafair value basis,inaccordance withtheGroup’s financial liabilitiesorboth,whichismanagedandits performance the financialliabilityforms partofaGroup offinancialassets or or recognition inconsistency thatwould otherwisearise;or such designationeliminates orsignificantly reduces ameasurement 117 117 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f.) Financial assets and financial liabilities (continued) Financial liabilities (continued)

or enlarge an accounting mismatch in profit or loss. The remaining amount of not significant for the Group. Modification gains are presented in ‘other income’ change in the fair value of liability is recognised in profit or loss. Changes in fair and modification losses are presented in ‘other expenses’ in the profit or loss value attributable to a financial liability’s credit risk that are recognised in OCI account. are not subsequently reclassified to profit or loss; instead, they are transferred to retained earnings upon derecognition of the financial liability. Transition For issued loan commitments and financial guarantee contracts that are Changes in accounting policies resulting from the adoption of IFRS 9 have been designated as at FVTPL all gains and losses are recognised in profit or loss. applied retrospectively, except as described below. In making the determination of whether recognising changes in the liability’s Comparative periods generally have not been restated. Differences in credit risk in OCI will create or enlarge an accounting mismatch in profit or loss, the carrying amounts of financial assets and financial liabilities resulting the Group assesses whether it expects that the effects of changes in the liability’s from the adoption of IFRS 9 are recognised in retained earnings and credit risk will be offset in profit or loss by a change in the fair value of another reserves as at 1 January 2018. Accordingly, the information presented financial instrument measured at FVTPL. This determination is made at initial for 2017 does not reflect the requirements of IFRS 9 and therefore is not recognition. Such financial liabilities are detailed in note 4. comparable to the information presented for 2018 under IFRS 9. Fair value is determined in the manner described in note 6. The Group used the exemption not to restate comparative periods but considering that the amendments made by IFRS 9 to IAS 1 introduced the requirement to Other financial liabilities present ‘interest income calculated using the effective interest rate’ as a separate line item in the statement of profit or loss and OCI, the Group has reclassified Other financial liabilities, including deposits and borrowings, are initially comparative interest income on finance leases to ‘other interest income’ and measured at fair value, net of transaction costs. Other financial liabilities are changed the description of the line item from ‘interest income’ reported in 2017 subsequently measured at amortised cost using the effective interest method. to ‘interest income calculated using the effective interest method’. The effective interest method is a method of calculating the amortised cost of a • The following assessments have been made on the basis of the facts financial liability and of allocating interest expense over the relevant period. The and circumstances that existed at the date of initial application. EIR is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, • The determination of the business model within which a financial to the net carrying amount on initial recognition. For details on EIR see the “net asset is held. interest income section” above. • The designation and revocation of previous designations of certain Modification and derecognition of financial liabilities financial assets and financial liabilities as measured at FVTPL. The Group derecognises financial liabilities when, and only when, the Group’s • The designation of certain investments in equity instruments not held obligations are discharged, cancelled or have expired. The difference between for trading as at FVOCI. the carrying amount of the financial liability derecognised and the consideration • For financial liabilities designated as at FVTPL, the determination of paid and payable is recognised in profit or loss. whether presenting the effects of changes in the financial liability’s When the Group exchanges with the existing lender one debt instrument into credit risk in OCI would create or enlarge an accounting mismatch in another one with substantially different terms, such exchange is accounted for profit or loss. as an extinguishment of the original financial liability and the recognition of a • If a debt security had low credit risk at the date of initial application of new financial liability. Similarly, the Group accounts for substantial modification IFRS 9, then the Group has assumed that credit risk on the asset had of terms of an existing liability or part of it as an extinguishment of the original not increased significantly since its initial recognition. financial liability and the recognition of a new liability. To determine if the modified terms of a liability are substantially different to the original terms a For more information and details on the changes and implications resulting from similar process with modification of financial assets is followed. The modification the adoption of IFRS 9, see note 4. is assessed at first on a qualitative basis, factors such as a change in currency or the introduction of a non-closely related embedded derivative that significantly (i) Recognition modifies the cash flows are regarded as substantially different. If it is not clear The Group initially recognizes loans and advances, deposits and debt securities from the qualitative assessment that a modification has resulted in a substantial on the date at which they are originated. All other financial assets and liabilities change in a financial liability, a quantitative assessment is applied. It is assumed (including assets designated at fair value through profit and loss) are initially that the terms of the financial liability are substantially different if the discounted recognised on the trade date at which the Group becomes a party to the present value of the cash flows under the new terms, including any fees paid net contractual provision of the instrument. of any fees received and discounted using the original effective rate is at least 10 per cent different from the discounted present value of the remaining cash flows A financial asset or liability is initially measured at fair value plus (for an item of the original financial liability. not subsequently measured at fair value through profit or loss) transaction costs that are directly attributable to its acquisition or issue. Subsequent to initial If the modification is not substantial, the Group recalculates the amortised cost of recognition, financial liabilities (deposits and debt securities) are measured at the modified financial liability by discounting the modified contractual cash flows their amortized cost using the effective interest method except where the Group using the original effective interest rate. The Group recognises any adjustment to designates liabilities at fair value through profit and loss. the amortised cost of the financial liability in profit or loss as income or expense at the date of the modification. The financial liability modification gain/loss is

118118 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES Policy applicable before 1January2018(continued) (f.) Financialassets andfinancialliabilities(continued) instruments. Theclassification madecan beseenonthetable below asfollows: The Group classifies thefinancialinstruments into classes thatreflect thenature ofinformation andtake into account thecharacteristics ofthosefinancial (ii) Classification andmeasurement instruments sheet financial Off- balance Liabilities Financial assets Financial Category (asdefinedbyIAS39) assets Financial assets Financial Category (asdefinedbyIAS39) Guarantees, acceptances andotherfinancialfacilities Loan commitments financial assets Available for sale investments Held to maturity Loans andreceivables Loans andreceivables through profit orloss Financial assets atfair value Borrowings Customers deposits Deposits from banks Investment securities–equity Investment securities–debt Investment securities–debt Class (asdetermined bytheGroup) instruments Investment securities–debt Loans andadvances to customers Loans andadvances to banks Loans andadvances to banks Financial assets held for trading Class (asdetermined bytheGroup) (CONTINUED) Loans to corporate entities Loans to individuals(retail) Debt Securities SMEs customers Large corporate Retail customers Unlisted Listed Listed Unlisted Listed Subclasses Unlisted Listed Others SMEs Large corporate customers Mortgages Term loans Credit cards Overdrafts Subclasses 119 119 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f.) Financial assets and financial liabilities (continued) Policy applicable before 1 January 2018 (continued) (iii) Financial assets measurements of financial liabilities is at amortised cost incurred. Subsequent measurements of financial liabilities is at amortised cost using effective interest The Group classifies its financial assets in the following categories: financial rate method. Financial liabilities will include deposits from banks or customers, assets at fair value through profit or loss; loans and receivables; held-to-maturity trade payables from the brokerage and lines of credit for which the fair value investments; and available-for-sale financial assets. Management determines option is not applied. the classification of its investments at initial recognition (v) Identification and measurement of impairment of financial This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. assets A financial asset is classified in this category if acquired principally for the At each reporting date the Group assesses whether there is objective evidence purpose of selling in the short term or if so designated by management. that financial assets not carried at fair value through profit or loss are impaired. Financial assets are impaired when objective evidence demonstrates that a loss Investments held for trading are those which were either acquired for generating event has occurred after the initial recognition of the asset, and that the loss a profit from short-term fluctuations in price or dealer’s margin, or are event has an impact on the future cash flows on the asset than can be estimated securities included in a portfolio in which a pattern of short-term profit-taking reliably. exists. Investments held for trading are subsequently re-measured at fair value based on quoted bid prices or dealer price quotations, without any deduction The Group considers evidence of impairment at both a specific asset and for transaction costs. All related realized and unrealized gains and losses collective level. All individually significant financial assets are assessed for are included in profit or loss. Interest earned whilst holding held for trading specific impairment. Significant assets found not to be specifically impaired investments is reported as interest income. are then collectively assessed for any impairment that may have been incurred but not yet identified. Assets that are not individually significant are collectively Foreign exchange forward and spot contracts are classified as held for trading. assessed for impairment by grouping together financial assets (carried at They are marked to market and are carried at their fair value. Fair values are amortized cost) with similar risk characteristics. obtained from discounted cash flow models which are used in the determination of the foreign exchange forward and spot contract rates. Gains and losses on Objective evidence that financial assets (including equity securities) are impaired foreign exchange forward and spot contracts are included in foreign exchange can include default or delinquency by a borrower, restructuring of a loan or income as they arise. advance by the Group on terms that the Group would otherwise not consider, indications that a borrower or issuer will enter bankruptcy, the disappearance Loans, advances and receivables of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers Loans and advances to customers and trade receivables are non-derivative in the Group, or economic conditions that correlate with defaults in the Group. financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money directly to a debtor with In assessing collective impairment the Group uses historical trends of the no intention of trading the receivable. Loans and advances are initially measured probability of default, timing of recoveries and the amount of loss incurred, at fair value plus incremental direct transaction costs, and subsequently adjusted for management’s judgment as to whether current economic and credit measured at their amortized cost using the effective interest method. conditions are such that the actual losses are likely to be greater or less than suggested by historical trends. Default rate, loss rates and the expected timing of Held to maturity future recoveries are regularly benchmarked against actual outcomes to ensure Held-to-maturity investments are non-derivative financial assets with fixed or that they remain appropriate. determinable payments and fixed maturities that the Group’s management has Impairment losses on assets carried at amortized cost are measured as the the positive intention and ability to hold to maturity. A sale or reclassification of difference between the carrying amount of the financial assets and the present more than an insignificant amount of held to maturity investments would result value of estimated cash flows discounted at the assets’ original effective interest in the reclassification of the entire category as available for sale. Held to maturity rate. Losses are recognised as profit or loss and reflected in an allowance investments includes treasury bills and bonds. They are subsequently measured account against loans and advances. Interest on the impaired asset continues to at amortized cost using the effective interest method. be recognised through the unwinding of the discount. Available for sale When a subsequent event causes the amount of impairment loss to decrease, the impairment loss is reversed through the income statement. Available for sale financial investments are those non derivative financial assets that are designated as available for sale or are not classified as any other Amounts classified as available for sale category of financial assets. Available for sale financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent Impairment losses on available-for-sale investment securities are recognised by to initial recognition, they are measured at fair value and changes therein are reclassifying the losses accumulated in the fair value reserve in equity to profit recognised in other comprehensive income and presented in the available for or loss. The cumulative loss that is reclassified from equity to profit and loss is sale fair value reserve in equity. When an investment is derecognised, the gain or the difference between the acquisition cost, net of any principal repayment and loss accumulated in equity is re-classified to profit or loss. amortization, and the fair value, less any impairment loss recognised previously in profit or loss. Changes in impairment attributable to application of the effective (iv) Financial Liabilities interest method are reflected as a component of interest income. Financial liabilities are recognised when the Group enters into the contractual provisions of the arrangements with counterparties, which is generally on trade date, and initially measured at fair value, which is normally the consideration received, net or directly attributable transaction costs incurred. Subsequent

120120 borrower’s financialcondition. Therestructuring may include: Group hasgranted aconcession to theborrower dueto adeterioration ofthe Restructured troubled loans and advances are loans and advances for which the (viii) Restructured loans as intheGroup’s trading activity. IFRSs, orfor gainsandlosses arisingfrom agroup ofsimilartransactions such Income and expenses are presented on a net basis only when permitted under or to realize theasset andsettle theliabilitysimultaneously. offset therecognised amounts andthere isanintention to settle onanetbasis, in thestatement offinancialpositionwhenthere isalegally enforceable rightto Financial assets andfinancialliabilitiesare offset andthenetamountreported (vii) Offsetting offinancial assets andfinancialliabilities transactions. with retention of all or substantially all risks and rewards include repurchase not derecognised from thestatement offinancialposition.Transfers ofassets substantially allrisks andrewards are retained, thenthetransferred assets are the risks andrewards ofthetransferred assets oraportionofthem.Ifall its statement of financial position, but retains either all or substantially all of The Group enters into transactions whereby ittransfers assets recognised in retained bytheGroup isrecognised asaseparate asset orliability. transferred financial assets that qualify for derecognition that is created or that hadbeenrecognised inOCI isrecognised inprofit orloss. Anyinterest in asset obtained less anynew liabilityassumed) and(ii)cumulative gainorloss derecognised) andthesumof (i) theconsideration received (includinganynew amount oftheasset (orthecarrying amountallocated to theportionofasset On derecognition ofafinancial asset, thedifference between thecarrying discharged or cancelled orexpire. The Group derecognizes afinancialliabilitywhenits contractual obligationsare retained bytheGroup isrecognised asaseparate asset orliability. are transferred. Anyinterest intransferred financialassets thatiscreated or which substantially allthe risks and rewards of ownership of the financial asset receive thecontractual cash flows onthefinancialasset inatransaction in cash flows from thefinancialasset expire, orwhenittransfers therights to The Group derecognizes afinancialasset whenthecontractual rights to the (vi) De-recognition OCI. value ofanimpaired available for sale equitysecurityisalways recognised in through OtherComprehensive Income (OCI). Anysubsequentrecovery inthefair reversed through profit orloss; otherwiseanyincrease infair value isrecognised occurring after theimpairmentloss was recognised, thentheimpairmentloss is security increases andtheincrease can berelated objectively to anevent If in subsequent period, the fair value of an impaired available for sale debt minimum numberofpayments underthenew arrangement have beenreceived. are nolonger considered to bepast duebutare treated asnew loans after the Such restructured loans andadvances whoseterms have beenrenegotiated 3. SIGNIFICANT ACCOUNTING POLICIES FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Policy applicable before 1January2018(continued) • • full orpartialsatisfaction oftheloan. from third parties,other assets, orequityinterest intheborrower in The transfer from the borrower to the Group of real estate, receivables originally agreed orareduction intheprincipalamount;and A modification of terms, e.g., a reduction in the interest from that (CONTINUED) (group ofunits) onapro-rata basis. to theunits andthento reduce thecarrying amountoftheotherassets intheunit units are allocated first to reduce the carrying amount of any goodwill allocated in theprofit orloss. Impairment losses recognised inrespect ofcash-generating independent from otherassets andgroups. Impairmentlosses are recognised smallest identifiable asset group thatgenerates cash flows thatlargely are generating unitexceeds its recoverable amount.Acash-generating unitisthe An impairmentloss isrecognised ifthecarrying amountofanasset orits cash- money andtherisks specificto the asset. tax discount rate thatreflects current market assessments ofthetimevalue of estimated future cash flows are discounted to theirpresent value usingapre- value inuseandits fair value less costs to sell.Inassessing value inuse,the The recoverable amountofanasset orcash-generating unitisthegreater ofits recoverable amountisestimated. is any indication of impairment. If any such indication exists then the assets’ tax assets, are reviewed ateachreporting date to determine whetherthere The carrying amounts oftheGroup’s non-financialassets, otherthandeferred (g) Impairmentfor non-financialassets maturity amount,minusanyreduction for impairment. interest methodofanydifference between theinitialamountrecognised andthe repayments, plusorminusthecumulative amortizationusingtheeffective the financial asset or liability is measured at initial recognition, minus principal The amortizedcost ofafinancialasset orfinancialliabilityistheamountatwhich (x) Amortizedcost measurement transaction between market participants atthemeasurement date. received to sellanasset orpaidto transfer aliabilityrespectively inanorderly Fair value offinancialassets andfinancialliabilitiesistheprice thatwould be (ix) Fair value offinancialassets andfinancialliabilities profit orloss. amount oftheitem andare recognised netwithin‘otheroperating income’ in determined bycomparing thenetproceeds from disposal with thecarrying Gains andlosses arising ondisposalofanitem ofproperty andequipmentare economic benefits are expected to arise from thecontinued useofthe asset. Property andequipmentisderecognised upondisposalorwhennofuture of thatequipment. that isintegral to thefunctionalityofrelated equipmentiscapitalized aspart that isdirectly attributable to theacquisition oftheasset. Purchased software depreciation andaccumulated impairmentlosses. Costs includeexpenditure Items ofproperty andequipmentare measured atcost, less accumulated (i) Recognition andmeasurement (i) Property andequipment interest methodinthestatement offinancialposition. Cash andcash equivalents are measured atamortizedcost usingeffective the Group inthemanagementofshortterm commitments. assets, subjectto insignificant riskofchangesintheirfair value andare usedin unrestricted balances deposited withtheCentral BankofKenya andhighly liquid maturity from the date of acquisition, including: notes and coins on hand, Cash andcash equivalents comprise balances withless thanthree months (h) Cashandcash equivalents 121 121 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) Property and equipment (continued)

(ii) Depreciation Where the Group is a lessor, it presents assets subject to operating leases in Statement of Financial Position according to the nature of the asset. Lease Depreciation is recognised in profit or loss on a straight line basis over the income from operating leases is recognised in income on a straight line basis estimated useful lives of each part of property and equipment. The annual over the lease term. Costs, including depreciation, incurred in earning the lease depreciation rates in use are: income are recognised as an expense. Freehold land Leasehold Leases where substantially all the risks and rewards of ownership of an asset improvements Rates based on the shorter of the lease are transferred to the lessee are classified as finance leases. Upon recognition, term or estimated useful lives the leased asset is measured at an amount equal to the lower of its fair value Motor vehicles 25% and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy Furniture and fittings 10% applicable to that asset as follows: Office equipment 20% (i) Operating lease Computers 20% The total payments made under operating leases are charged to profit or loss The residual values, useful lives and methods of depreciation are reviewed, and on a straight-line basis over the period of the lease. When an operating lease adjusted if appropriate, at each reporting date. Changes in the expected useful is terminated before the lease period has expired, any payment required to be life, residual values or methods of depreciation are accounted for as changes in made to the lessor by way of penalty is recognised as an expense in the period in accounting estimates. which termination takes place. (iii) Subsequent costs (ii) Finance lease Subsequent expenditure is capitalized only when it is probable that future When assets are held subject to a finance lease, the present value of the lease economic benefits of the expenditure will flow to the Group. Recurrence repairs payments is recognised as a receivable. The difference between the gross and maintenance are expensed as incurred. receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the (j) Intangible assets net investment method, which reflects a constant periodic rate of return. Intangible assets acquired separately are measured on initial recognition at (l) Employee benefits cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets The Group operates both a defined contribution plan and defined benefit plan. are measured at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized (i) Defined contribution plans development costs, are not capitalized and expenditure is recognised in profit or A defined contribution plan is a post-employment benefit plan under which loss in the year in which the expenditure is incurred. the Group pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to Intangible assets with finite lives are amortized on a straight-line basis in profit defined contribution plans are recognised as staff costs in profit or loss in the or loss over their estimated useful economic lives, from the date that they are periods during which related services are rendered. Prepaid contributions are available for use. recognised as an asset to the extent that a cash refund or a reduction in future The amortization method, useful life and the residual value are reviewed at payments is available. each reporting date and adjusted if appropriate. Changes in the expected useful The Group also contributes to the statutory defined contribution in the various life, residual value or amortization method are accounted for as changes in countries in which it operates. The Group’s contribution to these schemes are accounting estimates. The amortization expense on intangible assets with finite charged to the income statement. lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. (ii) Defined benefit plans The useful lives of intangible assets are assessed to be either finite or indefinite. The Group’s net obligation in respect of defined benefit plan is calculated Costs associated with maintaining computer software programmes are separately for each plan by estimating the amount of future benefit that recognised as an expense as incurred. However, expenditure that enhances or employees have earned in the current and prior periods, discounting that extends the benefits of computer software programmes beyond their original amount and deducting the fair value of any plan assets. The calculation of specifications and lives is recognised as a capital improvement and added to the defined benefit obligation is performed annually by a qualified actuary using the original cost of the software. Computer software development costs recognised projected unit credit method. When the calculation results in a potential asset for as assets are amortized using the straight-line method over a period of five the Group, the recognised asset is limited to the present value of the economic years. benefits available in the form of any refunds from the plan or deductions in future There are no intangible assets with indefinite useful lives. contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. (k) Leases Remeasurements of the net defined benefit liability, which compromise actuarial Leases, where a significant portion of the risks and rewards of ownership are gains and losses, the return on plan assets (excluding interest) and the effect of retained by the lessor, are classified as operating leases. Payments made under the asset ceiling (if any, excluding interest) are recognised immediately in other operating leases are charged to the profit and loss account on a straight-line comprehensive income. The Group determines the net interest (income) on the basis over the period of the lease. net defined benefit liability (asset) for the period by applying the discount rate

122122 settlement occurs. recognises gainsandlosses onsettlement ofadefinedbenefitplanwhenthe gain orloss oncurtailment isrecognised immediately inprofit orloss. TheGroup change inbenefitthatemployees have earnedinreturn for theirservice orthe When thebenefits ofaplanare changed orwhenaplaniscurtailed, theresulting plans -continued defined benefitplansare recognised inprofit orloss.(ii) and benefitpayments. Netinterest expense andotherexpenses related to the the netdefinedbenefitliability(asset) duringaperiodasresult ofcontributions the then-net defined benefit liability (asset), taking into account any changes in used to measure thedefinedobligationatbeginningofannualperiodto of alldilutive potential ordinary shares, ifany. and the weighted average number of ordinary shares outstanding for theeffects determined byadjusting theprofit orloss attributable to ordinary shareholders number ofordinary shares outstanding during theperiod.Diluted EPSis attributable to ordinary shareholders oftheCompanybyweighted average in thefinancialstatements. BasicEPSiscalculated bydividingtheprofit or loss Basic anddiluted earningspershare (EPS)data for ordinary shares are presented (o) Earningspershare Directors. up to thedate thatthefinancialstatements are approved for issue bythe contingent liabilitiesismadebymanagementbasedontheinformation available as contingent liabilities.Estimates ofthe outcome andthefinancialeffect of Letters of credit, acceptances, guarantees andperformance bondsare disclosed (n) Contingentliabilities customers are excluded from thesefinancial statements. and income arisingthereon with related undertakings to return suchassets to When the Group acts in a fiduciary capacity such as a nominee or agent, assets (m) Fiduciaryassets of theendreporting period,thenthey are discounted. restructuring. Ifbenefits are notexpected to besettled wholly within12months withdraw theoffer ofthosebenefits andwhentheGroup recognises costs for a Termination benefits are expensed at the earlier of when the Group can no longer (v) Termination benefits and theobligationcan beestimated reliably. obligation to pay thisamountasaresult ofpast service provided bytheemployee bonus orprofit-sharing plansiftheGroup hasapresent legal orconstructive A liabilityisrecognised for theamountexpected to bepaidundershort-term cash provided. measured on anundiscounted basisandare expensed astherelated service is benefits andtermination benefits. Short-term employee benefitobligationsare such asmedical aidcontributions andfree services. They exclude equitybased Short-term benefits consist of salaries, bonuses and any non-monetary benefits (iv) Short-term benefits in theperiodswhichthey arise. to determine its present value. Remeasurements are recognised inprofit orloss return for theirservice inthecurrent andpriorperiods.Thatbenefitisdiscounted pension plansistheamountoffuture benefitthatemployees have earnedin The Group’s netobligationinrespect oflong-term employee benefits otherthan (iii) Otherlong term employee benefits 3. SIGNIFICANT ACCOUNTING POLICIES (l) Employee benefits (continued) FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS eie benefit Defined (CONTINUED) with related parties.Therelated partytransactions are atarm’s length. In thenormalcourse ofbusiness, theCompanyhasentered into transactions (r) Related parties accrued over thelife oftheagreements usingtheeffective interest method. The difference between sale andrepurchase price istreated asinterest and tenure. after whichthey are repurchased andare notnegotiable ordiscounted duringthe (reverse Repos), are disclosed astreasury billsasthey are held atamortisedcost Securities purchased from theCentral BankofKenya underagreement to resell to bankinginstitutions. the financialstatements withthecounterparty liabilityincludedinamounts due Securities sold undersale andrepurchase agreements (Repos) are retained in (q) Sale andrepurchase agreements Dividends are recognised asaliabilityintheperiodwhichthey are declared. (p) Dividends risk managementframework inrelation to therisks faced bytheGroup. risk managementpoliciesandprocedures andfor reviewing the adequacyofthe The RiskCommittee isresponsible for monitoring compliance withtheGroup’s understand their roles andobligations. a disciplinedandconstructive control environment inwhichallemployees its training andmanagementstandards andprocedures, aims to develop changes inmarket conditions, products andservices offered. TheGroup, through Risk managementpoliciesandsystems are reviewed regularly to reflect monitor risks andadherence to limits. the risks faced by the Group, to set appropriate risk limits and controls and to The Group’s riskmanagementpoliciesare established to identifyandanalyze and report regularly to theBoard ofDirectors ontheiractivities. areas. AllBoard committees have bothexecutive andnon-executive members developing and monitoring the Group risk management policies in their specified Procurement andInformation Technology committees, whichare responsible for of theGroup hasestablished theCredit, Audit,Risk,HumanResources and oversight oftheGroup’s riskmanagementframework. TheBoard ofDirectors The Board ofDirectors hasoverall responsibility for theestablishment and seeks to minimizepotential adverse effects ontheGroup’s financialperformance. management program focuses ontheunpredictability offinancialmarkets and risk, liquiditymarket risks andoperational risks. TheGroup’s overall risk The Group’s activitiesexpose itto avariety offinancialrisks, includingcredit 4. FINANCIALRISKMANAGEMENT over andabove theparvalue of the shares isclassified asshare premium. Ordinary shares are classified asshare capital inequity. Anypremium received (t) Share capital andreserve performance, andfor whichdiscrete financialinformation isavailable. to make decisionsaboutresources allocated to eachsegmentandassess its Group’s ManagementCommittee (beingthechiefoperating decisionmaker) other components, whoseoperating results are reviewed regularly bythe revenues andexpenses thatrelate to transactions withanyoftheGroup’s activities from whichitmay earnrevenues andincurexpenses, including An operating segmentis a component ofthe Group thatengagesinbusiness (s) Operating segments 123 123 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED)

The Committee is assisted in these functions by a Risk and Compliance Internal credit risk ratings department which undertake reviews of risk management controls and procedures, the results of which are reported to the Risk Committee. In order to minimise credit risk, the Group has tasked its credit management committee to develop and maintain the Group’s credit risk grading to categorise (a) Credit risk exposures according to their degree of risk of default. The Group’s credit risk grading framework comprises five categories. The credit rating information is Credit risk is the risk that a customer or counterparty will default on its based on a range of data that is determined to be predictive of the risk of default contractual obligations resulting in financial loss to the Group. The Group’s main and applying experienced credit judgement. The nature of the exposure and type income generating activity is lending to customers and therefore credit risk is a of borrower are taken into account in the analysis. Credit risk grades are defined principal risk. Credit risk mainly arises from loans and advances to customers using qualitative and quantitative factors that are indicative of risk of default. and other banks (including related commitments to lend such as loan or credit card facilities), investments in debt securities and derivatives that are an asset The credit risk grades are designed and calibrated to reflect the risk of default position. The Group considers all elements of credit risk exposure such as as credit risk deteriorates. As the credit risk increases the difference in risk counterparty default risk, geographical risk and sector risk for risk management of default between grades changes. Each exposure is allocated to a credit purposes. The Group’s credit committee is responsible for managing the Group’s risk grade at initial recognition, based on the available information about the credit risk by: counterparty. All exposures are monitored and the credit risk grade is updated to reflect current information. The monitoring procedures followed are both • Ensuring that the Group has appropriate credit risk practices, general and tailored to the type of exposure. The following data are typically used including an effective system of internal control, to consistently to monitor the Group’s exposures: determine adequate allowances in accordance with the Group’s stated policies and procedures, IFRS and relevant supervisory guidance. • Delinquency in contractual payments of principal or interest; • Identifying, assessing and measuring credit risk across the Group, • Cash flow difficulties experienced by the borrower; from an individual instrument to a portfolio level. • Breach of loan covenants or conditions; • Creating credit policies to protect the Group against the identified • Initiation of bankruptcy proceedings; risks including the requirements to obtain collateral from borrowers, to perform robust ongoing credit assessment of borrowers and to • Deterioration of the borrower’s competitive position; continually monitor exposures against internal risk limits. • Deterioration in the value of collateral • Limiting concentrations of exposure by type of asset, counterparties, industry, credit rating, geographic location etc. The Group uses credit risk grades as a primary input into the determination of the term structure of the PD for exposures. The Group collects performance and • Establishing a robust control framework regarding the authorisation default information about its credit risk exposures analysed by jurisdiction or structure for the approval and renewal of credit facilities. region and by type of product and borrower as well as by credit risk grading. The information used is both internal and external depending on the portfolio • Developing and maintaining the Group’s risk grading to categorise assessed. The table below provides a mapping of the Group’s internal credit risk exposures according to the degree of risk of default. Risk grades are grades. subject to regular reviews. • Developing and maintaining the Group’s processes for measuring ECL Group’s credit riskgrades Description including monitoring of credit risk, incorporation of forward looking 1 Normal risk information and the method used to measure ECL. 2 Watch risk • Ensuring that the Group has policies and procedures in place to 3 Substandard risk appropriately maintain and validate models used to assess and measure ECL. 4 Doubtful risk • Establishing a sound credit risk accounting assessment and 5 Loss measurement process that provides it with a strong basis for common systems, tools and data to assess credit risk and to account for ECL. The Group analyses all data collected using statistical models and estimates the Providing advice, guidance and specialist skills to business units to remaining lifetime PD of exposures and how these are expected to change over promote best practice throughout the Group in the management of time. The factors taken into account in this process include macro-economic credit risk. data such as GDP growth, unemployment, benchmark interest rates and house prices. The Group generates a ‘base case’ scenario of the future direction of Significant increase in credit risk relevant economic variables for each region as well as a representative range of As explained in note 1 the Group monitors all financial assets that are subject other possible forecast scenarios. The Group then uses these forecasts, which to impairment requirements to assess whether there has been a significant are probability-weighted, to adjust its estimates of PDs. increase in credit risk since initial recognition. If there has been a significant The Group uses different criteria to determine whether credit risk has increased increase in credit risk the Group will measure the loss allowance based on significantly per portfolio of assets. The criteria used are both quantitative lifetime rather than 12-month ECL. changes in PDs as well as qualitative. The table below summarises per type of asset the range above which an increase in lifetime PD is determined to be significant, as well as some indicative qualitative indicators assessed.

124124 (a) Credit risk(continued) 4. FINANCIALRISKMANAGEMENT FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS banks, publicsector entities,sovereigns, corporates andotherbusinesses. The corporate portfolio ofthe Group iscomprised ofloans andadvances to Corporate ratings ofMoody’s andS&P. credit riskgrades relate to PDand,for thewholesale portfolio, to external credit The table below provides anindicative mappingofhow theGroup’s internal Significant increase incredit risk Irrespective oftheoutcome oftheabove assessment, theGroup presumes corporate loan are assessed usingsimilarcriteria to corporate loans. using similarcriteria to mortgage loans, while commitments to provide a committed to provide, i.e. commitments to provide mortgages are assessed Loan commitments are assessed along withthe category ofloan theGroup is credit cards. The retail portfolios are comprised ofmortgage lending, personal loans and Retail Corporate exposures Stage 1 Stage 3 Stage 2 Grading Stage 3 Stage 2 Stage 1 Grading • • • • activities. environment oftheborrower orinits business the political, regulatory andtechnological Actual andexpected significant changesin for theborrower where available. Quoted bondandcredit default swap (CDS)prices articles, changesinexternal credit ratings. Data from credit reference agencies,press management changes. covenants, qualityofmanagement,senior ratios, debtservice coverage, compliance with focus are: gross profit margins, financialleverage and projections. Examples ofareas ofparticular statements, managementaccounts, budgets of customer files –e.g.audited financial Information obtained duringperiodicreview 100% average PD 12-month weighted- 6.7583% 0.0185% average PD 12-month weighted- (CONTINUED) 38.8% 100% 5.8% Default rating External BBB to C AAA to A Retail exposures • • • credit scores. agencies, includingindustry-standard External data from credit reference Affordability metrics. card facilities. behaviour –e.g.utilisationofcredit Internally collected data oncustomer material impactinECLs. countries where theGroup operates andtherefore isthecountry thathasa for Kenya, Tanzania, Uganda,Rwanda, SouthSudanandBurundiwhichare the in theeconomic scenarios usedat31December 2018for theyears 2019to 2023, The table below summarisestheprincipalmacroeconomic indicators included significant assumptions madeduringthereporting period. credit losses. TheGroup has notmadechanges in the estimation techniques or estimated relationships between macro-economic variables andcredit riskand of financialinstruments and,usingastatistical analysis ofhistorical data, has and documented key drivers ofcredit riskandcredit losses for eachportfolio used bytheGroup for strategic planningandbudgeting.TheGroup hasidentified case scenario isthesingle most-likely outcome andconsists ofinformation The Group applies probabilities to the forecast scenarios identified. The base published bygovernmental bodiesandmonetary authorities. scenarios. Theexternal information usedincludeseconomic data andforecasts economic variables along witharepresentative range ofotherpossible forecast information to generate a‘basecase’ scenario offuture forecast ofrelevant measurement ofECL.TheGroup employs experts whouseexternal andinternal or effort inits assessment ofsignificant increase ofcredit riskaswell asinits The Group usesforward-looking information thatisavailable withoutunduecost Incorporation offorward looking information accurately reflected intherating inatimely manner. its ratings to consider whetherthedrivers ofcredit riskthatled to default were asset becomes 30days past due.TheGroup performs periodicback-testing of increase incredit riskisidentifiedbefore theexposure isdefaulted orwhenthe to identifysignificant increases incredit are effective, meaningthatsignificant The Group hasmonitoring procedures inplace to make sure thatthecriteria used otherwise. the Group hasreasonable andsupportable information thatdemonstrates recognition whencontractual payments are more than30days past dueunless that the credit riskon a financial asset has increased significantly since initial All exposures • • • • conditions. business, financialandeconomic Existing andforecast changesin forbearance. Requests for andgranting of Utilisation ofthegranted limit. variables aboutpayment ratios. overdue status aswell asarange of Payment record –thisincludes 125 125 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Credit risk (continued)

2019 2020 2021 2022 2023 Inflation - Base scenario 0.80 0.80 0.80 0.80 0.80 - Range of upside scenarios 0.05 0.05 0.05 0.05 0.05 - Range of downside scenarios 0.15 0.15 0.15 0.15 0.15 Exchange rates - Base scenario 0.80 0.80 0.80 0.80 0.80 - Range of upside scenarios 0.10 0.10 0.10 0.10 0.10 - Range of downside scenarios 0.10 0.10 0.10 0.10 0.10 Benchmark interest rates - Base scenario 0.80 0.80 0.80 0.80 0.80 - Range of upside scenarios 0.05 0.05 0.05 0.05 0.05 - Range of downside scenarios 0.15 0.15 0.15 0.15 0.15 Reserves - Base scenario 0.80 0.80 0.80 0.80 0.80 - Range of upside scenarios 0.15 0.15 0.15 0.15 0.15 - Range of downside scenarios 0.05 0.05 0.05 0.05 0.05

Incorporation of forward looking information - continued LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect Predicted relationships between the key indicators and default and loss rates on to receive, taking into account cash flows from any collateral. The LGD models various portfolios of financial assets have been developed based on analysing for secured assets consider forecasts of future collateral valuation taking into historical data over the past 10 years. account sale discounts, time to realisation of collateral, cross- collateralisation Measurement of ECL and seniority of claim, cost of realisation of collateral and cure rates (i.e. exit from non-performing status). LGD models for unsecured assets consider time The key inputs used for measuring ECL are: of recovery, recovery rates and seniority of claims. The calculation is on a discounted cash flow basis, where the cash flows are discounted by the original • probability of default (PD); EIR of the loan. • loss given default (LGD); and EAD is an estimate of the exposure at a future default date, taking into account • exposure at default (EAD). expected changes in the exposure after the reporting date, including repayments of principal and interest, and expected drawdowns on committed facilities. The As explained above these figures are generally derived from internally developed Group’s modelling approach for EAD reflects expected changes in the balance statistical models and other historical data and they are adjusted to reflect outstanding over the lifetime of the loan exposure that are permitted by the probability-weighted forward-looking information. current contractual terms, such as amortisation profiles, early repayment PD is an estimate of the likelihood of default over a given time horizon. It is or overpayment, changes in utilisation of undrawn commitments and credit estimated as at a point in time. The calculation is based on statistical rating mitigation actions taken before default. The Group uses EAD models that reflect models, and assessed using rating tools tailored to the various categories of the characteristics of the portfolios. counterparties and exposures. The Group measures ECL considering the risk of default over the maximum These statistical models are based on market data (where available), as well contractual period (including extension options) over which the entity is exposed as internal data comprising both quantitative and qualitative factors. PDs are to credit risk and not a longer period, even if contact extension or renewal is estimated considering the contractual maturities of exposures and estimated common business practice. However, for financial instruments such as credit prepayment rates. The estimation is based on current conditions, adjusted to cards, revolving credit facilities and overdraft facilities that include both a loan take into account estimates of future conditions that will impact PD. and an undrawn commitment component, the Group’s contractual ability to

126126 (a) Credit risk(continued) 4. FINANCIALRISKMANAGEMENT banked onthebasisofshared riskcharacteristics, suchas: When ECL are measured on a collective basis, the financial instruments are Rankings basedonshared risks characteristics applied for regulatory purposesare: methodologies usedto measure ECLinaccordance withIFRS9versus theones both accounting andregulatory purposes.Themain differences between the ensured thattheappropriate methodology isusedwhencalculating ECLfor for regulatory purposes,althoughmanyinputs usedare similar. TheGroup has The ECLcalculation for accounting purposesisdifferent to theECLcalculation to mitigate ECL,e.g.reduction inlimits orcancellation oftheloan commitment. into account thecredit riskmanagementactionsthattheGroup expects to take increase incredit riskatthefacility level. Thislonger periodisestimated taking on acollective basisandare cancelled only whentheGroup becomes aware ofan financial instruments. Thisisbecause thesefinancialinstruments are managed in thenormalday-to-day managementthecontractual rightto cancel these a shortcontractual cancellation period.However, theGroup doesnotenforce financial instruments donothave afixed term orrepayment structure andhave even ifthatperiodextends beyond themaximum contractual period.These to credit riskandECLwould notbemitigated bycredit riskmanagement actions, financial instruments theGroup measures ECLover theperiodthatitisexposed Group’s exposure to credit losses to thecontractual notice period.For such demand repayment and cancel the undrawn commitment does not limit the benchmark information represents asignificant inputinto measurement ofECL. historical data. Thetable below depicts theportfolios for whichexternal The Group usesexternal benchmarkinformation for portfolios withlimited comprised ofhomogenousexposures. The rankings are reviewed onaregular basisto ensure thateachbank is as noted below. credit riskitcan benecessary to perform theassessment onacollective basis In relation to theassessment ofwhetherthere hasbeenasignificant increase in measurement onacollective basisismore practical for large portfolios ofitems). of whetheritismeasured onanindividualbasisoracollective basis(although a result, themeasurement oftheloss allowance should bethesameregardless The measurement of ECL is based on probability weighted average credit loss. As FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS • • • • • • • • • • on theprobability ofadefault occurring (loan-to-value (LTV) ratios). the value ofcollateral relative to thefinancialasset ifithasanimpact industry; and remaining term to maturity; date ofinitialrecognition; collateral type; credit riskgrade; instrument type; Average PD’s usedinregulatory ECL Discounting appliedto collateral isprescribed inregulatory ECL Incorporation ofrecovery andcure rates inaccounting ECL (CONTINUED) represent theamounts committed orguaranteed, respectively. commitments andfinancialguarantee contracts, theamounts inthetable assets, theamounts inthetable represent gross carrying amounts. For loan is provided inthefollowing tables. Unless specifically indicated, for financial An analysis of the Group’s credit riskconcentrations per class of financial asset line for eachclass offinancialinstrument. the note thatprovides ananalysis oftheitems includedinthefinancialstatement outlines the classes identified, as well as the financial statement line item and The Group monitors credit riskperclass offinancialinstrument. Thetable below Credit quality Off balance sheet Other Assets Clearing house advances to banks Loans and costs held atamortized Financial assets held through FVOCI Financial assets with CBK Cash andbalances instrument Class offinancial with CBK Cash andbalances Clearing house at amortisedcost advances to banks Loans and cost customers atamortised Loans andadvances to amortised cost Financial Assets at Financial Assets atFVTOCI contracts and financialguarantee Loan commitments assets Other financial (millions) Exposure CBK balances with Cash and Clearing house Financial statement line banks Loans andadvances to customers Loans andadvances to Investment securities Investment securities None Other financialassets 13,428 30,646 32,017 37,174 83,805 50,101 1,217 Corporate PD benchmark External Corporate Corporate Corporate Sovereign Sovereign Sovereign S& Pratings LGD benchmark External S& Pratings S& Pratings S& Pratings S& Pratings S& Pratings S& Pratings Note Note 22 Note 25 Note 23 Note 27 Note 28 Note 24 Note 45 Note 26 127 127 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Credit risk (continued)

Credit quality (continued) Loan Commitments Concentration by region Kenya Tanzania Uganda Sudan Rwanda Burundi Total Loans and advances at amortised cost KShs. KShs. KShs. KShs. KShs. KShs. KShs. million million million million million million million 31-Dec-18 417,230 16,559 6,220 688 12,799 2,384 455,880 31-Dec-17 387,943 13,695 6,777 965 11,902 1,403 422,685

Concentration by sector Corporate Retail Total Loans and advances at amortised cost KShs. KShs. KShs. million million million 31-Dec-18 209,707 246,173 455,880 31-Dec-17 189,828 232,857 422,685

An analysis of the Group’s credit risk exposure per class of financial asset, internal rating and “stage” without taking into account the effects of any collateral or other credit enhancements is provided in the following tables. Unless specifically indicated, for financial assets, the amounts in the table represent gross carrying amounts. For loan commitments and financial guarantee contracts, the amounts in the table represent the amounts committed or guaranteed, respectively.

Total Corporate & Retail

Year ended 2018 Year ended 2017 Stage 1 Stage 2 Stage 3 -month ECL Lifetime ECL Lifetime ECL POCI Total Total KShs. Loans and advances to customers at amortised cost KShs. million KShs. million KShs. million KShs. million KShs.million million

Grade 1: Normal 365,412 15,140 1,577 - 382,129 354,765 Grade 2: Watch 18,595 16,382 28,607 - 63,584 46,382

Grade 3: Substandard 384 1,092 4,417 - 5,893 5,935

Grade 4: Doubtful 40 64 5,026 - 5,130 12,001

Grade 5: Loss 69 31 19,693 - 19,793 19,560 Total gross carrying amount 384,500 32,709 59,320 - 476,529 438,643

Loss allowance (4,115) (2,594) (13,940) - (20,649) (15,958)

Carrying amount 380,385 30,115 45,380 - 455,880 422,685

128128 Corporate Retail Credit quality(continued) (a) Credit risk(continued) 4. FINANCIALRISKMANAGEMENT No loss allowance isrecognised inthestatement offinancial positionfor debtinstruments measured atFVTOCI asthecarrying amountisatfair value. FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS at amortisedcost Loans andadvances to Corporate customers Loans andadvances to Retail customers atamortisedcost Grade 1:Normal Grade 1:Normal Grade 2:Watch Grade 2:Watch Grade 3:Substandard Grade 3:Substandard Letters ofCredit andguarantees Grade 4:Doubtful Grade 4:Doubtful Grade 5:Loss Grade 5:Loss Grade 1:AAA Total gross carrying amount Total gross carrying amount Grade 2:AA Loss allowance Loss allowance Grade 3:A Carrying amount Carrying amount Grade 4:BBB Grade 5:BB Grade 6:B Grade 7:CCC Grade 8:D Grade 9:U Total gross carrying amount Loss allowance Carrying amount (CONTINUED) 12-month ECL 12-month ECL 12-month ECL KShs. million KShs. million KShs. million 205,379 179,121 201,504 178,880 170,340 195,072 Stage 1 Stage 1 Stage 1 10,283 10,283 (3,875) 10,041 8,554 2,271 1,323 4,276 (241) 207 177 845 568 560 276 163 22 18 37 32 - - KShs. million KShs. million KShs. million Lifetime ECL Lifetime ECL Lifetime ECL Year ended2018 Year ended2018 Year ended2018 Stage 2 Stage 2 Stage 2 17,662 15,045 17,416 12,698 (2,347) 7,813 7,813 6,964 8,176 8,846 7,536 1,019 1,464 5,125 (246) 590 502 205 34 29 16 14 ------KShs. million KShs. million KShs. million Lifetime ECL Lifetime ECL Lifetime ECL Stage 3 Stage 3 Stage 3 32,033 27,287 27,253 18,127 (4,780) (9,160) 15,448 13,159 10,634 5,092 5,092 2,385 2,032 2,714 2,312 9,059 4,372 725 852 673 47 ------KShs. million KShs. million KShs. million ------POCI POCI POCI ------KShs. million KShs. million KShs. million 178,030 204,099 255,074 221,453 246,173 209,705 (11,748) 34,335 29,249 23,188 10,688 23,188 (8,901) 10,111 3,182 2,711 2,770 2,360 9,105 2,271 2,342 5,401 Total Total Total Year ended2017 Year ended2017 Year ended2017 845 568 813 673 163 - 196,994 189,827 241,649 232,858 159,325 195,440 million million million 38,200 38,200 (7,167) 20,830 23,124 (8,791) 25,552 10,776 KShs. KShs. KShs. 2,665 5,390 8,784 5,268 4,582 2,462 3,270 6,611 Total Total Total 420 973 604 767 - - 129 129 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Credit risk (continued) Credit quality (continued) The tables below analyse the movement of the loss allowance during the year per class of assets.

Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL POCI Total Corporate & Retail KShs. million KShs. million KShs. million KShs. million KShs. million Loss allowance as at 31 December 2017 295 858 14,805 - 15,958 Re measurement 4,590 2,176 3,441 - 10,207 Loss allowance as at 1 January 2018 4,885 3,034 18,246 - 26,165 Changes in the loss allowance - – Transfer to stage 1 996 (336) (660) - - – Transfer to stage 2 (109) 618 (509) - - – Transfer to stage 3 (132) (230) 362 - - – Write-offs - - (8,367) - (8,367) – Changes due to modifications that did not result in 168 942 1,915 - 3,025 derecognition New financial assets originated or purchased 12,236 9,323 10,451 - 32,010 Financial assets that have been derecognised (13,929) (9,935) (7,920) - (31,784) Changes in models/risk parameters - - - - - Foreign exchange and other movements - 28 (428) - (400) Loss allowance as at 31 December 2018 4,115 3,444 13,090 - 20,649

Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL POCI Total Retail KShs. million KShs. million KShs. million KShs. million KShs. million Loss allowance as at 31 December 2017 163 473 8,156 - 8,792 Re measurement 4,482 138 1,172 - 5,792 Loss allowance as at 1 January 2018 4,645 611 9,328 - 14,584 Changes in the loss allowance - – Transfer to stage 1 549 (185) (364) - - – Transfer to stage 2 (60) 340 (280) - - – Transfer to stage 3 (72) (127) 199 - - – Write-offs - - (5,262) - (5,262) – Changes due to modifications that did not result in 93 519 1,055 - 1,667 derecognition New financial assets originated or purchased 2,287 140 6,792 - 9,219 Financial assets that have been derecognised (3,566) (1,052) (6,688) - (11,306) Changes in models/risk parameters - - - - - Foreign exchange and other movements - - - - - Loss allowance as at 31 December 2018 3,875 246 4,780 - 8,902

130130 Credit quality(continued) (a) Credit risk(continued) 4. FINANCIALRISKMANAGEMENT FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Letters ofCredit, Guarantees andOtherFinancialAssets amortised cost Loss allowance –Loansandadvances to customers at Corporate – Transfer to stage 1 – Transfer to stage 1 Re measurement Loss allowance asat31December 2017 Loss allowance asat31December 2017 – Transfer to stage 2 – Transfer to stage 2 Loss allowance asat1January2018 Re measurement – Transfer to stage 3 Loss allowance asat1January2018 Changes intheloss allowance – Write-offs – Transfer to stage 3 Changes intheloss allowance derecognition – Changesdueto modifications thatdidnotresult in New financialassets originated orpurchased – Write-offs derecognition – Changesdueto modifications thatdidnotresult in New financialassets originated orpurchased Financial assets thathave beenderecognised Changes inmodels/riskparameters Foreign exchange andothermovements Financial assets thathave beenderecognised Loss allowance asat31December 2018 Changes inmodels/riskparameters Foreign exchange andothermovements Loss allowance asat31December 2018 (CONTINUED) 12-month ECL 12-month ECL KShs. million KShs. million (10,363) Stage 1 Stage 1 9,949 (49) (60) (72) 241 241 447 132 109 (9) 95 15 95 75 - - 1 ------KShs. million KShs. million Lifetime ECL Lifetime ECL Stage 2 Stage 2 (8,883) 2,422 3,197 2,037 9,183 (151) (103) (81) 208 385 278 208 423 81 81 28 ------KShs. million KShs. million Lifetime ECL Lifetime ECL Stage 3 Stage 3 (3,105) (1,233) 8,919 8,310 6,649 2,270 3,659 (296) (229) (136) (428) 122 126 122 140 163 860 ------KShs. million KShs. million POCI POCI ------KShs. million KShs. million (20,479) (3,105) 11,582 22,791 11,747 7,166 4,416 1,358 (289) (400) Total Total 298 298 349 349 (9) ------131 131 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Credit risk (continued) Credit quality (continued) More information about the significant changes in the gross carrying amount of financial assets during the period that contributed to the changes in the loss allowance, is provided at the table below:

Loans to banks Loans and advances to banks at amortised cost Stage 1 Stage 2 Stage 3 12-month ECL Lifetime ECL Lifetime ECL POCI Total KShs. million KShs. million KShs. million KShs. million KShs. million Gross carrying amount as at 31 December 2017 21,711 - - - 21,711 Restatement of the prior year - - - - - Gross carrying amount as at 1 January 2018 21,711 - - - 21,711 Changes in the loss allowance – Transfer to stage 1 - - - - - – Transfer to stage 2 - - - - - – Transfer to stage 3 - - - - - – Write-offs - - - - - New financial assets originated or purchased 10,306 - - - 10,306 Financial assets that have been derecognised - - - - - Other changes - - - - - Gross carrying amount as at 31 December 2018 32,017 - - - 32,017

No loss allowance is recognised in the statement of financial position for debt instruments measured at FVTOCI as the carrying amount is at fair value As discussed above in the significant increase in credit risk section, under the Group’s monitoring procedures a significant increase in credit risk is identified before the exposure has defaulted, and at the latest when the exposure becomes 30 days past due. This is the case mainly for loans and advances to customers and more specifically for retail lending exposures because for corporate lending and other exposures there is more borrower specific information available which is used to identify significant increase in credit risk. The table below provides an analysis of the gross carrying amount of loans and advances to customers by past due status.

Year ended 2018 Year ended 2017 Gross carrying Gross carrying amount Loss allowance amount Loss allowance KShs. million KShs. million KShs. million KShs. million Loans and advances to customers 0-29 days 384,500 4,115 354,765 19 30-59 days 32,709 2,594 46,382 1,134 60-89 days 59,320 13,940 37,496 14,805 Total 476,529 20,649 438,643 15,958

Modified financial assets As a result of the Group’s forbearance activities financial assets might be modified. The following tables refer to modified financial assets where modification does not result in derecognition.

132132 recent appraisals. Thetables below show theexposures from mortgage loans byranges ofLTV. based onthecollateral value atoriginationupdated basedonchanges inhouseprice indices. For credit-impaired loans thevalue ofcollateral is basedonthemost The valuation ofthecollateral excludes anyadjustments for obtaining andselling thecollateral. Thevalue ofthecollateral for residential mortgage loans istypically using theLTV ratio, whichiscalculated astheratio ofthegross amountoftheloan –ortheamountcommitted for loan commitments –to thevalue ofthecollateral. The Group holds residential properties ascollateral for the mortgage loans itgrants to its customers. TheGroup monitors its exposure to retail mortgage lending Mortgage lending The Group doesnothold anyderivatives. Derivatives andloans andadvances to banks (reverse sale andrepurchase agreements andsecuritiesborrowing) Group’s collateral policyduringtheyear. More details withregards to collateral held for certain classes offinancialassets can befound below. The Group didnothold anyfinancialinstrument for whichnoloss allowance isrecognised because ofcollateral at31December 2018.There was nochangeinthe charges for whichspecificvalues are notgenerally available. In additionto thecollateral includedinthetable above, theGroup holds othertypesofcollateral andcredit enhancements, suchassecond charges andfloating Credit quality(continued) (a) Credit risk(continued) 4. FINANCIALRISKMANAGEMENT these are associated withare listed inthetable below. Thecollateral presented relates to instruments thatare measured atFVTOCI, amortisedcost andatFVTPL. The Group holds collateral orothercredit enhancements to mitigate credit riskassociated withfinancialassets. Themaintypesofcollateral andthetypesofassets Collateral held assecurityandothercredit enhancements FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Corporate lending Personal lending Mortgage lending Net modification gain/(loss) Net amortisedcost before modification Loss allowance before modification Gross carrying amountbefore modification 12-month ECLbasisafter modification Gross carrying amountoffinancialassets for whichloss allowance haschangedintheperiodfrom lifetime to Financial assets modifiedsince initialrecognition atatimewhenloss allowance was basedonlifetime ECL Net amortisedcost after modification Financial assets (withloss allowance basedonlifetime ECL)modifiedduringtheperiod (CONTINUED) Percentage ofExposure thatissubjectto collateral requirements 31 December 88% 31% 95% 2018 Year ended2018 31 December Year ended2018 93% 32% 95% KShs. million 24,552 (149) (306) KShs. million 24,246 24,097 2017 179 Stock Property &equipment, Property &equipment Property Type ofCollateral held Year ended2017 Year ended2017 KShs. million KShs. million (838) 13,931 14,769 14,041 110 110 133 133 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) Mortgage lending - continued

Year ended 2018 Year ended 2017 Loss Gross Loss Gross carrying amount allowance carrying amount allowance KShs. million KShs. million KShs. million KShs. million Mortgage lending LTV ratio Less than 50% 343 99 776 201 51-70% 518 136 880 170 71-90% 4,129 291 4,266 302 91-100% 10,154 153 9,988 188 More than 100% 48,612 122 48,221 268 Total 63,756 801 64,131 1,129

Year ended 2018 Year ended 2017 Loss Loss Gross carrying allowance Gross carrying allowance Credit impaired – mortgage KShs. million KShs. million KShs. million KShs. million lending LTV ratio Less than 50% 140 87 243 123 51-70% 280 116 349 99 71-90% 877 221 755 229 91-100% 257 84 588 139 More than 100% 4,162 58 14,721 218 Total 5,716 566 16,656 808

Personal lending The Group’s personal lending portfolio consists of unsecured loans and credit cards.

Corporate lending The Group requests collateral and guarantees for corporate lending. The most relevant indicator of corporate customers’ creditworthiness is an analysis of their financial performance and their liquidity, leverage, management effectiveness and growth ratios. For this reason the valuation of collateral held against corporate lending is not routinely updated. The valuation of such collateral is updated if the loan is put on “watch-list” and is therefore monitored more closely. For credit-impaired loans the Group obtains appraisals of collateral to inform its credit risk management actions. At 31 December 2018 the net carrying amount of loans and advances to corporate customers was KShs. 190m (2017: KShs.173m) and the value of the respective collateral was KShs. 1,896m (2017: KShs. 1,776m). Investment securities The Group holds investment securities measured at amortised cost with a carrying amount of KShs.27,348m and at FVTOCI with a carrying amount of KShs.74,350m. The investment securities held by the Group are sovereign bonds and corporate bonds, which are not collateralised, as well as asset backed securities, which are secured by financial assets. Lease receivables The Group does not have any lease receivables. Assets obtained by taking possession of collateral The Group has not obtained any financial and non-financial assets during the year by taking possession of collateral held as security against loans and advances and held at the year end. The Group’s policy is to realise collateral on a timely basis. The Group does not use non-cash collateral for its operations.

134134 advances was asfollows: is notappropriate onthebasisofstage ofcollection ofamounts owed to theGroup. Asat31December, theageinganalysis ofpast duebutnotimpaired loans and Past duebutnotimpaired loans andadvances are thosefor whichcontractual interest orprincipalpayments are past due,buttheGroup believes thatimpairment (i) Past duebutnotimpaired loans andadvances credit riskatthereporting date isshown below: Overall, itisthepolicyofGroup to limitcredit riskexposures andconcentrations withintheconstraints ofits capital base.Ananalysis ofconcentrations of Group holds sufficientcapital to withstand anyloss arisingfrom significant exposure to asector, single customer andgroup ofclosely related customers. performance isnotnegatively impacted byalarge sectoral exposure default. Additionally, regular stress tests are performed ontheportfolio to ensure thatthe The Group focuses onthediversification ofits lending portfolio bysettingindustry sector limits basedonforecasts spanningaone-year horizonto ensure thatits (v) Concentration ofcredit risk individually assessed asimpaired. and guarantees. Estimates offair value are basedonthevalue ofcollateral assessed atthetimeofborrowing andgenerally are notupdated except whenaloan is The Group holds collateral against loans andadvances to customers intheform ofmortgage interests over property andotherregistered securitiesover assets (iv) Collateral onloans andadvances proceeds from collateral willnotbesufficientto pay backtheentire exposure. information suchastheoccurrence ofsignificant changesintheborrower’s financialpositionsuchthattheborrower can nolonger pay theobligationorthat The Group writes offaloan balance asandwhentheCredit Committee determines thattheloans are uncollectible. Thisdetermination isreached after considering (iii) Write-off policy mitigated bythesamecontrol processes andpolicies. customers intheevent ofaspecific act,generally related to theimportorexport ofgoods.Suchcommitments expose theGroup to similarrisks to loans andare lines to secure theirliquidityneeds.Letters ofcredit andguarantees (includingstandby letters of credit) commit theGroup to make payments onbehalfof The Group makes available to its customers guarantees whichmay require theGroup to make payments ontheirbehalf andenters into commitments to extend (ii) Credit related commitment risk (a) Credit risk(continued) 4. FINANCIALRISKMANAGEMENT FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Corporate Small &MediumEnterprises Agriculture Micro credit Construction

Greater than120days Between 60and120days Less than60days

GROUP COMPANY GROUP COMPANY (CONTINUED) 476,529 222,993 105,372 117,754 million 17,407 13,003 KShs. 2018 million KShs. 2017 ------17,668 12,475 48,983 79,126 million KShs. 2018 GROUP COMPANY 10,528 3,479 33,902 47,909 million KShs. 2017 438,643 194,318 105,272 million 43,594 12,042 83,417 KShs. 2018 - - - - million KShs. 2018 - - - - million million KShs. KShs. 2017 2017 ------135 135 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (a) Credit risk (continued)

(vi) Fair value of collateral held The Group holds collateral against loans and advances to customers in the form of cash, residential, commercial and industrial property; fixed assets such as plant and machinery; marketable securities; bank guarantees and letters of credit. The Group also enters into collateralised reverse purchase agreements. Risk mitigation policies control the approval of collateral types. Collateral is valued in accordance with the Group’s risk mitigation policy, which prescribes the frequency of valuation for different collateral types. The valuation frequency is driven by the level of price volatility of each type of collateral. Collateral held against impaired loans is maintained at fair value. The valuation of collateral is monitored regularly and is back tested at least annually. Collateral generally is not held over loans and advances to banks, except when securities are held as part of reverse purchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held as at 31 December 2018 and 2017. An estimate of fair values of collaterals held against loans and advances to customers at the end of the year was as follows:

GROUP COMPANY 2018 2017 2018 2017 KShs. KShs. KShs. KShs. million million million million

Less than 60 days 15,125 14,348 - - Between 60 and 120 days 1,931,585 1,801,051 - - 1,946,710 1,815,399 - -

The Group believes that the balances that are past due and not impaired are recoverable in full.

(b) Liquidity risk Liquidity risk is the risk that the Group, though solvent either does not have sufficient financial resources available to meet all its obligations and commitments as they fall due or can secure them only at excessive costs. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group’s treasury maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. Details of the reported Group’s ratio of net liquid assets to deposits from customers at the reporting date and during the reporting year were as follows:

GROUP GROUP 2018 2017 KShs. KShs. million million

At close of the year 33.3% 37.5% Average for the year 34.1% 38.9% Maximum for the year 35.3% 42.8% Minimum for the year 33.3% 36.8%

136136 (b) Liquidityrisk(continued) 4. FINANCIALRISKMANAGEMENT The company isnotsignificantly exposed to liquidityriskastheborrowings were paid inthecurrent year. contractual maturities. The table below summarizestheGroup’s liquidityriskasat31December 2018,categorized into relevant maturitygroupings basedontheearlierofremaining The amounts inthetables above have beencompiled basedonundiscounted cash flows, whichinclude estimated interest payments. FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS As at31December 2018 As at31December 2017 Cash andbalances withCentral Banks Loans andadvances to Banks Cash andbalances withCentral Banks income Financial Assets Fair value through othercomprehensive Loans andadvances to Banks Financial Assets held atamortizedcost income Financial Assets Fair value through othercomprehensive Loans andadvances to customers Financial Assets held atamortizedcost Clearing house Loans andadvances to customers Other Assets Clearing house Total financialassets Other Assets Deposits from banks Total financialassets Deposits from customers Deposits from banks Bills payable Deposits from customers Borrowings Bills payable Other Liabilities Borrowings Total financialliabilities Other Liabilities Total financialliabilities (CONTINUED) Upto 1month KShs.million KShs. million (245,164) (287,396) 138,545 132,807 383,709 420,203 362,473 404,718 50,101 30,160 50,714 10,850 17,873 34,842 54,512 11,004 11,350 1,973 1,128 1,222 6,428 6,531 5,514 6,141 4,140 1,689 1,124 460 232 85 KShs.million KShs. million 1-3months (66,031) (47,729) 32,231 15,987 98,262 63,716 27,121 90,878 61,698 1,244 1,565 3,437 4,894 8,708 7,384 1,819 413 820 199 16 ------KShs.million KShs. million 3 -12months 84,226 49,907 80,366 32,902 17,005 40,542 24,551 38,005 22,622 76,747 30,845 3,860 5,561 1,978 1,371 1,690 2,248 104 756 367 14 ------KShs.million KShs. million 1-5years 187,207 208,949 170,350 200,654 166,953 166,144 16,857 12,502 26,569 14,719 8,295 1,517 7,243 7,362 2,288 9,495 5,008 509 999 ------KShs.million KShs. million Over 5years 228,989 205,117 217,608 197,485 188,959 170,699 10,472 19,498 20,473 19,718 14,700 10,472 7,632 7,632 59 ------KShs.million KShs. million 671,198 612,767 589,666 532,748 455,880 422,685 537,460 499,549 80,623 80,019 50,101 32,017 50,714 83,805 21,711 37,174 71,743 38,264 11,004 20,105 11,039 22,447 14,895 Total 1,217 1,222 6,428 5,514 6,141 4,140 1,124 137 137 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED)

(c) Market risk (i) Currency risk The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions which are monitored daily and hedging strategies used to ensure that positions are maintained within the established limits. Foreign exchange risk arises from our non trading asset and liability positions, denominated in currencies other than the functional currency of the respective entity. Transactions in foreign currency are recorded at the rate in effect at the date of the transaction. The Group translates monetary assets and liabilities denominated in foreign currencies at the rate of exchange in effect at the reporting date. The Group records all gains or losses on changes in currency exchange rates in profit or loss. The table below summarizes the foreign currency exposure as at 31 December 2018 and 31 December 2017:

GROUP COMPANY

2018 2017 2018 2017 KShs. KShs. KShs. KShs. million million million million

Assets in foreign currencies 287,214 126,226 486 494 Liabilities in foreign currencies (301,548) (114,860) - (7,755) Net foreign currency exposure at the end of the year (14,334) 11,366 486 (7,261)

USD GBP EURO Other Total KShs. KShs. KShs. KShs. KShs. Group million million million million million 31 December 2018

ASSETS Cash and balances with Central Banks 11,235 240 37 19 11,531 Placements with Banks 13,965 929 1,190 473 16,557 Loans and advances to customers 72,404 50 1,514 4 73,972 Other assets 171,928 468 8,190 4,568 185,154 At 31 December 2018 269,532 1,687 10,931 5,064 287,214

LIABILITIES Deposits from banks 6,624 28 65 3,481 10,198 Deposits from customers 69,645 1,048 2,341 9,823 82,857 Other liabilities 194,943 559 8,690 4,301 208,493 At 31 December 2018 271,212 1,635 11,096 17,605 301,548 Net statement of financial position exposure (1,680) 52 (165) (12,541) (14,334)

138138 the Group’s profit before tax (due to changesinthefair value ofmonetary assets andliabilities). The following table demonstrates thesensitivityto areasonably possible changeinthebelow mentionedexchange rates, withallothervariables held constant, of (c) Market risk(continued) (i) Currency risk(continued) 4. FINANCIALRISKMANAGEMENT FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Net statement offinancialpositionexposure At 31December 2017 Other liabilities Deposits from customers Deposits from banks LIABILITIES At 31December 2017 Other assets Loans andadvances to customers Placements withbanks Cash andbalances withCentral Banks ASSETS ‘Million’ USD ASSETS GBP Euro Other USD LIABILITIES GBP Euro Others Percentage ofnetprofit Effect onnetprofit Tax charge at30% Total (decrease)/increase 31 December 2017 (CONTINUED) 107,390 119,073 million 11,683 26,973 73,621 83,671 24,506 KShs. 6,796 2,639 8,257 USD At31December 2018At31December 2017 Currency 419,079 Carrying Amount

269,532 271,212 10,931 11,096 17,605 1,687 5,064 1,635 Depreciation (28,721) (26,953) 30,156 million million (1,093) 27,121 4.18% 1,435 KShs. KShs. 1,110 1,761 1,004 (169) (506) 10% GBP 164 431 160 827 987 783 752 29 15 30 52 Appreciation (30,156) (27,121) (1,435) -4.18% 28,721 (1,110) (1,761) (1,004) 26,953 1,093 (164) (431) 10% 169 506 million KShs. EURO 5,745 5,142 5,399 1,564 2,244 1,067 (603) 246 100 267 Currency Carrying Amount 119,073 107,390 5,142 1,024 5,745 987 827 898 Depreciation million KShs. Other 1,024 126 898 298 580 194 281 549 (12,622) (11,907) 20 (1,135) -4.03% 11,487 10,739 - (514) (102) (794) (341) 10% (99) 575 83 90 Appreciation (11,487) 114,860 126,226 (10,739) 11,366 12,622 27,546 80,383 85,287 11,534 26,275 11,907 4.03% 1,135 6,931 3,130 Total (575) 10% (83) (90) 514 102 794 341 99 139 139 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market risk (continued)

i) Currency risk – continued At 31 December 2018 if the shilling had weakened/strengthened by 10% against the major trading currencies, with all other variables held constant, net profit would have been KShs. 1,004 million (2017: KShs. 794 million) lower/higher. (ii) Interest rate risk Interest rate is the risk that the future cash flows of financial instruments will fluctuate because of changes in the market interest rates. Interest margin may decrease as a result of such changes but may increase losses in the event that unexpected movement arises. The Group closely monitors interest rate movements and seeks to limit its exposure by managing the interest rate and maturity structure of assets and liabilities carried on the statement of financial position. Assets and Liabilities Committee monitors compliance with the set interest rate gaps. The table below shows interest rate sensitivity position of the Group at 31 December based on the earlier of maturity or re-pricing dates. Items not recognized on the statement of financial position do not pose any significant interest rate risk to the Group.

Up to 1 1 - 3 3 - 12 1 - 5 Over Non-interest Total Weighted month months months years 5 years bearing KShs. interest KShs. KShs. KShs. KShs. KShs. KShs. million As at 31 December 2018 rates million million million million million million

Cash and balances with Central Banks ------50,101 50,101 Loans and advances to banks 7.8% 30,160 1,244 104 509 - - 32,017

Financial assets FVTOCI - 10,850 413 40,542 12,502 19,498 - 83,805

Clearing house - 1,217 - - - - - 1,217

Loans and advances to customers 13.5% 34,842 27,121 38,005 166,953 188,959 - 455,880

Financial assets held at amortised cost 10.6% 460 3,437 5,561 7,243 20,473 - 37,174 Other Assets - 11,004 - - - - - 11,004 Total assets 88,533 32,215 84,212 187,207 228,930 50,101 671,198

Deposits from banks 8.2% 11,350 7,384 1,371 - - - 20,105

Deposits from customers 7.4% 362,473 90,878 76,747 7,362 - - 537,460 Bills payable - 5,514 - - - - - 5,514

Borrowings 3.8% 232 - 2,248 9,495 10,472 - 22,447 Other Liabilities - 4,140 - - - - - 4,140

Total liabilities and equity 383,709 98,262 80,366 16,857 10,472 - 589,666 Interest rate sensitivity gap (295,176) (66,047) 3,846 170,350 217,549 50,101 80,623

140140 (c) Market risk(continued) (ii) Interest rate risk-continued 4. FINANCIALRISKMANAGEMENT Cash andbalances withCentral Banks Loans andadvances to banks Financial assets FVTOCI Clearing house Loans andadvances to customers Financial assets held atamortisedcost Other Assets Total assets Deposits from banks Deposits from customers Bills payable Borrowings Other Liabilities Total liabilitiesandequity Interest rate sensitivitygap FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS As at31December 2017 Weighted interest rates 12.5% 12.8% 7.8% 8.2% 7.4% 3.8% (CONTINUED)

- - - - - (325,814) million Up to 1 399,603 month 384,118 KShs. 80,292 16,072 54,512 1,973 1,222 6,428 6,531 6,141 1,689 1,124 85 - months million (47,729) KShs. 15,987 63,716 61,698 1 -3 1,565 4,894 8,708 1,819 820 199 - - - - - months million KShs. 3 -12 49,907 32,902 17,005 24,551 22,622 30,845 1,978 1,690 756 367 - - - - - million 210,750 181,855 166,144 KShs. years 28,895 26,569 14,719 22,888 1 -5 3,318 5,008 999 - - - - - 5 years million 205,117 197,485 170,699 KShs. 19,718 14,700 Over 7,632 7,632 ------Non-interest bearing million KShs. 50,714 50,714 50,714 - - - million 612,767 532,748 422,685 499,549 KShs. 80,019 50,714 21,711 71,743 38,264 11,039 14,895 Total 1,222 6,428 6,141 1,124 141 141 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

4. FINANCIAL RISK MANAGEMENT (CONTINUED) (c) Market risk (continued)

ii) Interest rate risk - continued An analysis of the Group’s sensitivity to an increase or decrease in market interest rates assuming no asymmetrical movement in yield curves and a constant financial position is as follows on profit or loss (balances in millions):

2018 2017

GROUP Carrying 10% 10% Carrying 10% 10% amount Increase Decrease amount Increase Decrease

Cash and balances with Central Banks 50,101 - 50,714 - - Loans and advances to banks 32,017 (320) 320 21,711 (199) 199 Financial assets FVTOCI 82,896 (829) 829 71,743 (717) 717

Clearing house 1,217 (12) 12 1,222 (12) 12

Other assets 11,004 (1,100) 1,100 6,428 (643) 643 Loans and advances to customers (Net) 455,880 (4,559) 4,559 422,685 (4,227) 4,227 Financial assets held at amortised cost 37,174 (372) 372 38,264 (383) 383

670,289 612,767

LIABILITIES & EQUITY

Deposits from banks 20,105 201 (201) 11,039 110 (110)

Deposits from customers 537,460 5,375 (5,375) 499,549 4,995 (4,995) Bills payable 5,514 - - 6,141 - - Other liabilities and accrued expenses 4,140 - - 1,124 - - Borrowings 22,447 224 (224) 14,895 149 (149) 589,666 532,748

Net interest income Increase/(decrease) (1,392) 1,392 (927) 927 Tax Charge @ 30% - 418 (418) - 278 (278) Impact on profit after tax - (975) 975 - (649) 649

(d) Operational risk management The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each Operational risk is the risk of direct or indirect loss arising from a wide variety business unit. This responsibility is supported by the development of overall of causes associated with the Group’s processes, personnel, technology and Group standards for the management of operational risk in the following areas: infrastructure and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally • Requirements for appropriate segregation of duties, including the accepted standards of corporate behavior. Operational risks arise from all of the independent authorization of transactions. Group’s operations and are faced by all business units. • Requirements for the reconciliation and monitoring of transactions. The Group’s objective is to manage operational risk so as to balance the • Compliance with regulatory and other legal requirements. avoidance of financial losses and damage to the Group’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and • Documentation of controls and procedures. creativity. • Requirements for the yearly assessment of operational risks faced

142142 (d) Operational riskmanagement(continued) 4. FINANCIALRISKMANAGEMENT significant effect ontheamounts recognised infinancialstatements: process ofapplying theGroup’s accounting policiesandthathave themost (which are dealtwithseparately below), thatthedirectors have madeinthe The following are the critical judgements, apartfrom thoseinvolving estimations (a) Judgments Revisions to estimates are recognized prospectively. Estimates andtheunderlying assumptions are reviewed onanongoingbasis. expenses. Actualresults may differ from theseestimates. accounting policiesandthereported amounts ofassets, liabilities,income and judgments, estimates andassumptions thataffect theapplication oftheGroup’s In preparing theseconsolidated financialstatements, managementhasmade JUDGMENTS 5. CRITICAL ACCOUNTING ESTIMATES AND senior managementoftheGroup. unit to whichthey relate, withsummariessubmitted to theAuditCommittee and of internal auditreviews are discussed withthemanagementofbusiness undertaken byboththeInternal AuditandCompliance department.Theresults Compliance withGroup’s standards issupported byaprogram ofregular reviews FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS • • • • • • • Risk mitigation,includinginsurance where thisiseffective. Ethical andbusiness standards. Training andprofessional development. Development ofcontingency plans. remedial action. Requirements for thereporting ofoperational losses andproposed identified. and the adequacy of controls and procedures to address the risks so aprospective changeto theclassification ofthoseassets. appropriate whetherthere hasbeenachangeinbusiness modeland financial assets are held continues to beappropriate andifitisnot assessment ofwhetherthe business modelfor whichtheremaining the asset was held. Monitoring is part of the Group’s continuous reasons are consistent withthe objective of the business for which maturity to understand thereason for theirdisposalandwhetherthe other comprehensive income thatare derecognised priorto their financial assets measured atamortised cost orfair value through the managers of the assets are compensated. The Group monitors the performance oftheassets and how theseare managedandhow evaluated andtheirperformance ismeasured, therisks thataffect all relevant evidence includinghow theperformance oftheassets is business objective. Thisassessment includesjudgementreflecting of financialassets are managed together to achieve aparticular determines thebusiness modelatalevel thatreflects how banks model test (please seefinancialassets sectionsofnote 1).TheGroup financial assets dependsontheresults oftheSPPIandbusiness Business model assessment: Classification and measurement of 31 December 2018(SeeNote 19andNote 48) KCB Bank South Sudan Limited operates was hyper inflationary as at made indetermining whethertheeconomy ofSouthSudaninwhich recognized intheconsolidated financialstatements. Judgementwas accounting policiesthatwould have significant effects ontheamounts The Directors have madejudgements intheprocess ofapplying (CONTINUED) whether anallowance for impairmentshould be recognized inprofit orloss. In The Group reviews its loans andadvances ateachreporting date to assess Judgments may alsochange withtimeasnew information becomes available. in value andtimingmay vary from oneperson to anotherandteam to team. Subjective judgments are made in this process of cash flow determination both other claimants andtheexistence ofanycourt injunctions placed bytheborrower. for thecustomer, realizable value ofsecurities,theGroup’s positionrelative to are taken into account whichincludebutnotlimited to future business prospects All relevant considerations thathave abearingontheexpected future cash flows Impairment ismeasured for allaccounts thatare identifiedasnon-performing. requirements. competitive positionsandotherexternal factors suchaslegal andregulatory customers’ circumstances, structural changeswithinindustries that alter upon manyfactors, including general economic conditions, changesinindividual The estimation ofpotential credit losses isinherently uncertain anddepends Estimates appliedbefore 1January2018 (i) Impairmentlosses onloans andadvances are setoutbelow. a significant riskofresulting inmaterial adjustment inthefinancialstatements The information relating to assumptions andestimation uncertainties thathave (b) Assumptions andestimation uncertainties • • • details onECLandnote 6for more details onfair value measurement. relate to key drivers ofcredit risk.Seenote 1andnote 4for more the assumptions usedinthesemodels,includingassumptions that appropriate modelfor eachtypeofasset, aswell asfor determining as inestimating ECL. Judgementisapplied in identifyingthemost and assumptions inmeasuringfair value of financial assets aswell Models andassumptions used:TheGroup usesvarious models amount ofECLchangesbecause thecredit riskoftheportfolios differ. measured on thesamebasisof12-monthorlifetime ECLsbut the vice versa, but it can alsooccur within portfolios thatcontinue to be reverses) andso assets move from 12-monthto lifetime ECLs, or significant increase incredit risk(orwhenthatsignificant increase and movement between portfolios ismore common whenthere isa characteristics ofthatbankassets. Re-segmentation ofportfolios moving to anexisting portfolio thatbetter reflects thesimilarcredit risk the assets. Thismay result innew portfolios beingcreated orassets risk characteristics change there is appropriate re-segmentation of to besimilar. Thisisrequired inorder to ensure thatshould credit characteristics onanongoingbasisto assess whetherthey continue judgment. TheGroup monitors theappropriateness ofthecredit risk Refer to note 3for details ofthecharacteristics considered inthis instruments are banked onthebasisofshared riskcharacteristics. When ECLsare measured onacollective basis,thefinancial Establishing banks ofassets withsimilarcredit riskcharacteristics: note 3(a)for more details. reasonable and supportable forward-looking information. Refer to increased theGroup takes into account qualitative andquantitative risk. Inassessing whetherthecredit riskofanasset hassignificantly IFRS 9doesnotdefinewhatconstitutes asignificant increase incredit when its credit riskhasincreased significantly since initialrecognition. or lifetime ECLfor stage 2orstage 3assets. Anasset moves to stage 2 measured asanallowance equalto 12-monthECLfor stage 1assets, Significant increase ofcredit risk:Asexplained innote 1,ECL are 143 143 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

5. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (Continued) (i) Impairment losses on loans and advances (continued) Estimates applied before 1 January 2018 (continued)

particular, judgment by the Directors is required in the estimation of the amount active including for unlisted securities, the Group establishes fair value by using and timing of future cash flows when determining the level of allowance required. valuation techniques. Such estimates are based on the assumptions about a number of factors and These include the use of recent arm’s length transactions, discounted cash flow actual results may differ, resulting in future changes in the allowance. analysis, option pricing models and other valuation techniques commonly used The Group also makes a collective impairment measurement for exposures by market participants. Where representative prices are unreliable because of which, although not specifically identified as non-performing, have an inherent illiquid markets, the determination of fair value may require estimation of certain risk of default. The portfolio constitutes a large number of loan and advances parameters, which are calibrated against industry standards and observable account cutting across various industries. Assets with similar risk characteristics market data, or the use of valuation models that are based on observable market are banked together for the purpose of determining the collective impairment in data. the Group. The fair value for the majority of the Group’s financial instruments is based Estimates applied after 1 January 2018 on observable market prices or derived from observable market parameters. Changes in assumptions about these factors could affect the reported fair value The following are key estimations that the directors have used in the process of of financial instruments. applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in financial statements: (iii) Retirement benefits Establishing the number and relative weightings of forward-looking scenarios for The cost of the defined benefit pension plan is determined using actuarial each type of product/market and determining the forward-looking information valuation. The actuarial valuation involves making assumptions about discount relevant to each scenario: When measuring ECL the Group uses reasonable and rates, expected rates of return on assets, future salary increases, mortality supportable forward-looking information, which is based on assumptions for the rates and future pension increases. Due to the long term nature of these plans, future movement of different economic drivers and how these drivers will affect such estimates are subject to significant uncertainty and a change in any of the each other. Refer to note 3 for more details, including analysis of the sensitivity of assumptions will alter the carrying amount of pension obligations. the reported ECL to changes in estimated forward-looking information. The assumptions used in determining the net cost (income) for pensions include Probability of default: PD constitutes a key input in measuring ECL. PD is an the discount rate. The Group determines the appropriate discount rate at the estimate of the likelihood of default over a given time horizon, the calculation end of each year. This is the interest rate that should be used to determine the of which includes historical data, assumptions and expectations of future present value of estimated future cash outflows expected to be required to settle conditions. See note 3 for more details, including analysis of the sensitivity of the pension obligations. the reported EC In determining the appropriate discount rate, the Group considers the interest Loss Given Default: LGD is an estimate of the loss arising on default. It is based rates of high-quality corporate bonds that are denominated in the currency in on the difference between the contractual cash flows due and those that the which the benefits will be paid and that have terms to maturity approximating lender would expect to receive, taking into account cash flows from collateral the terms of the related pension liability. Other key assumptions for pension and integral credit enhancements. See note 3 for more details, including analysis obligations are based in part on current market conditions. of the sensitivity of the reported ECL to changes in LGD resulting from changes (iv) Property and equipment in economic drivers. Property and equipment is depreciated over its useful life taking into account Fair value measurement and valuation process: In estimating the fair value of residual values, where appropriate. The actual lives of the assets and residual a financial asset or a liability, the Group uses market-observable data to the values are assessed annually and may vary depending on a number of factors. extent it is available. Where such Level 1 inputs are not available the Group uses In reassessing asset lives, factors such as technological innovation, product valuation models to determine the fair value of its financial instruments. Refer life cycles and maintenance programs are taken into account which involves to note 7 for more details on fair value measurement. extensive subjective judgment. Residual value assessments consider issues L to changes in PD resulting from changes in economic drivers. such as future market conditions, the remaining life of the asset and projected disposal values. The rates used are set out on accounting policy 2.3(ii). (ii) Fair value of financial instruments (v) Income taxes Fair value is the price that would be received to sell an asset or paid to transfer a liability in orderly transaction between market participants at the measurement Significant estimates are required in determining the provision for income date. taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. Where the All financial instruments are initially recognized at fair value, which is normally final tax outcome is different from the amounts that were initially recorded, such the transaction price. Subsequent to initial recognition, some of the Group’s differences will impact the income tax balances and deferred tax provisions in financial instruments are carried at fair value. The fair values of quoted financial the period in which such determination is made instruments in active markets are based on current prices with no subjective judgments. If the market for a financial instrument does not exist or is not

144144 include fair value information for financialassets andfinancialliabilitiesnotmeasured atfair value ifthecarrying amount is areasonable approximation offair value. The tables below show thecarrying amounts andfair values offinancialassets andfinancialliabilities,includingtheirlevels inthefair value hierarchy. Itdoesnot a) Accounting classification andfair values 6. FAIR VALUE OFFINANCIALINSTRUMENTS FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Total financialliabilities Longterm debt Other liabities Billspayable Deposits from customers Dueto otherbanks Liabilities Total financialassets Other assets Clearing house customers Loansandadvances to comprehensive income value through other Financialassets Fair amortised cost Financialassets held at Duefrom other banks Central Banks Cash andbalances with Financialassets Assets 2018 -Group Held for trading million KShs.’ ------Amortised 589,666 587,393 537,460 455,880 million KShs.’ 22,447 20,105 11,004 37,174 32,017 50,101 4,140 5,514 1,217 cost - comprehensive KShs.’ million through other Fair value income 83,805 83,805 ------Carrying amount Total carrying KShs.’ million 589,666 671,198 amount 537,460 455,880 22,447 20,105 11,004 83,805 37,174 32,017 50,101 4,140 5,514 1,217 Level 1 million KShs.’ 83,805 83,805 ------Level 2 million KShs.’ ------Level 3 million KShs.’ ------KShs.’ million Fair value Fair value 83,805 83,805 ------145 145 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES ------71,743 71,743 499,549 499,549 Fair value Fair Fair value value Fair KShs.’ million KShs.’ ------KShs.’ KShs.’ million Level 3 Level ------

KShs.’ KShs.’ million 499,549 Level 2 Level 499,549 ------71,743 71,743 KShs.’ KShs.’ million Level 1 1 Level 6,141 1,222 1,124 6,428 50,714 11,039 21,711 38,264 71,743 14,895 499,549 422,685 amount 612,767 532,748 KShs.’ million KShs.’ Total carrying carrying Total Carrying amount ------6,141 1,124 11,039 14,895 KShs.’ KShs.’ million 499,549 532,748 At amor tized cost tized cost ------

71,743 71,743 for sale sale for Available Available KShs.’ million KShs.’ ------lion 1,222 6,428 50,714 21,711 422,685 502,760 receivables receivables KShs.’ mil KShs.’ Loans and ------38,264 38,264 KShs.’ KShs.’ million Held to to Held maturity ------lion trading trading Held for for Held KShs.’ mil KShs.’ Total financial liabilities Total Cash and balances with Cash and balances Banks Central to Loans and advances customers financial assets Total customers from Deposits 2017 - Group Liabilities other banks Due to Assets Assets Financial assets Bills payable Bills payable Due from other banks other banks Due from house Clearing Other liabilities Financial assets held at held Financial assets amortised cost Other assets Long term debt Long term Financial assets Fair value value Fair Financial assets other comprehensive through income KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS THE FINANCIAL STATEMENTS TO TO NOTES NOTES PLC PLC GROUP GROUP KCB KCB THE YEAR ENDED 31 DECEMBER 2018 THE YEAR ENDED 31 DECEMBER 2018 FOR FOR 6. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) VALUE 6. FAIR (continued) values and fair classification (a) Accounting

146146 The fair value hierarchy offinancialassets andliabilitieshasbeendisclosed innote 6(a). (a) Accounting classification andfair values (continued) 6. FAIR VALUE OFFINANCIALINSTRUMENTS or quoted market prices for securities with similar yield characteristics. Loans observable market data are fair valued eitherusingdiscounted cash flow method are fair valued usingthatinformation. Investment securitiesthatdonothave Investment securitieswithobservable market prices includingequitysecurities instruments: The following sets out the Group’s basis ofestablishing fair values of financial factors thatmarket participants would take into account inpricingatransaction. use ofunobservable inputs. Thechosenvaluation technique incorporates allthe techniques that maximise the use of relevant observable inputs and minimise the When there isnoquoted price inanactive market, theGroup usesvaluation and volume to provide pricinginformation onanongoingbasis. active iftransactions for theasset orliabilitytake place withsufficientfrequency quoted price inanactive market for thatinstrument. Amarket isregarded as When applicable, theGroup measures thefair value ofaninstrument usingthe reflects its non-performance risk. market to whichtheGroup hasaccess atthatdate. Thefair value ofaliability measurement date intheprincipal,or inits absence, themost advantageous transfer aliabilityinanorderly transaction between market participants atthe Fair value istheprice thatwould bereceived to sellanasset orpaidto FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Types offinancialliabilities Types offinancialassets Fair value determined using; instruments. Listed derivative Listed equities. instruments. Listed derivative securities. and otheragency Actively traded government liabilities; for identical assets or prices inactive markets Unadjusted quoted Level 1 (CONTINUED) Over-the-counter (OTC) derivatives. Over-the-counter (OTC) derivatives. loans. Corporate andothergovernment bondsand indirectly; fair value are observable, eitherdirectly or have asignificant effect ontherecorded Other techniques for whichallinputs which Level 2 value offinancialinstruments byvaluation technique: The Group usesthefollowing hierarchy for determining anddisclosing thefair (b) Valuation hierarchy fair value approximates theircarrying amount. Cash andbalances withCentral Banks are measured atamortizedcost andtheir value approximates theircarrying amounts. substantial proportion ofdeposits mature within12monthsandhence thefair prevailing market rates for debts withasimilarmaturitiesandinterest rates. A without quoted market prices isbasedondiscounting cash flows usingthe repayable ondemand.Estimated fair value offixed interest bearingdeposits The estimated fair value ofdeposits withnostated maturityistheamount fair value approximates theircarrying amounts. and advances are onfloating rates andre-price within12months,hence their current market rates to determine fair value. Asubstantial proportion ofloans cash flows expected to bereceived. Expected cash flows are discounted at fair value ofloans andadvances represents thediscounted amountoffuture and advances to customers are netofallowance for impairment.Theestimated parameters. derivatives withunobservable Highly structured OTC parameters. derivatives withunobservable Highly structured OTC markets. Corporate bondsinilliquid observable inputs. significant non-market Valuation modelsusing Level 3 147 147 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

7. MANAGEMENT OF CAPITAL Regulatory capital – Kenya

The Central Bank of Kenya sets and monitors capital requirements for all banks. The objective of the Central Bank of Kenya is to ensure that a bank maintains a level of capital which: • is adequate to protect its depositors and creditors; • is commensurate with the risks associated with its activities and profile • promotes public confidence in the bank. In implementing current capital requirements, the Central Bank of Kenya requires banks to maintain a prescribed ratio of total capital to total risk-weighted assets. Banks are expected to assess the Credit risk, Market risk and the Operational risk of the risk weighted assets to derive the ratios. The Capital adequacy and use of regulatory capital are monitored regularly by management employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Central Bank of Kenya for supervisory purposes. The Central Bank of Kenya requires a bank to maintain at all times:

• hold the minimum level of regulatory capital of KShs. 1 billion. • Total risk weighted assets, plus risk weighted off- balance sheet assets at above the required minimum of 10.5%. • Maintain a ratio of total regulatory capital; to • a core capital of not less than 8% of its total deposit liabilities • a total capital of not less than 14.5% of its total risk weighted assets, plus risk weighted off-balance sheet items. The bank’s regulatory capital is analysed into two tiers:

— Tier 1 capital. This includes ordinary share capital, share premium, retained earnings and after deduction of investment in subsidiaries, goodwill, other intangible assets and other regulatory adjustments relating to items that are included in equity which are treated differently for capital adequacy purposes. — Tier 2 capital. This includes 25% of revaluation reserves of property, subordinated debt not exceeding 50% of core capital, collective impairment allowances and any other approved reserves. The regulatory capital position for the Group’s banking subsidiaries was as follows:

Regulatory Capital - KCB Bank Kenya Limited 2018 2017 KShs.’ million KShs.’million

Core Capital (Tier 1): Ordinary share capital 53,986 53,986 Retained earnings 33,927 19,147

Other reserves 44 384

Deferred tax - (1,548) Total Core Capital 87,957 71,969 Supplementary Capital (Tier 2): 7,639 6,050 Total regulatory capital 95,596 78,019 Risk weighted assets 537,573 483,986 Capital ratios: Total regulatory capital expressed as a percentage of total risk-weighted assets 17.8% 16.1% Total tier 1 capital expressed as a percentage of total risk-weighted assets 16.4% 14.9%

148148 7. MANAGEMENT OFCAPITAL FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Tier I(Minimumrequired 10%) KCB BankTanzania hadthefollowing capital adequacyratios:- Regulatory capital –Tanzania Tier I+II(Minimumrequired 12%) Tier I(Minimumrequired 10%) KCB BankRwanda hadthefollowing capital adequacyratios:- Regulatory capital –Rwanda Tier I+II(Minimumrequired 15%) Tier I(Minimumrequired 10%) KCB BankSouthSudanhadthefollowing capital adequacyratios:- Regulatory capital –SouthSudan Tier I+II(Minimumrequired 12%) Tier I(Minimumrequired 12.5%) KCB BankBurundihadthefollowing capital adequacyratios:- Regulatory capital –Burundi Tier I+II(Minimumrequired 14.5%) Tier I(Minimumrequired 10%) KCB BankUgandahadthefollowing capital adequacyratios:- Regulatory capital –Uganda Tier I+II(Minimumrequired 12%) (CONTINUED) 124.0% 15.0% 15.7% 15.8% 15.8% 96.0% 26.2% 29.0% 17.7% 18.3% 2018 2018 2018 2018 2018 102.0% 13.9% 14.5% 14.3% 17.0% 85.0% 28.2% 29.4% 20.1% 20.8% 2017 2017 2017 2017 2017 149 149 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

8. SEGMENT REPORTING

Reportable segments The Group’s main business comprises of the following reportable segments and their respective products and services: Retail banking – incorporating banking services such as customer current accounts, savings and fixed deposits to individuals. Retail lending are mainly consumer loans and mortgages based lending. Corporate banking – incorporating banking services such as current accounts, fixed deposits, overdrafts, loans and other credit facilities both in local and foreign currencies. Mortgages – incorporating the provision of mortgage finance. Treasury – operates the Group’s funds management activities Other Group’s operations comprise of trade finance and forex business. The Group also participates in investments in Treasury Bills and Bonds from the Central Banks. The table below analyses the breakdown of segmental assets, liabilities, income and expenses;

Corporate banking Retail banking Treasury Mortgages Other Total

KShs. KShs. KShs. KShs. KShs. KShs. For the year ended 31 December 2018 million million million million million million Interest income 19,975 17,398 12,818 13,729 2,360 66,280 Interest expense (10,237) (4,019) (1,302) (919) (973) (17,450) Net interest income 9,738 13,379 11,516 12,810 1,387 48,830 Net fees and commission income 5,203 10,196 2,901 192 (4,254) 14,238 Other income 115 2,074 908 - 5,638 8,735 Depreciation and amortization (4) (2,569) (1) - (572) (3,146) Impairment (1,493) (1,381) - (70) - (2,944) Operating expenses (1,225) (13,134) (391) (208) (16,594) (31,552) Profit before monetary items 12,334 8,565 14,933 12,724 (14,395) 34,161 Loss on monetary items - - (1) - (301) (302) Profit before tax 12,334 8,565 14,932 12,724 (14,696) 33,859 Tax expense (3,350) (4,650) (3,971) (1,793) 3,900 (9,864) Profit after tax 8,984 3,915 10,961 10,931 (10,796) 23,995

150150 8. SEGMENTREPORTING FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Interest income For theyear ended31December 2017 Net interest income Interest expense Impairment Depreciation andamortization Other income Net fees andcommission income Profit before monetary items Operating expenses Loss onmonetary items Profit before tax Otherassets Loans andadvances Short term funds Financial positionAsat31December 2018 Tax expense Borrowed funds Customer deposits Total assets Profit after tax Other liabilities Shareholders’ funds Short term funds Financial positionAsat31December 2017 Total liabilitiesandshareholders’ funds Other assets Loans andadvances Borrowed funds Customer deposits Total assets Other liabilities Shareholders’ funds Total liabilitiesandshareholders’ funds (CONTINUED) Corporate banking 197,930 229,511 198,502 246,416 million 197,930 229,511 189,658 246,416 (8,245) (4,788) (2,130) (3,105) 21,044 12,799 KShs. 6,500 3,591 9,605 9,605 8,844 (64) 197

------Retail banking 274,092 223,208 200,551 224,243 (12,439) million 193,208 274,092 168,082 223,090 (3,568) (2,538) (3,903) 21,651 18,083 12,077 12,077 30,000 32,469 KShs. 8,174 9,647 1,153 (974) 298

------Treasury 131,378 122,664 million 123,926 122,543 18,189 25,523 (1,544) (4,486) 12,351 10,807 13,880 13,880 11,844 14,056 11,467 KShs. 9,394 4,120 7,452 6,345 (134) (942) 121 29

------Mortgages million 64,742 22,013 64,945 16,089 (2,315) 64,742 22,013 64,945 15,987 KShs. 4,849 7,753 7,214 7,164 7,164 (539) (152) (230) (16) 348 102

------170,508 134,397 (12,251) (16,464) (13,612) million 113,661 105,965 (9,213) 97,055 60,006 (1,392) (1,361) 49,479 47,576 22,447 34,400 27,855 32,151 14,895 13,537 KShs. Other 1,079 3,691 4,399 (518) (39) 874

- - - - - 714,313 714,313 646,668 646,668 (15,288) (32,205) million 455,880 203,405 537,460 113,661 191,711 422,685 499,549 105,965 19,704 (2,791) (5,914) (1,361) (9,410) 63,673 48,385 14,694 30,475 29,114 55,028 22,447 40,745 32,272 14,895 26,259 KShs. 8,306 Total

151 151 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

8. SEGMENT REPORTING (Continued) Geographical information

Major Customers The Group does not have major customers contributing to 10% or more of the Group’s income. Geographical information Five of the Group companies, KCB Bank Tanzania Limited, KCB South Sudan Limited, KCB Bank Uganda Limited, KCB Bank Rwanda Limited and KCB Bank Burundi Limited operate outside the domestic financial market. The following table analyses the regional segments in which the Group operates.

Income Statement Kenya Tanzania South Sudan Uganda Rwanda Burundi Group Total Elimination KShs. KShs. KShs. KShs. KShs. KShs. KShs. KShs. million million million million million million million million For the year ended 31-Dec-18

Interest income 59,688 2,523 38 1,718 2,094 567 (348) 66,280 Interest expense (15,282) (846) (63) (580) (919) (108) 348 (17,450) Net interest income 44,406 1,677 (25) 1,138 1,175 459 - 48,830 Net fees and commission income 12,293 416 293 499 487 250 - 14,238

Other income 6,928 304 1,030 188 181 104 - 8,735 Impairment (3,136) (118) 258 - 79 (27) - (2,944) Depreciation and amortization (2,754) (98) (55) (92) (98) (49) - (3,146) Operating expenses (26,411) (1,404) (534) (1,287) (1,400) (516) - (31,552) Profit before tax and monetary loss 31,326 777 967 446 424 221 - 34,161 Loss on monetary position - - (302) - - - - (302) Profit before income tax 31,326 777 665 446 424 221 - 33,859 Tax (8,960) (343) (237) (129) (198) 3 - (9,864) Profit after tax 22,366 434 428 317 226 224 - 23,995

For the year ended 31-Dec-17 Interest income 56,945 2,406 188 1,721 1,943 470 - 63,673 Interest expense (12,718) (1,019) (10) (745) (709) (87) - (15,288) Net interest income 44,227 1,387 178 976 1,234 383 - 48,385 Net fees and commission income 11,093 412 1,957 528 496 208 - 14,694 Other income 6,475 314 1,039 189 149 140 - 8,306 Impairment (4,978) (578) (188) (68) (62) (40) - (5,914) Depreciation and amortization (2,390) (101) (37) (89) (113) (59) - (2,789) Operating expenses (26,855) (1,417) (1,020) (1,254) (1,138) (523) - (32,207) Profit before tax and monetary loss 27,572 17 1,929 282 566 109 - 30,475 Loss on monetary position - - (1,361) - - - - (1,361) Profit before income tax 27,572 17 568 282 566 109 - 29,114 Tax (8,855) (9) (557) 35 (191) (40) 207 (9,410) Profit after tax 18,717 8 11 317 375 69 207 19,704

152152 Geographical information 8. SEGMENTREPORTING 9. INTERESTINCOME ANDEXPENSE Statement offinancialposition FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Interest ondeposits INTEREST EXPENSE Interest onborrowed funds NET INTERESTINCOME Interest onloans andadvances INTEREST INCOME Fair value through othercomprehensive income investment securities Amortised cost investment securities Interest onimpaired loans andadvances shareholders’ funds Total liabilitiesand Interest onplacements andbankbalances Shareholders’ funds Other liabilities Borrowed funds Customer deposits Total assets Other assets Loans andadvances Cash andshortterm funds 31-Dec-17 shareholders’ funds Total liabilitiesand Shareholders’ funds Other liabilities Borrowed funds Customer deposits Total assets Other assets Loans andadvances Cash andshortterm funds 31-Dec-18 (CONTINUED) (CONTINUED) 641,068 641,068 692,765 692,765 159,712 440,165 106,559 387,944 146,565 168,568 475,396 194,779 417,233 million 22,858 18,333 29,868 18,933 80,753 Kenya KShs. Tanzania million 23,440 23,440 26,654 26,654 14,717 14,283 15,003 16,465 KShs. 3,554 3,611 1,558 1,012 8,145 3,400 6,849 1,402 2,439 7,750 South Sudan million 19,068 19,068 14,113 14,113 12,602 15,066 11,162 KShs. 4,152 2,314 3,623 3,305 1,854 8,954 2,216 379 735 - - Uganda million 21,085 21,085 18,770 18,770 15,130 11,659 13,583 KShs. 2,996 1,157 1,802 2,649 6,777 2,640 1,554 6,488 6,274 6,008 KShs. million 993 17,450 48,830 66,280 15,464 52,706 1,986 5,863 7,120 2018 Rwanda 585 million GROUP 19,023 19,023 24,001 24,001 12,557 11,899 20,051 12,776 10,480 KShs. 6 2,089 3,212 1,165 6,266 2,440 858 952 558 745 KShs. million 15,288 48,385 63,673 13,162 51,389 2,126 6,088 5,697 2017 Burundi 499 million KShs. 7,160 7,160 7,279 7,279 1,111 - 5,771 1,403 5,403 1,286 5,897 2,397 4,563 278 354 319 96 - - KShs. million Elimination (84,176) (84,176) (69,269) (69,269) (67,649) (82,783) (67,978) (67,845) million (7,171) (7,963) (1,393) (1,393) (1,424) (1,424) Group KShs. 2018 COMPANY 272 317 272 295 133 45 22 ------KShs. million 646,668 105,965 499,549 646,668 422,685 191,711 714,313 113,661 537,460 714,313 139,141 455,880 119,292 million 26,259 14,895 32,272 40,745 22,447 KShs. Total 2017 527 580 527 580 53 ------153 153 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

10. FEES AND COMMISSIONS INCOME GROUP COMPANY 2018 2017 2018 2017 KShs. KShs. KShs. KShs. million million million million Retail and corporate fee income 7,415 6,785 - - Commission income 7,441 8,197 - - Custodian fee income 190 169 - - 15,046 15,151 - -

Commission expense (808) (457) - - 14,238 14,694 - -

11. FOREIGN EXCHANGE GAINS / (LOSSES) Foreign currency dealings 3,683 4,095 (14) 6 Translation gains 691 571 - - 4,374 4,666 (14) 6 12. DIVIDEND INCOME Dividend income from subsidiaries - - 16,864 12,417 - - 16,864 12,417 13. OTHER OPERATING INCOME Rent income 202 214 - - (Loss) /Profit on disposal of property and equipment (21) 12 - - Management fees 250 200 - - Profit/(loss) on disposal of securities 712 337 - - Risk premium 2,410 1,850 - - Miscellaneous income 808 1,027 105 116 4,361 3,640 105 116 14. NET IMPAIRMENT Losses on financial assets Stage 3 allowance (Note 27(b)) 8,576 9,479 - - Stage 1 & 2 allowance (Note 27(c)) (326) (18) - - Bad debts recovered during the year (Note 27(b) (4,906) (2,923) - - Effects of movement in exchange rates (Note 27(b) & 27 (c) (400) (624) - - 2,944 5,914 - - 15. EMPLOYEE BENEFITS Salaries and wages 14,182 14,604 84 40 Medical expenses 880 782 2 1 Pension costs – defined benefit scheme 656 595 5 4 Pension costs – defined contribution scheme 184 251 - 2 Social security contributions 124 128 - - Fringe benefits 611 612 - - Restructuring costs 175 2,016 - - Others * 195 158 - - 17,007 19,146 91 47

*Other costs relate to staff insurance, health and safety programs, recognition schemes, recruitment and other incidental costs. 154154 The number of employees of the Group as at 31 December 2018 was 6,217 (31 December 2017 – 7,192). 17. OTHER OPERATING EXPENSES 16. DEPRECIATION ANDAMORTIZATION FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 18. PROFIT BEFORE INCOME TAX Business stationery expenses Business subscriptions Card expenses Corporate socialresponsibility Depositor’s protection fundpremiums Guard services Insurance Leases Other administrative expenses Rent expense Staff development cost Water andpower Depreciation ofproperty andequipment(Note 29) Depreciation ofproperty andequipment Profit before tax isarrived atafter charging/ (crediting): Amortization ofintangible assets (Note 30) Amortization ofintangible assets Amortization ofprepaid operating lease rentals (Note 31) Directors’ emoluments –fees –others Auditors remuneration Amortization ofprepaid lease rentals Net loss/( profit) onsale ofproperty andequipment 398 1,037 2,340 4,300 2,021 1,423 351 168 464 675 148 857 14,545 million 21 KShs. 3,146 1,855 1,855 1,288 2018 1288 761 GROUP 29 45 3 3 2,370 2,803 2,039 1,636 1,174 286 159 344 619 884 159 13,059 million KShs. 2,791 1,729 1,729 1,060 2017 1060 586 (12) 365 35 42 2 2 246 95 16 28 2 7 1 4 399 43 - - - - million KShs. - 2018 COMPANY - - - - 4 4 4 - - 189 47 11 1 1 5 1 1 256 40 - - - - 1 million KShs. - 2017 3 - - 3 3 - - - 155 155 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018 19. LOSS ON MONETARY POSITION GROUP COMPANY 2018 2017 2018 2017 KShs. KShs. KShs. KShs. million million million million

Loss on monetary position on hyperinflation 302 1,361 - -

Loss on monetary position is as a result of the South Sudan economy being declared a hyper-inflationary economy in 2016. The financial statements for KCB Bank South Sudan Limited have been adjusted for hyperinflation which resulted in a loss on monetary position of KShs. 302 million. (2017: - KShs. 1,361 million)

2018 1-Jan-18 Net change in monetary items 31-Dec-18 Monetary Items KShs. KShs. KShs. million million million Cash and balances with Bank of South Sudan 14,909 (4,009) 10,900 Placements and balances with other banking institutions 157 261 418 Amounts due from related companies 405 (304) 101 Loans and advances to customers 379 125 504 Other assets 828 (598) 230

Customer deposits (12,602) 4,151 (8,451) Tax payable (124) 184 60 Other liabilities (1,135) 1,026 (109) Amounts due to related companies (887) (733) (1,620) Net monetary assets 1,930 103 2,033 Expressed in purchasing power at 31 Dec 2018 (3,291) 956 (2,335) Loss on net monetary position (1,361) 1,059 (302)

2017 1-Jan-17 Net change in monetary items 31-Dec-17 Monetary Items KShs. KShs. KShs. million million million Cash and balances with Bank of South Sudan 22,917 (8,008) 14,909 Investment in government securities 1,262 (1,262) - Placements and balances with other banking institutions 458 (301) 157 Amounts due from related companies 656 (251) 405 Loans and advances to customers 723 (344) 379

Other assets 965 (137) 828 Customer deposits (21,571) 8,969 (12,602) Balances due to other banks - - - Tax payable (133) 9 (124) Other liabilities (1,471) 336 (1,135) Amounts due to related companies (1,015) 128 (887) Net monetary assets 2,791 (861) 1,930 Expressed in purchasing power at 31 Dec 2017 (6,560) 3,269 (3,291) Loss on net monetary position (3,769) 2,408 (1,361)

156156 the weighted average numberofordinary shares duringtheyear of3,066million(2017:shares). Company: Basic and diluted earnings per share is calculated on the profit attributable to ordinary shareholders of KShs. 16,610 million (2017: 12,249 million) and on weighted average numberofordinary shares duringtheyear of3,066million(2017: millionshares). Group: Basicanddiluted earningspershare iscalculated ontheprofit attributable to ordinary shareholders ofKShs.23,995million(2017:19,704million)andonthe 21. 20. INCOME TAX The Group doesnothave apotential tax liabilityoutofpayment ofdividends FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Diluted earningspershare Basic earningspershare Effects ofhyperinflation adjustment Effects ofnon-taxable income Effects ofnon-allowable expenses spective income tax laws Tax calculated usingapplicable tax rates basedonre Accounting profit before tax Reconciliation ofeffective tax Deferred tax movement (Note 33) Current tax expense Income tax expense/ (credit) (a) Income statement Effects ofHyperinflationadjustments Tax payable Tax recoverable Comprising: At 31December Tax charge for theyear Tax paidduringtheyear At 1January (b) Statement offinancialposition Income statement EARNINGS PER SHARE EARNINGS PERSHARE - (1,412) (11,276) (721) 10,158 33,859 11,276 (309) (258) 11,043 204 223 800 9,864 (309) 9,864 309 - million 7.83 7.83 KShs. 2018 GROUP GROUP (10,143) (387) (733) 29,114 10,143 (827) (266) (653) 8,734 11,365 566 497 524 (258) 9,410 9,410 258 million 6.43 6.43 KShs. 2017 (5,163) (104) 16,506 4,952 (104) (104) 107 69 69 69 69 million 5.42 5.42 ------KShs. 2018 COMPANY COMPANY (3,727) 12,286 3,686 (36) (37) 142 78 37 37 69 37 69 69 4.00 4.00 million - - - - KShs. 2017 157 157 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

22. CASH AND BALANCES WITH CENTRAL BANKS

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million Cash on hand 11,063 5,633 - -

Bank balances - - 899 888 Cash reserve ratio 35,386 30,017 - - Other current accounts 3,652 15,064 - - 50,101 50,714 899 888 Cash held with Central Banks represent cash ratio and other non-interest earning current accounts and is based on the value of deposits as adjusted for Central Banks’ requirements. Mandatory cash reserve ratio is not available for use in the Group’s day-to-day operations. 23. LOANS AND ADVANCES TO BANKS GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million Balances in nostro accounts* 8,273 9,720 - -

Placements with other banks 23,744 11,991 - - 32,017 21,711 - -

The Group participates in the inter-bank market for the generation of revenue. Regularly, the counterparties are assessed for creditworthiness in line with the Group credit policies. The weighted average effective interest rate on balances due from other banks at 31 December 2018 was 7.8% (2017 – 7.9%). *Nostro accounts are accounts held in other banks in a foreign country. 24. FINANCIAL ASSETS AT FAIR VALUE THOUGH OCI (2017-AFS) GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million Quoted investments 3,392 2,531 23 42

Unquoted equity investments 141 100 11 11 Corporate bonds - - - - Treasury bonds 79,363 69,112 - - 82,896 71,743 34 53 25. CLEARING HOUSE Un-cleared effects 1,217 1,222 - -

The clearing house balance consists of items in transit to/from other banks through the Central Banks of various countries’ clearing systems. These items generally clear by end of the next business day. 26. OTHER ASSETS AND PREPAYMENTS GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million Other receivables 24,842 11,938 - 20

Prepayments 5,804 8,068 - - 30,646 20,006 - 20

Other receivables are current and non-interest bearing and are generally between 30 to 90 days credit terms.

158158 27. LOANS ANDADVANCES TO CUSTOMERS FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS The weighted average effective interest rate onloans andadvances asat31December 2018was 12.5% (2017:13.5%). At 31December Stage 1and2impairmentallowance (Note 27(c)) At 31December Effects ofmovements inexchanges rates (Note 14) Effects ofmovements inexchange rates (Note 14) Write downs/write offs duringtheyear (Note 14) Recoveries/allowances released duringtheyear Stage 3impairmentallowance (Note 27(b)) Gross loans andadvances to customers Allowance madeduringtheyear (Note 14) IFRS 9transition adjustment Allowance madeduringtheyear (Note 14) IFRS 9transition adjustment At 1January Specific impairmentallowance) (b) Stage 3impairmentallowance (2017- (a) Loansandadvances to customers Maturing after 5years Maturing after 1year, butwithin5years Maturing after 3months,butwithin1year Maturing after 1monthbutbefore 3months Maturing within1month d) Maturityanalysis ofgross loans andadvancesto customers: At 1January Collective impairmentallowance) (c) Stage 1and2impairmentallowance (2017- Government andparastatals Private sector andindividuals to customers: (e) Sectorial analysis ofgross loans andadvances KShs.’ million 2018 455,880 476,529 476,529 (13,090) 476,529 209,608 166,953 449,678 13,090 (7,559) (8,367) (4,906) 14,805 38,005 27,121 34,842 26,851 7,559 6,704 8,576 3,410 1,153 (428) (326) 28 GROUP KShs. million 422,685 438,643 438,643 (14,805) 438,643 194,646 155,319 413,510 14,805 (1,153) (2,837) (2,923) 11,708 36,449 13,382 38,847 25,133 1,153 9,479 1,173 2017 (622) (18) (2) - - KShs. million 2018 COMPANY ------KShs. million 2017 ------159 159 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

28. FINANCIAL ASSETS HELD AT AMORTIZED COST (2017-HTM)

Treasury bonds GROUP COMPANY

Maturing as follows:- 2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million Maturing within 1 month 460 1,973 - -

Maturing between 1-3 months 3,437 4,894 - - Maturing between 3-6 months 4,307 1,239 - - Maturing between 6-12 months 1,254 739 - - Maturing between 1-5 years 10,405 14,719 - - Maturing after 5 years 17,311 14,700 - - 37,174 38,264 - -

Treasury bonds are debt securities issued by the Government of the Republic of Kenya, Government of Uganda, Government of the Republic of Rwanda, United Re- public of Tanzania and Government of the Republic of Burundi. The bills and bonds are categorized as amounts held at amortised cost (2017-HTM) and carried at amortized cost. The weighted average effective interest rates on Government securities as at 31 December 2018 was 12.8% (31 December 2017 – 10.6%). 29. PROPERTY AND EQUIPMENT

a) GROUP Leasehold Leasehold Freehold and furniture premises improvements and equipment As at 31 December 2018: KShs.’ KShs.’ KShs.’ Total million million million COST:

At 1 January 2018 1,808 3,955 19,635 25,398 Additions - 40 2,919 2,959 Disposals - (50) (230) (280) Translation differences - (883) (470) (1,353) Hyperinflationary change - 380 193 573 At 31 December 2018 1,808 3,442 22,047 27,297 DEPRECIATION At 1 January 2018 368 1,655 12,921 14,944 Charge for the year 18 145 1,692 1,855 Disposals - (30) (212) (242) Translation differences - (242) (220) (462) Hyperinflationary change - 102 93 195 At 31 December 2018 386 1,630 14,274 16,290 CARRYING AMOUNT 1,422 1,812 7,773 11,007

160160 tional depreciation ofKShs.1,737Million(31December 2017:KShs.1,245Million) Included inproperty andequipmentare fully depreciated assets amountingto KShs.8,119Million(31December 2017: KShs.6,985Million)whichwould have ano 29. PROPERTY ANDEQUIPMENT (Continued) FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS Included inproperty andequipment are fully depreciated assets amountingto KShs.10.5Millionwhichwould have anotional depreciation ofKShs.1.1Million. Translation differences Disposals Charge for theyear Translation Difference Disposals Additions Hyperinflationary change At 1January2017 DEPRECIATION: At 31December 2017 Hyperinflationary change At 1January2017 COST: 2017: CARRYING AMOUNT At 31December 2017 As at31December CARRYING AMOUNTAt31December 2018 At 31December 2018 Charge for theyear At 1January2018 DEPRECIATION At 31December 2018 At 1January2018 COST: As at31December 2018: At 1January2017 COST: (b) COMPANY CARRYING AMOUNT At31December 2017 At 31December 2017 Charge for theyear At 1January2017 DEPRECIATION At 31December 2017 Leasehold Leasehold premises premises million million KShs.’ KShs.’

1,808 1,440 1,808 368 351 559 585 561 585 585 585 17 26 24 23 21 ------3 3 improvements improvements Leasehold Leasehold million million KShs.’ KShs.’ 3,955 2,300 1,655 1,414 2,886 (178) (457) (19) (19) 135 738 303 807 ------Freehold andfurniture Freehold andfurniture and equipment and equipment - - - - - million million 19,635 12,921 11,412 17,856 KShs.’ KShs.’ 6,714 1,577 1,758 (119) (121) (167) (333) 218 475 90 91 - 1 1 - - - 25,398 10,454 14,944 13,177 22,550 1,729 2,496 1,282 Total (138) (140) (345) (790) Total 521 649 676 585 561 585 585 27 24 23 21 4 3 - 161 161 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

30. INTANGIBLE ASSETS

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million COST

At 1 January 8,550 7,290 - - Additions 921 1,244 - - Transfer to KCB Bank Kenya Limited - 20 - - Translation differences (2) (4) - - At 31 December 9,469 8,550 - - AMORTISATION At 1 January 5,179 4,123 - - Amortization for the year 1,288 1,060 - - Translation differences (1) (4) - - At 31 December 6,466 5,179 - - CARRYING AMOUNT At 31 December 3,003 3,371 - -

Included in intangible assets are fully depreciated assets amounting to KShs. 3,632 Million (31 December 2017: 2,806 Million) which would have a notional amortisation of KShs. 561 Million (31 December 2017: 526 Million) The intangible assets are in respect of computer software purchase costs.

31. PREPAID OPERATING LEASE RENTALS

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million COST

At 1 January 223 223 - - At 31 December 223 223 - - AMORTISATION At 1 January 91 89 - - Charge for the year 3 2 - - At 31 December 94 91 - - CARRYING AMOUNT At 31 December 129 132 - -

162162 liquid assets, limittheirexposure to otherparts oftheGroup andcomply withotherratios. frameworks withinwhichbankingsubsidiariesoperate. Thesupervisoryframeworks require bankingsubsidiariesto keep certain levels ofregulatory capital and The Group doesnothave significant restrictions onits abilityto access oruseits assets andsettle its liabilitiesotherthanthoseresulting from thesupervisory Significant restrictions The significant risks for thevarious subsidiarieshave beendocumented inNote 4. 32. INVESTMENTINSUBSIDIARIES ANDASSOCIATED COMPANIES FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS KCB Insurance AgencyLimited Kencom HouseLimited Bank NomineesLimited Balance at31December Total additionalinvestment insubsidiaries Additional investment inKCB Capital Limited Additional investment inKCB BankKenya Limited Additional investment inKCB BankRwanda Limited Additional investment inKCB BankTanzania Limited Additional investment inKCB BankUgandaLimited Balance at1January Movement ininvestment insubsidiaries *Investment inUnited Finance isatKShs.125,000 United Finance Limited* Investment inassociates: KCB BankUgandaLimited KCB BankBurundiLimited KCB BankRwanda Limited KCB BankSouthSudanLimited KCB BankTanzania Limited Incorporated outside Kenya: Kenya Commercial KCB Foundation Savings &LoanKenya Limited KCB Capital Limited Kenya Commercial Finance CompanyLimited KCB BankKenya Limited Company Investments insubsidiaries:Incorporated inKenya: Property Ownership &Management Corporate SocialResponsibility Commercial Banking Commercial Banking Commercial Banking Commercial Banking Commercial Banking Commercial Banking Insurance Brokerage Shareholders Investment Nominee Dormant Dormant Dormant Activity ownership Beneficial 100 100 100 100 100 100 100 100 100 100 100 100 45 million 68,036 68,036 67,649 53,986 KShs.’ 3,145 2,269 2,354 3,546 2018 749 387 387 500 400 150 936 ------67,649 million 67,649 67,130 53,986 KShs.’ - 3,145 1,883 2,354 3,027 2017 749 519 519 500 400 150 936 ------163 163 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

33. DEFERRED TAX

(a) Deferred tax asset GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million At 1 January 4,664 3,566 (2) -

IFRS 9 initial application adjustment 3,062 - - - Recognized in profit or loss 1,412 733 104 (2) Retirement Benefit Scheme – through other comprehensive income 146 30 - - AFS Reserve – through OCI (723) (550) - - Hyperinflation adjustment 166 520 - - Translation difference (51) 365 - - At 31 December 8,676 4,664 102 (2) The net deferred tax asset is attributable to the following items: - Depreciation over tax allowances 535 661 94 - Provisions 8,313 3,842 - - Retirement Benefit Scheme – remeasurement 205 (165) - - Fair value reserve movement (817) (61) 8 (2) Tax losses carried forward 440 387 - - 8,676 4,664 102 (2) Comprising: - Deferred tax asset 8,676 4,824 102 - Deferred tax liability - (160) - (2) 8,676 4,664 102 (2)

Recognition of deferred tax asset of KShs. 8,676 million (2017: KShs. 4,824 million) is based on management’s profit forecasts (which are based on the available evidence, including historical levels of profitability), which indicates that it is probable that the group’s entities will have future taxable profits against which these assets can be used.

34. DEPOSITS FROM BANKS

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million Deposits and balances from other banks maturing as follows: 20,105 11,039 - -

Payable within 1 month 11,350 6,531 - - Payable after 1 month, but within 3 months 7,384 1,819 - - Payable after 3 months, but within 1 year 1,371 2,689 - - 20,105 11,039 - -

164164 35. DEPOSITSFROM CUSTOMERS 37. OTHER LIABILITIES 36. BILLSPAYABLE FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS The weighted average effective interest rates oninterest bearingcustomer deposits asatAt31December 2018was 7.4%(At31December 2017–7.4%). Other payables Payable after 1year butwithin5years Payable after 3monthsbutwithin1year Payable after 1monthbutwithin3months Payable within1month Maturing asfollows: Total othercustomer deposits Payable after 1year, butwithin5years Payable after 3months,butwithin1year Payable within1monthbut3months Payable within1month (b) From private sector andindividuals: Payable after 1year, butwithin5years Payable after 3months,butwithin1year Payable after 1month,butwithin3months Payable within1month (a) From government andparastatals: Accruals Bills payable KShs.’ million KShs.’ million KShs.’ million 10,003 4,814 14,817 537,460 537,460 363,589 173,871 362,473 233,094 129,379 5,514 90,878 62,799 60,334 13,948 30,544 76,747 7,362 7,362 2018 2018 2018 - GROUP GROUP GROUP KShs. million KShs. million KShs. million 499,549 499,549 378,151 121,398 404,718 308,832 6,141 3,785 4,868 8,653 61,698 26,322 40,709 20,989 95,886 30,845 2,288 2,288 4,523 2017 2017 2017 - KShs. million KShs. million KShs. million 55 55 - 2018 2018 2018 COMPANY COMPANY COMPANY ------KShs. million KShs. million KShs. million 1,267 2017 2017 2017 ------165 165 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

38. RELATED PARTY TRANSACTIONS A number of transactions are entered into with related parties in the normal course of business. These include loans, deposits and foreign currency transactions. The volumes of related party transactions, outstanding balances at the end of the year and the related expenses and income for the year are as follows:

(a) Balances due from group companies COMPANY 2018 2017 KShs.’ million KShs. million

KCB Bank Rwanda Limited - 256 KCB Bank Kenya Limited 7,105 8,313 7,105 8,569 (b) Balances due to group companies KCB Bank South Sudan Limited 731 70 Net balances due to group companies 731 70

6,374 8,499

Balances due from and due to group companies are non-interest bearing and are generally on 30 to 90 day credit terms. The balances relate to transactions entered into with the subsidiary companies at arm’s length in the ordinary course of business.

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million (i) Loans

Government of Kenya 1,685 548 - - Directors - Executive 45 49 - - -Non Executive 44 47 - - Senior management 371 513 - - 2,145 1,157 - - (Movement in loans to Directors and senior management At 1 January 609 572 - - Loans issued during the year 362 127 - - Loans repayments during the year (511) (90) - - At 31 December 460 609 - - Interest income earned 32 15 - - (ii) Deposits Government of Kenya 89,761 84,418 - - Directors 47 86 - - Senior management 74 39 - - At 31 December 89,882 84,543 - - Movement in deposits by Directors and senior management - - At 1 January 35 90 - - Deposits received during the year 1,292 1,313 - - Deposits withdrawn during the year (1,206) (1,278) - - At 31 December 121 125 - - Interest expense 71 1 - -

166166 38. RELATED PARTY TRANSACTIONS (Continued) interest charged onbalances outstanding from related partiesamounted to KShs.32million(2017:Shs15million).Theinterest paidonbalances outstanding to re Interest rates charged onbalances outstanding from related partiesare approximately halfoftherates thatwould becharged inanarm’s length transaction. The for impairmentlosses onbalances withkey managementpersonnel atthereporting date. No impairmentlosses have beenrecorded against balances outstanding duringtheperiod withkey managementpersonnel andnospecificallowance hasbeenmade balances are notsecured andnoguarantees have beenobtained. lated partiesamounted to KShs.71million(2017:1million).Themortgages andsecured loans granted are secured over property oftherespective borrowers. Other FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 39. BORROWINGS (iv) Directors’ remuneration amounted duringtheyear to KShs.427million(2017:400million).

Short term employee benefits (Included underpersonnel costs -Note 15) management (iii)Senior personnel compensation Maturing after 5years Maturing after oneyear, butwithinfive years Maturing withinoneyear At 31December Net movement in borrowings Recognition ofInternational Finance Corporation loan surbordinated to KCB BankKenya Limited Borrowings transferred to KCB BankKenya Limited At 1January Company At 31December Net movement inborrowings Translation differences Funds received -African Development Bank Payments onprincipalandinterest Funds received -European Investment Bank Funds received -International Finance Corporation At 1January Reconciliation ofthemovement inthelong term debt KShs.’ million KShs.’ million 291 22,447 10,185 10,756 1,506 2018 2018 GROUP GROUP KShs. million KShs. million 391 14,895 2,255 7,632 5,008 2017 2017 KShs. million KShs. million KShs.’ million (7,755) (7,755) (2,759) 14,895 7,755 7,552 22,447 126 - - - - 10,185 2018 2018 2018 COMPANY COMPANY - - - - - KShs. million KShs. million KShs. million (10,876) (8,087) 22,982 7,755 7,755 1,557 1,065 14,895 167 7,755 - - 7,755 7,755 2017 2017 2017 - - - - - 167 167 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

39. BORROWINGS (Continued) The long term debt includes: - (a) A 7 year loan obtained from African Development Bank (ADB) in 2018 of USD 100 million by KCB Bank Kenya at interest terms of Libor+2.70 p.a.%. (b) A 6 year loan obtained from International Finance Corporation in 2016 of USD 40 million by KCB Bank Kenya at interest terms of Libor +3.5 p.a.%. (c) A 7 year loan obtained from International Finance Corporation (IFC) in 2016 of USD 75 million by KCB Group PLC ,KCB Bank Kenya being Co-borrower at interest terms of Libor+5.3 p.a.%. (d) A six year loan obtained by KCB Bank Rwanda in 2012 from IFC of RWF 2,200,700,000, it’s effective interest rate is 5.4 p.a.% (e) A 5 year loan of RWF 4,412 million obtained by KCB Bank Rwanda from European Investment Bank , it’s effective interest rate is 8.04 p.a.% (f) A 5 year loan obtained from International Finance Corporation by KCB Bank Uganda in 2016 of USD 10 million at interest terms of Libor +3.5 p.a. %. ok (g) A 7 year loan obtained from European Investment Bank by KCB Bank Uganda in 2017 of UGX 33 billion at interest terms of 11.66 p.a. % ok (h) A 7 year loan obtained from European Investment Bank (EIB) by KCB Bank Tanzania in 2017 of TZS 27.9 billion at interest terms of 9.72% p.a. (i) A 3 year loan obtained from Tanzania Mortgage Refinance Company (TMRC) by KCB Bank Tanzania in 2017 of TZS 5.0 billion at interest terms of 12.5% p.a. (j) A 3 year loan obtained from Tanzania Mortgage Refinance Company (TMRC) by KCB Bank Tanzania in 2018 of TZS 5.0 billion at interest terms of 10.0% p.a.

40. SHARE CAPITAL

GROUP AND COMPANY (a) Share capital 2018 2017 KShs.’ million KShs. million

Authorised: As at 1 January and 31 December 2018: 4,500,000,000 (2017: 4,500,000,000) ordinary shares of KShs. 1 each 4,500 4,500 Issued and fully paid: As at 1 January and 31 December 2018: 3,066,063,487 (2017: 3,066,063,487) ordinary shares of KShs. 1 each 3,066 3,066

All ordinary shares rank equally with regards to the Company’s residual assets, entitled to dividends as declared from time to time and are entitled to one vote per share at general meetings of the company.

(b) Shareholding The top ten largest shareholders of the Company as at 31 December 2018 were:

Shareholder No. of shares %

Permanent Secretary to the Treasury of Kenya 537,378,947 17.53 National Social Security Fund 187,634,448 6.12 Stanbic Nominees Ltd A/C NR3530153-1 85,000,000 2.77 Standard Chartered Nominees Non-Resd. A/C 9069 56,920,595 1.86 Standard Chartered Nominees Non-Resd. A/C 9867 48,276,780 1.57 Standard Chartered Nominees A/C 9688 45,778,323 1.49 Standard Chartered Kenya Nominees Ltd A/C KE002382 33,067,087 1.08 Standard Chartered Nominees A/C 9687 31,680,986 1.03 Standard Chartered Nominee Account KE17682 30,290,760 0.99 Sandip Kana Sinh Babla & Alka Sandip Babla 28,728,500 0.94 Total shares 1,084,756,426 35.38

168168 The distribution ofshareholders asat31December 2018was asfollows: The distribution ofshareholders asat31December 2018was asfollows: The distribution ofshareholders asat31December 2018was asfollows: FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 41. RESERVES 40. SHARECAPITAL (Continued) - Translation reserve - Hyperinflationreserve - Definedbenefitreserve -Fair value reserve Other reserves: Statutory credit riskreserve Proposed dividend Share Premium Retained earnings Share range 50,001-100,000 5,001-50,000 1 to 5000 Share range 50,001-100,000 5,001-50,000 1 to 5000 100,001-1,000,000 100,001-1,000,000 1,000,001 andabove 1,000,001 andabove KShs.’ million 110,595 (4,995) (9,844) 21,647 85,056 2,984 1,821 1,222 7,665 2018 44 GROUP No. ofshareholders No. ofshareholders KShs. million 102,899 153,740 153,740 (5,039) (7,877) 125,072 125,072 11,233 21,647 68,926 26,666 26,666 2,320 6,132 2017 384 134 779 779 923 923 300 300 KShs. million 3,066,063,487 3,066,063,487 2,257,700,628 2,257,700,628 73,042 21,647 43,773 Shares held Shares held 280,001,951 200,153,731 280,001,951 200,153,731 274,721,730 274,721,730 7,665 2018 53,485,447 53,485,447 COMPANY (43) (43) - - - - KShs. million 65,649 21,647 37,894 100.00 100.00 6,132 73.64 73.64 2017 9.13 6.53 9.13 6.53 1.74 1.74 8.96 8.96 (24) (24) % % - - - - 169 169 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

41. RESERVES (Continued) The share premium arises from issue of shares at a price higher than the par value of the shares. This amount is not available for distribution. The fair value reserve arises from marking to market of investment securities classified under FVTOCI (2017-AFS) category. The reserves are recognized in income statement once the underlying asset has been derecognized. This amount is not available for distribution. Statutory credit risk reserve represents an amount set aside to cover additional provision for loan losses required to comply with the requirements of Central Banks Prudential guidelines. This amount is not available for distribution. The foreign currency translation reserve arises from translation of the net investment in foreign subsidiaries to Kenya Shillings. This amount is not available for distribution. Defined benefit reserve arises from changes in the fair value of the net assets held by the pension fund. The reserves are recognized in profit or loss once the underlying asset has been derecognized and is not available for distribution. Hyperinflation reserve relates to changes in equity of the foreign operation as a result of adjusting non-monetary assets and liabilities and equity balances for hyperinflation under IAS 29. The hyperinflation adjustment has been presented as an adjustment to equity in the statement of changes in equity.

42. DIVIDEND PER SHARE

Dividends are recognized as a liability in the period in which they are declared. At the Annual General Meeting to be held on 30 May 2019, a final dividend in respect of the year ended 31 December 2018 of KShs. 7,665 million (2017 – 6,132 million) for every ordinary share of KShs. 2.5 is to be proposed. An interim dividend of KShs. 1 i.e. KShs. 3,066 Million, ( 2017 – KShs. 3,066) was declared and paid during the year making in all KShs. 3.5 per share (KShs. 10,731). Payment of dividends is subject to withholding tax at the rate of 5% for residents and 10% for non-resident shareholders.

GROUP AND COMPANY 2018 2017 KShs.’ million KShs. million Dividends per share (KShs.) 3.50 3.00 At 1 January 640 3,706 Interim dividend declared and paid 3,066 3,066 Final dividend proposed 7,665 6,132 Dividend paid (9,198) (12,264) At 31 December 2,173 640

170170 FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 43. NOTES TO THESTATEMENT OFCASH FLOWS Net cash flows from operating activities Income taxes paid Profit/(loss) ondisposalofproperty andequip Retirement benefitexpense Hyperinflation adjustments Interest paid Dividend income Dividend received Net interest income Amortization ofintangible assets Amortization ofprepaid operating lease rentals Depreciation ofproperty andequipment Adjustments for: Interest received Other liabilities Other customer deposits Deposits from banks Profit before tax This hasbeenderived asfollows:- (a) Cashflows from operating activities Other assets Advances to banks Financial assets held atamortisedcost assets andliabilities Operating profit before movements inoperating ment Related partiesbalance Loans andadvances Financial assets held atamortisedcost Bank balances Cash onhand Balances withCentral Banks (c) Analysis ofcash andcash equivalents Financial assets FVTOCI Cash reserve ratio (b) Cashflows from operating activities - KShs.’ million (29,880) (11,811) (11,403) (17,450) (48,831) (43,402) (11,098) 50,629 (8,834) (1,880) (5,369) 66,281 37,911 33,859 32,017 11,063 7,908 1,288 1,855 5,537 9,066 3,897 3,652 2018 (126) 120 21 3 - - - - GROUP KShs. million (16,862) (15,238) (11,366) (15,288) (48,385) (36,940) 20,158 47,474 (3,885) (4,675) (7,942) (6,940) 63,674 51,375 29,114 19,910 15,064 1,361 1,060 1,729 1,435 6,867 5,948 5,633 2017 (107) (12) 2 - - - - KShs. million (16,864) 17,443 (1,212) 16,864 16,506 2,125 (399) 2018 (272) COMPANY (45) 534 899 317 899 20 4 ------KShs. million (12,417) 12,720 12,417 12,286 (181) 2017 (142) (527) (53) (20) 392 888 527 580 888 66 3 ------171 171 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

43. NOTES TO THE STATEMENT OF CASH FLOWS (Continued) For the purpose of the statement of cash flows, cash and cash equivalents comprise balances with less than three months to maturity from the date of acquisition. Cash and cash equivalents excludes, KShs. 33,277 million (2017 - KShs. 31,397 million) being the cash reserve requirement held with the Central Banks which is not available for use by the Group. The cash and cash equivalent components disclosed above are same amounts included in the statement of financial position except held at amortised cost investments, whose reconciliation is as follows:

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million

Balance as per statement of cash flows 3,897 6,867 - - Balances with more than three months maturity from the acquisition date 33,277 31,397 - - Balance as per statement of financial position 37,174 38,264 - -

44. COMMITMENTS To meet the financial needs of the customers, the Group enters into various irrevocable commitments. Even though these obligations may not be recognized on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group.

GROUP COMPANY

2018 2017 2018 2017 KShs.’ million KShs. million KShs. million KShs. million

Capital commitments contracted for at year end 2,199 89 - - Loans committed but not disbursed at year end 46,718 16,753 - - Foreign currency commitments 1,456 7 - -

Commitments to extend credit represent contractual commitments to make loans and other credit facilities to counterparties who, as per the Group credit risk rating model, are rated as either normal or watch. Commitments generally have fixed expiry dates, or other termination clauses. Since commitments may expire without being drawn upon, the total contract amounts do not necessarily represent future cash requirements.

45. CONTINGENT LIABILITIES To meet the financial needs of the customers, the Group enters into various irrevocable commitments. Even though these obligations may not be recognized on the statement of financial position, they do contain credit risk and are therefore part of the overall risk of the Group.

GROUP COMPANY

2018 2017 2018 2017 KShs.’000 KShs.’000 KShs.’000 KShs.’000 Letters of credit, acceptances, guarantees, in- demnities and other engagements entered into on behalf of customers at year end 94,585 93,534 - -

Letters of credit, guarantees and acceptances commit the Company and its subsidiary companies to make payments on behalf of the customers in the event of a specific act, generally relating to the import and export of goods. Guarantees and letters of credit carry the same credit risk as loans. In addition to this, litigation is a common occurrence in the banking industry due to the nature of the business. The Group and its subsidiary companies have established protocol for dealing with such legal claims. Once professional advice has been obtained and the amount of damages reasonably estimated, the Group makes adjustments to account for any adverse effects which the claim may have on its financial standing. At year end, the Group had several unresolved legal and tax claims. However, the Group believes, based on the information currently available, that the ultimate resolution of these legal proceedings and tax claims would not likely have a material effect on its operations.

172172 Changes inthepresent value ofthedefinedbenefitobligationover theyear: require theFund to maintain afundinglevel of100%.Where thefundinglevel isbelow, suchdeficits are required to beamortizedover aperiodnotexceeding 6years. The Fund isregistered underirrevocable trust withtheRetirement Benefits Authority. TheRetirement Benefits Act,1997(“theAct”) andtheRegulations undertheAct Characteristics andrisks oftheFund are responsible for theinvestment ofassets. bonds, call andterm deposits, investment properties, shares andoffshore investments. Old MutualAsset Managers andPineBridgeInvestments (East Africa) limited cost ofbenefits accruing. TheFund isestablished undertrust. TheFund assets are invested inavariety ofasset classes comprising Government securities,corporate The Bank operates a funded defined benefit plan. The Fund closed to new entrants effective 1 June 2006. The Fund is non-contributory with the Bank responsible for the KCB Pension Fund andStaff Retirement BenefitScheme KCB BankKenya Limited, asubsidiaryoftheGroup operates afundeddefinedbenefitplan. KCB Pension Fund andStaff Retirement BenefitScheme Composition offundassets basedontheInvestment Manager’s reports asat31December 2018. The information below summarizestheschemeassets andliabilities: FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 46. RETIREMENTBENEFITOBLIGATIONS Current service cost (netofemployer contributions) At start ofyear Actuarial gain/(loss)-due to experience Interest cost At endofyear Benefits paid Actuarial gain/(loss)-due to changesinassumptions At endofyear Benefits paid Employer contributions Interest income onplanassets At start ofyear Actuarial gains/(loss) Asset Class Property Government securities Quoted equities Fixed andterm deposits Total Net current liability Cash anddemanddeposits Corporate bonds • • • respect to thepensioners willalsohave animpactontheliabilitiesunderFund. In addition,thepensionbenefits are payable for theduration ofthelife ofthepensioners. Therefore, theFund’s post-retirement mortality experience with return earnedontheFund assets. For thein-service members, rates ofsalaryescalation willalsohave adirect bearingonthebenefits paidundertheFund. service members remain intheFund. Someofthemainrisks relating to thebenefits undertheFund are therates ofpensionincreases andtherates of Defined ContributionPlanestablished bytheCompany. TheFund therefore comprises mainly ofpensioners anddeferred pensioners, althoughsomein- Following theclosing oftheFund asat1June2006,someactive in-service members opted to transfer theiraccrued benefits undertheFund to thenew Company. 44.5% oftheFund assets are invested inproperty assets. Theexposure isaconcentration riskto theproperty market for theFund and,byextension, the beneficiaries ontime. The Fund ismanagedby a Board of Trustees. The Board is responsible for the overall operation of the Fund including makingsure benefits are paidto 3,885 2,263 1,404 (75) 387 309 KShs. Million - 8,173

2018 Percentage 893 212 62 52 (877) (681) 7,019 1,102 8,577 (877) - 47.53% 27.69% 17.18% -0.92% 100% 4.74% 3.78% 0.00% KShs. Million KShs. Million 7,309 8,173 2018 2018 KShs. Million 8,577 4,126 2,196 1,610 229 315 101 - (110) (869) 902 408 66 532 56 (869) 6,622 1,070 7,788 2017 7,019 8,577 KShs. Million KShs. Million Percentage 48.1% 25.6% 18.8% 100% 2.7% 3.7% 0.0% 1.2% 2017 2017 173 173 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

46. RETIREMENT BENEFIT OBLIGATIONS (Continued) Changes in the fair value of plan assets over the year:

2018 2017 KShs.’000 KShs.’000 Present value of fund obligations (7,309) (7,019) Fair value of plan assets 8,173 8,577 Effect of asset ceiling at end of period (206) (540) Asset recognized in the statement of financial position 658 1,018

Reconciliation of asset in the statement of financial position:

2018 2017 KShs.’000 KShs.’000 At start of year 1,018 811 Net expense recognised in statement of profit and loss 74 51 Employer contribution 52 56 Amount recognised in other comprehensive income (486) 100 At end of year 658 1,018

The amount recognised in profit and loss for the year are as follows:

Service Cost 2018 2017 KShs.’000 KShs.’000 Current service cost (employer) 62 66 Total Service Cost 62 66

Interest Cost Interest cost on defined benefit obligation 893 902 Interest income on plan assets (1,102) (1,070) Interest on the effect of the asset ceiling 73 51 Net interest cost on Balance Sheet liability (136) (117) Net included in profit and loss in respect of the scheme (74) (51) Re-measurement (Other comprehensive income) Actuarial loss – obligation 212 298 Return on plan assets (excluding amount in interest cost) (681) (532) Change in effect of asset ceiling (excluding amount in interest cost) 407 134 Amount recognized in other comprehensive income (486) (100)

174174 significant asachangeto thediscount rate asitaffects only in-service members. Given alarge portionoftheliabilityisinrespect ofinactive members, thesensitivityofliabilityto achangeinthesalary escalation assumption willnotbeas 47. OPERATING LEASECOMMITMENTS lease uponexpiry. Leaserentals are increased accordingly to reflect market rentals. The Group leases anumberofbranch andoffice premises underoperating leases. Theleases typically runfor ayear upto ten years, with anoptionto renew the FOR THEYEARENDED31DECEMBER2018 KCB GROUP PLC NOTES TO THEFINANCIALSTATEMENTS 46. RETIREMENTBENEFITOBLIGATIONS (Continued) The principalactuarialassumptions usedare asfollows: of oursensitivityanalysis are summarizedinthetable below: sensitivity analysis oftheresults to thediscount rate used,we have relied onourcalculations oftheduration oftheliability. Basedonthismethodology, theresults The results oftheactuarialvaluation willbemore sensitive to changesinthefinancialassumptions thanchangesinthedemographic assumptions. Inpreparing the Sensitivity Analysis Present Value ofObligation After 5years After 1year butless than5years Within 1year Operating leases –Group as lessor After 5years After 1year butless than5years Within 1year Mortality (pre-retirement) Future pensionincreases (%p.a.) Future salaryincreases (%p.a.) Discount Rate (%p.a.) Withdrawals (voluntary) Mortality (post-retirement) Actuarial Assumptions Retirement age At rates consistent with similar arrangements Current discount rate a(55) ultimate KShs.’million KShs.’million 5,805 A1949-1952 218 108 715 832 7,352 326 - 55 years 13.00% 6.00% 7,309 2018 2018 At rates consistent with similar arrangements Discount rate +1% a(55) ultimate KShs.’million KShs.’million 2,337 2,664 A1949-1952 173 690 739 7 5,740 870 55 years 13.5% 7,019 2017 0.0% 2017 6%

175 175 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES KCB GROUP PLC NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2018

48. HYPERINFLATION The Directors considered the following factors in determining and concluding that the South Sudan economy was hyperinflationary: (a) The population’s preference to keep wealth in non-monetary assets or a relatively stable foreign currency; (b) Prices for credit transactions being set at levels to compensate for expected loss of purchasing power during the credit period; (c) Interest rates and wages are frequently adjusted to compensate the loss of purchasing power; and (d) The cumulative inflation rate over the past three years exceeding 100%. The cumulative three years inflation rate was approximately 1,285.30% as at 31 December 2018 in South Sudan. The data below represents the Consumer Price Indexes (CPI) used in 2016 and prior year restatements in the KCB Bank South Sudan individual financial statements for the year ending 31 December 2018. The source of the price indexes used was the International Monetary Fund (IMF).

CPI as at 31 December 2016 2,780.51 CPI as at 31 December 2017 5,392.80 CPI as at 31 December 2018 6,916.73 Average CPI in 2016 1,592.32 Average CPI in 2017 4,384.19 Average CPI in 2018 6,975.10

49. EVENTS AFTER THE REPORTING PERIOD KCB Bank Kenya, a susidiary, received approval from the Central Bank of Kenya and Kenya Deposit Insurance Corporation (KDIC) to enter into a part transfer of assets and liabilities of Imperial Bank Limited (in receivership) -IBLR. The verification exercise is expected to be concluded in the first half of 2019 with the actual transfer of the selected assets to the KCB Bank Kenya books.

176176 NOTES 177 177 HIGHLIGHTSFINANCIAL STATEMENTS & NOTES NOTICE OF THE 48TH ANNUAL GENERAL MEETING

KCB GROUP PLC. (Incorporated in Kenya under the Companies Act, 2015, Laws of Kenya) (Registration Number C 9/88)

NOTICE IS HEREBY GIVEN that the 48TH ANNUAL GENERAL MEETING of the shareholders of KCB GROUP PLC will be held in the Kasarani Indoor Sports Arena, Nairobi, on Thursday, 30 May, 2019 at 10:00 a.m. when the following business will be transacted, namely:

AGENDA

1. Constitution of the Meeting To read the notice convening the meeting and determine if a quorum is present.

2. Ordinary Business

a. Report and Financial Statements for the Year ended 31 December, 2018 To receive, consider and, if thought fit, adopt the Audited Consolidated Financial Statements for the year ended 31 December, 2018 together with the reports of the Directors, the Group Chairman, the Group Chief Executive Officer and the Auditor thereon.

b. Dividend To confirm the interim dividend of KShs. 1.00 per ordinary share paid on 30 November, 2018 and to declare a final dividend of KShs. 2.50 per ordinary share, payable, net of withholding tax, on or before 30 July, 2019 to shareholders on the Register of Members at the close of business on 29 April, 2019. The dividend for the full year will be KShs. 3.50 per share.

c. Election of Directors (a) Rotation of Directors In accordance with Articles 94 and 95 of the Company’s Articles of Association, the following Directors retire by rotation, and being eligible, offer themselves for re-election:

i) Mr. Adil Khawaja ii) Mr. John Nyerere iii) The Cabinet Secretary – National Treasury

(b) Retirement of Directors In accordance with Article 93 Ms. Faith Bett-Boinett ceased to be a director.

(c) Audit Committee In accordance with the provisions of Section 769 of the Companies Act, 2015, the following directors, being members of the Board Audit Committee be elected to continue to serve as members of the said Committee:

i) Mr. Lawrence Mark Njiru ii) Ms. Georgina Malombe iii) Mr. John Nyerere

d. Remuneration of Directors To receive, consider and, if thought fit, approve the Directors’ Remuneration Report and to authorize the Board to fix the remuneration of Directors.

e. Appointment of Auditors To re-appoint Messrs. KPMG Kenya, Certified Public Accountants, as the Auditors of the Company until conclusion of the next Annual General Meeting.

f. Remuneration of the Auditors To authorize Directors to fix the remuneration of the Auditors.

3. Special Business Proposed Acquisition of 100% Shares in National Bank of Kenya Limited To consider and, if deemed appropriate to pass the following resolutions, noting that the completion of the proposed acquisition is subject to, and conditional upon fulfilment (or waiver to the extent legally capable of waiver) or receipt, as the case may be, of the various conditions, approvals and exemptions (as may be applicable) in form and substance acceptable to the Company:

178178 4. 3. 2. 1. 8 May, 2019 GROUP COMPANY SECRETARY JOSEPH KANIA BY ORDEROFTHEBOARD 4. AnyOtherBusiness B. SpecialResolution A. Ordinary Resolution Note: duly authorizedattorney ofsuchcorporation orGovernment office. If theappointer is abodycorporate, theinstrument appointingtheproxy shallbegiven underits common sealorunderthe hand ofanofficer or House attheclose ofthemeeting. Transport willbeprovided to Shareholders from Kencom Houseto theKasarani IndoorSports Arena, from 6:30a.m.to 10:00a.m.andbackto Kencom process. their nationalIDcards andacopy oftherelevant Central Depository andSettlement Corporation (CDSC)account statement for easeofregistration Registration ofmembers andproxies for theAnnualGeneral Meetingwillcommence at8:00a.m.on30May, 2019.Members andproxies should carry Company’s website atwww.kcbgroup.com. In accordance withArticle 129,acopy ofthisNotice, Proxy Form andtheentire AnnualReport &Accounts may beviewed onanddownloaded from the 00100, Nairobi, to arrive notlater than10:00a.m. on28May, 2019i.e.48hours before themeetingoranyadjournmentthereof. and must belodged attheoffices ofCompany’s share registrar, ImageRegistrars Limited, 5thFloor, Barclays Plaza,Loita Street, P.O. Box 9287,GPO proxy neednotbeamemberoftheCompany. To bevalid, aproxy form, whichisprovided bytheCompany, must becompleted andsignedbythemember A memberentitled to attend andvote atthemeetingandwhoisunable to attend isentitled to appointaproxy to attend andvote onhisorherbehalf. A To transact anyotherbusiness oftheCompanyfor whichduenotice hasbeenreceived rights, asifSection338oftheCompaniesActdidnotapply to suchissuance. shareholders ofNBKwhoaccept theoffer withoutfirst offering themto existing shareholders oftheCompanyonbasistheirpre-emption THAT subjectto thepassing ofresolution (b)above, theDirectors beandare hereby authorisedto allot andissue theSwap Shares to the d) THAT theDirectors beandare hereby authorisedto doallsuchthingsasare necessary to effect theTake-Over Scheme. Segment oftheNairobi SecuritiesExchange beand ishereby approved. c) THAT subjectto receipt oftheCapital Market Authority’s approval, thelisting oftheSwap Shares soissued ontheMainInvestment Market hereby approved. Shares) to theshareholders ofNBKwhoaccept thetake-over offer inconsideration for thetransfer oftheirshares inNBKto theCompany, beandis Over Scheme,theissuance ofupto amaximum of147,378,120ordinary shares oftheCompanywithanominalvalue ofKes 1.00each(theSwap b) THAT subjectto fulfilment(orwaiver atthesole discretion ofKCB where suchcondition islegally capable ofwaiver) oftheconditions oftheTake- approved. shareholders ofNBKwhoaccept theoffer becoming shareholders oftheCompany, andNBKbecoming asubsidiaryoftheCompany, beandishereby pursuant to Regulation 7ofTheCapital Markets (Take-Overs andMergers) Regulations, 2002,whichwillonsuccessful completion result inthe with theterms setoutinthetake-over offer document(theOffer Document)issued to theshareholders ofNationalBankKenya Limited (NBK) a) THAT theproposed acquisition of100% oftheissued ordinary shares ofNationalBankKenya Limited (theTake-Over Scheme)inaccordance 179 179 HIGHLIGHTSNOTICE OF THE 48TH ANNUAL GENERAL MEETING NOTES

180180 NOTES NOTES

181 ------

PROXY FORM

THE GROUP COMPANY SECRETARY, KCB GROUP PLC., KENCOM HOUSE, MOI AVENUE, P. O. BOX 48400 – 00100, NAIROBI, KENYA

I/We ______

holder of ID/Passport No. ______

and of P. O. Box ______

Being a Member/Members of KCB Group Plc., hereby appoint

______

ID/Passport No. ______

or failing him, the duly appointed Chairman of the meeting to be my/our proxy, to vote on my/our behalf at the 48th Annual General Meeting to be held on 30 May, 2019 at 10.00 am or at any adjournment.

Signed this ______day of ______, 2019

Signature(s) ______

______

Note:

1. If a member is unable to attend personally, this Proxy Form should be completed and returned to reach the Company’s share registrar, Image Registrars Limited, 5th Floor, Barclays Plaza, Loita Street, P.O. Box 9287, GPO 00100, Nairobi, to arrive not later than 10:00 a.m. on 28 May, 2019 i.e. 48 hours before the meeting or any adjournment thereof.

2. A person appointed as a proxy need not be a member of the Company

3. In case of a member being a corporate body, the Proxy Form must be under its common seal or under the hand of an officer or duly authorized attorney of such corporate body.

182182 Regulated by the Central Bank of Kenya. of Bank Central the by Regulated NEED TO SAVE? Earn over 6%p.a interest. The more you save, themore you canborrow. KCB M-PESA >>OPENTARGET SAVINGS ACCOUNT GO TO M-PESA MENU >>LOANS ANDSAVINGS WEKA NAKCB MPESA Twaweza

183 HIGHLIGHTS KCB I N TE GR A TE D

R EP O R T & F IN AN C IA L

S TA TEME N T S | 2018

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