Annual Report 2015

ANNUAL REPORT 2015

Annual Report & Financial Statements l 2015 2

Annual Report & Financial Statements l 2015 3

TABLE OF CONTENTS

LIST OF ACRONYMS 4

FINANCIAL DEFINITIONS 5

BANK CONTACT INFORMATION 6

CHAIRMAN BOARD OF DIRECTORS’ STATEMENT 11

MANAGING DIRECTOR’S STATEMENT 14

STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT 18

SUSTAINABILITY REPORTING STATEMENT 33

FINANCIAL REVIEW 47

AUDITED FINANCIAL STATEMENTS

Directors’ Report 54

Directors’ Responsibility for Financial Reporting 56

Report of Independent Auditors 57

Statement of Comprehensive income 59

Statement of Financial Position 60

Statement of changes in equity 61

Statement of Cash flow 62

Notes to the Financial Statements 63

BANK AND ATM NETWORK 117

Annual Report & Financial Statements l 2015 4

LIST OF ACRONYMS

aBi Agriculture Business Initiative Finance Limited aBi Trust Agriculture Business Initiative Trust ACF Agricultural Credit Facility ALCO Asset and Liability Committee ATM Automated Teller Machines BCP Business Continuity Plan BCM Business Continuity Management BCMT Business Continuity Management Team BOD Board of Directors BOU Bank of Uganda CBS Core Banking System EaR Earnings at Risk EIB EAC MF Loan European Investment Bank East African Community Microfinance Loan EIB PEFF European Investment Bank Private Enterprise Finance Facility ERM Enterprise Risk Management FAMOS Female and Male Operated Small enterprises HR Human Resource HRD Human Resource Division IAS International Accounting Standards ICT Information and Communication Technology IFRS International Financial Reporting Standards ILO Intenational Labour Organisation KCCA Kampala Capital City Authority MOGLSD Ministry of Gender, Labour and Social Development N.S.S.F National Social Security Fund NPAT Net Profit After Tax OSH Occupational Safety and Health P.A.Y.E Pay As You Earn QMM Quarterly Management Meeting ROA Return on Assets ROE Return on Equity RSA Interest Rate Sensitive Assets RSL Interest Rate Sensitive Liabilities SIDI Solidarite’ Internationale pour le Development et l’ investissement SOCI Statement of Comprehensive Income SOFP Statement of Financial Position UECCC Uganda Energy Credit Capitalization Company WENRECO West Nile Rural Electrification Company

Annual Report & Financial Statements l 2015 5

FINANCIAL DEFINITIONS

Core capital Permanent equity in the form of issued and fully paid-up shares plus all disclosed reserves less goodwill or any intangible assets

Cost-to-income ratio (%) Total operating expenses as a percentage of total income

Credit impairment charge (Shs) The amount by which the period profits are reduced to cater for the effect of non-performing loans for the period

Credit loss impairment [Statement of The amount by which gross loans in the SOFP are written down to cater for Financial Position (SOFP)] (Shs) non-performing loans

Credit loss ratio (%) Provision for credit losses per the Statement of Comprehensive Income as a percentage of average net loans

Dividend cover (times) Earnings Per Share divided by ordinary dividend per share

Dividend per share ( Shs) Total ordinary dividends declared per share with respect to the year

Earnings per share (cents) Earnings attributable to ordinary shareholders divided by the weighted average number of ordinary shares

Effective tax rate (%) The income tax charge as a percentage of income before tax excluding income from associates

Lending Ratio Net loans and advances divided by total deposits

Net interest margin (%) Net interest income as a percentage of average earning assets

Non-performing loans [NPL] (Shs) Loans whose servicing is due but the borrower has no money on the account from which to recover the installment(s)

Percentage change in credit loss ratio (%) Ratio of change in the rate of credit loss impairment between time periods

Percentage change in the impairment Ratio of change in the rate of impairment charge between time periods charge (%)

Profit for the year (Shs) Annual profit attributable to ordinary shareholders and preference shareholders

Return on Assets (%) Earnings as a percentage of average total assets

Return on Equity (%) Earnings as a percentage of average equity

SOFP credit impairment as a % Ratio of SOFP credit impairment to gross loans and advances of gross loans and advances (%)

Supplementary capital General provisions which are held against future and current unidentified losses that are freely available to meet losses which subsequently materialize, and revaluation reserves on banking premises, and any other form of capital as may be determined from time to time.

Total capital The sum of core capital and supplementary capital

Total capital adequacy Total capital divided by the sum of total risk weighted assets and total risk weighted contingent claims

Annual Report & Financial Statements l 2015 6

BANK CONTACT INFORMATION

1. Principal place of business and registered office Mapeera House Plot 44-46, Kampala Road P. O. Box 1892, Kampala. Tel: +256 414-251276/7 Toll-free line: 0800 200 555 Fax: +256 414-251273/4 E-mail: [email protected] Website: http://www.centenarybank.co.ug

2. Company Secretary Peninnah Tibagwa Kasule Mapeera House Plot 44-46, Kampala Road P. O. Box 1892, Kampala.

3. Correspondent Banks • Citibank NA New York - US • Deutsche Bank AG - Germany • Deutsche Bank Trust Company – USA • Co-operative Bank of Kenya • Bank of China - South Africa • Citibank N.A – Kenya • Ivory Bank - South Sudan • Sparkase Aachen Bank - US • Sparkase Aachen Bank - Germany

4. Auditors Ernst & Young Certified Public Accountants Ernst & Young House Plot 18, Clement Hill Road Shimoni Office Village P. O. Box 7215, Kampala. Uganda.

Annual Report & Financial Statements l 2015 7 VISION MISSION AND OWNERSHIP

The Bank will continue to deliver sustainable performance and to contribute to the country’s economic development through provision of inclusive customer-focused financial products and services.

Professor John Ddumba-Ssentamu, Board Chairman.

Annual Report & Financial Statements l 2015 8

OUR VISION

“To be the best provider of Financial Services, especially Microfinance.”

OUR MISSION STATEMENT

“To provide appropriate financial services especially microfinance to all people, particularly in rural areas, in a sustainable manner and in accordance with the law.”

OUR VALUES

SUPERIOR INTEGRITY TEAMWORK PROFESSIONALISM CUSTOMER SERVICE

LEADERSHIP EXCELLENCE COMPETENCE

Annual Report & Financial Statements l 2015 9

SHAREHOLDERS

• The Catholic Dioceses, which are all independent legal personalities incorporated as Registered Trusteeships, are: Arua, Fort Portal, Gulu, Hoima, Jinja, Kabale, Kasana-Luwero, Lugazi, Kampala, Kasese, Kotido, Lira, Masaka, Mbarara, Mityana, Moroto, Nebbi, Soroti, and Tororo.

• Registered Trustees of the Uganda Episcopal Conference.

• SIDI - Solidarite’ Internationale pour le Development et l’Investissement (International Solidarity for Development and Investment) based in France, invests in developing countries through institutions to foster financial inclusion, social and economic development.

• STICHTING HIVOS-TRIODOS FONDS. An investment fund, specializing in investing in microfinance and trade finance, managed by Triodos Investment Management in the Netherlands.

• Individual shareholders (4 individuals).

OWNERSHIP

The Registered Trustees of Various Catholic Dioceses in Uganda 38.5%

The Registered Trustees of the Uganda Episcopal Conference 31.3%

Solidarite’ Internationale pour le Development et I’Investissement (International Solidarity for Development SIDI and Investment) 11.6%

Stichting Hivos-Triodos Fonds 18.3%

Individuals 0.3%

To tal 100%

Annual Report & Financial Statements l 2015 10

Professor John Ddumba-Ssentamu

Chairman Board of Directors

Annual Report & Financial Statements l 2015 CHAIRMAN’S STATEMENT 11

CHAIRMAN’S STATEMENT

On behalf of the Board and myself, it gives me pleasure to present the Bank’s annual report for the year ended 31st December 2015. Centenary Bank registered growth and excellent performance despite the changing trends in banking, increasing cost of doing business, competition and unfavourable macro-economic conditions. We are set to keep the momentum while maintaining financial inclusion at the helm of all we do.

The Operating Environment

The key macro economic factors that affected the Bank in 2015 were inflation, rising interest rates and the exchange rates. The re-based annual headline inflation went up to 8.4% from 1.8% in 2014, where the main driver was the volatility in the exchange rate. This had an effect on the THE NUMBERS industry and in a bid to expand with minimal structural costs, the number For the year under review of players joining electronic banking increased. Some closed a number of their traditional brick and mortar branches while others merged them. On the contrary, Centenary Bank continued to reach the unbanked through the traditional platforms, as well as the electronic. 19.9% Inflation and foreign exchange volatility further led to an increase in the central bank rate from 11% in December 2014 to 17% as at 31st December 91 DAY TREASURY 2015. The consequent effect in the industry was an increase in lending rates BILL AVERAGE YIELD by most players there by impacting private sector borrowing. Centenary Bank also increased its prime-lending rate from 22 to 23%. While some players registered high non-performing rates (NPR) as a result, our Bank’s NPR improved due to enhanced risk management. 22.8% During the year, the Uganda shilling also weakened from USD/UGX 2,275 182 DAY TREASURY as at 31st December 2014 to USD/UGX 3,375 as at end of 31st December BILL AVERAGE YIELD 2015. Although the Bank’s balance sheet is predominantly denominated in Uganda shillings and most expenses are paid in local currency, the weakening shilling led to an increase in dollar denominated operating costs especially Information Technology related. The depreciation of the shilling also led to an increase in the Bank’s capital expenditure due to foreign currency 22.3% denominated obligations. 364 DAY TREASURY Regarding money markets, the interest rates increased in 2015 particularly BILL AVERAGE YIELD on short tenors. The 91 day treasury bill average yield for December 2015 closed at 19.9% from 11.3% in December 2014, 182 day treasury bill average yield for December 2015 was 22.8% from 13.5% for December 2014, while the 364 day rate closed at 22.3% in December 2015 compared to 13.8% for December 2014. This increased the Bank’s return on investment in short-term government paper, but also increased the cost of deposits.

Annual Report & Financial Statements l 2015 12 CHAIRMAN’S STATEMENT (continued...)

THE NUMBERS I am glad to report that the Bank’s basic earnings per ordinary share increased to Ushs For the year under review 4,059 from Ushs 2,952 the previous year. The Bank achieved a return on equity (ROE) of 28.3% up from 25.9% the previous year and this is above the Industry ROE of 16.0%. The Bank was adequately capitalised and its total capital adequacy ratio stood at 25.1%, which is above the statutory capital requirement and above the industry average of 21.0%. The Bank’s good performance and growth momentum demonstrates our ability to deliver Shs 4,059 substantial and sustained value for our shareholders and other stakeholders.

EARNINGS PER ORDINARY SHARE Corporate Social Investment

Centenary Bank’s policy on sustainability remains unchanged. We continue to invest 1% of the previous year’s net profit to Corporate Social Investment (CSI). The Bank reached millions of people countrywide in four main areas which are; health, education, environment 28.3% and the social mission of the Church. The youth, small and medium enterprises and women acquired financial literacy skills while numerous environment initiatives at community level RETURN ON EQUITY were supported. The breast, cervical and prostate cancer awareness drive reached more people through printing and distributing brochures countrywide, holding screening camps and the cancer run. We maintained our partnership with the church and supported many of their activities. Our plan is to do more in 2016.

Corporate Governance

The Board recognises that high standards of corporate governance are important for the effective functioning of the Bank. We remain committed to improvement of our duties as per the Bank’s corporate governance charter which is pivotal in sustenance of strong corporate governance. Two board members Mr. Rene Ehrmann and Mr. Jacco Minnaar left the board in June and September 2015 respectively and the process of replacing them is underway.

Environmental Outlook

The board remains confident about 2016. The economy is expected to grow at about 5.1%, and Centenary Bank is well positioned to leverage on its strength and seize opportunities in the business environment. The Bank will continue to deliver sustainable performance and to contribute to the country’s economic development through provision of inclusive customer-focused financial products and services.

Appreciation

Together with my colleagues on the Board, allow me to register our sincere appreciation and gratitude to all internal and external stakeholders who contributed to Centenary Bank’s performance in 2015. I pay special thanks to our Shareholders, Board Members, Management and the entire staff Centenary Bank family who continue to work tirelessly. I am confident that with your continued support, we shall be able to achieve more.

Professor John Ddumba-Ssentamu Chairman of the Board

Annual Report & Financial Statements l 2015 13

Fabian Kasi

Managing Director

Annual Report & Financial Statements l 2015 14

MANAGING DIRECTOR’S STATEMENT

I am happy to report that during financial year 2015 we sustained and further improved our performance, despite an environment marked by elevated interest rates, low growth and significant market volatility. Given the developments in the environment, we adopted a balanced approach to growth, profitability and risk management.

THE NUMBERS During the year, we reviewed our position in the market place with continued improvements For the year under review in our market share, a large and expanding distribution network and a healthy capital position; thereby creating a platform for robust growth. In the year under review, we are pleased with the bank’s performance which aligns well with our vision and our proven track record of sustained growth. In this context, I would like to share with you some of 37.6% our key performance highlights for the year:

PROFIT AFTER 2015 Performance review TAX The bank continued its growth momentum in all fronts especially profitability and total assets. This growth has been maintained due to continued focus on strategy execution. The bank posted a 37.6% growth in profit after tax to close at Shs 101.6 billion compared to Shs 73.8 billion the previous year and representing a market share of 18.8% an increase from 15.2% for the year before. Total operating income went up by 23.5% to reach Shs 354.8 billion up from Shs 287.2 billion the previous year, mainly driven by growth in loans and advances to customers and increase in transaction volumes. Notably, the loans 18.8% portfolio maintained good quality with NPR of 2.6% compared to industry rate of about 4%. Net interest income rose by 27.2% to Shs 267.7 billion from Shs 210.5 billion the MARKET SHARE previous year. Total expenses increased by 12.5% to Shs 257.4 billion from Shs 228.8 billion mainly attributed to the bank’s expansion and improvements in staff welfare. During the year, the balance sheet grew impressively with total assets reaching Shs 1,974.4 billion from Shs 1,635.1 billion the previous year, representing a 20.8% increase and far above the total assets industry growth of 10.9%. This impressive growth was reflected in the net loan book that grew to Shs 1,020.2 billion up from Shs 830.9 billion the previous year, representing a growth of 22.8% which is above the industry growth of 14.6%. 27.2% Despite this growth, the bank maintained a high quality asset portfolio with an average non-performing loan book of 2.6%, which is below last year’s figure of 2.8% and the NET INTEREST bank’s set target of 3%. INCOME Customer deposits grew from Shs 1,175.1 billion to Shs 1,380.2 billion, a growth of 17.5% which is above the industry growth of 12.1%. The bank continued to attract new customers and closed the year with 1,473,958 deposit accounts compared to 1,307,757 the previous year, thereby maintaining the lead position in the industry in terms of customer base. In addition to customer deposits, the other funding sources of the bank are represented by equity which increased by 26.2% to Shs 400.6 billion, up from Shs 317.5 billion the previous year.

Annual Report & Financial Statements l 2015 MANAGING DIRECTOR’S STATEMENT (continued...) 15

Business development and innovation

With regard to business development and innovation, the bank closed 2015 with 63 branches and 157 ATMs at 115 locations. Over the past years, the bank has Shs1,974.4 been expanding its footprint in terms of delivery channels. In 2012, we expanded billion by 2 branches and 11 ATMs. In 2013, we opened 4 Branches and 4 offsite ATMs. In order to consolidate our position, we decided to open one branch in 2015 and TOTAL ASSETS 5 offsite ATMs. Due to delays in idenifying suitable locations, the bank was only able to open one branch instead of the planned 4 and 4 offsite ATMs instead of the planned 5. In the view of the growing customer base, the bank will continue to open additional branches, offsite ATMs in addition to other e-banking channels for service delivery. In the year under review, the bank rolled out and launched its Mobile Wallet platform through partnerships with MTN and Airtel.

Shs1,020.2 Partnerships and collaborations billion The Bank continues to respond to some of the challenges that Private Enterprises NET LOAN BOOK and the youth face in accessing credit facilities. The bank went into partnership with European Investment Bank, aBi-Trust, Kampala Capital City Authority and Government of Uganda and the main focus was on financing the agro industry, micro credit projects and supporting expansion of business ventures owned by the youth residents in the country.

Shs1,380.2 Strategy 2016 billion Despite the difficult prevailing market conditions, the bank will remain committed to CUSTOMER DEPOSITS its long-term strategy which will enable it to capture emerging growth opportunities in Uganda. We expect that the growth momentum will be continued through maintaining efficient operations, prudent lending and risk management. The bank will continue to implement an engaging strategy that focuses on delighting customers, enhancing productivity and efficiency, and innovation and growth. The bank will pursue its growth focusing on new delivery channels and products. The bank plans to increase its market share by enhancing its electronic banking platforms and getting 1,473,958 on agency banking. Specifically, the bank expects to complete implementation of a new core banking system which is expected to enhance services to the clients. DEPOSIT ACCOUNTS Also in order to manage the emerging IT risks, the bank will be changing all the ATM cards from Mega stripe to PIN and Chip which is more secure. We will look to taking advantage of the revised financial laws to introduce agency banking and bancassurance.

Conclusion

63 On behalf of Management I wish to take this opportunity to express my sincere branches appreciation to our customers, shareholders and business partners for their support to the bank and continued confidence and trust in our business. I also want to thank 157 the Board of Directors for the oversight and guidance they have given the bank. ATMS Lastly, I am grateful to the management and staff of the bank for their dedication and sacrifice that enabled delivery of this excellent financial performance. Team, we 115 could not have done it without you! Thank you for continuing to live our core values. locations Fabian Kasi Managing Director

Annual Report & Financial Statements l 2015 16

THE EXECUTIVE MANAGEMENT

Mr. Fabian Kasi Dr. Simon M. S. Kagugube Mrs. Peninnah Kasule Mr. Godfrey Byekwaso Managing Director Executive Director Company Secretary General Manager - Finance

Mr. Joseph Kimbowa Mrs. Beatrice Lugalambi Mr. Joseph Lutwama Mr.s. Florence Mawejje General Manager - Operations General Manager - Business General Manager - Credit General Manager-Human Development & Marketing Resource

Mr. Denis Echeru Mr. Arnold Byansi Mr. George K. Thogo General Manager - Risk General Manager-Corporate Mr. Micheal Nyago General Manager - Business Management Services General Manager - Audit Technology

Annual Report & Financial Statements l 2015 17 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT

The Board recognises that high standards of corporate governance are important for the effective functioning of the Bank.

Professor John Ddumba-Ssentamu, Board Chairman.

Annual Report & Financial Statements l 2015 18 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...)

Statement of Corporate Governance

Centenary Bank embraces best corporate governance practices and their implementation is considered fundamental to its growth and sustainability. The Board is therefore consistent in its commitment to keep abreast with new corporate governance initiatives unfolding constantly on both the international, regional and local scenes to uplift corporate governance for the benefit of the company and for all its stakeholders. The Bank has remained a dedicated active member of the Institute of Corporate Governance Uganda and supports other local organizations which promote corporate governance in Uganda.

Compliance with codes and regulations Board Responsibilities

The Bank is regulated by the Central Bank which sets The business of the company is managed by the Board corporate governance principles and practices through which exercises all of the powers of the company, subject legislation and regulations. This is enjoined with the to the Articles of Association and the Companies Act. Bank’s own philosophy and belief that best corporate The Board is collectively responsible for the long-term governance should be engrained in all its processes, success of the company, and to achieve this the Board’s structure and culture. main responsibility and the key actions carried out during the period are set out below: - The Bank therefore bolsters high standards through compliance with legislation and regular evaluation of (a) Establish strategic objectives and approving its own corporate governance charter against much both financial and non-financial targets including acclaimed corporate governance principles advanced by new products and markets, Corporate Social the King III report. The Company though of private limited Investment plans and large capital investments. liability also made amendments to its Charter to rein in Management performance is regularly evaluated some good corporate governance standards mandatory by the Board for alignment with approved for public companies under the Code of Corporate targets and this is achieved through operational Governance promulgated by the new Companies Act of and financial performance reviews and dedicated Uganda of 2012 which came into force on 1st July 2013. strategy sessions between the Board and Senior The Board continues to review and consider emerging Management. The Board goes beyond ensuring trends in corporate governance and sets readiness plans that the Bank remains a going concern and attains for adoption of relevant principles and practices. maximization of shareholder and other stakeholder values through a healthy balance of risk and return Leadership within the bank. (b) The Board holds timely discussions of opportunities, Board Structure challenges and risks through a holistic and The Bank has a unitary board structure and is designed comprehensive analysis covering the short, medium to ensure that the Board focuses on strategy, evaluation and long term parameters and provides strategic of the performance of the company, and monitoring direction. governance, risk and control issues. (c) The Board and its respective committees convene The Board delegates specified matters to the Board at least once in every quarter of the financial year. Committees and remains accountable for all decisions To achieve this the Board maintains an annual taken by its Committees. Detailed implementation activities calendar and work plan to ensure meetings of matters approved by the Board and the day-to-day are convened as planned and that specifically agreed operational aspects of the business are delegated by the matters are accomplished. Board of Directors to the Executive Directors. (d) The Board recognizes the significant importance of the audit process which is therefore communicated throughout the Bank. Findings in both the internal

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 19

and external audits are reported and utilized in a timely and effective manner for correction by (b) Executive Directors Management of lapses, infractions and issues The Central Bank requires financial institutions identified by the Auditors. to have at least 2 Executive Directors, resident in Uganda who are knowledgeable in the institution’s (e) Review and set the Bank’s compensation long term strategy to direct the business of philosophy for recognition and reward as well the company. The Bank has two (2) Executive as approve compensation of senior management Directors including the Managing Director who and other key human resource. is accountable to the Board of Directors and (f) Establish and clearly demarcate the decision is assigned overall control of management of mandates between the Board and Management the Bank. The Managing Director is therefore and review approval authority of different charged with the responsibility of identifying, levels of senior management to ensure there is jointly with the Executive Director, the business appropriate oversight by Management. The strategy of the Bank. As the Chief Executive Board also reviews the decision mandates Officer, he is also responsible for directing the between the Board and Management to take Bank’s implementation and for acquisition and into account organizational growth requirements development of human resource talent with the while maintaining adequate risk control and right competencies/skills to drive the business. oversight. The Managing Director ensures that adequately informative reports on the state of affairs of the (g) Set, review and approve internal policies and business are submitted to the Board of Directors controls in line with prudent risk management. on a timely basis along with possible action plans for its alignment with approved targets. Board Roles (c) Non-Executive Directors The names and details of the current Directors on the The Bank takes cognizance of the increasing Board as at the date of this Annual report are set out importance and value of the role of non-executive in the Board of Directors section. Under the board directors. They bring about independent thinking, structure the executive and the non-executive directors outsider perspective, expertise and diversification are brought together in a single body and share collective of views by generating a wider spectrum of options responsibility. As at the date of this Annual Report, the to those proposed by Management. The non- Board comprises 9 members including the Chairman, 2 executive directors consequently enrich the final Executive Directors (namely the Managing Director and decision of the Board. At the Bank, the quorum the Executive Director) and 6 non-executive Directors. for all committees of the Board is accordingly There are 3 vacant positions on the Board, all for non- comprised of Non-Executive Directors. executive directors. The key responsibilities of these stated offices are as (d) Company Secretary follows: - The Board has a service of a full time Company Secretary who provides guidance to the Chairman (a) Board Chairperson and the Board on ethics and good corporate The office of the Chairman is non-executive and governance. The Company Secretary also guides provides overall leadership including setting the directors in their duties and responsibilities ethical tone, and setting the Board annual work in consonance with legislation. This is mostly plan. It also guides Board meetings and sets with the Financial Institutions Act and relevant a conducive atmosphere for frank discussions regulations and the new Company’s Act 2012 and is a vital link between the Board and which greatly enhanced the standard of care for Management. The Board Chairman ensures directors. The office of the Company Secretary that through an annual evaluation process for supports the Board in the annual evaluation the Board (both collectively and individually) and process inclusive of identifying the full Board for Management, a culture of accountability and and individual members development needs, performance is extended. The Chairman is also plans and appropriate faculty often agreed upon responsible for ensuring that the Bank maintains on completion of the evaluation process. The good relationships with its major shareholders, Company Secretary also supports the Board in regulators and major stakeholders. administering strategic level matters.

Annual Report & Financial Statements l 2015 20 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...)

The primary responsibilities of the Managing Director, and operational matters relating to quorum, secretary Chairman, the Lead Independent Director - a recently and attendance of Management. The mandates of the adopted role - and the Company Secretary are all set out specialized committees comply with relevant legislation in writing in the Corporate Governance Manual/Board and regulations and their performance is reviewed Charter. This is mainly for enhanced transparency and annually for accountability alongside enhancing risk the respective positions are embedded with checks and management above the standards set by legislation. balances in which no individual has unfettered decision- making power which therefore promotes accountability. The specialized committees of the Board are Audit, Assets & Liability Committee (ALCO), Human Resources and Board Committees Compensation and Risk Management. Besides these the Board has additional committees (Credit and IT Strategy) Certain aspects of the Board’s responsibilities have to support it in its oversight since the Board reserved been delegated to the Committees to assist the Board certain ‘high’ risk and large investment decisions to itself. by providing in-depth analysis. The members and Chairmen of the Committees are appointed by the Board To innovate succession planning at Board level which still of Directors which also approves their tenure. The remains a requirement for public companies only, the Chairman of each committee provides a report or update Board also set up a Nominations Advisory Committee . of each meeting to the Board at the subsequent Board This role is mainly to advise shareholders as they exercise meeting and Directors have full access to documents their mandate, to nominate and appoint directors. Again, and minutes of Committees. The Board Committees as a private company this committee reflects the Bank’s comprise of “specialized committees” required under the commitment to adopt good corporate governance Financial Institutions Act and regulations among others. practices tailored to fit the situation of the company at the Each committee has elaborate and clear written Terms time. The mandates of the non-specialized Committees of Reference setting out their role, function, term of and their performance are also reviewed annually. service of members, responsibilities, scope of authority

Some of the key functions of the Board Committees:

Minimum Membership Board No. of Role and Terms of Reference (TORs) Required under the Committee Meetings TORs per year

Audit Reviews and reports to the Board on financial reporting, internal control and risk man- 4 members all non- 4 agement systems, independence and effectiveness of both external auditors and the in- executive directors. ternal audit function and monitoring compliance with legislation. Makes recommendations to the Board for a resolution to be put to shareholders of the company in relation to appointment and remuneration of the external auditors.

Assets and Establishes guidelines in risk tolerance and expectations on investments, financial targets 4 members with at 4 Liability and expenses and supports Board in evaluating business performance. Ensures that Man- least 2 non-executive Committee agement implements the Assets and Liability Management policy and effectively manages directors. the market risks.

Human Make recommendations to the Board on remuneration and incentive, compensation 4 members all non- 4 Resource and plans (including bonuses), and other benefits and contract terms for Senior Management. executive directors. Compensation This is done in line with the institution’s culture, objectives, strategy and industry trends.

Risk Oversees Operational Risk Management systems, practices and procedures including risk 4 members with at 4 Management identification, management, monitoring and control. The Committee also monitors legal least 2 non-executive suits against the Bank and their materiality and reports on risk assessment levels. directors

Credit Consider the Bank’s credit strategy, its implementation and reports on the entire credit 4 members with at 4 portfolio of the Bank as well as compliance with applicable statutory and internal ratios least 2 non-executive and provisioning. directors

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 21

Minimum Membership Board No. of Role and Terms of Reference (TORs) Required under the Committee Meetings TORs per year

IT (Strategy) Reviews and reports on governance of the Bank’s IT resources, services and initiatives for 4 members with at 4 direction and alignment with the business. least 2 non-executive directors

Nominations Review and make recommendations to the Board for it to put to the shareholders for 4 members all inde- 2 (Advisory) consideration on the structure, size and composition of the Board with an appropriate pendent balance of skills, knowledge, experience and diversity.

Management Committees Certain detailed aspects of Board’s responsibilities are delegated, in addition to the Executive Directors, to appropriate management-led committees whose key roles are set out below: -

Management Role and Terms of Reference (TORs) Committee

Executive Comprises of Executive Directors, business line and support function heads. Meetings are attended by the head of Internal Audit. Committee The forum performs an advisory role of the office of Managing Director on various matters including formulation, implementation and review of strategy, structure and policy and is responsible for making recommendations on reports from all Management Committees

Assets & Ensures the Bank’s balance sheet is managed in accordance with regulatory requirements and policy set by the Board. It also Liability ensures that the financial performance (income/loss) and status (balance sheet) is optimal, stable and positive through implemen- Management tation of appropriate strategies in respect of funding, pricing, liquidity and investments. Committee

Human The Committee is responsible for reviewing, aligning and making recommendations on strategic matters regarding the Bank’s Resource human resource capital. Committee

Credit Reviews the policy, procedures and performance of the credit business in line with applicable legislation, board mandates and Committee performance targets.

Operational Responsible for Risk assessment, management and reporting matters arising from discussions of existing and potential operational Risk risk within the various units across the entire Bank. Committee

ICT Monitors progress, implementation and maintenance of the Bank’s ICT strategic plan and makes recommendations to the Board Committee on adequate policies, standards and procedures especially relating to information security, control and management of data.

Annual Report & Financial Statements l 2015 22

RISK GOVERNANCE STRUCTURE

Centenary Bank Board Board Oversight

Board Risk Board HR and Board IT Board Audit Management Board ALCO Board Credit Compensation (Strategy) Committee Committee Committee Committee Committee Committee

Management Responsibility Managing Director/ Executive Commitee

Management Management Operation Risk Management Credit Risk ALCO Management Committee ICT Committee Committee HRC

Assurance Internal Audit

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 23

Board Attendance subject to vetting by the Central Bank in accordance with the Financial Institutions Act before assuming the office The Board scheduled quarterly meetings for itself and of director. Centenary Bank Board its respective committees and all meetings are held in Board Oversight accordance with the Financial Institutions Act in respect Review of Board Composition to specialized committees. All the scheduled meetings were held during the period. Committees are permitted The Board has set up a Nominations Advisory Committee to convene additional meetings to afford them time to which along with the Board is tasked to review matters attend to critical matters within their purview. Additional related to composition of the Board majorly on diversity. meetings were held for the IT Strategy Committee as the The areas include skills, experience and gender ongoing new core banking project progresses to more concerns, independence and succession plans for key critical levels. Overall the Board and its Committees director positions. The Board has been consistent in Board Risk Board HR and Board IT achieved the following average attendance score: putting forward to its shareholders a preference for a Board Audit Management Board ALCO Board Credit Compensation (Strategy) Committee Committee Committee Committee Committee Committee woman director on the Board and such an appointment Name of Board Forum Actual attendance is currently contemplated. of members as % The Board made temporal changes in the membership of Board of Directors 96.77% the Committees to address the vacancies thereon arising Board ALCO 100% from the retirement and early retirement of Mr. Rene Board Audit Committee 100% Ehrmann and Mr. Jacco Minnaar respectively. Board Risk Committee 95.83% Board Human Resource & Compensation 80% Board IT Strategy 95% Tenure of directors Management Responsibility Board Credit Committee 96% Managing Director/ Executive Commitee The company has no restrictions on length of tenure and age of Directors. It rather recognizes the superseding Where full attendance was not achieved this was importance of strong objective judgment, independence largely due to conflicting prior/national commitments of its non-executive Directors, and that it has the right which included engagement of some directors in the mix of collective knowledge and experience which are preparations for the visit to Uganda by Pope Francis. critical for the strategic well-being of the company. This was a national event of significant importance for Due regard has nonetheless been given to ‘new blood’ on the East and Central African region and also to the the Board albeit not at the expense of desired continuity Bank’s shareholders. Alternate Directors appointed to in light of the strategic needs of the company. The “bridge” were also unavailable for the same reasons. Articles of Association were therefore amended during the period to introduce retirement by annual rotation of Board composition 1/3 of directors who have served longest on the Board as previously, the Board collectively served for a period Management Management Board Changes: of 3 years. Operation Risk Management Credit Risk ALCO Management Committee ICT Committee Committee HRC Mr. Rene Ehrmann, retired from the Board at the Annual General Meeting held on 12th June 2015 after serving Diversity and independence the Board since 2002. Mr. Jacco Minnaar was a Director from April 2008 to The Board seeks to ensure that it and its committees 15 September 2015 by virtue of his employment with have an appropriate composition to discharge their duties Stichting Hivos Triodos Fonds which nominated him to effectively and to manage succession issues. To enable the the Board of Directors. Mr. Minnaar left the Board on Board to meet its responsibilities, it is important that the 15th September 2015 upon his transfer and promotion Board’s composition is sufficiently diverse and reflects a Assurance as Director Energy and Climate with Triodos Investment broad range of knowledge, skills and experience and is committed to the Bank’s mission. The composition of Internal Audit Management BV. the Board illustrates the diversity of the Board in terms Their replacements on the Board have been nominated of skills and experience. and appointed by the Shareholders and are however

Annual Report & Financial Statements l 2015 24 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...)

This can be seen in the table below:

Economics Banking Accounting & Finance Prof. John Ddumba-Ssentamu Mr. Andrew Obol Mr. Kimanthi Mutua Mr. Henry Kibirige Mr. Fabian Kasi

Legal, Governance and Business Theology & Sociology Agricultural Economics Administration Archbishop Paul Bakyenga Dr. Simon Kagugube Dr. Peter Ngategize Archbishop Cyprian Kizito Lwanga

The Corporate Governance regulations to the In compliance with regulations and best practice, Financial Institutions Act require at least 5 directors members of the Audit Committee, Compensation to possess demonstrated expertise and experience (which is joined with Human Resource affairs) and the relevant to the functions of the financial institution. Nominations Advisory Committee are Non-Executive They do include financial control, accounting, banking, Directors. risk and corporate planning. The Bank is compliant and further conducts a skills review as part of its self- Effectiveness evaluation. This indicates the main areas of knowledge and experience of existing Directors and enables the Board to cite skills areas needed for recommendation Review of Board effectiveness to its shareholders to observe in submitting nominations of new directors. The effectiveness of the Board is important to the success of the company and for that reason the Board conducts an annual review to reflect on its collective performance and that of its individual members. The review for 2014 was carried out in the period In order to enhance independence and using an internally developed board self-assessment objectivity, the Financial Institutions Act questionnaire. This had been refined over the recent past by an independent consultant who also (Corporate Governance) regulations also contributed to the development of questionnaires for require that 50% of the Board should the evaluation of the chairman and the individual non- comprise of non-executive directors. The executive directors. The focus of the review was to Bank had 7 non-executive directors during assess the extent of progress of the Board in the areas the period and was above the mark. of governance, which includes the structure of the board; how its meetings are conducted; recruitment, remuneration and evaluation. It also includes corporate The Bank’s standard Board size is 10 strategy and planning; internal control, compliance and non-executive directors and this has been risk management, financial reporting and investor and maintained and justified. regulator relations among others. The Board recognizes that a continuous and constructive evaluation of its performance assists

the Board realize its maximum potential. During the Out of the current Non-Executive Directors only two period, the Board therefore discussed the results (2) are employees of shareholding companies, however of the review and extracted a work plan to address all the non-executive directors are independent in the areas of development identified; the results both character and judgment. generally indicated continued progress of the Bank in

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 25

its corporate governance. The Chairman separately discharge its duties, all Directors receive appropriate reviewed the results of the individual performance information from time to time, including briefing evaluations. At the end of the evaluation process papers distributed in advance of the Board meetings the Board was able to identify its development areas on an E-board reports software. which fed into the Board training plan for the period. Directors can, where they judge it to be necessary to discharge their responsibilities as Directors, obtain Board induction and professional independent professional advice at the Company’s development expense. The Board committees therefore have access to sufficient resources to discharge their duties, including external consultants and advisers. The Board received both local and international training during the year in specialist areas including strategy and company structures. This is typically External Board appointments and arranged by the Company Secretary in consultation conflicts with the Chairman. The members of the Audit Committee receive written technical updates from At every meeting directors are expected to disclose the Bank’s External Auditors, Ernst and Young to keep any area of potential conflict of interest and would abreast of latest financial reporting development. therefore be excluded during consideration of the Developments in the tax arena are received from relevant matter under the company’s governance time to time from the Company’s tax consultants charter. This principle is also practiced in Management. PricewaterhouseCoopers. Directors also attended The Chairman and the Board members are also conferences on corporate governance. expected to inform of any proposed external The Chairman and the Company Secretary are appointments they receive as they arise. Each responsible for preparing and coordinating an induction Director’s biographical details and significant time programme when new directors are appointed to the commitments outside of the company are set out in Board. the Board of Directors section.

Information for Directors Going Concern

The Chairman is responsible for ensuring that all of Based on performance, mid and long term projections the Directors are properly briefed on issues arising the Directors believe and continue to view the Bank at Board meetings and that they have full and timely as a going concern. access to relevant information. To enable the Board to

Annual Report & Financial Statements l 2015 26 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...)

BOARD OF DIRECTORS

Prof. John Ddumba Ssentamu Board Chairman. (Ugandan) Professor of Economics and holds a PhD in Economics, with various international awards. Currently Vice Chancellor, Makerere University Uganda and previously Ag. Principal, College of Business and Management Sciences. For several years he was Chairman, Microfinance African Institutions Network (based in Lome, Togo), and has contributed greatly to the Centre for Research on Environmental Economics and Policy in Africa as member of its Advisory Board and Committees. Has been Chairman, Academic Board, African Eco- nomic Research Consortium (AERC), Nairobi, Kenya and holds an honourary fellowship of the Uganda Institute of Banking and Financial Services (FUIB, HONS). He has made a number of publications on a spectrum of areas in Eco- nomics. Previously served as member of the Finance Committee of CARITAS, International based in the Vatican.

Archbishop Paul Bakyenga Non-Executive Director. (Ugandan) Holds a doctorate in Sacred Scripture from Rome LSS. Currently Archbishop of Mbarara Diocese which is a shareholder in the Bank and is an advocate for service to the poor which is a bedrock of the mission of the Bank of providing financial services especially to the rural poor. Previously chaired the Uganda Episcopal Conference, the Association of Members of Episcopal Conferences of Eastern Africa (AMECEA) and was Chancellor of Catholic University of East Africa (Nairobi) and Uganda Martyrs University [Nkozi].

Archbishop Cyprian K. Lwanga Non-Executive Director. (Ugandan) Archbishop of Kampala Archdiocese. Was a professor of Canon Law from Ggaba National Seminary and St. Mbaaga Major Seminary and holds a doctorate in Canon law from Urbanian University, Rome. As an entrepreneur, he has innovated and set various programmes including Wekembe Corporation Programme (now SACCO) and the Uganda Martyrs Development Foundation. Was head of CARITAS, Africa and has also served on Board of Governors of various Church founded schools/institutions.

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 27

BOARD OF DIRECTORS

Mr. Henry Kibirige Non-Executive Director. (Ugandan) Chairman of the Audit Committee. Also a Director on the Board of National Water and Sewerage Corporation. He serves on the Board of Lion Assurance Company Ltd and is the Chairman of its Investment Committee. He holds a Bachelor of Arts degree from Makerere University and most of his career was served in the Bank of Uganda (Central Bank) rising to the level of Execu- tive Director Supervision Function, where he contributed to the liberalization of foreign exchange transactions and implemented legislative and institutional reforms of the country’s financial sector. He worked with Citi Bank (U) as a Banking Consultant after leaving the Central Bank

Mr. Kimanthi Mutua Non-Executive Director. (Kenyan) Currently Chairs IT (Strategy) and the Assets and Liability Committees (ALCO). A Certified Public Accountant with considerable experience in banking, finance and information technology, he served as founding Managing Director of K-Rep Bank (now Sidian Bank in Kenya between 1999 – 2010). Currently he serves on boards of several organizations, including Sidian Bank, ECLOF International (Chair), PAMIGA Association (Chair) and K-Rep Group of Companies (Chair). He is a faculty member of the Boulder Microfinance Training Program and also advises several organizations, locally and international, on Regulatory & Super- vision issues for financial inclusion, as well as transformation strategies for microfinance institutions.

Dr. Peter Ngategize Non-Executive Director. (Ugandan) Currently Chairman of Credit and Risk Management Committees. PhD (Ag- ricultural Economics) and is the National Coordinator of the Medium Term Competitiveness Strategy Secretariat with the Ministry of Finance, Planning and Economic Development of Uganda. In that capacity he is a founder member and Director of the Agricultural Business Initiative Trust (aBiTrust) and has spearheaded many initiatives towards the Private Sector competitiveness.

Annual Report & Financial Statements l 2015 28 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...)

BOARD OF DIRECTORS

Mr. Andrew P.K. Obol Non-Executive Director. (Ugandan) Chairs the Human Resource & Compensation Committee. A qualified professional banker. Served on the top management of Uganda Commercial Bank (now Stanbic Bank) and was the Coordinator of CARITAS Kitgum under Gulu Diocese. He is also a member of the area District Service Commission.

Mr. Fabian Kasi Managing Director. (Ugandan) Managing Director of Centenary Rural Development Bank. He was a Board Chairman of the Association of Microfinance Institutions of Uganda and served on the Board of FINCA Uganda and Kampala Club. He is the current Chairman of the Uganda Bankers Association, a member of the Board of Uganda Institute of Bankers, British American Tobacco (U), PAX Insurance and is the Chairman of the Advisory Board of Microfinance Department of Nkozi University. He holds a Bachelor’s Degree in Commerce, a Masters of Business Administration and is a Fellow of the Association of Chartered Certified Accounts (FCCA), United Kingdom.

Dr. Simon Kagugube Executive Director. (Ugandan) He holds a Doctorate in the Science of Law (JSD), from Yale Law School (USA), and a Certificate in Public Finance from the University of Bath, (UK). He is an Advocate of the High Court of Uganda. Prior to assuming the office of Executive Director with the Bank, he had served as Chairman of the Board of Directors Centenary Bank in 2002, while also holding the position of Director, Tax and Legal Services PricewaterhouseCoopers. He worked with the Uganda Revenue Authority as Commissioner Value Added Tax and was appointed Dep- uty Commissioner General. Currently Board Chairman, Monitor Publications Limited, a Nation Media Group subsidiary in Uganda, and is a Member of the Board of Nation Media Group where he also serves as member of its Finance and Audit Committees. He is the President, East African School of Taxation.

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 29

Risk management and control

Centenary Bank uses an Enterprise wide Risk Management (ERM) approach which is governed by the Risk Management Framework Policy. The Bank recognizes that many risks within the organization are interrelated and should not be managed independently, but rather across the Bank. This ERM framework sets forth guidance to manage risks across the Bank. It aims to strengthen the Bank’s ability to develop an integrated view of risk and the means to handle risks within a comprehensive approach.

Enterprise-wide Risk Management provides uniform management processes and comply with both processes to identify, assess, manage, mitigate, and re- regulatory and local laws and jurisdictions. port on key risks. It supports Centenary Bank’s Board • Improve the understanding of interactions and of Directors (BOD) corporate governance needs, ena- interrelationships between risks. bles informed decision-making, and identifies areas for • Establish clear accountability and ownership of value optimization. risk. Centenary Bank’s Enterprise Risk Management (ERM) • Develop a common language that helps to estab- framework provides Management and staff with the lish the broad scope of risk and to organize risk information they need to perform their risk manage- management activities, and reinforce Centenary ment-related duties. Bank’s risk culture. • Develop capacity for continuous monitoring and The document provides background information such reporting of risk across Centenary Bank, from as Centenary Bank’s ERM objectives, policy, and prin- the operational level to the Board. ciples. It also provides detailed formal processes and methodologies for risk identification, assessment, management, monitoring and reporting using information Risk Management Policy such as process flow diagrams and procedures. The risk management policy defines the Bank’s business processes, structure, risk profile and risk appetite. ERM Objectives applicable It is a guiding document in the application of the bank’s comprehensive risk management framework which is Centenary Bank’s ERM program brings risk knowledge regularly reviewed. and information to the fore in decision-making processes to mitigate the downside of unrewarded risk while The policy among other things defines the roles and re- exploiting rewarded risks to benefit from business op- sponsibilities of management and the board in the man- portunities. agement of existing and emerging risks in the bank and the market respectively. The document defines “Sound The ERM objectives are to: Practice” in terms of the Bank’s risk management and • Support the Bank’s business growth strategy provides guidelines for management to address the through the implementation of well-defined and Bank’s risk profile on an ongoing basis. common risk management processes, tools, and techniques. • Counter losses and improve business value Risk Categories through optimization of risk and return. To enhance the understanding of particular sources of • More knowledgeably seize and exploit opportu- risk, their possible consequences, and the practical ap- nities and quickly identify risks to avoid, both cur- proaches to managing them, Centenary Bank has de- rent and emerging risks. fined risks into 9 major categories. • Reduce uncertainty and increase the likelihood of success in achieving the bank’s strategic initia- These risk categories are groupings that help the bank tives. to consistently identify, assess, measure, monitor and • Build credibility and sustainable stakeholder con- report across on its overall risk exposure. Using confidence in Centenary Bank’s governance and risk sistent risk categories across the bank enables aggre- gation and determination of overall risk impact. This

Annual Report & Financial Statements l 2015 30 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...)

enhances the understanding of particular sources of publicity or operational inadequacies that would risk, their possible consequences, and the practical ap- have an adverse effect on the Bank’s public im- proaches to managing them. age. Centenary Bank has adopted the following risk categories: vi) Operational Risk Risk of direct or indirect loss resulting from inad- i) Strategic Risk equate or failed internal processes, people, and Risk of current and prospective impact on the systems or from the external events or unfore- Bank’s earnings and capital arising from poor seen catastrophes. It includes the exposure to business decisions, improper implementation of loss resulting from the failure of a manual or au- decisions or lack of response to industry, eco- tomated system to process, produce, or analyze nomic or technological changes. transactions in an accurate, timely, and secure manner. ii) Credit Risk Potential that a Bank borrower or counterparty Operational risks increase the Bank’s exposure will fail to meet their obligations in accordance to other risks by impairing the Bank’s ability to with agreed terms. adequately assess, monitor and report on other risks. Operational risks cut across all the Bank’s iii) Liquidity Risk divisions and include, but not limited to: Risk resulting from the Bank’s failure to pay its debts and obligations when due because of its in- Human Resources Risk: The risk arising from ability to convert assets into cash, or its failure to inadequate human resources or inappropriate procure enough funds, or, if it can, that the funds use of available staffing resources. come with an exceptionally high cost that may affect the bank’s incomes and capital fund now Business Process Risk: The risk arising from in- and in the future. adequate implementation and non-adherence to the Bank’s business processes. iv) Market Risk This is the risk that the value of the Bank’s invest- Legal Risk: The risk arising from contracts or ments will decrease due to unexpected and/or other arrangements that are not enforceable adverse changes in market factors such as stock through available means. and commodity prices as well as interest and foreign exchange rates. Health & Safety Risk: The risk arising from noncompliance with or lack of health and safety Key market risks factors for the Bank include regulations, policies, or procedures. Interest Rate Risk and Foreign Exchange Risk which have been described below: vii) Compliance Risk Risk of legal or regulatory sanctions, material fi- i. Interest Rate Risk: the exposure of the Bank’s nancial loss, or loss to reputation. The Bank may financial condition to adverse movements in in- suffer these as a result of its failure to comply terest rates. with laws, regulations, prudential guidelines, supervisory recommendations and directives, ii. Foreign Exchange Risk: risk associated with rules, internal policies and procedural guidelines doing business in two or more currencies. For- and codes of conduct applicable to its banking ac- eign exchange price risk relates to possible re- tivities. valuation losses (or gains) on long/over bought or short/oversold currency positions in response to viii) Information Technology Risk movements in exchange rates. The risk arising from inadequate information communication technology (ICT) resources or v) Reputation Risk inappropriate use of available ICT resources. This is the risk arising from changes in public This can result in financial loss and lost business opinion that impact the Bank’s earnings or ac- opportunities due to unavailability of the ICT re- cess to capital. This can be mainly thought of as sources, loss of data integrity and confidentiality.

Annual Report & Financial Statements l 2015 STATEMENT OF CORPORATE GOVERNANCE AND RISK MANAGEMENT (continued...) 31

ix) Country Risk Refers to the risk of investing in a country, other Business Continuity than Uganda, resulting from uncertainties arising Management Framework from the economic, social and political conditions of that country that may cause borrowers Centenary Rural Development Bank continues to en- in that country to be unable or unwilling to fulfill sure that a business continuity management process is their obligations to the Bank. in place and sufficient financial, organizational, techni- The main categories of country risk comprise cal, and environmental resources are identified to ad- sovereign, transfer and contagion risk and are dress the specific requirements for Business Continuity. described below: A Business Continuity Management Framework was Sovereign risk: Denotes a foreign govern- developed in accordance with best practices and stand- ment’s capacity and willingness to repay its direct ards to ensure all plans are consistent and to identify and indirect (i.e. guaranteed) foreign currency priorities for testing and maintenance. obligations. Business Continuity Management (BCM) Process Transfer risk: This is the risk that a borrower BCM is important to the Bank and is the overall respon- may not be able to secure foreign exchange to sibility of Senior Management to ensure that it is imple- service its external obligations. mented. Senior Management is committed to drive the BCP process, provide adequate resources and ensure Contagion risk: This risk arises where adverse that the respective plans are well developed, docu- developments in one country lead to a down- mented, tested, updated and maintained. grade of rating or a credit squeeze not only for that country but also other countries in the re- Consequently, the following BCP management process gion. has been established to ensure that the plans are developed, documented, tested, updated and maintained; Business Continuity Management: • The Bank’s plans are developed according to the Business Continuity Management (BCM) is a holistic BCP framework and in compliance with the poli- management process that identifies potential impacts cies. that threaten an organization and provides a frame- • BCP is an ongoing process of development, test- work for building resilience and the capability for an ing, updating and maintenance, and not just a one effective response that safeguards the interests of its off project. It is a part of every division Head’s key stakeholders, reputation, brand and value creating normal responsibilities to ensure that the division activities. has not only planned for the recovery of all critical business processes of that business unit, but The Bank has in place an appropriate business conti- has also tested and maintained those plans. nuity management program. Its ultimate purpose is to • Each division has an approved Business Continu- minimise the impact on the organization and recover ity Recovery Plan for the recovery of its critical from loss of information assets which may result from business processes. natural disasters, accidents, equipment failures, and de- • Every year, the BCM unit in consultation with the liberate actions to an acceptable level. This is through a BCP Steering Committee/BCMT establishes the combination of preventive and recovery controls. The BCP Development Plan for the year. The plan process includes the development, maintenance, and sets out the BCP activities to be undertaken for testing of contingency plans and work-around proce- that year, who is responsible for those activities dures necessary to sustain the operational continuity of and the timeline for such activities. The BCP mission critical processes, information technology sys- Steering Committee reviews and approves the tems and resources. BCP Development Plan.

Annual Report & Financial Statements l 2015 32 SUSTAINABILITY REPORTING STATEMENT

Employee empowerment and engagement in an organization manifests itself in increased staff satisfaction, high productivity, quality customer service, strong staff retention, reduced costs, and competitive advantage and overall improved bottom-line.

Read more on Employee empowerments and engagement on page 36

Annual Report & Financial Statements l 2015 33

Sustainability Reporting Statement

This report represents a commitment by Centenary Bank to sustainable development and to comprehensive reporting thereon to all stakeholders. The report follows guidelines released by the Global Reporting Initiative (GRI), which is a joint initiative coalition for Environmentally Responsible Economies and the United Nations Environment Programme. The guidelines have been issued for voluntary use by organisations for reporting on the economic, environmental and social diversion of their activities, products and services aimed in articulating the understanding contribution to sustainable developments.

Value Added Statement

The Value Added Statement shows the social value added that the Bank makes through its activities. Value added is calculated as the Bank’s performance minus payments such as cost of materials, depreciation and amortisation. The resulting amount is distributed to the stakeholders who include employees, shareholders and the Govern- ment

Value Added Statement For the year ended 31 December 2015

2015 2014 Shs’000 % Shs’000 % Value added Interest income 305,327,547 77.5% 247,067,902 76.4% Commission, fee income 66,990,666 17.0% 58,679,232 18.1% Other revenue 21,582,433 5.5% 17,714,269 5.5% Total income 393,900,646 100% 323,461,403 100% Less: Interest paid to depositors 39,108,973 37,067,293 Cost of other services 80,331,284 74,913,912 Wealth created 274,460,389 211,480,198

Distribution of wealth Salaries, wages and other benefits 117,502,822 42.8% 96,887,176 45.8% Government 34,910,783 12.7% 21,669,531 10.2% Shareholders - (dividends) 25,516,936 9.3% 18,477,452 8.7% Retention to support future 96,529,849 35.2% 74,446,039 35.2% business growth

Wealth distributed 274,460,389 100% 211,480,198 100%

As illustrated by the Value Added Statement, the Bank is a material contributor in a financial sense to various stakeholders. Of the total wealth created in 2015: • Shs 117.5 billion (42.8%) was distributed to employees as remuneration and benefits. • Shs 34.9 billion (12.7%) was allocated to Government in form of direct and indirect taxes, including charges in deferred taxation assets and liabilities. • Shs 97.2 billion (35.2%) was retained for investment in business in order to ensure its profitability content- ment into the future. • Shs 25.5 billion (9.3%) is to be distributed to shareholders as dividends.

Annual Report & Financial Statements l 2015 34 SUSTAINABILITY REPORTING STATEMENT (continued...)

Distribution of wealth

2015 2014

Customers Engagement and Support For SME clients, workshops were organized. They were aimed at discussing strategic busi- a. Customers Engagement ness opportunities. These sessions exposed Understanding and responding to our custom- the SME owners to new ways of doing busi- ers’ needs is key to Centenary Bank’s success. ness, new developments in the market and The importance of service delivery is funda- other offerings that the Bank has in place to mental and a non-negotiable component of our improve what they do. The workshops also attitude towards customers. Our customers helped in obtaining feedback on how the bank are key to ensuring that we remain a profitable can improve its offerings and services. and sustainable organisation. How custom- During the year, the bank increased the num- ers are treated, where we choose to operate, ber of staff in the Call Center to receive and who we provide financial support to and our resolve customer complaints. The Call Centre response to customer needs all have great im- registerded 123,915 customer issues of which pact on our reputation and financial success. 48,016 were complaints and 75,899 were in- The Bank engages customers through various quiries and compliments. 1,070,855 toll free means including: calls were received . In a bid to address the increasing customer is- • Call Centre. sues, the bank has planned to further increase • Branch network. the number of agents per shift and introduce • Customer seminars/workshops, and product dedicated agent for Runyakitara, Kiswahili and research. Luo. • Dedicated Sales Staff for lending and deposit mobilisation. b. Customer Confidentiality • Electronic, digital, print and social media. The Bank demands the highest standards in • Marketing and advertising. carrying out its business activities. Centenary • Customer weeks. Bank like other banks in the country has always • CentePoints - Automatic Teller Machines been subject to the common law principle of (ATMs). bank client confidentially. In addition to this, With regard to customer weeks, branches to- Centenary Bank subscribes to the Code of gether with head and regional office represent- Banking Practice that requires banks to treat all atives, engage branch customers for a whole customers’ personal information as private and week through various activities. CenteMobile confidential. The Bank’s Operational Guide- clinics were set up in branches during the week lines and Staff Rules and Regulations govern the to educate customers about CenteMobile. conduct and duties of Bank employees, further Many customers appreciated and enrolled for emphasizing the importance of customer pri- the service during the weeks. Field visits to vacy and detailing the procedures that must be mobilise deposits, get feedback from our cus- observed in matters regarding confidential in- tomers were also carried out and the weeks crowned off with dinner for selected corporate formation. In handling such information, we clientele of the branch. have made a commitment that we will:

Annual Report & Financial Statements l 2015 SUSTAINABILITY REPORTING STATEMENT (continued...) 35

• Ensure that it is accurate, up to date, neither bi- Financial Products and Services ased nor misleading; • Only use it for the purposes for which it was The bank offers the following products given; • Keep it only for as long as is necessary; A. Deposit Products • Keep it securely; • Keep only relevant and required information; 1. Local Currency Deposits and • CenteSavings Account • Distribute it within the Bank only on a need to • CenteCurrent Accounts know basis. • CenteFixed Deposit Account • CentePlus Account C. Money Laundering • CenteJunior Account Money laundering is the process by which banks • CenteVSLA Savings Account are used to disguise or “launder” the proceeds • CenteVolution Savings Account of criminal activity. Such activities undermine a • CenteSACCO Savings Account bank’s integrity, damage its reputation, deter • CenteSACCO Current Account honest customers and expose a bank to severe • CenteSupa Woman Personal Savings Account sanctions. • CenteSupa Woman Group Savings Account • CenteSupa Woman Joint Savings Account We fully support the international drive against • CenteInvestment Club Savings Account serious crime and are committed to assisting • CenteInvestment Club Current Account the authorities in preventing money laundering. We have adopted policies and procedures de- 2. Foreign Currency Products and Services signed to protect ourselves from doing business with customers involved in criminal activity. • CenteForeign Savings Account • CenteForeign Current Account Our employees must adhere to the following • CenteForeign Fixed Deposit Account key principles: • Customer Identification - the identity of every 3. E-banking products customer must be established from reliable identifying documents. • ATM Service (CentePoint) • CenteMobile Service • Know Your Customer - our staff must know • PC Banking Service enough about their customers to be able to • Merchant POS Service identify transactions which are inconsistent with their business or personal status, or which do B. Credit Products not match the normal pattern of account activ- 1. Business loans ity. • CenteSME/Corporate business Loans • CenteLease • Reporting of Suspicious Transactions – all such • Bank Overdraft transactions are to be reported to the proper authorities immediately. 2. Agricultural Loans We take money-laundering prevention very se- • Production Loan riously and have created a rigorous programme • Revolving Production Loan to ensure that we can enforce consistent high • Marketing Loan standards across our network. The Know Your • Farm & Asset Equipment Loan Customer initiative, a key priority within the Bank, is a cornerstone of our anti-money laun- 3. Retail/Micro Loans dering programme. • CentePersonal Loan • CenteLand Loan Our policy is based on the Financial Institutions • CenteSolar Loan Act 2004 Money Laundering Rules and interna- • CenteYouth Loan tional best practices, such as recommendations • CenteMortgage loan made by the Financial Action Task Force (FATF). • CenteHome Improvement Loan • CenteHome

Annual Report & Financial Statements l 2015 36 SUSTAINABILITY REPORTING STATEMENT (continued...)

4. Trade finance products the organization successful. On the other hand, • Letters of Credit Employee Engagement is the extent to which • Bank Guarantees people enjoy and believe in what they do and feel • Invoice Discounting valued for doing it. People want to be recognized • Shipment Finance and rewarded for their contributions. An engaged • Local Purchase Order (LPO) Finance employee is one who is fully absorbed by and en- • Structured Trade Finance thusiastic about their work and so takes positive • Commodity Finance action to further the organization’s reputation and • Documentary Collections interests. Employee empowerment and engagement in C . Money Transfer Services an organization manifests itself in increased staff • Western Union Money Transfer satisfaction, high productivity, quality customer • Real Time Gross Settlement (RTGS) service, strong staff retention, reduced costs, • East African Payment Systems (EAPS) and competitive advantage and overall improved • Electronic Funds Transfer (EFT) bottom-line. To attain the goals above, the Bank • EFT Direct Debit Transfers Option empowers and engages its employees in several • MTN Mobile Money Transfers ways such as those highlighted below:- • Airtel money • Ezee Money a. Staff based HR strategies • Telegraphic Money Transfers The Bank has instituted a regular Staff Cli- mate Survey, an online avenue, through D. Other Services which staffs’ views, ideas and value-adding • Foreign exchange trading input is sought. These are valued and used to • Bulk Salary processing develop HR strategies that help improve the • SMS Transaction Alerts work environment and elicit staff satisfac- • Primary dealership services tion. It also contributes positively towards • E-payment services the strategic planning process of the Bank. * e-Visa fees collection service The Bank has registered a strong work cli- * e-Water payment service mate that has steadily improved over the * e - Umeme payment service years from 69.8% in 2011, to 73.2% in * e-Tax payment service 2013 and 75.2% in 2015. The primary aim * e-NSSF contributions collection service of the successive Bank Climate surveys is * Kampala Capital City Authority (KCCA) to track and evaluate progress made in ad- fees collection service dressing identified employee work related challenges and risks. It also captures new is- For more details about our products and sues and enables development of appropri- services please refer to the bank’s website ate empirical remedial strategies/initiatives www.centenarybank.co.ug to enhance staff engagement, retention, productivity as well as Bank business per- Employee empowerments formance and growth generally. The Bank further provides avenues to its employees and engagement through which they express their thoughts, feelings, concerns and make contributions Understanding and responding to our employee on various issues that help to enhance the needs remains a key aspect to Centenary Bank’s Bank’s plans and strategies. success. Employee Empowerment is a philoso- These are mainly: Email, Newsletter, meet- phy associated with real benefits for the Bank. It’s ings, helpdesk and managemtent and staff underlying principle of giving employees the free- open forums (CenteFusion). dom, flexibility and power to make decisions as well as solve problems leaves an employee feel- b. Reward and Recognition programs ing energized, capable and determined to make An engaged employee wants to feel valued

Annual Report & Financial Statements l 2015 SUSTAINABILITY REPORTING STATEMENT (continued...) 37

for doing what they do and their contribu- Branches. tion to the Bank. The Bank has created a The Bank actively participated in the prepa- ‘sense of worth’ environment in various ration for the Papal visit. The Bank spon- forms, through a market based competitive sored 400 staff to participate in the Papal compensation, Employee of the Month pro- walk from Kololo to Namugongo. Staff grams, merit awards, sports & teambuilding bought rosaries worth Shs. 1.5 million as a models and wellness programs to mention way of contributing to the papal visit prepa- but a few. rations. The Chaplaincy also collected ‘Olu- muli’ worth Shs. 3 million toward the same c. Occupational Safety & Health (OSH) cause. The bank overall contributed over OSH committees were formed and are op- Shs. 150 million towards the Papal Visit. erational across all business units. These are supported through the Human Resource e. Sports and Team building model Division’s (HRD) continuous follow up and The sports team building concept is focused guidance in line with the law. on delivering occupational benefits to the In compliance with the Labour Law, the Bank. Key among these are enhancement Bank undertook registration of all Bank of team work/networking, staff motiva- Premises at a cost (statutory). First aid box- tion, better health, improved performance es of prescribed standards were procured at work, enthusiasm for institutional goals, and circulated to all Bank units/Branches. talent identification, improved organization Inspection of identified critical Bank units for external engagements and furthering thr was done by the Ministry of Gender, Labour Bank’s brand visibility. and Social Development (MOGLSD) i.e. The first ever CenteFun Day was success- two branches namely Nateete and Kikuu- fully held on 21/11/2015. Seven (7) teams bo. Two other branches i.e. Ntungamo and were formed based on the sports talent Ntinda were inspected by the Bank Branch that had been identified through regional OSH Committees. and Head Office team building activities. A sensitisation session of Centenary Bank Head Office emerged the overall winners. Managers on OSH was conducted by the The Bank participated in the 2015 Annual commissioner, Occupational Safety and Bankers’ Gala and Corporate League ses- Health from the MOGLSD during one sions. The Bank won gold medals in Volley- of the Quarterly Management Meeting ball and pool table at the Corporate League. (QMM) sessions. The Bank has also instituted a bi-weekly aerobics class at its Headquarter premises. d. Chaplaincy activities /program Chaplaincy roll out was strengthened f. Performance management through establishment of Christian commu- The Bank paid 2014 performance bonus nities at all the 63 Centenary Bank branches that placed emphasis on recognizing the ex- where holy mass is conducted monthly. ceptional contribution of its branch network This helps to build the spiritual aspect of the staff. As part of the Integrated Performance employees. Partnerships with other corpo- Management system, the Bank rolled out rate Catholic communities like BOU, KCCA the Balance Score Card tool to all roles up and Vision group were also built. to Officer Level, to enhance its strategic The Chaplaincy through its reachout annual objective of accountability. The bank held programs gave back to the needy communi- workshops for all affected staff to support ties of Butabika Hospital and Luzira Wom- the roll out and enhance appreciation and en’s prison. Staff Christmas Carols competi- use of the tool. The BSC tool provides an tions were also successfully held among the enabling environment in which staff moni- Head Office Divisions and some Kampala tor their individual performance/ contribution in executing the Bank’s strategy.

Annual Report & Financial Statements l 2015 38 SUSTAINABILITY REPORTING STATEMENT (continued...)

g. Learning & Development undertakings h. New Core Banking System capacity The Bank continues to empower staff building through closing their skills and knowledge In October 2015, ‘Exodus’ project train- gaps on an ongoing basis. By 31st Decem- ings commenced with the main objec- ber 2015, one hundred seven (107) train- tive of equipping participants with practi- ing events had been implemented for 2,800 cal knowledge and skills in the New Core staff, at a cost of Shs. 1.84 billion represent- Banking System. By 31st December 2015, ing 51.8% compared to 114 trainings imple- 886 (47.5%) of the 1864 target participants mented for 2058 staff at a cost of Shs. 1.492 had been trained in various modules of the billion, same period last year. new core banking system. The Bank trained Trainers that in turn trained the end users of The staff enrolment and completion of the system. learning programs on ‘Click Campus’ online platform has continued to grow year on i. Talent Management / Succession Plan- year. With a 78% completion rate as at De- ning cember 2015, staff were able to cover vari- The Bank’s people management philoso- ous programs including mandatory ones like phy, is to build its own talent to support the Anti-Money Laundering (AML) module. the Bank’s growth. The Bank closed the Staff were able to close gaps in areas that year 2015 with 68.4% of the vacant posi- enabled them compete for higher positions tions filled internally through promotions contributing to a 68.4% internal promotion and re-designations. One way the Bank has rate. achieved this is to identify the staff development needs and bridge these gaps through appropriate interventions.

Below is a snapshot of the Bank’s investment in staff development:- Monthly Training Investment per staff

(Number of Participants)

(UShs)

Annual Report & Financial Statements l 2015 SUSTAINABILITY REPORTING STATEMENT (continued...) 39

Succession planning for Branch Leadership was ulation, compared to 45.3% female and 54.7% concluded in the year under review and devel- male as at 31st December 2014. opment skills / Knowledge gaps were identified. A synopsis of Senior Management gender di- The process helped management to identify versity stood at 72.3% male and 27.7% female the talent pool covering the Branch Manager, in 2015 compared to the ratio 72.4%:27.6% in Assistant Manager, Credit Administration and 2014, reflecting gradual improvement in gen- Branch Supervisory roles. The Head Office der mix profile. successor pool was also updated during the year. During 2015 Leadership / management THE NUMBERS training was conducted but mainly among the Branch management teams to bridge the iden- For the year under review tified critical knowledge gaps. 2211 298 Staffing highlights as at 31st TOTAL HEAD COUNT JOINED THE BANK December, 2015

The Bank closed the year 2015 with a total headcount of 2211 compared to 2001 as at 31st 12 06 10 05 December 2014. 298 staff joined the Bank in MALE FEMALE 2015, compared to 210 the previous year. The annual staff turnover rate declined to 4.3 % in 2015 down from 5.2% in 2014, due to 4.3% 33.4 YEARS 5.9 YEARS continued staff retention and development ini- STAFF TURNOVER AVERAGE AGE OF AVERAGE PERIOD RATE DECLINED STAFF OF SERVICE tiatives. The average age of staff remained at 33.4 years as at December 2015. The average period of service across the board was 5.9 years compared to 5.8 years the previous year. SENIOR MANAGEMENT 72.3% 27.7% Females constituted (1005) staff (45.5%) while GENDER DIVERSITY MALE FEMALE males constitute (1206) 54.5% of the staff pop-

The table below illustrates the comparative picture over the last 3 years; Table below shows Senior Management Diversity

2015 2014 2013 POSITION TITTLE/ CATEGORY Male Female Total Male Female Total Male Female Total

Executive Directors 2 - 2 2 - 2 2 - 2

General Managers 7 3 10 7 3 10 7 3 10

Chief Managers 17 6 23 17 6 23 15 6 21

Head Office Managers 38 24 62 39 22 61 39 16 55

Branch Managers/ 56 13 69 48 12 60 41 100 51 Service Center Heads

Total 120 46 166 113 43 156 104 35 139

Annual Report & Financial Statements l 2015 40 SUSTAINABILITY REPORTING STATEMENT (continued...)

Corporate Social Investment

In 2015, Centenary Bank centered its Corporate Social Investment (CSI) initiatives under its strategic theme of customer centricity. The aim was to sustainably support the public based on the Bank’s key customer categories which include the microfinance clients, youth, women and the small and medium enterprises.

Following our policy of investing up to 1% of the previous year’s after-tax income, the allocation on the banks CSI increased along with the number of activities and people reached as per table below.

Item 2013 2014 2015

CSI Amount 550M 580M (5.5%) 636M (9.7%) Number of activities 211 303 (43.6%) 359 (18.5%) People reached 15M 16M (6.7%) 19M (18.8%)

The goals of the Bank’s Corporate Social Investment were; 1. To achieve Centenary Bank’s social and environmental objectives of contributing to a sustainable society. 2. To support communities through partnerships and social and environmental projects.

3. To reinforce the bank’s values.

OUR OBJECTIVES FOR 2015 WERE AS BELOW;

To increase To expand the To increase the channels financial literacy the number used for financial training target of women literacy training group screened for by at least two. cervical cancer by 50%

We continued our focus on four themes; these were education, health, environment and the social mission of the church. Each of these focus areas was implemented in collaboration with partners and communities.

Annual Report & Financial Statements l 2015 EDUCATION 41

Over 1,470 people were trained

Over 100,000 people were reached via social media

Over 160,000 people lives improved through responses to the weekly print media articles

One of the Supawomen being awarded a certificate after training by Ms. Hellen Tomusange, Supervisor, Women Banking Centenary Bank.

Our Bank works in communities where the bulk of the population is illiterate. Managing their finances therefore becomes even a bigger challenge. It is for this reason that the bank has invested in financial literacy for the last 5 years. In 2015, we trained 720 microcredit customers in five districts, 360 youths in 10 groups, 150 small and medium enterprise owners in three districts and 240 women in Kampala. This was done in partnership with International Labour Organisation (ILO), Private Sector Foundation Uganda (PSFU), European In- vestment Bank (EIB), and Agriculture Business Initiative (ABI Trust). The trainings focused on Personal Finance, Managing Businesses, Loan utilisation, Sav- ing and Investment and Uses of Banking Facilities. The Bank further used social media channels of facebook, twitter and youtube A CenteBusiness Life to educate the public on financial literacy, there by reaching over 100,000 article extracted from the people. Weekly print media articles responding to the public’s questions on NewVision newspaper financial literacy where published as part of the CenteBusiness Life program hence improving lives of 160,000 people.

‘Bridging the Cancer Gap’ programme HEALTH 809,000 women were screened Over 10,000,000 people were educated through parades, electronic, print and social media

The health sector in Uganda is still wanting. More than half of the population is unable to access sustainable health services. It is worse with non-communicable diseases, cancer being among the leading at a rate of 55%. It is for this reason that the Bank partnered with Rotary District 9211 and St. Francis Hospital Nsambya in the ‘Bridging the cancer gap’ programme, to educate the public. Through screening and awareness building sessions. This programme was commissioned in 2011 and the Cancer Ward was officially opened in 2015. Going forward, all proceeds from the cancer run will be used to procure equipment for the cancer ward at St Francis Hospital Nsambya. In 2015 the Bank participated in the Rotary family health days, and cancer run thereby screening 809,000 women and educating over 10,000,000 through parades, electronic, print and social media.

Participants of the 2015 Cancer Run during the morning aerobics as they prepared for the run.

Annual Report & Financial Statements l 2015 42 SUSTAINABILITY REPORTING STATEMENT (continued...)

THE NUMBERS For the branches where we still use generators, For the year under review ENVIRONMENT the capacity has been scaled down from 15 - 150kva to 15 - 60kva

Increased Preserving the environment remains key for the Bank’s sustainability. In 2015, allocation on we increased the number of off-site Automated Teller Machines (ATM’s) us- the banks CSI ing the uninterruptable power supply (UPS) system to back up grid power by 100%. Currently they are 20, and we plan to increase the number by 10 in 9.7% 2016. For the branches where we still use generators, the capacity has been scaled down from 15 - 150kva to 15 - 60kva, to reduce on amount of carbon released. Staff were also educated on preserving power and water through a digital 636 campaign that run on all personal computer screens for six months. We also million continued to save on paper through the use of duplex printers and electronic devices namely ipads and blackberries for accessing information anytime. Was allocated on the banks CSI We continued to invest in community activities that preserved the environment, which included donations of refuse bins, community cleaning activities and tree planting.

Increased number of activities 18%

359 activities Were carried out by the bank

19 Centenary Bank Rubaga branch staff joined hands with green efforts foundation to million plant trees in preparation for the Popes’ visit in November 2015. People were reached

Annual Report & Financial Statements l 2015 SUSTAINABILITY REPORTING STATEMENT (continued...) 43

THE SOCIAL MISSION 300 million allocated in supporting the church through direct sponsoring OF THE CHURCH of various programmes, events and publications country wide

Centenary Bank owes its foundation to the Social Mission of the Catholic Church. It is with this background that the Bank endeavours to support the church in its various activities, both those concerning social development and evangelism. The Bank allocated over 300M (2015) from 138M (2014) to support the church through direct sponsorship of various programmes, events and publications country wide. Mbale branch donating a maternity bed and mattresses to St. John the Baptist dispensary

OTHER COMMUNITY ACTIVITIES We were involved in more than 70 community activities

Centenary Bank has a long history of supporting communities. We support them through participating in developmental activities and direct donations. We were involved in more than 70 community activities in 2015.

Kamuli Branch donated 10 hospital beds to Kidera Health Centre IV in Buyende District

Annual Report & Financial Statements l 2015 44 SUSTAINABILITY REPORTING STATEMENT (continued...)

GRI Indicators’ report

The index below comprises indicators from the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines.

The index has been abridged to relate it to the Bank’s disclosure status.

PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES 1.1 & 1.2 Vision, Mission and Ownership 8 Mission Statement

PROFILE PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES 2.1 Name of reporting organisation 6 & 63 Centenary Rural Development Bank Limited 2.2 Major products or services, including brands 35 -36 Financial products and services if appropriate 2.3 Operational structure of the organisation 16 & 18 - 31 Excecutive Management, Corporate governance 2.4 Description of major divisions, operating com- 16 & 18 - 31 Excecutive Management, panies, subsidiaries and joint ventures Corporate governance 2.5 Countries in which the organisation’s located 6 & 63 Bank contact information, general information 2.6 Nature of ownership 9 Ownership 2.7 Nature of markets served 76 Sectors financed / Industry analysis 2.8 Scale of the reporting organization’s: Number of employees 39 Staffing Products produced/services offered 35 - 36 Products and services

GOVERNANCE STRUCTURE AND MANAGEMENT SYSTEMS

PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES 3.1-3.6 Governance structure of the organisation, in- 18 -13 Corporate governance cluding major committees under the board of directors that are responsible for strategy and oversight

ECONOMIC PERFORMANCE INDICATORS PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES EC1 Net sales and Increase in retained earnings 18 - 31 & Statement of Comprehensive Income 47 -45 & / Statement of changes in Equity, 59 -61 Financial review EC3 Geographic breakdown of markets 117 - 120 Branch an ATM Network EC3 Cost of all goods and services purchased 33 Value added statement Total employee remuneration 33 Value added statement EC8 Total taxes of all types paid 33 & 59 & 99 Value added statement/ income statement/ note 14

Annual Report & Financial Statements l 2015 SUSTAINABILITY REPORTING STATEMENT (continued...) 45

SOCIAL LABOUR PERFORMANCE INDICATORS PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES LA1 Breakdown of workforce 39 Staffing highlights LA2 Net employment creation and average 33 & 39 Value added statements / turnover Staffing highlights LA3 Retention rates 39 Staffing highlights LA4 Policies/procedures on negotiations with em- 36 - 38 Employee empowerment and engagement ployees over changes in operations LA5 Health and safety committees 37 Occupational safety and health LA6 Occupational accidents and diseases 37 Occupational safety and health LA6 Injury, lost days and absentee rates and work- 37 Occupational safety and health related fatalities LA8 Policies and programmes on HIV/AIDS 37 Staff welfare issues LA9 Average hours of training per employee 38 Training and Development Programmes for the year 2015 LA10 Transformation policies and procedures 38 Perfomance management/ talent management LA11 Composition of senior management and cor- 23 - 24 & 39 Senior Management Diversity / Diversity and porate governance bodies independence

HUMAN RIGHTS PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES HR1 Policies and guidelines dealing with human rights HR2 Consideration of human rights impacts in making business decisions HR3 Policies/procedures to evaluate human rights Human rights recognized, observed and em- performance within supply chain bedded in the Ugandan’s Constitution. No evi- HR4 Global policy/procedures preventing discrimi- dence of transgressions but Bank’s Policies not nation of any form formally codified. HR5 Policy on freedom of association independent of local laws HR6 Policy excluding child labour HR7 Description of policy to prevent forced and compulsory labour

PRODUCT RESPONSIBILITY PERFORMANCE TOPIC DISCLOSURE DESCRIPTION INDICATORS PAGES PR1 Policy for preserving customer health and 40 - 43 Customers/Environment safety PR2 Product information and labeling policies/pro- 34 - 36 Customers engagement and support/ Finacial cedures products and services

Annual Report & Financial Statements l 2015 46

FINANCIAL REVIEW

The Bank continued its growth momentum in all fronts especially profitability and total assets. This growth has been maintained due to continued focus on strategy execution.

Fabian Kasi, Managing Director.

Annual Report & Financial Statements l 2015 FINANCIAL REVIEW (continued...) 47

FINANCIAL HIGHLIGHTS

37.6% 26.2% 21.5%

Shs101.6 Shs400.6 Shs393.9 billion billion billion NET PROFIT EQUITY CAPITAL REVENUE

5.2% 22.8% 17.5%

65.3% Shs1,020.2 Shs1,380.2 COST TO billion billion INCOME RATIO LOAN ASSETS DEPOSITS

Annual Report & Financial Statements l 2015 Annual Report & Financial Statements l 2015 48 FINANCIAL REVIEW (continued...)

Financial Performance Highlights –Budget Performance

Actual 2015 Budget 2015 Actual 2014 Budget 2014 2015% Shs.‘000’ Shs.‘000’ Shs.‘000’ Shs.‘000’ +/-

Financial data Total assets 1,974,400,355 1,973,577,855 1,635,070,774 1,626,395,968 20.8 Shareholders’ funds 400,625,133 377,918,596 317.501,337 365,899,318 26.2 Total customer deposit 1,380,193,855 1,414,443,439 1,175,115,554 1,080,612,941 17.5 Net loans and advances 1,020,227,352 986,476,641 830,931,969 777,502,181 22.8 Total income 393,900,646 323,554,518 324,298,922 357,837,361 21.5 Total expenses 257,388,615 217,137,789 228,812,880 180,009,703 12.5 Profit before income tax 136,512,031 106,416,728 95,486,042 77,827,658 43.0 Profit after income tax 101,601,248 79,794,882 73,816,511 64,750,341 37.6

Key performance ratios Cost to income ratio 65.3% 71.3% 70.6% 73.4% -5.2 Return on assets 5.6% 4.4% 4.8% 4.7% 0.8 Return on equity 28.3% 23.2% 25.9% 19.1% 2.4 Lending ratio 73.9% 69.7% 70.7% 73.7% 3.2 Total expenses to loan ratio 25.2% 22.0% 27.5% 23.2% -2.3 Capital adequacy ratio (Tier 2) 25.1% 12% 29.4% 12% -4.3

Non-financial data

Number of depositors 1,473,958 1,433,460 1,307,757 1,240,077 12.7

Number of ATMs 157 158 153 147 2.6

Number of Branches 63 66 62 63 1.6

Annual Report & Financial Statements l 2015 FINANCIAL REVIEW (continued...) 49

Statement of Comprehensive The Bank’s net interest margin increased by 0.8% (2014: decreased by 0.8 %) to close at 18.4% (2014: 17.6%). Income Analysis The increase was mainly attributed to a review of interest rate offered to customers following the increase in The Bank’s total income is comprised of interest income, the Central Bank Rate and an increase in rates on Gov- income from commissions and fees and other non-op- ernment securities. The trend of the Bank’s net interest erating income. Total income went up by Shs69.6 bil- income and net interest margin over the last five years is lion in 2015 (2014: 48.7 billion), representing a growth presented below: of 21.5% when compared to 17.7% in 2014. Income moved up as a result of growth in business of both loans Net Interest Income and investments.

Reinvigorating customer service, relationship management, and service processes has been key to the bank’s 2015 performance. The Call Centre has been able to support personal banking complaints and information dissemination. Special attention and care has been given to the top customer tickets. In this regard, there has been an improvement in customer bank interactions and indeed customer satisfaction, which propelled the up- take of the bank products and customer referrals.

In terms of microfinance, the bank has continued to re- Non-interest income: spond to the changing needs of the customers. Contrary to other banks, Centenary Bank is able to lend amounts The Bank’s non-interest income arose from trade financ- in excess of Shs.15m, against untitled land (kibanja) col- ing activities such as letters of credit, transactional activi- lateral. In the same vein, the bank stayed with the mi- ties including bank drafts, funds transfers, mobile money, crofinance loan interest rates in 2015, even when other trading income and revaluation of currency positions and financial institutions were stepping up. exchange income on foreign transactions with customers. Net interest income Net non-interest income: Net interest income, which is the margin between in- 2015 2014 terest income and interest expense, remained the main % % Growth in net non- interest income 13.5 15.6 source of income for the Bank. Net interest income for Net non-interest income as % of 24.6 26.7 the year 2015 was Shs 267.7 billion (2014: Shs 210.5 bil- total operating income lion) and it represents 75.4% of operating income(2014: 73.3%). Net non-interest income rose to Shs 87.1 billion (2014: Shs 76.7 billion) following growth in fee and commis- 2015 2014 % % sion income by 12.6% (2014: 12.3%). This growth was Growth in net interest income 27.2 20.1 mainly driven by higher transaction volumes initiated Net interest margin 18.4 17.6 through customer interactions with the branches and expanded ATM network. The bank‘s trade finance and Net interest income growth of 27.2 % was achieved. treasury activities increased during the year. Income benefited from strong growth in assets of 20.8% in 2015 (2014: 12.8%). The growth was also attributed The trend of the Bank’s net non-interest income as per to faster growth in loans and investments in government percentage of a total income over the last five years is securities. presented below.

Annual Report & Financial Statements l 2015 50 FINANCIAL REVIEW (continued...)

Non Interest Income Credit Loss as a % of Gross Loans and Advances

Despite the increase in value of non-interest Income, the percentage contribution to total income decreased due to faster growth in Total expenses interest income. The objective of 2015 2014 he bank is % % to reverse Growth in total operating expense 12.5 12.0 this trend Change in cost-to-income ratio 5.2 3.6 and increase reliance on Credit impairment charges non-interest Total expenses increased by 12.5% against income growth income. The charge for credit losses for the year 2015 (excluding of 21.5% (2014:12.0% against income growth of 17.7%). interest in suspense) decreased by 39% to Shs 6.9 billion The cost-to-income ratio reduced to 65.3% in 2015 from (2014:11.3 billion). This charge to the statement of com- 70.6% in 2014. The staff costs in 2015 were higher by prehensive income as a percentage of gross loans and ad- 20.3% compared to 2014. Other operating expenses in vances remained at 0.7% (2014: 1.3%). 2015 were higher by 16.0% when compared to 2014.

Credit impairment charges decreased by 0.4% (2014: The decrease in cost-to-income ratio is attributed to the increase by 18.3%). The reduction was due to massive continued focus on efficiency in execution of strategy and recovery strategy and loan quality improvement in 2015 increased staff productivity. compared with 2014. Income and Operating Expenses Credit impairment charges:

2015 2014

Percentage change in the (0.4) 18.3 impairment charge

Credit loss ratio 0.7 1.3

Credit impairment as % 1.9 2.3 of gross loans and advances Non-performing loans 27,454 24,215 (NPL) - millions

Credit loss provision 19,738 19,789 (SOFP) - millions Statement of Financial Position Analysis Credit impairment charge - millions 6,873 11,295 The Bank’s total assets during the year under review increased by 20.8% (2014: 12.8%) due to the expansion in the Bank’s distribution channels by 1 branch, 4 ATMs at 4 locations, completion of Mapeera House and growth in its investments, loan and advances portfolio.

Annual Report & Financial Statements l 2015 FINANCIAL REVIEW (continued...) 51

Net loans and advances accounted for 51.7% (2014: Deposit composition 50.8%) of total assets and registered a 22.8% (2014: Despite the 23.6%) growth to close at Shs 1,020.0 billion in 2015 The number of depositors increased to 1,473,958 in increase up from Shs 830.9 billion in 2014. The loan growth 2015 (2014: 1,307,757). This came as a result of in- in value of was driven by good customer service and increased non-interest creased market efforts to bring in more customers. Income, the lending opportunities in the market arising from in- The current account average balance per account in percentage creased outreach. 2015 decreased to Shs 6.7 million (2014: Shs 7.2 mil- contribu- lion); savings accounts average balance per account in tion to total Customer deposits, which consist of current accounts, income de- savings accounts and time deposits, made up the 2015 increased to Shs 0.7 million (2014: Shs 0.6 mil- creased due Bank’s main sources of funding. These deposits grew lion) and time deposits average balance per account in to faster by 17.5% (2014: 21.7%) to Shs 1,380.2 billion in 2015 2015 increased to Shs 38.8 million (2014: Shs 33.9 mil- growth in lion), signifying an improvement in the savings culture interest in- from Shs 1,175.1 billion in 2014 despite the economic come. The hardships during the year. The good deposit growth by our customers and the bank`s deposit mobilisation objective of is attributed to increased marketing efforts and an in- strategy. he bank is crease in the Bank’s distribution channels. Savings accounts continue to make up the biggest por- to reverse tion of the bank’s deposit liabilities. this trend Deposits and Loans and increase reliance on Deposit Mix (%) non-interest income.

Loan Composition

In accordance with the Bank’s mission, its microfinance segment continues to constitute over 50% of loans and advances. For the year ended December Funding mix 2015, Micro-finance loans were 57% of the gross loans and advances (2014:59%). The number of to- The funding mix has remained rather stable in terms tal borrowers increased to from162, 999 in 2014 to of value. Savings accounts represent 49.0% of total 178,576 in 2015 of which 92,758 (52%) were microfi- funding compared to 48.0% in 2014. The Bank has nance clients (2014: 86,023;53%) been able to maintain a stable deposit mix in 2015 due to an increase in its loyal customer base and deposit Loans Mix (%) mobilisation. Current accounts represent 14.7% of total funding compared to 17.2% for the same period last year. Time deposits constituted 6.2% of total funding compared to 6.7% for 2014. Borrowed and managed funds contribute only 5.7% of the total funding (2014: 5.1%). The bank’s borrowing from EIB increased during the year. The decrease in current account average balance and contribution to total equity and liabilities was due to a decrease in account balances held by Government agencies following a change in Local Government Funding by the Ministry of Finance.

Annual Report & Financial Statements l 2015 52 FINANCIAL REVIEW (continued...)

amounts to reflect their relative risk. At 31st December, 2015, the Bank had a regulatory total capital base of 25.1% (2014: 29.4%) of risk- weighted assets and core capital to risk weighted assets of 24.3% (2014:28.5). Risk weighted assets increased by 26.5% (2014:19.9%) whereas total capital (net of intangible assets) increased by 8.3% (2014:23.1%). This compares favorably with the regulatory requirement of 12.0% and 8% respectively.

The decrease in Capital Adequacy ratio was due to investment in the new core banking system which is expected to go live in 2016.

Total Assets and Shareholder Equity

Equity

Equity, which comprises share capital, share premium and retained earnings, finances 20.3% (2014:19.4%) of the total assets. The level of equity is a function of earnings which are distributed as dividends and amount of earnings which are Analysis of Cashflow Statement ploughed back into the business. The Bank’s policy is to maintain a sustainable dividend growth The bank’s cashflow from operating activities which satisfies shareholders. Dividend payable went up to Shs. 14.0billion in 2015 from Shs. 2.0 during the year represents 25% of Net profit billion in 2014. after tax. The increase was mainly due to increase in business revenue, reduction in interbank borrowing Capital Adequacy and decrease in short-term investments. Cashflows in investing activities increased from The Bank monitors its capital adequacy using Shs. 32.1 billion in 2014 to Shs. 78.1 billion in ratios established by the Bank for International 2015 as a result of a decreased investment in Settlement (BIS) as approved by Bank of Uganda, Mapeera House building. the regulator. The ratios measure capital adequacy by comparing the Bank’s eligible capital Cashflows from financing/(used in) financing ac- with its statement of financial position assets, tivities increased from a net outflow of Shs. 19.8 off-statement of financial position commitments billion to a net inflow of Shs. 10.4 billion in 2015 and market and other risk positions at weighted due to additional borrowings.

Annual Report & Financial Statements l 2015 53 AUDITED FINANCIAL STATEMENTS

Centenary Bank registered growth and excellent performance despite the changing trends in banking, increasing cost of doing business, competition and tough macro-economic conditions.

Professor John Ddumba-Ssentamu, Chairman of the Board

Annual Report & Financial Statements l 2015 54 AUDITED FINANCIAL STATEMENTS (continued...)

DIRECTORS’ REPORT

Principal activities Centenary Rural Development Bank (“The Bank or Centenary Bank”) provides a range of banking and related financial services especially to the economically disadvantaged people in rural areas. The Bank is an approved and licensed financial institution under the Financial Institutions Act 2004 and is a member of the Uganda Banker’s Association.

Results The Bank’s results for the year ended 31 December 2015 are shown in the statement of comprehensive income.

Dividend The directors recommend payment of dividends for the year ended 31 December 2015 of Shs 25,517 million (2014: Shs 18,477million).

Share capital During the year, no preference shares were issued.

Directors and directors’ interest The directors who held office during the year and to the date of this report were as follows:

Prof. John Ddumba Ssentamu Board Chairman Mr. Fabian Kasi Managing Director Dr. Simon M.S. Kagugube Executive Director Mr. Jacco Minnaar Member (Chairman ALCO Committee until Sept. 2015) Mr. Kimanthi Mutua Member (Chairman IT Strategy Committee & ALCO wef Q4 2015) Dr. Peter Ngategize Member (Chairman Credit Committee & Risk Management Committee) Mr. Henry Kibirige Member (Chairman Audit Committee) Mr. Andrew Obol Member (Chairman Compensation and Human Resources Committee) Mt. Rev. Dr. Cyprian K. Lwanga Member Mt. Rev. Paul Bakyenga Member Mr. Rene Ehrmann Member (Until June 2015)

None of the directors held any beneficial interest in the ordinary share capital of the Bank as at 31 December 2015.

Auditors Ernst & Young have expressed their willingness to continue as external auditors in accordance with section 67 of the Financial Institutions Act 2004.

Management by third parties None of the business of the Bank was managed by a third party or a company in which a director had an interest during the financial year.

Annual Report & Financial Statements l 2015 AUDITED FINANCIAL STATEMENTS (continued...) 55

Risk management Managing risk is an integral part of the Bank’s business. The Board of Directors is ultimately responsible for risk management and has established policies and procedures to control and monitor risk throughout the Bank.

Corporate Social Investment Statement The Bank is focused on achieving strong sustainable financial returns while promoting a more decent, dignified and kinder society. We commit considerable amounts of resources every year to the humani- tarian cause both directly and indirectly through our pricing and product mix. The Bank has adopted the reporting mechanism developed by the Global Reporting Initiatives (GRI) in an attempt to be transparent about our performance on the triple bottom line of people, property and planet.

Retirement benefits The Bank contributes to a retirement benefits scheme covering all of its employees. On attaining the retirement age or honorably leaving the service of the Bank, all permanent staff are eligible for terminal benefits applicable to them.

By order of the Board:

Mrs. Peninnah T Kasule COMPANY SECRETARY

Annual Report & Financial Statements l 2015 56 AUDITED FINANCIAL STATEMENTS (continued...)

DIRECTORS’ RESPONSIBILITY FOR FINANCIAL REPORTING

The Bank’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of Uganda, 2012 and Financial Institutions Act 2004, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

The directors’ responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of these financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Under the Companies Act of Uganda, the directors are required to prepare financial statements for each year that give a true and fair view of the state of affairs of the Bank as at the end of the financial year and of the operating results of the Bank for that year. It also requires the directors to ensure the Bank keeps proper accounting records that disclose with reasonable accuracy the financial position of the Bank.

The directors accept responsibility for the financial statements, which have been prepared using appropriate accounting policies supported by reasonable and prudent judgments and estimates, in conformity with Interna- tional Financial Reporting Standards, the Companies Act of Uganda, 2012 and Financial Institutions Act 2004. The directors are of the opinion that the financial statements give a true and fair view of the state of the financial affairs and the profit and cash flows for the year ended 31 December 2015. The directors further accept responsibility for the maintenance of accounting records that 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 Bank’s ability to continue as a going concern and have no reason to believe the business will not be a going concern for the next twelve months from the date of this statement.

The auditor is responsible for reporting on whether the annual financial statements are fairly presented in accordance with the International Financial Reporting Standards, the Companies Act of Uganda, 2012 and Financial Institutions Act 2004.

Approval of the Financial Statements

The financial statements, as indicated above, were approved by the Board of Directors and signed on its behalf on 4th March 2016 by:

Prof. John Ddumba-Ssentamu Mr. Fabian Kasi Mr. Henry Kibirige Mrs. Peninnah T. Kasule CHAIRMAN, BOARD OF DIRECTORS MANAGING DIRECTOR CHAIRMAN, AUDIT COMMITTEE COMPANY SECRETARY

Annual Report & Financial Statements l 2015 AUDITED FINANCIAL STATEMENTS (continued...) 57

REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF CENTENARY RURAL DEVELOPMENT BANK LIMITED

Report on the financial statements

We have audited the accompanying financial statements of Centenary Rural Development Bank Limited, which comprise the statement of financial position as at 31 December 2015, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information as set out on pages 59 to 115.

Directors’ responsibility for the financial statements

The Bank’s directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards and in the manner required by the Companies Act of Uganda, 2012 and the Financial Institutions Act, 2004, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s responsibility

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

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements.

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

Opinion

In our opinion the accompanying financial statements present fairly, in all material respects, the financial position of Centenary Rural Development Bank Limited as at 31 December 2015, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of Uganda, 2012 and the Financial Institutions Act, 2004.

Annual Report & Financial Statements l 2015 58 AUDITED FINANCIAL STATEMENTS (continued...)

Report on other legal requirements

As required by the Companies Act of Uganda, 2012, we report to you, based on our audit that:

i) we have obtained all the information and explanations which, to the best of our knowledge and belief were necessary for the purposes of the audit;

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

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

Certified Public Accountants KAMPALA 8th April 2016

Annual Report & Financial Statements l 2015 AUDITED FINANCIAL STATEMENTS (continued...) 59

Statement of comprehensive income

Note 2015 2014 Shs ‘000 Shs ‘000

Interest income 6(a) 306,784,732 247,573,040 Interest expense 7 (39,108,973) (37,067,293) Net interest income 267,675,759 210,505,747 Fee and commission Income 8 66,990,666 59,516,751 Net interest, fee and commission income 334,666,425 270,022,498 Loss from financial instruments at fair value 6(b) (1,457,185) (505,138) Foreign exchange income 9 9,868,336 6,161,964 Other operating income 10 11,714,097 11,552,305 Operating income 354,791,673 287,231,629

Employee benefits 11 (105,183,750) (87,409,176) Impairment losses on loans and advances 12 (6,872,858) (11,294,916) Depreciation 22(b) (19,243,295) (17,799,524) Amortisation 22(c) (1,202,241) (1,307,456) Operating expenses 13 (85,777,498) (73,934,515) Profit before income tax 136,512,031 95,486,042

Income tax expense 14 (34,910,783) (21,669,531) Profit for the year 101,601,248 73,816,511

Other comprehensive income net of tax - - -

Total comprehensive income, net of tax 101,601,248 73,816,511

Basic earnings per ordinary share (shillings per share) 31 4.059 2.952

Annual Report & Financial Statements l 2015 60 AUDITED FINANCIAL STATEMENTS (continued...)

Statement of financial position

Note 2015 2014 Shs ‘000 Shs ‘000 Assets Cash and balances with Bank of Uganda 15 176,919,896 140,653,147 Placements with other banks 16 92,522,927 49,527,599 Government securities –held for trading 17(a) 31,885,743 24,180,039 Loans and advances to customers 18 1,020,227,352 830,931,969 Government securities –held to maturity 17(b) 409,067,314 412,179,522 Other assets 19 37,930,814 31,667,816 Deferred income tax asset 20 2,548,050 - Deferred expenses 21 1,801,287 9,233,400 Finance lease on leasehold land 22(a) 2,178,446 2,223,977 Property and equipment 22(b) 197,655,135 132,475,944 Intangible assets 22(c) 1,663,391 1,997,361 Total assets 1,974,400,355 1,635,070,774

Liabilities Customer deposits 23 1,380,193,855 1,175,115,554 Deposits from other banks 24 3,071,430 5,456,389 Inter-bank borrowing 25 4,006,082 - Managed funds 26 10,284,689 10,769,684 Borrowed funds 27 102,045,662 72,656,320 Current income tax payable 14 5,137,889 5,259,400 Deferred income tax liability 20 - 300,406 Deferred grants 30 536,587 746,576 Other liabilities 28 66,858,407 46,686,379 Provision for litigation 29 1,640,621 578,729 Total liabilities 1,573,775,222 1,317,569,437

Equity Ordinary share capital 32 25,000,000 25,000,000 Preference share capital 32 116,624 116,624 Share premium 32 1,138,927 1,138,927 Regulatory reserve 34 5,239,369 3,377,657 Proposed dividends 33(b) 25,516,936 18,477,452 Retained earnings 343,613,277 269,390,677 Total equity 400,625,133 317,501,337 Total equity and liabilities 1,974,400,355 1,635,070,774

The financial statements were approved by the Board of Directors and signed on its behalf on 4th March 2016 by:

Prof. John Ddumba-Ssentamu Mr. Fabian Kasi Mr. Henry Kibirige Mrs. Peninnah T. Kasule CHAIRMAN, BOARD OF DIRECTORS MANAGING DIRECTOR CHAIRMAN, AUDIT COMMITTEE COMPANY SECRETARY

Annual Report & Financial Statements l 2015 AUDITED FINANCIAL STATEMENTS (continued...) 61

Statement of changes in equity

Year ended December 2015 Note Ordinary Preference Share Regulatory Retained Proposed TOTAL shares shares premium Reserve profits dividends Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000

At 1 January 2015 25,000,000 116,624 1,138,927 3,377,657 269,390,677 18,477,452 317,501,337

Total comprehensive income - - - - 101,601,248 - 101,601,248

Transfer to regulatory reserve 34 - - - 1,861,712 (1,861,712 ) - -

Dividend paid 33 (a) - - - - - (18,477,452) (18,477,452)

Proposed dividends 33 (b) - - - - (25,516,936) 25,516,936 -

At 31 December 2015 25,000,000 116,624 1,138,927 5,239,369 343,613,277 25,516,936 400,625,133

Year ended December 2014 Note Ordinary Preference Share Regulatory Retained Proposed TOTAL shares shares premium Reserve profits dividends Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000

At 1January 2014 25,000,000 116,624 1,138,927 1,822,018 215,607,257 9,652,245 253,337,071

To tal comprehensive income - - - - 73,816,511 - 73,816,511

Transfer to regulatory reserve 34 - - - 1,555,639 (1,555,639) - -

Dividend paid 33 (a) - - - - - (9,652,245) (9,652,245)

Proposed dividends 33 (b) - - - - (18,477,452) 18,477,452 -

At 31 December 2014 25,000,000 116,624 1,138,927 3,377,657 269,390,677 18,477,452 317,501,337

Annual Report & Financial Statements l 2015 62 AUDITED FINANCIAL STATEMENTS (continued...)

Statement of cash flows

Note 2015 2014 Shs ‘000 Shs ‘000 Cash flows from operating activities Interest receipts 283,657,004 237,844,632 Interest payments (37,320,999) (40,918,505) Fee and commission income 69,671,724 71,679,028 Other income received 10,490,357 9,430,404 Recoveries from loans previously written off 10 4,063,117 3,074,268 Payments to employees (101,621,113) (88,188,005) Payments to suppliers and other payments (76,164,903) (67,874,111) Grants received 30 421,187 758,073 Income tax paid 14 (37,880,750) (20,355,351) Cash flows from operating activities before changes in operating assets and liabilities 115,315,624 105,450,433

Changes in operating assets and liabilities Investments 12,060,603 (65,911,424) Loans and advances to customers 18 (189,295,383) (162,308,211) Other assets 19 (6,217,468) 3,689,596 Customer deposits 23 205,078,301 209,224,360 Deposits from other banks 24 1,621,123 (83,334,524) Other liabilities 28 5,439,038 (4,779,714) 28,686,214 (103,419,917) Net cash flows generated from operating activities 144,001,838 2,030,516

Cash flows from investing activities Additions to deferred expenses 21 (21,105,223) (17,562,349) Additions to property and equipment 22(b) (57,036,694) (14,932,413) Additions to software 22(c) (189,599) - Proceeds from sale of property and equipment 244,800 369,857 Net cash flows used in investing activities (78,086,716) (32,124,905)

Cash flows from financing activities Dividends paid 33(a) (18,477,452) (9,652,245) Proceeds from managed/borrowed funds 26,27 45,583,828 5,677,663 Repayments of managed/borrowed funds 26,27 (16,679,480) (15,909,627) Net cash flows generated from / (used in) financing activities 10,426,896 (19,884,209)

Net increase / (decrease) in cash and cash equivalents 76,342,018 (49,978,598) Net foreign exchange difference 19,574,158 2,529,497 Cash and cash equivalents at 1 January 342,532,018 389,981,119 Cash and cash equivalents at 31 December 35 438,448,194 342,532,018

Annual Report & Financial Statements l 2015 63

NOTES TO THE FINANCIAL STATEMENTS

1. General information

The Bank is incorporated in the Republic of Uganda under the Companies Act 2012 and is domiciled in the Repub- lic of Uganda. The address of its registered office is: Mapeera House Plot 44-46 Kampala Road P. O. Box 1892, Kampala

2. Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated. a. Basis of preparation

The financial statements are prepared in compliance with International Financial Reporting Standards (IFRS). The financial statements are presented in the functional currency, Uganda Shillings (Shs), rounded to the nearest thou- sand, and prepared on the historical cost basis, except where otherwise stated in the accounting policies below. The preparation of financial statements in conformity with IFRS requires the use of estimates and assumptions. It also requires management to exercise its judgment in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgment or complexity, or where assumptions and estimates are significant to the financial statements, are disclosed in Note 3.

For purposes of reporting under the Companies Act, 2012 of Uganda, the balance sheet in these financial statements is represented by the statement of financial position and the profit and loss account is represented by the statement of comprehensive income.

New and amended standards and interpretations

The accounting policies adopted are consistent with those used in the previous year. The following new and amended standards and interpretations that became effective for the Bank during the year did not have any impact on the accounting policies, financial position or performance of the Bank: • Amendments to IAS 19 Defined Benefit Plans: Employee Contributions • Annual Improvements 2010-2012 Cycle • IFRS 2 Share-based Payment • IFRS 3 Business Combinations • IFRS 8 Operating Segments • IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets • IAS 24 Related Party Disclosures • Annual Improvements 2011-2013 Cycle • IFRS 3 Business Combinations • IFRS 13 Fair Value Measurement • IAS 40 Investment Property

Standards issued but not yet effective The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Bank’s financial statements are disclosed below. The Bank intends to adopt these standards, if applicable, when they become effective.

Annual Report & Financial Statements l 2015 64 NOTES TO THE FINANCIAL STATEMENTS (continued...)

International Financial Reporting Standards and amendments issued but not effective for 31 December 2015 year-end

NUMBER TITLE EFFECTIVE EXECUTIVE SUMMARY DATE

IFRS 9 Financial 1-Jan-18 In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.

The Bank plans to adopt the new standard on the required effective date. During 2015, the Bank has performed a high-level impact assessment of all three aspects of IFRS 9. This preliminary assessment is based on currently available information and may be subject to changes arising from further detailed analyses or additional reasonable and supportable information being made available to the Bank in the future. Overall, the Bank expects no significant impact on its statement of financial position and equity except for the effect of applying the impairment requirements of IFRS 9. The Bank expects a higher loss allowance resulting in a negative impact on equity and will perform a detailed assessment in the future to determine the extent.

IFRS 15 Revenue from 1-Jan-18 IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts Contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an with entity expects to be entitled in exchange for transferring goods or services to a customer. Customers The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Bank plans to adopt the new standard on the required effective date using the full retrospective method. During 2015, the Bank performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more detailed ongoing analysis. Furthermore, the Bank is considering the clarifications issued by the IASB in an exposure draft in July 2015 and will monitor any further developments.

The Bank is still assessing the impact the new standard will have on its revenue.

IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The new revenue standard will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Bank plans to adopt the new standard on the required effective date using the full retrospective method. During 2015, the Bank performed a preliminary assessment of IFRS 15, which is subject to changes arising from a more detailed ongoing analysis. Furthermore, the Bank is considering the clarifications issued by the IASB in an exposure draft in July 2015 and will monitor any further developments.

IFRS 16 Leases 1-Jan-19 The IASB issued IFRS 16 Leases on 13 January 2016. The scope of the new standard includes leases of all assets, with certain exceptions. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

Key features • The new standard requires lessees to account for all leases under a single on-balance sheet model (subject to certain exemptions) in a similar way to finance leases under IAS 17. • Lessees recognise a liability to pay rentals with a corresponding asset, and recognise interest expense and depreciation separately. • The new standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computer) and short-term leases (i.e., leases with a lease term of 12 months or less). • Reassessment of certain key considerations (e.g., lease term, variable rents based on an index or rate, discount rate) by the lessee is required upon certain events. • Lessor accounting is substantially the same as today’s lessor accounting, using IAS 17’s dual classification approach.

The new standard is effective for annual periods beginning on or after 1 January 2019. Early application is permitted, but not before an entity applies IFRS 15. The new standard permits a lessee to choose either a full retrospective or a modified retrospective transition approach.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 65

The standards issued but not yet effective which the Bank down are deferred (together with related direct costs) does not expect to have an impact on the financial state- and recognised as an adjustment to the effective interest ments are listed below: rate on the loan. Other fees and commissions include; Loan and lease pro- • IAS 14 Regulatory Deferral Accounts cessing fees, Commitment Fees Overdraft to Customers, • Amendments to IFRS 11 Joint Arrangements: Ac- commissions on Advance Payment Guarantees, bid bonds counting for Acquisitions of Interests & Guarantees, drafts Payable, bills Payable, Inter-branch, • Amendments to IAS 16 and IAS 38: Clarification of RTGS /EFT Transfers, Cheques, uncleared effects and Acceptable Methods of Depreciation and Amorti- ledger fees. sation • Amendments to IAS 16 and IAS 41 Agriculture: d. Translation of foreign currencies Bearer Plants • Amendments to IAS 27: Equity Method in Separate The accounting records are maintained in the currency Financial Statements of the primary economic environment in which the Bank • Amendments to IFRS 10 and IAS 28: Sale or Con- operates, Uganda Shillings (“the functional currency”). tribution of Assets between an Investor and its As- Transactions in foreign currencies during the year are con- sociate or Joint Venture verted to Uganda shilling using the exchange rates prevail- • Annual Improvements 2012-2014 Cycle ing at the dates of the transaction. Foreign exchange gains • IFRS 5 Non-current Assets Held for Sale and Dis- and losses resulting from the settlement of such transac- continued Operations tions and from the translation at year-end exchange rates • IFRS 7 Financial Instruments: Disclosures of monetary assets and liabilities denominated in foreign • IAS 19 Employee Benefits currencies are recognised in profit or loss. • IAS 34 Interim Financial Reporting • Amendments to IAS 1 Disclosure Initiative Non–monetary items that are measured in terms of his- • Amendments to IFRS 10, IFRS 12 and IAS 28 Invest- torical cost in a foreign currency are translated using the ment Entities: Applying the Consolidation Excep- spot exchange rates as at the date of recognition. tion e. Financial instruments b. Interest income and expense A financial instrument is any contract that gives rise to a fi- Interest income and expense on all interest bearing in- nancial asset of one entity and a financial liability or equity struments are recognised using the effective interest instrument of another entity. method in profit or loss. The effective interest method is a method of calculating i) Financial assets the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense Initial recognition and measurement over the relevant period. The effective interest rate is the Financial assets are classified, at initial recognition, as fi- rate that exactly discounts financial instruments estimated nancial assets at fair value through profit or loss, loans and future cash payments or receipts through its expected life receivables, held-to-maturity investments or available- or, where appropriate, a shorter period, to the net car- for-sale financial assets. All financial assets are recognised rying amount. initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction Once a financial asset or a group of similar financial assets costs that are attributable to the acquisition of the finan- has been written down as a result of an impairment loss, cial asset. Purchases or sales of financial assets that re- interest income is recognised based on the rate of inter- quire delivery of assets within a time frame established by est that was used to discount the future cash flows for the regulation or convention in the market place (regular way purpose of measuring the impairment loss. trades) are recognised on the trade date, i.e., the date that the Bank commits to purchase or sell the asset. c. Fees and commission income Subsequent measurement Fees and commissions are generally recognised on an ac- For purposes of subsequent measurement financial assets crual basis when the service has been provided. Loan are classified in four categories: commitment fees for loans that are likely to be drawn • Financial assets at fair value through profit or loss

Annual Report & Financial Statements l 2015 66 NOTES TO THE FINANCIAL STATEMENTS (continued...)

• Loans and receivables calculated by taking into account any discount or • Held-to-maturity investments premium on acquisition and fees or costs that are • Available-for-sale financial investments an integral part of the EIR. The EIR amortisation is included as interest income in profit or loss. The Financial assets at fair value losses arising from impairment are recognised in through profit or loss profit or loss as finance costs. Financial assets at fair value through profit or loss include financial assets held for trading and finan- Available-for-sale (AFS) financial investments cial assets designated upon initial recognition at AFS financial investments include equity invest- fair value through profit or loss. Financial assets ments and debt securities. Equity investments are classified as held for trading if they are ac- classified as AFS are those that are neither classi- quired for the purpose of selling or repurchasing fied as held for trading nor designated at fair value in the near term. Derivatives, including separated through profit or loss. Debt securities in this cat- embedded derivatives are also classified as held egory are those that are intended to be held for for trading unless they are designated as effective an indefinite period of time and that may be sold hedging instruments as defined by IAS 39. The in response to needs for liquidity or in response Bank has designated its financial assets as held for to changes in the market conditions. The Bank did trading, at fair value through profit or loss. Finan- not have any available-for-sale assets as at 31 De- cial assets at fair value through profit or loss are cember 2015 or 2014. carried in the statement of financial position at fair value with net changes in fair value presented as Derecognition finance costs (negative net changes in fair value) or A financial asset (or, where applicable, a part of a finance income (positive net changes in fair value) financial asset or part of a group of similar finan- in profit or loss. cial assets) is primarily derecognised (i.e. removed from the Bank’s statement of financial position) Loans and receivables when: This category is the most relevant to the Bank. • The rights to receive cash flows from the Loans and receivables are non-derivative finan- asset have expired, or cial assets with fixed or determinable payments that are not quoted in an active market. After • The Bank has transferred its rights to re- initial measurement, such financial assets are sub- ceive cash flows from the asset or has as- sequently measured at amortised cost using the sumed an obligation to pay the received effective interest rate (EIR) method, less impair- cash flows in full without material delay to a ment. Amortised cost is calculated by taking into third party under a ‘pass-through’ arrange- account any discount or premium on acquisition ment; and either and fees or costs that are an integral part of the (a) The Bank has transferred substantially all the EIR. The EIR amortisation is included in finance risks and rewards of the asset, or income in profit or loss. The losses arising from (b) The Bank has neither transferred nor retained impairment are recognised in profit or loss. This substantially all the risks and rewards of the category generally applies to loans and advances asset, but has transferred control of the as- to customers, cash and balances with Bank of set Uganda, placements with other banks and treasury bills. When the Bank has transferred its rights to receive cash flows from an asset or has entered into Held-to-maturity investments a pass-through arrangement, it evaluates if and to Non-derivative financial assets with fixed or de- what extent it has retained the risks and rewards terminable payments and fixed maturities are of ownership. When it has neither transferred nor classified as held to maturity when the Bank has retained substantially all of the risks and rewards the positive intention and ability to hold them to of the asset, nor transferred control of the asset, maturity. After initial measurement, held to matu- the Bank continues to recognise the transferred rity investments are measured at amortised cost asset to the extent of the Bank’s continuing in- using the EIR, less impairment. Amortised cost is volvement. In that case, the Bank also recognises

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an associated liability. The transferred asset and the as- or loss when the liabilities are derecognised as well sociated liability are measured on a basis that reflects as through the EIR amortisation process. Amortised the rights and obligations that the Bank has retained. cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are ii) Financial liabilities an integral part of the EIR. The EIR amortisation is included as finance costs in profit or loss. This cat- Initial recognition and measurement egory generally applies to interest-bearing loans and Financial liabilities are classified, at initial recognition, borrowings, customer deposits, deposits from other as financial liabilities at fair value through profit or loss, banks, and managed funds loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, Derecognition as appropriate. All financial liabilities are recognised in- A financial liability is derecognised when the obligation itially at fair value and, in the case of loans and borrow- under the liability is discharged or cancelled, or ex- ings and payables, plus directly attributable transaction pires. When an existing financial liability is replaced by costs. The Bank’s financial liabilities include customer another from the same lender on substantially differ- deposits, deposits from other banks, loans and bor- ent terms, or the terms of an existing liability are sub- rowings and managed funds. stantially modified, such an exchange or modification is treated as the de-recognition of the original liability Subsequent measurement and the recognition of a new liability. The difference in The measurement of financial liabilities depends on the respective carrying amounts is recognised in profit their classification, as described below: or loss.

Financial liabilities at fair value Offsetting through profit or loss Financial assets and liabilities are offset and the net Financial liabilities at fair value through profit or loss amount presented in the statement of financial posi- include financial liabilities held for trading and finan- tion when, and only when, the bank has a currently en- cial liabilities designated upon initial recognition as at forceable legal right to set off the recognised amounts fair value through profit or loss. Financial liabilities are and it intends either to settle on a net basis or to real- classified as held for trading if they are incurred for ise the asset and settle the liability simultaneously. In- the purpose of repurchasing in the near term. This come and expenses are presented on a net basis only category also includes derivative financial instruments when permitted under IFRSs. entered into by the Bank that are not designated as hedging instruments in hedge relationships as defined f. Impairment of financial assets by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated The Bank assesses at each reporting date whether as effective hedging instruments. there is objective evidence that a financial asset or a group of financial assets is impaired. A financial asset Gains or losses on liabilities held or a group of financial assets is impaired and impair- for trading are recognised in profit or loss ment losses are incurred if, and only if, there is objec- Financial liabilities designated upon initial recognition tive evidence of impairment as a result of one or more at fair value through profit or loss are designated at events that occurred after initial recognition of the as- the initial date of recognition, and only if the criteria in set (a “loss event”) and that loss event (or events) has IAS 39 are satisfied. The Bank has not designated any an impact on the estimated future cash flows of the financial liability as at fair value through profit or loss. financial asset or group of financial assets that can be reliably estimated. Loans and borrowings This is the category most relevant to the Bank. After Objective evidence that a financial asset or group of initial recognition, interest-bearing loans and borrow- assets is impaired includes observable data that comes ings, customer deposits and managed funds are sub- to the attention of the Bank about the following loss sequently measured at amortised cost using the EIR events: method. Gains and losses are recognised in profit The estimated period between a loss occurring and its

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identification is determined by management for carried at amortised cost has been incurred, each identified portfolio. In general, the periods the amount of the loss is measured as the dif- used vary between 3 month and 6 months. ference between the asset’s carrying amount and • significant financial difficulty of the bor- the present value of estimated future cash flows rower (excluding future credit losses that have not been • a breach of contract, such as default or incurred) discounted at the financial instrument’s delinquency in interest or principal repay- original effective interest rate. ments; The carrying amount of the asset is reduced • the granting to the borrower, for econom- through the use of an allowance account and the ic or legal reasons relating to the borrow- amount of the loss is recognised in profit or loss. er’s financial difficulty, a concession that If a loan or held-to-maturity investment has a the lender would not otherwise consider; variable interest rate, the discount rate for meas- • it becoming probable that the borrower uring any impairment loss is the current effective will enter bankruptcy or other financial re- interest rate determined under the contract. As organization; a practical expedient, the Bank may measure • the disappearance of an active market for impairment on the basis of an instrument’s fair that financial asset because of financial dif- value using an observable market price. ficulties; or The calculation of the present value of the esti- • observable data indicating that there is a mated future cash flows of a collateralised finan- measurable decrease in the estimated fu- cial asset reflects the cash flows that may result ture cash flows from a group of financial from foreclosure less costs for obtaining and sell- assets since the initial recognition of those ing the collateral, whether or not foreclosure is assets, although the decrease cannot yet probable. be identified with the individual financial assets in the group, including: For the purposes of a collective evaluation of • adverse changes in the payment status of impairment, financial assets are grouped on the borrowers in the group; or basis of similar credit risk characteristics. Those • National or local economic conditions that characteristics are relevant to the estimation of correlate with defaults on the assets in the future cash flows for groups of such assets by group. being indicative of the debtors’ ability to pay all amounts due according to the contractual terms Assets carried at amortised cost of the assets being evaluated. The Bank first assesses whether objective evi- Provisions for impairment on assets assessed dence of impairment exists individually for fi- individually are referred to as specific provi- nancial assets that are individually significant, and sions, whilst provisions for such losses on assets individually or collectively for financial assets that assessed collectively are referred to as general are not individually significant. provisions. If the Bank determines no objective evidence When a loan is uncollectible, it is written off of impairment exists for an individually assessed against the related provision for loan impairment. financial asset, whether significant or not, it in- Such loans are written off after all the neces- cludes the asset in a group of financial assets with sary procedures have been completed and the similar credit risk characteristics and collectively amount of the loss has been determined. Subse- assesses them for impairment. Assets that are in- quent recoveries of amounts previously written dividually assessed for impairment and for which off are reported as other income in the state- an impairment loss is or continues to be recog- ment of comprehensive income. nised are not included in a collective assessment If, in a subsequent period, the amount of the im- of impairment. pairment loss decreases and the decrease can be related objectively to an event occurring after If there is objective evidence that an impairment the impairment was recognised (such as an im- loss on loans or held-to-maturity investments

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 69

provement in the debtor’s credit rating), the previous- the asset is not impaired. ly recognised impairment loss is reversed by adjusting • If fair value less costs of disposal cannot be de- the allowance account. The amount of the reversal is termined, then recoverable amount is value in recognised in profit or loss. use. In addition to the measurement of impairment losses • For assets to be disposed of, recoverable on loans and advances in accordance with IFRS as set amount is fair value less costs of disposal. out above, the Bank is required by the Financial Insti- tutions Act 2004 to estimate losses on loans and ad- The Bank looks at both external and internal indica- vances as follows: tors to determine if an asset is impaired.

Specific provision for the loans and advances consid- External Indicators: ered to be non-performing (impaired) based on the • Decline in market value criteria and classification of such loans and advances • Negative changes in technology, markets, econ- established by the Bank of Uganda, as follows: omy, or laws • Increases in market interest rates Commercial, Salary, Home Improvements and • Net assets of the Bank higher than market capi- Micro finance loans above 5 million talisation • Substandard loans with arrears period between 91 to 180 days – 20% Internal Indicators: • Doubtful loans with arrears period between • Obsolescence or physical damage of the asset 180 to 365 days – 50% • Asset is idle as part of a restructuring or held for • Loss with arrears period exceeding 365 days – disposal 100% provision • Worse economic performance than expected Microfinance loans up to 5 million • Substandard loans with arrears period between If an impairment loss is determined, the loss is recog- 30 to 59 days – 25% nised in profit or loss. • Doubtful loans with arrears period between 60 A previously recognised impairment loss is reversed to 89 days – 50% only if there has been a change in the assumptions used • Loss with arrears period exceeding 89 days – to determine the asset’s recoverable amount since the 100% provision last impairment loss was recognised. The reversal is • General provision of 1% of credit facilities less limited so that the carrying amount of the asset does specific provision and suspended interest not exceed its recoverable amount, nor exceed the In the event that provisions computed in accordance carrying amount that would have been determined, with the Financial Institution Act 2004 materially ex- net of depreciation, had no impairment loss been rec- ceed provisions determined in accordance with IFRS, ognised for the asset in prior years. Such reversal is the excess is accounted for as an appropriation of re- recognized profit or loss. tained earnings. g. Impairment of non-financial h. Property and equipment assets Recognition and measurement Items of property and equipment are measured at At the end of each reporting period, the Bank assesses cost less accumulated depreciation and accumulated whether there is any indication that an asset is im- impairment losses. paired, that is, whether its carrying amount is higher than its recoverable amount). If there is an indication Cost includes expenditures that are directly attribut- that an asset is impaired, then the asset’s recoverable to the acquisition of the asset. The cost of self- able amount is calculated. [IAS 36.9]The recoverable constructed assets includes the cost of materials and amount is determined by assessing; direct labour, any other costs directly attributable to • If the fair value less costs of disposal or value in bringing the assets to a working condition for their in- use is more than carrying amount, then it is not tended use, the costs of dismantling and removing the necessary to calculate the other amount since items and restoring the site on which they are located and capitalised borrowing costs. Purchased software

Annual Report & Financial Statements l 2015 70 NOTES TO THE FINANCIAL STATEMENTS (continued...)

that is integral to the functionality of the related financial instruments measured at amortised cost equipment is capitalised as part of that equipment. are disclosed in Note 4(c). When parts of an item of property or equipment Fair value is the price that would be received to sell have different useful lives, they are accounted for an asset or paid to transfer a liability in an orderly as separate items (major components) of property transaction between market participants at the and equipment. measurement date. The fair value measurement is The gain or loss on disposal of an item of property based on the presumption that the transaction to and equipment is determined by comparing the sell the asset or transfer the liability takes place ei- proceeds from disposal with the carrying amount of ther: the item of property and equipment, and are recog- • In the principal market for the asset or liabil- nised net within other income in profit or loss. ity, or • In the absence of a principal market, in the Subsequent costs most advantageous market for the asset or li- The cost of replacing a part of an item of property ability or equipment is recognised in the carrying amount The principal or the most advantageous market of the item if it is probable that the future eco- must be accessible to by the Bank. The fair value nomic benefits embodied within the part will flow of an asset or a liability is measured using the as- to the bank and its cost can be measured reliably. sumptions that market participants would use when The costs of the day-to-day servicing of property pricing the asset or liability, assuming that market and equipment are recognised in profit or loss as participants act in their economic best interest. incurred. A fair value measurement of a non-financial asset Depreciation takes into account a market participant’s ability to Depreciation is recognised in profit or loss on a generate economic benefits by using the asset in its straight-line basis over the estimated useful lives highest and best use or by selling it to another mar- of each part of an item of property and equipment ket participant that would use the asset in its highest since this most closely reflects the expected pattern and best use. The Bank uses valuation techniques of consumption of the future economic benefits that are appropriate in the circumstances and for embodied in the asset. Leased assets under finance which sufficient data are available to measure fair leases are depreciated over the shorter of the lease value, maximising the use of relevant observable in- term and their useful lives. puts and minimising the use of unobservable inputs. The estimated useful lives for the current and com- All assets and liabilities for which fair value is meas- parative periods are as follows: ured or disclosed in the financial statements are categorised within the fair value hierarchy, described Leased buildings Shorter of 50 years as follows, based on the lowest level input that is or lease period significant to the fair value measurement as a whole: Computer hard ware 3 years Furniture, fixtures and fittings 5 years • Level 1 — Quoted (unadjusted) market pric- Motor vehicles & cycles 4 years es in active markets for identical assets or li- Generators & office equipment 8 years abilities • Level 2 — Valuation techniques for which the lowest level input that is significant to the Depreciation methods, useful lives and residual val- fair value measurement is directly or indirect- ues are reassessed at each financial year-end and ly observable adjusted prospectively, if appropriate. • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable i. Fair value measurement For assets and liabilities that are recognised in the financial statements on a recurring basis, the Bank The Bank measures some financial instruments at determines whether transfers have occurred be- fair value at each reporting date. Also, fair values of tween levels in the hierarchy by re-assessing cat-

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egorisation (based on the lowest level input that is amounts for financial reporting purposes at the re- significant to the fair value measurement as a whole) porting date. Deferred income tax liabilities are rec- at the end of each reporting period. ognised for all taxable temporary differences, except: • When the deferred income tax liability arises j. Intangible assets from the initial recognition of goodwill or an asset or liability in a transaction that is not a busi- Computer software ness combination and, at the time of the trans- Acquired computer software licenses are capitalised action, affects neither the accounting profit nor on the basis of the costs incurred to acquire and bring taxable profit or loss to use the specific software. These costs are amor- • In respect of taxable temporary differences as- tised on the basis of the expected useful lives of 3 sociated with investments in subsidiaries, asso- years. ciates and interests in joint ventures, when the The useful life of the new Core Banking System timing of the reversal of the temporary differ- (CBS), was revised to 7 years w.e.f year 2014. ences can be controlled and it is probable that Costs associated with developing or maintaining the temporary differences will not reverse in computer software programs are recognized as an the foreseeable future. expense as incurred. Costs that are directly associ- Deferred tax assets are recognised for all de- ated with the production of identifiable and unique ductible temporary differences, the carry for- software products controlled by the bank, and that ward of unused tax credits and any unused tax will probably generate economic benefits exceeding losses. Deferred tax assets are recognised to costs beyond one year, are recognized as intangible the extent that it is probable that taxable profit assets. Direct costs include software development will be available against which the deductible employee costs and an appropriate portion of rel- temporary differences, and the carry forward evant overheads. of unused tax credits and unused tax losses can be utilised, except: k. Tax • When the deferred tax asset relating to the deductible temporary difference arises from Current income tax the initial recognition of an asset or liability in Income tax expense is the aggregate of the charge to a transaction that is not a business combination profit or loss in respect of current income tax and de- and, at the time of the transaction, affects nei- ferred income tax. Current income tax is the amount ther the accounting profit nor taxable profit or of income tax payable on the taxable profit for the loss . year determined in accordance with the Ugandan Income Tax Act. Current income tax assets • In respect of deductible temporary differences and liabilities for the current period are measured at associated with investments in subsidiaries, the amount expected to be recovered from or paid associates and interests in joint ventures, de- to the taxation authorities. ferred tax assets are recognised only to the extent that it is probable that the temporary Current income tax relating to items recognised di- differences will reverse in the foreseeable fu- rectly in equity or other comprehensive income is ture and taxable profit will be available against recognised directly in equity or other comprehensive which the temporary differences can be uti- income and not in profit or loss. Management period- lised. ically evaluates positions taken in the tax returns with respect to situations in which the tax regulations are Deferred income tax relating to items recognised subject to interpretation and establishes provisions outside profit or loss is recognised outside profit or where appropriate. loss. Deferred income tax items are recognised in correlation to the underlying transaction either in Deferred income tax OCI or directly in equity. Deferred income tax is provided using the liabil- The carrying amount of deferred tax assets is re- ity method on temporary differences between the viewed at each reporting date and reduced to the tax bases of assets and liabilities and their carrying extent that it is no longer probable that sufficient tax-

Annual Report & Financial Statements l 2015 72 NOTES TO THE FINANCIAL STATEMENTS (continued...)

able profit will be available to allow all or part of the de- m. Contingent liabilities and ferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and commitments are recognised to the extent that it has become probable that future taxable profits will allow the deferred Contingent liabilities and commitments comprised tax asset to be recovered. letters of credit, acceptances, guarantees and commitments to extend credit are not included in assets Deferred income tax assets and deferred income tax and liabilities in note 36. They are accounted for as liabilities are offset if a legally enforceable right exists off-statement of financial position transactions and are to set off current income tax assets against current in- disclosed as contingent liabilities and commitments. come tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. n. Share capital

Withholding tax Ordinary shares are classified as ‘share capital’ in equity. Withholding tax is deducted at source at 20% on in- Any premium received over and above the par value come earned on treasury bills and bonds. This amount of the shares is classified as ‘share premium’ in equity. is included under the income tax charge for the year. Preference shares (irredeemable) classified as share capital in equity. Value Added tax Dividends on shares are charged to equity in the pe- Value added tax is chargeable at a rate of 18%. Output riod in which they are declared. Proposed dividends VAT is the value added tax you calculate and charge on are shown as a separate component of equity until de- your own sales of goods and services if you are regis- clared. tered. Input VAT is the value added tax added to the price when you purchase goods or services liable to VAT. VAT payable arises when the output VAT is in ex- o. Cash and cash equivalents cess of input VAT. Cash and cash equivalents include cash at hand, deposits held at call with banks, other short term highly liquid l. Employee benefits investments with original maturities of three months or less, including: cash and balances with the Bank of The Bank and all its employees contribute to the Na- Uganda, Treasury and other eligible bills, and amounts tional Social Security Fund, which is a defined contribu- due from other banks. Cash and cash equivalents in- tion scheme. clude the cash reserve requirement held with the Bank The Bank also operates a defined contribution benefits of Uganda. scheme for its employees. The Bank has no legal or constructive obligation to pay further contributions if p. Comparatives the fund does not hold sufficient assets to pay all em-

ployees the benefits relating to employee service in the No comparative figures have been adjusted. current and prior periods. The assets of the scheme are held in separate trustee administered funds, which are funded by contributions from both the Bank and q. Grants employees. Grants are recognised where there is reasonable as- The Bank’s contributions to the defined contributions surance that the grant will be received and all attached schemes are charged to profit or loss in the year in conditions will be complied with. When the grant re- which they relate. lates to an expense item it is recognized as income over The estimated monetary liability for employees’ ac- the period necessary to match the grant on a system- crued annual leave entitlement at the reporting date is atic basis to the costs that it is intended to compensate. recognised as an expense accrual. Where the grant relates to an asset, it is recognized as deferred income and released to income in equal

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 73

amounts over the expected useful life of the related into finance lease transactions as a lessor (Note asset. 18(b) – Finance Leases). r. Provisions 3 Critical Accounting Estimates and Judgments in Applying A provision is recognised if, as a result of a past event, the Bank has a present legal or constructive obliga- Accounting Policies tion that can be estimated reliably, it is probable that an outflow of economic benefits will be required to The Bank makes estimates and assumptions that settle the obligation and a reliable estimate can be affect the reported amounts of assets and liabilities made of the amount of obligation. within the next financial year. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including ex- s. Managed funds and pectations of future events that are believed to be borrowed funds reasonable under the circumstances. The Bank manages funds on behalf of others in terms of specific agreements. The funds are recorded as a i. Tax liability on receipt of the funds and the correspond- The Bank is subject to various government ing investments (as per the agreement) are recorded taxes under the Ugandan tax laws. Significant under cash and cash equivalents or loans and advanc- judgment is required in determining the pro- es to customers. Details of the funds are included in vision for income taxes. Significant estimates note 26 and 27. and judgments are required in determining the provision for taxes on certain transactions. For t. Leases these transactions, the ultimate tax determination is uncertain during the ordinary course The determination of whether an arrangement is a of business. Where the final tax outcome of lease, or contains a lease, is based on the substance these matters is different from the amounts of the arrangement and requires an assessment of that were initially recorded, such differences whether the fulfilment of the arrangement is de- will impact the current and deferred income pendent on the use of a specific asset or assets and tax assets and liabilities in the period in which the arrangement conveys a right to use the asset. such determination is made. The deferred tax asset /liability is indicated in note 20. Bank as a lessee Leases that do not transfer to the Bank substantially ii Impairment losses on loans and all the risks and benefits incidental to ownership advances of the leased items are operating leases. Operat- The Bank reviews its loan portfolios to assess ing lease payments are recognised as an expense in impairment at least on a quarterly basis. In de- profit or loss on a straight-line basis over the lease termining whether an impairment loss should term. Contingent rental payable is recognised as an be recorded in profit or loss, the Bank makes expense in the period in which they are incurred. judgments as to whether there is any observable data indicating that there is a measurable Bank as a lessor decrease in the estimated future cash flows When assets are leased out under a finance lease, the from a portfolio of loans before the decrease present value of the lease payments is recognised as can be identified with an individual loan in that a receivable. The difference between the gross re- portfolio. This evidence may include observ- ceivable and the present value of the receivable is able data indicating that there has been an recognised as unearned finance income. Lease in- adverse change in the payment status of bor- come is recognised over the term of the lease using rowers in a group, or national or local eco- the net investment method. The Bank has entered nomic conditions that correlate with defaults

Annual Report & Financial Statements l 2015 74 NOTES TO THE FINANCIAL STATEMENTS (continued...)

on assets in the Management uses estimates Level 1: Quoted market price (unadjusted) in an ac- based on historical loss experience for assets tive market for an identical instrument. with credit risk characteristics and objective Level 2: Valuation techniques based on observable evidence of impairment similar to those in inputs, either directly (i.e., as prices) or indirectly the portfolio when scheduling its future cash (i.e., derived from prices). This category includes in- flows. struments valued using: quoted market prices in ac- The methodology and assumptions used for tive markets for similar instruments; quoted prices estimating both the amount and timing of fu- for identical or similar instruments in markets that ture cash flows are reviewed regularly to re- are considered less than active; or other valuation duce any differences between loss estimates techniques where all significant inputs are directly or and actual loss experience. indirectly observable from market data. The carrying amount of loans and advances is Level 3: Valuation techniques using significant un- indicated in note 18(a). observable inputs. This category includes all instruments where the valuation technique includes inputs iii. Held-to-maturity investments not based on observable data and the unobservable The Bank follows the guidance of IAS 39 on inputs have a significant effect on the instrument’s classifying non-derivative financial assets with valuation. This category includes instruments that fixed or determinable payments and fixed ma- are valued based on quoted prices for similar instru- turing as held-to-maturity. This classification ments where significant unobservable adjustments requires significant judgment. In making this or assumptions are required to reflect differences judgment, the Bank evaluates its intention and between the instruments. ability to hold such investments to maturity. The fair value disclosures are included in note 4. If the Bank fails to keep these investments to maturity other than for the specific circumstances – for example, selling a insignificant 4 Financial Risk Management amount close to maturity – it will be required to re-classify the entire class as available-for- The Bank’s activities expose it to variety of financial sale. The investments would therefore be and non-financial risks. These activities involve the measured at fair value and not amortised cost. analysis, evaluation, acceptance and management of The carrying amount of held-to-maturity in- some degree of risk or combination of risks. Taking vestments is indicated in note 17(b). risk is core to the Bank’s business, and the operational risks are inevitable consequences of being in iv. Determining fair values business. The effective management of risk is critical The determination of fair value for financial to earnings and balance sheet growth within Cen- assets and liabilities for which there is no tenary Bank where the culture encourages sound observable market price requires the use of commercial decision making, which adequately bal- valuation techniques. For financial instruments ances risk and reward. The identification and man- that trade infrequently and have little price agement of risk remains a high priority and under- transparency, fair value is less objective, and pins all business activities. requires varying degrees of judgement de- The Bank’s approach to risk management is based pending on liquidity, concentration, uncertain- on a well-established risk, compliance and govern- ty of market factors, pricing assumptions and ance process and relies both on individual responsi- other risks affecting the specific instrument. bility and collective oversight supported by comprehensive reporting. This approach balances strong The Bank measures fair values using the following corporate oversight at Head Office level with risk fair value hierarchy that reflects the significance of management structures within the business units. the inputs used in making the measurements: The Bank has governance standards for all major risk

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 75

types. All standards are applied consistently across • Business risk the Bank and are approved by the Board through • Strategic risk either Bank’s Board Risk Management Committee • Market risk or Board ALCO Committee. • Liquidity risk The standards form an integral part of the Bank’s • Taxation risk governance infrastructure reflecting the expecta- A combination of these risks occurring concurrently tions and requirements of the Board in respect of would be the most likely cause of significant loss. key areas control across the Bank. The standards The Bank’s approach to managing risk on a holistic ensure alignment and consistency in the manner basis therefore ensures that risk types are not man- major risk types across the Bank are identified, aged in isolation. measured, managed, controlled and are reported. The standards underpin the Bank’s governance a) Credit Risk principles, which are: Comprehensive resources, expertise and control Shareholder value are in place to ensure efficient and effective manage- The Bank’s primary objective is to protect and en- ment of credit risk. In lending transactions, credit hance shareholder value. As such the risks to this risk arises through non-performance by counter- objective drive the Bank’s system of internal con- party for facilities used. These facilities are typically trol. loans and advances, including the advancement of securities and contracts to support customer obliga- Embedded tions (such as letters of credit and guarantees). The Bank’s culture reflects its appetite for risk. Risk management is achieved at all levels of the business Approach to managing credit risk through a suitable organisational structure, policies, Credit risk is managed by means of a governance and procedure, and appropriate staff training. Re- structure with clearly defined mandates and del- sponsibility for risk resides at all levels of manage- egated authorities. The Board Risk Committee ment from the Board down through the delegates authority to the Management Credit Risk organisation to individuals in office. Each business Committee for the approval of credit proposals. manager is accountable for managing risk in his or The management further delegates authority within her business area, assisted and supported, where its limits, primarily on a risk adjusted basis. appropriately.

Supported and assured The system of governance and internal control provide management and Board with assurance that risks are being managed appropriately. The designated executives and Board Committees regularly receive and review reports on risks, compliance, governance and control process.

Reviewed The Board of Directors considers the effectiveness of the internal control system and risk management processes, at least annually. The major risks to which the Bank is exposed, including non – financial risks are:- • Credit risk • Operational risk • Compliance risk • Reputation risk

Annual Report & Financial Statements l 2015 76 NOTES TO THE FINANCIAL STATEMENTS (continued...)

Credit Risk Measurement Industry Analysis The Bank analyses its customers per industry using vari- Internal Risk Ratings ous portfolio segmentation techniques. These include The Bank assesses the credit quality and assigns – watch the use of Bank of Uganda categories as well as Interna- and standard for performing loans and substandard, tional Standard Classification (SIC) codes whilst ensur- doubtful and loss for non-performing borrowers. ing compliance with regulatory requirements.

• Agriculture • Manufacturing Standard Items that are fully current and the • Trade and commerce and current: full repayment of the contractual principal and interest amounts are • Transport and utilities expected. • Building and construction • Other services Watch list: Items for which the borrower is ex- periencing difficulties. Ultimate loss The Bank takes on exposure to credit risk which is the is not expected but could occur if risk that a counterparty will be unable to pay amounts in adverse conditions persist. full as and when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount Substandard1 Items that show underlying well de- of risk accepted in relation to one borrower, or groups fined weaknesses that could lead to of borrowers, and to industry segments. probable loss if not corrected. The risk that these items may be impaired Such risks are monitored on a revolving basis and are is probable and the Bank relies to a subject to an annual or more frequent review. Limits on large extent on the available security. the level of credit risk by product, and industry sector are approved by the Board of Directors.

Doubtful1 Items that are considered to be im- The exposure to any one borrower including banks and paired, but are not yet considered fi- brokers is further restricted by sub-limits covering on nal losses because of pending factors, and off-statement of financial position exposures and which may strengthen the quality of the items. daily delivery risk limits in relation to trading items. Ac- tual exposures against limits are monitored daily. Exposure to credit risk is managed through regular anal- 1 Loss Items that are considered to be un- ysis of the ability of borrowers and potential borrowers collectible and where the realization of collateral and institution of legal to meet interest and capital repayment obligations and proceedings have been unsuccess- by changing these lending limits where appropriate. ful. These items are considered of such little value that they should no Exposure to credit risk is also managed in part by ob- longer be included in the net assets taining collateral and corporate and personal guaran- of the Bank. tees, but a significant portion is personal lending where no such security/undertaking can be obtained. 1Classified as impaired for accounting purposes

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 77

Maximum exposure to credit risk before collateral held:

2015 2014 Shs ‘000 Shs ‘000

Credit risk exposure relating to statement of financial position items:

Balances with Bank of Uganda (Note 15) 97,215,868 58,732,147 Placements with other banks (Note 16) 92,522,927 49,527,599 Investment securities – held to maturity (Note 17) 409,067,314 412,179,522 Investment securities – held for trading (Note 17) 31,885,743 24,180,039 Loans and advances (Note 18 (a)) 1,039,965,420 850,721,299 Other assets 29,960,019 22,634,518 1,700,617,291 1,417,975,124

Credit risk exposures relating to off-statement of financial position items:

- Letters of credit, guarantees and performance bonds (Note 36) 31,123,717 25,023,470 - Commitment to extend credit (Note 36) 6,328,088 6,327,176 37,451,805 31,350,646

To tal 1,738,069,096 1,449,325,770

The above table represents the worst case scenario of credit risk exposure to the Bank at 31 December 2015 and 2014, without taking into account any collateral held or other credit enhancements attached. The exposures set out above are based on carrying amounts as reported in the statement of financial position.

As shown above, 59.8% (2014: 58.6%) of the total maximum exposure is derived from loans and advances to banks and customers. Investment in debt securities represents 25.4% (2014: 30.1%) of the total maximum exposure.

The table below shows the collateral coverage for secured loans as at year end. The type of collateral held includes land titles, motor vehicles and chattels.

As at Dec 2015 Total loan Netting off Exposure Collateral portfolio agreements after 51-100% Coverage Shs 000 (cash accured) netting off Shs 000 over 100% Shs000 Shs000

Secured loans 750,896,923 2,410,956 748,485,967 71,811,327 676,674,640 Un secured loans by cash 289,068,497 - 289,068,497 13,807,116 275,261,381

To tal 1,039,965,420 2,410,956 1,037,554,464 85,618,443 951,936,021

As at Dec 2014 Total loan Netting off Exposure Collateral portfolio agreements after 51-100% Coverage Shs 000 (cash accured) netting off Shs 000 over 100% Shs000 Shs000

Secured loans 639,744,629 754,053 638,990,576 35,599,871 603,390,705 Un secured loans by cash 210,976,670 - 210,976,670 15,274,234 195,702,436

To tal 850,721,299 754,053 849,967,246 50,874,105 799,093,141

Annual Report & Financial Statements l 2015 78 NOTES TO THE FINANCIAL STATEMENTS (continued...)

Loans and advances to customers are secured mainly by collateral in the form of charges over land and buildings and/or plant and machinery or corporate guarantees. Micro loans can also be secured by chattels.

Loans and advances are summarised as follows: 2015 2014 Shs ‘000 Shs ‘000

Neither past due nor impaired 973,990,998 791,395,724 Past due but not impaired 38,520,080 35,111,032 Impaired 27,454,342 24,214,543

Gross loans and advances 1,039,965,420 850,721,299 Less: Allowance for impairment (19,738,068) (19,789,330)

Net loans and advances 1,020,227,352 830,931,969

Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Bank resulting from both its loans and advance portfolio and debt securities based on the following:

• The Bank exercises stringent controls over granting new loans. • 93.7% (2014: 93.0%) of the loans and advances portfolio are neither past due nor impaired. • 100.0% (2014: 100.0%) of the investments in debt securities are government securities.

Loans and advances neither past due nor impaired

The quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by reference to the internal rating system adopted by the Bank, as follows:

2015 2014 Shs ‘000 Shs ‘000 Standard 932,918,680 764,504,141 Watch 41,072,318 26,891,583

Total 973,990,998 791,395,724

Loans and advances past due but not impaired

Micro loans that are less than 30 days overdue and other loans that are less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. The gross amounts of loans and advances that were past due but not impaired were as follows:

2015 2014 Shs ‘000 Shs ‘000

Past due up to 30 days 24,011,595 25,395,324 Past due 31-60 days 7,813,362 6,008,760 Past due 61-90 days 6,695,123 3,706,948

Total 38,520,080 35,111,032

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 79

Of the total gross amount of impaired loans, the following amounts have been individually assessed for impairment:

2015 2014 Shs ‘000 Shs ‘000 Loans individually assessed for impairment by category

Commercial loans 7,994,307 3,783,057 Micro loans 5,223,478 4,525,219 Home improvement loans 892,422 868,860 Agricultural loans 5,752,261 4,797,658 Salary loans 7,233,459 10,068,110 Overdrafts 358,415 171,639

27,454,342 24,214,543

Gross loans and advances by category Commercial loans 381,170,822 256,853,882 Micro loans 167,374,534 161,617,968 Home improvement loans 46,018,861 46,657,323 Agricultural loans 125,090,281 127,496,388 Salary loans 252,889,344 199,907,497 Overdrafts 35,545,430 30,185,205 Staff loans 31,876,148 28,003,036

Gross loans and advances 1,039,965,420 850,721,299

Less: Provision for impairment of loans and advances

Individually assessed (12,892,365) (14,352,602) Collectively assessed (6,845,703) (5,436,728)

Net loans 1,020,227,352 830,931,969

Other financial assets not impaired

Carrying amounts: Balances with Bank of Uganda 97,215,868 58,732,147 Placements with other banks 92,522,927 49,527,599 Investment securities- Held-to-maturity 409,067,927 412,179,522 Investment securities- Held for trading 31,885,743 24,180,039 Other assets 29,960,019 22,634,518

Total 660,652,484 567,253,825

Annual Report & Financial Statements l 2015 80 NOTES TO THE FINANCIAL STATEMENTS (continued...)

These are low risk assets which did not exhibit any indicators of impairment as at year end. Movement in provisions for impairment of loans and advances in the statement of financial position are as follows:

Commercial Microfinance Leasing Staff Overdraft Loans Loans portfolio Loans Total Shs’000 Shs ‘000 Shs’000 Shs’000 Shs’000 Shs’000

Non-performing loans - Identified loss:

At 1 January 2015 147,396 395,872 13,619,950 108,404 80,980 14,352,602 Impaired accounts written off (78,283) (1,200,197) (6,025,002) (157,864) (7,461,346) Additional identified impairment 120,777 1,703,144 13,679,404 204,827 - 15,708,152 Impairments released due (167,811) (383,317) (9,680,162) (12,979) - (10,244,269) to improved status Movement in interest suspended during the year 19,490 193,482 324,254 - - 537,226 At 31 December 2015 41,569 708,984 11,918,444 142,388 80,980 12,892,365

Performing loans - Unidentified loss:

At 1 January 2015 229,859 807,579 4,215,263 129,458 54,569 5,436,728 Net provisions raised 37,745 374,713 627,976 30,050 338,491 1,408,975 At 31 December 2015 267,604 1,182,292 4,843,239 159,508 393,060 6,845,703 Total 309,173 1,891,276 16,761,683 301,897 474,040 19,738,069

Commercial Microfinance Leasing Staff Overdraft Loans Loans portfolio Loans Total Shs’000 Shs ‘000 Shs’000 Shs’000 Shs’000 Shs’000

Non-performing loans - Identified loss:

At 1 January 2014 123,102 443,938 9,656,039 192,794 80,980 10,496,854 Impaired accounts written off - (2,883,922) (4,958,966) (129,139) - (7,972,027) Additional identified impairment 90,513 4,461,305 12,975,360 158,724 - 17,685,902 Impairments released due (94,392) (1,878,165) (4,519,343) (113,975) - (6,605,875) to improved status Movement in interest suspended during the year 28,173 252,716 466,859 - - 747,748 At 31 December 2014 147,396 395,872 13,619,950 108,404 80,980 14,352,602

Performing loans - Unidentified loss: At 1 January 2014 223,977 754,816 4,117,789 125,256 - 5,221,838 Net provisions raised 5,882 52,763 97,474 4,202 54,569 214,890 At 31 December 2014 229,859 807,579 4,215,263 129,458 54,569 5,436,728

To tal 377,255 1,203,451 17,835,213 237,862 135,549 19,789,330

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 81

Movement in provisions for impairment of loans and advances in the statement of comprehensive income are as follows:

2015 2014 Shs ‘000 Shs ‘000 Provision for impairment losses

Additional identified impairment 15,708,152 17,685,902 Additional unidentified impairment 1,408,975 214,890 17,117,127 17,900,792

Reduction due to improved status Identified impairment (10,244,269) (6,605,875) 10,244,269 6,605,875

Provisions for the year 17,117,127 17,900,792 Reductions in provision for impairment (10,244,269) (6,605,875) Total statement of comprehensive income movement 6,872,858 11,294,917

Concentration of Risk

Economic sector risk concentrations within the customer loan portfolio were as follows: 2015 2015 Shs ‘000 Shs ‘000 % Credit commitments Sector analysis by industry Agriculture 180,047,716 17.3 1,002,610 Manufacturing 7,890,510 0.8 1,970,418 Trade and commerce 205,952,558 19.8 14,026,154 Transport and utilities 22,443,306 2.2 122,600 Building and construction 245,999,992 23.7 16,253,330 Other services 377,631,338 36.3 4,076,694 1,039,965,420 100 37,451,806

2014 2014 Shs ‘000 Shs ‘000 % Credit commitments Sector analysis by industry Agriculture 145,706,306 17.0 1,611,632 Manufacturing 6,460,407 0.8 203,378 Trade and commerce 178,439,601 21.0 8,040,825 Transport and utilities 20,380,890 2.4 614 Building and construction 196,337,346 23.1 15,986,993 Other services 303,396,749 35.7 5,507,204 850,721,299 100 31,350,646

Annual Report & Financial Statements l 2015 82 NOTES TO THE FINANCIAL STATEMENTS (continued...)

As at 31 December 2015, the Bank had no loans and grading system. Investments in debt securities carried advances to a single borrower or group of related bor- at fair value through profit or loss are not assessed for rowers exceeding 25.0% of core capital (31 December impairment but are subject to the same internal grading 2014: Nil). system. Past due but not impaired loans Credit Related Commitments Past due but not impaired loans other than those carried The primary purpose of these instruments is to ensure at fair value through profit or loss, are those for which that funds are available to a customer as required. Guar- contractual interest or principal payments are past due, antees and standby letters of credit, which represent ir- but the bank believes that impairment is not appropriate revocable assurances that the Bank will make payments on the basis of the level of security / collateral available in the event that a customer cannot meet its obligation and / or the stage of collection of amounts owed to the to third parties, carry the same credit risk as loans. bank. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of the Loans with renegotiated terms customer authorizing a third party to draw drafts up to a stipulated amount under specific terms and conditions, Loans with renegotiated terms are loans that have been are collateralized by the underlying shipments of goods restructured due to deterioration in the borrower’s fi- to which they relate and therefore carry less risk than a nancial position and where the bank has made conces- direct borrowing. sions that it would not otherwise consider. Once the Commitments to extend credit represent unused por- loan is restructured it remains in this category for at least tions of authorizations to extend credit in the form of one year and returned to normal category there after loans, guarantees or letters of credit. With respect to satisfactory performance. credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the Allowances for impairment total unused commitments. However, the likely amount of loss is less than the total unused commitments since The Bank establishes an allowance for impairment loss- most commitments to extend credit are contingent es on assets carried at amortised cost or classified as upon customers maintaining specific credit standards. available for sale that represents its estimate of incurred The Bank monitors the term of maturity of credit com- losses in its loan and investment debt security portfolio. mitments because longer-term commitments generally The main components of this allowance are a specific have a greater degree of credit risk than shorter-term loss component that relates to individually significant ex- commitments. posures, and a collective loan loss allowance established for groups of homogeneous assets in respect of losses Impaired loans and advances that have been incurred but have not been identified on loans that are considered individually insignificant as well Individually impaired loans and securities are loans and as individually significant exposures that were subject advances and investments in debt securities (other than to individual assessment for impairment but not found those carried at fair value through profit or loss) for to be individually impaired. Assets carried at fair value which the bank determines that there is objective evi- through profit or loss are not subject to impairment dence of impairment and it does not expect to collect all testing as the measure of fair value reflects the credit principal and interest due according to the contractual quality of each asset. terms of the loan agreement. These loans are graded as standard and watch in the bank’s internal credit risk

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 83

Write-off policy The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and The Bank writes off a loan or an investment debt damage to the Bank’s reputation with overall cost ef- security balance, and any related allowances for im- fectiveness and to avoid control procedures that re- pairment losses, when the Bank Credit Committee strict initiative and creativity. determines that the loan or security is uncollectible. Operational risk is a responsibility of the Board’s Risk, This determination is made after considering informa- Board Human Resources and Compensation and tion such as the occurrence of significant changes in Board IT Risk Committees the borrower’s / issuer’s financial position such that the borrower / issuer can no longer pay the obligation, c) Market Risk or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance Market risk arises from decrease in the market value standardized loans, write-off decisions generally are of portfolio of financial instruments caused by adverse based on a product-specific past due status. movements in the market variables such as currency exchange rates, interest rates, credit spreads and Collateral held implied volatilities on all the above. The objective of market risk management is to manage and control The Bank holds collateral against loans and advances market risk exposures within acceptable limits, while to customers in the form of mortgage interests over optimizing the return on risk. The Board grants the property such as land and buildings and plant and ma- general authority to take on market risk exposures chinery, other registered securities over assets e.g. to the Board Asset and Liability Committee (ALCO). chattels for micro loans, and corporate guarantees. The ALCO sets market risk standards and policies to Estimates of fair value are based on the value of col- ensure that the measurement, reporting, monitoring lateral assessed at the time of borrowing, and gener- and management of market risk is maintained. The day ally are not updated except when a loan is individually to day implementation of these policies rests with the assessed as impaired. Collateral generally is not held Treasury Department and Management Assets and Li- over loans and advances to banks within the board ability Committee (MALCO). approved risk tolerance limit, except when securities The Bank manages risk through a range of market risk are held as part of reverse repurchase and securities and capital risk limits. Stress testing and basic risk man- borrowing activity. Collateral usually is not held against agement measures (permissible instruments, concen- investment securities and no such collateral was held tration of exposures, gap limits and maximum tenor) at 31 December 2015 or 31 December 2014. As an are used to facilitate this process. internal requirement, the forced sale value of the collateral security is over and above the amount of loans (i) Interest Rate Risk and advances disbursed. The Bank takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates b) Operational Risk on its financial position and cash flows. Interest mar- gins may increase as a result of such changes but may Operational risk is the risk of direct or indirect loss reduce or create losses in the event that unexpected arising from a wide variety of causes associated with movements arise. The Asset and Liability Committee the Bank’s processes, personnel , technology and in- sets limits on the level of mismatch of interest rate frastructure, and from external factors other than repricing that may be undertaken, which is monitored credit, market and liquidity risks such as those arising monthly. from legal and regulatory requirements and generally accepted standards of corporate behavior. Operation- al risks arise from all the Bank’s operations.

Annual Report & Financial Statements l 2015 84 NOTES TO THE FINANCIAL STATEMENTS (continued...)

Methods of Measuring and Managing The table on page 85 summarises the Bank’s exposure to interest rate risks. Included in the table are the Bank’s the Interest Rate Risk: assets and liabilities at carrying amounts, categorized by the earlier of contractual re-pricing or maturity dates. There are a good number of techniques and tools avail- The carrying amounts of derivative financial instruments able for measuring and managing interest rate risk rang- which are principally used to reduce the exposure to ing from simple calculation to highly complex simula- interest rate movements are included in ‘Other Assets’ tions and modeling. The technique that Centenary Bank and ‘Other Liabilities” under the heading ‘Non-interest utilises is explained below: Bearing’. The off-statement of financial position gap represents the net notional amounts of all interest-sen- Gap Analysis: sitive derivative financial instruments

Under this, interest sensitive assets and liabilities are classified into various time bands according to their maturity in the case of fixed interest rates, and residual maturity towards next repricing date in the case of floating interest rates. The size of the gap in a given time band is analyzed to study the interest rate exposure and the possible effects on the Bank’s earnings. Items in assets and liabilities are captured into various buckets, using judgmental factors by studying behavioral patterns, customer segmentation, and roll over history, etc, on a continuous basis which eventually leads to a dynamic gap analysis. In order to evaluate the earnings exposure, interest Rate Sensitive Assets (RSA) in each time band are netted off against the interest Rate Sensitive Liabilities (RSL) to produce a repricing “Gap” for that time band. A positive gap indicates that the Bank has more RSA than RSL. A positive or asset sensitive gap means that an increase in market interest rates could cause an increase in the net interest margin and vice versa. Conversely, a negative or liability sensitive gap implies that the Bank’s net interest margin could decline as a result of increase in market rates and vice versa. The positive or negative gap is multiplied by the assumed interest rate changes to derive the Earnings at Risk (EaR). The EaR method helps to estimate how much the earnings might be impacted by an adverse movement in interest rates. The assumed changes in interest rate are estimated on basis of past trends, forecasting of interest rates, etc. The off-statement of financial position items are excluded from the gap report because the Bank does not bear any interest rate risk on these items.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 85

Interest rate risk exposure Over 5 Fixed& Nov- <1 mth 1-12 mth 1-5 Years Years interest bearing TOTAL Shs’000 Shs ‘000 Shs’000 Shs’000 Shs’000 Shs’000 31 December 2015 Financial assets Cash and short-term funds - - - - 176,919,896 176,919,896 Due from other banks 81,933,951 - - - 10,588,976 92,522,927 Investments 67,777,422 373,175,635 - - - 440,953,057 Loans and advances to customers 11,761,829 255,438,624 471,382,697 52,953,389 228,690,813 1,020,227,352 Other financial assets - - - - 36,487,803 36,487,803

To tal financial assets 161,473,202 628,614,259 471,382,697 52,953,389 452,687,488 1,767,111,035

Liabilities Due to customers and other banks 20,249,258 1,072,048,661 732,145 - 294,241,303 1,387,271,367 Managed/ borrowed funds - - - - 112,330,352 112,330,352 Other liabilities - - - - 74,173,503 74,173,503 Total liabilities 20,249,258 1,072,048,661 732,145 - 480,745,158 1,573,775,222

Net on-SOFP gap 141,223,944 (443,434,402) 470,650,552 52,953,389 (28,057,670) 193,335,813 Net off-SOFP gap - - - - 37,451,805 37,451,805

To tal interest sensitivity gap 141,223,944 (443,434,402) 470,650,552 52,953,389 9,394,135 230,787,618

Over 5 Fixed& Nov- <1 mth 1-12 mth 1-5 Years Years interest bearing TOTAL Shs’000 Shs ‘000 Shs’000 Shs’000 Shs’000 Shs’000 31 December 2014 Financial assets Cash and short-term funds 1,501,356 - - - 139,151,791 140,653,147 Due from other banks 44,831,161 - - - 4,696,438 49,527,599 Investments 57,643,802 378,715,759 - - - 436,359,561 Loans and advances to customers 7,006,916 216,861,064 358,846,480 40,326,312 207,891,196 830,931,969 Other financial assets - - - - 34,091,896 34,091,896

To tal financial assets 110,983,235 595,576,823 358,846,480 40,326,312 385,831,321 1,491,564,172

Liabilities Due to customers and other banks 11,791,522 881,830,049 418,152 - 286,532,220 1,180,571,943 Managed/ borrowed funds - - 10,000,000 - 73,426,004 83,426,004 Other liabilities - - - - 53,571,490 53,571,490 Total liabilities 11,791,522 881,830,049 10,418,152 - 413,529,714 1,317,569,437

Net on-SOFP gap 99,191,713 (286,253,226) 348,428,328 40,326,312 (27,698,393) 173,994,735 Net off-SOFP gap - - - - 31,350,646 31,350,646

To tal interest sensitivity gap 99,191,713 (286,253,226) 348,428,328 40,326,312 3,652,253 205,345,381

Annual Report & Financial Statements l 2015 86 NOTES TO THE FINANCIAL STATEMENTS (continued...)

The re-pricing gaps for the Bank’s portfolios are shown below. Positions are managed by currency to take account of the fact that interest rates are unlikely to move together. All assets and liabilities are sited in gap intervals based on their re-pricing characteristics. Assets and liabilities, for which no specific contractual re-pricing or maturity dates exist are placed in gap intervals based on management judgment, where appropriate, based on the most likely re-pricing behavior.

>3months >6months Within 3 but within 6 but within After 12 months months 12 months months Shs million Shs million Shs million Shs million

2015 Interest rate sensitivity gap 30,365 (110,859) (221,717) 532,998 Cumulative interest rate sensitivity gap 30,365 (80,493) (302,210) 230,788 Cumulative interest rate sensitivity gap as a percentage of total assets 2% (5%) (17%) 13%

2014 Interest rate sensitivity gap 27,628 (71,563) (143,127) 392,407 Cumulative interest rate sensitivity gap 27,628 (43,935) (187,062) 205,345 Cumulative interest rate sensitivity gap as a percentage of total assets 2% (3%) (13%) 14%

Interest sensitivity analysis

The table below shows the increase / (decline) in 12-month earnings for upward and downward instantaneous parallel rate shocks.

Impact on profit before tax 2015 2014 Shs million Shs million + 500 bps rate shock 16,125 10,478 - 500 bps rate shock (16,125) (10,478) + 100 bps rate shock 3,225 2,096 - 100 bps rate shock (3,225) (2,096)

Assuming no management intervention, a parallel 500bps increase in all yield curves would increase the forecast net interest income for the next financial year by Shs 16,125 million. A parallel decreases in all yield curves would decrease the forecast net interest income for the next financial year by Shs 16,125 million. Whilst a parallel 100bps increase in all yield curves would increase the forecast net interest income for the next financial year by Shs 3,225 million. A parallel decreases in all yield curves would decrease the forecast net interest income for the next financial year by Shs 3,225 million.

Impact on equity 2015 2014 Shs million Shs million + 500 bps rate shock 20,031 15,844 - 500 bps rate shock (20,031) (15,844) + 100 bps rate shock 4,006 3,169 - 100 bps rate shock (4,006) (3,169)

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 87

Assuming no management intervention, a parallel 500bps increase in all yield curves would increase the equity for the next financial year by Shs 20,031 million. A parallel decreases in all yield curves would decrease the equity for the next financial year by Shs 20,031 million. Whilst a parallel 100bps increase in all yield curves would increase the equity for the next financial year by Shs 4,006 million. A parallel decreases in all yield curves would decrease the equity for the next financial year by Shs 4,006 million.

(ii) Currency risk

The Bank takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Asset and Liability Committee sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily. The table below summarises the Bank’s exposure to foreign currency exchange rate risk at 31 December 2015 and 31 December 2014. In- cluded in the table are the Bank’s assets and liabilities at carrying amounts, categorized by currency.

EUROS GBP USD TZ & Kshs TOTAL 31 December 2015 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000

Assets

Cash and balances at the Central Bank 1,243,406 12,500,182 3,205,689 16,949,277 Due from other banks 1,184,387 7,632,376 1,772,213 10,588,976 Investments - 5,878,691 5,878,691 Loans and advances to customers - 32,775,135 1,221 32,776,356 Other accounts receivable 32,902 45,764 11,373 90,039 Total assets 2,460,695 52,953,457 10,869,187 66,283,339

Liabilities

Customer deposits and balances due to other banks 1,249,764 53,360,744 11,947,942 66,558,450 Managed funds - Other accounts payable 36,685 349,223 1,901 387,809 Total liabilities 1,286,449 53,709,967 11,949,843 66,946,259 Net on-SOFP position 1,174,246 (756,510) (1,080,656) (662,920) Net off-SOFP position 168,986 7,192,088 146,776 7,507,850 Overall net position 1,343,232 6,435,578 (933,880) 6,844,930 % of Net position over core capital 0.42 2.00 (0.29) 2.15

GBP USD OTHERS TOTAL 31 December 2014 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000

Total assets 1,818,596 36,396,603 10,131,391 48,346,590 Total liabilities 1,371,134 35,663,036 8,884,051 45,918,221 Net on-SOFP position 447,462 733,567 1,247,340 2,428,369 Net off-SOFP position - 5,294,091 209,598 5,503,689 Overall net position 447,462 6,027,658 1,456,938 7,932,058 % of Net position over core capital 0.15 2.05 0.49 2.96

Annual Report & Financial Statements l 2015 88 NOTES TO THE FINANCIAL STATEMENTS (continued...)

The table below shows the increase (decline) in 12 month earnings for upward (appreciation) and downward (depreciation) of the shilling on all foreign currencies on instantaneous parallel rate changes over the next 12 months.

Parallel rate shocks: 2015 2014 Shs million Shs million +500bps exchange rate change 331 397 -500bps exchange rate change (331) (397) +100bps exchange rate change 66 79 -100bps exchange rate change (66) (79)

Assuming no management intervention a parallel appreciation of the shilling by 500bps on all foreign currencies would increase the profit for the year and retained earnings by Shs 331 million (2014: Shs 397 million) whilst a fall or depreciation shall reduce the profit for the year and retained earnings earnings by Shs 331 million (2014: Shs 397 million).

A 100bps appreciation of the shilling on all currencies would increase the profit before tax and retained earnings by Shs 66 million (2014: 79 million) whilst a full or depreciation shall reduce the profit before tax and retained earnings by Shs 66 million (2014: 79 million).

d. Liquidity Risk

Liquidity risk is the risk that the Bank is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they are withdrawn.

The Bank is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits, and calls on cash settled contingencies. The Bank does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Bank of Uganda requires that the Bank maintain a cash reserve ratio of 8.0% of total deposits. In addition, Bank of Uganda sets limits on the minimum proportion of liquid funds available to meet such calls at 20% and other borrowing facilities that should be in place to cover withdraws at unexpected levels of demand.

The Treasury Department monitors liquidity ratios on a daily basis.

The Bank incorporates the following elements as part of a cohesive liquidity management process:

• Short term and long term cash flow managements • Maintaining a structurally sound financial position • Foreign currency liquidity management • Preserving a diversified funding base • Undertaking regular liquidity stress testing • Maintaining adequate liquidity contingency plan.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 89

The table below presents the undiscounted cash flows payable by the Bank under financial liabilities by remaining contractual maturities at the reporting date.

<1month 1-12 months 1-5 years over 5 years Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000

Assets Cash and short-term funds 176,919,896 - - - 176,919,896 Due from other banks 92,522,927 - - - 92,522,927 Investments 67,777,422 373,175,635 - - 440,953,057 Loans and advances at amortised cost 18,646,871 404,965,169 747,339,479 83,928,124 1,254,879,643 Other assets 10,764,468 9,962,536 17,203,810 - 37,930,814

366,631,584 788,103,340 764,543,289 83,928,124 2,003,206,337

Liabilities Due to customers and other banks 1,281,084,057 105,455,165 732,145 1,387,271,367 Managed funds - - 10,284,689 - 10,284,689 Borrowed funds 1,743,750 8,269,578 72,736,449 42,500,067 125,249,844 Other liabilities 28,082,815 21,776,854 16,998,739 - 66,858,408

1,310,910,622 135,501,597 100,752,022 42,500,067 1,589,664,308

Liquidity gap (944,279,038) 652,601,743 663,791,267 41,428,057 413,542,029

Off balance sheet items (14,123,870) (21,998,716) (1,329,219) - (37,451,805)

Net liquidity gap (958,402,908) 630,603,027 662,462,048 41,428,057 376,090,224

The table below presents the maturity analysis of the bank’s assets and liabilities at their carrying amounts.

<1month 1-12 months 1-5 years over 5 years Total Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Assets Cash and short-term funds 176,919,896 - - - 176,919,896 Due from other banks 92,522,927 - - - 92,522,927 Investments 67,777,422 373,175,635 - - 440,953,057 Loans and advances at amortised cost 15,160,058 329,239,975 607,593,072 68,234,247 1,020,227,352 Other assets 20,029,196 19,094,369 126,798,109 77,855,449 243,777,123 372,409,499 721,509,979 734,391,181 146,089,696 1,974,400,355 Liabilities Due to customers and other banks 1,281,084,057 105,455,165 732,145 1,387,271,367 Managed/Borrowed Funds - - 87,076,566 25,253,696 10,284,689 Other liabilities 22,676,486 40,617,086 10,879,932 - 74,173,604 Capital and Reserves 25,516,936 375,108,197 400,625,133 1,303,760,543 171,589,187 98,688,732 400,361,893 1,974,400,355

Liquidity gap (931,351,044) 549,920,792 635,702,449 (254,272,197) -

Off balance sheet items (14,123,870) (21,998,716) (1,329,219) - (37,451,805)

Net liquidity gap (945,474,914) 527,922,076 634,373,230 (254,272,197) 37,451,805

Annual Report & Financial Statements l 2015 90 NOTES TO THE FINANCIAL STATEMENTS (continued...)

The fair values of financial assets and liabilities together with the carrying value shown in the statement of financial position are analysed as follows:

31 December 2015 31 December 2014 Carrying Amount Fair Value Carrying Amount Fair Value Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000 Assets Cash and short-term funds 176,919,896 176,919,896 140,653,147 140,653,147 Due from other banks 92,522,927 92,522,927 49,527,599 49,527,599 Investments 440,953,057 440,953,057 436,359,561 436,359,561 Loans and advances at amortised cost 1,020,227,352 1,280,635,278 830,931,969 1,011,763,630 Other assets 37,930,814 43,770,079 31,667,816 31,667,816 1,768,554,046 2,034,801,237 1,489,140,092 1,669,971,753

Liabilities Due to customers and other banks 1,387,271,367 1,387,519,869 1,180,571,943 1,180,741,945 Managed funds 10,284,689 13,775,486 10,769,684 14,813,196 Borrowed funds 102,045,662 153,336,422 72,656,320 114,103,026 Other liabilities 66,858,407 72,628,067 46,686,379 48,476,127 1,566,460,125 1,627,259,844 1,310,684,326 1,358,134,294

Fair value hierarchy

At 31 December 2015 Level 1 Level 2 Level 3 Total Shs‘000 Shs‘000 Shs‘000 Shs‘000 Assets measured at fair value - Government securities at fair value - 31,885,743 - 31,885,743

Assets and liabilities not measured at fair value for which fair values have been disclosed Loans and advances - - 1,202,599,905 1,202,599,905 Managed funds - - 13,775,486 13,775,486 Borrowed funds - - 153,336,422 153,336,422 Other liabilities - - 72,628,067 72,628,067

At 31 December 2014 Level 1 Level 2 Level 3 Total Shs‘000 Shs‘000 Shs‘000 Shs‘000 Assets at fair value - Government securities at fair value - 24,180,039 - 24,180,039

Assets and liabilities not measured at fair value for which fair values have been disclosed Loans and advances - - 996,836,683 996,836,683 Managed funds - - - 14,489,351 Borrowed funds - - 110,498,627 110,498,627 Other liabilities - - 52,058,104 52,058,104

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 91

The fair value of the financial assets and liabilities is included at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date.

The following methods and assumptions were used to estimate the fair values: Long-term fixed-rate and variable-rate receivables/borrowings are evaluated by the Bank based on parameters such as interest rates, individual creditworthiness of the customer and the risk characteristics of the financed project. Based on this evaluation, allowances are taken into account for the expected losses of these receivables.

Fair value of the treasury bonds is based on price quotations at the reporting date. The fair value of unquoted instruments, loans from banks and other financial liabilities, as well as other non-current financial liabilities is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.

Fair values of the Bank’s interest-bearing borrowings and loans are determined by using DCF method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk as at 31 December 2015 was assessed to be insignificant. e. Financial instruments not measured at fair value i. Loans and advances The estimated fair value of loans and advances represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. ii. Government securities and investments held-to-maturity The fair value for these held-to-maturity assets is based on market prices. Where this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. The carrying amount of investment securities is a reasonable approximation of fair value. iii. Deposits due to customers and other banks The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand and this is the carrying amount. The estimated fair value of interest-bearing deposits not quoted in an active market is based on discounted cash flows using interest rates for new debts with similar remaining maturity. The carrying amounts are a reasonable approximation of this. iv. Borrowings and managed funds The interest rates charged on borrowings held by the bank based on WACC or other bases for determining market interest rates. The interest rates are variable and in line with market rates for similar facilities. The fair values of such interest bearing borrowings not quoted in an active market is based on discounted cash flows using interest rates for similar facilities.

The significant unobservable inputs used in the fair value measurement categorised within Level 3 of the fair value hierarchy are as shown below:

Valuation technique Significant Range (weighted average) unobservable inputs 2015 2014 Loans and advances DCF method WACC 21.8% 22.5% Managed funds and borrowed funds DCF method WACC 10.3% 11.7%

The loans and advances have a carrying amount of Ushs 1,020,227,352 (level 3 in the fair value hierarchy) whereas managed funds and borrowed funds have carrying amounts of Ushs 10,284,689 and Ushs 102,045,662 (level 3 in the fair value hierarchy) respectively.

Annual Report & Financial Statements l 2015 92 NOTES TO THE FINANCIAL STATEMENTS (continued...)

f. Capital Management

The Bank monitors the adequacy of its capital using ratios established by Bank of Uganda, which ratios are broadly in line with those for the Bank for International Settlements (BIS). These ratios measure capital adequacy by comparing the Bank’s eligible capital with its statement of financial position assets, off-statement of financial position commitments and market and other risk positions at weighted amounts to reflect their relative risk.

The market risk approach covers the general market risk and the risk of open positions in currencies and debt and equity securities. Assets are weighted according to the amount of capital deemed to be necessary to support them. Four categories of risk weights (0%, 20%, 50%, 100%) are applied; for example cash and money market instruments have a zero risk weighting which means that no capital is required to support the holding of these assets. Property and equipment carries a 100% risk weighting, meaning that it must be supported by capital equal to 100% of the carrying amount. Certain asset categories have intermediate weightings. Off-statement of financial position credit related commitments and forwards are taken into account by applying different categories of credit conversion factors, designed to convert these items into balance sheet equivalents. The resulting credit equivalent amounts are then weighted for credit risk using the same percentages as for statement of financial position assets.

The Bank’s objectives when managing capital, which is broader than the equity on the face of the statement of financial position, are: • To comply with the capital requirement set by Bank of Uganda; • To safeguard the Bank’s ability to continue as a going concern so that it can continue to provide returns to the shareholders and; • To maintain a strong capital base to support the development of the Bank’s business. Capital adequacy and the use of regulatory capital are monitored monthly by management, employing techniques based on guidelines developed by Basel committee as implemented by Bank of Uganda, for supervisory purposes. The required information is filled with Bank of Uganda on a quarterly basis. Bank of Uganda requires each bank to: a. Hold the minimum level of the regulatory capital of Ushs 25,000,000,000 (Shs Twenty five billion); b. Maintain a ratio of total regulatory capital to the risk –weighted assets of not less than 12.0%; and c. Maintain core capital of not less than 8.0% of risk weighted assets. The Bank’s regulatory capital is divided into two tiers:

Tier 1 capital (core capital): Share capital, share premium, retained earnings and reserves created by appropriations of retained earnings. The book value of goodwill, current year losses, prohibited loans to insiders; investments in un- consolidated financial statements, deficiencies in provisions for losses and other deductions determined by BOU are deducted in arriving at tier 1 capital.

Tier 2 capital (Supplementary Capital): Revaluation reserves, unidentified impairment allowance, statutory regulatory reserves (reserves created by appropriations of retained earnings), subordinated debt and hybrid capital instruments.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 93

The table below summaries the composition of regulatory capital and the ratios of the Bank, for the years ended 31 December 2015 and 2014. During those two years, the Bank complied with all of the externally imposed capital requirements to which it is subject.

2015 2014 Shs 000 Shs 000 Core Capital (Tier 1) Permanent equity 25,116,624 25,116,624 Share premium 1,138,927 1,138,927 Prior years’ retained profits 269,390,677 215,607,257 Appropriation from retained profits (1,861,712) (1,555,639) Proposed dividends (25,516,936) (18,477,452) Net after-tax profits (current year-to-date) 101,601,248 73,816,511 369,868,828 295,646,228

Computer software (50,392,052) (1,997,361) Unrealised foreign exchange gains and deferred tax asset (2,925,416) (65,747) Tier 1 Capital 316,551,360 293,583,120

Supplementary Capital (Tier 2) Unencumbered general provisions for losses 10,796,131 8,814,385 Tier 2 Capital 10,796,131 8,814,385 Total Capital (Tier 1+Tier 2) 327,347,491 302,397,505

The increase of the regulatory capital in the year 2015 is mainly due to the contribution of the current-year profit.

The risk–weighted assets are measured by means of hierarchy of four risk weights classified according to the nature of portfolio holding and reflecting an estimate of credit and market risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-statement of financial position exposure, with some adjustments to reflect the more contingent nature of potential losses.

The table on the next page summarises the composition of the risk weighted assets of the Bank for the years ended 31 December 2015 and 31 December 2014

Annual Report & Financial Statements l 2015 94 NOTES TO THE FINANCIAL STATEMENTS (continued...)

Statement of financial position

Nominal amounts Risk weighted amounts 2015 2014 2015 2014 Shs ‘000 Shs ‘000 Shs ‘000 Shs ‘000

Assets Notes, coins & other cash assets 79,704,028 81,921,000 0% - - Balances with Bank of Uganda 97,215,868 58,732,147 0% - - Due from commercial banks in Uganda 76,058,502 44,837,023 20% 15,211,700 8,967,405 Due from commercial banks outside Uganda

(1) Rated AAA to AA (-) - 3,719,164 20% - 743,833 (2) Rated A (+) to A (-) 16,281,447 806,099 50% 8,140,724 403,050 (3) Rated A (-) and non-rated 182,978 165,313 100% 182,978 165,313 Investment securities 440,953,057 436,359,561 0% - - Loans and advances to customers 1,019,366,583 830,206,386 100% 1,019,366,583 830,206,386 (net of those secured by cash) Other accounts receivable 41,910,547 43,125,193 100% 41,910,547 43,125,193 Property and equipment 197,655,135 132,475,944 100% 197,655,135 132,475,944

Off-statement of financial position items Contingencies secured by cash collateral 6,407,205 5,691,443 0% - - Guarantees & acceptances 11,937,764 4,178,266 100% 11,937,764 4,178,266 Performance bonds 8,317,813 11,199,166 50% 4,158,907 5,599,583 Documentary credits (trade related) 4,460,935 3,954,594 20% 892,187 790,919 Other commitments 6,328,088 6,327,176 50% 3,164,044 3,163,588 Total risk-weighted assets 2,006,779,950 1,663,698,475 1,302,620,569 1,029,819,480

2014 Ratio 2013 Ratio Shs ’000 Shs ‘000 Capital ratios Tier 1 Capital (Core) 316,551,360 24.3% 293,583,120 28.5% Tier 1 + Tier 2 Capital (Total) 327,347,491 25.1% 302,397,505 29.4%

FIA 2004 minimum ratio capital requirement Core capital 8% 8% Total capital 12% 12%

The Bank’s total capital adequacy ratio went down from 29.4% to 25.1% as at 31 December 2015 and Tier 1 capital decreased from 28.5% to 24.3% as at 31 December 2015 showing that the Bank is well capitalised. The drop was due to deduction of costs related to the new Core banking system.

Trend in risk-weighted assets

Shs million 2011 2012 2013 2014 2015 Total assets 944,044 1,122,296 1,451,040 1,635,071 1,974,400 Risk-weighted assets 646,689 725,911 862,538 1,029,819 1,302,621

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 95

Trend in risk-weighted assets

Risk-weighed Assets Total Assets

g. Financial instruments by category

At 31 December 2015 (All figures in Ushs’000)

Financial Held to Available- Fair value Total liabilities at maturity for-sale though profit amortised cost or loss -held for trading Financial Assets Cash and bank balances with Bank of Uganda 176,919,896 - - - 176,919,896 Placements with other banks 92,522,927 - - - 92,522,927 Government securities- held for trading - - - 31,885,743 31,885,743 Loans and advances to customers 1,020,227,352 - - - 1,020,227,352 Government securities-held to maturity - 409,067,314 - - 409,067,314 Other assets 37,930,814 - - - 37,930,814 Total 1,327,600,989 409,067,314 - 31,885,743 1,768,554,046

Financial Held to Available- Fair value Total liabilities at maturity for-sale though profit amortised cost or loss -held for trading Financial Liabilities Cash and bank balances with Bank of Uganda 140,653,147 - - - 140,653,147 Placements with other banks 49,527,599 - - - 49,527,599 Government securities- held for trading - - - 24,180,039 24,180,039 Loans and advances to customers 830,931,969 - - - 830,931,969 Government securities-held to maturity - 412,179,522 - 412,179,522 Other assets 31,667,816 - - - 31,667,816 Total 1,052,780,531 412,179,522 - 24,180,039 1,489,140,092

Annual Report & Financial Statements l 2015 96 NOTES TO THE FINANCIAL STATEMENTS (continued...)

At 31 December 2014 (All figures in Ushs’000)

Financial Held to Available- Fair value Total liabilities at maturity for-sale though profit amortised cost or loss -held for trading Financial liabilities Customer deposits 1,380,193,855 - - - 1,380,193,855 Deposits from other banks 3,071,430 - - - 3,071,430 Inter-bank borrowing 4,006,082 - - - 4,006,082 Managed funds 10,284,689 - - - 10,284,689 Borrowed funds 102,045,662 - - - 102,045,662 Other liabilities 66,858,407 - - - 66,858,407 Total 1,566,460,125 - - - 1,566,460,125

Financial Held to Available- Fair value Total liabilities at maturity for-sale though profit amortised cost or loss -held for trading Financial liabilities Trading Total Customer deposits 1,175,115,554 - - - 1,175,115,554 Deposits from other banks 5,456,389 - - - 5,456,389 Managed funds 10,769,684 - - - 10,769,684 Borrowed funds 72,656,320 - - - 72,656,320 Other liabilities 46,686,379 - - - 46,686,379 Total 1,310,684,326 - - - 1,310,684,326

5 Turnover

The Bank’s turnover is derived substantially from the business of banking and related activities and comprises net interest income, fees and commission income, trading income and other income. These revenues are shown in the statement of comprehensive income and accompanying notes and represent the most appropriate equivalent of turnover compared with other forms of business enterprise.

6(a) Interest income

2015 2014 Shs ‘000 Shs ‘000 Interest on loans 238,991,345 192,910,797 Interest on treasury bills held to maturity 60,477,780 42,431,071 Interest on treasury bonds 3,746,381 2,111,827 Interest on inter-bank placements 3,569,226 10,119,345 306,784,732 247,573,040

The interest on impaired loans as at 31 December 2015 was Ushs 3.506 billion (2014: Ushs 2.969 billion).

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 97

6(b) Loss from financial instruments at fair value

2015 2014 Shs ‘000 Shs ‘000 Fair value loss on held for trading securities (1,457,185) (505,138) (1,457,185) (505,138)

7. Interest expense 2015 2014 Shs ‘000 Shs ‘000 Savings accounts 16,139,076 13,152,428 Current accounts 527,676 544,008 Fixed deposit accounts 11,423,325 9,565,802 Managed/borrowed funds 9,276,729 7,856,883 Other financial costs 109,117 - Inter-bank borrowings 1,633,050 5,948,172 39,108,973 37,067,293

8 Fee and commission income

2015 2014 Shs ‘000 Shs ‘000 Trade related fees and commision 16,319,536 13,776,423 Ledger fees 19,059,069 17,888,977 Other commissions and fees 31,612,061 27,851,351 66,990,666 59,516,751

9 Foreign exchange income

2015 2014 Shs ‘000 Shs ‘000 Foreign trade commission 3,907,899 3,081,171 Revaluation gain 5,960,437 3,080,793 9,868,336 6,161,964

10 Other operating income

2015 2014 Shs ‘000 Shs ‘000 Income from bullion van hire 1,021 14,724 Recovery of written off loans 4,063,117 3,074,268 Sale of ATM cards & banking stationery 4,703,874 4,102,499 Release of unutilised accruals 948,778 1,556,567 Credit Reference Bureau search fee income - 344,615 Grant income 631,176 1,041,747 Uncollected ATM cards 526,601 456,055 Other income* 839,530 961,830 11,714,097 11,552,305

Annual Report & Financial Statements l 2015 98 NOTES TO THE FINANCIAL STATEMENTS (continued...)

*Other income 2015 2014 Shs ‘000 Shs ‘000 Fees on current accounts 51,238 61,959 Gain on sale of securities 285 - Penalties 37,058 47,101 Profit on sale of assets 230,470 365,913 Cash overages 174,703 217,780 Income from uncollected balances - 10,569 Early redemption fees 345,776 258,508 839,530 961,830

11 Employee benefits expense

2015 2014 Shs ‘000 Shs ‘000 Staff salaries 73,986,654 60,918,835 Staff bonuses 17,397,398 13,993,895 NSSF contributions 8,202,860 7,620,800 Retirement plan contributions 5,596,838 4, 875,646 105,183,750 87,409,176

12 Impairment losses on loans and advances

2015 2014 Shs ‘000 Shs ‘000 Credit losses impairment-Identified 5,463,883 11,080,027 Credit losses impairment-Unidentified 1,408,975 214,889 6,872,858 11,294,916

13 Operating expenses 2015 2014 Shs ‘000 Shs ‘000 Auditors’ remuneration and expenses 317,402 221,607 Software costs 5,362,638 3,986,538 Premises cost 14,474,801 11,631,093 Insurance 7,785,244 6,081,284 Security 3,580,718 3,218,390 Office expenses 12,139,803 11,752,244 Equipment lease expenses 3,940,760 1,476,776 Motor vehicle expenses 2,361,766 2,458,401 Telephone, telex and postage 6,309,518 5,557,786 Corporate Social Responsibility (CSR) 636,156 457,626 Advertising and marketing 5,057,486 4,655,112 Directors’ fees and other expenses 3,572,454 3,065,168 Consultancy and legal fees 2,368,438 2,947,637 Recruitment and training 2,039,755 1,497,246 Staff transfer 1,118,832 802,416 Seminars & conferences 480,889 322,985 Subscription 616,491 493,767 Stationery 4,778,976 4,897,014 Transport & travel 6,225,974 5,430,120

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 99

2015 2014 Shs ‘000 Shs ‘000 Bank charges 664,606 529,518 Long-term rental amortization 45,532 45,532 Cash shortages and other losses 831,760 859,461 Other operating expenses* 1,067,499 1,546,794 85,777,498 73,934,515

*Other operating expenses

2015 2014 Shs ‘000 Shs ‘000 Foreign exchange loss 117,840 34,289 Funeral expenses 81,303 53,454 Business promotion account 246,741 313,937 Annual General Meeting expenses 83,052 57,918 Licence (Bank) 18,762 6,410 Cashiers allowance 249,863 235,567 Loss on sale of assets 19 - Management fees expense 25,660 606,574 Meeting expenses 231,093 118,903 Financial card fees expenses 1,995 119,742 Debt Collection Expenses 11,171 - 1,067,499 1,546,794

14 Income tax expense

2015 2014 Shs ‘000 Shs ‘000 Current income tax 23,821,612 15,065,619 Withholding tax expense 12,844,832 8,908,579 Prior year over provision 1,092,795 - Current year deferred tax credit (1,805,059) (2,304,674) Prior year under provision – deferred tax (1,043,397) 7 34,910,783 21,669,531

The tax on the Bank’s profit before tax differs from the theoretical amount that would arise using the basic tax rate as follows:

2015 2014 Shs ‘000 Shs ‘000 Profit before income tax 136,512,031 95,486,042 Tax calculated at 30.0% (2014: 30.0%) 40,953,609 28,645,812 Tax effect of: - Expenses not deductible for tax 767,348 1,326,193 - Income not subject to tax (19,267,248) (17,211,060) - Prior year under provision – deferred tax (1,043,397) 7 - Prior year over provision – current tax 1,092,795 - - 20% final tax on treasury bills 12,844,832 8,908,579 Adjustment to under taxation on revalued assets not recognised (437,156) - Income tax expense 34,910,783 21,669,531

Annual Report & Financial Statements l 2015 100 NOTES TO THE FINANCIAL STATEMENTS (continued...)

Movement in current tax payable is as follows:-

2015 2014 Shs ‘000 Shs ‘000 At 1 January 5,259,400 1,640,550 Over provision in prior years- tax 1,092,795 3 Current income tax expense 36,666,444 23,974,198 Tax paid during year (37,880,750) (20,355,351) At 31 December 5,137,889 5,259,400

15. Cash and balances with Bank of Uganda

2015 2014 Shs ‘000 Shs ‘000 Cash in hand – Uganda Shillings 66,937,234 72,131,981 Cash in hand – Foreign Currency 12,766,794 9,789,019 Bank of Uganda clearing account 97,215,868 57,230,791 Bank of Uganda Repo -` 1,501,356 176,919,896 140,653,147 Due within < 1 month 176,919,896 140,653,147

Balances on hand and with the Central Bank are non-interest bearing and include the minimum cash reserve requirement of Shs 104.8 billion as at 31 December 2015 (2014: Shs 91.3 billion). The mandatory reserve is based on the value of deposits as adjusted in accordance with Bank of Uganda Regulations.

Banks are required to maintain a prescribed minimum cash reserve comprising cash in hand and balances with Bank of Uganda. This reserve is available to finance the Bank’s day-to-day activities; however there are restrictions as to its use and sanctions for noncompliance. The amount is determined as a percentage of the average outstanding customer deposits over a cash reserve cycle period of fourteen days.

16. Placements with other banks 2015 2014 Shs ‘000 Shs ‘000 Balances with local banks 3,242 5,862 Balances with foreign banks 10,585,734 4,690,576 Placements with local banks 76,055,260 39,504,740 Placements with foreign banks 5,878,691 5,326,421 92,522,927 49,527,599 Due within < 1 month 92,522,927 49,527,599

The weighted average effective interest rate on placement with other banks was 12.2% (2014:10.8%)

17 Government securities 2015 2014 Shs ‘000 Shs ‘000 (a) Government securities held for trading

Government Treasury bills 10,882,881 - Government bonds 21,002,862 24,180,039

31,885,743 24,180,039

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 101

Maturity analysis of Government bonds 2015 2014 Shs ‘000 Shs ‘000 No more than twelve months after the reporting period 2,060,169 - More than twelve months after the reporting period. 18,942,693 24,180,039 21,002,862 24,180,039

(b) Government securities held to maturity 2015 2014 Shs ‘000 Shs ‘000 Government treasury bills 409,067,314 412,179,522 409,067,314 412,179,522

Treasury bills are debt securities issued by the Central Bank for a term of three months, six months and twelve months, whilst bonds are also issued for a term of two years, three years, five years and ten years.

The weighted average effective interest rate on treasury bills and bonds was 18.2% (2014: 12.5%) and 14.2% (2014:13.8%) respectively.

Maturity analysis of government securities held-to-maturity

2015 2014 Shs ‘000 Shs ‘000 Short Term (1-3 months) 137,119,628 128,171,233 Medium Term (3-6 months) 115,037,292 95,283,935 Long Term (Over 6 months and within 12 months) 156,910,394 188,724,354 409,067,314 412,179,522

18(a) Loans and advances to customers 2015 2014 Shs ‘000 Shs ‘000 Overdrafts 35,545,430 30,185,205 Commercial loans 352,872,208 270,765,529 Micro finance loans 591,373,020 500,203,696 Finance leases (18b) 28,298,614 21,563,833 Staff loans 31,876,148 28,003,036 Gross loans and advances 1,039,965,420 850,721,299

Provision for loan impairment – identified losses (12,892,365) (14,352,602)

Provision for loan impairment – unidentified losses (6,845,703) (5,436,728)

Net loans and advances 1,020,227,352 830,931,969

Annual Report & Financial Statements l 2015 102 NOTES TO THE FINANCIAL STATEMENTS (continued...)

Maturity analysis of loans and advances 2015 2014 Shs ‘000 Shs ‘000 Short Term (1-3 Months) 42,769,615 33,708,722 Medium Term (3-6 Months) 21,622,424 18,973,937 Long Term (Over 6 Months and within 12 months) 246,285,937 211,299,237 Long Term (Over 12 months) 729,287,444 586,739,403 1,039,965,420 850,721,299

% 2015 % 2014 Shs ‘000 Shs ‘000 Sector Analysis Agriculture 17.3 180,047,716 17.1 145,706,306 Manufacturing 0.8 7,890,510 0.8 6,460,407 Trade and Commerce 19.8 205,952,558 21.0 178,439,601 Transport and Utilities 2.2 22,443,306 2.4 20,380,890 Building and Construction 23.6 245,999,992 23.1 196,337,346 Other Services 36.3 377,631,338 35.7 303,396,749 100 1,039,965,420 100 850,721,299

18 (b) Finance leases

2015 2014 Shs’000 Shs’000 Minimum lease Present Value of Minimum lease Present Value of payments lease payments payments lease payments receivable receivable receivable receivable

No Later than 1 Year 713,943 674,936 388,454 364,156 Later than 1 Year but no later than 5 Years 30,678,922 24,898,041 25,422,802 20,449,759 Later than 5 Years 4,314,451 2,725,637 1,154,700 749,918 35,707,316 28,298,614 26,965,956 21,563,833 Less: amounts representing unearned finance income (7,408,702) - (5,402,123) - Net Investment in Finance Leases 28,298,614 28,298,614 21,563,833 21,563,833

This is a form of financing an asset where the asset serves as the main security. The leases are offered for a period between 1 to 7 years depending on the type of equipment financed and the anticipated cash flows. The average interest rate on these facilities for 2015 was 20.8% for Ushs facilities and 9.9% for USD facilities (2014: 26.1% and 10.0 % respectively). Future minimum lease payments receivable together with the present value of the net minimum lease receipts are shown above.

19 Other assets 2015 2014 Shs ‘000 Shs ‘000 Cheques in transit 89,441 173,972 Staff advances 16,113 21,207 Accrued late fee payment 826,664 734,066 Accounts receivable 135,537 9,554

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 103

( Other Assets continued...) 2015 2014 Shs ‘000 Shs ‘000 Prepaid expenses 7,057,838 7,495,011 Sundry stationery stock 912,957 1,538,287 Western Union commission receivable 418,015 229,550 Outward clearing 843,897 962,650 Mobile E-money 9,397,002 7,385,307 Deferred staff loan off market discount 16,377,147 10,792,115 Unsettled interbank trading deals - 693,750 Value Added Tax recoverable 38,684 66,809 Other sundry assets 1,817,519 1,565,538 37,930,814 31,667,816

All other assets are due within one year.

20 Deferred income tax (asset)/liability

Deferred income taxes are calculated on all temporary differences under the liability method at the applicable rate of 30.0%. The movement on the deferred income tax account is as follows:

2015 2014 Shs ‘000 Shs ‘000 At 1 January 300,406 2,605,073 Credit to statement of comprehensive income (Note 14) (2,848,456) (2,304,667) At 31 December (2,548,050) 300,406

1 Jan 2015 Movement 31 Dec 2015 Shs’000 Shs’000 Shs’000

Deferred tax liability Accelerated tax depreciation 6,131,942 (638,847) 5,493,095 Fair value adjustments (123,902) (437,156) (561,058) 6,008,040 (1,076,003) 4,932,037 Deferred tax asset Provisions (1,804,631) (741,266) (2,545,897) Deferred income (3,903,003) (1,031,187) (4,934,190) (5,707,634) (1,772,453) (7,480,087) Net deferred tax liability/(asset) 300,406 (2,848,456) (2,548, 050)

1 Jan 2014 Movement 31 Dec 2014 Shs’000 Shs’000 Shs’000

Deferred income tax liability Accelerated tax depreciation 7,408,517 (1,276,576) 6,131,942 Fair value adjustments 27,639 (151,541) (123,902) 7,436,156 (1,428,117) 6,008,039

Deferred income tax asset Provisions (1,766,531) (38,100) (1,804,631) Deferred income (3,064,552) (838,450) (3,903,003) (4,831,083) (876,550) (5,707,633) Net deferred income tax liability 2,605,073 (2,304,667) 300,406

Annual Report & Financial Statements l 2015 104 NOTES TO THE FINANCIAL STATEMENTS (continued...)

21 Deferred expenses 2015 2014 Shs ‘000 Shs ‘000 At start of year 9,233,400 1,700,003 Additions 21,105,223 17,562,349 Transfer to property and equipment, and operating expenses (28,537,336) (10,028,952) At end of year 1,801,287 9,233,400

These include capital expenses incurred but for which the capital items have not yet been put into use. In addition, it includes prepayments made on the bank’s operational activities. The transfers to property and equipment, and operating expenses are analysed in the table below;

2015 2014 Shs’000 Shs’000 Computer equipment & accessories 6,430,575 2,640,739 Furniture, fixtures & equipment 11,089,681 4,626,064 Intangible assets 678,671 1,715,173 Motor vehicles 391,210 156,370 Work in progress-core banking system 9,488,732 - Operating expenses 458,467 890,606 28,537,336 10,028,952

The transfers to property and equipment, and operating expenses are under notes 22(b) and 13 respectively.

22(a) Finance lease on leasehold land

2015 2014 Shs’000 Shs’000 Cost At 1 January and 31 December 2,536,543 2,536,543

Amortisation At 1 January 312,566 267,035 Charge for the year 45,531 45,531 At 31 December 358,097 312,566 Net carrying amount 2,178,446 2,223,977

The finance lease relates to costs incurred when acquiring the leasehold land on plot 44-46 Kampala Road. The costs are being amortised on a straight line basis over the life of the lease agreement. The lease agreement for plot 44 – 46 Kampala Road became effective November 2009 for ninety nine years. As at 31st December 2015 the remaining lease period is 93 years.

At the inception of the lease, the obligations associated with the acquisition was all paid up front in full as required by the local laws. Therefore, all the lease payments/installments were paid upfront at the beginning of the lease and as at 31 December 2015 there were no other lease obligations outstanding.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 105

22(b) Property and Equipment

At 31 December 2015 Computer Work In Buildings Motor Equipment & Furniture Work In Progress Vehicles & Accessories Fixtures & Progress Core Banking Total Cycles Equipment Mapeera System Cost At 1 Jan 2015 82,720,610 10,981,966 38,433,275 61,830,063 11,418,222 - 205,384,136 Additions 590,895 - 3,538,744 13,667,126 - 39,239,929 57,036,694 Transfers from deferred expenses 391,210 6,430,575 11,089,681 - 9,488,732 27,400,198 Disposals - ( 765,733) (737,821) (492,394) - - (1,995,948) Transfer from work-in-progress - - - 11,418,222 (11,418,222) - - At 31 Dec 2015 83,311,505 10,607,443 47,664,773 97,512,698 - 48,728,661 287,825,080

Depreciation At 1 Jan2015 3,803,566 7,882,183 29,820,220 31,402,223 - - 72,908,192 Charge for the year 1,652,518 1,694,149 5,483,357 10,413,271 - - 19,243,295 On disposals - (755,448) (733,848) (492,246) - - (1,981,542) At 31 Dec 2015 5,456,084 8,820,884 34,569,729 41,323,248 - - 90,169,945

Net Carrying Amount At 31 Dec 2015 77,855,421 1,786,559 13,095,044 56,189,450 - 48,728,661 197,655,135

At 31 December 2014 Computer Work In Buildings Motor Equipment & Furniture Work In Progress Vehicles & Accessories Fixtures & Progress Core Banking Total Cycles Equipment Mapeera System Cost At 1 Jan 2014 71,566,200 11,944,669 38,181,066 57,570,894 7,716,182 - 186,979,011 Additions 3,438,228 70,908 - 5,055 11,418,222 - 14,932,413 Transfer from deferred expenses - 156,370 2,640,739 4,626,064 - - 7,423,173 Disposals - ( 1,189,981) (2,388,530) (261,461) - - (3,839,972) Transfer from work-in-progress 7,716,182 - - - (7,716,182) - - Impairment - - - (110,489) - - (110,489) At 31 Dec 2014 82,720,610 10,981,966 38,433,275 61,830,063 11,418,222 - 205,384,136

Depreciation At 1 Jan 2014 2,247,567 6,951,084 26,526,870 23,329,534 - - 59,055,055 Charge for the year 1,555,999 2,119,730 5,679,156 8,444,639 - - 17,799,524 On disposals - (1,188,631) (2,385,806) (261,461) - - (3,835,898) Impairment - - - (110,489) - - (110,489) At 31 Dec 2014 3,803,566 7,882,183 29,820,220 31,402,223 - - 72,908,192

Net Carrying Amount At 31 Dec 2014 78,917,044 3,099,783 8,613,055 30,427,841 11,418,222 - 132,475,944

Annual Report & Financial Statements l 2015 106 NOTES TO THE FINANCIAL STATEMENTS (continued...)

22(c) Intangible assets

2015 2014 Shs’000 Shs’000 Cost At 1 January 8,146,907 6,440,001 Additions 189,599 - Transfers from deferred expenses 678,671 1,715,173 Write downs - (8,267) At 31 December 9,015,177 8,146,907

AMORTISATION At 1 January 6,149,546 4,843,085 Charge for the year 1,202,240 1,307,456 Write down - (995) At 31 December 7,351,786 6,149,546

NET CARRYING AMOUNT At 31 December 1,663,391 1,997,361

23 Customer deposits 2015 2014 Shs’000 Shs’000 Current accounts 291,169,869 281,075,829 Savings accounts 966,593,498 784,414,283 Time deposits 122,430,488 109,625,442 1,380,193,855 1,175,115,554

The weighted average effective interest rate on customer deposits was 2.0% (2014: 2.1%). Customer deposit balances are due within one year.

24 Deposits and balances due to banks and other financial institutions

2015 2014 Shs’000 Shs’000 Balances from local banks 395,748 2,715,713 Other finance institutions 2,675,682 2,740,676 3,071,430 5,456,389

Deposits and balances due to banks and other financial institutions are due within one year. The average interest rate on the deposits and balances due to banks and other financial institution was 0.18% (2014: 0.19%)

25 Inter-bank borrowing

2015 2014 Shs’000 Shs’000 Borrowings from banks 4,006,082 - 4,006,082 -

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 107

Inter-bank borrowings relate to short-term borrowings from local banks. The interest rates range between 1% and 29% and the term of the loans ranges between 2 to 7 days. As at 31st December 2015, there was one interbank borrowing from Equity Bank.

26 Managed funds

2015 2014 Shs’000 Shs’000 Agricultural Credit Facility-Bank of Uganda 760,618 734,869 Rural Electrification Fund 74,855 76,252 Youth Venture capital fund 6,068,778 6,500,532 KCCA Fund 3,180,438 3,258,031 Managed Funds UECCC & WENRECCO 200,000 200,000 10,284,689 10,769,684

ACF-BOU

The Government of Uganda through the central bank in partnership with commercial banks, Uganda Development Bank Ltd and micro-deposit taking institutions (MDIs) created the Agricultural Credit Facility. The facility was created for the provision of medium term credit facilities to agriculture and agro-processing projects on more favorable terms as opposed to the open market. The credit facilities are advanced to customers at an interest rate of 12%. The other objectives of the facility include the promotion of commercial agriculture, increasing access to finance by agribusi- nesses, increased agricultural production thus food security as well as boosting the confidence of financial institution in lending to agriculture.

Rural Electrification Fund

On 8 August 2011, the Bank signed a Memorandum of Understanding with the Government of Uganda to improve and increase the provision of energy in the rural sector in Uganda. These funds are at zero interest and are applied as subsidies to qualifying rural borrowers to offset the cost of electrification. Their application is certified by Rural Electrification Board staff. Fresh replenishment on application are made by Government subject to availability. In 2015 no additional funds were received because the government suspended its operation to carry out a countrywide audit on all the systems installed by the solar providers.

Government Of Uganda Youth Venture Capital Fund

The Bank is a Participating Partner in the Government of Uganda (GoU) revolving Youth Venture Capital Fund (YVCF) established in Financial Year 2011/12 to facilitate job creation and employment generation targeted at addressing the rampant unemployment problem among the Ugandan youth by supporting financially viable start-up micro, Small and Medium Enterprises operated by Youth Entrepreneurs. Under the scheme the bank makes an equal contribution to the revolving fund and as at 31 December 2015 the fund stood at Shs 6.1 billion (31 December 2014: Shs 6.5 billion).

KCCA Youth Venture Capital Fund

The Bank in collaboration with Kampala Capital City Authority signed a Memorandum of Understanding on 30 Oc- tober 2012 to take custody and on-lend the authority’s Youth Venture Capital funds worth Shs 3.3 billion to eligible youth as per criteria set out and agreed upon. The fund is for 5 years subject to renewal terms and conditions acceptable to both parties. The funds are to support expansion of business ventures owned by the youth residing and working in Kampala District.

Annual Report & Financial Statements l 2015 108 NOTES TO THE FINANCIAL STATEMENTS (continued...)

UECCC and WENRECO

On 13th June 2014, the Bank signed a Memorandum of Understanding with the West Nile Rural Electrification Com- pany Limited (WENERECO) in partnership with Uganda Energy Credit Capitalisation Company (UECCC) to col- laborate in financing hydro power connections. UECCC provided the bank with Shs 200 million at a zero cost for on lending and to share risk by offering a default risk cover of up to 10%. WENRECO, on the other hand, is to participate in mobilisation of potential applicants for the power connection loan. The project targets West Nile sub regions that can be effectively served by Koboko, Paidha, Nebbi and Arua branches.

27 Borrowed funds

2015 2014 Shs’000 Shs’000 Triodos - 10,000,000 EIB PEFF I & II 10,395,870 14,310,585 Solar loan (UECCC) 512,846 586,110 ABI Trust 29,224,623 20,325,171 EIB EAC MF 25,253,696 27,434,454 EIB ECA PEFF 36,658,627 - 102,045,662 72,656,320

Triodos

This was a syndicated loan agreement between Centenary Bank and Triodos Investment Management B.V to finance the expansion of the loan portfolio. This facility was paid off at the end of its 3 year tenure in December 2015.

EIB PEFF (Private Enterprise Finance Facility) I & II

This was a global loan facility extended to a group of financial institutions in Uganda from Cotonuo Investment facility resources. The availability of this line of credit expired in 2012; the outstanding amount is principal plus interest on already drawn funds. The facility was used to finance private enterprises in agro industry, fishing, construction, food processing, and manufacturing, tourism and services provided to these sectors and in health and education sectors. Repayments are made semiannually and interest is computed on reducing balance. The interest rate charged on this facility was not fixed or uniform but was dependent on the tenure of the loan for which it was disbursed. In 2015, the EURO equivalent of UShs. 4 billion was paid off.

EIB EAC (European Investment Bank, East African Community) Microfinance facility

This is a Global Facility from the Cotonou Investment Facility which is used by East African Community banks for the financing of micro credit projects. This was a bullet disbursement (in 2014) of the UShs. equivalent of EURO 8 million. The loan tenure is 7 years at a fixed interest rate of 10.008%.

EIB ECA PEFF (European Investment Bank, East and Central Africa Private Enterprise Finance Facility)

The loan agreement was signed in December 2014 for an agreed maximum amount of the UShs. equivalent of EURO 20 million. The first tranche was disbursed in 2015 and as at December 2015, EURO 9.1million had been drawn down. The loan agreement allows for minimum and maximum tenures of 4 years and 7 years respectively. Rates vary by tenure but do not exceed 10%.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 109

Solar Loan

Centenary Bank signed a solar refinance facility of USD 250,000 with Uganda Energy Credit Capitalisation Company on 12th July 2012. The refinance facility is denominated in Ushs and the shilling liability is determined at the exchange rate applicable on every release of funds. The Bank drew down Shs 128.8 million in October 2012. The refinance interest rate is 8.15% per annum fixed. The repayment of the principal borrowed is in 18 equal half yearly installments commencing 12 months after draw down. The funds are applied exclusively for the purpose of provision of solar loans to rural households. The loans are secured by promissory notes. In 2014 there was an additional funding of Shs 255.9 million. In 2015 there was no additional funding received. The Bank expects to sign a new contract of USD 150,000 in 2016.

Agri Business Initiative (aBi) Trust

The Bank partnered with aBi trust and Private Sector Foundation Uganda to extend financial literacy to millions of people through the “CenteBusinessLife” programme. This was done through classroom training, electronic media training, print media messages, market vendor training and mentorships. Over 10,000 Small and Medium Enterprises (SMEs) in 9 districts countrywide have improved their businesses. During the year 2015, two facilities were secured that is Shs. 3.9 billion and Shs. 5 billion priced at 12.5% and 11.25% respectively. There is no unfulfilled condition as at the year end.

28 Other liabilities 2015 2014 Shs’000 Shs’000 Bills payable 959,645 994,368 Clearing suspense 259,138 197,825 Unearned fees on late payments 542,573 627,561 Deferred fee income 16,447,303 13,010,011 Guarantees - Cash collateral 262,291 411,577 Contract staff (Terminal benefits) 790,748 632,644 Accrued expenses 9,644,100 6,883,831 PAYE payable 3,863,049 3,493,617 N.S.S.F payable 1,906,661 1,743,028 Centemobile service charge 1,507,648 690,500 Accounts payable 5,354,691 1,510,235 Uganda Revenue Authority collections 19,157,389 9,339,630 Unclaimed balances (Nostro A/cs) 8,863 3,287 Excise duty on bank charges 439,528 439,716 Real Time Gross Settlement 949,402 216,045 Withholding tax payable 1,245,485 936,579 Other payables 3,519,893 5,555,925 66,858,407 46,686,379

29 Provisions for litigation

2015 2014 Shs’000 Shs’000 Legal cases 1,520,636 571,749 Defalcations 119,985 6,980 1,640,621 578,729

Annual Report & Financial Statements l 2015 110 NOTES TO THE FINANCIAL STATEMENTS (continued...)

The Bank is a litigant in several cases which arise from normal day-to-day banking activities. The Directors and Manage- ment believe the Bank has strong grounds for success in majority of them and are confident that they should get a ruling in their favor and none of the cases individually or in aggregate would have a significant impact on the Bank’s operations. Management carried out an assessment of all the cases outstanding as at 31 December 2015 and where considered necessary, provisions were made as indicated above.

30 Deferred Grants 2015 2014 Shs’000 Shs’000 At start of year 746,576 1,030,250 Additions / Direct Transfers 421,187 758,073 Transfers to profit or loss (631,176) (1,041,747) At end of year 536,587 746,576

The opening balance at the start of the year 2015 and 2014 relates to grants in form of cars, laptops and scanners to assist the Bank to set up the leasing portfolio and a grant from USAID to procure a mobile bank van to improve outreach in the Northern region where infrastructure is not so well developed. Grant additions include:

2015 2014 Shs’000 Shs’000 ABI Trust 390,816 - ILO 16,967 - GIZ 13,404 179,669 Agrifin - 578,404 421,187 758,073

GIZ Financial Systems Development Program

GIZ Financial Systems development Programme (FSD), through the support of the German Development Cooperation of the German Government, supported the Bank in financing a baseline survey on SACCOs , Village Savings and Loan Association( VSLAs) and farming groups based in Karamoja to inform whether the groups are bankable and investigate the most effective, impactful financial products and appropriate channels of delivering such products to the sub-region. The Bank, under the same programme, was supported to install solar systems in the service outlets located in Moroto and Kotido. There is no unfulfilled condition as at the year end.

aBi Trust

In July 2015, Centenary Bank partnered with ABi Trust to set up a service center in Adjumani. The aim of this was to transform the social and economic livelihoods of Adjumani district through offering affordable financial services to the people of West Nile and the sorrounding areas. The agreement was to support the bank with a total contribution of Shs. 403.8 million 47% of the total budgeted cost of Shs. 851.5 million. The grant was disbursed quarterly in two tranches and by 31st December 2015 Shs. 390.8 million had been disbursed.

ILO

The bank received financial support of 4,700USD (equivalent 16.9 million) from International Labour Organisation (ILO) under the Women Entrepreneurship Development and Economic Empowerment(WED-EE) Project to organize and conduct a training of trainers on gender sensitive financial services. 22 staff were trained on how to use the FAMOS guide tool kit which kit enables the institution to build a business case of “why targeted and holistic interventions for women” is beneficial and promotes a win – win situation for a better- served woman and an expanded client base for the financial institution.

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 111

31 Earnings per ordinary share

Basic earnings per share are calculated by dividing the profit attributable to the ordinary equity holders of the Bank by the weighted average number of ordinary shares in issue during the year

2015 2014 Shs’000 Shs’000 Net income 101,601,248 73,816,511 Dividends to preference shareholders (116,624) (23,324) Net income attributable to ordinary shareholders 101,484,624 73,793,187 Weighted average number of ordinary shares (No.) 25,000,000 25,000,000

Basic earnings per ordinary share (shillings per share) 4.059 2.952

There were no potentially dilutive shares outstanding at 31 December 2015 or 2014. Diluted earnings per share are therefore the same as basic earnings per share.

32 Share capital 2015 2014 Shs’000 Shs’000 Authorized 28,825,356 ordinary shares (2014: 28,825,356) of Shs 1,000 each 28,825,356 28,825,356 150,000 non-redeemable preference shares of Shs 1,000 each 150,000 150,000 28,975,356 28,975,356

2015 2014 Shs’000 Shs’000 Issued and fully paid 25,000,000 ordinary shares (2014:25,000,000)of Shs 1,000 each 25,000,000 25,000,000 116,624 preference shares (2014: 116,624) of Shs 1,000 each 116,624 116,624 25,116,624 25,116,624

The issued number of shares as at year end was 25,000,000 ordinary shares and 116,624 preferences. Shares (2014: 25,000,000 ordinary shares and 116,624 preference shares). All issued shares are fully paid.

There was no movement in share capital and share premium in 2015 and 2014.

Share Premium Preference Ordinary At 1 January and 31 December 2015 1,138,927 116,624 25,000,000

Share Premium Preference Ordinary At 1 January and 31 December 2014 1,138,927 116,624 25,000,000

The holders of ordinary shares are entitled to receive dividend from time to time and are entitled to one vote per share at meeting of the Bank. Holders of preference shares received a non-cumulative coupon of 100% (2014: 20%) and they do not carry the right to vote. All shares rank equally with regards to the Bank’s residual assets except that the preference shareholders have priority over ordinary shareholders but participate only to the extent of the face value of the shares. Share premium is the reserve that resulted from the ordinary shares being sold at a price that was over and above the nominal share price of Shs 1,000.

Annual Report & Financial Statements l 2015 112 NOTES TO THE FINANCIAL STATEMENTS (continued...)

33 (a) Cash dividends on shares declared and paid

2015 2014 Shs’000 Shs’000 Final dividend for ordinary shares for 2014 (Shs 738 per share): 25% of NPAT 18,454,128 9,652,245 (2013 [Ushs 386 per share]: 16.6%) Final dividend for preference shares for 2014: 20.0% of issued and fully paid 23,324 23,324 (2013: 20%) 18,477,452 9,675,569

33(b) Proposed dividends

2015 2014 Shs’000 Shs’000 Final dividend for ordinary shares for 2015(Shs 1,016 per share) and 2014 25,400,312 18,454,128 (Shs 738 per share): 25% of NPAT Final dividend for preference shares for 2015: 100.0% of issued and fully paid 116,624 23,324 (2014: 20%) 25,516,936 18,477,452

Proposed dividends on ordinary and preference shares are subject to approval at the annual general meeting and are not recognised as a liability as at 31 December. Dividends are subject to withholding tax at rates which vary depending on the tax residence status of the recipient and double tax agreements in place.

34 Regulatory reserve 2015 2014 Shs’000 Shs’000 At start of year 3,377,657 1,822,018 Transfer from retained earnings during the year 1,861,712 1,555,639 At end of year 5,239,369 3,377,657

The regulatory reserve represents amounts by which provisions for impairment of loans and advances determined in accordance with the Financial Institutions Act 2004 exceed those determined in accordance with International Financial Reporting Standards. These amounts are appropriated from retained earnings in accordance with the Bank’s accounting policy and BOU guidelines.

35 Cash and cash equivalents 2015 2014 Shs’000 Shs’000 Cash and balances with Bank of Uganda (Note 15) 176,919,896 140,653,147 Balances with other financial institutions (Note 16) 92,522,927 49,527,599 Treasury bills and other eligible bills < 91 days 137,119,628 128,171,233 Government securities held for trading (Note 17) 31,885,743 24,180,039 438,448,194 342,532,018

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 113

36.Off-statement of financial position financial instruments and capital commitments 36.1 Guarantees and performance bonds

2015 2014 Shs’000 Shs’000 Acceptances and letters of credit 4,460,935 3,954,594 Performance bonds 12,332,041 15,846,321 Bid securities bond guarantees 14,330,741 5,222,555 Commitments to extend credit 6,328,088 6,327,176 37,451,805 31,350,646

36.2 Capital Commitments 2015 2014 Shs’000 Shs’000 Capital expenditure authorised and contracted 12,160,569 48,137,000 12,160,569 48,137,000

The expenditure was funded from the Bank’s internal resources.

In 2013, Phase three of the Bank’s new headquarters on Plot 44-46 Kampala Road commenced at an estimated cost of USD 16.3M. By close of year 2015 a total of USD 12.8M had been made (2014: USD 9.2M). The remaining amount of USD 3.5M (equivalent to UShs. 12.2Bn) under this project mainly relates to defect liability and will be paid in the year 2016. Phase three was completed and handed over to the bank in November 2015. .

36.3 Operating lease commitments - Bank as a lessee

The Bank entered into commercial leases for motor vehicles and photo copiers. These leases have an average life of two years with a renewal option included in the contracts. There are no restrictions placed upon the lessee by entering into these leases. Future minimum lease payments under non–cancellable operating leases as at 31 December are, as follows:

2015 2014 Shs’000 Shs’000 Within one year 3,940,760 1,476,776

37 Related party transactions and balances (i) Directors’ remuneration 2015 2014 Shs’000 Shs’000 Fees to Non-Executive Directors 654,866 514,407 Emoluments to Executive Directors 2,163,873 2,138,625 Emoluments to directors 2,818,739 2,653,032 Other expenses – Non-Executive Directors 740,081 412,136 Other expenses - Executive Directors 13,634 - 3,572,454 3,065,168

Annual Report & Financial Statements l 2015 114 NOTES TO THE FINANCIAL STATEMENTS (continued...)

(ii) Loans and advances to related parties

2015 2014 Shs’000 Shs’000 At 1 January 32,167,147 26,021,517 Advanced during the year 20,316,458 14,473,215 Repaid during the year (12,879,808) (8,327,585) At 31 December 39,603,797 32,167,147

The value of security pledged for the above loans amounts to Ushs 180.7 billion as at 31 December 2015 (2014: Ushs 160.8 billion). The average period of the loans is 48 months. The average interest rate was 23% (2014: 21%)

(iii) Substantial shareholders (>5% of shareholding)

2015 2014 % % Shareholder name Catholic Archdiocese of Kampala 5.3 5.3 Registered Trustees of the Uganda Episcopal Conference 31.3 31.3 SIDI (France) 11.6 11.6 Stiching Hivos Triodos 18.3 18.3 Total 66.5 66.5

(iv) Loans to shareholders and guarantees by shareholders

2015 2014 Shs’000 Shs’000 Shareholder Catholic Diocese of Kabale 346,257 464,329 Catholic Archdiocese of Kampala 21,237,875 20,375,089 Catholic Diocese of Lugazi 2,375,227 946,321 Catholic Diocese of Hoima 1,581,009 1,038,416 Catholic Diocese of Gulu 39,033 21,438 Catholic Diocese of Jinja 349,063 508,495 Catholic Diocese of Arua 1,276,729 198,419 Catholic Archdiocese of Lira 717,612 226,599 Catholic Diocese of Masaka 6,518,389 4,853,485 Catholic Archdiocese of Tororo 178,292 319,277 Catholic Diocese of Fort Portal 628,687 139,091 Catholic Archdiocese of Mbarara 2,063,385 1,458,956 Catholic Diocese of Kasana, Luweero 566,259 271,712 Catholic of Diocese Kasese 30,000 3,732 Catholic Diocese of Mityana 137,963 158,914 Total 38,045,780 30,984,273

Executive Directors 260,716 438,874 Non-Executive Directors 45,607 47,099 EXCO members 1,251,694 696,901 1,558,017 1,182,874 Total 39,603,797 32,167,147

Annual Report & Financial Statements l 2015 NOTES TO THE FINANCIAL STATEMENTS (continued...) 115

The average interest rate for loans advanced to dioceses was 20.9% (2014: 22.7%).

(v) Key management compensation

2015 2014 Shs’000 Shs’000 Salaries and short term employee benefits 5,457,181 5,127,302 Post-employment benefits 1,615,116 1,457,355 Total 7,072,297 6,584,657

Annual Report & Financial Statements l 2015 116 BRANCH AND ATM NETWORK

Understanding and responding to our customers’ needs is key to Centenary Bank’s success. The importance of service delivery is fundamental and a non-negotiable component of our attitude towards customers.