Tel +265 (0) 1 876 222 / 231. Fax +265 (0) 1 875 298. Email: [email protected] Website: www.nbsmw.com We continue to ensure that our customers receive services of the highest standards.

NBS Annual Report 2006 Our vision: To be the Bank of choice in . Our mission: We undertake to add value to our stakeholders by offering an innovative range of banking products through efficient processes and empowered and caring staff. Our values: Integrity, Care, Quality Service, Health and Safety, Ethical Standards, Transparency and Good Corporate Governance.

Contents: 1 Background 3 Chairmans report 6 7 Chief Executive Officer’s report 9 Senior Management 10 Corporate Governance 11 Branch Network 12 Social responsibility 13 Financial highlights 15 Financial statements Contact details: NBS Bank, Head Office, NBS House, Cnr. Chipembere Highway/ Johnstone Road, P.O. Box 32251, Chichiri, 3, Malawi. Telephone: +265 (0) 1 876 222. Fax: +265 (0) 1 876 041. Email: [email protected]. Web: www.nbsmw.com 1

Banking together. Growing together. Stronger everyday.

background

NBS Bank was incorporated as Commonwealth Century Building mortgage business to financial a Limited Liability company on Society and First Building Society. institutions registered under the 14th March 2003 and registered It got incorporated under the Banking Act. under the Banking Act on the 1st Building Societies Act on 7th March 2004. It started its February 1964. Since then the The Society however, could not commercial banking operations Society continued to operate under offer products traditionally on 1st July 2004, when the New the Act and raised funds from the marketed by . It therefore Building Society was dissolved. public and advanced them by became increasingly more difficult way of mortgage against the for the Society to compete fairly The bank’s predecessor institution, security of the land and buildings. and satisfy the expectations of its The New Building Society, was customers. A decision was formed following the It operated almost monopolistically consequently made to convert the amalgamation of the Central in mortgages until the building society to a commercial African Building Society, liberalization of the financial bank. market in Malawi opened the 2

The Bank launched EazySave which is a savings product with a reduced minimum balance to ensure affordability for those who could not raise the minimum balance for ordinary savings account. 3

NBS continued to be The Bank of choice on the scene as evidenced by the growth in its deposits, assets and ATM Card holders. Chairman’s Report

For the financial year ended 31 Standards which have resulted in New Products December 2006 more provisions being made to The Bank launched Eazy save Year 2006 marked the second full cater for severance and leave pay. which is a savings product with a year of NBS operating as a Bank. reduced minimum balance to As a new player on the saturated For the year ended 31st December ensure affordability for those who banking market, the challenges 2006, NBS Bank registered a net could not raise the minimum were immense as the Bank had profit before tax of K299 million balance for ordinary savings to deal with competition on level representing a 109% growth over account. playing field. The economic 2005 profit of K143 million, performance improved as despite major challenges in forex ATM Network compared to the previous year shortages and a relative high cost During the year, the Bank resulting into reduction in inflation of running the business. Net profit continued to expand its own ATM and interest rates. One of the after tax of K182 million was 28% network operating through major challenges was shortages above the 2005 profit of K142 MOSAIC’s Postilion switch on of foreign exchange despite the million the major disparity in tax Wincor Nixodorf’s ATMs. These exchange rate stabilising with most being K76 million tax losses ATMs which accept the three main of the major currencies. carried forward from 2004 which languages of English, Chichewa were fully utilized in 2005. and Tumbuka are unique and the Notwithstanding the above, the first of its sort in Malawi. Todate Bank strategised its operations Prospects for 2007 are bright the Bank has 32 ATMs in total, during the year to consolidate on though major challenges will all of which are at its Branches the gains achieved since 2005. remain to manage interest margins and Agencies. The plan is to have NBS continued to be the Bank of with likely reduction in interest 40 units functional before the end choice on the scene as evidenced rates and continued shortages of of 2007 in order to improve by the growth in its deposits, foreign exchange. service delivery to our rapidly assets and the ATM Card holders. growing customer card base. The Board did not recommend Financial Performance payment of dividend to Branch and Agency Operations st st During the year ended 31 Shareholders for year ended 31 In the year 2006, the bank opened December 2006, the Bank December 2006 due to funding a new Agency in continued adopting new requirements for the ongoing making it the only fully fledged International Accounting expansion programme. to have outlets 4

Year 2007 looks to be more challenging as we roll out more products and services and would like to thank our clients and business associates for their continued support.

in all districts in the Nothern Changes On Board of Directors products and services and would Region. Now the Bank has a total The Board of Directors for the like to thank our clients and st of 24 outlets, 12 branches and Bank as at 31 December 2006 business associates for their 12 agencies countrywide. was as follows: continued support. F.L. Mlusu: Chairman Full Year Changes in Management I wish to thank both management J. Swankie: Director Weston Kusani who was the Head and staff for their hard work and Full Year of Credit since the Bank converted commitment to duty. G.M. Wawanya: Director from a Building Society in 2004 Full Year left the Bank in Octobeer 2006 V Kumwenda: Director I wish also to thank the Directors, joining Malawi Rural Finance as Full Year who were on the Board both past Director of Operations and we wish R Mwadiwa: Director and present, for their support and him well. Mr Samson Kamkosi Full Year guidance. who has been the Bank’s E Nuka (Mrs): Director st Mortgage Manager since 2002, From 1 April 2006 Let me also take this opportunity is the Acting Head of Credit. J Banda (Mrs): Director to thank Mr T Daniel who has st From 1 April 2006 been Director of the Bank from A Mwala (Mrs): Director Staff st the period the institution was a From 1 April 2006 We continue to ensure that our building society up to the post- P.T. Daniel: Director customers receive service of the banking conversion period. Up to 30/09/06 highest standards, which has been Mr Daniel was instrumental in the instrumental in the growth of our conversion process from a building I wish to express my gratitude for customer base. Major emphasis the invaluable contributions made society to a retail bank. Mr Daniel is put on staff development by fellow Directors on several served in several committees of focusing on training for improved Board Committees during the the Society and (later the Bank) customer service especially on period leading to the building of during his tenure as Director. efficiency. The sourcing of quality a vibrant Bank Brand during the staff that is geared towards facing year. the challenges has augmented this. Word of Appreciation Year 2007 looks to be more challenging as we roll out more F L Mlusu 5

Board of Directors

Mr Mr Vizenge Kumwenda Mr Joe Swankie (Chairman) (Director) (Director)

Mrs Audrey Mwala Mrs Estelle Nuka Mr R Mwadiwa (Director) (Director) (Director)

Mrs J Banda Mr G Wawanya (Director) (Director) 6

Countrywide multilingual ATMs with up to K60 000 daily withdrawal allowance. 7

The bank will continue to strive for growth with the ultimate goal of generally satisfying all stakeholders and, in particular, increasing Shareholders value in a sustainable manner.

Chief Executive Officer’s Report

The financial year ended 31 Banking Operations New Products and Services December 2006 In 2006, the bank expanded its In conjunction with Travellex, the In Year 2006 the Bank continued operations and opened a new bank also rolled out into the to consolidate on the gains made outlet in NkhataBay. This market a Visa Cash passport. This since July 2004 when it started effectively made NBS bank the is a that is meant to offering the full range of banking only full serviced commercial bank replace traveller’s for products. Despite the challenges to have branches in all districts people who travel outside the associated with new entrants in of the Nothern Region of Malawi. country. The card can be used at any industry, the Bank was able This is apart from being the only any VISA registered merchant or to achieve growth through bank that serves University at any VISA enabled automatic acquisition of already banked students and staff right on campus teller machine. customers as well as previously through its initiative. The bank’s unbanked sector. geographical expansion program Financing the SME Sector is in line with its philosophy of As a pilot project, the Bank Business Growth taking banking to the people. financed bee-keeping farmers in In terms of business growth, the Chitipa and Nkhata Bay districts bank’s deposit base grew to over The Bank continued to adopt the in collaboration with ECO Products MK8.4 billion, from K7.6 billion new and revised Financial Ltd. This is aimed at offering at the beginning of the year. This Reporting Standards that are financing opportunities to allowed the bank to maintain its relevant to the Bank’s Operations smallholder farmers and small- third position in deposit taking in and effective for accounting scale , which have the banking industry. Net assets periods beginning on 1 January hitherto lacked capital. The Bank grew from K8.7 billion to 2006. will expand this initiative to other K10 billion in 2006. And lending sectors in 2007. grew from K4.8 billion to K6 The Bank was exempted from the billion. The bank will continue liquidity reserve requirement with Delivery Outlets to strive for growth with the the Reserve Bank for a period of Continuing our programme of ultimate goal of generally 24 months ended 30 June 2006 improving the ambience of our satisfying all stakeholders and, in and has been subjected to liquidity outlets, we continued particular, increasing Shareholders reserve requirement from 1 July refurbishment works of the value in a sustainable manner. to 31 December 2006 which it Blantyre Branch, Victoria Avenue complied with. wing. The main branch is now 8

At NBS Bank, we regard staff as our greatest asset.

operating from the Chilembwe Social Responsibility Road wing from October 2006. On its social responsibility Meanwhile, as at end of December program, NBS Bank part 2006, similar works had been sponsored the Mulanje Mountain completed for the Haile Selassie Porter’s Race. This is Malawi’s Branch (previously called Business only extreme sport that also gives Centre) and now relocated to Haile an opportunity to communities Selassie Avenue in ground floor around Mount Mulanje (who of NICO House. This is a normally serve as porters or tour continuation of a programme guides) to participate. The much which started with refurbishment publicised race attempts to bring of the Head Office, , awareness to all about the need and Kasungu Branches. to conserve our natural resources.

Appreciation Staff Development Lastly, I would like to thank our At NBS Bank, we regard staff as board of directors, my our greatest asset. As such, we management team and all continued to develop skills and members of staff for their competencies of staff so as to dedication and support during the meet the challenges of an year as we look forward to an even increasingly competitive more successful 2007. environment. Through the motivation and encouragement that we give, the number of staff studying privately to develop themselves and attain professional banking, accounting and John S Biziwick marketing qualifications continue Chief Executive Officer to increase 9

Senior Management

Mr J Biziwick Mr G Kadzakumanja Mr M Ndenya (CEO) (Deputy CEO) (Finance and ICT Executive/ Co Secretary)

Mr D Chatima Mr M Mlomba (Head of ICT) (Head of Internal Audit and inspection

Mr S Kamkosi Mrs E Chafulumira (Head of Credit) (Head of HR and Admin) 10

NBS Bank is fully devoted to the principles of accountability, integrity and transparency. Corporate Governance

Introduction accountable for the performance the government, the community NBS Bank is committed to good of the bank to all its stakeholders. and its service providers. The corporate governance. NBS Bank There are three Board committees Board recognises the importance is fully devoted to the principles namely; the Finance and Audit of building and maintaining of accountability, integrity and Committee, the Appointments and sustainable relationships with its transparency. It embraces and Remuneration Committee and the stakeholders and striking an abides by the principles of Credit Committee. appropriate balance between their corporate governance as contained various needs. in the Cadbury Report and the Finance and Audit Committee King’s Report. The Finance and Audit committee is comprised of E. Nuka(Mrs)- Board composition Chairperson and V. Kumwenda as NBS Bank has a Board consisting Member, Mr T. Daniel was the th of eight directors whose chairman up to 30 September, membership comprises of non- 2006. executive directors. This set-up ensures the highest possible Appointment and Remuneration standard of corporate governance. committee This committee is comprised of Board procedures J. Banda (Mrs) – Chairperson, The Board remains in control of V. Kumwenda– Member and the company and monitors the R. Mwadiwa – Member. implementation of agreed strategies by Executive Credit Committee Management as well as its risk This committee comprised of management practices and Messrs J. Swankie, G. Wawanya policies. and A. Mwala (Mrs)

The Board holds regular formal Intergrity and ethics meetings at least four times a The company is committed to year. maintaining the highest standard of integrity and ethics in all its Board committees external and internal dealings. The Board appointed a number of committees within itself and Communication and relationships delegated certain responsibilities with stakeholders to those committees. The Board The company’s stakeholders recognises that it remains include its shareholders, ultimately responsible and employees, customers, regulators, 11

Wide branch network satisfying the philosophy of “ Taking banking to the people.”

Branch Network

Kanego Agency Chitipa Capital City Branch Lake Malawi Lilongwe Branch Northern Bunda College Bank@Campus Rumphi Mzuzu

Nkhata Bay Luwawa Limbe Branch Chichiri Mall Agency Dwangwa Ginnery Corner Nkhota Kota Kasungu Bua Branch Central Blantyre Branch Mchinji Salima

Haile Selassie Road Lilongwe Monkey Bay Branch Dedza Mangochi Southern

Ncheu Liwonde Zomba Branch Zomba Shire Chancellor College Blantyre Limbe

Chikwawa Bank@Campus Mulanje 12

Below: Porters Race, Mt Mulanje. Bottom: Donation to Country Club Limbe during monthly Mug winner of winners golf competition Social Responsibility 13

In terms of business growth, the bank’s deposit base grew to over MK8.4 billion, from K7.6 billion at the beginning of the year. This allowed the bank to maintain its third position in deposit taking in the banking industry.

Financial Highlights

Total assets Total deposits

15 000 10,000,000 8,000,000 10 000 6,000,000 4,000,000 5 000 2,000,000 - - Dec 04 Dec 05 Dec 06 Dec 04 Dec 05 Dec 06 3,300,115 8,134,008 10,045,488 5,380,834 7,172,427 8,452,393

Net operating Profit (Before tax) Loans and advances 8,000,000 400,000

6,000,000 300,000

4,000,000 200,000

2,000,000 100,000

- - Dec 04 Dec 05 Dec 06 Dec 04 Dec 05 Dec 06 1,355,773 4,214,727 5,754,229 143,163 143,143 299,343 14

In conjunction with Travellex, the bank also rolled out into the market a Visa Cash passport. 15

ABank that works for you should always be part of your business plan.

Financial Statements for the year ending 31 Decembercontents 2006

16 Directors’ report 17 Statement of directors’ responsibilities 16 Independent auditor’s report 19 Income statement 21 Statement of changes in equity 23 Balance sheet 24 Statement of cash flows 25-31 Significant accounting policies 32-48 Notes to the financial statements 16 Director’s Report

For the year ended 31 December 2006. principles of good corporate governance. All board committees have terms of reference and report to the The Directors have pleasure in submitting the financial main board. statements of NBS Bank Limited for the year ended 31 December 2006. Finance and Audit Committee The Audit Committee is responsible for reviewing the Nature of business reports of both internal and external auditors, as well as NBS Bank Limited was registered as a financial institution the adequacy and effectiveness of internal and accounting under the Banking Act 1989 on the 1 March 2004 however controls. The committee consists of three non-executive it commenced banking operations from 1 July 2004 and directors and the Chief Executive Officer attends the audit is engaged in commercial banking activities. committee meetings as a management representative.

The Share holders and their respective shareholdings are: Both internal and external auditors have unlimited access 2006 2005 to the Audit Committee.The Committee is comprised of % % E. Nuka (Mrs) – Chairperson and V. Kumwenda as Member. NICO Holdings Ltd 74 74 Mr T. Daniel was the Chairman up to 30th September, Malawi Government 16 16 2006. National Investment Trust 10 10 Appointments and Remuneration Committee Financial performance The Committee is responsible for reviewing Employees The bank reported profit before tax of K299 million Conditions of Service and hiring of Executive Management. and net profit after tax of K182 million and Directors are not recommending a dividend pay out for 2006 The Committee is comprised of J. Banda (Mrs) – due to the Bank’s ongoing expansion programme. The Chairperson, V. Kumwenda – Member and results and state of affairs of the Bank are set out in the R. Mwadiwa –Member. accompanying income statement, statement of changes in equity, balance sheet, statement of cash flows and Credit Committee associated accounting policies and notes. The Committee is responsible for Credit approvals which are above the Management Credit Committee and also Directorate and Secretary approvals of all non performing loans to be written off. The following directors and secretary served during the year: The Committee is comprised of J. Swankie – Chairman, Mr F L Mlusu: Chairman All year G. Wawanya – Member and A. Mwala (Mrs) –Member. Mr J Swankie: Director All year Mr G M Wawanya: Director All year Auditors Mr R Mwadiwa: Director All year A resolution will be proposed at the forthcoming Annual Mr V Kumwenda: Director All year General Meeting to re-appoint KPMG, Certified Public Mrs E Nuka: Director Appointed Accountants (Malawi) as auditors in respect of the bank’s April 2006 31 December 2007 financial statements. Mrs J Banda: Director Appointed April 2006 Mrs A Mwala: Alternate Director Appointed April 2006 Mr P T Daniel: Director Resigned Director Director September 2006 Mr M Ndenya: Company Secretary All year 29th March 2007

Board Committees Board Committees were established to ensure that the board discharges its duties effectively in accordance with 17 Statement of Director’s Responsibilities

For the year ended 31 December 2006

The Companies Act, 1984, requires the directors to The directors accept responsibility for taking such prepare financial statements for each financial year steps as are reasonably open to them to safeguard which give a true and fair view of the state of affairs the assets of the company and to maintain adequate of the company as at the end of the financial year systems of internal controls to prevent and detect and of the operating results for that year. fraud and other irregularities.

The Act also requires the directors to ensure the The directors are of the opinion that the financial company keeps proper accounting records which statements give a true and fair view of the state of disclose with reasonable accuracy at any time the the financial affairs of the company and of its financial position of the company and enable them operating results. to ensure that the financial statements comply with the Companies Act, 1984.

In preparing the financial statements, the directors accept responsibility for the following: Director • Maintenance of proper accounting records; • Selection of suitable accounting policies and applying them consistently; • Making judgements and estimates that are reasonable and prudent; • Compliance with applicable accounting standards, when preparing financial statements, subject to Director any material departures being disclosed and th explained in the financial statements; and 29 March, 2007 • Preparation of financial statements on a going concern basis unless it is inappropriate to presume that the company will continue in business. 18

The Board recognises the importance of building and maintaining sustainable relationships with its stakeholders and striking an appropriate balance between their various needs. 19 Independent Auditor’s Report

We have audited the financial statements of NBS Bank to the entity’s preparation and fair presentation of the Limited, which comprise the balance sheet at 31 December financial statements in order to design audit procedures 2006, the income statement, the statement of changes that are appropriate in the circumstances, but not for the in equity and cash flow statement for the year then ended, purpose of expressing an opinion on the effectiveness of and the notes to the financial statements, which include the entity’s internal control. An audit also includes a summary of significant accounting policies and other evaluating the appropriateness of accounting policies used explanatory notes as set out on pages 17 to 44. and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation Directors Responsibility for the Financial Statements of the financial statements. The company’s directors are responsible for the preparation and fair presentation of these financial statements in We believe that the audit evidence we have obtained is accordance with International Financial Reporting sufficient and appropriate to provide a basis for our audit Standards and with the Malawi Companies Act, 1984. opinion. This responsibility includes: designing, implementing and maintaining internal controls relevant to the preparation Opinion and fair presentation of financial statements that are free In our opinion, the financial statements present fairly, in from material misstatement, whether due to fraud or error; all material respects, the financial position of NBS Bank selecting and applying appropriate accounting policies; Limited at 31 December 2006 and of its financial and making accounting estimates that are reasonable in performance and cash flows for the year then ended in the circumstances. accordance with International Financial Reporting Standards and with the provisions of the Malawi Companies Auditor’s Responsibility Act, 1984. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. KPMG An audit involves performing procedures to obtain audit Certified Public Accountants (Malawi) evidence about the amounts and disclosures in the financial Blantyre statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks 29 th March 2007 of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant 20

Prospects for 2007 are bright though major challenges will remain managing interest rate margins with likely reduction in interest rates and continued shortages of foreign exchange. 21 Income Statement

For the year ended 31 December 2006 In thousands of Malawi Kwacha

Notes 2006 2005 INCOME Restated* Interest on loans and advances 1,209,222 652,938 Interest on placements with other banks 36,671 8,253 Income from lease financing 215,533 96,448 Income from money market investments 279,065 570,119 Total Interest Income 1,740,491 1,327,758 Interest expense (810,452) (632,772) Net Interest Income 930,039 694,986 Fee and commission income 337,785 250,062 Profit on foreign exchange transactions 256,372 212,164 Other operating income 2 83,639 22,089 Operating Income 1,607,835 1,179,301

EXPENDITURE Staff costs 3 569,120 433,639 Recurrent expenditure on premises and equipment 144,746 109,508 Depreciation 17 165,924 108,369 Other operating costs 4 397,675 335,303 Operating expenditure 1,277,465 986,819

Profit before impairment losses 330,370 192,482

Loan impairment loss 15 (31,022) (49,339) Profit before income tax expense 299,348 143,143

Income tax expense 5 (117,803) (1,207) PROFIT FOR THE PERIOD 181,545 141,936

Basic earnings per share (MK) 6 0.91 0.71

The financial statements are to be read in conjunction with the accounting policies on pages 25 to 31 and notes on pages 32 to 48.

* The restatement is fully disclosed in note 18.

The auditor's report is on page 19. 22 Statement of Changes in Equity

For the year ended 31 December 2006. In thousands of Malawi Kwacha

Share Share Property Fair value loss Retained Total capital premium revaluation reserve reserve earnings reserve

Balance as at 1 January 2005 200,000 164,637 287,322 - - 160,492 812,451 Prior period adjustment - - - - - (59,069) (59,069) Adjusted balance at 1 January 2005 200,000 164,637 287,322 - - 101,423 753,382 Profit for the year - - - - - 141,936 141,936 Revaluation of property - - 26,468 - - - 26,468 Transfer to deferred tax - - (56,482) - - - (56,482) Fair value reserve - - - 10,122 - - 10,122 Transfer to deferred tax - - - (3,036) - - (3,036) Dividends paid - - - - - (170,000) (170,000)

Balance as at 31 December 2005 200,000 164,637 257,308 7,086 - 73,359 702,390

Balance at 1 January 2006 200,000 164,637 257,308 7,086 - 73,359 702,390 Profit for the year - - - - - 181,545 181,545 Revaluation of property - - 9,095 - - - 9,095 Realisation on disposal of property - - (144,257) - - 144,257 - Change in deferred tax percentage - - 4,473 - - - 4,473 Transfer to loan loss reserve ** - - - - 139,000 (139,000) - Addition to fair value reserve - - - 19,286 - 19,286 Transfer from deferred tax - - - - - 23,890 23,890

Balance as at 31 December 2006 200,000 164,637 126,619 26,372 139,000 284,051 940,679

* Prior year adjustments relate to applications of revisions to IAS 39 fully described in note 18.

** Relates to additional charge on loan loss provisions in accordance with Reserve Bank of Malawi guidelines (Refer to Note 24).

The financial statements are to be read in conjunction with the accounting policies on pages 25 to 31and notes on pages 32 to 48.

* The restatement is fully disclosed in note 18.

The auditor's report is on page 19. 23 Balance Sheet

As at 31 December 2006. In thousands of Malawi Kwacha LIABILITIES AND EQUITY Note 2006 2005 Restated* Liabilities Current and savings accounts 5,498,766 3,945,704 Foreign currency denominated accounts 213,702 529,811 Term deposit accounts 7 2,739,925 2,696,912 8,452,393 7,172,427

Deferred tax liabilities 5 133,094 60,475 Other liabilities 7.1 274,821 238,706 Long –term loan 7.2 244,501 20,010 Total liabilities 9,104,809 7,491,618

Equity Issued capital 8 200,000 200,000 Share premium 9 164,637 164,637 Revaluation reserve 10 126,619 257,308 Loan loss reserve 24 139,000 - Fair value reserve 11 26,372 7,086 Retained earnings 284,051 73,359 Total equity 940,679 702,390

Total equity and liabilities 10,045,488 8,194,008

ASSETS Cash and cash equivalents 12 625,416 286,536 Balances due from other banks 13 1,231,258 436,961 Other assets 14 143,043 361,135 Loans and advances to customers 15 5,754,229 4,214,727 Consumable inventories 41,197 35,728 Income tax recoverable 14,152 14,100 Money market Investments 16 948,438 1,625,690 Investment in shares 11,275 - 8,769,008 6,974,877 Property and equipment 17 1,276,480 1,219,131

Total assets 10,045,488 8,194,008

The financial statements of the company were approved for issue by the Company’s Board of Directors on 29th March, 2007 and were signed on its behalf by:

Director Director

The financial statements are to be read in conjunction with the accounting policies on pages 25 to 31and notes on pages 32 to 48. * The restatement is fully disclosed in note 18. The auditor's report is on page 19 . 24 Statement of Cash Flows

For the year ended 31 December 2006. In thousands of Malawi Kwacha

Notes 2006 2005 OPERATING ACTIVITIES Interest and fees received 2,418,287 1,795,997 Interest paid (810,452) (632,772) Dividend paid - (170,000) Cash paid to suppliers and employees (1,097,361) (966,046) 510,474 27,179 Movement in net customer balances (259,536) (1,103,403) Cash flows from operating activities 250,938 (1,076,224)

FINANCING ACTIVITIES New loans 530,000 - Cash outflows to investing activities 530,000 -

INVESTING ACTIVITIES Proceeds from sale of equipment and Investments properties 453,160 4,050 Acquisition of property and equipment 17 (594,218) (554,610) Acquisition of other investments - - Cash outflows to investing activities (141,058) (550,560)

Net movement in cash and cash equivalents 639,880 (1,626,784) Cash and cash equivalents at 1 January 2,165,232 3,792,016 Cash and cash equivalents at 31 December 12 2,805,112 2,165,232

The financial statements are to be read in conjunction with the accounting policies on pages 25 to 31 and notes on pages 32 to 48.

The auditor's report is on page 19. 25 Significant Accounting Policies

(a) Statement of compliance The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB), and the Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that were relevant to its operations and effective for accounting periods beginning on 1 January 2006.

(b) Basis of preparation and use of accounting estimates and judgements The financial statements are presented in Malawi Kwacha, rounded to the nearest thousand. They are prepared on the historical cost basis except for some fixed assets which are revalued and certain investments held for trading which are stated at their fair value. Recognised assets and liabilities that are hedged are stated at fair value in respect of the risk that is being hedged.

The preparation of financial statements in conformity of IFRSs requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Use of estimates and judgements Management discusses with the Finance and Audit Committee the development, selection and disclosure of the Bank’s critical accounting policies and estimates, and the application of these policies and estimates.

These disclosures supplement the commentary on financial risk management.

Key source of estimation uncertainty

Allowances for credit losses Assets accounted for at amortised cost are evaluated for impairment on a basis described in accounting policy (m,n).

The specific counter-party component of the total allowances for impairment applies to claims evaluated individually for impairment and is based upon management’s best estimate of the present value of the cash flows that are expected to be received. In estimating these cash flows, management makes judgements about counter-party’s financial situation and the net realisable value of any underlying collateral. Each impaired asset is assessed on its merits and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Credit Risk Function.

Collectively assessed impairment allowances cover credit losses inherent in portfolios of claims with similar economic characteristics when there is objective evidence to suggest that they contain impaired claims, but the individual impaired items cannot yet be identified. In assessing the need for collective loan loss allowances, management considers factors such as credit quality, portfolio size, concentrations, and economic factors. In order to estimate the required allowance, assumptions are made to define the way inherent losses are modeled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowances depends on how well these estimate future cash flows for specific counter-party allowances and the model assumptions and parameter used in determining collective allowances.

Determining fair values The determination of fair value for financial assets and liabilities for which there is no observable market price 26 Significant Accounting Policies continued

require the use of valuation techniques as described in accounting policy (v) and note 19. For financial instruments that trade infrequently and have little price transparency, fair value is less objective and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument.

Critical accounting judgements in applying the Bank’s accounting policies Critical accounting judgements made in applying the Bank’s accounting policies include:

Financial asset and liability classification The Bank’s accounting policies provide scope for assets and liabilities to be designated on inception into different accounting categories in certain circumstances:

In classifying financial assets or liabilities as “trading”, the Bank determines that it meets the description of trading and liabilities set out in accounting policy(s).

In designating financial assets or liabilities at fair value though profit or loss, the Bank has determined that it has met one of the criteria for this designation set out in accounting policy(s).

In classifying financial assets as held-to-maturity, the Bank has determined that it has both the positive intention and ability to hold the assets until their maturity date as required by accounting policy(s).

The accounting policies set out below have been applied consistently to all periods presented in these financial statements and in preparing opening balance sheet at 1st January 2006.

(c) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31st December 2006, and have not been applied in preparing these financial statements:

IFRS 7 Financial Instruments: Disclosures and the Amendment to IAS 1 Presentation of Financial Statements: Capital Disclosures require extensive disclosures about the significance of financial instruments for an entity’s financial position and performance, and qualitative and quantitative disclosures on the nature and extent of risks. IFRS 7 and amended IAS 1, which become mandatory for the Company’s 2007 financial statements, will require extensive additional disclosures with respect to Company’s financial instruments and share capital.

IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies addresses the application of IAS 29 when an economy first becomes hyperinflationary and in particular the accounting for deferred tax. IFRIC 7, which becomes mandatory for the Company’s 2007 financial statements, is not expected to have any material impact on the financial statements.

IFRIC 8 Scope of FRS 2 Share-based Payment addresses the accounting for share-based payment transactions in which some or all of goods or services received cannot be specifically identified. IFRIC 8 will become mandatory for the Company’s 2007 financial statements, with retrospective application required. The adoption of IFRIC 8 is not expected to have any material impact on the financial statements.

IFRIC 9 Reassessment of Embedded Derivatives requires that a reassessment of whether embedded derivative should be separated from the underlying host contract should be made only when there are changes to the contract. IFRIC 9, which becomes mandatory for the Company’s 2007 financial statements, is not expected to have any material impact on the financial statements.

IFRIC 10 interim Financial Reporting and impairment prohibits the reversal of an impairment loss recognised in a previous interim period in respect of goodwill, an investment in an equity instrument or a financial asset carried at cost. IFRIC 10 will become mandatory for the Company’s 2007 financial statements, and will apply to investments in equity instruments, and financial assets carried at cost prospectively from the date that the 27

entity first applied the measurement criteria of lAS 36 and lAS 39 respectively (i.e., 1st January 2004). The adoption of IFRIC 10 is not expected to have a material impact on the financial statements.

(d) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to Malawi Kwacha at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Malawi Kwacha at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Malawi Kwacha at foreign exchange rates ruling at the dates the values were determined. (e) Property and equipment (i) Owned assets Items of property and equipment are stated at cost or valuation less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of overheads. Where relevant, the cost of dismantling and removing the items and restoring the site on which the assets were located is also included in the cost of the assets.

Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment.

(ii) Subsequent expenditure Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately, including major inspection and overhaul expenditure, is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditure is recognised in the income statement as an expense as incurred.

Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.

(iii) Depreciation Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of items of property and equipment, and major components that are accounted for separately. Leased assets are depreciated over the shorter of the lease term and their useful lives. Land is not depreciated.

The estimated useful lives are as follows: Freehold buildings 40 years Leasehold property over 40 years to run 40 years Leasehold property under 40 years to run over period of lease Leasehold improvement 10 years Computer hardware 3 years Computer Software 4 years Office typewriters and calculators 4 years Motor vehicles 5 years Furniture and other equipment 10 years Auto Teller Machines 10 years

Depreciation, useful lives and residual values are re-assessed at each balance sheet date.

(f) Intangible assets Acquired computer software is capitalised on the basis of costs incurred to acquire and bring to use specific software. These costs are amortised in accordance with the accounting policy on depreciation. Computer software expenditure is recognised in the income statement as incurred. 28 Significant Accounting Policies continued

(f) Intangible assets (Continued) Computer software development costs recognised as assets are amortised on a straight line basis over the estimated useful life.

(g) Investments (i) Investments in debt and equity securities Investments held for trading are classified as current assets and are stated at fair value, with any resultant gain or loss recognised in profit or loss. Where the bank has the positive intent and ability to hold government bonds to maturity, they are stated at amortised cost less impairment losses. The fair value of investments held for trading is their quoted bid price at the balance sheet date.

Investments held for trading are recognised/derecognised by the bank on the date it commits to purchase/sell the investments. Investments held-to-maturity are recognised/derecognised on the day they are transferred to/by the bank. Investments in equity where there is no active market are recognised at cost and reviewed annually for impairment.

(ii) Investment in finance leases Lease and instalment sale contracts are regarded as financing transactions and rentals and instalments receivable there-under, less unearned finance charges, are not capitalised as fixed assets but are shown as lease debtors at amounts equal to the net investment in the leases.

Investment in leases are reviewed for impairment on a monthly basis.

(h) Other assets Other assets comprise rental receivables, prepayments, staff advances and office assets and are stated at their cost less impairment losses.

Cash and cash equivalents comprise coin and bank notes, balances with Reserve Bank and balances with other banks and money market instruments.

(i) Impairment The carrying amounts of the Bank’s assets, other than deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. For intangible assets, the recoverable amount is estimated at each balance sheet date.

An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.

An impairment loss in respect of held-to-maturity security or receivable carried at amortised cost is reversed if the subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.

In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount.

An impairment loss is reversed only to the extent that asset’s carrying amount does not exceed the carrying amount that would have been determined if the impairment loss had not been recognised.

(j) Dividends payable Dividends are recognised as a liability in the period in which they are declared.

(k) Interest-bearing borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. 29

Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in profit or loss over the period of the borrowings on an effective interest basis.

(l) Employee benefits (i) Defined contribution plans The bank operates a Defined Contribution Scheme based on a percentage of pensionable earnings, the assets of which are generally held in separate trustee administered fund. Contributions to this fund are charged to Profit or loss.

(ii) Terminal benefits The actual amounts accrued as pension and retirement gratuities to those employees who are not covered by the Pension Fund are charged to profit or loss.

Obligations for contributions to defined contribution plans are recognized as an expense in the profit or loss as incurred.

Employee entitlements to annual leave and long term service leave.

(m) Provisions for credit losses Loans and advances are recognized when cash is advanced to borrowers. Loans and advances are initially recognized at fair value (plus any directly attributable transaction costs). Subsequent to initial recognition, loans and advances are measured at amortised cost, using the effective interest bank method.

A provision for loan impairment is established if there is objective evidence that the company will not be able to collect all amounts due according to the original contractual terms of the loans. The amount of provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, including amounts recoverable from guarantee and collateral, discounted at the original effective interest rate.

A portfolio impairment for loans is established to cover losses that are judged to be present in the lending portfolio at the balance sheet date, but which have not been specifically identified as such. This provision is based on the directors’ assessment of the latent risk of default known to be present in the portfolio of the bank’s advances.

When a loan is deemed uncollectable, it is written off against the related provision for impairments. Subsequent recoveries are credited to the provision for the loan losses in the income statement. If the amount of the impairment subsequently decreases due to an event occurring after the write-down, the release of the provision is credited as a reduction of the provision for impairment in the income statement.

(n) Provisions and other liabilities A provision is recognised in the balance sheet when the Bank has a legal or constructive obligation as result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation.

Interest income and expense are recognised in the income statement using the effective interest method. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or liability (or,where appropriate, a shorter period) to the carrying amount of the financial asset or liability. The effective interest rate is established on initial recognition of the financial asset and liability and is not revised subsequently.

The calculations of the effective interest rate includes all fees and points paid or received, transaction costs, and discounts or premiums that are an intergral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal or a financial asset or liability.

30 Significant Accounting Policies continued

(o) Interest Income and Expense (Continued) Interest income and expense presented in the income statement include:

Interest on financial assets and liabilities at amortised cost on an effective interest rate basis. Interest on available-for-sale investment securities on an effective interest basis. The effective portion of qualifying hedge derivatives designated in a cash flow hedge in the hedged item is recorded in interest income/expense. Fair value changes in qualifying derivatives (including hedge ineffectiveness) and related hedged items when interest rate risk is the hedged risk.

Interest income and expense on all trading assets and liabilities are considered to be incidental to the Bank’s trading operations and are presented together with all other changes in the fair value of trading assets and liabilities in net trading income.

Fair value changes on other derivatives held for risk management purposes, and other financial assets and liabilities carried at fair value through profit or loss, are presented in net income on other financial instruments carried at fair value in the income statement.

(p) Fees and Commission Fees and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate.

Other fees and commission income, including account servicing fees, investment management fees, sales commission, placement fees and syndication fees are recognised as the related services are performed. When a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised in a straight-line basis over the commitment period.

Other fees and commission expenses relates mainly to transaction and service fees, which are expensed as the services received.

(q) Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realised and unrealised fair value changes, interest, dividends and foreign exchange differences.

(r) Net Income from other financial instruments at fair value Net income from other financial instruments at fair value related to non-qualifying derivatives held for risk management purposes and financial assets and liabilities designated at fair value through profit or loss, and includes all realised and unrealised fair value changes, interest dividends and foreign exchange differences.

(s) Dividend income Dividend income is recognised when the right to receive income is established. Usually this is the ex-dividend date for equity securities. Dividends are reflected as a component of net trading income, net income on other financial instruments at fair value or other operating income based on the underlying classification of the equity instrument.

(t) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. 31

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

(u) Earnings per share Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders by weighted average number of ordinary shares in issue during the year.

(v) Financial instruments Financial assets and liabilities are classified and accounted as follows:

Fair value through profit or loss: - assets which are acquired for the purpose of selling or repurchasing in the short term or on which short term profit/loss arises. Fair value through profit or loss assets are accounted initially at fair value (which at the time of acquisition will normally be at cost, assuming purchase at market values) and subsequently measured at fair value through the profit and loss account.

Held-to-maturity investments: - assets with fixed or determinable payments and fixed maturity over which the Bank has intention and ability to hold to maturity. Held-to-maturity assets are accounted initially at fair value (cost) and subsequently measured at amortised cost using the effective interest method, through the profit and loss account.

Loans and receivables: - assets with fixed or determinable payments. Loans and receivables are accounted initially at fair value (cost) and subsequently measured at amortised cost using the effective interest method, through the profit and loss account.

Available-for-sale: -assets that do not fall under a) to c) above. Available-for-sale assets are accounted initially at fair value (cost) and subsequently measured at fair value. Gains or losses on changes in fair value are recognized directly in equity, except for impairment losses and foreign exchange gains and losses.

(w) Financial guarantees Financial guarantees are contracts that require the bank to make specific payments to reimburse the holder for a loss it incurs because specified debtor fails to make payment when due in accordance with a debt instrument.

Financial guarantee liabilities are initially recognized at their fair value and the initial value is amortised over the life of the guarantee. The guarantee liability is subsequently carried at the higher of the present value of any expected payment (when payment under the guarantee has become probable). Financial guarantees are included within other liabilities.

32 Notes to the Financial Statements

For the year ended 31 December 2006. In thousands of Malawi Kwacha

1. Financial risk management a) Introduction and overview The bank has exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risks Operational risks

This note presents information about the Bank’s exposure to each of the above risks, the Bank’s objectives, policies and processes for measuring and managing risk, and the Bank’s management of capital.

Risk Management framework The Board of Directors has overall responsibility for the establishment and oversight of the Bank’s risk management framework. The Board has established the Finance and Audit Committee responsible for Asset and Liability Committee (ALCO) and Credit Committee which are responsible for developing and monitoring Bank’s risk management policies in their specified areas. All Board Committees have both executive and non-executive members and report regulary to the Board of Directors on their activities.

The Bank’s risk management policies are established to identify and analyse the risk faced by the Bank, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regulary to reflect changes in market conditions, products and services offered. The Bank through its training and management standards and procedures, aims to develop a disciplined and constructive control environment, in which all employees understand their roles and obligations.

The Bank’s Finance and Audit Committee is responsible for monitoring compliance with the Bank’s management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank. The Bank’s Finance and Audit Committee is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Finance and Audit Committee.

b) Credit Risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Bank’s loans and advances to customers and other banks and investment securities. For risk management reporting purposes, the Bank considers and consolidates all elements of credit risk exposure (such as individual obligor default risk, and sector risk).

For management purposes, credit risk arising on trading securities is managed independently but reported as a component of market risk exposure.

Management of credit risk The Board of Directors has delegated responsibility for the management of credit risk to its Credit Committee. A separate Credit department, reporting to the Credit Committee, is responsible for oversight of the credit risk, including: Formulating credit policies in consultation with the business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures and compliance with regulatory and statutory requirements. 33

Establishing the authorisation structure for the approval and renewal of credit facilities. Authorisation limits are allocated to business unit Credit Officers. Larger facilities require approval by Management Credit Committee, Head of Credit, Bank’s Credit Committee or the Board of Directors as appropriate.

Reviewing and assessing credit risk. Bank’s Credit Committee assesses all credit exposures in excess of designated limits, prior to facilities being committed to customers by the same review process.

Limiting concentrations of exposure to counterparties, geographical location and industries (for loans and advances), and by issuer, credit rating band and market liquidity.

Developing and maintaining the Bank’s risk gradings in order to categorise exposures according to the degree of risk financial loss faced and to focus management on the attendant risks. The risk grading system is used in determining where impairment provisions may be required against specific credit exposures.

Reviewing compliance of business units with agreed exposure limits, including those for selected industries and product types. Regular reports are provided to Bank’s Credit Committees on the credit quality of portfolios and appropriate corrective action is taken.

Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

Each business unit is required to implement Bank’s credit policies and procedures, with credit approval authorities delegated from the Bank Credit Committee. Each business unit has a Credit Risk Officer who reports on all credit related matters to management. Each business unit is responsible for the quality and performance of its credit portfolio and for monitoring and controlling all credit risks in its portfolios, including those subject to central approval.

Regular audits of business units and Bank’s Credit processes are undertaken by Internal Audit.

Impaired loans and securities Impaired loans and securities are loans and securities for which the Bank determines that it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan/securities agreement(s).

Past due but not impaired loans Loans and securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of security/collateral available and/or the stage of collection of amounts owed to the Bank.

Loans with negotiated terms Loans with negotiated terms are loans that have been restructured due to deterioration in the borrower’s financial position and where the Bank has made concessions that it would not otherwise consider. Once the loan is restructured it remains in this category independent of satisfactory performance after restructuring.

Allowances for impairment The Bank established an allowance for impairment losses that represents its estimates of incurred losses in its loan portfolio. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collectives loan loss allowance established for groups of homogenous assets in respect of losses that have been incurred but have not been identified on loans subject to individual assessment for impairment.

34 Notes to the Financial Statements continued

Write off policy The Bank writes off a loan/security balance (and any related allowances for impairment losses) when bank Credit determines that the loans/securities are uncollectible. This determination is reached after considering information such as the occurrence of significant changes in the borrower/issuer’s financial position such that the borrower/issuer can no longer pay the obligation, or that proceeds from collateral will not be sufficient to pay back the entire exposure. For smaller balance standardised loans, charge off decisions generally are based on a product specific past due. The Bank holds collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing, and generally are not updated except when a loan is individually assessed as impaired. Collateral generally is not held over loans and advances to banks except when securities are held as part of reverse purchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at the year end.

Settlement risk The Bank activities may give rise to risk to the time of settlement of transactions and trades. Settlement risk is the risk of loss due to the failure of a company to honour its obligations to deliver cash, securities or other assets as contractually agreed.

For certain types of transactions the Bank mitigates this risk by conducting settlements through a settlement/clearing agent to ensure that trade is settled only when both parties have fulfilled their contractual settlement obligations. Settlement limits form part of the credit approval/limit monitoring process described earlier. Acceptance of settlement risk on free settlement trades required transaction specific or counterparty specific approvals from Bank’s ALCO.

(c) Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations from its financial liabilities.

Management of liquidity risk The Bank’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Bank’s reputation.

Treasury receives information from other business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. Treasury then maintains a portfolio of short-term liquid assets, largely made up of short-term liquid investment securities, loans and advances to banks and other inter-bank facilities, to ensure that sufficient liquidity is maintained within the Bank as a whole. The liquidity requirements of business units are met through Treasury to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements.

The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by ALCO. Daily reports cover the liquidity position of operating units. A summary report, including any exceptions and remedial action taken, is submitted regulary to ALCO.

Exposure to liquidity risk The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits from customers. For this purpose net liquid assets are considered as including cash and cash equivalents and

35

investment securities for which there is an active and liquid market less any deposits from banks, other borrowings and commitments maturing within the next month. A similar, but not identical, calculation is used to measure the Bank’s compliance with the liquidity limit established by the Reserve Bank of Malawi. Details of the reported Bank’s ratio of net liquid assets to deposits and customers at the reporting date and during the reporting period were as per note number 22 and 23.

(d) Market risks Market risks is the risk that changes in market prices, such as interest rate, equity prices, foreign exchange rates and credit spreads (not relating to changes in the obligor’s/issuer’s credit standing) will affect the Bank’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk.

Management of market risks The Bank separates its exposure to market risk between trading and non-trading portfolios. Trading portfolios mainly are held by the Treasury Department, and include positions arising from market making and proprietary position taking, together with financial assets and liabilities that are managed on a fair value basis.

Overall authority for market risk is vested in ALCO. The Bank’s ALCO is responsible for the development of detailed risk management policies (subject to review and approval by Finance and Audit Committee) and for the day-to-day review of their implementation.

Exposure to interest rate risk – non trading portfolios The principal risk to which non-trading portfolios are exposed is the risk of loss from fluctuations in the future cash flows or fair values of financial instrument because of a change in market interest rates. Interest rate risk is managed principally through monitoring interest rate gaps and by having pre-approved limits for re-pricing bands. The ALCO is the monitoring body for compliance with these limits and manages the risks on day-to-day by monitoring activities on the market. A summary of the Bank’s interest rate gap position on non-trading portfolios is as per note number 26.

The management of interest rate risk against interest rate gap limits is supplemented by monitoring the sensitivity of the Bank’s financial assets and liabilities to various standard and non-standard interest rate scenarios. Standard scenarios that are considered on a monthly basis include a 100 basis point (bp) pararell fall or rise in all yield curves and a 50bp rise or fall in the greater than 12-month portion of all yield curves. An analysis of the Bank’s sensitivity to an increase or decrease in market interest rates (assuming no assymetrical movement in yield curvesand a constant balance sheet position). As per note number 26.

Exposure to other market risks – non trading portfolios Credit spread risk (not relating to changes in the obligor/issuer’s credit standing) on debt securities held by Treasury subject to regular monitoring by ALCO, but it is not currently significant in relation to the overall results and financial position of the Bank.

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

The Bank’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Bank’s reputation with overall cost effectiveness and to avoid control procedures that restrict initiative and creativity. 36 Notes to the Financial Statements continued

(e) Operational risks (Continued) The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall Bank’s standards for the management of operational risk in the following areas: Requirement for appropriate segregation of duties, including independent authorisation of transactions. Requirements for the reconciliation and monitoring of transactions Compliance with regulatory and other legal requirements Documentation of controls and procedures Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified. Requirements for the reporting of operational losses and proposed remedial action Development of contingency plans Training and professional development Ethical and business standards. Risk mitigation, including where this is effective.

(f) Capital Management Regulatory capital The Reserve Bank of Malawi sets and monitors capital requirements for the Bank as a whole.

In implementing current capital requirements, Reserve Bank of Malawi requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets as per note number 22 (ii).

The Bank’s regulatory capital is analysed into two tiers:

Tier 1 capital, which includes ordinary share capital, share premium, retained earnings, translation reserve and intangible assets, and other regulatory adjustments relating to items that are included in equity but are treated differently for capital adequacy purposes.

Tier 2 capital, which includes qualifying liabilities, collective impairment allowances and the element of the fair value reserve relating to unrealised gains on equity instruments as available-for-sale.

There are restrictions on the amount of collective impairment allowances that may be included as part of tier 2 capital. Other deductions from capital include the carrying amounts of investments in subsidiaries that are not included in the regulatory consolidation, investments in the capital of banks and certain other regulatory items.

Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposure.

The Bank’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The impact of the level of capital on shareholders’ return is also recognised and the Bank recognises the need to maintain a balance between the higher returns that might be possible with greater gearing and the advantages and security afforded by a sound capital position.

The Bank and its individually regulated operations have complied with all externally imposed capital requirements throughout the period.

There have been no material changes in the Bank’s management of capital during the period. 37

(g) Segment reporting Segment information is presented in respect of the Bank’s business and geographical segments. The primary format, business segments, is based on the Bank’s management and internal reporting structure.

Business segments pay and receive interest to and from the Treasury on arm’s length basis to reflect the allocation of capital and funding costs.

Segment capital expenditure is the total cost incurred during the period to acquire property and equipment and intangible assets other than goodwill.

Business segments The Bank comprises the following main business segments: • Corporate Banking: Includes loans, deposits and other transactions and Balances with corporate customers. • :Includes loans, deposits and other transactions and Balances with retail customers. • Asset Management: Operated the Bank’s funds management activities. • Treasury: Undertakes the Bank’s funding and centralised risk management activities through borrowings, issues of debt securities, use of derivatives for risk management purposes and investing in liquid assets such as short-term placement and corporate Government debt securities.

Geographical The Bank operates in three geographic regions being: Southern - with a total of 11 Branches and Agencies Central - with a total of 7 Branches and Agencies Nothern - with a total of 6 Branches and Agencies 38 Notes to the Financial Statements continued

For the year ended 31 December 2006. In thousands of Malawi Kwacha

2. Other operating income 2006 2005 Rental Income 8,911 17,949 Profit on disposal of fixed assets 74,728 4,140 83,639 22,089

The bank disposed off some of its properties to a property company NBS Properties Limited. The properties were disposed at an average of the market value as determined by chartered quantity surveyors Knight Frank and Landed Property Agents. Consideration for the sale was received in form of cash and 2.5% equity share holding in NBS Properties Limited. The transaction resulted into re-classification of Revaluation Reserves to Retained Earnings and the profit on disposal is included as part of other income.

NBS Bank limited was issued with shares and debenture stock in NBS Properties Limited upon incorporation and NBS Bank Limited disposed off a significant part of its investment in NBS Properties limited through the disposal of shares and debentures and has a 2.5% holding in the properties company.

3. Staff costs 2006 2005 Salaries 314,795 250,912 Staff expenses 161,018 100,690 Staff loan subsidy 19,595 14,900 Christmas expenses 2,684 2,097 Training expenses 29,321 27,884 Management car scheme 41,707 37,156 569,120 433,639

The average number of employees for the year ended December 2006 was 384 (31 December 2005 was 371)

4. Other operating costs Accommodation costs 61,907 46,745 Communication costs 162,511 136,886 Directors fees 3,530 2,382 Auditors remuneration:- Current year fees 7,400 4,300 Prior period under provision - 450 Other expenses and VAT 1,295 1,887 Legal & professional fees 20,215 17,264 Sundry business charges 92,695 79,289 Management fees 46,544 39,600 Group shared expenses 1,578 6,500 397,675 335,303

Management fee is paid to NICO Holdings Limited on cost recovery basis. 39

For the year ended 31 December 2006. In thousands of Malawi Kwacha

5. Income tax expense 2006 2005 Current year tax charge - 250 Deferred tax charge 106,766 957 Capital gains tax 11,037 - Total income tax charge 117,803 1,207

Reconciliation of tax charge Profit before tax 299,348 143,143

Income Tax using corporate tax rate 30% 89,803 30% 42,943 Capital gains tax 4% 11,037 - Profit on sale of non qualifying assets (8%) (22,418) - Other permanent differences 6% 19,088 (1%) (1,834) Correction of prior year deferred tax 8% 24,443 54% 77,863 Other adjustments (1%) (4,150) (82%) (117,765) 39% 117,803 1% 1,207

NBS Bank was exempted from income tax in its first year of operations after conversion from a Building Society. The exemption covered period 1st July 2004 to 30th June 2005.

Deferred tax liability 2006 2005 Assets Liability Total Assets Liability Total Capital allowance on property and equipment - (72,951) (72,951) - (77,863) (77,863) Loan loss reserve (in equity) - (41,700) (41,700) - - - Revaluation of properties (in equity) - (22,345) (22,345) - (56,482) (56,482) Fair value adjustments (in equity) - (4,654) (4,654) - (3,036) (3,036) Tax loss carry forward 15,327 - 15,327 76,906 - 76,906 Other 4,496 (11,267) (6,771) - - - 19,823 (152,917) (133,094) 76,906 (137,381) (60,475)

6. (a) Basic earnings per share 2006 2005 The calculation of basic earnings per share is based on the net profit attributable to ordinary shareholders and a weighted average number of ordinary shares outstanding during the period calculated as follows:

Net profit attributable to ordinary shareholders 181,545 141,93 Weighted average number of ordinary shares 200,000 200,000 Basic earnings per share (MK) 0.91 0.71

(b) Diluted earnings per share (MK) 0.91 0.71 40 Notes to the Financial Statements continued

For the year ended 31 December 2006. In thousands of Malawi Kwacha

7. Term deposit accounts 2006 2005 Maturing within 3 months 2,716,666 2,273,638 Maturing between 3 and 12 months 23,259 423,274 2,739,925 2,696,912

7.1 Other liabilities Cheques 18,509 14,988 Accruals 197,394 95,696 PAYE and other taxes 40,172 69,033 Bills Payable 18,746 58,989 274,821 238,706

7.2 Long term loan Malawi Government 20,010 20,010 Pension funds loan 224,491 - 244,501 20,010

The Malawi Government loan represents an IDA credit which was loaned to Malawi Housing for the construction of low cost housing at a fixed interest rate of 7% per annum.

Pension funds loan is for a 5 year term at prime +2% and was utilized in renovating the Blantyre Branch Property.

8. Share capital In issue at 1 January and 31 December Fully Paid of K1 each 200,000 200,000

Authorised share capital 250,000 250,000

The authorised share capital comprised 250,000,000 ordinary shares of K1 each. The holders of ordinary shares are entitled to receive dividends as declared from time to time.

9. Share Premium Share premium 164,637 164,637

Share premium account arose from the transfer of balances on revenue and general reserves on the conversion of New Building Society to NBS Bank Limited

10. Revaluation reserve 126,619 257,308

The revaluation reserve relates to the surplus arising on the revaluation of properties. 41

For the year ended 31 December 2006. In thousands of Malawi Kwacha

11. Fair value reserve 2006 2005

The fair value reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognized. 26,372 7,086

12. Cash and cash equivalents Cash balances 625,416 286,536 Balance with Reserve Bank of Malawi 1,044,940 90,780 Balances due from other banks 186,318 346,181 Short term investments (Note 16) 948,438 1,441,735 Cash and cash equivalents as shown in cash flow statement 2,805,112 2,165,232

13. Balance due from other banks Call and deposit accounts 186,318 346,181 Balance with Reserve Bank of Malawi 1,044,940 90,780 1,231,258 436,961

The bank was exempted from Liquidity Reserve Requirement (LRR) up to June 2006 but is now fully compliant with the Liquidity Reserve Requirement.

14. Other assets Prepayments and sundry debtors 131,464 315,848 in course of collection 11,579 45,287 143,043 361,135

15. Loans and advances to customers 2006 2005 Loans and overdrafts 3,234,923 1,803,516 Lease contracts 555,477 713,100 Mortgage advances 2,095,302 1,798,563 Total loans and advances 5,885,702 4,315,179 Allowance for impairment (131,473) (100,452)

Net loans and advances 5,754,229 4,214,727

Total loans and advances are due to mature as follows: • Between three months and one year 2,378,629 1,470,249 • After one year 3,507,073 2,844,930 5,885,702 4,315,179

Movement on allowance for impairment:- At beginning of period 100,451 51,112 Increase in provisions 31,022 49,339 Balance at end of year 131,473 100,451

The analysis of the allowance for impairment in accordance with The Reserve Bank on Malawi requirements is fully described in Note 24. 42 Notes to the Financial Statements continued

For the year ended 31 December 2006. In thousands of Malawi Kwacha

16. Investments 2006 2005 Government of Malawi and Reserve Bank of Malawi bills 377,838 1,441,735 Government of Malawi Local Registered Stock 570,600 183,955

Total investments 948,438 1,625,690

The investments are due to mature as follows:- • Within three months 209,823 876,794 • Between three months and one year 738,615 564,941 • Between one year and five years - 183,955

948,438 1,625,690

17. Property and equipment Freehold Leasehold Motor vehicles, Land Land fixtures Under 2006 2005 & buildings& buildings & fittings construction Total Total Cost or valuation Balance at 1 January 115,250 458,144 770,526 18,157 1,362,077 796,728 Additions - 19,635 187,664 386,919 594,218 554,610 Disposals - (381,825) (6,253) - (388,078) (4,050) Impairment loss - - - - - (7,263) Revaluation (4,136) 14,836 - - 10,700 22,052

Balance at 31 December 111,114 110,790 951,937 405,076 1,578,917 1,362,077

Depreciation Balance at 1 January - - 142,946 - 142,946 41,243 Charge for the year 3,713 8,018 154,193 - 165,924 108,369 Eliminated on revaluation - - - - - (4,416) Eliminated on disposal - (4,404) (2,029) - (6,433) (2,250)

Balance at 31 December 3,713 3,614 295,110 - 302,437 142,946

Carrying amount At 31 December 107,401 107,176 656,827 405,076 1,276,480 1,219,131

Registers of land and building giving details as required under the Companies Act 1984, Schedule 3, Section 16 are maintained at the registered office of the Bank and are open for inspection by members or their duly authorised agents.

All buildings were revalued on 31 December 2006 by G.M. Wawanya BSc, MRCIS, MCIH, MSIM chartered Valuer, on a current market value. Under the method used, accumulated depreciation was eliminated and the net revalued amount treated as the new carrying amount. The resultant surplus was taken to revaluation reserve. ÊÊÊÊÊ 43

For the year ended 31 December 2006. In thousands of Malawi Kwacha

18. Prior period adjustments Prior period adjustments made in 2006 arose due to the following:- (a) Previously accrued leave pay was not recognized as an obligation for the company. In accordance with IAS 19 (revised) an amount of MK9.6 million has been debited to the income statement of the year 2005 as a result of adoption of revised IAS 19. (b) Under IAS 39 Loans and advances given to staff are financial instruments and must be initially measured at fair value. A number of advances to staff were granted to staff members at interest percentages below market interest. Taken this difference of interest rates into account the value of the advances to staff had to be decreased by MK14.9 million, which is charged to the income statement of the year 2005. (c) The Employment Act (2000) requires employers to pay severance pay where employment is terminated by mutual agreement. The excess of severance pay over the employers pension contribution of K20.3 million is provided for and adjusted in the opening equity of 2005.

The above changes decreased the profit for the year 2005 and the retained earnings as at 31 December 2005 as follows:- Income statement Opening equity Total adjustment (K million) 2005 (K million) 2005 (K million) Provision for leave pay 9.6 - 9.6 On staff loans 14.9 - 14.9 Severance pay - 20.3 20.3 Total prior year adjustment 24.5 20.3 44.8

Prior period adjustments made in 2005 arose on application of revisions to IAS 39 as follows:- a) Under previous standard, staff loans were measured at amounts advanced plus interest accrued to date less impairment losses. In accordance with IAS 39 (revised) an amount of MK39 million has been debited to retained earnings at 1st January 2005 as a result of valuing the staff loans at fair value. b) In accordance with IFRS, available-for-sale investments have been recognized as assets at fair value. The effect was to decrease the value of these investments by MK15 million at 1st January 2005. c) Loans and advances have been recognized initially at fair value and subsequently measured at amortised cost using the effective interest method. The effect was to decrease the loan loss provisions at 1st January 2005 by MK15 million.

The above changes (increased)/decreased the retained earnings At 1st January 2005 as follows (K million): On staff loans 38.6 Fair value on treasury bills 15.4 Provision for loan losses (15.2) 38.8 44 Notes to the Financial Statements continued

For the year ended 31 December 2006. In thousands of Malawi Kwacha

19. Fair value Fair value adjustments with respect to non-performing loans, off-market loans and treasury bills has been incorporated in the current year income statement.

Basis Net Fair value Net impairment Balance at of valuation adjustment to adjustment to year end income Income statement/equity Statement Financial Assets Held to maturity investments - Malawi Government local registered stocks Fair value 28,535 - 570,600

Loans and receivables - Loans and advances to customers Amortised cost - 131,474 5,754,228 - Due from other banks Amortised cost - - 186,318

Available for sale assets - Malawi Government Treasury bills Fair value 2,491 - 377,782

Financial Liabilities - Customer savings accounts Amortised cost - - 5,498,766 - Foreign currency accounts Amortised cost - - 213,702 - Term deposit accounts Amortised cost - - 2,739,925

Estimation of fair values The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table. - Malawi Government Treasury Bills The fair value is based on quoted market prices, if available, or is calculated based on discounted expected future principal and interest cash flows.

- Malawi Government Local Registered Stocks The amortised cost is estimated as the present value of future cash flows, discounted at effective interest rates.

- Loans and receivables The amortised cost is estimated as the present value of future cash flows, discounted at effective interest rates.

For receivables / payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables / payables are discounted to determine the fair value. ÊÊÊÊÊ 45

For the year ended 31 December 2006. In thousands of Malawi Kwacha

20. Related parties transactions Identity of related parties The bank has a controlling related party relationship with fellow subsidiaries and parent company. During the year and at year end, the following transactions and balances were made:

Volume of Balances as at 31/12/06 Company Nature of transactions transactions Assets Liabilities K’000 K’000 K’000 - NICO Holdings Limited Management fees 48,145 - 1,979 - NICO Life Insurance Limited Interest payable 94,229 - 201,496 - NICO General Insurance Limited Interest payable 15,406 - 27,011 - NICO Technologies Limited Suppliers & consultancy 61 1,321 61 - Loans to directors Advances - - 8,410 - Landed Property Agents Consultancy 7,487 - 1,336 - Millenium Investments Limited Advances 23 84,000 - - Executive Management Loans Advances - 58,003 -

All transactions were at arms length except for part of the loans to executive management. The related party balances are included in these financial statements. Loans amounting to K17.4 million at a subsidized rate have been included in the balance of K58 million.

Transactions with directors and executive officers Total remuneration paid to the directors and executive officers during the period were as follows:- 2006 2005 Directors' fees 3,530 2,382 Executive officers 45,919 41,232 49,448 43,614

The above expenses are included in staff and training costs and other operating expenses in note 2 and 3.

21. Capital commitments As at 31 December 2006, the contracted but not yet incurred capital commitments were K44 million.The authorised but not yet contracted for commitments as at 31 December 2006 were K 344 million.

These commitments are to be funded from internal resources.

22. Statutory requirement In accordance with Section 27 of the Banking Act 1989, the Reserve Bank of Malawi has established the following requirements as at the balance sheet date:

(i) Liquidity Reserve Requirement The Bank is required to maintain a liquidity reserve amount with Reserve Bank of Malawi or with a registered discount house, calculated on a weekly basis, of not less than 20.0% percent of the preceding month's average total deposit liabilities. NBS bank was exempted from the liquidity reserve requirement with the Reserve Bank for a period of 24 months ended 30June 2006 and has been subjected to liquidity reserve requirement form 1st July to 31st December 2006 which it complied with .

(ii) Capital Adequacy Requirement The Bank’s available Tier 1 capital is required to be a minimum of 6% of its risk bearing assets and contingent liabilities. At 31 December 2006, the Bank’s available capital was 10% of all its risk bearing assets and contingent liabilities. 46 Notes to the Financial Statements continued

For the year ended 31 December 2006. In thousands of Malawi Kwacha

23. Prudential Aspects of Bank Liquidity

The Reserve Bank of Malawi has issued the following guidelines on the management of liquidity:

-Liquidity Ratio 1 : Net liquidity (total liquid assets less suspense account in foreign currency) divided by total deposits must be at least 30%.

As at 31 December 2006, the bank’s liquidity Ratio 1 was 34%.

-Liquidity Ratio 2 : Net liquidity ( total liquid assets less suspense account in foreign currency and cheques in the course of collection) divided by total deposits must be at least 20%.

As at 31 December 2006, the Bank’s Liquidity Ratio 2 was 34%.

24. Regulatory requirement The Reserve Bank of Malawi provides guidelines for loan losses provision which must be followed by all commercial banks in Malawi. The bank has computed the provisions which amount to K270million. The provision for loan losses included in the financial statements in accordance with IAS 39 amount to K131million. Additional charges required to meet requirements on loan loss provisions of K139 million has been charged directly to equity. Computations for the purpose of reporting are as below;

Movement on provision 2006 2005 At the beginning of the period 100,354 66,328 Increase/(decrease) 196,077 74,726 Recovered (26,685) (40,700)

Balance at end of the year 269,746 100,354

Analysis of recoveries Specific provisions 10,414 31,584 Interest in suspense 16,271 9,116

26,685 40,700

Analysis of provisions held at end of the period • Specific provision 150,545 34,287 • Portfolio impairment 57,871 45,038 • Interest in suspense 61,330 21,029

Total provisions 269,746 100,354

Interest in suspense Total loans and advances on which interest is suspended 687,664 97,895

25 Maturity gap analysis The table below analyses assets and liabilities into relevant maturity groupings based on the remaining period at 31 December 2006 to the contractual maturity date. All figures are in thousands of Malawi Kwacha.

ASSETS Up to 1 month 1-3 months 3-12 Months Over 1 year Total Cash and balances with banks 1,856,674 - - - 1,856,674 Investment securities - 255,363 120,000 584,625 959,988 Loans and advances 1,581,533 89,049 403,224 3,680,423 5,754,229 Other assets 209,826 - - 1,264,771 1,474,597 Total assets 3,648,033 344,412 523,224 5,529,819 10,045,480 ÊÊÊÊÊ 47

For the year ended 31 December 2006. In thousands of Malawi Kwacha

LIABILITIES AND SHAREHOLDERS FUNDS Domestic deposits 1,475,397 2,436,799 4,012,344 314,151 8,238,691 Foreign Currency denominated deposits 213,702 - - - 213,702 Other borrowed funds - - - 244,501 244,501 Other liabilities 407,915 - - - 407,915 Shareholders funds - - - 940,679 940,679 Total liabilities and shareholders funds 2,097,014 2,436,799 4,012,344 1,499,331 10,045,488 Net Liquidity Gap 1,551,019 (2,092,387) (3,489,120) 4,030,488 - Cumulative Liquidity Gap 1,551,019 (541,368) (4,030,488) - -

26 Interest rate gap analysis The table below summarises the exposure to interest rate risk. Included in the table are the banks assets and liabilities at carrying amounts categorised by the earlier of contractual pricing or maturity dates. The bank does not have an interest rate exposure on off balance sheet items. All figures are in thousands of Malawi Kwacha.

Fixed Rate Instruments Assets subject to interest rate adjustment Zero rate Floating rate 0-3 3—6 6-9 12 Over 12 Total months months months months months Loans and leases: Fixed rate by maturity - 5,729,330 - - - - - 5,729,330 Securities: Fixed rate by maturity - 69617 552,225 - - - 562,060 1,183,902 Other 3,132,256 - - - - - - 3,132,256

Total rate sensitive assets (RSA) 3,132,256 5,798,947 552,225 - - - 562,060 10,045,488

Liabilities subject to interest rate adjustment: Demand accounts - 689,099 - - - - - 689,099 Savings deposits 3,532,708 - - - - - - 3,532,708 Time deposits - - 3,981,680 - - - - 3,981,680 Other borrowings 20,010 224,491 - - - - - 244,501 Other 1,348,295 249,205 - - - - - 1,597,500 Total rate sensitive liabilities (RSL) 1,368,305 4,695,503 3,981,680 - - - - 10,045,488

Asset Liability Gap 1,763,951 1,103,444 (3,429,455) - - - 562,060 - Cumulative Gap 1,763,951 2,867,395 (562,060) (562,060) (562,060) (562,060) - - Net position as a % of total assets 51,47% 19,03% -621,02% 0,00% 0,00% 0,00% 100% - RSA as a % of RSL 206,00% 123,50% 13,87% 0,00% 0,00% 0,00% 0,00% 100 Impact of increase 5% 1,852,149 1,158,616 (3,600,928) - - - 590,164 - 10% 1,940,346 1,213,788 (3,772,401) - - - 618,267 - 15% 2,028,544 1,268,960 (3,943,873) - - - 646,370 - Impact of decrease (5%) 1,675,753 1,048,271 (3,257,982) - - - 533,958 - (10%) 1,587,556 993,099 (3,086,510) - - - 505,855 - (15%) 1,499,358 937,927 (2,915,037) - - - 477,752 - 48 Notes to the Financial Statements continued

For the year ended 31 December 2006. In thousands of Malawi Kwacha

27. Contingent Assets/Liabilities 2006 2005 Letters of credit 309,079 75,236 Severance pay 157,000 -

Total 466,079 75,236

The Employment Act (2000) requires employers to pay severance pay where employment is terminated by mutual agreement. The amount of severance payable is K177million with likely extra liability of K20 million over pension contributions which have been provided for as part of staff costs.

There are discussions to re-consider a recent court ruling, which advocated for payment of both pension and severance and the Employment Act is being reviewed to only recognise the higher of the two.

28. Accounting estimates and judgements Management discussed with the audit committee the development, selection and disclosure of the bank’s critical accounting policies and estimates and the application of these policies and estimates.

Key sources of estimation uncertainty Note 15 contain information about the loans and advances impairment. In notes 25 and 26 detailed analysis is given of the interest rate and liquidity risk exposures of the bank.

29. Inflation and exchange rates Exchange rates as at 31 December 2006 2005 United States Dollar (USD) 139,34 123,78 British Pound (GBP) 283,07 216,03 South African Rand (ZAR) 20,71 20,05

Inflation rates as at 31 December 10,1% 16,5%

30. Incorporation NBS Bank Limited is limited liability company (Bank) incorporated in Malawi under the Malawi Companies Act 1984 and is registered as a financial institution under the Banking Act 1989.

31. Subsequent events Subsequent to balance sheet date no events have occurred necessitating adjustments to or disclosures in the financial statements.

32. Staff mortgage securitisation Staff mortgages were re-financed through a lender NICO Life during the year, the bank guaranteed repayment of the loans during the remaining tenor of each of the staff mortgage and all the mortgage securities are registered in the Bank’s favour. The Bank pays an interest subsidy on behalf of employees and the related Fringe Benefit Tax inclusive of the subsidy, are included under staff costs.

33. Equity Investment in NBS Properties Ltd During the year the bank acquired 2.5 % interest in NBS Properties Limited, a company to which the properties formerly owned by the bank were sold. The investment is carried at cost/valuation net of impairment and was reported at K11.275 million as at 31st December 2006.

Annual Report 2006 We undertake to add value to our stakeholders by offering an innovative range of banking products through efficient business processes and empowered and caring staff