Finca Bank Georgia Joint Stock Company

FINCA BANK GEORGIA JOINT STOCK COMPANY

Financial Statements and Management Report Independent Auditor’s Report For the Year Ended December 31, 2019

FINCA Bank Georgia Joint Stock Company

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STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS AND MANAGEMENT REPORT FOR THE YEAR ENDED DECEMBER 31, 2019 ...... 1

MANAGEMENT REPORT FOR THE YEAR ENDED DECEMBER 31, 2019:

FINCA Bank Nature of the Business and Mission ...... 2 Vision for the Bank ...... 2 Value proposition and long-term place in the market ...... 3 Strategic Priorities and Goals ...... 3 FINCA Bank Core operating segments ...... 3 Results of Operation for 2019 ...... 4 Corporate Governance...... 4 General Meeting of Shareholders ...... 5 Supervisory Board ...... 5 FINCA Bank Georgia’s Management Board ...... 5 FINCA Bank Georgia Supervisory Board Committees ...... 6 Management Committees ...... 6 Other functional lines ...... 7 Risk Management Strategy and Individual Risk Management ...... 7 Management of Individual Risk ...... 9 FINCA’s Commitment to Social Performance ...... 12 FINCA Bank CSR Projects ...... 12 Policies and Procedure to Protect Employees ...... 13

INDEPENDENT AUDITORS’ REPORT ...... 16-18

FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2019: Statement of financial position ...... 19 Statement of profit or loss and other comprehensive income...... 20 Statement of changes in equity ...... 21 Statement of cash flows ...... 22

Notes to the financial statements:

1. Organization ...... 23 2. Application of new and revised international financial reporting standards (ifrss) ...... 25 3. Significant accounting policies...... 29 4. Critical accounting judgements and key sources of estimation uncertainty ...... 43 5. Cash and cash equivalents ...... 44 6. Mandatory reserve with national bank of georgia ...... 44 7. Due from banks ...... 45 8. Loans to customers ...... 45 9. Investments in debt instruments ...... 49 10. Financial assets/liabilities at fair value through profit or loss ...... 49 11. Property and equipment ...... 50 12. Other assets ...... 51 13. Intangible assets ...... 51 14. Deposits by banks ...... 52 15. Deposits by customers ...... 52 16. Right of use assets and lease liabilities ...... 53 17. Borrowed funds ...... 54 18. Other liabilities ...... 55 19. Subordinated debt ...... 55 20. Share capital ...... 56 21. Net interest income ...... 56 22. Allowance for impairment losses ...... 56 23. Net (loss)/gain on foreign exchange operations...... 57 24. Fee and commission income ...... 57 25. Other income ...... 58 26. Staff cost ...... 58 27. Other operating expenses ...... 58 28. Income tax ...... 59 29. Commitments and contingencies ...... 60 30. Transactions with related parties ...... 61 31. Fair value of financial instruments ...... 62 32. Capital risk management ...... 64 33. Risk management policies ...... 66 34. Subsequent events ...... 89

FINCA Bank Georgia Joint Stock Company

Management Report for the Year Ended 31 December 2019

1. FINCA BANK NATURE OF THE BUSINESS AND MISSION

FINCA Bank Georgia JSC (hereinafter FINCA Bank or the bank) is a subsidiary of FINCA Microfinance Holding Company (FMH) with headquarters in Washington, DC. FMH reaches over 2 million clients through its 20 subsidiaries in Africa, Eurasia, the Middle East, Latin America and South Asia being among the biggest and most comprehensive of today’s microfinance networks.

FINCA Impact Finance Global Network

FINCA launched its operations in Georgia back in 1998, operating as a microfinance institution till 6 August, 2013.

On 6 August 2013 institution received its Banking license from the National Bank of Georgia and started the process of transformation into a full-fledged commercial bank.

FINCA Bank Georgia played an important role in establishing and developing credit culture in the country - being a pioneer of microfinance for 22 years FINCA Bank Georgia has been providing responsible financial services to entrepreneurs in all regions of Georgia. With 22 years of experience in the Georgian financial services sector and having impacted lives of tens of thousands Georgian families, FINCA Bank Georgia strives for excellence and uniqueness to generate greater value to its customer base.

2. VISION FOR THE BANK

FINCA Bank Georgia is a successful medium-size bank, meeting both - profit and social performance expectations of its stakeholders, occupying a prominent position in the microfinance market. FINCA Bank Georgia is the bank of choice for the niche segment (micro/small businesses and agricultural clients, micro-retail segment) and the employer of choice in the employment market, a true family partner that satisfies the financial services needs of the core segment through technologically innovative, scalable and value adding solutions.

The Bank retains a critical mass of loyal customers through services accessible 24/7, through innovative channels (smart phone, internet, call center, terminals, SMS), diverse range of sticky products and creative bundle offerings. The bank complements its technology-based outreach through

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digital literacy programs. FINCA's strong brand loyalty, digital innovation resulting in superior CX, convenience and accessibility will differentiate the bank from key competitors.

The vision for the bank will be achieved with exclusive focus on the following essential building blocks:

a. Ambitious growth in core segments of the bank, primarily in the rural areas. b. Superior customer experience for both – internal and external customers. c. Prevailing growth in retail deposit base. d. Innovative and digital solutions, to serve the customer base more conveniently. e. Highly efficient institutional structure.

When implementing its strategic goals the bank will be governed by its vision and goals and will exercise social responsibility by achieving a positive impact on the country’s society as a whole, the specific communities it works in, as well as each individual customer.

3. VALUE PROPOSITION AND LONG-TERM PLACE IN THE MARKET

FINCA Bank Georgia’s long-term viability as a niche bank will be a function of its value proposition in the local market. The commitment of shareholders to future of the institution, combined with proper governance, leadership, corporate culture and skillful execution will consistently evolve and deliver a compelling value proposition that will ensure a prominent long-term place in the Georgia financial services landscape.

FINCA Bank Georgia’s value proposition will deliver:

 Brand association and loyalty among core customer segments.  Appealing and sticky product/service bundles, available 24/7, fast and simple.  Accessible technologies/platforms enabling simplicity of service delivery as well as acquisition of next generation customers.  Cost efficient systems, enabling competitive pricing on all products/services.  Flexibility, agility, dynamism, market responsiveness (relative to business lines, product design, pricing, delivery channels, customer experience, and other aspects due to size and focus of the Bank.)  Community-roundedness – proximity of staff, channels to customer neighborhoods.  Strength of leadership, inclusive culture, results-focus, uncompromising performance standards and skillful execution.

4. STRATEGIC PRIORITIES AND GOALS

According to FINCA Bank Georgia's strategy for 2020, all supporting initiatives will be directed in two main directions: 1. increasing competitive positioning of the bank in the market (through respective products, channels, staffing and reorganizations) and 2. Ensuring high efficiency of internal and external processes, as a standing effort. Most of the initiatives for the year 2020 and forward are heavily digital, therefore having adequate capacity to support the digitization plans are essential.

5. FINCA BANK CORE OPERATING SEGMENTS

FINCA Bank Georgia is a medium-size bank, meeting both - profit and social performance expectations of its stakeholders, occupying a prominent position in the microfinance market. FINCA Bank Georgia is the bank of choice for its core segment (micro/small businesses and agricultural clients, micro-retail segment) a true family partner that satisfies the financial services needs through technologically innovative, scalable and value adding solutions.

The Bank serves customers through services accessible 24/7, through innovative channels, diverse range of sticky products and creative bundle offerings. The bank complements its technology-based outreach through digital literacy programs to micro retail segment, agricultural segments/farmers, micro and small entrepreneurs.

The Bank targets to increase outreach in rural areas (currently 61% of current customer base is in rural areas) to increase accessibility and diversified offerings to remote areas of the country. For this purpose, FINCA Bank Georgia implements number of initiatives related to customer service improvement such as: modification of loan processing process and procedures aiming at offering quick

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services to customers, launch additional sales channels to increase accessibility to clients, developed and launched new banking services and products to ensure that clients remotely get the services and products they need.

6. RESULTS OF OPERATION FOR 2019

2019 for the bank was the year of new initiatives with challenges and opportunities, which was reflected in operational as well as financial results. The most impacting challenges for the bank were changes introduced in the regulatory and macroeconomic environment since Q2, 2018. The management responded to the challenges resulted in improvement of loan portfolio quality, maintaining retail deposit portfolio and reaching annual profitability targets.

In 2019 the bank launched a new compensation system for loans officers, completed centralization of underwriting practices and established new unit of Recovery Call-Center. The new credit products such as Credit Limit for micro entrepreneurs and Car Loans supported maintaining loan portfolio yields on high level. On the other hand to mitigate lending limitations on the market the bank continued active marketing campaigns towards promotion of the retail banking service operations and ensured increased incomes from commission fees.

Basic Financial indicators in GEL

Financial Indicators 31-Dec-19 31-Dec-18

Total Assets 279,321,543 297,009,851

Gross Loan Portfolio 220,905,386 237,084,478

Client Deposit Portfolio 169,133,192 144,596,458

Total Equity 48,804,238 42,011,650

Operating Income 37,442,784 33,541,572

Operating Expenses (29,832,677) (33,246,473)

Net profit for the year 6,792,588 718,437 Efficiency Indicators ROE 13.91% 1.71% ROA 2.43% 0.24%

7. CORPORATE GOVERNANCE

General Information FINCA Bank Georgia’s corporate governing bodies are the General Meeting of Shareholders, the Supervisory Board and the Management Board, each having its own responsibilities and authorities in accordance with Georgian law and the Bank’s Charter.

Shareholders Structure

FINCA Bank Georgia JSC is 100% owned by FINCA Microfinance Coöperatief U.A. a cooperative registered in the Netherlands with the trade register of the Chamber of Commerce of Amsterdam under number 53004698 and having its official seat in Amsterdam (the “Cooperative”). The members of the Cooperative are:

1. FINCA MICROFINANCE HOLDING COMPANY LLC,

The shareholders of FINCA MICROFINANCE HOLDING COMPANY LLC are as follows:

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 FINCA International, Inc. – Majority Shareholder  International Finance Corporation (IFC)  KfW  FMO (Nederlandse Financierings Maatschappij voor Ontwikkelingslanden N.V)  Credit Suisse Microfinance Fund Management Company, acting for responsAbility Global Microfinance Fund  Triodos Investment Management  Triple Jump, acting for ASN-NOVIB FONDS

2. FINCA INTERNATIONAL LLC

8. GENERAL MEETING OF SHAREHOLDERS

The General Meeting of Shareholders is the supreme body for the management of the Bank. A General Meeting of Shareholders is convened either for annual or extraordinary meetings. The annual meeting shall be held within two months following the closing of the Annual Audited Financial Statement.

9. SUPERVISORY BOARD

FINCA Bank Georgia‘s Supervisory Board’s primary responsibilities are to manage risk, to ensure the Bank has a system of internal controls that operates effectively, and to provide oversight of the Bank on behalf of the shareholders and independent of the FINCA Bank Georgia Management, including with respect to carrying out FINCA’s mission, strategy implementation and alignment with the FINCA Network, financial performance, social performance, and compliance with applicable law and regulations. The Supervisory Board is also responsible for overseeing and evaluating the operations of FINCA Bank Georgia in accordance with the Bank’s foundational documents, other applicable documents or standards.

The General Meeting of Shareholders elects a Supervisory Board consisting of 3 (three) to 21 (twenty- one) members. Each member of the Supervisory Board shall be elected for the term of four years. The General Meeting may, at any time remove any members or re-elect the Supervisory Board member before the expiry of their term. At the same time, any member may resign at any time. The Supervisory Board elects its Chairman from amongst its members. The meetings of the Supervisory Board are conducted at least once in every calendar quarter.

The Supervisory Board conducts self-evaluation regarding compliance with Board activities, existing processes, effectiveness, composition and on fit and proper criteria of the Members. The result of the evaluation is considered by the shareholders.

FINCA Bank Georgia Supervisory Board consists of following members: Florin Lila, Chairman Volker Renner, Member Chikako Kuno, Supervisory Board Member and Audit Committee Chair Sridhar Srinivasan, Supervisory Board and Risk and Audit Committee Independent Member

10. FINCA BANK GEORGIA’S MANAGEMENT BOARD

The Management Board of FINCA Bank Georgia consists of Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) (vacant at the moment), Chief Operating Officer (“CCO”) and General Counsel & Corporate Secretary. Each member is appointed by the Supervisory Board for a 4-year term, but the authority of the members continues after expiration of the term until the Supervisory Board appoints the new Member(s) of the Management Board. The Management Board shall be responsible for the management and the execution of the Bank's activities and Board members shall be eligible for re- election on one or more additional terms.

Conflicts of Interest None of the members of the Supervisory Board and the Management Board is engaged in any activity that is, or could be reasonably perceived to be, in conflict with the interests of the FINCA Bank Georgia.

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11. FINCA BANK GEORGIA SUPERVISORY BOARD COMMITTEES

FINCA Bank Georgia Supervisory Board appoints a Risk and Audit Committee, an Asset-Liability Committee (“ALCO”). The Committees are required to report to the Supervisory Board on matters within their respective scopes of authority (as defined in their Committee Charters) and provide recommendations to the Supervisory Board.

Risk & Audit Committee

The Supervisory Board appoints the members of the Risk & Audit Committee from Supervisory Board Members for a period of 4 years. The authority of the Risk & Audit Committee member shall be prolonged until duly replaced. The appointment can be renewed for one or more additional terms. The Risk & Audit Committee consists of up to 3 (three) members. Regular Meeting of the Risk & Audit Committee shall be held at least once every quarter. Extraordinary meetings shall be held upon the request of the Supervisory Board or Risk & Audit Committee Chairman.

ALCO

ALCO governs and monitors Financial Risk, including but not limited to Liquidity Risk, Funding Risk, Counterparty Credit Risk, Foreign Exchange Risk, and Interest Rate Risk. It also monitors other relevant risks such as Lending, Credit and Operational risk, and makes recommendations for remediating exceptions, funding mobilization and asset allocation. ALCO evaluates and recommends capital structure decisions and manages capital adequacy, in the context of its risk management activities as well as ensures the compliance with existing covenants from the NBG and IFIs.

ALCO committee meets on a monthly basis. ALCO members are: CEO (Chair), CFO (Secretary), Regional Director, Hub Representative (prepares agenda and gathers materials for distribution), Capital Markets Group representative and Treasurer. ALCO meetings can be also attended by other guests periodically invited for special topics as determined by the Committee Chair. The Committee shall provide a report to the Supervisory Board (following each meeting held) summarizing risk issues and key areas discussed recommendations to the board, and decisions taken by the Committee.

12. MANAGMENT COMMITTEES

Risk & Compliance Committee

Supervisory Board appoints Management Board Level Risk & Compliance Committee for the purpose of overseeing and approving the company-wide risk management practices. Risks to be considered by the risk Committee include credit, market, liquidity, operational, compliance and reputational risk of the Bank. Risk Committee assists the Supervisory Board in overseeing FINCA Bank Georgia’s risk governance structure, risk management and risk assessment guidelines and policies, risk tolerance, capital and funding practices.

Credit Committee

The Credit Committee of FINCA Bank Georgia has the authority to review and make a final decision on approval or rejections of all proposed loan applications. It is also discussing the necessity of loan restructuring, level of collateral and any other related issues.

Credit Committee may include following members: CEO, COO, Regional Operations Manager, Service Center Manager, Credit Manager, Lawyer, and Internal Control Department Manager. Credit Committee meets daily when required and its exact composition depends on the respective loan size.

HR Committee

HR committee meets quarterly, its composition is as follows: Regional Eurasia HR Director, Head of HR Department FINCA Bank Georgia, FINCA Bank Georgia Executive Management – CEO, COO, CFO and GC.

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Disciplinary Committee

Disciplinary committee reviews FINCA Bank Georgia employees’ disciplinary cases should any employee misconduct notification be submitted to members of disciplinary committee. Disciplinary committee members are: Executive Management – CEO, COO, CFO, GC Head of HR Department and Head of Risk Management.

13. OTHER FUNCTIONAL LINES

FINCA Bank Georgia has various functional managers level that provide oversight of certain operations and procedures, including the technical areas of finance, operations, risk management, internal audit, legal, governance, human resources, marketing communications, and information services. These functional managers ensure that critical Supervisory Board and management information is sufficiently complete, accurate and timely, to enable appropriate decision making, and provide the control mechanisms to ensure that strategies, directions and instructions from both the Supervisory Board and Management Board are carried out systematically and effectively.

14. RISK MANAGEMENT STRATEGY AND INDIVIDUAL RISK MANAGEMENT

Risk Strategy

Bank’s Risk Strategy sets risks appetite levels and controls the alignment with approved limit in order to support Bank’s Management Board in execution of the Bank’s Business Strategy.

Risk appetite is the level of risk that the bank chooses to take in pursuit of its strategic objectives. It also reflects the bank’s capacity to sustain potential losses at varying levels of probability, based on available capital resources. The bank’s risk appetite is approved by the Supervisory Board and combines a top-down view of the bank’s capacity to take risk with a bottom-up view of the risk profile provided by each business line. In order to control risk exposure Bank defines limits per all relevant types of risk (such as credit, market, operational and other risks). This annual setting of risk appetite considers the bank’s ability to support business growth. Performance against risk appetite is measured and reported to the Management and Supervisory board quarterly.

The bank regularly monitors the level of potential deviation from expected financial performance that it is prepared to sustain at relevant points on the risk profile. It is established with reference to the strategic objectives and to the business plans of the bank, including the achievement of annual financial targets.

FINCA Bank’s Risk Strategy targets accomplishment of the following tasks:

 Protect Bank’s financial stability and profitability;  Protect Bank’s digital products and infrastructure;  Protect the Bank from the reputational risk;  Take part in new product approval process in order to ensure healthy risk –return decisions;

Bank’s Risk Strategy and appetite is approved by the Supervisory Board. The risk management committee oversees the alignment with the risk strategy and appetite levels. Risk Appetite is reflecting in the Bank’s respective policies, procedures and limits.

Risk Culture

Risk Management Department regularly performs trainings for the functional units. Bank has implemented risk awareness trainings for different risk directions such as operational risk, credit risk, information security risk and compliance risk.

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Code of Conduct

FINCA Bank’s Code of Conduct describes the ethical standards expected of all those associated with FINCA and its affiliates. Details as to specific requirements and policies are included in the FINCA Personnel Manual (Employee Handbook), and in other policies established by FINCA.

According to the code it is the policy of FINCA that all employees conduct their activities according to the highest ethical and professional standards. In order to reaffirm this policy, the Board of Directors and the Members have adopted this Code of Conduct, to which FINCA Persons - every employee, Board or Advisory Board member, consultants and volunteers, and others acting on behalf of FINCA, wherever located, must adhere. Failure to conduct activity in keeping with this Code of Conduct is grounds for immediate termination of employment or other relationships with FINCA.

Compliance with law - No one has the authority to violate any law or governmental regulation or to direct another employee or any other person to violate any law or regulation on behalf of FINCA.

Public Perception and Fair Dealing - FINCA is conducting its activities fairly with its clients, vendors, partners and employees and in such a way that, if disclosed to the public, would bring credit on FINCA.

Risk Management Organization

The Bank has established a risk management framework, whose main purpose is to protect the Bank from risk and allow it to achieve its performance objectives.

The Supervisory Board is responsible for the overall risk management of the FINCA Bank Georgia. The Supervisory Board approves the Bank’s strategies and policies that are recommended by the management board. The Management Board is responsible to implement the strategic direction set by the supervisory board in the shape of policies and procedures and to institute an effective hierarchy to execute these policies.

The Management Board has overall responsibility for the determination of the Bank’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the organizations finance function.

The overall objective of the Management Board is to set polices that seek to reduce risks as far as possible without unduly affecting the Bank’s competitiveness and flexibility. Through the risk management framework, the Bank manages above stated risks. The risk management framework combines tools, actions, resources and systems with the aim to effectively identify, assess and manage risks.

Management Board level Risk Committee is established to oversee and monitor risk management process, risk framework, risk appetite and risk policies.

The monitoring and implementation of the Bank’s risk management function is split among four principal risk management bodies: the Management Board, the Audit and Risk Management Committee, the Assets and Liabilities Management Committee (the ALCO) and Risk Management Department. The Management Board level Risk Management Committee

Risk management committee oversees effectiveness of the risk management framework. As well as alignment of the existing processes and limits with the risk appetite and strategy of the Bank. Risk Management Committee assesses risks and takes decision about the mitigation measures. Accountability for risk management is structured by the three lines of defense principles to achieve effective governance of Risk Management.

I. First line of defense

FINCA Bank Georgia’s business units bear full responsibility for the risks that arise in their operations. Businesses are responsible for identification, management and ensure that a risk and control environment as part of day to day operations is established. First line of defense is primary responsible for any losses resulted in their business areas.

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II. Second line of defense

Risk Management Function – Oversees and controls risk management processes in organization. Risk Management Department sets risk management framework and establishes risk limits. Risk management department performs independent monitoring of the risk profile and supports business in developing of the risk mitigation procedures, tools and policies. Additionally, risk management function makes recommendations about the mitigation actions of the particular risks. Risk Management and Compliance Unit reports directly to the CEO and the Supervisory Board.

III. Third line of defense

Internal Audit - an independent review function directly reports to the Audit Committee and Supervisory Board.

Risk Reporting

Risk Management and Compliance department prepares risk report to the Audit and Risk Management Committee regularly, where the risk trend and the current risk exposures are being discussed. Comprehensive risks report including all material risk such as credit risk, market risk, liquidity risk, operational risk and compliance risk is delivered to the Supervisory Board on the quarterly basis. The risk report presents alignment with the risk appetite limits and KRY’s trend for all material risk types.

15. MANAGEMENT OF INDIVIDUAL RISK

Credit Risk

The Bank is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

The main business of the Bank is to provide micro-loans. To avoid significant financial damage caused by this the Bank uses various methods to identify and manage effectively the credit risks. The Bank’s credit policy and lending control is determined by the respective manuals, where all the related procedures and requirements, along with corresponding controls are clearly defined, including loan disbursement, monitoring of delinquent loans, etc. The fundamental principle of the Bank’s lending policy is avoiding the over-indebtedness of its customers. Accordingly, the lending practices are designed so that customer’s debt capacity is carefully assessed. The high quality of the procedures are ensured also by the sound credit practices which are developed by FINCA International’s professionals during 30 years.

The Bank focuses principally on micro-credit to low income entrepreneurs with cash flows from income generating activities (including trade, production, agriculture, and others).

Bank’s practices individual lending methodology in its loan products. Where appropriate, and in the case of most loans, the Bank obtains personal guarantee and/or collateral. However, a significant portion of loans is personal lending, where no such facilities can be obtained. All applicants’ credit history is checked in credit bureau with their consent.

The Credit Committee is the analytical body responsible for analyzing the information in the loan applications. It is the independent body authorized to make the final decision about financing or rejecting the loan application and changing in the conditions of loan, including restructuring. To assess the credit risk bank is conducting the stress tests, based on parameters provided by the NBG. It includes both the direct credit risk and CICR.

Bank assesses various concentration dimensions including industry sector, geographic spread, credit rating, customer segment and exposure to single counterparties or groups of related counterparties.

Bank applies the HHI (Herfindahl-Hirschman Index) to analyze its concentration risk. The concentration of portfolio on individual borrower’s level are very limited due to high granularity of portfolio. Risk assessment shows that overall concentration risk in the Bank is low.

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The Bank continues to follow a prudential lending policy. All credit activities strive towards a long-term customer relationship to achieve solid profitability and avoid credit expansion that may endanger long- term stability.

Liquidity risk

Among other issues, for liquidity management purposes, during the meetings, ALCO considers Liquidity Schedule and forecast and funding schedule. ALCO discussions related to liquidity are resulting in: identification of future funding need (timing, amount, currency), identification of possible liquidity sources (direct attraction of funds from international financial institutions, using money market instruments – interbank deposits, cross currency swaps etc.) and action plan. Besides, ALCO sets internal limits on no loan liquidity (unrestricted Cash and Cash Equivalents) to manage the liquidity risk.

Current liquidity is managed by the Treasury Department, which deals in the money markets for current liquidity support and cash flow optimization.

The Bank also monitors internal liquidity covenants and ensures compliance with them. The Bank manages existing funds to finance current business operations in order to maintain sufficient level of cash and its equivalents.

Market Risk

Market risk is that the risk that the Bank’s earnings or capital or its ability to meet business objectives will be adversely affected by changes in the level or volatility of market rates or prices. Market risk covers interest rate risk, currency risk, credit spreads, commodity prices and equity prices that the Bank is exposed to. There have been no changes as to the way the Bank measures risk or to the risk it is exposed or the manner in which these risks are managed and measured. Major market risks that the Bank is exposed are currency and interest rate risks.

Interest Rate Risk

The Bank manages fair value interest rate risk through periodic estimation of potential losses that could arise from adverse changes in market conditions. The Bank’s management conducts monitoring of the Bank’s current financial performance, estimates the Bank’s sensitivity to changes in fair value interest rates and its influence on the Bank’s profitability. The Bank offers deposits and the loans mostly at the fixed interest rates, but some IFI borrowings are in floating rates.

FINCA Bank Identifies IRR trough analyses of all assets, liabilities and off-balance-sheet positions which are sensitive to fluctuations in interest rates, particularly:

 Monitoring of the Interest rates movements on the local and global money markets.  Reviewing the attraction of any new funds sensitive to floating rates as well as the possibility of existing funds prepayment.

In order to monitor and control Interest Rate Risk FINCA Bank regularly monitors compliance with the limits. In addition, the Bank performs stress tests on the regular basis, which allows to calculate losses in case of realization of the, extremely severe scenarios of interest rate fluctuations. Bank’s Interest rate risk model is based on Basel II requirements and uses 6 shock scenarios to estimate changes in the economic value and 2 shock scenarios to estimate changes in the earnings. The Bank aims to maintain interest rate margins that incorporate interest rate risk. Bank mitigates IRR within the policies established by the ALCO Framework. Changes in a Bank’s mix of assets and liabilities in order to mitigate IRR shall be approved by the Bank’s ALCO and must include approval from the Bank’s Regional Director, the F/I CFO and the F/I Treasurer.

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Currency Risk

Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Bank is exposed to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank strives to maintain almost closed open currency position that is monitored on daily basis.

To assess the market risks, the bank has created the models for each specific risk. To measure the currency risk, the Bank uses 99% VaR model of daily changes of GEL/USD exchange rates for last few years (covering whole economic cycle). The results are recalculated for 30 days holding period.

FINCA Bank Georgia measures FX Risk as consolidated overall open foreign currency position according to “Regulation Setting, Calculating and Maintaining Overall Open Foreign Exchange Position Limit of Commercial Banks”.

FX risk ratios (OCP limits) set by National Bank of Georgia, ALCO as well as Bank’s lenders (whichever is stricter) are controlled by the Bank on the regular basis.

Operational Risk

Operational risk is the risk of loss arising from systems failure, human error, fraud or external events. When controls fail to perform, operational risks can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Bank cannot expect to eliminate all operational risks, but it endeavors to manage these risks through a control framework and by monitoring and responding to potential risks.

The management of the operational risk lies within business units as operational risk is a part of their day to day activities and is reflected in strategic and operational decision making. Operational Risk Unit helps business lines to identify and manage operational risk by providing them with relevant tools and experience.

Key Risk Indicators are used as an early warning signals to assess potential operational risk. Through the Key Risk Indicators, the Bank monitors the factors which increase Operational Risk. The Risk Indicator's report is quarterly presented to the Bank's Supervisory Board. The Operational Risk Database is used to analyze risk losses caused by operational risks events and to plan preventive measures in order to avoid further reoccurrence of the similar events. To ensure that appropriate responsibility is allocated to the management, reporting and escalation of operational risk, the Bank operates a ‘three lines of defense’ model.

Mitigation of operational risk is achieved through following strategies: Incident cause analysis – to avoid re-occurrence of the material losses, the procedure is implemented which implies analyzing the flaws of the system and carrying out correcting activities. Insurance – Insurance policies are used to transfer the risk of “low frequency, high severity” nature to third party.

Adequate procedures – The Bank has policies, processes and procedures to control and mitigate material operational risks.

Accountability and segregation of duties – assessment of the current conflicts of interest, reducing them to the extent possible for a given staffing model and application of mitigating controls is performed on a regular basis and before assigning any new function.

Business continuity plans – business continuity plans are used to ensure Bank’s ability to operate on an on-going basis and limit losses in the event of severe business disruption. Operational risk limits – limits are set on high risk transactions to minimize risk exposure on particular products/services (such as cash limits, treasury limits and operational limits).

Compliance risk

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In order to preserve the integrity of the organization and the reputation for professional and ethical conduct, the management and all employees of FINCA bank Georgia, are responsible for good understanding of and strict compliance with the applicable laws, regulations and standards in whatever business operations are being performed.

The existing Compliance Policy of FINCA Bank Georgia aims to implement effective controls and frameworks to ensure that Compliance Risk is managed effectively and in compliance with governance and legislative requirements.

Compliance starts at the top and is part of the culture of the Bank and the Board of Management and senior management shall lead by example. It concerns everyone within the Bank and is an integral part of the Bank’s business activities.

In order to operate effectively, Compliance function is based on the principles of independence, authority (including access to information) and reporting.

 Compliance is not engaged in any other business of the Bank which could create a conflict of interest;  Compliance is given access to all relevant information and to staff necessary to carry out its responsibilities. Compliance has full and free access to the Management board level Risk and Compliance Committee to report of any non-compliance with the Policy or any other relevant policy, laws, rules and regulations;  The reporting system ensures that the Supervisory and Management Boards are provided with sufficient higher-level information to enable them to understand the Bank’s overall Compliance profile and focus on the material and strategic implications for the business.

16. FINCA’S COMMITMENT TO SOCIAL PERFORMANCE

FINCA is dedicated to maintaining its social mission as an intrinsic part of its business model - a priority that is fully embraced by every one of FINCA's subsidiaries as well. FINCA is taking a leadership role in all major industry efforts in the area of social performance such as the Smart Campaign, Microfinance Transparency and the Social Performance Task Force, and has also implemented its own internal safeguards to ensure mission protection and focus through the Social Performance Audit Committee. The Committee is a standing committee of the FINCA International Board of Directors and oversees and enforces adherence to the fundamental principles of social responsibility that remain at the core of FINCA's business model.

FINCA Bank Georgia is constantly working to enhance its social performance and develop programs that expand and deepen the benefits to clients. The mechanism of monitoring of social function is based on statistical analysis of living standards measurement surveys that are conducted periodically.

In addition to Social Performance, FINCA's research program supports fulfilling client needs through sustainable interventions (social ventures, etc.).

FINCA defines social performance as:

 Expanded access to financial services, primarily among underserved, low-income people and communities;  Increased employment and incomes;  Improved living standards;  Empowerment and the achievement of personal aspirations among our clients and in their families;  Acting responsibly and equitably towards all stakeholders, and the communities of which we are a part.

FINCA Bank Georgia implements number of initiatives related to customer service improvement such as: modification of loan processing process and procedures aiming at offering quick services to customers, launch additional sales channels to increase accessibility to clients, develop and launch new banking services and products to ensure that clients remotely get the services and products they need. FINCA Bank Georgia permanently cares about improvement of products and services for its target segments and all actions and efforts of the bank are based on analysis of client needs and requirements.

12 FINCA Bank Georgia Joint Stock Company

Management Report for the Year Ended 31 December 2019

17. FINCA BANK CSR PROJECTS

FINCA Bank is implementing number of initiatives fostering improvement of financial literacy in the country. As a bank is considered to be a reliable partner not only when the client needs to get or allocated financial resources, but also when the client needs the right advice from professionals, our mission is to be where our support is needed the most to support our clients achieve their goals – therefore, purpose of financial literacy projects and initiatives serves this purpose as well. FINCA bank is member of National Bank of Georgia financial education committee that conforms the readiness of the bank to participate in the process of enhancing financial knowledge in country. Majority of the customers of FINCA Bank Georgia are from outside of the capital city. By vast majority those are clients from rural and remote areas of the country, with limited exposure to financial services in general. FINCA BANK Georgia continues focus principally on micro-credit to low income entrepreneurs with cash flows from income generating activities (including trade, production, agriculture, and others). The Bank has also expanded offerings to small and medium enterprises in the service of market demand.

Different projects were implemented with the aim of increase public awareness about financial literacy for clients:

 FINCA Bank has been part of the campaign initiated by National Bank of Georgia dedicated to Global Money Week for over the 6 years. In 2019 FINCA Bank created special content for print and digital with message about savings and reached its target segments.  FINCA Bank joined National Bank of Georgia’s and German Savings Bank’s initiative and has been celebrating Global Savings Day for over 5 years. In 2019 Special content (print and digital media) about the impact of savings was developed and special campaign launched.  Rubric dedicated to financial literacy and Savings culture were managed by FINCA Bank Georgia in journal “Entrepreneur” and “OK”.  FINCA Bank partnered with Junior Achievement Georgia and participated in/sponsored various events organized to promote financial literacy among young entrepreneurs. FINCA Bank team members were mentors and judges of the event. About 250 children participated in the event.

18. POLICIES AND PROCEDURE TO PROTECT EMPLOYEES

FINCA Bank Georgia, is an organization that aims to achieve massive financial inclusion, in challenging markets around the world, through responsible financial services.

The Brand promise of “Creating Brighter Futures,” for our employees, our customers, and in the communities where we live and work – is incorporated in all actions and projects of the bank.

Each employee in FINCA Bank Georgia promotes and shares FINCA brand values and ensures high quality service not only toward external client, but also internal clients. FINCA Bank Management team is oriented on long term relationships with each employee, and for that purpose is very oriented on development of projects and programs that serve employee development and retention. The Brand promise is reflected in policies and procedures described below:

Equal Employment - In order to provide equal employment and advancement opportunities to all individuals, employment decisions at FINCA Bank Georgia are based on merit, qualifications, and abilities. FINCA Bank Georgia does not discriminate in employment opportunities or practices on the basis of race, color, religion, sex, national origin, gender, age, or any other characteristics protected by law.

Gender Diversity - FINCA Bank promotes gender diversity and equality, fostering a culture of inclusion where all genders enjoy the same opportunities, rights, support and outcomes. FINCA Bank aims to achieve gender diversity and equality focusing in promoting equal participation and diversity in five key areas: governance and leadership; clients; hiring and staffing; development and advancement opportunities and work environment. FINCA recognizes the importance of gender diversity and equality in the workplace and of the clients we serve as an integral part of what we are as an organization and a key to our success. We strive to promote gender diversity and equality by removing barriers to the full and equal participation of women in the workplace. We provide unrestricted and genuine access to leadership roles for women

13 FINCA Bank Georgia Joint Stock Company

Management Report for the Year Ended 31 December 2019

and men and foster a culture of inclusion where all genders enjoy the same opportunities, rights, support and outcomes

Standards of Behavior and Code of Conduct - The successful business operation and reputation of FINCA Bank Georgia is built upon the principles of fair dealing and ethical conduct of our employees. Our reputation for integrity and excellence requires careful observance of the spirit and letter of all applicable laws and regulations, as well as a scrupulous regard for the highest standards of conduct and personal integrity.

The continued success of FINCA Bank Georgia is based on customers' trust and we are dedicated to preserving that trust. Employees owe a duty to FINCA Bank Georgia, its customers, and shareholders to act in a way that will merit the continued trust and confidence of the public.

FINCA Bank Georgia complies with all applicable laws and regulations and expects its staff to conduct business in accordance with the letter, spirit, and intent of all relevant laws and to refrain from any illegal, dishonest, or unethical conduct.

FINCA Bank Georgia Standards of Behavior and FINCA International Code of Conduct guide the lines of business ethics. In some situations, the use of good judgment, based on high ethical principles, leads you with respect to lines of acceptable conduct. If a situation arises where it is difficult to determine the proper course of action, the matter should be discussed openly with the immediate supervisor, with senior supervisory level and, if necessary, with the Human Resources Department for advice and consultation

Whistle Blower policy - The Purpose of this policy is to encourage all employees to disclose in good faith any wrong doing that may adversely impact the Company, the Company’s Clients, shareholders, employees, investors or the public at large with the confidence that they will not suffer any adverse employment action. This policy encourages employees to report any illegal or fraudulent act perpetuated by a staff or management confidentially or anonymously.

Employees are strongly encouraged to discuss with supervisors, managers, Human Resources or other appropriate personnel, when in doubt, the best and ethical course of action in a particular situation

Sexual and Other Unlawful Harassment - FINCA is committed to providing a work environment that is free from all forms of discrimination and conduct that can be considered harassing, coercive, or disruptive, including sexual harassment. Actions, words, jokes, or comments based on an individual's sex, race, color, national origin, age, religion, disability, sexual orientation, or any other legally protected characteristic will not be tolerated.

Sexual harassment is defined as unwanted sexual advances, or visual, verbal, or physical conduct of a sexual nature. This definition includes many forms of offensive behavior and includes gender-based harassment of a person of the same sex as the harasser. In addition, as mandatory training, HR department conducts refreshment trainings (self-study and quiz) of sexual harassment.

Diversity & Inclusion – special committee that takes care that the equal opportunities are considered in all directions, including gender. Team organizes special activities to empower women in leadership roles, give development opportunities, equal pay gap per levels and positions and promotion in the new roles.

Open door policy - The FINCA Bank Georgia is committed to promoting a positive work environment and a climate of open communication.

Employees are encouraged to offer positive input and constructive criticism to continuously improve our work environment and the way that we operate.

An “open door” means that a supervisor’s door is always open, and employees should feel comfortable speaking with their supervisors about any questions or concerns they have. In many cases, talking with a supervisor is the most effective way to resolve issues and to understand an employee’s job, policies and procedures

14 FINCA Bank Georgia Joint Stock Company

Management Report for the Year Ended 31 December 2019

FINCA Development Academy (FDA) - The FINCA Development Academy (FDA) is responsible for delivering a global Learning and Development (L&D) strategy that offers professional development and employee training (technical and soft skills) and offers capacity building to strengthen Subsidiary L&D skills to deliver trainings locally. The FDA administers FIF’s global learning management system (LMS) and sets minimum standards for the network. Within Development Academy framework, on annual basis each Managerial position employees are going through set of managerial training and modules that ensures and provides increase of leadership skill and competencies.

In addition, employees are offered number of internal or external trainings as benefits, for their development purposes.

Employee On Boarding and New Employee Orientation programs (NEO) - Each new employee in FINCA Bank Georgia goes through On-Boarding program (1 day with HR Specialist) and 4 days intensive on the job coaching with manager and in addition New Employee Orientation trainings (NEO). On-Boarding programs differ based on the employee position. On-Boarding and NEO helps newcomer to easily integrate with FINCA Bank company culture in the most positive and effective way.

Internship opportunities and programs: FINCA Bank Development Center - FINCA Bank Georgia established development center for Loan Officers and Customer Service Officers positions. FBDC ensures active and efficient learning and development opportunities for those who plan to start or further develop their career path in the Banking Sector, each student has vast opportunities to learn from experienced subject experts and at the same time start earning. The course entry requirements are simple (working experience is not required) to ensure that applicants from all regions of the country have access to learn and at the same time work at FINCA Bank Georgia branches located in 30 cities.

Individual Development Plan - Individual Development Plan (IDP) supports employees to reach their professional and career goals through proper planning and effective activities. This is a program that supports employees to reach their short-term and long-term career goals, as well as improve their current performance. IDP includes self-assessment of employees to identify their needs and gaps and set clear action plan in order to reach their goals.

Individual Development Plan (IDP) is a shared responsibility between the employee and manager. Through discussion and collaboration, the manager and employee establish a strategic development plan outlining goals, learning activities and timelines. The IDP discussion is an opportunity to discover the employee’s career needs and interests, strengths and growth areas. Meanwhile, other functional lines / other departments will ensure full support to employee in the development process if their role in IDP is identified.

Participation in IDP is voluntary and is driven by the individual. It is a four step process comprised of: preparation – self assessment; meeting with line manager and receiving consultancy about career aspirations and objectives; setting action plan (including tailored program for development process) and final self-evaluation and coach’s evaluation

Employee Compensation and Benefits - FINCA Bank Compensation strategy is aligned with financial sector compensation packages - market trends are taken into account. FINCA Bank Georgia participates in Market Salary / Compensation survey to ensure that the compensation offerings correspond to and are competitive in the Georgian market. Compensation systems differ, depending on the position of employee. In sales line FINCA Bank Georgia applies fixed and performance passed compensation, taking into consideration, that variable pays are built on very SMART targets.

In other position compensations, the company does annual analysis, ensuring that employee monetary rewarding and compensation serves employee motivation and retention.

In addition to fair and competitive compensation system in place, FINCA Bank Georgia employees enjoy health insurance family package (the package includes family members and the price of the package is fully covered by the bank).

15 Deloitte & Touche LLC King David Business Center 12 Merab Aleksidze Street Tbilisi, 0171, Georgia

Tel: +995 (32) 224 45 66 Fax: +995 (32) 224 45 69 deloitte.ge

INDEPENDENT AUDITOR’S REPORT

To the Shareholders and the Management Board of FINCA Bank Georgia Joint Stock Company:

Opinion

We have audited the financial statements of FINCA Bank Georgia Joint Stock Company (the “Bank”), which comprise the statement of financial position as at December 31, 2019, and the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2019, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”).

Basis for Opinion

We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant to our audit of the financial statements in Georgia, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Other Information

Management is responsible for the other information. The other information comprises the management report prepared in accordance with the requirements of the Law of Georgia on Accounting, Reporting and Auditing.

Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.  Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Report on Other Legal and Regulatory Requirements

Management is responsible for the preparation of the management report in accordance with the Law of Georgia on Accounting, Reporting and Auditing, and for such internal control as management determines is necessary to enable the preparation of the management report that is free from material misstatement, whether due to fraud or error.

We performed procedures with respect to whether the management report is prepared in accordance with the requirements of Law of Georgia on Accounting, Reporting and Auditing and includes the information required by the Law of Georgia on Accounting, Reporting and Auditing.

We have selected and performed procedures based on our judgment, including but not limited to inquiries, analysis and review of documentation, comparison of the Bank’s policies, procedures, methodologies and reported information with the requirements of the Law of Georgia on Accounting, Reporting and Auditing, as well as recalculations, comparisons and reconciliations of numeric values and other information.

In our opinion:

 The management report for the year ended December 31, 2019 is prepared in accordance with the requirements of Law of Georgia on Accounting, Reporting and Auditing;  The management report for the year ended December 31, 2019 includes the information required by the Law of Georgia on Accounting, Reporting and Auditing;  The information provided in the management report for the year ended December 31, 2019 is consistent, in all material respects, with the financial statements for the year ended December 31, 2019.

Stuart Leighton on behalf of Deloitte and Touche LLC

Tbilisi, Georgia May 8, 2020

FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

1. Organization

FINCA Bank Georgia Joint Stock Company (the “Bank”) is a joint-stock company, which was established on December 20, 2007 in Tbilisi, Georgia, with the registration number 205235262. The Bank’s primary business consists of originating micro and small loans to individuals and the Bank conducts its business under general banking license number 252. The loans are disbursed both in local and foreign currencies.

As at December 31, 2019 the members of the Cooperative were:

1. FINCA Microfinance Holding Company LLC, a limited liability company registered under the laws of the State of Delaware, United States of America and having its registered address at 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808, United States of America. FINCA Microfinance Holding Company LLC holds 99 voting rights as a Member A and 1 voting right as a Member B of the Cooperative. 2. FINCA International LLC, a limited liability company registered under the laws of the State of Maryland, United States of America and having its registered address at 11 East Chase Street, Baltimore, Maryland 21202, United States of America. FINCA International LLC holds 1 voting right as a Member B of the Cooperative.

The Bank’s registered address and place of business is: 71 Vazha Pshavela Avenue, 0186, Tbilisi, Georgia. The Bank has 36 (2017: 36) service centers within Georgia. As at December 31, 2018 the Bank had 540 employees (2017: 577 employees).

As at December 31, 2019 and 2018 the following shareholders owned FINCA Microfinance Holding Company LLC:

December 31, December 31, 2019 2018 First level shareholders/holders of the issued share capital: FINCA International, Inc. 62.93% 62.93% International Finance Corporation 14.27% 14.27% KfW 8.87% 8.87% Nederlandse Financierings Maatschappij voor Ontwikkelingslanden N.V. 7.25% 7.25% Credit Suisse Microfinance Fund Management Company 2.96% 2.96% Triodos Investment Management 2.05% 2.06% Triple Jump (ASN-NOVIB FONDS) 1.67% 1.66%

Total 100% 100%

FINCA International, Inc. is a not-for-profit corporation under the laws of the United State of America and as such, its Members hold no ownership in the company and have no economic rights. As at December 31, 2019 the Members of FINCA International, Inc. are as follows: Rupert Scofield, John Hatch, Robert Hatch, Richard Williamson.

These financial statements were authorized for issue by the Management Board of the Bank on May 8, 2020 Significant accounting policies

Statement of Compliance

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).

23 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Going concern

These financial statements have been prepared on the assumption that the Bank is a going concern and will continue in operation for the foreseeable future. In making this assumption, the management considered the Bank’s financial position, current intentions, profitability of operations and access to financial resources.

Economic impact due to spread of COVID-19 resulted in revision of financial forecasts for the year 2020 and approval of Business Continuity Plan. The Management developed measures to increase its liquidity: As of March, 2020 the Bank has access to refinancing loan in amount of GEL 33 mln from NBG, which will be pledged by collateralized loan portfolio, as well as bank has access to swap facility. Additionally the bank is negotiating with IFI partners for senior debt facilities. Besides that, based on the Bank’s deposit retention history, the management does not expect volatility in deposit portfolio (Note 33)

Due to impact of COVID 19 pandemic at the end of March, 2020, the Bank has breached the covenant for DWM loan , however the part of the loan was repaid in April and the remaining outstanding amount equals to GEL 1,7 mln and matures in 2021. Negotiation regarding the waiver is in progress with lender. The management of the Bank believes that the breach of covenants does not trigger any cross default on other borrowings of the Bank.

The Bank’s management believes that based on current forecasts and measures together with current deposit structure, the Bank has enough funds to continue its activities in the foreseeable future.

These financial statements are presented in Georgian Lari (“GEL”), unless otherwise indicated.

These financial statements have been prepared on the historical cost convention. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Bank takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these financial statements is determined on such a basis.

In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

 Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;  Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and  Level 3 inputs are unobservable inputs for the asset or liability.

The Bank is registered in Georgia and maintains its accounting records in accordance with Georgian law.

The Bank presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery or settlement within 12 months after the statement of financial position date (current) and more than 12 months after the statement of financial position date (non-current) is presented in Note 32.

Items included in the financial statements of the Bank are measured using the currency of the primary economic environment in which the Bank operates (“the functional currency”). The functional currency of the Bank is the Georgian Lari (“GEL”). The presentation currency of the financial statements of the Bank is the GEL. All values are rounded to the nearest thousand Lari, except when otherwise indicated.

24 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the statement of profit or loss and other comprehensive income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank.

This is the first set of the Bank’s annual financial statements in which IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers have been applied. Changes to significant accounting policies are described in Note 3.

2. Application of new and revised international financial reporting standards (IFRSs)

Amendments to IFRSs affecting amounts reported in the financial statements

The Bank has initially adopted IFRS 9 and IFRS 15 from 1 January 2018. Also, the Bank early adopted Prepayment Features with Negative Compensation (Amendments to IFRS 9), issued in October 2017.

IFRS 9 Financial Instruments

In 2018, the Bank adopted IFRS 9 as issued by the IASB in July 2014 with a date of initial application of 1 January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements.

As permitted by the transitional provisions of IFRS 9, the Bank elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognised in the opening retained earnings and other reserves of the current period.

The adoption of IFRS 9 has resulted in changes in our accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial instruments such as IFRS 7: Financial Instruments: Disclosures.

The effect of initially applying IFRS 9 is mainly attributed to the following: • an increase/decrease in impairment losses recognised on financial assets; • additional disclosures related to IFRS 9; • change in write-off policy and reversal of previously written-off instruments

IFRS 15 Revenue from Contracts with Customers

IFRS 15 establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related Interpretations when it becomes effective.

The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

 Identify the contract with the customer;  Identify the performance obligations in the contract;  Determine the transaction price;  Allocate the transaction price to the performance obligations in the contracts;  Recognise revenue when (or as) the entity satisfies a performance obligation.

25 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Under IFRS 15, an entity recognises revenue when or as a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.

In April 2016, the IASB issued Clarifications to IFRS 15 in relation to the identification of performance obligations, principal versus agent considerations, as well as licensing application guidance.

The adoption of IFRS 15 did not impact the timing or amount of fee and commission income from contracts with customers and the related assets and liabilities recognised by the Bank.

New and revised IFRSs in issue but not yet effective

The Bank has not applied the following new and revised IFRSs that have been issued but are not yet effective:

 IFRS 17 Insurance Contracts;  Amendments to IAS 28 – Long-Term Interests in Associates and Joint Ventures;  Annual Improvements to IFRSs 2015-2017 Cycle  Amendments to IAS 19 Employee benefits  Amendments to IFRS 10 Consolidated Financial Statements  IFRIC 23 Uncertainty Over Income Tax Treatments;

The management of the Bank does not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the Bank in future periods.

IFRS 16 Leases

The Bank has adopted IFRS 16 Leases from January 1, 2019. IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related interpretations when it becomes effective.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right- of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.

Previously, the Bank recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. The right of use of asset and lease liability in the amount of GEL 7,828,717 was recognized as at 01 January 2019. The discount rate used is 7.7%. Weighted average lease term is 4 years.

26 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) 01 January 2019

Lease commitments 14,263,080

Short term leases, leases of low value asset (426,726) (6,007,637) Discounting effect

Lease liability as at January 01,2019 7,828,717

IFRS 17 Insurance Contracts

The new Standard establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts and supersedes IFRS 4 Insurance Contracts.

The Standard outlines a General Model, which is modified for insurance contracts with direct participation features, described as the Variable Fee Approach. The General Model is simplified if certain criteria are met by measuring the liability for remaining coverage using the Premium Allocation Approach.

The General Model will use current assumptions to estimate the amount, timing and uncertainty of future cash flows and it will explicitly measure the cost of that uncertainty, it takes into account market interest rates and the impact of policyholders’ options and guarantees. The implementation of the Standard is likely to bring significant changes to an entity’s processes and systems, and will require much greater co‑ordination between many functions of the business, including finance, actuarial and IT.

The Standard is effective for annual reporting periods beginning on or after 1 January 2021, with early application permitted. It is applied retrospectively unless impracticable, in which case the modified retrospective approach or the fair value approach is applied.

For the purpose of the transition requirements, the date of initial application is the start if the annual reporting period in which the entity first applies the Standard, and the transition date is the beginning of the period immediately preceding the date of initial application.

The management of the Bank does not anticipate that the application of the Standard in the future will have an impact on the Bank’s financial statements.

Annual Improvements to IFRS Standards 2015–2017 Cycle

The Annual Improvements include amendments to four Standards.

IAS 12 Income Taxes The amendments clarify that an entity should recognise the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised the transactions that generated the distributable profits. This is the case irrespective of whether different tax rates apply to distributed and undistributed profits.

IAS 23 Borrowing Costs The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation rate on general borrowings.

IFRS 3 Business Combinations

The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, the entity applies the requirements for a business combination achieved in stages,

27 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) including remeasuring its previously held interest (PHI) in the joint operation at fair value. The PHI to be remeasured includes any unrecognised assets, liabilities and goodwill relating to the joint operation.

IFRS 11 Joint Arrangements The amendments to IFRS 11 clarify that when a party that participates in, but does not have joint control of, a joint operation that is a business obtains joint control of such a joint operation, the entity does not remeasure its PHI in the joint operation.

All the amendments are effective for annual periods beginning on or after 1 January 2019 and generally require prospective application. Earlier application is permitted.

The management of the Bank does not anticipate that the application of the Standard in the future will have an impact on the Bank’s financial statements.

Amendments to IAS 19 Employee Benefits

The amendments clarify that the past service cost (or of the gain or loss on settlement) is calculated by measuring the defined benefit liability (asset) using updated assumptions and comparing benefits offered and plan assets before and after the plan amendment (or curtailment or settlement) but ignoring the effect of the asset ceiling (that may arise when the defined benefit plan is in a surplus position). IAS 19 is now clear that the change in the effect of the asset ceiling that may result from the plan amendment (or curtailment or settlement) is determined in a second step and is recognised in the normal manner in other comprehensive income.

The paragraphs that relate to measuring the current service cost and the net interest on the net defined benefit liability (asset) have also been amended. An entity will now be required to use the updated assumptions from this remeasurement to determine current service cost and net interest for the remainder of the reporting period after the change to the plan. In the case of the net interest, the amendments make it clear that for the period post plan amendment, the net interest is calculated by multiplying the net defined benefit liability (asset) as remeasured under IAS 19.99 with the discount rate used in the remeasurement (also taking into account the effect of contributions and benefit payments on the net defined benefit liability (asset)).

The amendments are applied prospectively. They apply only to plan amendments, curtailments or settlements that occur on or after the beginning of the annual period in which the amendments to IAS 19 are first applied.

The amendments to IAS 19 must be applied to annual periods beginning on or after 1 January 2019, but they can be applied earlier if an entity elects to do so.

The management of the Bank does not anticipate that the application of the Standard in the future will have an impact on the Bank’s financial statements.

IFRS 10 Consolidated Financial Statements and IAS 28 (amendments)

The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent’s profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s profit or loss only to the extent of the unrelated investors’ interests in the new associate or joint venture. The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted.

The management of the Bank does not anticipate that the application of the Standard in the future will have an impact on the Bank’s financial statements.

28 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) IFRIC 23 Uncertainty over Income Tax Treatments

IFRIC 23 sets out how to determine the accounting tax position when there is uncertainty over income tax treatments. The Interpretation requires an entity to:  determine whether uncertain tax positions are assessed separately or as a group; and  assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings: – If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned to be used in its income tax filings. – If no, the entity should reflect the effect of uncertainty in determining its accounting tax position.

The Interpretation is effective for annual periods beginning on or after 1 January 2019. Entities can apply the Interpretation with either full retrospective application or modified retrospective application without restatement of comparatives retrospectively or prospectively.

The management of the Bank does not anticipate that the application of the Standard in the future will have an impact on the Bank’s financial statements.

3. Significant accounting policies

The principal accounting policies are set out below:

b. Recognition of interest income and expense - applicable after January 1, 2018

Interest income and expense are recognised in profit or loss using the effective interest method by applying the effective interest rate.

Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset except for:

 purchased or originated credit-impaired financial assets. For those financial assets, the Bank applies the credit-adjusted effective interest rate to the amortised cost of the financial asset from initial recognition.  Financial assets that are not purchased or originated credit-impaired financial assets but subsequently have become credit-impaired financial assets. For those financial assets, the Bank applies the effective interest rate to the amortised cost of the financial asset in subsequent reporting periods.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability.

When calculating the effective interest rate, the Bank estimates the expected cash flows by considering all the contractual terms of the financial instrument excluding expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts.

c. Recognition of fee and commission income

Financial instrument origination fees are deferred, together with the related direct costs, and recognised as an adjustment to the effective interest rate of the financial instrument. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognised as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognised in profit or loss over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognised in profit or loss on expiry. Loan servicing fees are recognised as revenue as the services are provided.

29 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

All other fee and commissions are recognised when services are provided.

d. Financial instruments

IFRS 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. The standard brings fundamental changes to the accounting for financial assets and to certain aspects of the accounting for financial liabilities.

The Bank has adopted consequential amendments to IFRS 7 Financial Instruments: Disclosures that are applied to disclosures about 2018 but have not been applied to the comparative information.

The key changes to the Bank’s accounting policies resulting from its adoption of IFRS 9 are summarized below. The full impact of adopting the standard is set out in note 3.

i. Recognition and initial measurement

Financial assets and financial liabilities are recognised in the Bank’s financial position when the Bank becomes a party to the contractual provisions of the instrument.

A financial asset or financial liability is measured initially at fair value plus, for an item not at FVTPL, transaction costs that are directly attributable to its acquisition or issue.

e. Financial assets - applicable after January 1, 2018

i. Classification and subsequent measurement

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). IFRS 9 classification is generally based on the business model in which a financial asset is managed and its contractual cash flows. The standard eliminates the previous IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. For an explanation of how the Bank classifies financial assets under IFRS 9 see note 3.

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities.

Financial assets

A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:

• The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

A financial asset is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL:

• The asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

On initial recognition of an equity investment that is not held for trading, the Bank may irrevocably elect to present subsequent changes in the investment’s fair value in OCI. This election is made on an investment-by-investment basis.

All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets.

30 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

On initial recognition, financial asset that otherwise meets the requirements to be measured at amortised cost or at FVOCI, the Bank may irrevocably designate such financial asset to be measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.

The Bank’s financial assets classified into the measurement categories are as following:

Measurement Financial assets Business Model SPPI Category Cash flows are solely Cash and cash Hold to collect contractual payments of principal and equivalents cash flows interest Amortised cost Cash flows are solely Hold to collect contractual payments of principal and Restricted cash cash flows interest Amortised cost Cash flows are solely Loans and advances Hold to collect contractual payments of principal and to banks cash flows interest Amortised cost Cash flows are solely Hold to collect contractual payments of principal and Loans to customers cash flows interest Amortised cost Cash flows are not solely Derivative financial payments of principal and instruments Other business model interest FVPL (Mandatory) Cash flows are solely Investment Hold to collect contractual payments of principal and securities cash flows interest Amortised cost

Business model assessment

The Bank makes an assessment of the objective of the business model in which a financial asset is held at a portfolio level because this best reflects the way the business is managed and information is provided to management. The information considered includes:

 The stated policies and objectives for the portfolio and the operation of those policies in practice. In particular whether management’s strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realizing cash flows through the sale of the assets;  How the performance of the portfolio is evaluated and reported to the Bank’s management;  The risks that affect the performance of the business model (and the financial assets held within that business model) and its strategy for how those risks are managed;  How managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); and  The frequency, volume and timing of sales in prior periods, the reasons for such sales and its expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Bank’s stated objective for managing the financial assets is achieved and how cash flows are realized.

Financial assets that are held for trading or managed and whose performance is evaluated on a fair value basis are measured at FVTPL because they are neither held to collect contractual cash flows nor held both to collect contractual cash flows and to sell financial assets.

Assessment whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g., liquidity risk and administrative costs), as well as profit margin.

31 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) In assessing whether the contractual cash flows are SPPI, the Bank considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. In making the assessment, the Bank considers:

 Contingent events that would change the amount and timing of cash flows;  Leverage features;  Prepayment and extension terms;  Terms that limit the Bank’s claim to cash flows from specified assets (e.g., non-recourse loans); and  Features that modify consideration of the time value of money (e.g., periodical reset of interest rates).

ii. Cash and cash equivalents

Cash and cash equivalents include notes and coins on hand, unrestricted balances held with National Bank of Georgia and highly liquid financial assets with original maturities of three months or less from the date of initial recognition that are subject to an insignificant risk of changes in their fair value, and are used by the Bank in the management of its short-term commitments.

iii. Mandatory cash balance with the NBG

Mandatory cash balances with the NBG are carried at amortised cost and represent mandatory reserve deposits that are not available to finance the Bank’s day to day operations. Hence they are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows.

iv. Due from financial institutions

Amounts due from other banks are recorded when the Bank advances money to counterparty banks with original maturity of more than three months. Amounts due from financial institutions are carried at amortised cost.

v. Investments in debt instruments

Investments in debt instruments include investments in certificate of deposits issued by National Bank of Georgia. These are initially measured at fair value plus incremental direct transaction costs, and subsequently at their amortised cost using the effective interest method.

vi. Reclassification

Financial assets are not reclassified subsequent to their initial recognition, except in the period after the Bank changes its business model for managing financial assets. If the business model under which the Bank holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that results in reclassifying the Bank’s financial assets. During the current financial year and previous accounting period there was no change in the business model under which the Bank holds financial assets and therefore no reclassifications were made. Changes in contractual cash flows are considered under the accounting policy on Modification and derecognition of financial assets described below.

vii. Impairment

IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model. The new impairment model also applies to certain loan commitments and financial guarantee contracts but not to equity investments. Under IFRS 9, credit losses are recognised earlier than under IAS 39. The Bank recognises loss allowances for expected credit losses (ECLs) on the financial assets that are not measured at FVTPL. With the exception of purchased or originated credit-impaired (POCI) financial assets, ECLs are required to be measured through a loss allowance at an amount equal to:

32 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

 12-month ECL, i.e. lifetime ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as Stage 1); or  Full lifetime ECL, i.e. lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3).

A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL.

Loss allowances for other receivables are always measured at an amount equal to lifetime ECL. ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as the present value of the difference between the cash flows due to the Bank under the contract and the cash flows that the Bank expects to receive arising from the weighting of multiple future economic scenarios, discounted at the asset’s effective interest rate (EIR).

The Bank measures ECL on a collective basis for portfolios of loans that share similar economic risk characteristics. More information on measurement of ECLs is provided in note 32, including details on how instruments are grouped when they are assessed on a collective basis.

Credit-impaired financial assets

A financial asset is ‘credit-impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit-impaired financial assets are referred to as Stage 3 assets. Evidence of credit-impairment includes observable data about the following events:

 Significant financial difficulty of the borrower or issuer;  A breach of contract such as a default or past due event;  The restructuring of a loan or advance by the Bank on terms that the Bank would not consider otherwise;  The disappearance of an active market for a security because of financial difficulties; or  It is becoming probable that the borrower will enter bankruptcy or other financial reorganization.

It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired. The Bank assesses whether debt instruments that are financial assets measured at amortised cost or FVTOCI are credit- impaired at each reporting date.

A loan is considered credit-impaired when a concession is granted to the borrower due to a deterioration in the borrower’s financial condition unless there is evidence that as a result of granting the concession the risk of not receiving the contractual cash flows has reduced significantly and there are no other indicators of impairment. For financial assets where concessions are contemplated but not granted the asset is deemed credit-impaired when there is observable evidence of credit-impairment including meeting the definition of default.

The definition of default (see below) includes unlikeliness to pay indicators and a back-stop if amounts are overdue for 90 days or more.

Purchased or originated credit-impaired financial assets

POCI financial assets are treated differently because the asset is credit-impaired at initial recognition. For these assets, the Bank recognises all changes in lifetime ECL since initial recognition as a loss allowance with any changes recognised in profit or loss. A favorable change for such assets creates an impairment gain. The Bank did not purchase or originate any credit- impaired financial assets during years 2018 and 2019.

Presentation of allowance for ECL in the statement of financial position

33 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Loss allowances for ECL are presented in the statement of financial position as follows:

 For financial assets measured at amortised cost: as a deduction from the gross carrying amount of the assets;  For debt instruments measured at FVOCI: no loss allowance is recognised in the statement of financial position as the carrying amount is at fair value;  For loan commitments and financial guarantee contracts: as a provision; and  Where a financial instrument includes both a drawn and an undrawn component, and the Bank cannot identify the ECL on the loan commitment component separately from those on the drawn component: the Bank presents a combined loss allowance for both components. The combined amount is presented as a deduction from the gross carrying amount of the drawn component. Any excess of the loss allowance over the gross amount of the drawn component is presented as a provision.

Definition of default

Critical to the determination of ECL is the definition of default. The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk.

The Bank considers the following as constituting an event of default:

 The contract is past due more than 90 days; or  The credit obligations reflected in the contract is unlikely to be paid to the Bank in full.

The definition of default is appropriately tailored to reflect different characteristics of different types of assets. When assessing if the borrower is unlikely to pay its credit obligation, the Bank takes into account both qualitative and quantitative indicators. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. The Bank uses a variety of sources of information to assess default which are either developed internally or obtained from external sources. Significant increase in credit risk

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Bank considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Bank’s historical experience and expert credit assessment and including forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing:

 The remaining lifetime PD as at the reporting date; with  The remaining lifetime PD for this point in time that was estimated at the time of initial recognition of the exposure (adjusted where relevant for changes in prepayment expectations).

The Bank uses three criteria for determining whether there has been a significant increase in credit risk:

 Quantitative test based on movement in PD;  Forbearance status; and  A backstop of 30 days past due.

34 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) the payment schema of the loan. Restructuring only occurs when the appropriate division of the bank is reasonably confident that a borrower is able to service the renewed payment schedule.

Multiple economic scenarios form the basis of determining the PD at initial recognition and at subsequent reporting dates. Different economic scenarios will lead to a different PD. It is the weighting of these different scenarios that forms the basis of a weighted average PD that is used to determine whether credit risk has significantly increased. Forward-looking information includes the future prospects of Georgia economy obtained from economic expert reports, financial analysts, governmental bodies, relevant think-tanks and other similar organizations, as well as consideration of various internal and external sources of actual and forecast economic information.

viii. Modification and derecognition of financial assets

A modification of a financial asset occurs when the contractual terms governing the cash flows of a financial asset are renegotiated or otherwise modified between initial recognition and maturity of the financial asset. A modification affects the amount and/or timing of the contractual cash flows either immediately or at a future date .The bank uses criteria which based on 10% of difference between discounted value of future cash flows and amortised cost to identify whether the effect will be recognized immediately or at a future date.

The Bank renegotiates loans to customers in financial difficulty to maximize collection and minimize the risk of default. Loan terms are modified in cases where although the borrower made all reasonable efforts to pay under the original contractual terms, there is a high risk of default or default has already happened and the borrower is expected to be able to meet the revised terms. The revised terms in most of the cases include an extension of the maturity of the loan, changes to the timing of the cash flows of the loan (principal and interest repayment), reduction in the amount of cash flows due (principal and interest forgiveness) and amendments to other terms. When a financial asset is modified, the Bank assesses whether this modification results in derecognition. In accordance with the Bank’s policy a modification results in derecognition when it gives rise to substantially different terms. To determine if the modified terms are substantially different from the original contractual terms the Bank considers the following:

 Quantitative assessment is performed to compare the present value of the remaining contractual cash flows under the original terms with the contractual cash flows under the revised terms, both amounts discounted at the original EIR. If the difference in present value is greater than 10% the Bank deems the arrangement is substantially different leading to derecognition.

If the terms are substantially different, the Bank derecognises the original financial asset and recognises a ‘new’ asset at fair value and recalculates a new EIR for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred.

If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Bank recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in profit or loss. The new gross carrying amount is recalculated by discounting the modified cash flows at the original EIR (or credit-adjusted EIR for purchased or originated credit-impaired financial assets).

The Bank derecognises a financial asset only when the contractual rights to the asset’s cash flows expire (including expiry arising from modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognise the financial asset.

ix. Write-off

35 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Financial assets are written off when the Bank has no reasonable expectations of recovering the financial asset (either in its entirety or a portion of it). This is the case when the Bank determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. A write-off constitutes a derecognition event. The Bank may apply enforcement activities to financial assets written off. Recoveries resulting from the Bank’s enforcement activities will result in impairment gains.

x. Financial guarantees and loan commitments – applicable after 1 January 2018

Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss that it incurs because a specified debtor fails to make payment when it is due in accordance with the terms of a debt instrument. Loan commitments are firm commitments to provide credit under pre-specified terms and conditions.

Liabilities arising from financial guarantees and loan commitments are included within impairment allowance.

xi. Financial guarantees and loan commitments – applicable before January 1, 2018

Financial guarantee contracts issued by the Bank are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of:

 The amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets ; and  The amount initially recognised less, where appropriate, cumulative amortization recognised in accordance with the revenue recognition policies.

xii. Financial assets – applicable before January 1, 2018

Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (“FVTPL”), ‘held to maturity’ (“HTM”) investments, ‘available-for-sale’ (“AFS”) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

The principal financial assets of the Bank are cash and cash equivalents, mandatory cash balance with the NBG, investments available-for-sale, investments held to maturity and loans and receivables. Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, unrestricted balances on correspondent and term deposits with the National Bank of Georgia (the “NBG”) with original maturity of less or equal to 90 days and amounts due from credit institutions with original maturity of less or equal to 90 days and are free from contractual encumbrances. Mandatory cash balance with the National Bank of Georgia

Mandatory cash balance with the National Bank of Georgia (the “NBG”) is carried at amortised cost and represent interest bearing mandatory reserve deposits, which are not available to finance the Bank’s day to day operations and hence are not considered as part of cash and cash equivalents for the purposes of the statement of cash flows.

Investments held to maturity Investments held to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Bank has the positive intent and ability to hold to maturity. Investments held to maturity investments are measured at amortised cost using the effective interest method less any impairment.

If the Bank were to sell or reclassify more than an insignificant amount of investments held to maturity before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Bank would be prohibited from classifying any financial asset as held to maturity during current financial year and following two financial years.

36 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market (including due from financial institutions, loans to customers and other financial assets) are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, objective evidence of impairment could include:

 Significant financial difficulty of the issuer or counterparty; or  Breach of contract, such as default or delinquency in interest or principal payments;  Default or delinquency in interest or principal payments; or  It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or  Disappearance of an active market for that financial asset because of financial difficulties.

For certain categories of financial asset, such as loans and receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Bank’s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables.

For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective interest rate.

For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods.

The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of an allowance account. When a loan or a receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognied.

Renegotiated loans Where possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan

37 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. Management continually reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate.

Write off of loans and advances Loans and advances are written off against the allowance for impairment losses when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Bank and after the Bank has sold all available collateral. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the statement of profit or loss and other comprehensive income in the period of recovery.

Derecognition of financial assets The Bank derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain of loss that had been recognised in other comprehensive income and accumulated in equity is recognised in profit or loss.

f. Financial liabilities and equity

Debt and equity instruments that are issued are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

i. Financial liabilities

A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Bank or a contract that will or may be settled in the Bank’s own equity instruments and is a non-derivative contract for which the Bank is or may be obliged to deliver a variable number of its own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Bank’s own equity instruments.

The Bank derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. In this case, a new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability derecognised and consideration paid is recognised in profit or loss. Consideration paid includes non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability.

If the modification of a financial liability is not accounted for as derecognition, then the amortised cost of the liability is recalculated by discounting the modified cash flows at the original effective interest rate and the resulting gain or loss is recognised in profit or loss. For floating-rate financial liabilities, the original effective interest rate used to calculate the modification gain or loss is adjusted to reflect current market terms at the time of the modification. Any costs and fees incurred are recognised as an adjustment to the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument.

38 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) The Bank derecognises a financial liability when its terms were modified and the cash flows of the modified liability were substantially different. In this case, a new financial liability based on the modified terms was recognised at fair value. The difference between the carrying amount of the financial liability extinguished and consideration paid was recognised in profit or loss.

Consideration paid included non-financial assets transferred, if any, and the assumption of liabilities, including the new modified financial liability. If the modification of a financial liability was not accounted for as derecognition, then any costs and fees incurred were recognised as an adjustment to the carrying amount of the liability and amortised over the remaining term of the modified financial liability by re-computing the effective interest rate on the instrument.

ii. Due to financial instititutions, deposits by customers and subordinated debt

Financial liabilities include due to financial institutions, deposits by customers and subordinated debt that are the Bank’s sources of debt funding. Financial liabilities are initially measured at fair value, net of incremental direct transaction costs. Financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis.

iii. Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Bank are recognised at the proceeds received, net of direct issue costs.

g. Derivative financial instruments

Forwards are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index of foreign currency rate.

In a currency forwards, the Bank pays a specified amount in one currency and receives a specified amount in another currency. Currency forwards are net-settled.

h. Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

i. Repossessed assets

In certain circumstances, assets are repossessed following the foreclosure on loans that are in default. Repossessed assets are measured at the lower of carrying amount and fair value less costs to sell.

j. Property and equipment

Property and equipment is carried at historical cost less accumulated depreciation and any recognised impairment loss, if any.

39 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Depreciation is charged on the carrying value of property and equipment and is designed to write off assets over their useful economic lives. Depreciation is calculated on a straight line basis at the following useful lives:

Years Buildings 30 Furniture and fixtures 5-7 Computers and office equipment 3-6 Vehicles 5 Leasehold improvements According to lease contracts Other 2-5

Leasehold improvements are amortised over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in the operating expenses unless they qualify for capitalization.

The carrying amounts of property and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less cost to sell and value in use. Where carrying values exceeded the estimated recoverable amount, assets are written down to their recoverable amount; impairment is recognised in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for property and equipment is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life.

An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss.

k. Intangible assets

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses. Intangible assets are assessed for impairment when there is an indication that the intangible assets may be impaired. Derecognition of intangible assets. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised.

Impairment of tangible and intangible assets other than goodwill. At the end of each reporting period, the Bank reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Bank estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

40 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre- tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash- generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

l. Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

i. Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the statement of profit or loss because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Bank's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

ii. Deferred tax

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition of assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax laws and rates that have been enacted or substantively enacted by the end of the reporting period.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

iii. Current and deferred tax for the year

Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively.

On 13 May 2016 the Parliament of Georgia passed the bill on corporate income tax reform (also known as the Estonian model of corporate taxation), which mainly moves the moment of taxation from when taxable profits are earned to when they are distributed.

41 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) The new system of corporate income taxation does not imply exemption from Corporate Income Tax (CIT), rather CIT taxation is shifted from the moment of earning the profits to the moment of their distribution; i.e. the main tax object is distributed earnings. The Tax Code of Georgia defines Distributed Earnings (DE) to mean profit distributed to shareholders as a dividend. However some other transactions are also considered as DE, for example non-arm’s length cross-border transactions with related parties and/or with persons exempted from tax are also considered as DE for CIT purposes. In addition, the tax object includes expenses or other payments not related to the entity’s economic activities, free of charge supply and over-limit representative expenses.

The corporate income tax arising from the payment of dividends is accounted for as an expense in the period when dividends are declared, regardless of the actual payment date or the period for which the dividends are paid.

The law has entered into force in 2016 and is effective for tax periods starting after January 1, 2017 for all entities except for financial institutions (such as banks, insurance companies, microfinance organizations, pawnshops), for which the law initially was effective for financial institutions from January 1, 2019. On December 27, 2018, the parliament of Georgia extended effective date of application of the law to January 1, 2023.

iv. Operating taxes

Georgia also has various other taxes, which are assessed on the Bank’s activities. These taxes are included as a component of operating expenses in the statement of profit or loss.

m. Provisions

Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, it is probable that the Bank will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when the effect of the time value of money is material). When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. n. Contingencies

Contingent liabilities are not recognised in the statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognised in the statement of financial position but disclosed when an inflow of economic benefits is probable.

o. Foreign currencies

In preparing the financial statements of the Bank, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non- monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences on monetary items are recognised in profit or loss in the period in which they arise.

The exchange rates used by the Bank in the preparation of the financial statements as at year- end are as follows: December 31, December 31, 2019 2018

42 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) GEL/1 US Dollar 2.8677 2.6766 GEL/1 Euro 3.2095 3.0701

p. Collateral

The Bank obtains collateral in respect of customer liabilities where this is considered appropriate. The collateral normally takes the form of a lien over the customer’s assets and gives the Bank a claim on these assets for both existing and future customer liabilities.

q. Share Capital

Contributions to share capital are recognised at cost. Costs directly attributable to the issue of new shares, other than on a business combination, are deducted from equity net of any income taxes.

4. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Bank’s accounting policies the management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate 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.

In 2019 the Company completed a review of its property plant and equipment, and intangible assets useful lives. The Company determined, that based on historical utilisation periods and as a result of actions taken to increase its preventative maintenance, actual lives for certain asset categories were generally longer than the useful lives for depreciation purposes. Therefore, the Company extended the estimated useful lives of certain categories of property plant and equipment, and intangibles, effective January 1, 2019 and applied those changes in useful lives prospectively, accounting for it as change in estimates under IAS 8. The effect of this change in estimate reduced depreciation and amortisation expenses for the year ended December 31, 2019 by approximately GEL 1,044,000.

Useful life Useful life (years) before (years) after January 01, 2019 January 01, 2019 Buildings 10 30 Vehicles 5 5 Equipment 3 5 Other 1-5 1-7 Intangibles 5 7

Critical judgements in applying accounting policies

The following are the critical judgements, apart from those involving estimations (see below), that the management has made in the process of applying the Bank’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Key sources of estimation uncertainty. The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

43 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Measurement of the expected credit loss allowance - applicable after January 1, 2018

The measurement of the ECL allowance for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behavior (e.g., the likelihood of customers defaulting and the resulting losses).

A number of significant judgments are also required in applying the accounting requirements for measuring ECL, such as:

 Determining criteria for significant increase in credit risk;  Choosing appropriate models and assumptions for the measurement of ECL;  Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and  Establishing groups of similar financial assets for the purposes of measuring ECL.

The management of the Bank is confident deferred tax assets/liabilities balances at the reporting will be fully utlised or the effect will be immaterial for the users of financial statements.

The carrying value of deferred tax liabilities and assets amounted to GEL 180,094 and GEL 219,435 as at December 31, 2019 and 2018, respectively.

5. Cash and cash equivalents

Cash and cash equivalents comprise:

December 31, December 31, 2019 2018

Cash on hand 10,200,900 14,611,716 Correspondent accounts with banks 1,761,656 6,035,089 Correspondent accounts with the National Bank of Georgia 22,110,124 14,946,545

Less allowance for impairment (6,479) -

Total cash and cash equivalents 34,066,201 35,593,350

Cash and cash equivalents are non-past due financial assets as at December 31, 2019 and 2018.

6. Mandatory reserve with National Bank of Georgia

Mandatory cash balance with the National Bank of Georgia (“NBG”) represent amounts deposited with the NBG. Resident financial institutions are required to maintain an interest-earning obligatory reserve with the NBG, the amount of which depends on the level of funds attracted by the financial institutions. Mandatory balances with the NBG is interest bearing financial asset.

44 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

December 31, December 31, 2019 2018

Mandatory reserve with NBG 10,120,021 14,814,367

Total mandatory reserve with NBG 10,120,021 14,814,367

Mandatory balances with the NBG are non-past due financial assets as at December 31, 2019 and 2018.

7. Due from banks

Due from banks comprise:

December 31, December 31, 2019 2018

Time Deposits - 987,500

Total due from banks - 987,500

As at December 31, 2018 time deposit totaling GEL 987,500 were pledged as collateral under the financing loans received from the National Bank of Georgia.

As at December 31, 2019 and 2018 accrued interest included in due from banks amounted to GEL nil and GEL nil, respectively.

8. Loans to customers

Loans to customers comprise:

December 31, December 31, 2019 2018

Loans to customers 220,905,386 237,084,478 Less: allowance for impairment losses (19,487,180) (19,258,637)

Total loans to customers 201,418,207 217,825,841

Movements in the allowance for impairment losses for the years ended December 31, 2019 and 2018 are disclosed in Note 23.

December 31, December 31, 2019 2018

Analysis by sector: Agriculture 92,434,175 95,683,337 Trade 55,053,474 63,380,157 Service 52,031,994 58,522,945 Production 11,246,941 12,939,980 Consumer 7,828,914 4,057,597 Other 2,309,889 2,500,462

Less: allowance for impairment losses (19,487,180) (19,258,637)

45 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Total loans to customers 201,418,207 217,825,841

The table below summarizes carrying value of loans to customers analyzed by type of collateral obtained by the Bank at December 31, 2019:

Agriculture Trade Service Production Consumer Other Total

Loans collateralized by pledge of real 7,309,933 12,414,953 12,883,056 3,632,926 732,696 334,779 37,308,343 estate Loans collateralized by guarantees of 53,938,436 29,396,868 25,445,077 5,139,697 1,483,609 477,271 115,880,958 individuals Loans collateralized - 119,707 209,431 66,082 - 777,158 1,172,378 by deposits Other collateral 21,946 21,927 305,142 - 4,214,972 - 4,563,987 Unsecured loans 31,163,8601 13,100,019 13,189,288 2,408,236 1,397,637 720,681 61,979,721 Total loans to customers (before 92,434,175 55,053,474 52,031,994 11,246,941 7,828,914 2,309,889 220,905,387 impairment)

Less: allowance for (9,132,570) (4,584,783) (3,822,151) (1,306,151) (256,518) (385,007) (19,487,180) impairment losses

Total loans to 83,301,605 50,468,691 48,209,843 9,940,790 7,572,396 1,924,882 201,418,207 customers

The table below summarizes carrying value of loans to customers analyzed by type of collateral obtained by the Bank at December 31, 2018:

46 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Agriculture Trade Service Production Consumer Other Total

Loans collateralized 7,157,921 17,295,559 15,338,651 4,369,473 413,408 445,635 45,020,647 by pledge of real estate Loans collateralized 67,080,409 39,687,046 34,955,366 7,116,236 2,042,545 633,544 151,515,146 by guarantees of individuals Loans collateralized - 28,436 170,072 46,895 - 365,562 610,965 by deposits Other collateral - 37,443 167,444 - - - 204,887 Unsecured loans 21,445,007 6,331,673 7,891,412 1,407,376 1,601,644 1,055,721 39,732,833 Total loans to 95,683,337 63,380,157 58,522,945 12,939,980 4,057,597 2,500,462 237,084,478 customers (before impairment)

Less: allowance for impairment losses (8,890,035) (4,588,612) (4,068,839) (1,155,176) (244,112) (311,863) (19,258,637)

Total loans to customers 86,793,302 58,791,545 54,454,107 11,784,803 3,813,485 2,188,599 217,825,841

Loans to customers comprise the following products:

December 31, December 31, 2019 2018

Individual Express Loan 112,006,695 120,180,175 Individual Rural Loan 91,800,857 95,217,871 SME Loan 7,463,212 14,282,394 Consumer loan 7,233,716 5,275,364 Cash cover 1,172,378 610,695 Agro Instalment Loan 633,331 461,653 Staff loan 595,198 1,056,326 Less: allowance for impairment losses (19,487,180) (19,258,637)

Total loans to customers 201,418,207 217,825,841

As at December 31, 2019 and 2018 all loans to customers (100% of total portfolio) are granted to individuals and companies operating in Georgia.

As at December 31, 2019 and 2018 loans to customers included loans totaling GEL 19,428,356 and GEL 18,937,971, respectively, which terms were renegotiated.

As at December 31, 2019 and 2018, there were no loans to customers pledged as collateral under refinancing loans received from the National Bank of Georgia.

47 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Analysis by credit quality of loans outstanding at December 31, 2019 is as follows:

Agriculture Trade Service Production Consumer Other Total

Loans collectively determined to be impaired - not overdue 82,685,798 50,141,943 47,986,856 9,787,765 7,544,989 1,929,213 200,076,564 - 1 to 30 days 1,072,742 556,483 625,430 236,728 41,130 19,077 2,551,590 overdue - 31 to 60 days 727,344 182,844 144,950 55,081 28,024 4,395 1,142,638 overdue - 61 to 90 days 510,155 161,463 84,823 38,668 14,853 7,515 817,477 overdue - 91 to 180 days 992,701 395,879 579,573 73,909 29,555 7,603 2,079,220 overdue - over 180 days 6,445,435 3,614,862 2,610,362 1,054,790 170,363 342,086 14,237,898 overdue

Total loans to customers 92,434,175 55,053,474 52,031,994 11,246,941 7,828,914 2,309,889 220,905,387 (before impairment) Less: allowance for impairment (9,132,570) (4,584,783) (3,822,151) (1,306,151) (256,518) (385,007) (19,487,180) losses

Total loans to 83,301,605 50,468,691 48,209,843 9,940,790 7,572,396 1,924,882 201,418,207 customers

Analysis by credit quality of loans outstanding at December 31, 2018 is as follows:

Agriculture Trade Service Production Consumer Other Total

Loans collectively determined to be impaired - not overdue 84,106,759 57,728,856 53,664,589 11,461,147 3,812,836 2,053,929 212,828,116 - 1 to 30 days overdue 2,457,767 983,291 1,508,706 334,719 31,702 107,774 5,423,959 - 31 to 60 days overdue 1,260,143 644,214 292,827 139,864 17,856 28,950 2,383,854 - 61 to 90 days overdue 764,224 302,230 156,559 66,600 9,990 12,356 1,311,959 - 91 to 180 days overdue 1,838,201 1,025,689 637,325 239,379 27,869 77,999 3,846,462 - over 180 days overdue 5,256,243 2,695,877 2,262,939 698,271 157,344 219,454 11,290,128

Total loans to customers (before impairment) 95,683,337 63,380,157 58,522,945 12,939,980 4,057,597 2,500,462 237,084,478 Less: allowance for impairment losses (8,890,035) (4,588,612) (4,068,839) (1,155,176) (244,112) (311,863) (19,258,637)

Total loans to customers 86,793,302 58,791,545 54,454,106 11,784,804 3,813,485 2,188,599 217,825,841

48 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

9. Investments in debt instruments

Investments in debt instruments comprise:

December 31, 2019 December 31, 2018 Nominal Nominal annual annual interest rate Amount interest rate Amount

Treasury bills of the Ministry of Finance 6.52%-9.16% 18,131,184 7.10%-7.36% 16,750,162 Treasury notes of the Ministry of Finance 9.05% 701,483 9.05% 1,997,440

Less: allowance for impairment losses (11,956) (7,758)

Total investments in debt instruments 18,820,711 18,739,844

Investment in debt securities are measured at amortized cost. As at December 31, 2019 and 2018, investments in debt instruments totaling GEL 15,030,900 and GEL nil, respectively, were pledged as collateral under refinancing loans received from the National Bank of Georgia.

As at December 31, 2019 and 2018 accrued interest included in investments in debt instruments amounted to GEL 26,483 and GEL 74,441, respectively.

10. Financial assets/liabilities at fair value through profit or loss

Financial assets at fair value through profit or loss comprise:

December 31, Notional December Notional amount 2019 amount 31, 2018

Derivative financial instruments: - foreign exchange forward contracts 19,364,927 708,973 16,810,350 (750,750)

Total financial assets/liabilities at fair value through profit or loss 19,364,927 708,973 16,810,350 (750,750)

Most of the Bank’s derivative trading activities relate to foreign exchange forward contracts deals with banks.

The Bank uses foreign exchange forward contracts solely, to hedge the on-balance-sheet open currency position. So, while the fair value of those forward contracts proves to be highly volatile, it is counter-balanced with the revaluation of the on-balance-sheet open currency position, which considering the overall lifetime of the forward contracts, results in a fixed, known in advance, hedging costs.

49 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

11. Property and equipment

Property and equipment comprise:

Buildings and Leasehold Furniture other real Improveme Computer and office estate nts equipment equipment Vehicles Other Total

At cost

1-Jan-18 1,439,131 2,438,704 3,153,550 1,645,811 241,302 1,107,028 10,025,526

Additions 6,831 165,256 2,078,906 175,764 - 51,381 2,478,138 Disposals - (87,392) (158,928) (63,342) (60,325) (89,529) (459,516)

31-Dec-18 1,445,962 2,516,568 5,073,528 1,758,233 180,977 1,068,880 12,044,148

Additions - 11,488 92,984 122,644 - 16,024 243,140 Disposals - (45,974) (74,781) (61,797) (180,977) (51,189) (414,718)

31-Dec-19 1,445,962 2,482,082 5,091,731 1,819,080 - 1,033,715 11,872,570

Accumulated depreciation and impairment

1-Jan-18 (227,713) (1,268,139) (2,593,220) (1,079,383) (241,302) (751,406) (6,161,163)

Depreciation (144,499) (349,946) (758,181) (232,234) - (140,461) (1,625,321) charge Eliminated on - 86,475 157,460 62,648 60,325 82,400 449,308 disposals

31-Dec-18 (372,212) (1,531,610) (3,193,941) (1,248,969) (180,977) (809,467) (7,337,176)

Depreciation (39,244) (308,109) (482,593) (91,002) - (104,911) (1,025,859) charge Eliminated on - 22,954 70,275 61,285 180,977 51,189 386,680 disposals

31-Dec-19 (411,456) (1,816,765) (3,606,259) (1,278,686) - (863,188) (7,976,355)

Net book value

As at December 1,034,506 665,317 1,485,472 540,394 - 170,526 3,896,215 31, 2019

As at December 1,073,750 984,958 1,879,587 509,264 - 259,413 4,706,972 31, 2018

Depreciation and amortization charge presented on the face of the statement of profit or loss and other comprehensive income include depreciation and amortization charge of property and equipment, and intangible assets.

As at December 31, 2019 and 2018 the Bank did not have any pledged property and equipment.

As at December 31, 2019 and 2018 fully depreciated assets amounted to GEL 4,679,612 and GEL 4,492,649, respectively.

50 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

12. Other assets

Other assets comprise:

December 31, December 31, 2019 2018

Other financial assets Receivables 1,477,865 1,752,340

Other non-financial assets Prepayments 327,373 338,365 Repossessed Collateral 215,546 114,503 Tax assets other than income tax 110,184 220,203 Prepaid rent 66,532 7,200 Prepayments for non-current assets 7,588 22,090 Advances to employees 5,965 3,421 Other 80,595 29,165

Total other assets 2,291,648 2,487,287

13. Intangible assets

Intangible assets comprise:

Computer software and licenses

At cost

1-Jan-18 5,022,125

Additions 286,276

31-Dec-18 5,308,401

Additions 937,735

31-Dec-19 6,246,136

Accumulated amortization and impairment

1-Jan-18 (2,659,087)

Amortization charge (1,014,059)

31-Dec-18 (3,673,146)

Amortization charge (641,743)

31-Dec-19 (4,314,889)

Net book value

As at December 31, 2019 1,931,247

As at December 31, 2018 1,635,255

51 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

14. Deposits by banks

Deposits by banks comprise:

December 31, December 31, 2019 2018

Term deposits of banks and other financial institutions - 5,315,137 Short-term loans from National Bank of Georgia 15,018,976 790,000

Total deposits by banks 15,018,976 6,105,137

15. Deposits by customers

Deposits by customers comprise:

December 31, December 31, 2019 2018

State and public organizations - Current/settlement accounts 1,062 - - Saving deposits 1,057,551 2,402,880 - Term deposits 14,784,260 14,128,351

Individuals: - Current/settlement accounts 7,401,623 5,605,329 - Saving Deposits 20,360,997 14,436,823 - Term deposits 92,272,463 78,042,682

Other legal entities - Current/settlement accounts 2,041,635 2,200,986 - Saving Deposits 9,683,388 1,254,772 - Term Deposits 21,530,213 26,524,635

Total deposits by customers 169,133,192 144,596,458

As at December 31, 2019 and 2018 the Bank offered following annual interest rates on the term and saving deposits:

As at December 31, 2019 As at December 31, 2018 Min Max Min Max GEL 3.5% 13.25% 5.5% 12.5% USD 1% 5.5% 1% 4.5% EUR 0.1% 3.5% 0.1% 3%

52 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

16. Right of use Assets and Lease liabilities

Buildings and Vehicles Total Offices Cost

January 1, 2019 7,706,896 121,821 7,828,717

Modification of leases 1,287,367 - 1,287,367

December 31,2019 8,994,263 121,821 9,116,084

Accumulated depreciation

January 1, 2019 - - -

Depreciation charges for the year 3,043,703 4,061 3,047,764

December 31, 2019 3,043,703 4,061 3,047,764

Net Book Value

December 31, 2019 5,950,560 117,760 6,068,320

Movements in lease liabilities in 2019 were as follows:

2019

Initial recognition 7,828,717 Interest expense on lease liabilities 524,424 Foreign exchange effect 29,348 Modification of the leases 914,765 Repayment of lease liabilities (3,006,885) Lease liability as at December 31,2019 6,290,369

Weighted average lease term for the Right of Use Assets is 4 years and the weighted average lessee’s incremental borrowing rate applied to the lease liabilities is 7.7%.

Amounts recognized in profit and loss 31-Dec-19

Income from lease modifications 372,602 Depreciation expense on right-of-use assets (3,047,764) Interest expense on lease liabilities (524,424) Expense relating to short-term leases (312,335) Expense relating to low value assets (114,041) Total (3,625,962)

53 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Lease Liability 31-Dec-19 Amounts payable Future finance

Maturity analysis under finance leases charges Year 1 1,850,014 458,052 Year 2 1,447,754 318,838 Year 3 1,080,529 209,160 Year 4 757,860 125,699 Year 5 543,614 61,510 Year 6-7 487,321 47,424 Year 8-10 123,277 25 Total lease Liability 6,290,369 1,220,708

17. Borrowed funds

Borrowed funds comprise:

December 31, December 31, 2019 2018

Foreign banks and financial institutions 24,020,550 66,728,997 International financial institutions - 15,356,894 Government institutions - 345,984

Total borrowed funds 24,020,550 82,431,875

As at December 31, 2018 borrowed funds from Foreign banks and financial institutions included GEL 11,368,147 denominated in USD.

As at December 31, 2019 and 2018 accrued interest included in borrowed funds amounted to GEL 580,475 and GEL 1,647,576, respectively.

As at December 31, 2019 and 2018, investments in debt instruments with carrying value of GEL 15,030,900 and GEL nil, respectively, were pledged as collateral under refinancing loans received from the National Bank of Georgia.

As at December 31, 2018 time deposit with carrying value GEL 987,500 were pledged as collateral under the financing loans received from the National Bank of Georgia.

The Bank is obligated to comply with financial covenants in relation to borrowed funds disclosed above. These covenants include stipulated ratios, debt to equity ratios and various other financial performance ratios.

The Bank is not in breach of any covenants as at December 31, 2019 and 2018.

RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES

The changes in the Bank’s liabilities arising from financing activities can be classified as follows

Interest Non cash Interest

1-Jan-19 Proceeds Repayments payment movement expense 31-Dec-19 Borrowed 82,431,875 1,711,300 (60,151,466) (8,512,088) 808,500 7,732,429 24,020,550 funds Lease 7,828,717 - (2,486,480) (520,405) 944,113 524,424 6,290,369 liabilities Subordinate 20,044,670 - (6,451,300) (1,974,743) 1,145,210 1,505,926 14,269,762 d debt

54 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES

The changes in the Bank’s liabilities arising from financing activities can be classified as follows

Interest Non cash Interest 31-Dec- 1-Jan-18 Proceeds Repayments payment movement expense 18 Borrowed 98,652,729 36,279,901 ( 52,333,205 ) (10,036,360) (676,821) 10,545,631 82,431,875 funds Debt securities 20,141,138 - (20,000,000) (1,021,459) - 880,321 - issued Subordinated 12,552,520 12,672,712 - (1,467,884) (4,992,552) 1,279,874 20,044,670 debt

As at December 31, 2018 subordinated debt in amount of GEL 5,429,600 was converted into share capital. Foreign exchange gain on transaction equals to GEL 437,048.

18. Other liabilities

Other liabilities comprise:

December 31, December 31, 2019 2018

Other financial liabilities: Settlements on other operations 395,097 405,915 Professional services fee payable 119,282 200,084 Royalty fees payable to FINCA Microfinance Cooperative 94,781 111,337 Other fee payables to related parties 78,046 62,374 Payables to employees 52,136 4,438

739,342 784,148 Other non-financial liabilities: Advances received 221,724 - Taxes payable, other than income tax 125,454 92,337 Other 117,527 175,154

Total other liabilities 1,204,047 1,051,639

19. Subordinated debt

Subordinated debt comprise:

December 31, December 31, 2019 2018

Non-convertible subordinated debt from financial institutions 14,269,762 20,044,670

Total subordinated debt 14,269,762 20,044,670

As at December 31, 2018 subordinated debt from financial institutions included GEL 13,356,822 denominated in USD.

In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to the repayments of the Bank’s liabilities to all other creditors.

The Bank is obligated to comply with financial covenants in relation to subordinated debt disclosed above. These covenants include stipulated ratios, debt to equity ratios and various other financial performance ratios.

55 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

20. Share capital

As at December 31, 2019 and 2018 the Bank‘s authorized and issued share capital, respectively consisted of 2,914 and 2,914 ordinary shares with par value of GEL 8,800 each.

Bank has not declared any dividends As at December 31, 2019. Dividends declared as at December 31, 2019 GEL 3,662,375.

21. Net interest income

2019 2018

Interest revenue calculated using the effective interest rate

method: Interest on loans to customers 57,844,236 60,567,708 Interest on investments in debt instruments 1,334,776 1,112,150 Interest on balances due from banks 1,260,758 843,950

Total interest income 60,439,770 62,523,808

Interest expense calculated using the effective interest rate

method: Interest on deposits by customers (13,502,834) (8,931,538) Interest on borrowed funds (7,208,005) (10,582,907) Interest on subordinated debt (1,505,925) (1,279,873) Interest on deposits by banks (722,395) (1,517,009) Interest on debt securities issued - (880,321) Interest on Lease Liabilities (524,424) -

Total interest expense (23,463,583) 23,191,648

Net interest income before impairment losses on interest bearing 36,976,187 39,332,160 assets

22. Allowance for impairment losses

The movements in allowance for impairment losses on interest bearing assets were as follows:

Consumer Trade Agriculture Service Production Loan Other Total

January 1, 2018 808,023 1,850,163 638,880 219,822 69,758 85,474 3,672,120

Adjustment on initial application of IFRS 9 4,044,910 6,402,345 3,581,430 1,263,122 66,721 58,545 15,417,073 Additional provisions recognised 1,665,854 3,689,231 1,516,901 438,158 114,683 184,963 7,609,790 Write-off of assets (1,930,176) (3,051,704) (1,668,372) (765,926) (7,050) (17,118) (7,440,346)

December 31, 2018 4,588,611 8,890,035 4,068,839 1,155,176 244,112 311,864 19,258,637 Provision for impairment/(recover 1,084,905 1,774,206 (683,996) (176,565) 58,241 116,448 2,173,239 y of provision) during the year Net interest income adjustment for stage 3 198,642 395,680 165,600 56,591 11,114 16,681 844,308 loans Amounts written off (1,635,808) (2,488,706) (13,335) - (61,718) (81,705) (4,281,272) during the year

56 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated) Recovery of previously written off 284,707 434,416 231,917 252,794 1,204 16,368 1,221,406 loans forex gain 63,726 126,939 53,126 18,155 3,565 5,351 270,862

31-Dec-19 4,584,783 9,132,570 3,822,151 1,306,151 256,518 385,007 19,487,180

Movement in the ECL on Treasury Notes and Cash and Cash Equivalents 2019 2018 ECL on Treasury Notes at 1 January 7,758 - Provision for impairment during the year 4,198 7,758 ECL on Treasury Notes at 31 December 11,956 7,758

2019 2018 ECL on Cash and Cash Equivalents at 1 January - - Provision for impairment during the year 6,479 - ECL on Cash and Cash Equivalents at 31 December 6,479 -

23. Net (loss)/gain on foreign exchange operations

Net (loss)/gain on foreign exchange operations comprise:

2019 2018

Dealing, net (483,571) 575,706 Translation differences, net (1,444,441) (243,750)

Total net (loss)/gain on foreign exchange operations (1,928,012) 331,956

As at December 31, 2019 and 2018 FINCA Bank Georgia maintained an on-balance-sheet open currency position of GEL 20,715,150 and GEL 17,061,300, which was hedged through the currency forward contracts. The negative translation difference reflects the revaluation of only the on-balance-sheet open currency position.

24. Fee and commission income

Fee and commission income comprise:

2019 2018

Settlement transactions income 1,193,180 1,399,459 Clients Current, Deposits and Savings Accounts Maintenance Fees and C 695,689 719,018 ommission Other fee income 579,806 445,893

Total fee and commission income 2,468,675 2,564,370

57 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

25. Other income

Other income comprises:

2019 2018

Reimbursement of legal fees 448,650 490,658 Income from lease modification 372,602 - Grants received 94,442 65,193 Other 81,765 338,116

Total other income 997,459 893,967

26. Staff Cost

Staff costs comprise:

2019 2018

Salaries and bonuses 13,604,222 14,662,553 Health insurance 565,815 573,806 Other employee benefits 110,471 83,605 Corporate hospitality and entertainment 8,942 13,749

Total staff cost 14,289,450 15,333,713

27. Other operating expenses

Other operating expenses comprise: 2019 2018

Professional services 3,083,009 3,048,414 Royalty fee 1,561,389 816,437 Advertising costs 1,153,821 1,219,626 Utilities 684,125 686,081 Expenses related to short-term leases and low-cost items 442,778 3,859,434 Legal services 417,764 676,266 Communications 390,447 426,063 Stationery 387,326 513,339 Fuel expenses 297,087 302,523 Property and equipment maintenance 227,294 102,488 Cash collection expenses 225,534 303,254 Security expenses 200,361 222,401 Business trip expenses 191,599 282,992 Deposit insurance expenses 185,341 136,351 Representative expenses 177,054 350,014 Management service fee 168,537 1,585,569 Taxes, other than income tax 95,488 69,595 Insurance costs 78,255 78,714 Membership fee 61,680 37,352 Mail and courier expenses 61,359 114,741 Training 23,835 84,776 Recruitment expenses 18,647 23,830 Other expenses 271,836 333,120

Total operating expenses 10,404,566 15,273,380

58 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Pursuant to the terms of the Intellectual Property License Agreement made by and between FINCA Microfinance Cooperatief U.A (“FMC”) and FINCA Bank Georgia JSC dated November 18, 2011, the parties agreed that the Bank shall pay FMC a royalty payment on all future interest income. On August 6, 2013 royalty fee calculation method was determined as the following percentages of operating revenues: 0%, 1.5%, 2% and 3% respectively, if operating revenue is less than USD 500,000, within the range of USD 500,000 and USD 1,000,000, within the range of USD 1,000,000 and USD 2,500,000 and greater than USD 2,500,000.

28. Income tax

The Bank measures and records its current income tax payable and its tax bases in its assets and liabilities in accordance with the tax regulations of Georgia, which differ from IFRS. The Bank is subject to certain permanent tax differences due to the non-tax deductibility of certain expenses and certain income being treated as non-taxable for tax purposes. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at December 31, 2019 and 2018 relate mostly to different methods/timing of income and expense recognition as well as to temporary differences generated by tax – book bases’ differences for certain assets and liabilities. The tax rate used for the reconciliations below is the corporate tax rate of 15% payable by corporate entities in Georgia on taxable profits (as defined) under tax law of Georgia. Deferred income tax assets/(liabilities) as at December 31, 2019 and 2018 comprise:

2019 2018

Deferred income tax assets/(liabilities) in relation to: Property and equipment, intangible assets 89,463 59,945 Loans to customers (273,729) 230,763 Borrowed funds (35,507) (71,273) Investments debt Instruments 1,793 -

Net deferred income tax (liability)/asset (180,094) 219,435

The effective tax rate reconciliation is as follows for the years ended December 31, 2019 and 2018: 2019 2018 Profit before income tax 7,610,107 295,099

Tax at the statutory tax rate (15%) 1,141,517 44,265 Adjustment recognised in relation to previous year current tax (58,289) (21,663)

Tax effect of permanent differences (265,709) (213,916) Change in deferred tax asset not recognised - (232,024)

Income tax expense/(benefit) 817,519 (423,338)

Current income tax expense 417,991 17,675 Deferred tax expense/(benefit) 399,528 (441,013)

Income tax expense/(benefit) 817,519 (423,338)

Deferred income tax (liabilities)/assets 2018

As at January 1 – deferred tax (liabilities)/assets 219,435 (490,280) Adjustment on application of IFRS 9 - 268,702 Changes in deferred income tax balances recognised in profit or loss (399,528) 441,013

As at December 31- deferred income tax (liabilities)/assets (180,094) 219,435

59 FINCA Bank Georgia Joint Stock Company

Notes to the Financial Statements (continued) for the Year Ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

29. Commitments and contingencies

In the normal course of business, the Bank is a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the statement of financial position.

The Bank uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations.

The Bank has no provision for losses on contingent liabilities as at December 31, 2019 and 2018.

Capital commitments – No material capital commitments were outstanding as at December 31, 2019 and 2018.

Legal proceedings –Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these financial statements.

Taxation – Commercial legislation of Georgia, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management’s judgment of the Bank’s business activities, was to be challenged by the tax authorities, the Bank may be assessed additional taxes, penalties and interest.

Operating environment – Emerging markets such as Georgia are subject to different risks than more developed markets; these include economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Georgia continue to evolve rapidly with tax and regulatory frameworks subject to varying interpretations. Starting from early 2020 a new coronavirus disease (COVID-19) has begun rapidly spreading all over the world resulting in announcement of the pandemic status by the World Health Organization in March 2020. Responses put in place by many countries to contain the spread of COVID-19 are resulting in significant operational disruption for many companies and have significant impact on global financial markets. As the situation is rapidly evolving it may have a significant effect on business of many companies across a wide range of sectors, including, but not limited to such impacts as disruption of business operations as a result of interruption of production or closure of facilities, supply chain disruptions, quarantines of personnel, reduced demand and difficulties in raising financing. In addition, the Bank may face the increasingly broad effects of COVID-19 as a result of its negative impact on the global economy and major financial markets. The significance of the effect of COVID-19 on the Bank largely depends on the duration and the incidence of the pandemic effects on the world and Georgian economy.

The future direction of Georgia’s economy is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment.

For the last two years Georgia has experienced a number of legislative changes, which have been largely related to Georgia’s accession plan to the European Union. Whilst the legislative changes implemented during 2018 and 2019 paved the way, more can be expected as Georgia’s action plan for achieving accession to the European Union continues to develop.

60 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

30. Transactions with related parties

Related parties or transactions with related parties, as defined by IAS 24 “Related party disclosures”, represent:

(a) Parties that directly, or indirectly through one or more intermediaries; control, or are controlled by, or are under common control with, the Bank (this includes parents, subsidiaries and fellow subsidiaries); have an interest in the Bank that gives then significant influence over the Bank; and that have joint control over the Bank; (b) Members of key management personnel of the Bank or its parent; (c) Close member of the family of any individuals referred to in (a) or (b);

Parties that are entities controlled, jointly controlled or significantly influenced by, or for which significant voting power in such entity resides with, directly or indirectly, any individual referred to in (b) or (c).

In considering each possible related party relationship, attention is directly to the substance of the relationship, and not merely the legal form. Details of transactions between the Bank and related parties are disclosed below:

December 31, 2019 December 31, 2018 Total category Total category as per the as per the financial financial Related party statements Related party statements balances caption balances caption

Deposits by customers 1,114,824 169,133,192 1,114,824 144,596,458 - key management personnel of the entity or its parent 78,507 74,762 - Close Person of key management personnel of the entity 11,184 25,252 - Other related parties 792,218 1,014,810

Other liabilities 172,827 1,204,047 173,711 1,051,639 - the parent 94,781 111,337 - Other related parties 78,046 62,374

The remuneration of key management of the Bank was as follows:

Year ended Year ended December 31, 2019 December 31, 2018 Total category as Total category as per the financial per the financial Related party statements Related party statements transactions caption transactions caption

Key management personnel compensation: - short-term employee benefits 1,406,611 14,289,450 1,474,048 15,333,713

Total 1,406,611 14,289,450 1,474,048 15,333,713

Included in the statement of profit or loss and other comprehensive income for the years ended December 31, 2019 and 2018 are the following amounts which were recognised in transactions with related parties:

61 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Interest expense 400 23,463,583 238,120 23,191,648 - key management personnel of the entity or its parent 400 988 - the parent - 198,587 - Close Person of key management personnel of the entity - 1,275 - entities with joint control or significant influence over the Entity - 37,270

Other operating expenses 2,420,176 10,404,566 3,087,425 15,273,380 - the parent 1,729,926 2,402,006 - Other related parties 690,250 685,419

31. Fair value of financial instruments

Estimated fair value disclosures of financial instruments are made in accordance with the requirements of IFRS 7 “Financial Instruments: Disclosures” and IAS 39 “Financial Instruments: Recognition and Measurement”. IFRS defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The estimated fair values of financial instruments have been determined by the Bank using available market information, where it exists, and appropriate valuation methodologies. However, judgment is necessarily required to interpret market data to determine the estimated fair value. Georgia continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.

Fair value of financial assets and financial liabilities that are not measured at fair value on a recurring basis (but fair value disclosures are required).

Cash and cash equivalents – Cash and cash equivalents are carried at amortised cost which approximates their current fair value.

Mandatory reserve with the National Bank of Georgia – Mandatory reserve with the National Bank of Georgia is carried at amortised cost which approximates their fair value.

Due from banks – Balances due from banks include deposits placed by FINCA Bank Georgia JSC in local banks at the end of the year with original maturity less than 1 year. Therefore, management of the Bank has concluded that carrying amount of due from banks balances which are carried at amortised cost approximates their fair value.

Deposits by banks – Deposit by banks include deposits placed by banks in FINCA Bank Georgia JSC at the end of the year with original maturity less than 1 year. Therefore, management of the Bank has concluded that carrying amount of deposits by banks which are carried at amortised cost approximates their fair value.

Other financial assets and liabilities – Other financial assets and liabilities are mainly represented by short-term receivables and payables, therefore the carrying amount is assumed to be reasonable estimate of their fair value.

62 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Loans to customers – The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates of new instruments with similar credit risk and remaining maturity. Discount rates depend on currency, maturity of the instrument and credit risk of the counterparty.

Investments in debt instruments – The fair values of investments in debt instruments is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions for similar instruments

Deposits by customers – For the short term maturity deposits it is assumed that the carrying amounts approximate to their fair value. This assumption is also applied to demand deposits and current accounts without a maturity. Long term deposits by customers fair value was estimated based on expected future cash flows discounted at current interest rates for new instruments with similar risk and remaining maturity. Discounted rates used were consistent with the Bank’s credit risk and also depend on currency and maturity of the instrument.

Borrowed funds, debt securities and subordinated debt – The fair values of subordinated debt, debt securities and borrowed funds is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using current interest rates of new instruments. For the borrowings received at variable rates management believes that carrying rate may be assumed to be market interest rate.

Lease liability- The fair values of leases is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using current interest rates of new instruments. Management believes that carrying rate may be assumed to be market interest rate.

There were no change in valuation techniques during 2019.

Except as detailed in the following table, the management considers that the carrying amounts of financial assets and financial liabilities recognised in the financial statements approximate their fair values.

Fair value hierarchy December 31, 2019 December 31, 2018 Carrying value Fair value Carrying value Fair value

Loans to customers Level 3 201,418,207 214,387,810 217,825,841 224,588,394 Investments in debt instruments Level 2 18,820,711 18,636,459 18,739,844 18,673,390 Deposits by banks Level 3 15,018,976 15,236,700 6,105,137 6,105,137 Deposits by customers Level 3 169,133,192 169,264,722 144,596,458 144,817,517 Borrowed funds Level 3 24,020,550 24,058,416 82,431,875 82,682,245 Subordinated debt Level 3 14,269,762 14,433,355 20,044,670 20,159,267

63 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

a. Fair value of the Bank’s financial assets and financial liabilities measured at fair value on a recurring basis.

Some of the Bank's financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table gives information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation technique(s) and inputs used).

Fair value as at

Relationship of Valuation Significant unobservable Financial December December Fair value technique(s) and unobservable inputs to fair instruments 31, 2019 31, 2018 hierarchy key input(s) input(s) value

Financial assets at 708,973 - Level 2 Future cash flows N/A N/A fair value through are estimated profit or loss based on forward exchange rates (from observable forward exchange rates at the end of the reporting period) and contract forward rates. Financial liabilities - 750,750 Level 2 Future cash flows N/A N/A at fair value are estimated through profit or based on forward loss exchange rates (from observable forward exchange rates at the end of the reporting period) and contract forward rates.

32. Capital risk management

The Bank manages its capital to ensure that entities in the Bank will be able to continue as a going concern while maximizing the return to stakeholders through the optimization of the debt and equity balance.

For capital management process bank uses the internal capital adequacy process (“ICAAP”) that includes the assessment of capital needs in relation to the business environment, growth and strategic/operational plans.

ICAAP allows assessing the potential major changes to the risk profile, and thereby the future solvency needed. The result of the ICAAP is used as an input to the capital plan. The capital plan is reflected in the Bank’s 5 years financial projections for budgeting purposes. Besides, ALCO evaluates and recommends capital structure decisions and manages capital adequacy, in the context of its risk management activities.

ICAAP process includes assessment of economic capital that is the internal measure of the capital required for the Bank to absorb unexpected losses. In this context, the Bank’s economic capital is set to cover losses with a confidence level of 99% over a one-year time horizon. The Bank calculates economic capital for credit risk, market risk (including non-traded interest rate risk), operational risk and reputational risk. The Bank regularly enhances its economic capital methodology and benchmarks outputs to external reference points.

Capital Market Group of FINCA Microfinance Holding supports the securing of commercial sources of finance (debt and equity) for the FINCA network and/or the individual subsidiaries.

64 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

The adequacy of the Bank’s capital is also monitored using, among other measures, the ratios established by the NBG in supervising the Bank.

The ratios set by the NBG are monitored monthly with reports outlining their calculation reviewed and signed by the Bank's General Director and the Financial Manager and subsequently submitted to the NBG. Other objectives of capital management are evaluated on an ongoing basis.

Under the current capital requirements set by the NBG, existing commercial banks have to

a) hold the minimum level of Regulatory Capital according to the following schedule:

1. 30,000 thousand GEL as at December 31, 2017 2. 40,000 thousand GEL as at June 30, 2018 3. 50,000 thousand GEL as at December 31, 2018

b) maintain a minimum ratio of regulatory capital to risk weighted assets as follows:

 Maintain common equity tier one capital to risk weighed assets (RWA) at or above 4.5%  Maintain a ration of tier one capital to RWA at or above 6%  Maintain a ration of regulatory capital to RWA at or above 8%

Above to this minimum requirements bank has to keep conservation buffer of 2.5% and other risk buffers.

Table below illustrates all capital requirements and actual limits as of December 2018:

Required limit as Required limit as at 31 December Ratios as at 31 at 31 December Ratios as at 31 2019 December 2019 2018 December 2018

Common equity tier 1 capital 7.86% 15.05% 8.10% 14.69% Tier 1 capital 9.65% 15.05% 9.97% 14.69% Regulatory capital 15.77% 20.59% 16.57% 20.64%

The capital structure of the Bank consists of equity, comprising issued capital and retained earnings as disclosed in statement of changes in equity.

The following table analyzes the Bank’s regulatory capital resources for capital adequacy purposes in line with NBG instructions:

Year ended Year ended December 31, December 31, 2019 2018

Share capital 25,643,200 25,643,200 Retained earnings 18,784,805 15,182,683 Less: intangible assets (1,931,247) (1,635,255)

Tier 1 capital 42,496,758 39,190,628

General provisions (maximum 1.25% credit and market risk weighted assets) 2,703,140 2,502,528 Subordinated debt (up to 50% of tier 1 capital) 12,918,989 13,383,000

Tier 2 capital 15,622,129 15,885,528

Total regulatory capital 58,118,887 55,076,156

Risk weighted assets 282,281,378 266,788,410

Tier 1 capital adequacy ratio 15.05% 14.69% Total regulatory capital adequacy ratio 20.59% 20.64%

65 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

As at December 31, 2019 the Bank included in the computation of total regulatory capital for capital adequacy purposes the subordinated debt received, limited to 50% of Tier 1 capital. In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinated to the repayments of the Bank’s liabilities to all other creditors.

33. Risk management policies

Management of risk is fundamental to the Bank’s business and is an essential element of the Bank’s operations. The main risks inherent to the Bank’s operations are those related to:

 Credit risk;  Liquidity risk;  Market risk;  Operational risk;  Concentration risk;  Reputational risk;  Compliance risk  Other risks.

Risk management framework

The Bank recognizes that it is essential to have efficient and effective risk management processes in place. To enable this, the Bank has established a risk management framework, whose main purpose is to protect the Bank from risk and allow it to achieve its performance objectives.

The risk management framework combines tools, actions, resources and systems with the aim to effectively identify, assess and manage risks.

Management Board and Supervisory Board level Risk Management and Audit Committee is established to oversee and monitor risk management process, risk framework, risk appetite and risk policies.

Central to the Bank’s risk management and governance is its risk culture. The risk culture is defined by the tone being set from the top. Risk culture is incorporated in the Bank's risk strategy, risk appetite statement, and in a daily processes. Accountability for risk management is structured by a three lines of defense model to achieve effective governance of risk management. Risk management responsibilities are split therefore accordingly between front line – business, risk management and internal audit.

Risk strategy and risk appetite

Risk strategy and risk appetite are defined and approved by Supervisory Board based on Bank’s strategic goals in order to ensure alignment of risk, capital and performance targets.

Considering the Bank’s vision which is: To be a global network collectively serving more low- income entrepreneurs operating on commercial principles of performance and sustainability, the main objectives of the risk management strategy are the following:

 Contribute to the development of the Bank’s business strategy by ensuring risk adjusted profitability.

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Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

 Guarantee the Bank’s sustainable development through the implementation of an efficient system for the risk analysis, measurement and monitoring.

The Bank’s executive management and all employees are committed to the Bank’s risk strategy principles and make their day-to-day decisions according to the risk/reward approach.

Credit Risk

The Bank is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss.

The main business of the Bank is to provide micro-loans. To avoid significant financial damage caused by this the Bank uses various methods to identify and manage effectively the credit risks.

The Bank’s credit policy and lending control is determined by the Credit Manual, where all the related procedures and requirements, along with respective controls are clearly defined, including loan disbursement, monitoring of delinquent loans, etc.

The Bank continues focus principally on micro-credit to low income entrepreneurs with cash flows from income generating activities (including trade, production, agriculture, and others). The Bank also expanded credit offering to small and medium enterprises in the service of market demand.

There are different levels of credit committees depending on amount of loan. There is alternative method of loan approval based on credit ratings of credit bureaus for small amount of loans (less than GEL 5,000 GEL or USD 3,000). Decision making process workflow of credit committee is fully computerized. Decision making limits are controlled by the MIS automatically based on the predefined access levels.

The Bank continues to adopt a prudential lending policy after transformation as the Bank. Internal Control team performs regular checks of credit analyses quality. All credit activities strive towards a long-term customer relationship to achieve solid profitability and avoid credit expansion that may endanger long-term stability.

The Bank structures the level of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to bank product. Bank carefully monitors changes in its credit portfolio. To assess the credit risk bank is conducting the stress tests, based on parameters provided by the NBG. It includes both the direct credit risk and CICR.

The concentration of portfolio on individual borrowers level are very limited due to high granularity of portfolio, while the sectoral concentration is more actual issue due to high concentration of portfolio in few sectors. This risk was taken into account in ICAAP in Pillar II capital add-ons calculation.

Maximum exposure of credit risk

The Bank’s maximum exposure to credit risk varies significantly and is dependent on both individual risks and general market economy risks.

The following table presents the maximum exposure to credit risk of balance sheet financial assets. For financial assets in the balance sheet, the maximum exposure is equal to the carrying amount of those assets prior to any offset or collateral. The Bank’s maximum exposure to credit risk under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by

67 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

the contractual amounts of those instruments.

Maximum exposure December 31, 2019 Cash and cash equivalents 34,066,201 Mandatory reserve with the National Bank of Georgia 10,120,021 Loans to customers 201,418,207 Investments in debt instruments 18,820,711 Other financial assets 1,477,865

December 31, 2018 Cash and cash equivalents 35,593,350 Mandatory reserve with the National Bank of Georgia 14,814,367 Due from banks 987,500 Loans to customers 217,825,841 Investments in debt instruments 18,739,844 Other financial assets 1,752,340

Off-balance sheet risk

The Bank applies fundamentally the same risk management policies for off-balance sheet risks as it does for its on-balance sheet risks.

Credit risk assessment

The Bank uses a combination of individual assessment and group assessment in determining the loan loss provision required at any reporting date. Individual assessment is performed on loans that are considered individually significant.

Loans with outstanding balance greater than 0.5% of equity capital are considered to be individually significant. Individually significant loans that are not impaired, as well as all other loans that have not been individually assessed are then included in the group of loans that are collectively assessed for impairment.

The collectively assessed loans are grouped based on similar credit risk characteristics and on their past-due status and assessed accordingly. The collectively assessed methodology strives to ensure the loan loss provisions reflects the loss events that have occurred, but have not yet been identified on an individual loan basis.

The process uses a combination of historical data and current observable data that reflects the existing circumstances and how it may affect the current loan portfolio. This set of combined data is a basis for the management for setting the provision rates.

Default is defined using the delinquency status of the loans unless other qualitative indicators of inability to repay provides objective evidence of impairment.

Assessment of Probability of Default (“PD”) is performed using roll rates approach. PD is calculated using time-series data pulled out from the operational loan database. Observation period to estimate roll rates to higher risk category is 48 months. The last period analyzed is from November 2014 to December 2018.

Expected credit loss measurement

IFRS 9 outlines a “three-stage” model for impairment based on changes in credit quality since initial recognition as summarized below:

 A financial instrument that is not credit-impaired on initial recognition is classified in (“Stage 1”) and has its credit risk continuously monitored by the Bank;  If a significant increase in credit risk (“SICR”) since initial recognition is identified, the financial instrument is moved to (“Stage 2”) but is not yet deemed to be credit-impaired;  If the financial instrument is credit-impaired, the financial instrument is then moved to (“Stage 3”);

68 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

 Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis;  A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward-looking information;  Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

Significant increase in credit risk

When determining whether the risk of default on a financial instrument has increased significantly since initial recognition, the Company considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and expert credit assessment and including forward-looking information. The objective of the assessment is to identify whether a significant increase in credit risk has occurred for an exposure by comparing:

The Company uses three criteria for determining whether there has been a significant increase in credit risk:

 Quantitative test based on movement in PD;  Forbearance status; and  A backstop of 30 days past due.

“Forbearance” occurs upon restructuring, i.e. prolongation in payment terms of payment of interest or principal arising from a deterioration of a borrower’s financial condition such that it is not the same as it was at the time of loan origination and a borrower has applied for a change in the payment schema of the loan. Restructuring only occurs when the appropriate division of the bank is reasonably confident that a borrower is able to service the renewed payment schedule.

The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk.

The Company considers the following as constituting an event of default:

 The contract is past due more than 90 days; or  The credit obligations reflected in the contract is unlikely to be paid to the Company in full.

The definition of default is appropriately tailored to reflect different characteristics of different types of assets. When assessing if the borrower is unlikely to pay its credit obligation, the

69 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Company takes into account both qualitative and quantitative indicators. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. The Company uses a variety of sources of information to assess default which are either developed internally or obtained from external sources.

The following diagram summarizes the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired financial assets):

Stage 1 Stage 2 Stage 3 (Initial recognition) (Significant increase in credit risk since initial (Credit-impaired assets) recognition) 12-month expected credit Lifetime expected credit Lifetime expected credit losses losses losses

Credit-impaired assets in Stage 3 undergo a probationary period of 6 months after the material credit obligations of the Contract are met before moving to Stage 2.

Write-off

When periodic collective historical recovery analysis indicates that the Company does not expect significant additional recoveries after certain months in default (“MID”), it is the policy of the Company to write-off loans on a collective basis.

Amount outstanding on financial assets that were written off during 2019 and are still subject to enforcement activity is GEL 4,281,258.

Grouping with similar credit risk characteristics

Financial assets are split into two segments for the purposes of PD calculation:

 Small (for loan amounts up to USD 2,000);  Large (for loan amounts greater than USD 2,000).

The segments above reflect the level of assessment of client creditworthiness, with the Large segment exhibiting a comparatively stricter assessment. The historical default rate is utilized as an indicator of strictness, such that the difference in default rates is maximized between the segments.

Rating Model

All available information (product groups, industries, etc.) are used to derive internal ratings for each segment. In such a way groups with the same risk characteristics are created and used afterwards to adjust the PD curve of the segment.

Significant increase in credit risk

The Bank considers a financial instrument to have experienced a significant increase in credit risk when the remaining Lifetime PD at the reporting date has increased by 50%, compared to the residual Lifetime PD expected at the reporting date when the exposure was first recognised.

Measurement of ECL

The key inputs into the measurement of ECL are the term structure of the following variables:

 Probability of default (PD);  Loss given default (LGD);  Exposure at default (EAD).

These parameters are generally derived from internally developed statistical models and other historical data.

70 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Probability of default (PD) The PD represents the likelihood of a borrower defaulting on its financial obligation (as per “Definition of default and credit-impaired” above), either over the next 12 months (12M PD) or over the remaining lifetime (Lifetime PD) of the obligation.

The Lifetime PD is developed by applying a maturity profile to the current 12M PD. The maturity profile looks at how defaults develop on a portfolio from the point of initial recognition throughout the lifetime of the loans. The maturity profile is based on historical observed data and is assumed to be the same across all assets within a portfolio and credit grade band. This is supported by historical analysis.

Probability of Default is modeled by survival function, which is based on hazard rates.

Hazard rates are obtained by Cox proportional hazard model, which is a semi-parametric model, it uses assumed simple form for effect of covariates and the exact value of free parameters is estimated with partial likelihood. The baseline is obtained by non-parametrical methods. A macroeconomic overlay can be directly included into the hazard function through a time- dependent variable. From obtained hazard rates, then Point-in-Time (“PiT”) PD is derived, i.e. marginal PDs assigned to a respective date.

Observation period for modeling cox hazard rates is 5 years.

Set out below are the changes to the ECL as at December, 31 2019 and 2018 that would result from reasonably possible changes in the macroeconomic parameter from the actual assumptions used in the Bank’s economic variable assumptions.

2019 LC

Macro parameter used GDP % change of macro parameter for the sensitivity 46.00% -36.00% test

GDP + 46% No change GDP- 36% Small 2,366,562 2,340,622 2,322,172 Loan portfolio Large 16,924,055 17,146,557 17,331,273 Total 19,290,616 19,487,180 19,653,446

Loss given default (LGD)

LGD is the magnitude of the likely loss if there is a default. The Company estimates LGD parameters based on the history of recovery rates of claims against defaulted counterparties. The LGD model considers cash recoveries only. LGD is calculated on a discounted cash flow basis using the EIR as the discounting factor.

Exposure at default (EAD)

EAD is based on the amounts the Company expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD).

Incorporation of forward-looking information

The Bank incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL.

The Company has identified and documented the key drivers of credit risk and credit losses for the portfolio using an analysis of historical data, has assessed the impact of macro-economic variables on PD and recovery rate. The macro-economic variable which was involved in the analysis is a real growth rate of GDP.

71 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

The table below summarizes the principal macroeconomic indicators included in the economic scenarios used as at December 31, 2019, for the years 2020 to 2024, for

2020 2021 2022 2023 2024 Baseline 5% 5% 5% 5% 5% Real GDP growth rate Optimistic 6% 6% 5% 5% 5% Pessimistic 3% 4% 5% 5% 5%

Weightings (%) 2019 Baseline 50% Optimistic 25% Pessimistic 25%

Credit quality of loans to customers The following table provides information on the credit quality of loans to customers as of December 31, 2019:

Small Loans Stage 1 Stage 2 Stage 3 Lifetime ECL - Gross Carrying 12 month not credit- Lifetime ECL – Amount ECL impaired credit-impaired Total Current 10,835,522 178,054 10,648 11,024,224 Past due 1-30 days - 117,684 2,855 120,539 Past due 31-60 - 68,401 2,832 71,233 days Past due 61-90 - 48,534 204 48,738 days Past due more - - 2,433,854 2,433,854 than 90 days

Expected credit (223,237) (80,121) (2,037,264) (2,340,622) loss

Total small loans 10,612,285 332,552 413,129 11,357,966

Large Loans Stage 1 Stage 2 Stage 3 Lifetime ECL - Gross Carrying 12 month not credit- Lifetime ECL – Amount ECL impaired credit-impaired Total Current 176,224,999 12,414,522 412,819 189,052,340 Past due 1-30 days - 2,300,157 130,894 2,431,051 Past due 31-60 - 972,425 98,980 1,071,405 days Past due 61-90 - 724,385 44,354 768,739 days Past due more - - 13,883,264 13,883,264 than 90 days

Expected credit (2,211,384) (2,712,988) (12,222,186) (17,146,558) loss

Total large loans 174,013,615 13,698,501 2,348,125 190,060,241

Total loans to 184,625,900 14,031,053 2,761,254 201,418,207 customers During the years ended December 31, 2019, and 2018, the Bank modified the contractual cash flows on certain loans to customers. All such loans were transferred to at least Stage 2 with a loss

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Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

allowance measured at an amount equal lifetime expected credit losses. Movements in the loan impairment allowance for the year ended December 31, 2019, are as follows:

Small Loans Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL 12 month - not credit- – credit- ECL impaired impaired Total Expected credit loss as at January 134,280 169,704 1,571,620 1,875,604 1, 2019 Movements with P&L impact - Transfer from Stage 1 to Stage 2 (106,076) 106,076 - - - Transfer from Stage 2 to Stage 3 - (470,913) 470,913 - - Transfer from Stage 3 to Stage 2 - 4,582 (4,582) - - Transfer from Stage 2 to Stage 1 14,339 (14,339) - - New financial assets originated or 221,392 - - 221,392 purchased Changes in risk parameters 70,356 341,813 339,776 751,945 Modification of contractual cash flows 2,205 (3,967) (1,014) (2,776) of financial assets Foreign exchange movements 62 (14) 1,485 1,533 Other movements with no P&L - impact - Transfer from Stage 1 to Stage 2 (2,939) 2,939 - - Financial assets derecognised during (110,382) (55,760) (31,054) (197,196) the period Write-offs - - (309,880) (309,880) Expected credit loss as at 223,237 80,121 2,037,264 2,340,622 December 31, 2019 Expected credit loss as at January 134,280 169,704 1,571,620 1,875,604 1, 2019

Large Loans Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL - not credit- – credit- 12 month ECL impaired impaired Total Expected credit loss as at 3,824,847 2,673,075 10,885,113 17,383,035 January 1, 2019 Movement with impact on profit &

loss Movements with P&L impact - Transfer from Stage 1 to Stage 2 (3,676,816) 3,676,816 - - - Transfer from Stage 2 to Stage 3 - (6,108,277) 6,108,277 - - Transfer from Stage 3 to Stage 2 - 281,716 (281,716) - - Transfer from Stage 2 to Stage 1 396,494 (396,494) - - New financial assets originated or 4,092,809 - - 4,092,809 purchased Changes in risk parameters (12,203) 3,407,211 (41,656) 3,353,352 Modification of contractual cash 180,272 (305,868) (77,615) (203,211) flows of financial assets Foreign exchange movements 31,734 41,408 196,173 269,315 Other movements with no P&L - impact -Transfer from Stage 1 to Stage 2 (282,780) 282,780 - - -Transfer from Stage 3 to Stage 2 - 96 (96) - Financial assets derecognised during (2,342,973) (839,475) (601,241) (3,783,689) the period Write-offs - - (3,965,053) (3,965,053) Expected credit loss as at 2,211,384 2,712,988 12,222,186 17,146,558 December 31, 2019

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Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Respective movements in the gross carrying amounts of loans to customers for the year ended December 31, 2019, are as follows:

Small Loans Stage 1 Stage 2 Stage 3 Lifetime ECL - not Lifetime ECL –

12 month credit- credit- ECL impaired impaired Total Gross carrying amount as at 1 10,759,451 739,558 2,061,411 13,560,420 January 2019 Transfer from Stage 1 to Stage 2 (1,861,726) 1,861,726 - - Transfer from Stage 2 to Stage 3 - (1,036,699) 1,036,699 - Transfer from Stage 3 to Stage 2 - 35,354 (35,354) - Transfer from Stage 2 to Stage 1 521,752 (521,752) - - New financial assets originated or 23,768,340 - - 23,768,340 purchased Repayment of principal amount (21,460,672) (489,039) (247,048) (22,196,759) Changes in interest accrual (344,172) 122,601 54,843 (166,728) Modification of contractual cash 1,208 (3,065) (1,585) (3,442) flows of financial assets Foreign exchange rate movements 740 (64) 1,480 2,156 Financial assets derecognised (549,349) (295,947) (110,388) (955,684) during the period Write-offs (50) - (309,665) (309,715) Gross carrying amount as at 31 10,835,522 412,673 2,450,393 13,698,588 December 2019

Large Loans Stage 1 Stage 2 Stage 3 Lifetime ECL - not credit- Lifetime ECL – credit- 12 month ECL impaired impaired Total Gross carrying amount as at 1 194,156,285 15,298,763 14,069,011 223,524,059 January 2019 - Transfer from Stage 1 to Stage 2 (38,420,807) 38,420,807 - - - Transfer from Stage 2 to Stage 3 - (13,610,352) 13,610,352 - - Transfer from Stage 3 to Stage 2 - 2,198,187 (2,198,187) - - Transfer from Stage 2 to Stage 1 11,666,957 (11,666,957) - - New financial assets originated or 198,055,804 - - 198,055,804 purchased Repayment of principal amount (186,337,418) (7,874,670) (2,622,298) (196,834,386) Changes in interest accrual 5,337,936 817,792 (780,209) 5,375,519 Modification of contractual cash (32,881) (78,444) (136,758) (248,083) flows of financial assets Foreign exchange rate movements 853,304 255,210 239,699 1,348,213 Financial assets derecognised (9,054,181) (7,348,847) (3,652,384) (20,055,412) during the period Write-offs - - (3,958,915) (3,958,915) Gross carrying amount as at 31 176,224,999 16,411,489 14,570,311 207,206,799 December 2019

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Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Credit quality of loans to customers The following table provides information on the credit quality of loans to customers as of December 31, 2018:

Small Loans Stage 1 Stage 2 Stage 3 Lifetime ECL - Gross Carrying 12 month not credit- Lifetime ECL – Amount ECL impaired credit-impaired Total Current 10,759,400 84,403 24,927 10,868,730

Past due 1-30 days - 309,186 7,469 316,655 Past due 31-60 days - 192,710 2,878 195,588 Past due 61-90 days - 153,256 3,366 156,622 Past due more than 90 days - - 2,022,768 2,022,768

Expected credit loss (134,279) (169,703) (1,571,619) (1,875,601)

Total small loans 10,625,121 569,852 489,789 11,684,762

Large Loans Stage 1 Stage 2 Stage 3 Lifetime ECL - Gross Carrying 12 month not credit- Lifetime ECL – Amount ECL impaired credit-impaired Total Current 194,156,284 7,048,165 754,934 201,959,383 Past due 1-30 days - 5,024,191 83,111 5,107,302 Past due 31-60 days - 2,120,972 67,292 2,188,264 Past due 61-90 days - 1,105,432 49,902 1,155,334 Past due more than 90 days - - 13,113,832 13,113,832

Expected credit loss (3,824,846) (2,673,074) (10,885,116) (17,383,036)

Total large loans 190,331,438 12,625,686 3,183,955 206,141,079

Total loans to customers 200,956,559 13,195,538 3,673,744 217,825,841

During the years ended December 31, 2018, and 2017, the Bank modified the contractual cash flows on certain loans to customers. All such loans were transferred to at least Stage 2 with a loss allowance measured at an amount equal lifetime expected credit losses. Movements in the loan impairment allowance for the year ended December 31, 2018, are as follows:

Small Loans Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL – 12 month - not credit- credit- ECL impaired impaired Total Expected credit loss as at January 1, 167,397 273,427 2,575,305 3,016,129 2018 Movements with P&L impact - Transfer from Stage 1 to Stage 2 (177,369) 177,369 - - - Transfer from Stage 2 to Stage 3 - (1,275,144) 1,275,144 - - Transfer from Stage 3 to Stage 2 - 2,404 (2,404) - - Transfer from Stage 2 to Stage 1 31,308 (31,308) - - New financial assets originated or 228,068 - - 228,068 purchased Changes in risk parameters 681 1,148,737 (1,014,417) 135,001 Modification of contractual cash flows of 811 (1,696) (1,352) (2,237) financial assets

75 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Foreign exchange movements (45) 13 (12) (44) Other movements with no P&L - impact - Transfer from Stage 1 to Stage 2 (1,334) 1,334 - - Financial assets derecognised during the (115,237) (125,433) (66,648) (307,318) period Write-offs - - (1,193,995) (1,193,995) Expected credit loss as at December 134,280 169,703 1,571,621 1,875,604 31, 2018

Large Loans Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL – 12 month - not credit- credit- ECL impaired impaired Total Expected credit loss as at January 1, 3,348,448 2,053,101 10,671,512 16,073,061 2018 Movement with impact on profit & loss Movements with P&L impact - Transfer from Stage 1 to Stage 2 (2,700,289) 2,700,289 - - - Transfer from Stage 2 to Stage 3 - (5,109,657) 5,109,657 - - Transfer from Stage 3 to Stage 2 - 62,550 (62,550) - - Transfer from Stage 2 to Stage 1 512,418 (512,418) - - New financial assets originated or 2,860,807 - - 2,860,807 purchased Changes in risk parameters 1,659,731 4,536,830 1,947,673 8,144,234 Modification of contractual cash flows of 97,863 (170,815) (34,447) (107,399) financial assets Foreign exchange movements 4,287 15,027 76,100 95,414 Other movements with no P&L

impact - Transfer from Stage 1 to Stage 2 (136,759) 136,759 - - - Transfer from Stage 2 to Stage 3 - (6,713) 6,713 - - Transfer from Stage 3 to Stage 2 - 1,580 (1,580) - Financial assets derecognised during the (1,821,663) (1,033,461) (623,444) (3,478,568) period Write-offs - - (6,204,516) (6,204,516) Expected credit loss as at December 3,824,843 2,673,072 10,885,118 17,383,033 31, 2018

Respective movements in the gross carrying amounts of loans to customers for the year ended December 31, 2018, are as follows:

Small Loans Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL 12 month - not credit- – credit- ECL impaired impaired Total Gross carrying amount as at 1 14,071,625 1,258,702 3,216,824 18,547,151 January 2018 Transfer from Stage 1 to Stage 2 (5,063,911) 5,063,911 - - Transfer from Stage 2 to Stage 3 - (2,930,997) 2,930,997 - Transfer from Stage 3 to Stage 2 - 14,199 (14,199) - Transfer from Stage 2 to Stage 1 1,564,179 (1,564,179) - - New financial assets originated or 22,871,930 - - 22,871,930 purchased Repayment of principal amount (24,371,803) (952,789) (403,543) (25,728,135) Changes in interest accrual 1,938,487 264,340 (2,282,749) (79,922) Modification of contractual cash flows (1,962) (2,121) (2,251) (6,334) of financial assets Foreign exchange rate movements (2,763) (345) (2,818) (5,926) Financial assets derecognised during (246,381) (411,163) (188,721) (846,265) the period Write-offs - - (1,192,126) (1,192,126) Gross carrying amount as at 31 10,759,401 739,558 2,061,414 13,560,373 December 2018

76 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Large Loans Stage 1 Stage 2 Stage 3 Lifetime ECL Lifetime ECL 12 month - not credit- – credit- ECL impaired impaired Total Gross carrying amount as at 1 194,454,328 12,730,801 12,983,173 220,168,302 January 2018 - Transfer from Stage 1 to Stage 2 (44,411,332) 44,411,332 - - - Transfer from Stage 2 to Stage 3 - (12,445,420) 12,445,420 - - Transfer from Stage 3 to Stage 2 - 469,950 (469,950) - - Transfer from Stage 2 to Stage 1 16,606,338 (16,606,338) - - New financial assets originated or 207,835,724 - - 207,835,724 purchased Repayment of principal amount (180,330,672) (8,071,595) (1,981,603) (190,383,870) Changes in interest accrual 6,008,179 632,189 (282,585) 6,357,783 Modification of contractual cash flows 10,704 (37,592) (38,720) (65,608) of financial assets Foreign exchange rate movements (490,984) 18,782 13,977 (458,225) Financial assets derecognised during (5,526,001) (5,803,347) (2,460,455) (13,789,803) the period Write-offs - - (6,140,198) (6,140,198) Gross carrying amount as at 31 194,156,284 15,298,762 14,069,059 223,524,105 December 2018

Geographical concentration

The Assets-Liabilities Management Committee (“ALCO”) exercises control over the risk in the legislation and regulatory area and assesses its influence on the Bank’s activity. The global oversight of the asset-liability management function helps in compensating the country-specific risks. The geographical concentration of assets and liabilities is set out below:

Other December 31, non-OECD OECD 2019 Georgia countries countries Total NON-DERIVATIVE FINANCIAL ASSETS Cash and cash equivalents 34,066,201 - - 34,066,201 Mandatory reserve with the National Bank of 10,120,021 - - 10,120,021 Georgia Loans to customers 201,418,207 - - 201,418,207 Investments in debt instruments 18,820,711 - - 18,820,711 Other financial assets 1,477,865 - - 1,477,865

TOTAL NON-DERIVATIVE FINANCIAL 265,903,005 - - 265,903,005 ASSETS

NON-DERIVATIVE FINANCIAL

LIABILITIES Deposits by banks 15,018,976 - - 15,018,976 Deposits by customers 169,133,192 - - 169,133,192 Borrowed funds - - 24,020,550 24,020,550 Lease liabilities 6,290,369 - - 6,290,369 Other financial liabilities 566,899 - 172,443 739,342 Subordinated debt - - 14,269,762 14,269,762

TOTAL NON-DERIVATIVE FINANCIAL 191,009,436 - 38,462,755 229,472,191 LIABILITIES

NET POSITION ON NON-DERIVATIVE 74,893,569 - (38,462,755) 36,430,814 FINANCIAL INSTRUMENTS

Net settled: - foreign exchange forward contracts 708,973 - - 708,973

NET POSITION ON DERIVATIVE 708,973 - - 708,973 FINANCIAL INSTRUMENTS

77 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

NET POSITION 75,602,542 - (38,462,755) 37,139,787

Other December 31, non-OECD OECD 2018 Georgia countries countries Total NON-DERIVATIVE FINANCIAL ASSETS Cash and cash equivalents 35,593,350 - - 35,593,350 Mandatory reserve with the National Bank of Georgia 14,814,367 - - 14,814,367 Due from banks 987,500 - - 987,500 Loans to customers 217,825,841 - - 217,825,841 Investments in debt instruments 18,739,844 - - 18,739,844 Other financial assets 1,752,340 - - 1,752,340

TOTAL NON-DERIVATIVE FINANCIAL ASSETS 289,713,242 - - 289,713,242

NON-DERIVATIVE FINANCIAL LIABILITIES Deposits by banks 6,105,137 - - 6,105,137 Deposits by customers 144,596,458 - - 144,596,458 Borrowed funds 345,984 15,356,894 66,728,997 82,431,875 Other financial liabilities 598,214 8,917 177,017 784,148 Subordinated debt - - 20,044,670 20,044,670

TOTAL NON-DERIVATIVE FINANCIAL LIABILITIES 151,645,793 15,365,811 86,950,684 253,962,288

NET POSITION ON NON-DERIVATIVE FINANCIAL INSTRUMENTS 138,067,449 (15,365,811) (86,950,684) 35,750,954

Net settled: - foreign exchange forward contracts - - (750,750)

NET POSITION ON DERIVATIVE FINANCIAL INSTRUMENTS - - (750,750)

NET POSITION 138,067,449 (15,365,811) (87,701,434)

Collateral

The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

 For commercial lending, charges over real estate properties, inventory  For retail lending, mortgages over residential properties.

Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for impairment losses.

The following table details credit ratings of financial assets held by the Bank that are neither past due nor impaired:

78 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

December 31, 2019

Cash and cash equivalents 23,871,510 - 23,871,510 Mandatory reserve with the 10,120,021 - 10,120,021 National Bank of Georgia Investments in debt instruments 18,820,711 - 18,820,711 Other financial assets - 1,477,865 1,477,865

December 31, 2018 Cash and cash equivalents 20,981,634 - 20,981,634 Mandatory reserve with the National Bank of Georgia 14,814,367 - 14,814,367 Due from banks 987,500 - 987,500 Investments in debt instruments 18,739,844 - 18,739,844 Other financial assets - 1,752,340 1,752,340

The Bank enters into numerous transactions where the counterparties are not rated by international rating agencies. For the counterparties, which are not rated by international rating agencies, the Bank has developed internal models, which allow it to determine the ratings of counterparties, which are comparable to rating of international rating agencies.

The Banking industry is generally exposed to credit risk through its loans to customers and bank deposits. With regard to the loans to customers this risk exposure in concentrated within the Georgia. The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Bank’s risk management policy are not breached.

A model of the borrower’s scoring assessment has been developed in the Bank to assess and decide on loans to small and medium-sized businesses. The scoring model is developed relating to standard loan products and includes key performance indicators of borrowers: financial situation, relations with the borrower, management quality, target use, location, credit history, collateral, etc.

Financial assets other than loans to customers are graded according to the current credit rating they have been issued by an internationally regarded agency such as Fitch, Standard & Poor’s and Moody’s. The highest possible rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade.

The credit rating of the Georgia according to the international rating agencies corresponded to investment level BB-.

Liquidity risk

Liquidity risk management

Liquidity risk refers to the availability of sufficient funds to meet financial commitments associated with financial instruments as they actually fall due. The main body in the Bank, dealing with the liquidity management is ALCO that takes place at least monthly. ALCO reports presented on the meeting include detailed forecast of financial position, profit or loss and cash flows for the period of at least upcoming 18 months, resulting in the precise identification of future funding needs. Based on the current developments, projections used in ALCO files are updated at least monthly.

Among other issues, for liquidity management purposes, during the meetings, ALCO considers Liquidity Schedule and forecast and funding schedule. ALCO discussions related to liquidity are resulting in: identification of future funding need (timing, amount, currency), identification of possible liquidity sources (direct attraction of funds from international financial institutions, using money market instruments – interbank deposits, cross currency swaps etc.) and action plan. Besides, ALCO sets internal limits on non-loan liquidity (unrestricted Cash and Cash Equivalents) to manage the liquidity risk.

Current liquidity is managed by the Treasury Department, which deals in the money markets for current liquidity support and cash flow optimization. In order to manage liquidity risk, the Bank

79 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

performs daily monitoring of future expected cash flows on clients’ and other operations, which is a part of assets/liabilities management process. The Management Board sets limits on the minimum proportion of maturing funds available to meet on the minimum level on interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. An analysis of liquidity and interest rate risk is presented in the following table. The presentation below is based upon the information provided internally to key management personnel of the Bank.

Weighted average effective December 31, interest Up to 1 month to 3 months to 1 year to Over 2019 rate 1 month 3 months 1 year 5 years 5 years Total NON-DERIVATIVE

FINANCIAL ASSETS Fixed interest rate instruments Cash and cash 4.94% 22,467,196 - - - - 22,467,196 equivalents Loans to customers 22.93% 24,615,003 15,095,146 67,693,858 92,838,706 1,175,494 201,418,207 Investments in debt 7.70% 701,037 - 18,119,674 - - 18,820,711 instruments Total fixed interest 47,783,236 15,095,146 85,813,532 92,838,706 1,175,494 242,706,114 bearing financial assets Variable interest rate instruments Mandatory reserve with the National Bank of 1.10% 10,120,021 - - - - 10,120,021 Georgia Total variable interest 10,120,021 - - - - 10,120,021 bearing financial assets Non-interest bearing financial assets Cash and cash 11,599,005 - - - - 11,599,005 equivalents Other financial assets 687,076 - 790,789 - - 1,477,865 Total non-interest 12,286,081 - 790,789 - - 13,076,870 bearing financial assets

Total non-derivative 70,189,338 15,095,146 86,604,321 92,838,706 1,175,494 265,903,005 financial assets

NON-DERIVATIVE FINANCIAL LIABILITIES Fixed interest rate instruments Financial liabilities at fair value through profit or loss Deposits by banks 10.8% 15,018,976 - - - - 15,018,976 Deposits by customers 9.14% 39,226,056 14,831,479 76,702,749 28,324,609 603,978 159,688,871 Borrowed funds 13.11% - - 19,918,048 - - 19,918,048 Lease liabilities - 487,663 1,329,427 3,858,406 614,873 6,290,369 Total fixed interest bearing financial 54,245,032 15,319,142 97,950,224 32,183,015 1,218,851 200,916,264 liabilities Variable interest rate instruments Borrowed funds 11.61% - 79,508 2,323,635 1,699,359 - 4,102,502 Subordinated debt 8.89% - - 94,855 7,034,015 7,140,892 14,269,762 Total variable interest bearing financial - 79,508 2,418,490 8,733,374 7,140,892 18,372,264 liabilities Non-interest bearing financial liabilities Deposits by customers 9,444,321 - - - - 9,444,321 Other financial liabilities 569,849 - - 169,493 - 739,342 Unutilized Credit limits 1,078,353 - - - - 1,078,353 (Off-balance)

80 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Weighted average effective December 31, interest Up to 1 month to 3 months to 1 year to Over 2019 rate 1 month 3 months 1 year 5 years 5 years Total Total non-interest bearing financial 11,092,523 - - 169,493 - 11,262,016 liabilities Total non-derivative 65,337,555 15,398,650 100,368,714 41,085,882 8,359,743 230,550,544 financial liabilities

Interest sensitivity gap 3,658,225 (303,504) (14,555,182) 51,922,317 (7,184,249) 33,537,607

Cumulative interest 3,658,225 3,354,721 (11,200,461) 40,721,856 33,537,607 sensitivity gap

Derivative financial instruments Net settled: - foreign exchange - - (708,973) - - (708,973) forward contracts

Total derivative - - (708,973) - - (708,973) financial instruments

Liquidity gap 4,851,783 (303,504) (14,473,366) 51,752,824 (7,184,249) 34,643,488

Cumulative liquidity 4,851,783 4,548,279 (9,925,087) 41,827,737 34,643,488 gap

As at 31 December 2019, the Bank has negative cumulative liquidity gap in the amount of GEL 9,925,087 as disclosed in the table above, which is mainly related to the nearing of the payment of significant part of borrowed funds and deposits by customers. As at the date of signing these financial statements the Bank already closed the gap by making repayments of maturing liabilities.

Management believes that liquidity gap does not lead to going concern issue due to the fact that in spite of a substantial portion of deposits by customers being on demand, diversification of these deposits by number and type of depositors, and the past experience of the Bank would indicate that these customer accounts provide a long-term and stable source of funding for the Bank. The Bank’s expected liquidity risk management includes estimation of maturities for its current deposits. The estimate is based on statistical methods applied to historic information on the fluctuations of customer account balances. Therefore, negative liquidity gap per contractual maturities up to 1 year is significantly reduced and becomes positive if behavioral maturities are applied.

The Contractual Maturity analysis note does not reflect the historical stability of the current accounts. In particular, the customer current account and on demand positions repayment behaviour has historically taken place over a longer period than one indicated in the tables above. These balances are included in amounts due in less than three months in the tables above.

Term Deposits included in the customer accounts consists of 84.6% of irrevocable fixed term deposits. According to GeoCivil Code, individuals have the right to withdraw their term deposits prior to maturity if they partially or fully forfeit their right to accrued interest and the Bank is obliged to repay such deposits upon the depositor’s demand but this does not apply irrevocable fixed term deposit which can be withdrawn only at their maturity date.

Based on the Bank’s deposit retention history, the management does not expect that ordinary term depositors will require repayment on the earliest possible date; accordingly, the table does not reflect the management’s expectations as to actual cash outflows.

The Bank also monitors and analyses the customers’ deposits based on historical pattern of their behaviour. The Bank’s balance of current accounts and deposits from customers as at December 31, 2019, December 31, 2018 and December 31,2017 has amounted to GEL 169,133,192, GEL 144,569,458 and GEL 97,929,163,respectively. Management monitors the balances of current

81 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

accounts on a regular basis and observes that there is no excessive withdrawal of current accounts, despite the fact of being on demand.

Weighted average effective December interest Up to 1 month to 3 months to 1 year to Over 31, 2018 rate 1 month 3 months 1 year 5 years 5 years Total NON-DERIVATIVE FINANCIAL ASSETS Fixed interest rate instruments Cash and cash equivalents 5.14% 17,071,473 - - - - 17,071,473 Due from banks 0.25% - 987,500 - - - 987,500 Loans to customers 23.92% 16,481,665 18,585,393 77,323,971 104,083,940 1,350,872 217,825,841 Investments in debt instruments 7.39% 54,187 644,253 17,366,404 675,000 - 18,739,844 Total fixed interest bearing financial assets 33,607,325 20,217,146 94,690,375 104,758,940 1,350,872 254,624,658 Variable interest rate instruments Mandatory reserve with the National Bank of Georgia 14,814,367 - - - - 14,814,367 Total variable interest bearing financial assets 14,814,367 - - - - 14,814,367 Non-interest bearing financial assets Cash and cash equivalents 18,521,877 - - - - 18,521,877 Other financial assets 946,011 378,074 428,255 - - 1,752,340 Total non-interest bearing financial assets 19,467,888 378,074 428,255 - - 20,274,217

Total non-derivative financial assets 67,889,580 20,595,220 95,118,630 104,758,940 1,350,872 289,713,242

NON-DERIVATIVE FINANCIAL LIABILITIES Fixed interest rate instruments Financial liabilities at fair value through profit or loss Deposits by banks 10.75% 790,000 - 5,315,137 - - 6,105,137 Deposits by customers 9.12% 24,805,609 10,566,048 73,751,792 27,083,573 583,122 136,790,144 Borrowed funds 12.05% - 161,470 39,012,766 19,343,320 - 58,517,556 Subordinated debt 11.00% - - 6,687,848 - - 6,687,848 Total fixed interest bearing financial liabilities 25,595,609 10,727,518 124,767,543 46,426,893 583,122 208,100,685 Variable interest rate instruments Borrowed funds 12.51% 623,360 345,997 20,629,258 2,315,704 - 23,914,319 Subordinated debt 9.18% - - 87,626 - 13,269,196 13,356,822 Total variable interest bearing financial liabilities 623,360 345,997 20,716,884 2,315,704 13,269,196 37,271,141 Non-interest bearing financial liabilities Deposits by customers 7,806,314 - - - - 7,806,314 Other financial liabilities 556,745 201,167 26,236 - - 784,148 Total non-interest bearing financial liabilities 8,363,059 201,167 26,236 - - 8,590,462 Total non-derivative financial liabilities 34,582,028 11,274,682 145,510,663 48,742,597 13,852,318 253,962,288

Interest sensitivity gap 22,202,723 9,143,631 (50,794,052) 56,016,343 (12,501,446) 24,067,199

Cumulative interest sensitivity gap 22,202,723 31,346,354 (19,447,698) 36,568,645 24,067,199

Derivative financial instruments Net settled:

82 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Weighted average effective December interest Up to 1 month to 3 months to 1 year to Over 31, 2018 rate 1 month 3 months 1 year 5 years 5 years Total - foreign exchange forward contracts - - (750,750) - - (750,750)

Total derivative financial instruments - - (750,750) - - (750,750)

Liquidity gap 33,307,552 9,320,538 (51,142,783) 56,016,343 (12,501,446) 35,000,204

Cumulative liquidity gap 33,307,552 42,628,090 (8,514,693) 47,501,650 35,000,204

In the table above, the terms to maturity correspond to the contractual terms.

The amounts included above for variable interest rate instruments for both financial assets and liabilities is subject to change if changes in variable interest rates differ to those estimates of interest rates determined at the end of the reporting period.

The following tables detail the Bank’s remaining contractual maturity for its financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Bank can be required to pay. The tables include both interest and principal cash flows. To the extent that interest flows are floating rate, the undiscounted amount is derived from interest rate curves at the end of the reporting period. The contractual maturity is based on the earliest date on which the Bank may be required to pay.

Weighted average effective interest Up to 1 month to 3 months to 1 year to Over December 31, rate 1 month 3 months 1 year 5 years 5 years 2019 Total

Fixed interest rate instruments Deposits by banks 9.24% 15,018,976 - - - - 15,018,976 Deposits by customers 9.09% 38,991,800 14,630,207 82,102,454 33,147,391 1,076,696 169,948,548 Borrowed funds 12.95% - - 20,841,028 - - 20,841,028 Total fixed interest bearing financial liabilities 54,010,776 14,630,207 102,943,482 33,147,391 1,076,696 205,808,552 Variable interest rate instruments Borrowed funds 11.04% - 106,759 2,496,623 1,153,258 - 3,756,640 Subordinated debt 8.89% - - 1,337,848 12,329,745 7,694,327 21,361,920 Total variable interest bearing financial liabilities - - 106,759 3,834,471 13,483,003 7,694,327 25,118,560 Non -interest bearing instruments

Deposits by customers 9,444,321 - - - - 9,444,321 Other financial liabilities 569,849 - - 169,492 - 739,341 Total non-interest bearing financial liabilities 10,014,170 - - 169,492 - 10,183,662 Total financial liabilities 64,024,946 14,736,966 106,777,953 46,799,886 8,771,023 241,110,774

83 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Weighted average effective interest Up to 1 month to 3 months to 1 year to Over December 31, rate 1 month 3 months 1 year 5 years 5 years 2018 Total

Fixed interest rate instruments Deposits by banks 10.75% 794,697 - 5,537,500 - - 6,332,197 Deposits by customers 9.12% 24,542,213 10,696,537 73,831,538 36,468,052 1,157,873 146,696,213 Borrowed funds 12.05% - 227,853 43,734,935 20,841,028 - 64,803,816 Subordinated debt 11.00% - - 6,882,999 - - 6,882,999

VariableTotal interestfixed interest rate 25,336,910 10,924,390 129,986,972 57,309,080 1,157,873 224,715,225 bearing financial 12.51% Borrowedinstruments funds 730,930 344,504 22,258,961 2,472,302 - 25,806,697 liabilities Subordinated debt 9.18% - - 1,271,064 5,087,740 14,979,799 21,338,603 Total variable interest-bearing - financial liabilities 730,930 344,504 23,530,025 7,560,042 14,979,799 47,145,300

Non-interest-bearing instruments

Deposits by customers 7,806,314 - - - - 7,806,314 Other financial liabilities 556,745 201,167 26,236 - - 784,148 Total non-interest- bearing financial liabilities 8,363,059 201,167 26,236 - - 8,590,462 Total financial liabilities 34,430,899 11,470,061 153,543,233 64,869,122 16,137,672 280,450,987

The following table details the Bank’s liquidity analysis for its derivative financial instruments. The table has been drawn up based on the undiscounted contractual net cash inflows and outflows on derivative instruments that settle on a net basis, and the undiscounted gross inflows and outflows on those derivatives that require gross settlement. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves at the end of the reporting period.

December Up to 1 month to 3 months to 1 year to Over 31, 2019 1 month 3 months 1 year 5 years 5 years Total

Net settled: - foreign exchange - - 708,973 - - 708,973 forward contracts

Net cash inflow - - 708,973 - - 708,973

December Up to 1 month to 3 months to 1 year to Over 31, 2018 1 month 3 months 1 year 5 years 5 years Total

Net settled: - foreign exchange forward contracts - - (750,750) - - (750,750)

Net cash outflow - - (750,750) - - (750,750)

Market Risk

84 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Major market risks that the Bank is exposed are currency and interest rate risks.

Interest rate risk

Interest rate risk can have negative effect on the bank’s banking book balance sheet arising from adverse movements in market interest rates. The Bank offers deposits and the loans mostly at the fixed interest rates, but some IFI borrowings are in floating rates.

FINCA Bank Identifies IRR trough analyses of all assets, liabilities and off-balance-sheet positions which are sensitive to fluctuations in interest rates, particularly:

In order to monitor and control Interest Rate Risk FINCA Bank regularly monitors compliance with the limits. Bank’s Interest rate risk model is based on Basel II requirements and uses 6 shock scenarios to estimate changes in the economic value and 2 shock scenarios to estimate changes in the earnings. The Bank aims to maintain interest rate margins that incorporate interest rate risk.

Interest rates of the Bank’s products and borrowings are discussed on ALCO, which also approves any changes or the new proposals. At the same time ALCO monitors the interest rate risk and is main decision making body for the interest rate risk mitigation measures. Additionally, ALCO controls the fulfilment of its’s decisions and recommendations.

Currency risk

The Bank strives to maintain almost closed open currency position that is monitored on daily basis.

The Bank’s exposure to foreign currency exchange rate risk is presented in the table below:

EUR USD EUR 1 December USD 1 = =3.2095 31, 2019 GEL 2.8677 GEL GEL Total

Non-derivative financial assets

Cash and cash equivalent 15,913,175 15,673,190 2,479,836 34,066,201 Mandatory reserve with the National Bank of - 9,320,798 799,223 10,120,021 Georgia Loans to customers 192,790,829 8,627,378 - 201,418,207 Investments in debt instruments 18,820,711 - - 18,820,711 Other financial assets 1,333,558 104,576 39,731 1,477,865 - - - - Total non-derivative financial assets 228,858,273 33,725,942 3,318,790 265,903,005

85 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

EUR USD EUR 1 December USD 1 = =3.2095 31, 2019 GEL 2.8677 GEL GEL Total

Non-derivative financial liabilities

Deposits by banks 15,018,976 - - 15,018,976 Deposits by customers 130,336,101 35,516,166 3,280,925 169,133,192 Borrowed funds 24,020,550 - - 24,020,550 Lease liabilities 3,043,575 3,246,794 - 6,290,369 Other financial liabilities 382,954 355,233 1,155 739,342 Subordinated debt - 14,269,762 - 14,269,762 - - - - Total non-derivative financial liabilities 172,802,156 53,387,955 3,282,080 229,472,191 OPEN BALANCE SHEET POSITION 56,056,117 (19,662,013) 36,710 36,430,814

Derivative financial instruments

Net settled: - foreign exchange forward contracts (20,006,177) 20,715,150 - 708,973

OPEN POSITION ON DERIVATIVE (20,006,177) 20,715,150 - 708,973 FINANCIAL INSTRUMENTS

OPEN POSITION 36,049,940 1,053,137 36,710 37,139,787

USD EUR December USD 1 = EUR 1 31, 2018 GEL 2.6766 GEL =3.0701 GEL Total

Non-derivative financial assets

Cash and cash equivalent 20,913,833 12,428,826 2,250,691 35,593,350 Mandatory reserve with the National Bank of Georgia - 14,147,075 667,292 14,814,367 Due from banks - 987,500 - 987,500 Loans to customers 197,677,024 20,148,817 - 217,825,841 Investments in debt instruments 18,739,844 - - 18,739,844 Other financial assets 880,345 776,945 95,050 1,752,340 - - - - Total non-derivative financial assets 238,211,046 48,489,163 3,013,033 289,713,242

Non-derivative financial liabilities

Deposits by banks 6,105,137 - - 6,105,137 Deposits by customers 101,480,889 40,458,107 2,657,462 144,596,458 Borrowed funds 71,077,787 11,355,088 - 82,432,875 Subordinated debt 6,687,054 13,357,616 - 20,044,670 Other financial liabilities 345,994 437,057 1,097 784,148 - - - - Total non-derivative financial liabilities 185,696,861 65,607,868 2,658,559 253,963,288 OPEN BALANCE SHEET POSITION 52,514,185 (17,118,705) 354,474 35,749,954

Derivative financial instruments

Net settled: - foreign exchange forward contracts (17,812,050) 17,061,300 - (750,750)

86 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

USD EUR December USD 1 = EUR 1 31, 2018 GEL 2.6766 GEL =3.0701 GEL Total

OPEN POSITION ON DERIVATIVE FINANCIAL INSTRUMENTS (17,812,050) 17,061,300 - (750,750)

OPEN POSITION 34,702,135 (57,405) 354,474 34,999,204

Currency risk sensitivity

The following table details the Bank’s sensitivity to a 20% increase and decrease in the GEL against USD. 20% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 20% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations with the Bank where the denomination of the loan is in a currency other than the functional currency of the lender or the borrower. A positive number below indicates an increase in profit and other equity where the GEL strengthens 20% against the USD. For a 20% weakening of the GEL against the USD, there would be a comparable impact on the profit and other equity, and the balances below would be negative.

December 31, 2019 December 31, 2018 USD impact USD impact +20% -20% +20% -20%

Impact on profit before tax 210,627 (210,627) (11,481) 11,481 Impact on equity 179,033 (179,033) (9,759) 9,759

Limitations of sensitivity analysis

The above tables demonstrate the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts should not be interpolated or extrapolated from these results.

The sensitivity analyses do not take into consideration that the Bank’s assets and liabilities are actively managed. Additionally, the financial position of the Bank may vary at the time that any actual market movement occurs. For example, the Bank’s financial risk management strategy aims to manage the exposure to market fluctuations. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value in the statement of financial position. In these circumstances, the different measurement bases for liabilities and assets may lead to volatility in shareholder equity.

Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Bank’s view of possible near- term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion.

Price risk

Price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices whether those changes are caused by factors specific to the individual security or its issuer or factors affecting all securities traded in the market. The Bank is exposed to price risks of its products which are subject to general and specific market fluctuations.

The Bank manages price risk through periodic estimation of potential losses that could arise from adverse changes in market conditions. The risks of losses associated with the undrawn loan

87 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

commitments are mitigated through fixing the appropriate clauses in the loan agreements making those commitments contingent upon certain conditions set out in the loan agreements.

Reputational risk

Reputation risk is the risk resulting from adverse perception, whether true or not, of the image of the organization by the Bank’s stakeholders, contractual counterparties, the public or supervisory authorities.

Reputational risk is managed by the risk management department which reports to the Bank’s risk committee. Risk management department reviews and approves all new products and services that the Bank proposes in the market.

Risk management department collects all reputational risk events from marketing department and analyses its impact on the Bank. Additionally risk management department receives all customer complaints and assesses them.

Client satisfaction surveys and media monitoring are conducted regularly for timely identification of any risks. The operational systems and controls in place as well as loyal customer base helps the Bank to mitigate the risk.

Operational Risk

RCSA (Risk and control self-assessment) are used to assess the risks of the existing processes and products and to determine the adequate levels of controls. In this process, various business units, organizational functions or process flows are mapped by risk type. This exercise reveals areas of weaknesses and helps prioritize subsequent management actions.

To ensure that appropriate responsibility is allocated to the management, reporting and escalation of operational risk, the Bank operates a ‘three lines of defence’ model.

Minimization of operational risk is achieved through following strategies:

Incident cause analysis – to avoid re-occurrence of the great losses, the procedure is implemented which implies analyzing the flaws of the system and carrying out correcting activities.

Insurance – Insurance policies are used to transfer the risk of “low frequency, high severity” nature to third party.

Adequate procedures – Bank have policies, processes and procedures to control and mitigate material operational risks.

Business continuity plans – business continuity plans are used to ensure Bank’s ability to operate on an on-going basis and limit losses in the event of severe business disruption.

Operational risk limits – limits are set on high risk transactions to minimize risk exposure on particular products/services (such as cash limits, treasury limits and operational limits).

88 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

Compliance risk

Compliance means adherence to laws, rules, standards, and codes of conduct applicable to banking activities, such as Regulation of the National Bank of Georgia on risk management in commercial Banks, Basel Committee principles on Compliance and Compliance function in Banks and other domestic and international rules/regulations and standards.

Compliance Risk means risk of legal or regulatory sanctions, material financial loss, or loss to reputation, a Bank may suffer because of its failure to comply with compliance laws, rules and standards and codes of conduct applicable to its banking activities. In order to preserve the integrity of the organization and the reputation for professional and ethical conduct, the management and all employees of FINCA bank Georgia, are responsible for good understanding of and strict compliance with the applicable laws, regulations and standards in whatever business operations are being performed.

Coordinating activities of the Bank's Compliance Risk function is assigned to the Head of AML and Compliance Unit (hereinafter referred as “Compliance”); Compliance is administratively placed in under the Head of Risk Management and Compliance Department. In order to operate effectively, Compliance function is based on the principles of independence, authority (including access to information) and reporting.

Compliance Program describes compliance requirements and action plans in the Bank. Compliance Program is approved by Management board level Risk and Compliance Committee. The Program is risk-based and is in line with documents regulating compliance risk assessment at the Bank.

34. Subsequent events

 Due to impact of COVID19 pandemic, the Bank has breached the covenant for DWM loan After the reporting date. The part of the loan was already repaid in April 2020, and the remaining outstanding amount is GEL 1.7 mln maturing in 2021. Negotiation regarding the waiver is in progress with the lender. The management of the Bank believes that the breach of covenants does not trigger any cross default on other borrowings of the Bank.  On March 11, 2020, the World Health Organization declared the outbreak of a respiratory disease caused by a new coronavirus as a “pandemic”. First identified in late 2019 and known now as COVID-19, the outbreak has impacted thousands of individuals worldwide. In response, many countries have implemented measures to combat the outbreak, which have impacted global business operations. As of the date of issuance of these financial statements, the Bank's operations have not been significantly affected; however, the Bank continues to monitor the situation and has taken certain preventive measures to safeguard its capital position. In particular management ensured sufficient funding pipeline in order to cover the contractual liquidity gap, which as of the date of signing of financial statements is already

89 JOINT STOCK COMPANY FINCA BANK GEORGIA

Notes to the Financial Statements (Continued) for the year ended December 31, 2019 (In Georgian Lari, unless otherwise indicated)

closed. Also worthwhile to mention that the Bank has an opportunity to receive refinancing loan from NBG by pledging collateralized loan portfolio, which as of the end of March 2020 amounted to GEL 33 million, as well as access to unlimited swap facility from NBG.  Management currently believes that it has adequate liquidity and business plans to continue to operate the business as going concern.  Management assumes that the impact of the crisis will be temporary, and most of its clients will resume normal operations afterwards.  The Bank also sees an opportunity to use the crisis situation to streamline its structure and accelerate its digital transformation, and thus emerge from the crisis with stronger, more efficient operations.”